Central African Economic and Monetary Community (CEMAC): Common Policies of Member Countries and Common Policies in Support of Member Countries Reform Programs—Press Release; Staff Report; and Statement by the Executive Director
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International Monetary Fund. African Dept.
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Publication Date:
03 Jan 2019
eISBN:
9781484392799
Language:
English
Keywords:
ISCR; CR; CEMAC Commission; policy; BEAC; CEMAC authorities; country; IMF staff estimate; CEMAC regulation; current account; charter article; financial situation; Foreign exchange regulations
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Common Policies of Member Countries, and Common Policies in Support of Member Countries Reform Programs-Press Release; Staff Report; and Statement by the Executive Director

Abstract

Common Policies of Member Countries, and Common Policies in Support of Member Countries Reform Programs-Press Release; Staff Report; and Statement by the Executive Director

Background and Recent Developments

Background

1. Two years after its adoption by CEMAC’s heads of states, the regional strategy has helped avert an immediate crisis but is not yet fully delivering on its objectives.1 Regional reserves have underperformed recently despite higher-than-projected oil prices. Two countries have yet to enter financing arrangements with the Fund, resulting in a good part of the budget support expected by end-2018 being delayed and lower reserves accumulation. Finally, the security, social, and political context is challenging at this juncture, entailing risks of policy slippages. The region’s heads of states recognized these difficulties at their October 25 extraordinary summit in N’Djamena, where they reiterated their commitment to the regional strategy and called for its stronger enforcement.

2. Beyond the present difficulties, the region is facing daunting development challenges over the longer term. Non-oil growth has not recovered as quickly as expected and remains well below what is needed to provide jobs and income to a rapidly growing population. The diversification of the economy remains an elusive goal, even as oil production is projected to gradually decline over the medium term. These worrying trends stem to a large extent from: a poor business environment; weak governance and high perception of corruption; poor infrastructure and public services; shallow financial markets and low financial inclusion; and limited regional integration.

3. Existing programs advance broadly satisfactorily but new IMF-supported programs with Congo and Equatorial Guinea are unlikely to be adopted before early next year:

  • Program performances in Central African Republic (CAR), Chad, Cameroon, and Gabon are broadly on track. Reviews under their respective arrangements are scheduled to be discussed by the Executive Board in December. Disbursements of World Bank’s budget assistance to a few countries will nevertheless be delayed to early next year.

  • The first review under Equatorial Guinea’s staff-monitored program was satisfactorily concluded in August. The conclusion of the second review and discussions of a possible financing arrangement under the EFF have been postponed to next year, owing to delays in the completion of two important governance reforms.

  • The approval of a new IMF-supported program with Congo has been delayed, pending the provision of explicit financing assurances from external official creditors, including debt relief, which is needed to restore debt sustainability. While progress has been achieved in the implementation of the authorities’ structural reform agenda, additional remaining steps needed to bring Congo’s request for a three-year arrangement under the Extended Credit Facility to the consideration of the Executive Board include some adjustments to the 2019 draft budget law and implementation of reforms to improve governance and transparency.

4. Progress in implementing the recommendations of the 2017 regional surveillance consultation has been mixed (Annex I). The BEAC has tightened its monetary policy stance and made good strides in modernizing its monetary operational framework, including through the elimination of statutory advances, the establishment of an emergency liquidity assistance system, and providing refinancing through competitive auctions. The COBAC has also started implementing risk-based supervision while strengthening prudential enforcement and taking actions to resolve banks in distress. On the other hand, progress has been limited with regard to the enforcement of the regional surveillance framework and the strengthening of regional integration.

Recent Developments and 2018 Outlook

5. The regional economic situation remains challenging. Economic growth in the region, which declined substantially after the oil price slump of 2014, remains sluggish and has not yet picked up as expected. Non-oil growth is now projected to decline in 2018 (from 2.6 percent in 2017 to 1.0 percent). A larger-than-expected rebound in oil GDP (+7.3 percent) would nevertheless contribute to an increase in overall growth (from 1.0 percent in 2017 to 2.2 percent in 2018). While increasing, inflation would remain low, at about 2 percent at end-year.

6. Reflecting higher oil exports, the external current account and overall balance of payments deficits would decline faster. Reflecting higher oil prices and production, oil exports receipts are projected to increase by 4 percentage points of GDP in 2018. Although imports would also increase, the current account deficit would decline to 1.9 percent of GDP in 2018 (from 4.1 percent in 2017). Despite this adjustment, CEMAC’s external position is moderately weaker than implied by fundamentals and desirable policy settings (Annex III). While the overall balance is projected to improve compared with previous projections, the accumulation in net reserves will be lower due to large shortfalls in exceptional external financing stemming primarily from delays in adopting new programs with Congo and Equatorial Guinea.

7. Fiscal consolidation efforts are broadly on track in program countries. Cameroon, CAR, and Chad met their end-June and end-September fiscal deficit targets, while Equatorial Guinea met its end-July one. While Gabon missed its end-June deficit target, it did so by a lower margin than estimated at the time of its program’s second review, and its end-September indicative target was met. Congo’s non-oil deficit was, however, larger than expected owing to lower non-oil revenue and higher current spending. The region’s non-oil fiscal balance is expected to broadly meet expectations in 2018, with possible larger deficit in Congo being offset by lower deficit in Gabon while other countries would achieve their program targets. The regional overall balance would, however, exceed expectations on account of higher oil revenue. Moreover, net arrears repayments (actual and projected) remain broadly in line with previous projections in all CEMAC countries.

8. In response to the lower-than-targeted reserves accumulation, which was a policy assurance, the BEAC has taken corrective action by tightening its monetary policy stance and the enforcement of foreign exchange (forex) regulations. End-June NFAs were about € 290 million lower than staff projections, owing to delays in external financing to Cameroon and in Congo’s repatriation of it deposits abroad and the slower surrendering to BEAC of net foreign assets accumulated by commercial banks. To address the latter, the COBAC and BEAC strengthened the enforcement of banks forex position limits and sanctioned in September 11 banks in breach of these limits. Reportedly in response, banks reduced their foreign assets position by about CFAF 120 billion (essentially reversing the second-quarter increase) during the third quarter and surrendered these to the BEAC, bringing the banks’ NFA back to about CFAF 140 billion, around their historical average. However, the repatriation of foreign exchange receipts by exporters does not appear to have improved. Despite the banks’ stronger surrendering, the gap in NFA accumulation compared with staff projections widened by end-September, to about €480 million, as government deposits with BEAC declined (against a projected increase) largely reflecting shortfalls in exceptional external financing of € 375 million. Against this background, on October 31, the BEAC increased its policy rate by 55 bps, to 3.50 percent.

