Central African Republic: Third Review Under the Extended Credit Facility Arrangement, Requests for Waiver of Non-Observance of Performance Criterion, Modification of Performance Criteria, Augmentation of Access, and Financing Assurances Review—Debt Sustainability Analysis Update

Third Review under the Extended Credit Facility Arrangement, Requests for Waiver of Nonobservance of Performance Criterion, Modification of Performance Criteria, Augmentation of Access, and Financing Assurances Review-Press Release; Staff Report; and Statement by the Executive Director for the Central African Republic

Abstract

Third Review under the Extended Credit Facility Arrangement, Requests for Waiver of Nonobservance of Performance Criterion, Modification of Performance Criteria, Augmentation of Access, and Financing Assurances Review-Press Release; Staff Report; and Statement by the Executive Director for the Central African Republic

This debt sustainability analysis (DSA) updates the joint IMF/IDA DSA from the second review under the ECF arrangement of July 2017 (Country report 17/245). It reflects updated information on the macroeconomic outlook and the proposed augmentation from the IMF. The Central African Republic (C.A.R.) continues to be assessed at high risk of external debt distress—unchanged from the previous analysis. Under the baseline scenario, one external debt indicator breaches the policy-related thresholds at end-2017. Alternative scenarios underline the vulnerabilities to slower GDP growth, revenue and export growth of both external and total public debt. C.A.R.’s overall risk of debt distress is also high due to vulnerabilities related to total debt. The proposed augmentation of access (35 percent of quota) has a manageable impact on external debt sustainability. To safeguard external debt sustainability, the government’s investment program requires grant financing, with highly concessional debt financing to be considered only in exceptional cases.

Structure of Debt2

1. In 2016, C.A.R.’s total public debt stood at 56.0 percent of GDP (Text Table 1). External public debt accounted for 36 percent of GDP (CFAF 253.4 billion) at end-2016. C.A.R. has about CFAF 101 billion of pre-HIPC debt to Non-Paris Club Members (Text Table 1). Under the Paris Club agreements, C.A.R. has committed to seek debt relief from its Non-Paris Club creditors with terms similar or better than those granted by the Paris Club. The government continues to reach out to the Non-Paris Club creditors to re-negotiate these obligations. During the conflict years, C.A.R. accumulated post-HIPC arrears to official creditors of 1 percent of GDP by end 2016 which it seeks to resolve. China has indicated its willingness to provide debt relief on all outstanding official debt while discussions with India about modalities to resolve a modest amount of post-HIPC arrears (0.2 percent of GDP) continue.3 C.A.R. has also arrears to private creditors, and is continuing to make good-faith efforts to reach a collaborative agreement with them.

Text Table 1.

Central African Republic: Domestic and External Debt Stock 2016

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Sources: C.A.R. authorities and IMF Staff calculations.

Includes pre-HIPC arrears

2. Domestic debt mainly consists of wage and pension and commercial arrears and central bank advances. At end 2016, domestic debt stands at CFAF 208.3 billion, of which CFAF 78.5 billion to BEAC, CFAF 14.2 billion in arrears to suppliers, CFAF 72.2 billion in wage, benefits and pension arrears, CFAF 26.1 billion in arrears to banks and CFAF 7.8 billion in cross-debt and other debts.

Macroeconomic Projections, 2017–37

3. Macroeconomic assumptions have changed since the July DSA. The most important changes are that medium-term growth from 2017–22 has been lowered to 4 percent and that exports are assumed somewhat stronger in the medium to long term, reflecting the recent buoyant performance of some export sectors (timber, diamonds) (Text table 2).

  • Real GDP growth is expected to average 4 percent over 2018–21 compared to 5.3 percent in the previous DSA. The lack of a significant rebound in economic activity that could be expected from a low base is attributable to the lasting damage from the 2013–14 conflict and continued high level of violence. Longer-term growth is expected to average 3.4 percent per year, a conservative assumption given the low level of per-capita GDP.

  • On fiscal policy, the assumption for the longer term primary deficit remains unchanged at 1.4 percent of GDP. Differences in the short term reflect the revised growth outlook and updated assumptions on external assistance. As before, revenues are expected to reach 14 percent of GDP in the longer run.

  • The non-interest current account deficit is expected to decline gradually in the medium to long term, as assumed in the July DSA. However, exports will pick up somewhat stronger due to the recent recovery of the mining and forestry sectors and to better reflect pre-crisis levels.

  • Grant-equivalent financing is assumed to decline from an average of 6 percent of GDP in 2017–19 to about 2.5 percent of GDP in the long run.

Text Table 2.

