Central African Economic and Monetary Community (CEMAC): Staff Report on the Common Policies of Member Countries
Author:
International Monetary Fund. African Dept.
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Publication Date:
24 Aug 2016
eISBN:
9781475529685
Language:
English
Keywords:
ISCR; CR; CEMAC authority; authority; FAD CEMAC; CEMAC Commission; oil-price shock; CEMAC authorities; CEMAC institution; IMF staff estimate; CEMAC data; CEMAC value; Oil prices; Fiscal consolidation
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CEMAC is buffeted by the oil-price shock. The outlook has deteriorated, as members continue to suffer from the shock. Regional and national authorities have yet to take appropriate measures to address the economic downturn, whilst continuing to face substantial capacity constraints. Although the banking sector has weathered the downturn so far, government payment delays could undermine its soundness. Risks are significant: a weaker-than-expected oil price recovery or deteriorating security conditions could jeopardize macroeconomic stability.

Abstract

CEMAC is buffeted by the oil-price shock. The outlook has deteriorated, as members continue to suffer from the shock. Regional and national authorities have yet to take appropriate measures to address the economic downturn, whilst continuing to face substantial capacity constraints. Although the banking sector has weathered the downturn so far, government payment delays could undermine its soundness. Risks are significant: a weaker-than-expected oil price recovery or deteriorating security conditions could jeopardize macroeconomic stability.

A Community Blighted by Low Oil Prices

1. The security situation in the Central African Economic and Monetary Community (CEMAC) improved in 2015, but the economic situation deteriorated markedly. On the one hand, security threats from Boko Haram in the Lake Chad region were reduced through regional military cooperation, but they continue to place a heavy fiscal burden on Cameroon and Chad. Following presidential elections in February 2016, the civil strife in the Central African Republic (CAR) is abating. On the other hand, the oil-price shock took a toll on CEMAC’s five oil exporting members. Oil prices have declined by more than 55 percent since June 2014, and with oil representing more than three-quarters of regional exports and half of fiscal revenues (in 2014), most countries are facing budgetary pressures (Figure 1; Tables 1–3). Despite its resource wealth, CEMAC has been lagging behind peers in economic performance (Figure 2). CEMAC’s economic challenges are compounded by a timid regional cooperation.

Figure 1.
Figure 1.

CEMAC: Selected Economic Indicators, 2000–15

Citation: IMF Staff Country Reports 2016, 277; 10.5089/9781475529685.002.A001

Sources: CEMAC authorities; WEO database; and IMF staff estimates.
Table 1.

CEMAC: Selected Economic and Financial Indicators, 2014–21

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Source: Authorities’ data; and IMF staff estimates and projections.

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

Excluding grants, foreign-financed investment, and interest payments.

Excluding grants and foreign-financed investment.

Table 2.

CEMAC: Millennium Development Goals, 1990-2015

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Source: World Development Indicators.
Table 3.

CEMAC: National Accounts, 2014–211/

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Sources: Authorities’ data; and IMF staff estimates and projections.

CEMAC values are calculated using the purchase power parity (PPP) GDP weighted average of member countries’ data.

Figure 2.
Figure 2.

CEMAC: Regional and International Comparisons, 2011–16

Citation: IMF Staff Country Reports 2016, 277; 10.5089/9781475529685.002.A001

Sources: CEMAC authorities; WEO database; World Bank; and IMF staff estimates.

2. Regional growth more than halved in 2015 and medium-term prospects are uncertain. Growth slowed to 1.6 percent, from 4.9 percent in 2014, because of reduced public investment and lower oil production. Growth is projected to be 1.9 percent in 2016, as oil production and investment remain sluggish. From 2017 onward, growth is expected to reach on average 3½ percent a year, as oil prices gradually recover. Growth of money and credit to the economy turned negative in 2015 for the first time in a decade, contributing to keeping inflation low.

3. The region’s “twin” deficits widened in 2015 and are projected to grow in 2016. The regional fiscal and current account deficits grew to 6 and 9 percent of GDP in 2015, respectively, as oil export proceeds fell by 33 percent (Tables 4a–5b). Continued low oil prices and high public expenditure will contribute to maintaining both deficits at about 6 percent and 8 percent of GDP in 2016, respectively. The gradual recovery in oil prices and the expected moderate fiscal consolidation should narrow the regional fiscal deficit to 2½ percent by 2021. Similarly, the current account is projected to improve with recovering exports and lower public imports.

Table 4.

CEMAC: Relative Size of Economies and Importance of Oil Sector, 2014–21

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Sources: Authorities’ data; and IMF staff estimates and projections.

The sum of the countries’ nominal oil GDP divided by CEMAC’s nominal GDP.

The sum of the countries’ oil exports divided by CEMAC’s total exports.

The sum of the countries’ fiscal oil revenues divided by CEMAC’s fiscal revenues.

Table 5a.

CEMAC: Fiscal Balances, 2014–211/

(Percent of GDP)

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Sources: Authorities’ data; and IMF staff estimates and projections.

All CEMAC values are calculated as purchase power parity (PPP) GDP weighted averages of member countries.

Overall budget balance excluding grants and foreign-financed investment.

Overall budget balance including grants and excluding interest payments.

Table 5b.

CEMAC: Fiscal Non-Oil Balances, 2014–211/

(Percent of non-oil GDP)

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Sources: Authorities’ data; and IMF staff estimates and projections.

All CEMAC values are calculated as purchase power parity (PPP) GDP weighted averages of member countries.

Overall budget balance excluding grants and foreign-financed investment.

Non-oil fiscal balance including grants and excluding interest payments.

4. Fiscal dominance has come to the fore. In the wake of the oil-price shock, monetary financing has been the primary response tool. Although the non-oil primary deficit dropped by 8 percentage points of GDP in 2015, this response has been insufficient to check the overall fiscal deficit. A major weakness in CEMAC is the lack of fiscal policy coordination among members and the absence of fiscal discipline enforcement. In spite of a decade of high oil prices and robust growth, most CEMAC countries have failed to diversify their economies and build sufficient buffers.

5. Banks’ exposure to the public sector is the main transmission channel of macrofinancial risks. With dwindling oil revenues, public sector bank deposits have shrunk. The increase in government payment delays and the scaling down of public investment programs could increase banks’ non-performing loans (NPLs), especially to the construction sector. In turn, higher NPLs could limit credit to the private sector and undermine non-oil GDP growth.

6. The medium-term outlook is fraught with risks (Annex I). A weaker-than-expected oil price recovery or a relapse in security conditions could undermine macroeconomic stability and private investment. Lower growth in China could dampen commodity prices—especially oil—, lower demand, and reduce financing. Previous IMF staff advice has generated limited traction (Annex II).

Policy Discussions—Managing the Economic Downturn

Against the backdrop of declining international reserves, dwindling fiscal buffers, and mounting macro-imbalances, discussions focused on policies to mitigate the structural oil-price shock, supported by regional and national structural measures, regional integration, and economic diversification.

A. An External Position at Risk

7. CEMAC’s non-oil competitiveness is poor and the external position could weaken further in the near term. At end-2015, reserve coverage was 4.6 months of future imports and represented 52 percent of broad money. Despite the depreciation of the euro in 2014–15, both the nominal and real effective exchange rates (REERs) appreciated during the 12 months to April 2016, because of the inflation differential and CFA franc appreciation vis-à-vis the currencies of trade partners. According to model-based assessments, the REER appears to be moderately overvalued (by about 6 percent) with respect to the current account norms (Figure 3; Table 6; Annex III). In addition, large structural competitiveness challenges persist.