9. BEAC’s NFA are now projected to miss the previous end-2018 target but would get back on track in 2019. The projected €430-million end-2018 shortfall is fully associated with the postponement of the IMF-supported programs with Congo and Equatorial Guinea and of the related external budget support (previous projections assumed that these two countries would receive € 440 million of external budget support in 2018). When excluding external budget support, the NFA position would be at end-2018 around the level projected when the strategy was adopted, and slightly above previous projections in 2019 and 2020 (text chart). It also turned out that a good part of additional government oil revenues has been used to pay down oil-related debt more quickly, according to contracts, and settle unexpected investment disputes. Nevertheless, BEAC’s NFA are projected to increase substantially during the fourth quarter of 2018 (by € 509 million) which is predicated on a large part of the external budget financing expected to be disbursed by end-year to countries under programs (€ 770 million) being saved. In 2019, assuming that new IMF-supported programs with Congo and Equatorial Guinea, to address their balance of payments needs, are approved and unlock the related external budget support, NFAs would increase by €1.1 billion and get back to their projected path.

uA01fig01

CEMAC: Net Foreign Assets excluding External Budget Support

(Billions of CFA francs)

Citation: IMF Staff Country Reports 2019, 001; 10.5089/9781484392799.002.A001

1 Objective as defined in CR/18/210.Sources: BEAC and IMF Staff estimates.
uA01fig02

CEMAC: NFA accumulation: Shortfall relative to end-2018 objectives 1

(Billions of CFA francs)

Citation: IMF Staff Country Reports 2019, 001; 10.5089/9781484392799.002.A001

1 Objective as defined in CR/18/210.Sources: BEAC and IMF Staff estimates.

10. The situation in the banking sector remains difficult, owing to delays in the repayment of government arrears. Non-performing loans (NPLs) continue to rise (to 17 percent in September from 15 percent at end-2017) and put pressure on the weaker banks’ liquidity (Table 8). Credit to the private sector started to pick-up (+2.1 percent y-o-y in September), while deposits continued to increase (+4.6 percent y-o-y). Several banks remain in breach of key prudential indicators (Table 12), despite some improvements since end-2017. Except for a few institutions currently under close supervision, all banks are adequately capitalized. While all national banking sectors were profitable in 2017 (except for Chad), bank profitability will increasingly depend on the repayment of government arrears, a major driver of NPLs. At its September meeting, the COBAC withdrew the license of one undercapitalized systemic institution and requested the national authorities to withdraw the license of another undercapitalized institution.

Table 1.

CEMAC: Selected Economic and Financial Indicators, 2016–22

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

Estimated after rebasing the national real GDP series to 2005.

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

Excluding grants and foreign-financed investment and interest payments.

Refers to the projections published in the IMF Country Report No 18/210

Table 2.

CEMAC: National Accounts, 2016–22

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

Refers to the projections published in the IMF Country Report No 18/210

Table 3a.

CEMAC: Balance of Payments, 2016–22

(Billions of CFA francs)

article image
Sources: BEAC; and IMF staff estimates and projections.

FDI data have been revised, including to better reflect the flows linked to the construction of the Moho-Nord platform in Congo.

Does not reflect reserve accumulation by BEAC’s central services.

Table 3b.

CEMAC: Balance of Payments, 2016–22

(Percent of GDP)

article image
Sources: BEAC; and IMF staff estimates and projections.

FDI data have been revised, including to better reflect the flows linked to the construction of the Moho-Nord platform in Congo.

Does not reflect reserve accumulation by BEAC’s central services.

Table 4a.

CEMAC: Fiscal Indicators, 2015–22

(Percent of GDP)

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

The reference fiscal balance is defined as the overall budget balance minus 20 percent of oil revenue and minus 80 percent of the oil revenue in excess of the average observed during the 3 previous years.

Table 4b.

CEMAC: Fiscal Indicators, 2015–22

(Percent of Non-oil GDP)

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

Overall budget balance excluding grants and foreign-financed investment.

Table 5.

CEMAC: Compliance with Convergence Criteria, 2015–22

article image
Sources: Authorities’ data; and IMF staff estimates.

Until 2016, the basic fiscal balance (i.e. the overall budget balance, excluding grants and foreign-financed investment) had to be positive. From 2017 onward, the reference fiscal balance (i.e. the overall budget balance minus 20 percent of oil revenue and minus 80 percent of the oil revenue in excess of the average observed during the 3 previous years) must exceed -1.5 percent of GDP.

Change in the stock of arrears-to-GDP ratio. Includes external and domestic payments arrears, and based on data reported by country authorities (which may differ from CEMAC teams’ findings).

Assessment by the CEMAC Comission based on: (i) the non-accumulation of new arrears during the current year; and (ii) the gradual repayment of existing arrears in line with a published schedule.

Table 6.

CEMAC: Monetary Survey, 2016–20

(Billions of CFA francs, unless otherwise indicated)

article image
Sources: BEAC; and IMF staff estimates.

Data on the commercial banks’ foreign liabilities have been revised to include the medium- and long-term liabilities (hitherto reported in the other items, net).

Table 7.

CEMAC: Summary Accounts of the Central Bank, 2016–20

(Billions of CFA francs, unless otherwise indicated)

article image
Sources: BEAC.

Gross foreign reserves, including gold, foreign currency reserves, IMF reserve position, and net overall balance of the operations account at the French Treasury.

Table 8.

CEMAC: Net Foreign Assets of the Central Bank, 2016–21

(Billions of CFA francs)

article image
Sources: BEAC; and IMF staff projections.

Medium-Term Outlook and Risks

11. Benefiting from higher oil prices, the medium-term outlook continues to see a gradual improvement in the economic and financial situation. It assumes the full implementation of policy commitments by CEMAC member states and regional institutions, including: continued fiscal consolidation and structural reform efforts by the member states; tight monetary policy and enforcement of foreign exchange regulations by BEAC; and further efforts to strengthen the financial sector by COBAC. The outlook also assumes that new IMF arrangements with Congo and Equatorial Guinea will be adopted during the first half of 2019 and reflects the upward revision of oil price projections. Under these assumptions:

  • The overall fiscal balance (excluding grants) would be around equilibrium from 2019 onward, reflecting a further decline in the non-oil primary fiscal deficit (excluding grants) and higher (but still declining over the medium term) oil revenue. Public debt would decline more rapidly than previously envisaged to below 44 percent of GDP by end-2020, owing to stronger overall fiscal balances and higher nominal oil GDP.

  • Reforms to improve the business environment and governance and strengthen the financial sector, along with a lower drag from fiscal adjustment and the repayment of government arrears would contribute to the gradual recovery of non-oil growth, to 4½ percent by 2021. While increasing slightly, inflation would remain under the regional convergence criterion of 3 percent.

  • Reflecting higher oil exports, the current account deficit would be about 1 percent of GDP lower than previously envisaged, averaging 1¾ percent of GDP over 2019–21. This lower deficit, while partly offset by slightly lower FDIs and larger capital outflows (reflecting still low oil revenue repatriation by foreign oil companies), would lead to a gradual reserve accumulation, with the reserves coverage reaching close to 4 months of imports by 2020.

Text Table 1.

CEMAC: Selected Macroeconomic Indicators, 2016–21

article image
Sources: IMF Staff Estimates.
uA01fig03

Current Account Deficit and Sources of Financing, 2016–20

(Percent of GDP)

Citation: IMF Staff Country Reports 2019, 001; 10.5089/9781484392799.002.A001

Sources: BEAC and IMF Staff estimates.
uA01fig04

Net Foreign Assets of the Central Bank, 2016–19

(Billions of CFA francs)

Citation: IMF Staff Country Reports 2019, 001; 10.5089/9781484392799.002.A001

Sources: BEAC and IMF Staff estimates.

12. The outlook remains subject to significant downside risks, including:

  • Further delays in the approval of financial arrangements with Congo and Equatorial Guinea could compromise again the attainment of the regional NFA accumulation objectives and bring into question the eventual success of the regional strategy (Box 1). The projected accumulation of government deposits is key to the achievement of the 2019 NFA targets.

  • With the region still heavily dependent on oil receipts/revenue, a decline in oil prices would put additional pressure on fiscal and external balances and on the financial sector.2 This would notably be the case if the recent decline in oil prices were to persist.

  • A deterioration of the security situation would negatively affect economic activity and might lead to increased military spending and capital outflow pressures. If the situation has improved around the Pool region in Congo, tensions persist in CAR and in Cameroon’s anglophone regions.

  • Tighter global financial conditions, which could be triggered by a sharper-than-expected increase in U.S. interest rates or the materialization of other risks, could raise debt service and refinancing risks, putting pressures on the capital account and weakening NFA accumulation.

Would these risks materialize, member states and regional institutions should promptly consult on the necessary corrective actions, which could possible include an acceleration of fiscal adjustment and structural reform efforts and a further tightening of the monetary stance.

