Central African Economic and Monetary Community (CEMAC): Staff Report on Common Policies of Member Countries

Regional growth weakened in 2013 due to a fall in oil production in most countries. GDP growth is expected to pick-up in 2014 due to the recovery of oil production and the continuation of the implementation of public investment plans in most of CEMAC countries. Despite large spending of oil wealth during the last years, poverty, income inequality and unemployment remain high. The business climate is one of the most challenging in Africa. The region’s most pressing challenge is to implement structural reforms to promote sustainable and inclusive growth while adopting macro policies to preserve financial stability, ensure an efficient use of oil revenues and increase resilience to shocks.

Abstract

Regional growth weakened in 2013 due to a fall in oil production in most countries. GDP growth is expected to pick-up in 2014 due to the recovery of oil production and the continuation of the implementation of public investment plans in most of CEMAC countries. Despite large spending of oil wealth during the last years, poverty, income inequality and unemployment remain high. The business climate is one of the most challenging in Africa. The region’s most pressing challenge is to implement structural reforms to promote sustainable and inclusive growth while adopting macro policies to preserve financial stability, ensure an efficient use of oil revenues and increase resilience to shocks.

Introduction

1. The CEMAC region has recorded robust growth for more than a decade but substantial development challenges remain. Oil producing countries (all CEMAC countries except CAR) have benefited from a prolonged period of high oil prices and launched ambitious public investment programs to fill infrastructure gaps.1 Despite large spending of oil wealth, poverty, income inequality and unemployment (especially among the young) remain high as public spending was often poorly targeted and used unproductively.2 The business climate is one of the most challenging in Africa. The region’s most pressing challenge is to implement structural reforms to promote sustainable and inclusive growth while adopting macro policies to preserve financial stability, ensure an efficient use of oil revenues and increase resilience against shocks. Regional institutions face important capacity constraints and should be strengthened to support reform efforts.

2. Policy direction has been broadly in line with IMF recommendations but reform implementation has been too slow (see Annex 1). Weak governance and capacity of CEMAC institutions (i.e. regional central bank -Banque Centrale des Etats d’Afrique Centrale, BEAC, the Banking Commission—Commission Bancaire, COBAC, the CEMAC Commission and the Central African Development Bank—Banque de Développment des Etats d’Afrique Centrale, BDEAC) hamper regional integration and growth. Following serious governance challenges, the BEAC launched an ambitious reform agenda and has made progress in some areas. The CEMAC Commission activities were substantially affected by the conflict in Central African Republic (CAR) where it was headquartered, seriously limiting progress in various policy coordination initiatives. The issue of non-full repatriation of foreign assets by some member states remains unresolved, the monetary policy framework is unchanged despite the extensive technical assistance provided by the Fund, and preparation for possible reform of the surveillance framework has not progressed much.

Recent Economic Developments, Medium-Term Outlook and Risks

3. Overall macroeconomic performance weakened in 2013, due to a further decline in oil production. Real GDP growth decelerated in 2013 to 2½ percent, due to falls in oil production in most member countries (Chad, Congo, Equatorial Guinea and Gabon). Non-oil GDP growth remained solid, largely driven by the continuation of large public investment programs (Cameroon, Congo, Gabon) and buoyant domestic consumption contributing to a 4½ percent growth in the non-oil sectors. Inflation declined to 1.8 percent, below the regional convergence ceiling of 3 percent due to the decline of food prices and an appreciation of the nominal effective exchange rate.

4. The regional fiscal position further deteriorated in 2013. The continuation of expansionary fiscal policies and declining oil revenues turned the regional primary balance into a deficit for the first time since 2009 and the non-oil primary deficit reached 24.6 percent of non-oil GDP (NOGDP)3. With all but one eligible country (Chad) having benefited from debt relief, the average public debt for the region has slightly increased but remains low at around 23 percent of GDP, well below the 70 percent of GDP ceiling set by the regional surveillance framework for individual countries. The debt sustainability analyses (DSAs) for the individual countries show only low risk of debt distress.

5. The external current account widened in 2013 but the external reserves position remains sound. The current account deficit increased to 3.1 percent of GDP as oil exports declined and investment-related imports remained large. Foreign reserves (not taking into account the non-repatriated foreign assets) decreased slightly but remained around US$17.5 billion, equivalent to 5.1 months of imports at end-2013.