Figure 3.
Figure 3.

CEMAC: Selected External Indicators, 2007–16

Citation: IMF Staff Country Reports 2016, 277; 10.5089/9781475529685.002.A001

Sources: CEMAC authorities; and IMF staff estimates.
Table 6a.

CEMAC: Balance of Payments, 2014–21

(CFAF billions, when otherwise indicated)

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Sources: BEAC; and IMF staff estimates and projections.

8. Staff expressed concerns about the significant fall in reserves. Between December 2014 and March 2016, international reserves contracted by 41 percent in CFA francs. By end-March 2016, reserve coverage dropped to 3.9 months of prospective imports, below what is considered adequate (5 months) for a resource-rich monetary union with a fixed exchange rate.1 Staff projects that, without policy adjustment, reserve coverage could shrink in 2016 to a decade low. Staff urged a stronger CEMAC-wide policy mix (e.g., fiscal retrenchment; end to monetary accommodation; and structural measures) to forestall this.

9. Staff reiterated its call for the repatriation of foreign assets and improved reserve management. In a context of falling foreign assets, within and outside CEMAC, member states and their agencies (e.g., national oil companies) should repatriate them to support the Community’s external viability. The BEAC has made efforts to improve the management and performance of its reserves to encourage member states to comply with regional repatriation regulations. However, the current outlook requires additional measures, such as those recommended by the 2015 Financial Sector Assessment Program (FSAP). These include: (i) the definition of the optimal level of reserves; (ii) a better reserve portfolio structure to meet new liquidity requirements; and (iii) a new method to manage member states’ deposits and ensure that foreign reserves are backed by long-term resources (Selected Issues Paper—SIP—1). Higher remuneration of reserves should increase incentives for foreign asset repatriation.

10. The BEAC needs to strengthen its balance sheet. To maintain the required proportion of liquid reserves, the BEAC sold 37 percent of its investment portfolio (at market value) in 2015. This resulted in a significant realized profit for the BEAC, about one third of which was distributed to member states as dividends. Given the continuing decline in reserves, the BEAC may be required to pursue similar operations in 2016. Staff recommended retaining the full amount of future sales to boost the BEAC’s balance sheet.

Authorities’ views

11. The authorities shared staff’s concerns about falling reserves. They had implemented reforms to enhance reserve management, promote reserve repatriation, and make reserves management more transparent, which also bolstered the BEAC’s balance sheet. The authorities are working on a solution to pool reserves without requiring member states to repatriate all their foreign currency holdings by creating BEAC correspondent accounts in major international public and private financial institutions. They concurred that governments and private companies, especially oil companies, should fully comply with reserve pooling requirements. They considered that, in the event of a dramatic fall in reserves, the French Treasury’s guarantee will protect the peg.2 To ensure compliance with their obligations vis-à-vis the French Treasury, they conducted regular asset sales to match their liquidity needs in foreign currencies.

B. Urgency of Fiscal Consolidation

12. In the presence of a fixed exchange rate regime and weak monetary policy transmission, policies to counter the oil-price shock need to focus on fiscal consolidation and real-economy reforms.3 Staff analysis suggests that adjustment through fiscal consolidation is most appropriate in the case of commodity exporters with a fixed exchange rate regime. National fiscal policies ranged from fairly conservative (Gabon’s overall fiscal deficit in 2015 was 1 percent of GDP) to loose (Congo had a deficit of 18 percent of GDP). Staff considered that regional macroeconomic stability required CEMAC-wide fiscal retrenchment. Given the expected duration of the oil-price shock and low public savings, staff recommended that regional authorities urge their national counterparts to take measures to increase non-oil revenue and rein in spending. Staff urged an expansion of tax bases to move toward the CEMAC objective of non-oil revenue of 17 percent of GDP. Fiscal consolidation should focus on the quality of expenditure, preserve priority social spending (e.g., education, health) and finishing infrastructure projects, which are well advanced and demonstrably support development.

13. The capacity of commercial banks to finance budget deficits may have reached its limits. Although some banks have ample liquidity—including because of the recent halving of the reserve requirement—prudential regulations constrain government financing beyond the short term. Recent stress tests by staff highlight that without an additional increase in banks’ capital, it would be risky for them to increase sovereign lending.

14. Staff emphasized the need to contain debt (Figure 4). Regional authorities should urge member countries to adopt cautious debt policies and borrow on concessional terms to the extent possible. Indeed, member countries have limited access to international financial markets, except at prohibitive rates. Rapid accumulation of debt would only delay fiscal adjustment and would lower regional reserves when new external debt service kicks in (SIP 2). The BEAC should consider creating a regional debt issuance agency, similar to West Africa’s UMEOA Titres, to improve the efficiency of regional debt markets.

Figure 4.
Figure 4.

CEMAC: External Debt Developments, 2014–16

Citation: IMF Staff Country Reports 2016, 277; 10.5089/9781475529685.002.A001

Sources: CEMAC authorities; and IMF staff estimates and projections.

15. Staff presented a “moderate adjustment” scenario and a “no adjustment” scenario (Text Table 1). In the moderate adjustment scenario, staff assumed—in line with declarations by several CEMAC governments—that countries would adopt limited adjustment policies to support macroeconomic stability. Some structural reforms would be implemented to spur non-oil growth focusing on enhancing the business climate and private investment growth, including streamlining regulation, promoting tax harmonization, and improving intra-Community trade facilitation. Conversely, the no adjustment scenario envisaged a continuation of current policies, which lead to a deterioration in the regional economic outlook, with reserves falling to low levels.4,5

Text Table 1.

CEMAC: Economic Outlook Scenarios, 2016–21

(Units as indicated)

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Source: IMF staff projections.

Authorities’ views

16. The authorities concurred with staff on the challenging economic outlook. They agreed on the need to encourage fiscal consolidation at the country level, but noted that regional authorities could not impose fiscal discipline on member states. They opined that staff’s oil-price projections were too pessimistic and thus could overestimate the size of the required fiscal adjustment. They reiterated that countries were aware of the need for adjustment, but if needed, they could raise additional financing given that regional financial markets still had the capacity to absorb additional public debt. The BEAC’s plans to revitalize regional debt markets would also support this. They saw the creation of a regional public debt issuing institution as useful in the long term, but they felt there were more appropriate measures in the near term (e.g., better coordination among national Treasuries to plan debt issuances; harmonization of procedures in regional depositories; stronger competition among market participants).

C. A New Convergence Framework for Regional Stability

17. The economic downturn underscores the need to overhaul the regional convergence framework (Table 8). In late 2015, the CEMAC Commission presented a revised framework, to enter into force on January 1, 2017. The new framework includes a number of innovative features, including (i) a new fiscal rule based on a three-year average overall budget deficit; (ii) a public deficit ceiling, reinforced with a debt break; (iii) a revised inflation criterion; and (iv) additional secondary criteria (Box 1). The Commission is exploring options to include a budgetary savings mechanism to help build buffers for future commodity shocks.

Table 6b.

CEMAC: Balance of Payments Indicators by Country, 2014–211/

(Percent of GDP)

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Sources: BEAC; and IMF staff estimates and projections.
Table 7.