CEMAC: Downside scenario

To illustrate the critical importance of the approval of Fund-supported programs with Congo and Equatorial Guinea to the regional strategy, staff prepared a downside scenario assuming that no agreement would be found on such programs in the near future. Under this scenario, financing constraints would force the two countries to pursue fiscal policies broadly similar to the baseline. However, to replace the external budget financing that they would have received under the programs, they would resort to the accumulation of domestic and external arrears and deposits withdrawal (or lower accumulation of deposits). Under these assumptions:

  • Regional growth would be slightly lower, reflecting lower domestic and foreign investment;

  • Gross public debt would be lower, as the two countries would rely on deposit withdrawals instead of borrowing to finance their deficits;

  • The current account deficit would be slightly lower, reflecting lower growth and investment; and

  • NFA accumulation would be substantially lower, with the reserve coverage ratio increasing to only 3.6 months of imports by 2021, compared with 4.2 months under the baseline.

It is worth noting that this scenario does not assume more deteriorated fiscal positions, which would likely further increase arrears and public debt and negatively affect banking sectors through higher NPLs. It does not assume either any contagion to the other CEMAC countries: consequences would be direr, notably in terms of growth and NFA accumulation, if developments in Congo and Equatorial Guinea were to undermine confidence in the regional strategy and trigger capital flight.

If this downside scenario were to materialize and programs with Congo and Equatorial Guinea were expected to be substantially delayed beyond what is currently envisaged in the regional framework, the regional strategy would need to be revisited.

Main Macroeconomic Indicators in the Baseline and Alternative Scenarios, 2016–21

article image
Sources: IMF Staff Estimates.

Implementation of the Regional Strategy to Address the Crisis

The regional authorities shared staff’s concerns about the underperformance of NFA accumulation, as they viewed the rebuilding of an adequate reserve buffer as one of the regional strategy’s overarching objective, which, if not met, would raise doubts on the authorities’ ability to support the peg and thereby on the external viability of each CEMAC members. Discussions on the regional strategy therefore focused on measures to ensure that its objectives and the regional policy assurances are sustainably met. There was an agreement that current fiscal consolidation plans should be implemented thoroughly and that, following the recent increase of its policy rate, the BEAC should continue to gradually reduce liquidity injections and enforce strictly forex regulations while submitting by year-end enhanced regulations to the UMAC ministerial committee. The COBAC will finalize its strategic plan for 2019–21, with a major focus on risk-based supervision. In its updated letter of support (Appendix I), the BEAC provides updated policy assurances on the NFA path for 2019.

A. Fiscal Consolidation Efforts

13. Regional institutions agreed on the importance of member states continuing to implement strictly their fiscal consolidation plans. Delivering the projected reduction in the non-oil primary deficit (from 7½ percent of non-oil GDP in 2018 to 4 percent of non-oil GDP in 2021) is critical to rebuild international reserves, put public debt firmly on a declining path, and reduce vulnerability to oil prices while raising savings for future generations. The quality of the adjustment should also improve, with stronger efforts needed to enhance non-oil revenue mobilization, which has remained disappointing (see below). Moreover, fuel subsidies should be limited and any oil revenue windfall should be saved to rebuild fiscal buffers.

14. Efforts to reimburse government arrears should be better coordinated. Given the size of these arrears, their reimbursement will have a significant impact on the financial situation of the private sector, and in turn on NFA accumulation and on the solvency and liquidity of commercial banks. Governments should urgently finalize and implement their arrears repayment plans. The COBAC and BEAC agreed to monitor more closely these plans, analyze their potential financial, monetary, and macroeconomic impact, and share their findings with national authorities.

15. The amendment of a BEAC’s Charter Article should contribute to ensure stronger discipline by member states in support of the monetary arrangement. The BEAC, in close cooperation with France, is working on a draft amendment to its Charter to provide better response mechanisms in case of deteriorating external positions. The envisaged amendment will notably provide for increased haircuts on government securities used as collateral for monetary operations or for a reduction of BEAC’s refinancing when reserves fall under specific national and regional thresholds. BEAC plans to submit the draft amendment, after consultation with Fund staff, to its Executive Board for adoption in coming months.

Text Table 2.

CEMAC: Financing Sources1 (Billions of CFA francs)

article image

Reflects Fund-supported programs for all six CEMAC countries

Reflects one external short-term bridge loan in 2018, owing to a delayed external disbourement, to be fully repaied in 2019.

B. Monetary Policy and Foreign Exchange Regulations

Monetary Policy Stance and Modernization of the Operational Framework

16. Staff welcomed BEAC’s tightening of monetary policy. The recent policy rate increase confirmed BEAC’s commitment to gear monetary policy toward the rebuilding of an adequate international reserve buffer in support of the peg. The current policy stance appears now adequate as: this increase brought the policy rate closer to the level required by some measures of the region’s risk premium and reduced the interest rate differential at a time when monetary policy normalization is gathering pace; and growth remains well below potential, inflation moderate, credit to the private sector sluggish, and the banking sector fragile. Although the direct impact on net foreign assets may be relatively limited given the still weak monetary policy transmission, this increase provides a strong signal of support for the regional strategy. The BEAC reiterated its commitment to stand ready to tighten further its monetary policy stance if needed, including as global financial conditions tighten and as required to support the regional strategy.

17. The BEAC has made substantial progress in modernizing its monetary policy operational framework:

  • A new liquidity management system based on autonomous factors projections and competitive multi-rate liquidity auctions has been implemented since June 2018.

  • The new collateral framework for government securities—with progressive haircuts for market, credit and specific risks to better reflect differences in CEMAC countries’ sovereign risks—is now used for the monetary operations;

  • An asymmetric interest rate corridor system bounded by a marginal deposit facility and marginal lending facility has been set-up;

  • An increasing number of banks have signed bilateral arrangements to conduct secured interbank transactions based on the new master repurchase agreement; and

  • Good progress has been made toward setting up (by end-2018) a new accounting scheme for recording monetary operations.

uA01fig05

Policy Rate Corridor and Key Interest Rates

(as of October 31, 2018)

Citation: IMF Staff Country Reports 2019, 001; 10.5089/9781484392799.002.A001

uA01fig06

BEAC’s Monetary Operations

(Billions of CFA francs)

Citation: IMF Staff Country Reports 2019, 001; 10.5089/9781484392799.002.A001

uA01fig07

Required and Excess Reserves by Country

(as of September 30, 2018) (Billions of CFA francs)

Citation: IMF Staff Country Reports 2019, 001; 10.5089/9781484392799.002.A001

uA01fig08

Segmentation of the Interbank Market

(as of September 10, 2018) (Billions of CFA francs)

Citation: IMF Staff Country Reports 2019, 001; 10.5089/9781484392799.002.A001

Sources: BEAC and IMF Staff calculations.

Looking ahead, staff encouraged the BEAC to strengthen further its operations through: the implementation of a new sanctions framework for monetary operations and non-constitution of reserve requirements; and the review of the framework for private securities used as collateral in monetary transactions including eligibility criteria, valuation and applied haircuts.

18. The BEAC must pursue its efforts to develop the interbank market, including through the further reduction of excess liquidity. While interbank transactions have increased since the new monetary policy operational framework was implemented, the interbank market remains largely segmented, with highly liquid foreign-owned banks unwilling to lend to the banks short of liquidity, which in turn must rely on BEAC’s monetary operations. To incentivize banks to participate to this market, the BEAC should:

  • further reduce excess reserves. From June to early September, the liquidity auction’s cut-off rate gradually increased to about 4 percent owing to oversized demands from a systemic and undercapitalized bank, limiting the room for reducing the offered volumes. At the same time, other forms of BEAC liquidity provision (liquidity at penalty rate and ELA) declined, offsetting the recent increase in overall banks liquidity. As the liquidity auctions’ cut-off rate has since stabilized to just over the policy rate, the BEAC agreed that the calibration of BEAC’s monetary operations should now aim primarily at bringing excess liquidity close to its incompressible level. In view of the still strong segmentation of the interbank market, BEAC decided to adopt a gradual approach in reducing banks’ refinancing.