6. Large unsterilized surpluses resulting from the surge in oil export revenues over the last decade continue to impair the monetary policy transmission mechanism and make monetary policy largely ineffective. The growth of bank deposits slowed in 2013 but remained strong, while the growth of credit accelerated due to the dynamism of the non-oil sector and domestic consumption. Liquidity in the banking system decreased following a decline in foreign assets. Nevertheless, excess liquidity in the system remains high in part due to some liquidity injection by the BEAC to support some financial institutions.

7. In 2014, regional growth is projected to pick-up to 5 to 5½ percent. The increase in oil production (mostly in Cameroon and Chad) and the continued implementation of public investment plans in a large number of CEMAC countries is expected to support growth. The inflation rate should remain moderate, reflecting favorable trends in food prices. The continuation of expansionary fiscal policies in some countries (Cameroon, Republic of Congo and Gabon) will maintain the fiscal deficit at around 3 percent of GDP on average despite an increase in hydrocarbon revenues. The current account deficit is expected to remain around 3 percent of GDP as higher hydrocarbon export revenues (nearly 90 percent of the total exports) will be offset by strong imports.

8. CEMACs medium-term outlook would remain relatively positive, provided significant reforms are implemented4. Assuming the implementation of reforms to promote private investment, including an improved business climate and deepening of the financial sector, non-oil growth could average around 5½ percent per annum over the 2014-19 period, while oil output would initially grow by 1 to 1½ percent before declining at the end of the period. The regional fiscal balance would remain in deficit due to declining hydrocarbon revenue, which would be partially offset by a considerable improvement of the non-oil primary deficit (from 28 percent of non-oil GDP in 2013 to 16 percent in 2019) resulting from a substantial scaling back of public investment in Equatorial Guinea, Republic of Congo and Chad. The current account deficit is expected to stay between 3 and 4 percent of GDP owing to lower oil prices and continued high levels of imports associated with public and private investment. However, capital account surpluses would support the steady growth of reserves, which should be around the equivalent of six months of goods and services imports in 2019.5

9. The CEMAC could face potentially significant risks in the coming years (see Annex 2). The region remains highly dependent on oil revenues, and a significant, prolonged drop in oil and other commodity prices represents the main risk for the CEMAC. It would have a significant impact on fiscal balances and the current account balance.6 Although the baseline scenario already asssumes a substiantial scaling down in public investment, the materialization of the downside scenario would require a larger and more abrupt fiscal consolidation effort. In addition, in a context where an extremely difficult business climate severely limits private investment growth, the lack of reforms could weigh on the potential for medium-term growth. Without enhanced capacity of regional institutions and stronger political support by member states, regional integration will remain limited.7 Finally, increased political instability and security risks in the region with the deepening of the crisis in the Central African Republic and a number of attacks by Boko Haram could weigh on FDI and growth.

Figure 1.
Figure 1.

CEMAC Nominal GDP, 2013

(CFAF, Billions)

Citation: IMF Staff Country Reports 2014, 252; 10.5089/9781498315685.002.A001

Sources: WEO Database and IMF Staff Estimates
Figure 2.
Figure 2.

GDP Growth Contribution, 2013

(in percentage points)

Citation: IMF Staff Country Reports 2014, 252; 10.5089/9781498315685.002.A001

Sources: WEO Database and IMF Staff Estimates
Figure 3.
Figure 3.

CEMAC Selected Economic Indicators, 2011–13

Citation: IMF Staff Country Reports 2014, 252; 10.5089/9781498315685.002.A001

Sources: Country authorities and IMF Staff Estimates.
Figure 4.
Figure 4.

Recent Economic Developments, 2010–13

Citation: IMF Staff Country Reports 2014, 252; 10.5089/9781498315685.002.A001

Source: IMF Regional Economic Outlook, April, 2014.
Figure 5.
Figure 5.

Medium-term Outlook, 2014–19

Citation: IMF Staff Country Reports 2014, 252; 10.5089/9781498315685.002.A001

Source: IMF Regional Economic Outlook, April, 2014.

Policy Discussions

The discussions covered four major challenges: a) improving the fiscal surveillance framework to ensure stability and sustainability of the Monetary Union; b) making the conduct of monetary policy more effective; c) ensuring the stability and development of the financial sector and financing of the economy; and d) promoting regional integration and enhancing the potential for regional growth. The strengthening of regional institutions needed to overcome these challenges was also discussed. A number of reforms will require stronger support by CEMAC member states.