CEMAC: Nominal and Real Effective Exchange Rates, 2006–15

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Source: IMF Information Notice System.

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

Table 8.

CEMAC: Compliance with Convergence Criteria, 2013–16

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Sources: Authorities’ data; and IMF staff estimates and projections.

Overall budget balance, excluding grants and foreign-financed investment.

Includes external and domestic payments arrears. Data reported by country authorities, which may not coincide with CEMAC teams’ findings. A negative sign indicates a reduction in the stock of past arrears.

CEMAC: New Convergence Framework

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18. Staff welcomed the adoption of the new framework as an important step for strengthening macroeconomic surveillance. Although the framework does not fully reflect staff’s earlier advice, it nonetheless constitutes progress in restraining the pace of debt accumulation.6 Staff considered that because of the difficulties in monitoring certain criteria (e.g., non-accumulation of arrears), the new framework should be complemented by a strengthened monitoring mechanism for primary and secondary criteria, including a mandate for the Commission to validate the data submitted. This would require strong political support and adequate resources. Staff supported creating a fiscal savings mechanism.

19. Staff encouraged the authorities to enhance regional policy coordination and harmonization. One element would be the implementation of a structural budget-balance rule which requires, inter alia, comprehensive data, technical forecasting capacity, and the ability to analyze sector linkages and business cycles (SIP 3). Because these take time to develop, the short-term priority should be meeting the new fiscal criterion. Implementing the six regional public finance management (PFM) directives would also enhance coordination (SIP 4). Similarly, CEMAC authorities should promote harmonized tax policies to reduce dependence on foreign trade in favor of broad-based domestic taxes. This is particularly important, as international trade negotiations will lower custom tariffs (see infra).

Authorities’ views

20. The CEMAC Commission indicated that the new framework will be brought to CEMAC Heads of State for endorsement. Although the new framework had already been adopted by the ministers of finance, its approval by the presidents would reinforce its legitimacy. The approval would also help the implementation of new mechanisms, such as the budgetary savings instrument. To strengthen monitoring, the Commission would enhance cooperation with the BEAC to share macroeconomic data. The Commission was making a determined effort working with national authorities to have the CEMAC PFM directives incorporated into national legislation. They expected significant progress by end-2017.

D. A Monetary Policy Reaching its Limits

21. The BEAC has implemented an accommodative monetary policy. It has used direct and indirect monetary tools to support member states. First, it reversed its previous policy of gradual elimination of “statutory advances” (i.e., unconditional budget lending) in August 2015, and re-instituted them at their statutory level, which resulted in a 52 percent increase in such advances CEMAC-wide. Second, the BEAC approved exceptional additional advances to CAR and Chad (50 percent of their statutory ceiling). Currently only Cameroon is below its statutory ceiling (Figure 5).7 Third, the BEAC also lowered its refinancing rate repeatedly and raised government paper refinancing ceilings for commercial banks. Forth, in April 2016, it halved the reserve requirement ratio, releasing the equivalent of one-fifth of outstanding statutory advances in additional bank liquidity.

Figure 5.
Figure 5.

CEMAC: Monetary Developments, 2016

Citation: IMF Staff Country Reports 2016, 277; 10.5089/9781475529685.002.A001

Sources: CEMAC authorities; and IMF staff estimates.

22. Staff considered that the accommodative monetary policy had reached its limits and had contributed to the loss of reserves. Staff considered that the extent of past monetary financing was not justified based on ex post regional output gap estimations. Indeed, four countries, representing some 85 percent of regional GDP, had positive or virtually no output gaps (Figure 6). Monetary stimulation in this context was likely to stoke inflationary and exchange rate pressures. Moreover monetary financing not only delayed fiscal consolidation, but also hindered the development of regional financial markets (SIP 5); limited monetary transmission; and undermined the effectiveness of new monetary policy instruments developed by the BEAC.8 In addition, staff wondered whether the BEAC would be able to rescind this policy swiftly if needed. Staff recommended the freezing of statutory advances at their current level, pending a resumption of their gradual elimination when circumstances allow.9 Staff also recommended that the BEAC resist indirect monetary financing, such as raising refinancing ceilings of commercial banks or granting additional financing to the regional development bank (BDEAC). These two recommendations are consistent with lower broad money and credit to the economy in 2015 than the year before. Staff explained adoption of these recommendations would send a strong signal to member states on the need for fiscal adjustment to buttress the exchange rate.

Figure 6.
Figure 6.

CEMAC: Output Gap, 1990–2015

Citation: IMF Staff Country Reports 2016, 277; 10.5089/9781475529685.002.A001

1/ Output gap estimared using a Hodrick–Prescott decomposition.Sources: CEMAC authorities; and IMF staff estimates.

23. Staff urged the BEAC to pursue the development of its monetary policy instruments. It noted the progress in bolstering interbank transactions and establishing a liquidity forecasting framework. Given that the monetary transmission channel remains weak, the BEAC should accelerate reforms (e.g., reserve management), with the help of IMF technical assistance, and strengthen its capacity to conduct monetary policy operations. Staff supported the BEAC’s decision—to be implemented soon—to standardize the rates of reserve requirements across banks. It argued, however, against the introduction of computational changes, which could, in practice, exacerbate excess liquidity (by excluding assets below certain thresholds from reserve requirements). Staff also supported the decision to stop injecting and withdrawing liquidities simultaneously, as this improves the transparency of monetary policy and of the interbank money market.

Authorities’ views

24. The authorities emphasized they could not remain passive while member governments were confronting a severe exogenous shock. They considered supporting members’ budget positions in the current exceptional circumstances as part of their mandate. They argued that members’ ongoing infrastructure projects needed to continue to sustain development plans. They saw their accommodative monetary policy as similar to those implemented by other central banks, confronted with similar trying circumstances.

25. The authorities emphasized progress in reforming monetary policy instruments. They considered their recent decisions on monetary instruments as increasing the effectiveness of monetary policy. In particular, a new repo contract, to be put in place in the second half of 2016, should reduce credit risk in interbank operations and support the development thereof. They were cognizant, however, of the limitations imposed by the challenging business climate on the development of the interbank and debt markets.

E. A Regional Financial Sector Showing Vulnerabilities

26. So far, the financial sector has been able to cope with the challenging economic environment, but troubled banks remain an issue.

  • Banks appear generally profitable, even though the situation varies by country and type of institution. Most banks have a business model, which relies on service fees, and which has partially shielded them thus far from the downturn. However, because of increasing NPLs, some banks have already suffered a significant reduction in their interest revenues.

  • Bank liquidity has declined because of the drop in government deposits, but remains broadly adequate. Excess liquidity of banks at the BEAC represented 12 percent of their balance sheet in January 2016 against 15 percent in September 2014. Liquid assets and interbank deposits, excluding statutory reserves, remained stable at 26 percent of total assets during the same period. With the recent decline in reserve requirement, bank liquidity should rise to close to 30 percent, ensuring that banks remain liquid.