  • pursue its technical efforts to stimulate the market, including through developing the trading platform and encouraging banks to use repurchase agreements; and

  • consider widening its interest rate corridor.

19. The BEAC will strengthen its coordination with COBAC in enforcing the eligibility criteria for access to its refinancing facilities. BEAC’s refinancing of a recently found undercapitalized bank using a non-performing loan as collateral highlights the need for a better coordination with the COBAC, which should inform the BEAC more rapidly of breaches of prudential requirements by banks or of the deterioration of the quality of their assets. BEAC acknowledged that cooperation procedures between the two institutions should be strengthened, to allow BEAC to better comprehend the financial situation of the banks and their groups and the quality of the collateral before granting liquidity support. BEAC is therefore developing a stronger cooperation framework and revised formal guidelines for its liquidity support operations.

Revision and Enforcement of Foreign Exchange Regulations

20. The BEAC aims at submitting for adoption revised foreign exchange regulations to the UMAC Ministerial Council by end-year. These regulations will aim at clarifying certain requirements by economic agents and banks, strengthening reporting requirements, broadening the scope of BEAC and SG-COBAC’s controls, and adopting more realistic and better enforceable sanctions. BEAC agreed to take into account Fund’s TA detailed recommendations on how to better define responsibilities among the different regional and national institutions in implementing the regulations and on how to strengthen the sanctions provisions, including through secondary legal instruments. Meanwhile, the COBAC and BEAC will continue to closely monitor banks’ implementation of the regulations. The repatriation and surrender requirements represent capital flow management measures (CFMs) under the Fund’s Institutional View and their stricter enforcement, implemented along with other necessary macroeconomic policy adjustments, is assessed to be appropriate to address the low level of reserves. Going forward, CFMs should be consistently and transparently enforced and clearly communicated to enhance market participants’ confidence and compliance with the regulatory framework.

21. National authorities must support the BEAC and COBAC’s efforts to enforce more strictly the foreign exchange regulations. In view of the still large amounts of deposits held abroad by CEMAC residents, possibly in breach of forex regulations, the BEAC and COBAC agreed that a stronger involvement at the national level was necessary, absent of which forex regulations would not be effective. National authorities should notably: (i) provide by end-2018 copies of all the contracts/agreements they have signed with companies in extractive industries; (ii) strictly control the domiciliation of all exports transactions with a resident commercial bank; (iii) provide the BEAC with copies of all exports licenses; (iv) ensure that all public entities (including SOEs in extractive industries) repatriate and surrender all their forex receipts to resident banks and do not hold deposit accounts abroad not authorized by BEAC; (v) replace by mid-2019 any escrow accounts held abroad as part of project financing agreements with external creditors by BEAC accounts with these creditors; (vi) review their hydrocarbon and mining codes to align them by end-2019 with the forex regulations; and (vii) if not an EITI member already, commit to apply for membership. New commitments along these lines were made by national authorities under the IMF-supported programs. The BEAC will also compile a list of exempted companies to better monitor forex repatriation.

uA01fig09
Source: BIS.Note: Data shows the BIS data series for loans and deposits liabilities with a counterparty in CEMAC countries. As loans liabilities are generally very small, in particular for non-bank sector, staff has considered this data series to show mostly deposits

C. Strengthening the Banking Sector

22. The Secretariat General of COBAC (SG-COBAC) will make risk-based supervision (RBS) the focal point of its 2019–21 strategic plan. This plan will be finalized by end-2018, building on a thorough assessment of the 2016–18 plan implementation. Consistent with staff’s recommendations, the plan will also aim at strengthening the supervisory framework and tools, ensuring prompter resolution of distressed banks, and prompting banks to prepare and implement NPL reduction plans. The SG-COBAC should also incorporate other recommendations including: consolidated supervision; strengthening the framework on concentration risk, governance and internal control, and sovereign exposure; supporting the enforcement of the new forex and microfinance regulations; and preparing for the transition to Basel 2/3 and IFRS.

23. Staff welcomed SG-COBAC’s continued strengthening of the supervisory approach and its more proactive stance to address non-compliance with prudential requirements. SG-COBAC further developed RBS, with targeted inspections focusing on loan portfolio reviews, AML/CFT, liquidity and foreign exchange repatriation. It is providing training on banking and credit dispute resolution for judges and supporting the development of legal frameworks on credit protection. To strengthen compliance with prudential rules, the SG-COBAC introduced and already applied a more constraining financial penalties system and plans to adopt by mid-June 2019 a new framework of immediately applicable fines in case of breach or repeated breach. It will also assess the need to strengthen the prudential treatment of concentration excesses, including those resulting from loans to related parties.

24. Staff encouraged the SG-COBAC to guide more proactively NPL resolution processes. The SG-COBAC already asked banks to submit strategies to reduce NPLs and will be reviewing those by end-year. As a further increase in NPLs would have negative consequences on financial stability and banks’ ability to provide credit, staff advised SG-COBAC to: (i) request member state’s government arrears repayment plans, (ii) request and assess banks’ individual NPL resolution plans, (iii) oversee the implementation of these plans, and (iv) develop a proposal for a prudential treatment of sovereign arrears depending on the arrears’ duration and the economic cost of carry for a bank.

25. While the COBAC has taken important steps toward resolving insolvent banks, future resolution costs could be reduced by shortening delays in resolution decisions. To this end, staff suggested evaluating whether the COBAC could make earlier use of its power to nominate provisional administrators and conduct early evaluations of resolution scenario when a bank faces stress. The COBAC should also remain vigilant to allow only fit and proper investors with a credible plan as bank owner.

26. The SG-COBAC is strengthening further banking regulations and governance. Staff welcomed SG-COBAC’s plan to adopt by end-year new regulations on payment systems and, by mid-2019, regulations implementing the deposit guarantee fund (FOGADAC), revising the AML/CFT COBAC regulations for banks to implement the 2016 COBAC regulation, as well as the regulations on consumer protection, leverage ratio and consolidated supervision. Staff further advised to explore preparing a dashboard to monitor banks’ compliance with regulations on internal control and governance, and to revisit FSAP recommendations on ways to ensure the highest degree of expertise and independence of COBAC members.

27. A reinforcement of SG-COBAC’s human resources by early 2019 will be key to meeting these objectives. Recent staff moves left the SG-COBAC understaffed in some areas. While BEAC and SG-COBAC budget constraints will limit possible new hiring, staff emphasized that the SG-COBAC should enhance its human capacity to fulfill its existing and future responsibilities as envisaged in the strategic plan and new regulations. The SG-COBAC should also review options for simplifying, automating, or delegating procedures to improve its effectiveness.

Promoting Sustained Inclusive Growth

Progress has been limited toward restoring sustained inclusive growth. The national and regional authorities should intensify their efforts toward this objective, including through: giving more prominence to non-oil revenue-enhancing measures in their fiscal consolidation efforts to create fiscal space for priority development spending; supporting the development of financial markets; improving governance; and promoting regional integration.

A. Enhancing Non-Oil Revenue Mobilization

28. The quality of CEMAC countries’ fiscal consolidation efforts has been weaker than expected, relying heavily on capital expenditure cuts. While the regional strategy called for an increase in non-oil revenue as a main pillar for fiscal consolidation, this increase has not materialized, and non-oil revenue are now projected to be slightly lower in 2018 than in 2016. As a result, the targeted fiscal adjustment came from larger than initially envisaged cuts in investment spending, while the rationalization of primary current spending has also been less ambitious. CEMAC’s performance in non-oil revenue mobilization remains well below the average in sub-Saharan Africa and its tax revenue potential.

