Abstract
The Central African Republic (CAR) authorities are committed to sustaining the reform momentum initiated under the current Fund-supported program. Amid persistent security challenges and a difficult external environment, the CAR authorities have managed to advance their policy and reform agenda, resulting in a broadly satisfactory performance under the Extended Credit facility (ECF), as assessed by staff.
The Central African Republic (CAR) authorities are committed to sustaining the reform momentum initiated under the current Fund-supported program. Amid persistent security challenges and a difficult external environment, the CAR authorities have managed to advance their policy and reform agenda, resulting in a broadly satisfactory performance under the Extended Credit facility (ECF), as assessed by staff.
Notwithstanding these encouraging steps, the country remains in a fragile situation with fragile security conditions, significant social demands, and limited capacities. In this context, the authorities look forward to continued assistance from the international community in their efforts to secure peace and reconciliation, put in place a broad-based and inclusive peace process, sustain the ongoing economic reform agenda, deliver critical social services, and implement basic infrastructure projects.
Against the backdrop of satisfactory performance and given their renewed commitment to the ECF-supported program objectives, the authorities request the completion of the second review under the ECF. They would also appreciate the Executive Board’s support to their request for an augmentation of access to address additional balance-of-payment needs.
Recent Developments and Prospects
In 2016, growth reached 4.5 percent thanks to the rebound in some sectors such as cotton, coffee and forestry. Inflation for the same period is estimated at 4.6 percent. On the fiscal front, the authorities have kept the domestic primary balance in line with the program target, notably through savings from non-wage primary expenditure to offset shortfalls in custom revenues. On the external front, the current account deficit was stabilized at around 9% of GDP in 2016 owing to improved terms of trade, lower investment-related imports, and stronger export performance.
Staff assesses that risks to the outlook remain tilted to the downside, given domestic and external uncertainties. Looking forward, the improved security conditions expected from the ongoing dialogue, disarmament, demobilization, reintegration, and repatriation (DDRR) efforts and redeployment of defense forces should help sustain the recovery in the forestry, coffee and cotton sectors, while providing conditions conducive to a rapid resumption of activities in agriculture, mining and other sectors. Growth is expected to rise to 4.7 percent this year.
Program Implementation
The implementation of the ECF-supported program has been satisfactory on the quantitative front, with all quantitative performance criteria (PCs) for this second review being met. On the structural front, steps were taken to meet the two structural benchmarks (SBs) that were delayed on account of tight capacity constraints These relate notably to the consolidation of the Treasury Single Account and the suspension of expatriation benefits to diplomats who completed their assignment. Progress has since been made toward these measures, including as part of the three prior actions to the completion of this second review. Beside the delayed benchmark on the expatriation benefits of diplomats, these prior actions include the publication of a budget execution report per end-March 2017, and the termination of a sub-contract for customs management.
Policy and Reform Agenda
Going forward, the authorities intend to build on the favorable outlook to put in place their policy and reform agenda. This outlook is predicated on the assumptions of improved security, higher public investment, and rising production in the agriculture and mining sectors. The authorities’ agenda remains anchored by the country’s National Recovery and Peacebuilding Plan.
As noted in the staff report, the country’s development partners have pledged about US$2.2 billion during the November 2016 Brussels donor conference in support of the National Plan for Recovery and peace (NPRP). The authorities look forward to the fulfillment of these pledges, as any shortfall or delay in external assistance run the risk of adversely impacting the reform momentum, jeopardizing the economic recovery and potentially derailing the peace building process. Sustained capacity building from the Fund and other partners is also an important prerequisite for the continued success of the ECF-supported program. In this connection, we welcome the understandings reached by the authorities and the Fund on a comprehensive capacity building strategy as part of the Capacity Building Framework pilot project.
On their part, the authorities are cognizant of their responsibility on maintaining fiscal sustainability, sustaining DDRR efforts, and preserving social cohesion. They are determined to make progress in this direction.