  • Bank solvency ratios have remained high and relatively unchanged. At end-2015, capital to risk-weighted assets represented about 13 percent, in line with the findings of the last FSAP. The increase in NPLs from 11.9 percent of total loans in September 2014 to 12.6 percent in January 2016 has not undermined overall bank soundness so far, as shown by broadly unchanged solvency ratios. During the same period, banks’ adjusted net capital remained also unchanged, because of the increase in equity in the banking sector by nearly 8 percent. The majority of NPLs derives from “connected” lending and does not come from the downturn. Similarly, the NPLs in microfinance institutions (MFIs) increased modestly, from 13.3 percent of total loans in December 2014 to 14.0 percent in September 2015. However, the regional banking supervisor (COBAC) reports that NPLs could exceed 20 percent in some MFIs.

  • Eight of fifty-two banks have negative equity and do not comply with the solvency norm. Total assets of these banks is less than 5 percent of total bank assets, but the inability of the national and regional authorities to close them remains an issue and sends the wrong signal to the financial sector.

27. Staff noted that banks appeared to have weathered the economic downturn thus far, but vulnerabilities were increasing. These stem partly from delayed government payments to the private sector, and specifically the construction sector, which is heavily indebted to domestic banks. For instance, in Equatorial Guinea, credit to the construction sector represented 57 percent of gross bank loans at end January 2016. Recent stress tests showed that macroeconomic risks had increased in three countries, compared to the findings of the last FSAP. Tests show that if the oil price shock further spreads in the real economies, bank solvency will deteriorate. To assess this risk, the COBAC should run additional stress tests for all member countries.

28. Staff emphasized the importance of the effectiveness of the microprudential framework to prevent the spreading of macrofinancial risks (Annex V). Given the importance of direct and indirect links between the public and financial sectors, ongoing reforms of the microprudential framework are critical to ensure financial stability. Progress has been made following the 2015 FSAP recommendations, especially in the treatment of connected loans; cross-border supervision; and treatment of NPLs. Additional efforts are necessary to implement the remaining FSAP recommendations (Annex IV). Staff encouraged the COBAC to increase the solvency ratio for systematically important banks, and develop bank supervision on a consolidated basis. Staff supported the COBAC’s efforts to enhance its supervisory framework through an effective risk-based supervision, focusing on liquidity and foreign exchange risks.

29. Staff encouraged the BEAC to develop its macroprudential framework. The analytical tools and institutional capacities needed upgrading to deal with the current economic challenges. The BEAC had created a Financial Stability Committee (FSC) in 2012, but the Committee’s first working meeting took place only in April 2015. The Committee’s analytical agenda is ambitious, but constrained by the lack of macrofinancial data. The current approach of “expert judgment” does not provide a detailed risk mapping, but is a critical step in the design of vulnerability indicators.

30. Staff noted the improvement in bank supervision, following the hiring of new staff. However, following FSAP recommendations, a number of additional measures should be implemented to align COBAC’s supervisory framework better with the specificities of CEMAC. Given the banks’ varying risk profiles, it would be advisable to implement the Basel Pillar II approach, to allow the COBAC to adjust capital requirements to banks’ risk profiles. To reflect the weakness of some guarantees or collaterals for loans, the COBAC should increase risk weights applied to these assets for the calculation of the solvency ratio, to reflect more accurately the associated risk. Finally, the BEAC and national authorities should agree on resolving troubled banks in a timely manner.

31. Staff welcomed progress in the supervision of MFIs. The COBAC launched e-Sesame, a data collection system to improve financial information. In addition, increased staffing at the COBAC’s microfinance department should allow closer monitoring and more frequent inspections. The COBAC plans to update prudential regulation to raise the minimum capital requirement for MFIs and restrict lending to non-members. Staff noted, however, that strengthening governance within MFIs requires a more effective judicial system and more resolute prosecution of fraud.

32. Staff advised promoting financial inclusion. The BEAC, working in tandem with national authorities, should facilitate small and medium-size enterprises’ (SMEs) and households’ access to credit. With the increase in credit risk of public and construction companies, banks are looking for new customers, particularly SMEs. However, the lack of financial transparency, accounting reliability, and governance problems of SMEs hinder credit growth. Staff noted that mobile banking had been growing rapidly because of recent changes to the legal framework for issuing electronic money. This development should be supported by appropriate regulation and enhanced supervision.

Authorities’ views

33. The authorities agreed with staff’s assessment of the financial sector. They concurred that banks were only moderately affected by the economic downturn, because of their business model. They noted that some banks had strengthened their equity position. Nonetheless, they remained vigilant and were following closely the situation of the banking sector and stood ready, if needed, to implement contingency plans, such as appointing interim administrators for problem banks. They emphasized that the recent increase in COBAC’s staffing (34 new executives) would enable closer supervision and more on-site visits to banks and MFIs.

34. The authorities concurred with staff’s assessment of macrofinancial linkages. They agreed that enhanced microprudential supervision should be a priority and that a proper macroprudential framework should be in place to support financial sector development. They were committed to strengthening regulations with transnational supervision on a consolidated basis; implementation of Basel II Pillar II; and enhanced cooperation among regional financial institutions through the FSC.

F. Strengthening Regional Institutions

35. Uncertain economic prospects should encourage regional and national authorities to strengthen CEMAC institutions and work together more closely. Several institutions lack appropriate human and financial resources and countries do not coordinate policies with significant regional impact (e.g., public investment programs, taxation). Efficient regional institutions could support efforts to diversify growth, improve budget management, and promote financial sector development. The CEMAC Commission should work with national governments to improve the business environment and to promote private investment and economic diversification. Similarly, the BDEAC should take the lead in coordinating regional infrastructure projects.

36. Staff noted progress in the implementation of the BEAC’s safeguards reforms. In early May 2016, the BEAC’s Board of Directors mandated the institution to initiate work on improving governance and transitioning to International Financial Reporting Standards (IFRS). This decision met two principal requirements the 2016 IMF Finance Department’s (FIN) safeguards mission (see companion FIN report).

37. Staff welcomed the COBAC’s strengthened operational capacity. The regional supervisor had more than doubled the number of its inspectors and deployed a new financial information system. However, more efforts are needed to strengthen the quality of financial reporting and financial sector statistics. Similarly, the COBAC should accelerate the adoption of stricter regulations on connected loans and on the supervision of MFIs.

38. Staff observed that the CEMAC Commission still faced major challenges. The Commission has been displaced from its headquarters since 2013, which is hindering its operational capacity. Despite its constraints, it persevered in launching important reforms, including the adoption of a new regional surveillance framework; the harmonization of national policies to reduce non-tariff barriers to intra-regional trade; and integration of national customs policies into a common regional policy. With the coming into force of the Economic Partnership Agreement (EPA) between Cameroon and the European Union in August 2016, a region-wide EPA would be necessary to avoid the risk of tariff dismantling between Cameroon and the European Union undermining intra-regional trade. Staff encouraged the Commission to coordinate efforts with member states to improve the business climate and ensure free movement of goods and people.

39. Staff noted that BDEAC envisions becoming a key regional development institution. Following its 2014 capital increase, the BDEAC is implementing reforms, while expanding its investment activities. Besides the harmonization of its management and operating procedures with best international practices, the Bank must increase its support to the design, financing, and implementation of regional investment projects, including in the form of public-private partnerships (PPPs).

40. Staff called for a more robust regional legal framework against money laundering and terrorist financing (AML/CFT), aligned with the 2012 Financial Action Task Force (FATF) standard.10 Resources need to be mobilized to ensure an effective implementation of AML/CFT risk-based supervision by the COBAC and the enforcement of AML/CFT requirements. GABAC, the recently recognized FATF-style regional body for Central Africa, is now working with the FATF global network to combat money laundering and terrorist financing, assess the compliance of its members against the FATF standard, and provide technical assistance.