29. Regional authorities agreed that non-oil revenue-enhancing measures should play a more prominent role in the remaining fiscal consolidation efforts.3 Such measures, including the streamlining of tax exemptions and the strengthening of tax and customs administration, would be more supportive to growth as their fiscal multiplier is generally lower than that associated to cuts in spending, particularly in investment spending. They will also provide CEMAC countries with a more stable revenue base to finance their considerable infrastructure and spending needs. To enhance their efficiency and minimize tax competition, these efforts should be harmonized and better coordinated at the regional level, starting with the adoption of: the revised customs code; a classification of tax exemptions; and the new directive on excise taxes.

B. Development of Financial Markets

30. The authorities have taken important steps toward merging the existing stock markets, market regulators and depositories. The physical merger of the two stock markets is expected by year-end, and the alignment of the merged institution’s procedures with best international standard by mid-2019. The increased efforts of regional institutions to establish new specifications for Treasury Securities Specialists are significant and should lead to an improvement in the functioning of the public securities markets and the revitalization of the secondary market.

31. The BEAC is committed to boost financial transparency and timely implement its financial information strategy, including: (i) a regional credit registry, a regional balance sheet databases and credit bureaus accessible to financial institutions to facilitate and better manage credit, and (ii) the strict enforcement of the financial institutions’ obligation to publish their financial statements, which should contribute to the development of the interbank market.

32. The BEAC will refrain from providing additional financing to the regional development bank (BDEAC) as long as the reforms called for by its board and by the heads of states have not been fully implemented. Governance and financial management reforms such as those identified in SG-COBAC’s audit earlier this year are crucial for the sound and gradual expansion of BDEAC’s activities and to allay safeguards concerns about BEAC’s large exposure (CFAF 220 billion) to this institution. The President of BDEAC, while disagreeing with some important recommendations by SG-COBAC, argued that important reforms are being prepared which should put BDEAC on a much stronger institutional and financial footing. Staff noted that it is not a central bank’s role to finance a development bank and advised BDEAC to seek alternative sources of financing as soon as feasible, to reduce BEAC’s exposure to BDEAC.

C. Improving Governance

33. The regional institutions welcomed the opportunity to discuss reforms to improve governance in the region.4 They agreed that improving governance was key to the efforts to promote sustained and inclusive growth. In addition to the need to strengthen governance in the oil sector, discussions focused on:

  • AML/CFT. The CEMAC regulation adopted in 2016 brings the regional framework in closer line with the 2012 international AML/CFT standards. Staff emphasized that the challenge will now be for COBAC to revise its AML/CFT regulation to implement the 2016 CEMAC regulation and adapt practices and work plans to establish effective risk-based AML/CFT supervision for banks, in particular to enforcement of preventive measures on politically-exposed persons.

  • Public financial management. Staff reviewed with the CEMAC Commission key aspects in which country practices and procedures did not fully meet the regional standards of transparency, including full disclosure of contracts signed by the member states with extractive industries. Shortcomings are also evident regarding regular budget execution and reporting, as well as audits. Staff was encouraged by the Commission’s recent decision to establish a unit to monitor and report annually on progress and gaps in the implementation of CEMAC directives.

D. Promoting Regional Integration and Enhancing the Business Climate

CEMAC’s Economic and Financial Reform Program (PREF)

34. The CEMAC Commission and national authorities need to intensify and better coordinate their efforts to implement the PREF. The policy and reforms included in the PREF action plan are critical to address the root causes of the crisis—an excessive dependence on oil and highly undiversified economies. Progress so far has been lagging, particularly in enhancing the tax system, raising non-oil revenues, and deepening the regional market. To address this PREF implementation gap, the Commission has refocused its approach to actual implementation and impact assessment, rather than on the process. Staff viewed this as a welcome change but encouraged the Commission to step up its efforts in some important areas. In particular, it urged the Commission to finalize by end-March 2019 its draft regulation proposing a simplified list of possible exemptions and the elimination of the others. Staff also encouraged the Commission to intensify efforts to obtain copies of the contracts signed by member-states with extractive industries, so as to assess their consistency with regional directives.

35. The CEMAC Commission should also step-up efforts to enhance the business environment, a central pillar of the PREF. Progress in this area is probably the weakest of all reform areas covered by the PREF. The number of procedures, the time required, and the resources involved in registering a new company remain very high. Moreover, the judicial system is unable to ensure a clear protection of the rights of investors and creditors. Staff encouraged the Commission to double efforts in this area, as reform to enhance the business environment are often budget-neutral and can have a sizeable and lasting effect in supporting the private sector.

Regional Surveillance Framework

36. The member states need to support the CEMAC Commission’s efforts to strengthen the regional convergence framework. As requested by the heads of states, they should provide convergence plans, articulating their macroeconomic policies and reform plans for 2019–21, to the Commission by the end-of-the year. While compliance with the convergence criteria has slightly improved (Table 5), the Commission should not hesitate to impose sanctions on the non-compliers.

Monitoring of Regional Developments and Policies

37. In addition to taking corrective actions to address the NFA underperformance, the BEAC has made great strides toward honoring the assurances provided in its June 2018 letter of support. Consistent with these assurances, by end-year the BEAC will submit for adoption new foreign exchange regulations to the UMAC ministerial committee and start using a new accounting scheme for recording monetary operations, thereby making the new monetary policy framework fully operational.

38. The attached follow-up letter of support provides updated policy assurances on NFA accumulation over the coming 12 months (Appendix I). Consistent with staff projections, the end-2018 NFA projection covered by a policy assurance was revised down with the shortfall being fully reversed by end-2019. In the event of a deviation from the stated NFA accumulation projections, the follow-up letter also reiterates the commitment to identify and adopt any additional corrective measures that would be deemed necessary at the national and/or regional policy levels to allow the continuation of (or approval of new) IMF financial support as part of the IMF-supported programs with CEMAC members.

39. Semi-annual tripartite consultations—bringing together national authorities, the regional institutions and the IMF—will help strengthen the monitoring and implementation of the regional strategy. These consultations were agreed in principle by the BEAC and the UMAC ministerial committee and should start in the first half of 2019. They will be an opportunity to assess progress, at the regional and national levels, in implementing the strategy, and, when necessary, to identify additional measures to ensure that its objectives are met. They will also help enhance coordination on regional issues, such as foreign exchange repatriation or fiscal harmonization.

40. The BEAC continues to implement the remaining recommendations of the 2017 safeguards assessment. BEAC’s full transition to IFRS is progressing broadly as planned, and steps are being taken to accelerate the adoption of revisions to the secondary legal instruments to align these with the BEAC Charter, in consultation with IMF staff.

Staff Appraisal

41. The regional strategy helped avert an immediate crisis but is not yet fully delivering on its objectives. While the reduction of the fiscal and current account deficits is broadly as expected, NFA accumulation has stalled over the last few months, falling short of the strategy’s objectives, and CEMAC’s external position is moderately weaker than implied by fundamentals and desired policy settings. The projected recovery of non-oil growth has still to materialize. These setbacks owe essentially to the fact that, two years after the regional strategy was launched, two countries have still to adopt IMF-supported programs.

42. The regional institutions’ commitments and efforts to support the regional strategy are welcome. BEAC’s increase of its policy rate confirmed its commitment to use all the monetary policy tools within its mandate to help reach the strategy’s objectives. The modernization of the monetary policy operational framework and measures to develop the interbank market will help strengthen monetary policy transmission. The strengthening and better enforcement of foreign exchange regulations will also contribute to bringing NFA accumulation back on the targeted path.

43. To be effective, these efforts must be supported more strongly by member states. Member states must pursue their fiscal consolidation efforts and address promptly any fiscal slippages through corrective measures. To help strengthen the enforcement of foreign exchange regulations, they also need to ensure the domiciliation of exports proceeds and the repatriation and surrendering of foreign assets by public companies and to provide regional institutions with copies of their contracts with companies in extractive industries.

