Central African Economic and Monetary Community: Selected Issues

Abstract

Central African Economic and Monetary Community: Selected Issues

Cemac—Debt Sustainability Analysis

The risk of external debt distress for the Economic and Monetary Community of Central Africa (CEMAC), as a whole, is moderate, despite a steady increase in the debt burden. None of the policy-dependent thresholds is breached under the baseline scenario. However, all five thresholds are breached under at least one of the standard stress tests, which points to risks to macroeconomic stability. CEMAC should implement an active and effective region-wide risk management framework for external debt sustainability.1

A. Introduction

1. This external debt sustainability analysis (DSA) is the first such attempt for CEMAC. Typically DSAs are conducted at the country level, not at the community level.2 However, because in CEMAC reserves are pooled and falling, it seems important to assess debt sustainability at the community level. Because there is no agreed regional DSA template, this analysis uses the standard, dynamic, low-income country (LIC) template. For aggregation purposes, it assumes that all CEMAC countries are LICs and have weak macro-financial management capacity.3 The DSA uses the macroeconomic framework that closely tracks the companion 2016 regional consultation report, which itself aggregates the frameworks of the six member countries. The assessment is based on actual data at end-2014 for external debt of all six central governments, plus implicitly or explicitly guaranteed external debt of public enterprises for Cameroon.4

B. Background

2. The overall external debt burden of CEMAC at end-2014 was US$19.3 billion, equivalent to 20.5 percent of regional GDP. The dominant share of this debt was owed by Cameroon, which accounted for almost 30 percent of total regional external debt, while Gabon accounted for almost a quarter. Chad and Congo each claimed a fifth of the total, while the Central African Republic and Equatorial Guinea accounted together for less than a tenth of the total (Figure 1).

Figure 1.
Figure 1.

CEMAC: External Debt by Country, 2014

(Percent)

Citation: IMF Staff Country Reports 2016, 290; 10.5089/9781475535464.002.A002

Sources: CEMAC country authorities; and IMF staff estimates.

3. CEMAC’s external debt has significantly risen in the wake of debt relief. The regional level of external debt contrasts markedly with the level that prevailed for the three countries,5 which benefited from debt relief under the Highly Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI) a decade ago. Upon reaching their respective “completion points,” these countries saw their external debt burden fall below 6 percent of GDP. Since then, CEMAC’s external debt has increased more than threefold to exceed 20 percent of GDP.

4. The composition of external debt exhibits dominant trends. External commercial debt was the largest category, followed by debt to non-Paris Club countries.6 Commercial debt, the most onerous category of debt, accounted for about 40 percent of CEMAC’s external debt. Cameroon, Gabon, and Chad held the largest external commercial liabilities, which together accounted for a third of all external debt. The importance of bilateral debt from non-Paris Club countries, representing a third of all external debt, highlights the rapid rise of China among CEMAC creditors (Figures 23). Concessionality (i.e., a 35 percent grant element) represents a declining portion of overall debt.

Figure 2.
Figure 2.

CEMAC: External Debt by Creditor, 2014

(Percent)

Citation: IMF Staff Country Reports 2016, 290; 10.5089/9781475535464.002.A002

Sources: CEMAC country authorities; and IMF staff estimates.
Figure 3.
Figure 3.

CEMAC: External Debt by Country and Creditor, 2014

(USD billions)

Citation: IMF Staff Country Reports 2016, 290; 10.5089/9781475535464.002.A002

Sources: CEMAC country authorities; and IMF staff estimates.

C. Assumptions

The following assumptions are used for the projection period 2015–35.

  • Assumptions on the level and composition of external borrowing are similar to those used in the latest individual medium-term country frameworks, and are the main drivers for external debt in the medium term (Figure 4). Actual external debt developments in 2015, such as the Eurobond issues by Gabon and Cameroon, have been reflected in the modeling of new debt.

  • Assumptions on the financing terms draw on the latest available contract information from bilateral and commercial financiers, bond issuance documents, and multilateral lenders (Text Table 1). Specific sets of financing terms are used for each main creditor type. The discount rate is 5 percent, as mandated by the IMF and World Bank Executive Boards in October 2013. The financing terms in this regional DSA are applied equally to all CEMAC countries. Although they are close to the financing terms used in individual countries’ DSAs, there may be slight differences with actual country-specific terms; this may result in marginally different country profiles for amortization, external debt stock, and debt service in the outer years.

  • The macroeconomic assumptions reflect the impacts of low oil prices and security threats (Box 1). In the medium term, growth is projected at 3.5 percent a year, while revenue dips by about a fifth from the average 2014–15 level, in line with export projections. The medium term is challenging, as shrinking public resources compromise governments’ ability to contribute essential public services to growth. In the long term, prospects improve, as oil prices rebound, economies diversify and generate new types of exports, and government revenues recover.