41. Sound statistical information is important for policy implementation. Although commendable efforts have been made in the preparation of financial soundness indicators, progress is hampered by the lack of resources at the BEAC and national statistics offices. This is compounded by challenges in the coordination between regional and national institutions. To enhance data provision, the BEAC could consider implementing a system for preparing and sharing statistics, similar to that in use at the West African regional bank.

Authorities’ views

42. The authorities considered that the BEAC’s modernization and reform plan was all but completed. They noted that efforts were still needed in the upgrading of information and budget management systems.

43. The Commission and the BDEAC noted that they were addressing challenges on many fronts. The Commission’s operational capacity is constrained by the lack of permanent headquarters and the absence of a common position among member states on key issues, such as the EPA or the reform of the regional business climate. The Commission noted that any regional EPA agreement should recognize the level of economic development of each member state. The BDEAC authorities concurred with the need to streamline and improve PPP legislation. They are preparing a new regional investment strategy; seeking an independent financial rating; and raising funds for regional projects.

44. The authorities stressed that they made considerable efforts to improve regional statistics. The BEAC had almost completed a database of regional economic and financial data, which should be operational later in 2016. They noted, however, the difficulties in collating data at national level because of the paucity of data in some member countries.

Staff Appraisal

45. CEMAC’s economic situation has deteriorated markedly and the medium-term outlook entails significant risks. The oil-price shock has taken a toll on the oil-producing Community. Scaling down of public investment and the lack of economic diversification could have lasting developmental consequences and affect the most vulnerable parts of the population. Insufficient policy response to the oil-price and security shocks could undermine regional macroeconomic stability.

46. The policy response to the oil-price shock needs to be firmed up. Fiscal policy is the most appropriate tool to address structural shocks for commodity exporters with a fixed exchange rate. In the absence of sufficient buffers, the fiscal response to the oil revenue loss and increased security spending has been insufficient. The BEAC’s accommodative monetary policy has reached its limits and has delayed fiscal adjustment. Foreign reserves have dropped and are expected to stay below recommended levels in the medium term. These levels may be insufficient to withstand a further decline in oil prices or another exogenous shock. The BEAC should make progress in ensuring full compliance with the reserves pooling requirement by member states and government agencies. Against this background, staff recommended a freezing of statutory advances at their current level, pending a resumption of their gradual elimination when circumstances allow, and to adopt a cautious debt policy.

47. The new convergence framework can help strengthen regional macroeconomic management. it constitutes progress. However, its criteria call for a reinforced monitoring mechanism, involving regional and national authorities. Staff supports the Commission’s plan to create a fiscal savings mechanism to cope with future revenue shocks. CEMAC authorities should strengthen regional coordination and harmonization, including the implementation of the six CEMAC PFM directives.

48. The financial sector appears to have weathered the oil-price shock so far. Most vulnerabilities reflect internal governance challenges more than the economic downturn. However, emerging government payment delays could undermine the banking sector.

49. An effective microprudential framework is essential to prevent the spread of macrofinancial risks. Direct and indirect links between the public and the banking sectors can propagate risks and affect macrofinancial stability. Progress has been made following the 2015 FSAP recommendations, especially in the treatment of connected loans; cross-border supervision; and treatment of NPLs. Others still need implementation. Staff encouraged the COBAC raising the solvency ratio for systematically important banks; developing bank supervision on a consolidated basis; and implementing an effective risk-based supervision.

50. Liquidity in the banking sector remains ample, especially in the wake of the recent reduction of the reserve requirement ratio. The BEAC has developed new monetary policy framework instruments, which should be put in place in late 2016. However, excessive liquidity and the lack of sufficiently deep interbank and debt markets hamper monetary transmission. The impact of this liquidity on prices and foreign exchange markets needs to be monitored carefully. The BEAC should finalize its lender of last resort framework to address specific liquidity needs.

51. After delays, the BEAC made some progress in the implementation of outstanding safeguards recommendations. The BEAC’s Board of Directors decision to initiate governance reform and the transition toward IFRS are important steps for the successful completion of safeguards reform.

52. Regional and national authorities should promote regional integration by strengthening CEMAC institutions. Efficient regional institutions could support efforts to diversify growth, enhance public policy coordination, and promote financial sector development. Several institutions lack human and financial resources to contribute effectively to the creation of an integrated common market.

53. Shortcomings in regional statistics remain a concern. Although regional authorities (the BEAC and the COBAC) have made efforts to improve the quality of key economic information, important gaps remain. In the current economic context, timely and quality statistical information is essential for policy implementation.

54. The discussions with the CEMAC authorities will remain on a 12-month cycle in accordance with Decision No.13654-(06/1), adopted on January 6, 2006.

Table 9.

CEMAC: Monetary Survey, 2013–17

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Sources: BEAC; and IMF staff estimates and projections.

Net foreign assets (NFA) are not directly comparable to reserve flows in the balance of payments because of BEAC’s own international reserves.

Table 10.

CEMAC: Bank Ratings, December 20151/(Units)

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Source: Banking Commission of Central Africa (COBAC).

Ratings: 1=strong; 2=good; 3=not fully satisfactory; 4=fragile; 5=critical.

Because it uses stringent criteria, the COBAC deems banks in the first three categories to be broadly in good condition.

Table 11.

CEMAC: Financial Soundness Indicators, 2014–15

(Percent)

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Source: Banking Commission of Central Africa (COBAC).
Table 12.

CEMAC: Violations of Prudential Ratios, 2013–15

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Source: Banking Commission of Central Africa (COBAC).

Short-term assets of up to one month (remaining maturity) over short-term liabilities of up to one month (remaining maturity).

Net capital and other premanent resources over fixed assets.

Long-term assets of more than five years over long-term liabilities of more than five years.

Minimum capital is CFAF 5 billion for all the countries.

Single large exposure is limited to 45 percent of capital.

Violating banks’ deposits as a percentage of total deposits in each country.

Annex I. CEMAC: Risk Assessment Matrix1

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Annex II. CEMAC: Response to Past IMF Advice

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Annex III. CEMAC: External Sustainability Assessment

Based on various methods, the real effective exchange rate appears to be moderately overvalued with respect to the current account norm and warrants close monitoring. Non-price competitiveness assessments continue to point to important structural competitiveness issues, which need to be addressed to ensure that public investment translates into growth and to make the region more attractive to private investment.

A. Balance of Payments

1. Following the oil-price shock, the regional external current account deficit is projected to widen in 2016, reflecting a significant deterioration in the trade balance of most of the Central African Economic and Monetary Community’s (CEMAC) member countries. The current account deficit grew from 1.8 percent of GDP in 2013 to 9. 4 percent in 2015 (Figure 1). It is expected to remain high in 2016, reaching 8.1 percent. This deterioration has been driven mainly by sizable investment programs in most member states—which have contributed to higher imports—and has been compounded by the fall in oil export proceeds. In 2016, the current account deficit in individual member countries is projected to range from 5.7 percent of GDP in Cameroon to 14.9 percent of GDP in Equatorial Guinea. In the medium term, a deceleration in public investments and a slow recovery in oil exports are expected to narrow the regional current account deficit to about 4–5 percent of GDP.