44. Ensuring prompt approval of Fund-supported programs with Congo and Equatorial Guinea is also critical to the success of the regional strategy. Absent such programs, NFA accumulation will be insufficient to allow for the rebuilding of an adequate regional reserve buffer, exposing the region to severe consequences should the numerous downside risks materialize. Weak policy implementation by one of these countries would also undermine support for, and undermine investors’ confidence in, the strategy, increasing substantially the region’s vulnerability.

45. Member states must also step up their efforts to establish the conditions for sustained and inclusive growth. They should: (i) rely more heavily on non-oil revenue-enhancing measures, including the streamlining of VAT exemptions and increases in excise taxes, to meet their remaining fiscal consolidation efforts and create fiscal space for priority development spending; (ii) tackle more forcefully governance issues, including by strengthening COBAC’s AML/CFT supervision and public financial management; and (iii) promote regional integration, including through preparation of convergence plans for 2019–21.

46. With the new monetary policy framework essentially in place, the BEAC now needs to focus on the development of the interbank market, including through reducing the excess bank liquidity. To strengthen the transmission of its policy rate to the interbank market rate, it should move promptly to bring excess bank liquidity close to its incompressible level. Further communication also appears necessary to dispatch any banks’ concerns about using repurchase agreements, while a further widening of the interest rate corridor could help incentivize them to engage in interbank transactions.

47. The SG-COBAC must step up further its efforts to address the banking sector’s weaknesses. Its strategy for 2019–21 should aim at strengthening risk-based supervision. The SG-COBAC should also better prompt banks to implement NPL reduction plans, implement bank resolution decisions more quickly, and more strictly enforce prudential regulations. SG-COBAC’s more proactive stance on NPLs and non-compliance with prudential requirements is welcome and should be pursued further. The COBAC and the BEAC should notably work closer with member states to assess the potential impact of their government arrears repayment plans on NPLs, liquidity and the macroeconomic framework.

48. Overall, staff considers that: (i) BEAC and SG-COBAC have taken satisfactory corrective measures to address the end-June NFA underperformance and made substantial progress toward honoring the other policy assurances provided in the June follow-up letter; and (ii) the updated policy assurances provided in the attached follow-up letter in support of CEMAC countries’ IMF-supported programs are adequate. Implementation of the policy assurances on (i) completing by end-2018 the modernization of BEAC’s monetary policy operations framework, (ii) submitting to the UMAC ministerial committee for adoption revised foreign exchange regulations by end-2018, and (iii) achieving the projected NFA accumulation based on BEAC’s commitment to implement an adequately tight monetary policy together with the commitment by the member states to implement adjustment policies in the context of IMF-supported programs will be critical for the continuation of (or approval of new) IMF financial support as part of the IMF-supported programs with CEMAC members.

49. The surveillance 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.

Figure 1.
Figure 1.

CEMAC: Selected Economic Indicators, 2000–18

Citation: IMF Staff Country Reports 2019, 001; 10.5089/9781484392799.002.A001

Sources: CEMAC authorities; and IMF staff estimates.
Figure 2.
Figure 2.

CEMAC: Selected Economic Indicators, 2006–21

Citation: IMF Staff Country Reports 2019, 001; 10.5089/9781484392799.002.A001

Sources: GAS Live, CEMAC authorities; and IMF staff estimates.
Figure 3.
Figure 3.

CEMAC: Monetary Indicators

Citation: IMF Staff Country Reports 2019, 001; 10.5089/9781484392799.002.A001

Sources: CEMAC; and IMF staff calculations.
Table 9.

CEMAC: Bank Ratings, June 2018 1 2

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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 10.

CEMAC: Financial Soundness Indicators, 2010–18

(Percent)

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Source: Banking Commission of Central Africa (COBAC).

Current year profits are excluded from the definition of regulatory capital, following the Basel I capital accord guidelines. General provisions are included in Tier 2 capital up to an amount equal to 1.25% of risk-weighted assets. Regulatory capital is the sum of Tier 1 capital, and the minimum of Tier 1 and Tier 2 capital

The risk-weighted assets are estimated using the following risk weights: 0% – cash reserves in domestic and foreign currency and claims on the central bank; 100% – all other assets.

The ratio of after-tax profits to the average of beginning and end-period total assets.

Table 11.

CEMAC: Violations of Prudential Ratios, 2014–18

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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 varied by country until May 2010 (CFA millions): Cameroon 1000; Central African Republic 200; Chad 150; Republic of Congo 150; Equatorial Guinea 300; Gabon 1000. From June 2010, minimum capital is 5 billion CFAF for all the countries.

Single large exposure is limited to 45 percent of capital.

Percentage of deposits represented by the number of banks in violation in the country.

Annex I. Response to Past IMF Advice

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Annex II. Risk Assessment Matrix1

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Annex III. External Sector Assessment

CEMAC’ external position is assessed to be moderately weaker than implied by fundamentals and desirable policy settings at end-2018. The current account deficit is expected to significantly decline in 2018 and remain at about the same level in 2019 on the back of a rebound in net exports and fiscal adjustment. Reserves have stabilized in 2018 and are projected to increase in 2019 but remain below levels that are appropriate according to reserve adequacy metrics. Non-price competitiveness indicators remain behind peers with no significant improvement in 2018.

A. Recent Developments in External Accounts

1. The regional external current account balance has improved but is expected to remain negative over the medium term (Figure 1). The current account deficit is projected to decline from 11.0 percent of GDP in 2016 to 1.9 percent of GDP in 2018 on the back of higher oil exports and a reduction in imports stemming from the tighter fiscal stance and weak domestic demand. While improving in most member countries, the overall current account balance would remain negative, ranging from [10.5] percent of GDP in Congo1 to [-8.6] percent of GDP in the Central African Republic.

Figure 1.
Figure 1.

CEMAC: Current Account, 2012–22

(Percent of GDP)

Citation: IMF Staff Country Reports 2019, 001; 10.5089/9781484392799.002.A001

2. In the medium term, the current account deficit is projected to stabilize at around 2 percent of GDP. Supported by tighter monetary policy as well as the recent recovery in international oil prices, the current account deficit is projected to narrow to 1.4 percent of GDP in 2019 and stabilize in the medium term at 2 percent of GDP.2 As a result, reserves are projected to improve to about 5 months of imports by 2022, from 2.6 months of imports at end-2018.

3. Although foreign direct investment (FDI) has traditionally dominated external financing flows, the non-full repatriation of export proceeds has recently put pressure on the financial account. FDI peeked in 2015 at almost 9 percent of GDP but decreased sharply to an average of four percent over the last three years, back to pre-crisis levels. In the medium term, FDI is projected to remain stable as commodity prices recover and structural reforms take hold. On the other hand, the BOP records large net capital outflows (a residual item difficult to interpret), which may reflect various factors, including the non-repatriation of export proceeds and possibly capital outflows because of concerns about the regional economic and financial situation.3 Restoring confidence will depend on the timely implementation of the macroeconomic policies envisaged in the IMF-supported programs and enforcement of the foreign exchange regulations to support the recovery in foreign reserves.

B. Reserves Adequacy

4. CEMAC’s reserve coverage remains significantly below appropriate levels. The reserve coverage is expected to recover to just 2.6 months of prospective extra-regional imports by end-2018 (Figure 3). This is below the benchmark of 5 months of imports considered appropriate for a resource-rich currency union. In the same vein, the cost-benefit analysis for credit constrained economies with a fixed exchange rate regime indicates that the optimal level of reserves would be about 9 months of imports, well above current reserve coverage levels.4 Further, at end-2018 reserves would amount to no more than 50 percent of the IMF reserve adequacy metric, well below the range of 100–150 percent deemed broadly adequate for precautionary purposes. Even if the reserve adequacy assessment looks somewhat more favorable when considering the broad money and short-term liability ratios (respectively 32 and 186 percent, compared to minimum thresholds of 20 and 100 percent), the ratio to short-term liabilities would deteriorate at end-2018 compared to end-2017 (Figure 3).

