Statement by Mr. Yambaye, Executive Director for the Central African Republic and Mr. Tall, Senior Advisor to the Executive Director, September 14, 2015

This paper discusses the Request of Central African Republic for Disbursement Under the Rapid Credit Facility (RCF). Central African Republic is emerging slowly from a dramatic security and political crisis that started in 2013, but daunting challenges remain. Security conditions are improving and the inclusive political dialogue continues. Most of the country is now under government control after the full deployment of international forces. The authorities are implementing economic reforms and have put together an election schedule with a view to end the political transition by mid-December 2015. The IMF staff supports the authorities' request for a third disbursement under the RCF.

Abstract

This paper discusses the Request of Central African Republic for Disbursement Under the Rapid Credit Facility (RCF). Central African Republic is emerging slowly from a dramatic security and political crisis that started in 2013, but daunting challenges remain. Security conditions are improving and the inclusive political dialogue continues. Most of the country is now under government control after the full deployment of international forces. The authorities are implementing economic reforms and have put together an election schedule with a view to end the political transition by mid-December 2015. The IMF staff supports the authorities' request for a third disbursement under the RCF.

First of all, we would like to convey our Central African Republic authorities’ appreciation for the continued support of the IMF, and the productive discussions with staff in the context of program negotiations. The balanced set of reports reflects well these discussions, and the broad agreement reached between the authorities and staff on the challenges facing the country and the policy recommendations going forward.

The Central African Republic (CAR) is gradually emerging from a conflict which has caused, since 2013, an unprecedented humanitarian and political crisis with spillovers in the region. When the transition Government assumed power in January 2014, inter-community violence was at its height, and state functions had collapsed. About half of the population was either internally displaced, or sought refuge in neighboring countries.

In this particularly difficult context, the authorities strived to restore peace and implement an emergency economic recovery plan. The support of the international community, particularly from the UN’s MINUSCA, France, as well as member countries of the Economic Community of Central African States (CEEAC), has been decisive in stopping the violent conflict, and progressively improving the security outlook.

Building on this momentum, the authorities pursued efforts to further consolidate peace and democratic governance in CAR. In this vein, an inclusive political dialogue forum was held in Bangui in May 2015, which saw the broad participation of armed rebel groups and militias, political and civil society organizations, and religious representatives. A consensus was reached at the end of this Bangui Forum, with participants agreeing to a ceasefire, endorsing a road map for elections, and for the demobilization and reinsertion into civil life of former combatants.

The authorities have been working tirelessly to implement the Bangui Forum’s resolutions and meet the timetable for elections. The legal framework required for these elections has been enacted, and voter registration has been in train. In spite of the significant progress achieved, major obstacles remain, including securing the remaining financing needed for the elections, and addressing insecurity in certain regions. The authorities have been reaching out to development partners to close the financing gap for the conduct of credible elections, as well as the successful disarmament, demobilization and reinsertion (DDR) of former combatants.

Economic rebuilding and a stable macroeconomic framework is the third pillar of the strategy to achieve a lasting peace in CAR. The authorities’ economic policies have been guided by their homegrown Emergency Recovery Plan which had been endorsed by donors. Beyond emergency social and humanitarian measures, they focused on rebuilding economic governance institutions, and laying the ground for medium-term reforms.

The authorities’ continued to build a track record of satisfactory IMF- supported program performance, with economic outcomes for the first half of 2015 broadly in line with targets. Despite challenging conditions, the authorities met all their end-March and end-June quantitative and policy objectives under the Rapid Credit Facility (RCF). On structural reforms, major accomplishments include the appointment of the head of the treasury unit, ACCT, improving revenue collection, and the cleaning of the civil service roster.

In spite of the improved near-term outlook, significant challenges lay ahead, including in maintaining the momentum for peace, and accelerating economic recovery efforts to address pressing humanitarian and social needs, while making inroads towards sustainable development goals. Against this backdrop, the authorities are requesting continued Fund support to meet urgent balance of payments needs, and catalyze essential donor’s support, as they intensify their efforts to rebuild state functions, further strengthen capacity, and create conditions for longer-term engagement with the Fund.

I. Recent Economic Developments

The macroeconomic outlook for 2015 has improved compared to 2014, as security gains consolidated and facilitated the resumption of economic activity. Indeed in 2014, economic activity was subdued with a real GDP growth rate of 1 percent, while average inflation reached 11.6 percent of GDP, due to conflict-related supply bottlenecks. As the security situation is improving, economic recovery is building momentum. Notably, displaced populations have started to return and efforts were made to improve the security of goods transportation in the international trade corridors. Accordingly, real GDP growth rate is projected to reach 5.5 percent in 2015, while average inflation declined to 6 percent as of June 2015.

On fiscal policy, the authorities adhered to prudent goals in the context of lower than anticipated revenues. They sought to improve revenue collection, including through the rebuilding of revenue administration capacity. However, security challenges and capacity constraints continued to weigh on revenue performance. On spending, the authorities aimed for a prudent execution in budgeted spending, in the face of significant spending needs. They met all current and social spending goals, including through the timely payment of wages and pensions, and by clearing outstanding wage arrears. They prioritized capital spending plans to match their implementation capacity, and the availability of external support. They also completed the payroll cleaning exercise, which yielded a CFA 2.8 billion in saving. Overall, these efforts helped contain the projected primary deficit for 2015 at 3 percent of GDP, following the primary surplus of 3.6 percent of GDP recorded in 2014.

