Central African Republic: Staff Report for the 2016 Article IV Consultation and Request for a Three-Year Arrangement Under the Extended Credit Facility

The Central African Republic (C.A.R.) is at a turning point, with the return to democratic institutions since April 1, 2016 offering prospects of ending the cycle of violent conflicts and political instability that has beleaguered the country since end-2012 and also engineering a turnaround to rebuild its economy, reduce poverty, and exit progressively from fragility. Three disbursements under the Rapid Credit Facility (RCF) helped to address urgent balance of payments needs and restore macroeconomic stability during the protracted political transition that lasted from January 2014 to March 2016. The newly elected government is focusing on reforms for a progressive exit from fragility, including improving security, consolidating the peace and the reconciliation process, rebuilding government institutions, and strengthening economic management.

Abstract

The Central African Republic (C.A.R.) is at a turning point, with the return to democratic institutions since April 1, 2016 offering prospects of ending the cycle of violent conflicts and political instability that has beleaguered the country since end-2012 and also engineering a turnaround to rebuild its economy, reduce poverty, and exit progressively from fragility. Three disbursements under the Rapid Credit Facility (RCF) helped to address urgent balance of payments needs and restore macroeconomic stability during the protracted political transition that lasted from January 2014 to March 2016. The newly elected government is focusing on reforms for a progressive exit from fragility, including improving security, consolidating the peace and the reconciliation process, rebuilding government institutions, and strengthening economic management.

Context: Post-Conflict Peacebuilding and Reconstruction

The return to democratic institutions provides a new window of opportunity for C.A.R. to engage on the path of national reconciliation, good governance, and better economic management.

1. The peaceful elections in early 2016 brought to an end a protracted political transition and the return to democratic institutions. This enhances the prospects of ending the political instability in the country that erupted in 2013 when armed rebels overthrew the democratically elected government, leading to violent fighting along religious lines. State institutions collapsed, economic activity ceased, civilians fled to internal camps or abroad, and a humanitarian crisis ensued. With help from the international community, a transitional government was eventually set up in January 2014. The United Nations put in place a peace keeping mission mandated to restore security, protect civilians, support the transition to democracy, and restore the rule of law. Following several delays for financial, security or logistical reasons, presidential and legislative elections were held in early 2016, leading to the election of President Touadera and a new parliament. The elections were generally acclaimed as free and the results widely accepted and President Touadera formed a coalition government composed of representatives from a wide array of political parties, but excluding some minority groups.

2. The new government is turning its attention to development challenges, with a focus on peace, governance, and economic management. It has announced that its long-term objectives are to reduce widespread poverty by reinforcing security, fostering national reconciliation and social peace, strengthening human and administrative capacity, and undertaking economic reforms. Consistent with these challenges, the authorities intend to: (i) undertake a comprehensive reform of the security services (RSS); (ii) further mobilize revenue collection and rein in non-priority public spending, while ramping up pro-poor spending; (iii) strengthen the government institutional capacity; and (iv) improve competitiveness.

3. The RSS will be a key element of the government’s medium-term strategy. This comprehensive security reform plan is being worked out between the authorities and stakeholders. The key issues relate to the departure of many old and untrained officers, the place of the ex-combatants in the society, and the role of a new army, with most of the donors favoring a shift to a civil security format, with small specialized forces to ensure security. The reform will require significant financial support from development partners and is not expected to impact the public finances. It is expected to be submitted to the donor community in November 2016.

Central African Republic and the IMF

The IMF provided significant support during the 2014-2015 political transition through three disbursements under the RCF. Performance by the authorities under their program created favorable conditions for longer term engagement.

4. The IMF and the international community supported the transition’s government emergency program with significant financial assistance and targeted technical assistance. The transition authorities improved treasury management, streamlined the civil service roster to contain a ballooning wage bill, and put in place a collaborative institutional framework. Donors provided significant budgetary aid, humanitarian assistance, and project support. The three successive disbursements under the RCF provided SDR 22.28 million (20 percent of new quota).

5. In the 2011 Article IV consultation, the authorities were encouraged to maintain macroeconomic stability while substantially increasing investment to address structural gap. Directors called for measures to ensure budget execution in line with the priorities approved by Parliament. They also recommended putting in place a mechanism for adjusting domestic petroleum products on a monthly basis. Directors stressed the need to strengthen public debt management, contract new debt on concessional terms to preserve debt sustainability, and clear arrears. They identified improving financial intermediation, removing structural rigidities, including expanding access to electricity, and improving the business environment as key structural reforms to uplift growth prospects. Notwithstanding the political and security crisis that prevailed, most of these reforms are underway, including those aimed at enhancing the contribution of the banking sector to growth and expand electricity supply.