Figure 2.
Figure 2.

CEMAC: External Sector Developments, 2000–18

Citation: IMF Staff Country Reports 2019, 001; 10.5089/9781484392799.002.A001

Sources: CEMAC authorities; International Financial Statistics (IFS); and IMF staff calculations.
Figure 3.
Figure 3.

BEAC: International Reserves Coverage, 2012–18

Citation: IMF Staff Country Reports 2019, 001; 10.5089/9781484392799.002.A001

Sources : AFR REO-database and IMF staff calculations.

5. Rebuilding reserves buffers in the medium term requires an appropriate policy mix. The reserve coverage is expected to recover gradually in the medium term as fiscal consolidation takes hold and monetary policy is maintained tight, while being mindful of growth and financial stability. Data up to September 2018 suggest that BEAC reserves reached an inflection point mid-2017 and have been increasing up to end-2017. Nevertheless, no further increases have been observed during the first three quarters of 2018 despite favorable oil price developments. Supported by disbursements of external budget support, BEAC reserves are expected to increase substantially during the fourth quarter, to reach a reserve coverage of 2.6 months of prospective extra-regional imports by end-year. Nonetheless, even if current projections materialize, the medium-term reserve coverage would remain lower than what is deemed as adequate for a resource-rich currency union (Figure 4), thus leaving the region somewhat vulnerable to adverse external shocks. However, this assessment does not take into account the guarantee by the French Treasury to cover negative reserves position, which could reduce the need for higher reserves buffer.

Figure 4.
Figure 4.

Oil Price and Reserve Coverage

(U.S. Dollar per barrel, and months of prospective imports)

Citation: IMF Staff Country Reports 2019, 001; 10.5089/9781484392799.002.A001

Sources: BEAC, Country authorities, WEO and IMF staff calculations.

C. Exchange Rate Assessment

6. The assessments of the 2018 current account and real effective exchange rate (REER) suggest a moderate overvaluation and a moderately weaker external position than fundamentals and desirable policies. After some moderate depreciation at end-2016, the REER started to appreciate during 2017 by 3.8 percent on a year-on-year basis in February 2018, reflecting mainly a strengthening of the euro vs the US dollar (Figure 2). The appreciation has been partly reversed in the second part of the year, as the REER slightly depreciated by 1.8 percent from February 2018 to October 2018. Two standard approaches have been used to assess the external position of the CEMAC region. The first approach is the EBA-Lite’s Index Real Effective Exchange Rate (IREER), for which the comparison of the fitted IREER and the norm indicates an undervaluation of 8.5 percent in 2018.5 The second approach is the “EBA-Lite’s Current Account (CA) model, which compares the underlying current account balance with the model-estimated current account norm. This model suggests an overvaluation of about 7 percent with the 2018 current account deficit estimated at 1.9 percent of GDP against a norm of 0.1 percent GDP surplus (assuming an elasticity of the current account to REER of -0.26).6 The external position at end-2018 is assessed to be moderately weaker than implied by fundamentals and desirable policies.7 The previously estimated policy gap at end-2017 has almost closed in 2018, however, some policy objectives remain a concern. The change in reserves is considered to be below what is needed to achieve the medium-term target of 5 months of extra-regional imports by 2022.8 Similarly, despite a positive contribution from the adjustment in the fiscal balance, health expenditure contributes negatively to the policy gap.

D. Structural Competitiveness

7. According to the World Bank “Doing Business Indicators”, CEMAC countries continue to underperform relative to comparable countries, indicating ample room for strengthening the business environment. Specifically:

  • Progress in doing business ranking is heterogenous (Figure 5). Between 2015 and 2018, some progress has been achieved in Cameroon, Central African Republic and Chad, while other countries showed little progress or even a deterioration in the quality of business environment, for example in Gabon.

  • CEMAC countries lag behind their peers in the West African Economic and Monetary Union (WAEMU), although they are comparable to SSA oil exporters (Figure 6)9.The weak performance of CEMAC countries spans across the different sub-components of the overall doing business indicators, with the more pronounced impediments to business in the areas of starting a business, getting electricity, dealing with construction permits, enforcing contracts and trading across borders (Figure 6). In addition, the lack of adequate infrastructure and reliable energy supply remains a challenge. Further, procedures for paying taxes and registering properties continue to be cumbersome.

  • Governance indicators also suggest disappointing performance of CEMAC countries. CEMAC countries are behind their WAEMU peers and emerging economies according to the World Bank’s “Governance Indicators”. Moreover, governance is weaker in CEMAC even after accounting for income per capita levels (Figure 6).

Figure 5.
Figure 5.

CEMAC: Change in Doing Business Distance to the Frontier (2015–18)

(A positive number indicates an improvement)

Citation: IMF Staff Country Reports 2019, 001; 10.5089/9781484392799.002.A001

Source: World Bank Doing Business Report 2018.
Figure 6.
Figure 6.

CEMAC: Governance and Business Indicators

Citation: IMF Staff Country Reports 2019, 001; 10.5089/9781484392799.002.A001

Sources: World Bank Doing Business Report 2018; World Governance Indicators 2016; and, IMF staff calculations.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.

Appendix I. Follow-up to the Letter of Support to the Recovery and Reform Programs Undertaken by the CEMAC Member Countries

December 5, 2018

Madame Christine Lagarde

Managing Director

International Monetary Fund

700 19th Street, NW

Washington, DC 20431

United States of America

Object: Follow-up to the letter of support to the recovery and reform programs undertaken by the CEMAC Member Countries

Ms. Managing Director,

Following the regional consultations held from October 23–November 3 by International Monetary Fund (IMF) staff with the institutions of the Economic and Monetary Community of Central Africa (CEMAC), and as part of the support of the latter to the recovery and economic reform programs undertaken by the member states, I am pleased to inform you of the implementation status of the measures to which the Bank of Central African States (BEAC) and the Banking Commission of Central Africa (COBAC) had committed, as well as the measures that these two institutions consider taking during the coming months.

Overall, despite the efforts undertaken, the Community’s situation remains difficult. Despite the rebound in oil production, growth remains weak and the activity level is insufficient to create jobs and generate income for a growing population.

Moreover, BEAC’s accumulation of net foreign assets during the last few months has been below expectations, as they amounted to euro 2.94 billion at end-June 2018, below projections of euro 3.10 billion. This shortfall can be explained by: (i) the delays in the disbursements of external budget support (euro 50 million); the non-repatriation of deposits held abroad, estimated at euro 70 million; (iii) the insufficient repatriation and surrendering of foreign currency by some commercial banks; and (iv) the postponement of the programs with Congo and Equatorial Guinea and of the related budget support. This underperformance is all the more worrying as it occurred at a time when a rise in oil prices was observed and the fiscal adjustment measures of CEMAC’s member states were broadly in line with the targets under their programs with the IMF.

In this context, the BEAC and COBAC have striven to support the rebuilding of an adequate level of net foreign assets. In this regard, they have taken corrective measures, which demonstrate their unwavering commitment to contribute within their mandate and with their available instruments, to the recovery of foreign exchange reserves. These measures include:

  • The strengthened enforcement of the foreign exchange regulation. This action notably translated into the disciplinary sanctions imposed by COBAC on 11 banks that had not complied with the rules on the surrendering of their foreign assets and on their external position. It will continue unabated to ensure an enhanced surrendering by banks. The BEAC has established a mechanism to monitor transfers to respond as quickly as possible to banks’ justified requests for foreign exchange.