On structural fiscal reforms, the authorities made inroads in strengthening the fiscal framework, and public financial management. The Director and Deputy Director of ACCT have been appointed. The externally-appointed Director of the Treasury’s accounting unit, ACCT, has been given considerable statutory powers to approve or deny payment requests, and strong controls have been put in place to ensure that development assistance is used as intended. The Treasury and Public Financial Management Committees have been functioning as planned. Moreover, a National Committee for Aid Coordination has been established to further improve the management of development assistance.

II. Economic Policies for the Remainder of 2015, and Medium Term Outlook

The authorities’ first priority going forward is the successful organization of credible elections, which will usher in a new democratically-elected leadership. The authorities are also working towards the consolidation of peace and security throughout the country. Economic policies for the remainder of 2015 will continue to be guided by the Emergency Recovery Plan.

Assuming continued improvements in the security situation, GDP growth rate is projected to reach 5.7 percent in the medium term, while inflation is projected to return to an average of 3.3 percent in the medium term, in line with the regional convergence criteria. The current account deficit is projected to reach 10.4 percent of GDP in 2015 on account of increased imports to finance major energy and infrastructure projects, and is expected to gradually decline in the medium run

Fiscal Policy

The authorities’ fiscal policies are aimed in the short run at mobilizing the resources needed to address urgent spending needs, including for elections and the DDR process, and rebuilding capacity. Medium-term policies are geared towards supporting growth and reducing poverty while preserving fiscal sustainability.

To improve revenue collection, the authorities will progressively rebuild state functions, including the equipment and staffing of decentralized revenue administration offices. They will also broaden the tax base by reducing tax exemptions, and strengthening controls to ensure compliance. In the same vein, they will seek to strengthen international tax cooperation and the exchange of information, especially with Cameroon’s customs authorities.

The authorities also adopted a comprehensive medium-term plan to strengthen domestic revenue collection. In this regard, they plan to deepen reforms already underway, including by further streamlining tax exemptions, and undertake new initiatives—amongst others, an overhaul of tax policy in the forestry, mining, and telecommunication sectors. They intend to phase in these reforms progressively, as administrative capacity is rebuilt, and with the benefit of Fund’s technical assistance.

On spending, the authorities plan to improve the efficiency of spending and align it with available financing with the view to achieving their fiscal sustainability goals. In the context of reduced revenues, the authorities will intensify efforts to control the wage bill by proceeding with the next phases of the payroll cleaning operation. They are also committed to meeting their spending ceiling target, including through sizeable reductions in public investments to reflect weaker administrative capacity.

The authorities are also prioritizing spending to ensure that the monthly cash management plan is implemented, and that available resources are directed towards priority spending. Structural reforms to improve public financial management will be intensified as well.

Over the medium term, the authorities are aiming for a return to normal budgetary procedures.

To that effect, they are committed to strictly limiting the use of exceptional budget and spending procedures, to reestablish the Treasury single account, and to ensure the effective operations of the Treasury’s ACCT.

Debt Sustainability

The authorities have taken good note of staff’s advice in the Debt Sustainability Analysis, which highlighted CAR’s exports vulnerability to conflict-related dislocations, and the volatility of commodity markets, especially in the aftermath of the global financial crisis. They are committed to preserving debt sustainability, against a particularly difficult internal and external environment.

Following the 2013 political and security crisis, CAR’s external public debt-to-GDP ratio spiked to 33.4 percent, while the total public debt–to-GDP ratio, including domestic debt, reached 47 percent. Owing to the authorities’ prudent debt policies, these ratios have been on a declining path since.

To broaden their export base and reduce debt vulnerabilities, the authorities took additional measures to ensure compliance with the requirements of the Kimberley certification process, which resulted in the partial lifting of the ban on diamond exports from CAR. They are working towards securing the remaining diamond production areas and to regain their market share in timber and forestry goods exports.

The authorities remain also committed to seeking financing only in the form of grants and highly concessional borrowing. Moreover, they are determined to intensify reforms aimed at strengthening debt management capabilities, with Fund’s technical assistance.

Structural Reforms

The authorities’ structural reforms will aim at broadening the sources of growth, leveraging CAR’s competitive advantage—notably in natural resources—to build an inclusive economy and reduce poverty in order to break the conflict cycle.

In the short run, the authorities’ priority is to reduce tensions, facilitate the return of displaced populations, and restore social cohesion, which will help ensure that economic activity is resumed throughout the country. They will also seek to remove conflict-related bottlenecks including by rebuilding infrastructure, securing trade routes, and investing in priority sectors such as health and education.

They will further accelerate the pace of reforms aimed at improving the business environment. In this respect, they plan to modernize and streamline the legal and regulatory framework for businesses, particularly in the mining and forestry sectors. They also plan to review the investment code to make it more attractive.

III. Conclusion

The Central African Republic’s authorities are grateful to the international community for the support they have been receiving, which has been decisive in halting the conflict’s downward spiral, and building much needed momentum for peace consolidation and economic rebuilding.

They undertook key reforms under the RCF, and laid out a vision to address the daunting medium-term challenges ahead. To succeed, the authorities need the full support of the international community, particularly at this critical juncture as they set out to organize the upcoming elections, and lay the foundations for medium-term economic policies.

The IMF in particular has an essential role to play in this fragile situation, notably through scaled up technical assistance, a successor medium-term program engagement, and its support in mobilizing the external resources critical to building a strong and inclusive economy, and securing a lasting peace.

On the basis of the authorities’ track record of Fund program implementation, ownership of the program as evidenced by the implementation of all prior actions and program performance criteria, as well as their commitment to sound policies going forward, we call on Executive Directors to support the Central African Republic authorities’ requests.