A. Improving the Regional Surveillance Framework to Ensure the Stability of the Union

Fiscal surveillance framework reform

10. The CEMAC’s current fiscal surveillance framework does not provide an appropriate anchor for fiscal policies of CEMAC member states. Natural resources, particularly oil, offer a unique opportunity to foster economic development but also pose significant challenges to macroeconomic management (IMF, 2012).8 In this context, the current fiscal convergence criteria do not provide an effective basis to ensure the sustainability of fiscal policies. For example, the budget balance rule based on the basic fiscal balance9 could contribute to procyclicality of fiscal policies, and the failure to include investment expenditure financed from external resources could mask an unsustainable debt dynamic. In a monetary union, this challenge is even more complex because fiscal policy management at the individual country level can have implications for the stability of the entire zone. Also, following debt relief and the increase in hydrocarbon resources, the public debt criterion of 70 percent of GDP no longer presents a constraint and would not prevent the risk of another debt crisis.

Staff advice

11. The CEMACs budget rule could be improved to address current challenges. As discussed also during the 2013 regional consultations, staff identified potential avenues of reform to ensure sustainability and reduce procyclicality of fiscal policies while remaining simple, transparent, and as uniform as possible.10 One option could be to adopt a rule based on a structural primary fiscal balance with an oil price smoothing formula. Fiscal objectives should be calibrated to ensure building-up or preserving adequate fiscal buffers. The new rule could also include country-specific objectives on the level of fiscal savings accumulated, for example in stabilization funds. These types of funds could be important for those countries most dependent on hydrocarbon resources, which need to protect themselves against large and prolonged commodity price fluctuations and avoid sudden, drastic adjustments in public spending.

12. The reform of the budget rule could be supplemented with a downward revision of the public debt ceiling. Staff conducted an analysis to determine an appropriate debt ceiling and concluded that the risk of debt distress for the region would increase considerably if public debt exceeded 50 percent of GDP (see Annex 4). On this basis, the debt ceiling could be lowered from 70 percent to around 50 percent of GDP to limit the risk of debt distress in the future. The aim should also be to establish consistency among the fiscal surveillance criteria to ensure, for instance, that an excessively high limit on the primary fiscal balance does not lead countries to exceed the debt ceiling. In addition, complementary fiscal rules, consistent with the regional rules, could be considered at the national level to provide better anchoring of policies taking account of the economies’ specific structural characteristics. The criteria should be simple, transparent, and easy to implement and monitor.

13. The authorities should design a comprehensive regional medium-term debt strategy. The definition of an optimal composition of debt in CEMAC would help the authorities to balance the cost-risk debt management objectives. A regional medium-term debt strategy11 should play a supportive role in strengthening the regional debt market by setting harmonized rules for government debt issuance, while preventing crowding-out one country by another when issuing debt at the regional market. A regional debt strategy would have to go in tandem with capacity building at the individual country level.

14. Enforcement of the fiscal surveillance framework should be strengthened. Fiscal convergence criteria are often not respected, with no consequence (Table 7). First of all, ownership of the surveillance framework by member states should be enhanced. To this end, an inclusive, participatory approach should be adopted in any reform of the regional surveillance mechanism. The regional institutions (especially the CEMAC commission) should be strengthened to ensure wider dissemination of the results of regional surveillance, and should be more involved in the preparation of national budgets. Authorities should also consider improving compliance with fiscal criteria, by expanding the role of national supervisory entities in monitoring and disseminating regional rules. Finally, the regional surveillance framework should be supplemented by additional structural changes at the national level, including strengthening public financial management in the selection of investment projects.

Table 1.

CEMAC: Selected Economic and Financial Indicators, 2011–19

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Sources: IMF staff compilations.

Using as weights the shares of member countries in CEMAC’s GDP in purchasing power parity US dollar.

Excluding grants and foreign-financed investment and interest payments.

Excluding grants and foreign-financed investment.

Table 2.

CEMAC: Millennium Development Goals, 2012

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Source: World Development Indicators.
Table 3.

CEMAC: National Accounts, 2011–19

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Sources: Authorities’ actual data and IMF staff estimates and projections.
Table 4.

CEMAC: Nominal and Real Effective Exchange Rates, 2005–13

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Sources: IMF, Information Notice System.

CEMAC data are weighted by GDP in purchasing power parity US dollar.

Table 5a.

CEMAC: Balance of Payments, 2011–19

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Sources: BEAC and IMF staff estimates and projections.
Table 5b.

CEMAC: Balance of Payments Indicators by Country, 2011–19

(Percent of GDP)

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Sources: BEAC and IMF staff estimates and projections.
Table 6a.

CEMAC: Fiscal Balances, 2011–19

(Percent of GDP)

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Sources: Country authorities’ actual data and IMF staff projections.

Overall budget balance excluding grants and foreign-financed investment.