6. Performance under three successive RCF disbursements set the stage for an upper credit tranche program and staff sees merit in longer-term engagement. The authorities have rebuilt basic state functions and core capacity, and delivered on macroeconomic management objectives and structural reforms—even under difficult political and security conditions. The new authorities have requested an ECF arrangement to meet protracted balance of payments needs. The latter would persist beyond the medium term because of a slow take off of their export earnings capacity due to the lingering impact of the partial embargo on diamond exports,1 low timber prices, and rising imports to meet the country’s food needs and reconstruction and investment requirements. The ECF-supported program aims to provide a macroeconomic framework to that will strengthen substantially and in a sustainable manner its balance of payments position consistent with strong and durable poverty reduction and growth. In line with this objective, the ECF will help mobilize revenue, improve efficiency of spending, scale-up social and infrastructure investment, anchor priority structural reforms, and mobilize and coordinate support from development partners.

Recent Economic and Financial Developments

Despite the progress achieved in the context of the emergency program, economic growth remained elusive, and fiscal revenue insufficient to cover current primary spending. The return to democratic institutions and the restoration of a peace –albeit fragile- provides a historic window of opportunity for C.A.R. to focus on longer term issues.

7. The crises during 2013 followed by a protracted political transition in 2014–15 provide the context for recent economic developments. Following a 4.1 percent rise in 2012, real GDP growth contracted by an estimated 36.7 percent in 2013. During the transition, economic activity remained weak, reaching 1 percent in 2014, before rising to 4.8 in 2015, driven by an uptick of subsistence agricultural activity, construction, transportation and trade. Inflation peaked at 11.6 percent in 2014 and receded to 4.5 percent in 2015 thanks to improved supply conditions resulting from enhanced security along the Douala-Bangui transport corridor, a fall in the prices of some basic imports, and improved distribution networks (Table 1 and MEFP, ¶5). Per capita growth, which stagnated throughout the pre-crisis, collapsed in 2012 and did not recover during the transition. Furthermore, the crisis led to a deterioration of all social indicators, as suggested by the 2015 Human Development Report which ranked C.A.R. at 187 out of 188 countries, with a Human Development Index significantly lower than the average sub-Saharan Africa (Box 1).

Table 1.

Central African Republic: Selected Economic and Financial Indicators, 2012–21

article image
Sources: C.A.R. authorities; and IMF staff estimates and projections.

Expenditure is on a cash basis in 2014 and 2015 in the context of the Rapid Credit Facility.

Excludes grants, interest payments, and externally-financed capital expenditure.

Comprises government debt to BEAC, commercial banks and government arrears.

8. Fiscal and current account deficits widened. The primary fiscal position shifted from a small surplus in 2012 to a deficit of 3 percent of GDP in 2015 (Tables 2 and 3). This was attributable to a collapse in domestic revenue to 4.9 percent of GDP in 2014 (from 11.5 percent of GDP in 2012) before rebounding to 7.1 percent of GDP in 2015 thanks to corrective measures taken during the last year of transition. At the same time, current primary spending remained at about 9.7 percent of GDP, of which 6 percent representing the wage bill. Domestically-financed capital spending fell to 0.4 percent of GDP in 2015, from 1.5 percent in 2012. The current account deficit doubled since 2012 to 9 percent of GDP, mainly reflecting a collapse in exports of diamonds and forestry products.

Table 2.

Central African Republic: Central Government Financial Operations, 2012–21

(CFAF billions)

article image
Sources: C.A.R. authorities; and IMF staff estimates and projections.

Expenditure is on a cash basis, except for interest, which is recorded on a due basis.

Excludes grants, interest payments, and externally-financed capital expenditure.

Includes repayments to CEMAC commercial banks and domestic suppliers for oil subsidies.

Including arrears.

Table 3.

Central African Republic: Central Government Financial Operations, 2012–21

(In percent of GDP)

article image
Sources: C.A.R. authorities; and IMF staff estimates and projections.

Expenditure is on a cash basis, except for interest, which is recorded on a due basis.

Excludes grants, interest payments, and externally-financed capital expenditure.

Includes repayments to CEMAC commercial banks and domestic suppliers for oil subsidies.

Including arrears.

9. The treasury situation remained tight during the first half of 2016 despite strong revenue performance and strict expenditure control (Table 6a). During the first quarter, domestic revenue, together with the financial reserves accumulated at end-December 2015, helped cover salaries, pensions, and debt service obligations, including vis-a-vis the IMF. For the second quarter, the authorities faced a treasury gap of CFAF 10 billion which prompted donors to provide bridge emergency support as they were reassured by the discussions on a new ECF-supported program.

Table 4.

Central African Republic: Monetary Survey, 2012–21

article image
Sources: C.A.R. authorities; and IMF staff estimates and projections.
Table 5.

Central African Republic: Balance of Payments, 2012–21

article image
Sources: C.A.R. authorities; and IMF staff estimates and projections.

Includes HIPC debt relief from multilateral creditors. For 2010 onward, reflects full delivery of HIPC and MDRI relief on a flow basis.

Table 6a.

Central African Republic: Treasury Cash Management Plan, 2016

(In millions of CFA francs)

article image
Source: Data provided by the Authorities.
Table 6b.

Central African Republic: Treasury Cash Management Plan, 2017

(In millions of CFA francs)

article image
Source: Data provided by the Authorities.