Figure 4.
Figure 4.

CEMAC: External Debt, 2014–20

(USD billions)

Citation: IMF Staff Country Reports 2016, 290; 10.5089/9781475535464.002.A002

Sources: CEMAC country authorities; and IMF staff estimates and projections.
Text Table 1.

CEMAC: External Financing Terms, 2015–35

(Units as specified)

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

5. The regional debt management capacity is deemed to be weak. As a result, corresponding standard policy-dependent thresholds are used to judge external debt sustainability. Specifically, thresholds are set at 30 percent for the ratio of the present value (PV) of external debt over GDP; 100 percent for the PV of external debt over exports; and 200 percent for the PV of external debt over revenue. As regards “flow” indicators, the threshold for the ratio of debt service over exports is 15 percent; and that for the ratio of debt service over revenue is 18 percent. Cameroon typically does well in managing its debt service. Other countries have occasionally struggled with their accounting of debt service liabilities, in part because of severe capacity constraints.

D. External Debt Sustainability

6. CEMAC is estimated to be at a moderate risk of external debt distress. There are no instances in which projections under the baseline scenario breach the policy-dependent thresholds for LICs (Figure 5). However, CEMAC’s external debt position is vulnerable. Indeed, each of the five indicators used to track the risk of debt distress includes at least one standard stress test, which breaches the aforementioned thresholds. An additional customized stress test, which tracks the CEMAC convergence criterion on debt (i.e., debt/GDP), also yields results that warrant close scrutiny of the evolution of external debt (Box 2). Moreover, the baseline scenario for the PV of debt over exports trends in a manner that is a cause for concern: it increases rapidly in the near term and remains high in the medium-to-long term.

Figure 5.
Figure 5.

CEMAC: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2015–351/

Citation: IMF Staff Country Reports 2016, 290; 10.5089/9781475535464.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio on or before 2025. In figure b. it corresponds to a shock on net non debt-creating flows; in c. to a shock on net non debt-creating flows; in d. to a shock on net non debt-creating flows; in e. to a shock on net non debt-creating flows; and in figure f. to a one-time depreciation shock.

CEMAC: Macroeconomic Assumptions for the Baseline Scenario

Medium Term, 2016–20

  • Real GDP growth is projected to average of 3.5 percent in the medium term, supported by a recovering domestic demand and public investment. Annual inflation is projected to remain low, at about 2 percent, in line with historical trends and below the CEMAC convergence criterion.

  • The revenue-to-GDP ratio is projected to decline in the medium term, from an average of 23.6 percent of GDP in 2014–15 to 18.7 percent of GDP in 2016–20. Oil prices are expected to stabilize at about US$50 per barrel in the medium term. New and more expensive technology to increase aging well production, and limited new green-field investments, will have a dampening effect on oil revenue.

  • The external current account deficit is projected to peak at almost 9 percent of GDP in 2016, and gradually narrow to under 4 percent of GDP by 2020, as the region adjusts to the terms-of-trade shock of 2014–15. This reflects falling volumes of oil exports and a decline in imported equipment goods for infrastructure projects, as oil exploration and investment remains low and public investment programs slow down. Despite robust volume growth, non-oil commodity export proceeds are expected to be held back by low prices. The current account deficit is expected to be financed largely through external public borrowing.

Long Term, 2021–35

  • Real GDP growth is projected to increase, and average almost 4 percent in the long term.

  • The revenue-to-GDP ratio is projected to stabilize at about 21 percent of GDP in the long term. This trend assumes a decline in oil revenue with the gradual depletion of oil reserves, and an increase in non-oil revenue with improved revenue collection.

  • The external current account deficit is projected to narrow and average about 1.3 percent of GDP in 2021–35. Exports of goods are projected to grow in the long term, as a result of increases in volume and prices of non-oil exports and exports of services. Conversely, the growth in imports is slower, in line with the lower public investment.

CEMAC: Customized Stress Test on the Ratio of External Debt Over GDP

Growth is critical to keep the external debt burden sustainable. A customized stress test on the main CEMAC surveillance criterion on debt (the ratio of debt over GDP) shows the importance of sustaining robust growth. The test, which deals with external debt only, is applied to real GDP growth, which in the base case (no stress) growth, decreases gradually from 4.4 percent to 4 percent annually in the long run (Box Figure 1). In each of the next three figures, real GDP grows by one percentage point less than in the previous figure. The severe stress test (Box Figure 4) shows how slow growth causes external debt to increase rapidly, relative to the size of the economy, as years of slow growth are compounded.

uA02fig01

CEMAC: Debt over GDP, 2014–35

(Percent)

Citation: IMF Staff Country Reports 2016, 290; 10.5089/9781475535464.002.A002

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

7. CEMAC countries’ complementary debt profiles result in an aggregate regional risk of external debt distress that is moderate. Whereas the DSA for Cameroon shows that the ratio of the PV of external debt over exports breaches its policy-dependent threshold, thus putting Cameroon at high risk of debt distress, the same indicator for CEMAC remains well below its threshold. In this case, the high path of external debt accumulation of Cameroon is offset by the lower debt paths of peers.