Advancing Fiscal Reforms
The authorities remain committed to further improving domestic revenue mobilization. In this vein, they will endeavor to enhance customs administration by improving control and strengthening procedures, with the objective of increasing transparency and recovering losses. Moreover, reforms of the tax administration and the VAT system in particular are expected to help enhance fiscal management and increase revenue.
On the expenditure side, the authorities will take necessary steps to contain current expenditure, notably by maintaining the freeze on salary advances and capping spending related to official travel. The ongoing civil service reform will also help to contain government spending. At the same time, priority will be given to investments in basic infrastructure which are expected to carry a significant impact and unlock the development of economic activity and jobs creation.
Strengthening Public Financial and Debt Management
Improving PFM is instrumental to the success of the authorities’ economic agenda. However, effective implementation remains a challenge in this fragile country. To enhance transparency and achieve efficiency, the authorities plan to prohibit the creation of new bank accounts of the treasury, bring revenue to the single treasury account, and continue to reduce the use of extraordinary expenditure procedures. They will also implement the production of budget execution reports and strengthen the public accounting IT system to bring practices to higher standards.
Reducing domestic payment arrears contributes to improving PFM and is key to supporting growth and peace. Following audits of arrears to commercial banks, small- and medium-sized enterprises (SMEs), and wage and pension payments, a comprehensive settlement plan will be adopted. Arrears to commercial banks in particular will be securitized with the assistance of the central bank BEAC. Clearance of arrears to commercial SMEs, which is indispensable to lower non-performing loans (NPLs) in banks, alleviate liquidity constraints on those enterprises, and help them rebuild productive capacity, will create an additional BoP need. If approved, the requested augmentation of access under the ECF will help to close this gap.
Resolving public debt arrears is a top priority for the CAR authorities. Most post-HIPC external payment arrears have been cleared, and close dialogue has been maintained with remaining creditors to resolve outstanding debts, with some having already indicated their plan to cancel them. Likewise, efforts are being pursued to settle pre-HIPC external arrears.
CAR’s debt management framework is being strengthened with the assistance of Fund’s technical assistance and training. The authorities will rely on grants and highly concessional resources to finance critical projects. They call on bilateral and multilateral development partners to avail CAR with such financing.
Financial Sector Reforms
The authorities put particular emphasis on maintaining a healthy financial system and enhancing financial intermediation. All but one banks meet the prudential capital requirements and remain resilient. As underscored above, the authorities are determined to achieve a rapid clearance of payment arrears to commercial banks.
Efforts to strengthen the banking supervision framework is underway—with the support of the regional banking commission COBAC—and are focusing on governance practices and risk management. To promote financial intermediation and enhance financial inclusion, the authorities are implementing a dedicated work plan, and will strengthen the judicial system and modernize banking services, notably through mobile banking. The agriculture sector is their main target for access to credit given its high potential in advancing financial inclusion and reducing poverty.
Capacity Building
Successful implementation of CAR’s program will depend on restoring administrative and absorptive capacity. The authorities welcome the different training and technical assistance provided by the Fund and other partners, notably on tax policy, revenue collection, public financial management, public debt management, macro fiscal capacity, and macroeconomic statistics. They look forward to additional TA provided by the Fund in those areas.
Conclusion
Central African Republic is a country in fragile situation that requires sustained financial and technical assistance to make meaningful inroads in restoring peace and political stability, safeguarding macroeconomic stability, and putting in place conditions for sustainable and inclusive growth. The authorities remain fully committed to restoring peace and stability in a durable manner. In this regard, efforts are being pursued tirelessly to maintain close dialogue with all armed groups which are currently participating in the disarmament, demobilization, reintegration, and repatriation (DDRR) process. The CAR authorities also continue to demonstrate strong commitment to sound reform agenda, building on recent progress. The authorities hope that they can continue to count on the international community, notably the Fund to assist their efforts.
We call on Directors to support the completion of the Second Review under the ECF and the requested augmentation of access under the ECF.