Figure 1.
Figure 1.

CEMAC: Current Account Balance, 2012–19

1(Percent of GDP)

Citation: IMF Staff Country Reports 2016, 277; 10.5089/9781475529685.002.A001

Sources: CEMAC authorities; and IMF staff estimates.

2. Foreign direct investments (FDI) constitute a stable source of external financing. They have been a steady source of external financing, averaging about 5 percent of GDP in the last decade (Figure 2). Official aid averaged about 0.8 percent of GDP over the same period, whereas portfolio investment contributed negatively, at an average of -0.3 percent. Debt-creating financial flows averaged about 1.2 percent of GDP in the last decade and are expected to remain between 2–3 percent in the medium term. However, net financial inflows did not entirely match the external financing needs—inducing a projected decline in the official reserves.

Figure 2.
Figure 2.

CEMAC: External Sector Developments, 2000–16

Citation: IMF Staff Country Reports 2016, 277; 10.5089/9781475529685.002.A001

Sources: CEMAC authorities; International Financial Statistics (IFS); and IMF staff estimates.

B. Reserves Adequacy

3. CEMAC’s reserve coverage at end-2015 was below prudent levels and it is projected to decline in 2016. Regional official reserves are projected to decrease from US$10.1 billion (CFAF 5,994 billion) at end-2015 to US$7.9 billion (CFAF 4,596 billion) at end-2016, which corresponds to a decrease from 4.6 months of prospective extra-regional imports to 3.4 months (Figure 3). Reserve adequacy assessment methods give diverging results. Reserve coverage in 2016 appears adequate using a number of usual metrics—i.e., 39 percent of broad money; 432 percent of short-term liabilities; and 135 percent in terms of the reserve adequacy ratio, which is above the level of adequate buffers for crisis prevention. Conversely, in terms of the most widely used metric (i.e., reserves in terms of prospective imports), reserve coverage in 2016 will remain below what is considered appropriate for a resource-rich currency union (i.e., 5 months of imports),1,2 The cost-benefit analysis,3 also indicates that the level of reserves is below the optimal range, which varies between 4.8 months and 12.0 months of imports, depending on the interest rate differential with the rest of the world.

Figure 3.
Figure 3.

BEAC: International Reserves Coverage, 2012–17

Citation: IMF Staff Country Reports 2016, 277; 10.5089/9781475529685.002.A001

Sources: AFR REO-database and IMF staff calculations.

4. Going forward, reserve coverage appears insufficient. It is projected to decline to about 3.0–3.3 months of imports in the medium term, the lowest level in more than a decade. This medium-term level is deemed inadequate for a resource-rich currency union. The projected reserve trajectory could make the Community vulnerable to a further drop in oil prices or another external shock.

C. Price Competitiveness

5. The assessments of the current account and real effective exchange rate (REER) at the regional level do not indicate a significant misalignment or price-competitiveness issues. The REER appreciated by 3.2 percent during the 12 months leading to April 2016, reflecting essentially the evolution of the nominal effective exchange rate (NEER) and the inflation differential with trading partners. The NEER appreciated as a result of the CFA franc’s appreciation vis-à-vis the US dollar and other trading partners’ currencies. Some divergences could be noticed at the individual country level with about 2 percent REER depreciation in Chad, no change in Gabon, and a 44 percent appreciation in the Central African Republic. Model-based and other assessments indicate a moderate overvaluation—6.2 percent on average (Box 1).

CEMAC: Current Account and Real Effective Exchange Rate Assessments 1

Alternative approaches are applied to assess regional current account and real effective exchange rate (REER) developments.

  • The first approach is “EBA-Lite’s” Current Account (CA) model, which compares the underlying current account balance with the model-estimated current account norm. This model shows a 13.3 percent overvaluation of the REER in 2015.

  • The second approach is EBA-Lite’s Index Real Effective Exchange Rate (IREER). The IREER regression result for CEMAC indicates a 2.5 percent undervaluation in 2015.

  • The third approach uses the Bems and Carvalho’s real annuity method to better account for natural resource windfall revenues in CEMAC countries.2 It computes the current account norm consistent with a long-term trend in net foreign assets to account for the impact of oil revenues. This method points to a 16.2 percent positive deviation (i.e., overvaluation) in 2015. However, the model ignores other factors, such as temporary investment needs, financial frictions, and low investment productivity in CEMAC countries.3

  • The fourth approach uses Araujo et al.’s. model, which corrects these drawbacks.4 In particular, it estimates the current account norm consistent with natural resources revenue, investment needs, and real and financial frictions (absorptive capacities, investment productivity and efficiency, borrowing constraints). The model indicates a 1.7-2.3 percent REER overvaluation in 2015, depending on the cost overrun assumptions in the model (60 percent and 40 percent, respectively; see figure above).

uA01fig01

CEMAC: Model-Based Current Account Benchmark

(Percent of GDP)

Citation: IMF Staff Country Reports 2016, 277; 10.5089/9781475529685.002.A001

Sources: IMF staff estmates using Araujo et al. (2013).

Taking into account CEMAC-specific factors, namely the monetary union and the French Treasury’s guarantee, the results do indicate moderate overall overvaluations of the regional current account and real effective exchange rate, provided that the current account deficit narrows as expected in the medium term.

CEMAC: External Stability Assessments

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Source: IMF staff estimates.

Based on 0.4 trade elasticity for the Bems and Carvalho, and Araujo et al. methodologies.

Based on 0.6 trade elasticity is estimated assuming exports volume and imports volume elasticities equal to zero.

Hakura and Billmeier (2008): "Trade Elasticities in the Middle East and Central Asia: What is the Role of Oil?", WP/08/216, IMF.

1 The alternative Araujo et al. model-based approach was prepared in collaboration with Bin Li and Michele Andreolli. The EBA-Lite models do not provide a specific template for CEMAC. Hence, as a proxy, we use the EBA-Lite regression coefficients provided by the IMF’s Strategy and Policy Review Department and CEMAC data, based on purchasing power parity GDP-weighted averages from the six member countries. 2 Bems, R., Carvalho I. (2009) “Exchange Rate Assessments: Methodologies for Oil Exporting Countries”, IMF Working Paper 09/281. 3 “Macroeconomic Policy Frameworks for Resource-Rich Developing Countries,” IMF Policy Paper, August 2012. 4 Araujo, J., Li B., Poplawski-Ribeiro M., Zanna L-F., (2013), “Current Account Norms in Natural Resource Rich and Capital Scare Economies”, IMF Working Paper 13/80.

D. Structural Competitiveness

6. Survey-based indicators point to important structural competitiveness issues. Various competitiveness indicators continue to rank CEMAC countries among the worst performers in the world.

  • The World Bank’s 2016 “Doing Business Indicators” show that CEMAC countries remain at the bottom of the countries surveyed, with most countries either stagnating or regressing in 2016 compared to 2015 (Figures 4 and 5, upper panels). CEMAC countries are behind their peers in sub-Saharan Africa and the West African Economic and Monetary Union in terms of business environment4 The situation is particularly challenging with regards to starting a business, getting electricity, and enforcing contracts. Infrastructure remains inadequate and electricity supply, problematic. Procedures for paying taxes and registering properties continue to be cumbersome.