8. CEMAC should implement an active and effective region-wide risk management framework for external debt sustainability, paired with a strengthened monitoring mechanism. CEMAC’s regional convergence framework provides a number of debt-related criteria (Box 3). However, other traditional indicators used for external DSA could be usefully tracked as well, such as the present value of external debt over exports, or debt service over exports. Moreover, the current difficult regional economic circumstances reinforce previous IMF recommendations to disseminate these indicators widely and frequently for transparency and peer review purposes; and introduce yearly convergence compliance reviews of member countries by the CEMAC Commission, accompanied by a clear public statement of the regional institutions’ findings.

CEMAC: Debt Management Processes and Objectives

In the context of the Heavily Indebted Poor Countries (HIPC) and the Multilateral Debt Reduction Initiatives, which involved four of the six CEMAC countries, CEMAC Ministers of Economy and Finance adopted a public debt policy and debt management framework in 2007. The 2007 “regulation” requires each member government to develop a national public debt strategy to be submitted to its parliament annually along with draft budget law. In addition, country authorities were invited to establish specialized agencies under the Ministers of Finance to coordinate public debt policy. These agencies are to provide opinions on any domestic and external project financing. So far only Cameroon has successfully set up a national public debt committee, which meets every six weeks to review envisaged financing terms for new projects.

In parallel with the new surveillance mechanisms within each country, the regional authorities also adopted rules to monitor “convergence” through a common set of criteria and indicators (the “convergence framework”), which help track member countries’ macroeconomic performance. There is a criterion on public debt, namely a ceiling of 70 percent of GDP for total public debt. With the adoption of a revised convergence framework from January 1, 2017, a new “secondary criterion” on public debt has been adopted to send an early warning of a potentially unsuitable pace of debt accumulation. The new criterion limits the “maximum pace of debt accumulation.” It is defined as the maximum linear annual public debt increase consistent with reaching the ceiling of 70 percent of GDP in the following 25 years.

E. Conclusions

9. The recent increase in external debt in all CEMAC countries, except Chad, and the less favorable external environment give rise to a “moderate” regional risk of external debt distress. This is the result of the breach of every policy-dependent threshold in at least one of the stress tests. The broad distribution of breaches across “flow” and “stock” criteria in terms of fiscal and external performance underscores the wide-range of risks for CEMAC. The unfavorable outlook for oil prices exacerbates the impact of the rising debt stock on key debt ratios. Moreover, rising domestic borrowing compounds the overall risk of debt distress.

10. Investment programs financed by external debt are the main drivers of the regional debt increase. This finding lends weight to earlier recommendations that a reorientation of debt policies is needed to heed the unfavorable external environment. Recommendations to improve debt sustainability and to reduce the risk of debt distress include the following.

  • Adhering to the new regional secondary convergence criterion targeting the pace of debt accumulation.

  • Anchoring fiscal policy to a sustainable pace of external debt accumulation.

  • Making greater use of concessional borrowing.

  • Monitoring debt developments closely on the basis of real-time data.

  • Implementing policies to improve debt management.

Table 1.

CEMAC: External Debt Sustainability Framework, Baseline Scenario, 2012–351/

(Percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

Includes both public and private sector external debt.

Derived as [r - g - p(l+g)]/(l+g+p+gp) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and p = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Assumes that PV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Table 2a.

CEMAC: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2015–35

(Percent)

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Table 2b.

CEMAC: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2015–35 (concluded)

(Percent)

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Sources: Country authorities; and staff estimates and projections.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline, while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

1

Prepared by Jean van Houtte and Du Prince Tchakoté.

2

This regional debt assessment is an analytical exercise, not a formal World Bank/IMF sanctioned DSA.

3

Four countries of CEMAC’s six members are in this category.

4

External debt is defined as debt owed to non-residents and issued in a foreign currency. Overdue payment obligations due to external suppliers and not paid by the standard 90-day settlement period are considered external debt. Cameroon’s guarantied liabilities were CFAF 527 billion at end-2014. Similar data are not available for the other countries.

5

The early HIPC Initiative countries are Cameroon, Central African Republic, and Congo. Gabon benefited from a Paris Club debt rescheduling in 2000 and Chad reached its completion point under the HIPC Initiative in 2015.

6

External commercial debt includes large outstanding payment obligations—as defined in footnote 4—for Cameroon (public enterprises), Congo, and Chad. External commercial debt includes Eurobond issues by Gabon before end-2014.

Central African Economic and Monetary Community: Selected Issues
Author: International Monetary Fund. African Dept.