Central African Republic: Macroeconomic Projections

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4. C.A.R. has contracted one small new loan in 2017. The African Development Bank provided a highly concessional budget support loan of USD15 million with a grant element of 60.6 percent. Looking ahead, the DSA assumes that C.A.R. will sign a highly concessional loan of USD13 million with a grant element of 50 percent for a critical infrastructure project in 2018. Furthermore, this updated DSA reflects the proposed augmentation of Fund support. C.A.R. undertook two Debt Management Performance Assessments (DeMPA) and receives support by technical partners to strengthen debt management.

External Debt Sustainability Results

5. Under the baseline scenario, one external debt indicator breaches the threshold.4 The present value (PV) of debt-to-exports ratio is projected to breach the policy threshold until 2023. This mainly reflects C.A.R.’s narrow export base. The ratios for debt service-to-exports and debt service-to-revenue remain well below the thresholds due to the concessionality of outstanding debt and the low debt service burden. The augmentation of IMF financial support has a noticeable but manageable impact on debt service indicators from 2024 onwards.

6. Alternative scenarios and stress tests highlight the vulnerabilities. In the most extreme scenario, all indicators breach the threshold and the increase of external debt would be significant. The PV of debt-to-exports ratio remains above the policy threshold under the extreme scenario throughout the projection period. And the PV of debt-to-revenue ratio stays above the policy threshold under the extreme scenario till 2025.The historical scenario may not adequately reflect the baseline prospects for C.A.R. as the historical scenario captures the 2009 HIPC debt relief and the crisis years. The results of the sensitivity analysis, however, underscore the vulnerabilities particularly to lower growth and exports.

Public Debt Sustainability Results

7. C.A.R.’s overall risk of debt distress is also considered elevated because of significant vulnerabilities related to total debt. The public debt level increased significantly due to the accumulation of domestic arrears and the collapse in GDP after the 2013 crisis. Contingent liabilities could further exacerbate sustainability concerns. The stress tests show that total debt is vulnerable to lower growth or a higher deficit of the primary balance. The analysis captures the strategy to repay domestic arrears over the coming years, which will lead to a significant reduction of domestic debt.

Conclusion

8. The updated DSA confirms that C.A.R. is at high risk of debt distress. This rating reflects mainly the past collapse of GDP, tax revenues and exports. Alternative scenarios show that C.A.R.’s debt trajectory is vulnerable to GDP, export and revenue shocks and materializing contingent liabilities could exacerbate debt sustainability concerns. The PV of external debt-to-exports ratio remains for some time above the policy threshold under the baseline scenario. The proposed augmentation of Fund financial support would have a noticeable but manageable impact on debt sustainability.

9. The authorities concur with staff’s assessment. Consistent with the conclusions, they remain committed to securing grants to finance investments and contracting highly concessional loans only in exceptional cases.

Figure 1.
Figure 1.

Central African Republic: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2017–37 1/

Citation: IMF Staff Country Reports 2017, 407; 10.5089/9781484335642.002.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 2027. In figure b. it corresponds to a Combination shock; in c. to a Combination shock; in d. to a Combination shock; in e. to a Exports shock and in figure f. to a Combination shock
Figure 2.
Figure 2.

Central African Republic: Indicators of Public Debt Under Alternative Scenarios, 2017–37 1/

Citation: IMF Staff Country Reports 2017, 407; 10.5089/9781484335642.002.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 2027.2/ Revenues are defined inclusive of grants.
Table 1.

Central African Republic: External Debt Sustainability Framework, Baseline Scenario, 2014–37 1/

(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 – ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = 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 2.

Central African Republic: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2017–37

(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 assume 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.

Table 3.

Central African Republic: Public Sector Debt Sustainability Framework, Baseline Scenario, 2014–37

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

[Indicate coverage of public sector, e.g., general government or nonfinancial public sector. Also whether net or gross debt is used.]

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

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

Table 4.

Central African Republic: Sensitivity Analysis for Key Indicators of Public Debt, 2017–37

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Sources: Country authorities; and staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period.

Revenues are defined inclusive of grants.

1

C.A.R.’s average rating in the World Bank’s Country Policy and Institutional Assessment (CPIA) during 2014–2016 is 2.44. This corresponds to a weak policy performance under the Debt Sustainability Framework for Low-Income Countries.

2

The debt (both external and public) covers gross central government debt. Debt to the IMF and pre-HIPC arrears are included in external debt.

3

The obligations to China are included in the debt stock but no debt service is assumed.

4

The high residual in the external debt sustainability framework (Table 1 on p. 11) can be explained by project grants (recorded in the capital account) and unrecorded non-debt creating inflows.