  • The World Bank’s “Governance Indicators” also rank CEMAC countries behind their peers and show a relative deterioration in the last five years (Figure 5, middle and lower panels). In particular, the CEMAC lags behind its peers in terms of government effectiveness, accountability, and quality of regulation.

Figure 4.
Figure 4.

Change in Doing Business Ranking, 2015–16

Citation: IMF Staff Country Reports 2016, 277; 10.5089/9781475529685.002.A001

Source: World Bank, Doing Business, 2016.
Figure 5.
Figure 5.

Business Environment and Governance, 2014–16

Citation: IMF Staff Country Reports 2016, 277; 10.5089/9781475529685.002.A001

1/ SSA oil exporters = Angola, Nigeria and South Sudan.2/ WGI overall governance indicator is calculated as the simple average of control of corruption, government effectiveness, rule of law, regulatory quality, political stability and voice and accountability.

Annex IV. CEMAC: 2015 FSAP Recommendations1

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Annex V. CEMAC: Macrofinancial Linkages

A. Context

1. The financial sector in CEMAC is small and highly concentrated. It is dominated by commercial banks and about 85 percent of total assets belong to foreign banks. Although the banking sector expanded significantly during the last decade, its size is smaller than in other major sub-Saharan African economies. In January 2016, CEMAC banking assets represented CFAF 13 trillion (about US$22.5 billion; 29.9 percent of CEMAC’s GDP), compared to 15.7 percent in 2004. Banks dominate the financial sector, but microfinance institutions (MFIs) are significant players in Cameroon and Congo, and in some cases, have become systemic (Congo). Mobile banking is growing, but it is still a nascent industry.

2. The financial sector does not support CEMAC’s development needs adequately. Although there are large pockets of excess liquidity in CEMAC, banks are unwilling to extend credit to the private sector in many instances, because of well-known obstacles (e.g., lack of reliable financial reporting; weak justice systems). Financial institutions’ resources rely on deposits and their business model rests about equally on fees and interest rate margins, unlike most banking business models in the world where interest income is the largest source of revenue. Financial information is limited and contributes to the lack of trust among institutions, hampering the development of interbank and debt markets. The regional capital market is small (only four companies are listed) and fragmented, with two stock exchanges in Douala, Cameroun, and Libreville, Gabon.

B. Macrofinancial Linkages and Risk Spreading

3. The banking sector’s exposure to the public sector is the main transmission channel of macrofinancial risks (Figure 1). The oil sector is the main driver of economic activity in CEMAC and generated 59 percent of regional fiscal revenues in the last decade. With the contraction of oil revenues, public sector bank deposits decreased from 22 percent of total deposits in September 2014 to 19 percent in January 2016. In addition, the increase in government payment delays and the scaling down of public investment programs could increase bank’s non-performing loans (NPLs) to the private sector, in particular the construction sector. Higher NPLs could limit the profitability of the financial sector and its ability to provide credit to the private sector, and thus undermine non-oil GDP growth.

Figure 1.
Figure 1.

CEMAC: Macrofinancial Linkages

Citation: IMF Staff Country Reports 2016, 277; 10.5089/9781475529685.002.A001

Source: IMF.

4. The direct link between the banking and the oil sectors is weak. At end-January 2016, the share of loans to extractive industries was only 2.4 percent, and their NPLs represented only 1.4 percent. This link is weak because international oil companies keep their oil revenues abroad and are externally financed. Moreover, the assets of state-owned oil companies are already included in the public sector and are covered in the assessment of the link between the public and the banking sectors (see paragraph 3).

5. Linkages through interbank markets are limited and should hinder the transmission of shocks. The low level of development of interbank markets explains the weak linkages among financial institutions. The factors explaining the underdevelopment of these markets include asymmetry of information on credit risk (e.g., the corporate accounts registry—centrale des bilans—is not fully operational); reluctance of commercial banks to provide liquidity to competitors, which could help the latter to provide new credits; excess systemic liquidity, which reduces the need for temporary borrowing; and direct government borrowing from banks, which crowds out the government bond market. Recent actions of the BEAC to improve its monetary policy framework may support the development of the interbank market, but it will take some time before these measures produce their full effects. For example, the BEAC has stopped injecting and borrowing liquidity at the same time, and started working on a lender of last resort framework, which should enable it to address specific problems with tailored answers, rather than injecting additional liquidity into the entire banking system.

6. Linkages between MFIs and banks are in some cases strong and require specific attention. Many banks in CEMAC have created MFIs to access specific client segments, such as households and small and medium size enterprises (SMEs). In return, the MFIs deposit their excess liquidity at these banks, as they cannot have an account at the BEAC—except for one MFI. Given that clients consider MFIs vulnerable, the latter may be subject to liquidity shocks, stemming from possible deposit runs, which in turn could affect banks with large MFI deposits. The ongoing liquidations of some MFIs, triggered by severe governance problems, has affected thousands of low-income savers and highlighted the credit risk that these institutions represent.

C. The Financial Sector’s Health

7. Despite a difficult economic environment, the financial sector has so far weathered the oil-price shock. Although the situation varies by country and type of institution, banks appear generally profitable. The increase in NPLs from 11.9 percent of total loans in September 2014 to 12.6 percent in January 2016 did not significantly undermine the soundness of the banking sector. The increase in NPLs, however, is significant in the largest CEMAC oil exporting countries where NPLs were above 19.0 percent at end–January 2016. Construction is the most vulnerable sector for banks. Similarly, NPLs in microfinance institutions have increased only from 13.3 percent of total loans in December 2014 to 14.0 percent in September 2015. According to the regional banking supervisor (COBAC), this level could exceed 20 percent in some important institutions.

8. The financial sector appears generally profitable, but the situation varies by country. For example, Equatorial Guinea saw a decline of 16 percent in its yearly net banking income between 2014 and 2015, almost solely explained by a sharp decline in interest rate revenues. In the same period, Cameroon and Congo saw their yearly net banking income increase by 9 percent and 13 percent, respectively, because of an increase in lending in both countries.

9. Going forward, the current high level of NPLs in some countries could undermine the soundness of the financial sector and constrain its ability to provide new credits. The solvency ratios remain comfortable on average, reaching 13.0 percent, with eight of fifty-two banks in CEMAC not complying with the 8.0 percent norm at end–January 2016. The increase in NPLs may look small—because the initial level was already high—but remains significant nonetheless. In most countries this ratio is well below 10 percent.1

10. Although the financial sector has coped so far with the economic downturn, it may not have enough capacity to withstand further increases in NPLs. Despite recent recapitalizations in some countries, banks have little spare resources. In January 2016, the banking sector’s excess equity and long-term debt with respect to total long-term assets were only about CFAF 285 billion (about USD494 million). Many banks are beset with sizable NPLs, caused by loans granted to connected parties, in a context of longstanding governance issues. Because of this weakness, they have little margin to absorb additional risks. Excessive exposure to connected parties remains the critical issue in CEMAC’s financial sector.

11. Large net oil-exporting countries are the most exposed to further spreading of the effects of the oil-price shock. Stress tests results show that the average solvency ratio for Equatorial Guinean banks would decline from 22 percent to 15 percent with the construction sector becoming the main transmission channel. Gabon would be the second most exposed country, with stress tests results showing a decline in the average solvency ratio from 15 percent to 8 percent. In this case, the public sector would be the direct channel because banks have high exposure to the government.

