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

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 13). 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 4a5b). 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.