12. Banks’ excess liquidity at the BEAC remains significant. They represented 12.3 percent of their total assets in January 2016. Banks could use this excess liquidity to invest in higher yielding assets, but they remain cautious because of the large uncertainties on credit and liquidity risks. Moreover, CEMAC banks need to have large liquidity buffers because they cannot rely on easy refinancing at the BEAC. Their eligible collateral is limited and the pool of outstanding government bonds is small. Consequently, the level of refinancing at the BEAC is low for most banks; it represented 1.7 percent of the aggregated sector-wide balance sheet at end–January 2016. At the same time, banks had only CFAF 123 billion (about USD213 million; 0.9 percent of total assets) of unused eligible collateral.

13. Some banks have been using their excess liquidity to extend riskier loans. This strategy could be encouraged by the BEAC’s accommodative monetary policy, which reduces banks’ incentives to discriminate credit risk adequately. In the absence of proper risk assessment tools, such as a credit bureau, banks should remain careful, and refrain from misusing their excess liquidity. Foreign-owned banks are in most cases subject to more stringent prudential rules from their parent companies than locally owned banks, and thus tend to avoid riskier loan practices.

14. Troubled banks remain a critical issue in some CEMAC countries. Eight banks in CEMAC had negative equity, representing about 4.6 percent of the banking sector’s total assets. The COBAC should address this issue quickly, as these banks contribute to the lack of confidence among financial institutions and hamper the development of interbank and money markets. MFIs face similar issues and the COBAC is working on reinforcing the legal framework of these intuitions by increasing the minimum capital and strengthening supervisory regulation.

D. Ability of CEMAC Institutions to Prevent Negative Financial Spillovers

15. Bank supervision remains the main protection against negative spillovers through macrofinancial linkages. The COBAC supervision framework addresses relatively well the credit risk, but more should be done in relation to loans to connected parties. Many of the 2015 FSAP recommendations have been implemented—or are planned to be—and should help strengthen supervision. In addition, the COBAC should also focus on the level of compliance of banks regarding the quality of the reporting of their financial statements. The supervision of the largest MFIs remains a major challenge and the ongoing strengthening of the regulatory framework, a top priority.

16. The regional macroprudential framework is at a nascent stage and is hampered by weak data. Despite the creation of a Financial Stability Committee in 2012, CEMAC institutions do not have enough capacity to assess risks or develop relevant strategies to absorb shocks. The Committee should urgently develop a robust set of early warning indicators, covering macroeconomic indicators, financial institutions, households, government budgets, and financial markets (e.g., foreign exchange, interest rate).

17. The BEAC has little room to mitigate the effects of the current shock because foreign reserves have significantly declined and monetary financing has reached its limits. The BEAC should put in place appropriate measures to preserve foreign reserves. In particular, it should reduce excess liquidity, and increase its stable resources (i.e., balance sheet liabilities) backing foreign reserves through its own funds or CEMAC governments’ long-term deposit. On the liquidity side, it should also urgently finalize its lender of last resort framework to address specific liquidity needs.

18. CEMAC’s weak legal framework undermines the actual value of financial collaterals and other guarantees. Given that this issue will not be solved in the near term because of the challenges in CEMAC’s judicial system, banks should avoid overly relying on collateralized credit to hedge against credit risk. The COBAC should take this issue more into account in its rules when computing the solvency ratios of banks (for example by increasing the provision rate for NPLs).
1

“Assessing Reserves Adequacy”, IMF Policy Paper, February 2011; and “Assessing Reserves Adequacy—Specific Proposals”, IMF Policy Paper, April 2015.

2

Articles 5 and 6 of the Convention between the BEAC and France (signed in 1973 and last revised in 2014), authorize financing overdrafts in BEAC’s operations account at the French Treasury.

3

On the assessment of monetary policy transmission channels, see SIP 2, “Macrofinancial Linkages and the Effectiveness of Monetary Policy” in the 2015 CEMAC Regional Consultation Report (15/308).

4

Under this scenario, reserves stabilize in the medium term because of the recovery in oil prices and a surge in oil production in Congo. However, in the absence of reforms, Dutch disease effects would perpetuate repressed growth, high un(der)employment, and poverty.

5

Non-oil growth is pulled by large infrastructure programs in the region. A number of major infrastructure projects will come on stream starting in 2017, which will contribute to non-oil growth. However, this development model is based on sizable, non-concessional borrowing, and thus it will be difficult to sustain beyond the medium term. In the alternative scenario, CEMAC countries may be forced to make a more abrupt adjustment, which could entail suspensions or delays in public investment projects, which will have a negative impact on non-oil growth.

6

Staff had advocated lowering the 70 percent ceiling of total debt to GDP.

7

The ceiling for statutory advances is set at 20 percent of the previous year’s fiscal revenue.

8

BEAC will manage liquidity based on money market needs.

9

Staff understands that if this recommendation was implemented, Cameroon could be considered to be penalized vis-à-vis its peers because of its restraint in making use of statutory advances.

10

The FATF is an inter-governmental body whose objectives are to set standards and promote effective implementation of legal, regulatory, and operational measures for combating AML/CFT.

1

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent; “medium” a probability between 10 and 30 percent; and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly. “Short term” and “medium term” are meant to indicate that the risk could materialize within 1 year and 3 years, respectively.

1

“Assessing Reserves Adequacy”, IMF Policy Paper, February 2011; and “Assessing Reserves Adequacy—Specific Proposals”, IMF Policy Paper, April 2015.

2

These approaches do not take into account the access to reserves guaranteed by the French Treasury under the Franc Zone arrangements. For more details on the methodology, see IMF Country Report 13/322, 2013.

3

Dabla-Norris, E., J, .I. Kim, and K. Shorono, “Optimal Precautionary Reserves for Low-Income Countries: A Cost-Benefits Analysis”, IMF Working Paper 11/249, 2011.

4

These indicators should be interpreted with caution because of the small number of respondents, a limited geographical coverage, and standardized assumptions about business constraints and information availability.

1

Prepared by the Financial Stability Assessment Program team.

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Cover IMF Staff Country Reports
Central African Economic and Monetary Community (CEMAC): Common Policies of Member Countries-Press Release; Staff Report; and Statement by the Executive Director
Author:
International Monetary Fund. African Dept.
Volume/Issue:
Volume 2016: Issue 277
Publisher:
International Monetary Fund
ISBN:
9781475529685
ISSN:
1934-7685
Pages:
63
DOI:
https://doi.org/10.5089/9781475529685.002
Figure 1.

CEMAC: Selected Economic Indicators, 2000–15
Figure 2.

CEMAC: Regional and International Comparisons, 2011–16
Figure 3.

CEMAC: Selected External Indicators, 2007–16
Figure 4.

CEMAC: External Debt Developments, 2014–16
Figure 5.

CEMAC: Monetary Developments, 2016
Figure 6.

CEMAC: Output Gap, 1990–2015
Figure 1.

CEMAC: Current Account Balance, 2012–19

1(Percent of GDP)
Figure 2.

CEMAC: External Sector Developments, 2000–16
Figure 3.

BEAC: International Reserves Coverage, 2012–17

CEMAC: Model-Based Current Account Benchmark

(Percent of GDP)
Figure 4.

Change in Doing Business Ranking, 2015–16
Figure 5.

Business Environment and Governance, 2014–16
Figure 1.

CEMAC: Macrofinancial Linkages