  • The tightening of monetary policy. BEAC’s Monetary Policy Committee has indeed raised, during its October 31, 2018 meeting, its policy rate by 55 basis points to 3.50 percent. Moreover, over the coming months, BEAC will aim at gradually reducing the amount of its liquidity auctions, which should contribute to the development of the interbank market and enhance the effectiveness of monetary policy.

I would also like to emphasize anew the substantial progress that has been accomplished in reforming the operational framework and the implementation of monetary policy. BEAC’s new collateral mechanism for bank refinancing operations, which includes a discount system on government securities to better reflect the risks associated with each state, is now fully operational. The same is true of the calibration of monetary policy operations on the basis of forecasts of autonomous liquidity factors. Since June 2018, the supply of bank liquidity by BEAC is thus conducted through a system of auctions/multi-rate tenders. The interest rate corridor, comprising the marginal deposit and borrowing facilities to which the banks can freely access, has been formally established. We therefore only have to adopt of the new accounting system for recording monetary transactions. Work is well advanced in this area and will be finalized, as we had committed, by end-2018.

Otherwise, the reform of the foreign exchange regulation is well advanced. So as to support the rebuilding of foreign exchange reserves and limit as much as possible non-legitimate transactions, the BEAC has revised the existing regulation to strengthen the provisions relating to the repatriation of export earnings and to the powers of BEAC and COBAC in terms of monitoring and enforcement of the sanction framework. The draft revised regulation has been submitted to stakeholders and to our other financial and technical partners, including the IMF. Their comments will be taken into account prior to the submission of the revised text to the Bank’s decision-taking bodies for its adoption, which, consistently with our commitments, should occur by end-year. To be fully effective, these actions must be supported by the member states, both in terms of making available the conventions signed with the oil and mining and with respect to the repatriation of their foreign assets by public companies and the strict enforcement of rules on the domiciliation of exports and the centralization of foreign exchange reserves with BEAC.

These measures, combined with member states’ fiscal consolidation programs and the development partners’ budget support, should allow BEAC’s net foreign assets to reach a level of euro 3.45 billion by end-2018. This lower-than-expected accumulation is entirely due to the postponement of new programs that could be supported by the IMF, as well as the associated budget support, in Congo and Equatorial Guinea. For 2019, BEAC’s net foreign assets should recover and then reach back the levels we had forecast last June. Hence, they would reach euro 3.50 billion euros at end-June 2019 and euro 4.60 billion at end-December 2019.

As I had in my previous letter, I wish to emphasize that the achievement of these objectives is not only dependent on the actions of the BEAC but also depends on the satisfactory implementation of the fiscal consolidation and structural reform programs by CEMAC countries, as well as on the budget support from our external partners, including other external (non-project) financing, as expected at euro 0.89 billion in the second half of 2018, euro 0.63 billion in the first half of 2019, and euro 1.28 billion over the whole of 2019. In addition, other exceptional financing from commercial and bilateral sources is expected to cover a substantial part of debt service due by Congo in 2019 and following years. In this regard, it seems to me necessary to emphasize anew the crucial nature of the rapid approval of IMF-supported programs in all member states, as well as the preparation and implementation of domestic arrears repayment strategies to preserve the banking and financial sector stability, and remain in line with the objective of rebuilding foreign exchange reserves.

I am also pleased to inform you that the principle of semi-annual consultations involving the national authorities of CEMAC countries, the main regional institutions, and IMF staff has been approved. The first consultations should be held during the first half of 2019. They will be an opportunity to assess progress in implementing the regional crisis exit strategy and—in the event of significant deviations from the net foreign assets accumulation projections provided above—to identify and adopt additional corrective measures that would be necessary, at both the national and regional policy levels, to enable the pursuit of (or the approval of new) IMF financial support under the IMF-supported programs with CEMAC members.

In addition, we are resolutely aiming at implementing, in collaboration with IMF staff, the remaining recommendations of the 2017 safeguard assessment, including with regard to ensuring the consistency of BEAC’s secondary legal instruments with its revised Charter and with the transition to IFRS. With regard to the BDEAC, our Board of Directors will assess the effective implementation of the governance reforms it had recommended as well as of those edicted by the extraordinary session of the Heads of State Conference held on October 25, 2018 in Djaména, before authorizing any additional financing to the BDEAC. This represents a safeguards issue for the Central bank given the relatively important financing it has provided to this institution.

For its part, COBAC has pursued, and will continue to pursue, its efforts to strengthen the situation of the banking sector, notably by strengthening the application of foreign exchange regulations and prudential rules, important decisions regarding the resolution of banks in difficulty, and the strengthening of the banking supervision framework. The General Secretariat of COBAC will finalize by end-2018 its Strategic Plan for 2019–21, which notably as objectives the continued implementation of risk-based supervision, the acceleration of the fight against money laundering and the financing of terrorism, and the modernization of some prudential rules.

BEAC and COBAC will pursue their efforts to ensure the close monitoring of developments with the ongoing programs to restore CEMAC countries’ macroeconomic balances and will continue to work closely with IMF staff to support the regional crisis exit strategy.

Finally, I authorize the IMF to make a legal and pertinent use of this letter, and notably to publish it.

Remaining fully available to work alongside the IMF and CEMAC’s member states for the restoration of the region’s macroeconomic balances, I ask you to accept, Ms. Managing Director, the expression of my perfect consideration,

/s/ Abbas Mahamat Tolli

BEAC Governor
1

The term “authorities” refers to regional institutions responsible for common policies in the currency union and not to the respective member states’ authorities, unless specifically identified by the country’s name.

2

While estimates are particularly tricky owing to the complexity of production sharing agreements and the uncertainty surrounding oil-related capital outflows, back-of-the envelop estimates indicate that a $10-per-barrel decline in the oil price would reduce the region’s net oil exports receipts by around 2 percent of GDP (about € 1½ billion) and government revenues by about 1 percent of GDP. While part of this impact would be compensated by lower debt repayments (as part of oil price-contingent restructuring agreements) and lower services imports by oil industries, the remainder would need to be addressed through additional macroeconomic and structural corrective measures.

3

See Selected Issues Paper “Fiscal consolidation efforts; moving the focus to non-oil revenue-enhancing measures”.

4

See Selected Issues Paper on Governance issues.

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

Congo’s current account was very volatile over 2014–18 due to the impact of the oil price shock, the declining oil production up to 2016, and the increase of oil-sector related imports. The expected improvement over 2018–19 is driven by the compression in oil-sector related imports and the significant increase in oil production (exploitation of a new field).

2

In 2022, the current account is projected to temporarily decline to -4 percent of GDP towing to large imports related to the construction of a gas liquefication platform in Equatorial Guinea.

3

Given the quality of available balance of payments data, current financial account projections do not allow assessing intra-regional capital flows. Staff will try to complete coverage of balance of payments data with regional cross-border holdings of equity, securities and loans by private sector. Similarly, a comprehensive discussion on the IIP position is currently not possible.

4

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.

5

However, the model does not fit the evolution of the REER very well. Measures of REER for the CEMAC region are not very accurate, as data availability on intra-regional trade is scarce.

6

The CA norm was estimated by aggregating inputs by country, with weights based on GDP (nominal) for economic indicators and population for demographics. The norm estimated with data up to 2018 shows that given fundamentals, in particular the change in reserves, the current account should be slightly on surplus. The unexplained residual is 1.7 percentage point lower than in previous CA gap estimates.

7

Desirables policies are based on end-programs projections in 2022 and defined as follows: (i) accumulation of reserves is considered not to be below what is needed to achieve the medium-term objective of 5 months of extra- regional imports by 2022; (ii) a fiscal deficit equal to 0 percent of GDP, while health expenditure of 2.5% of GDP, and (iii) a private credit to GDP ratio equal to 21.7 percent and a credit growth of 2%.

8

Given the long-standing policy arrangement on capital flow management measures agreed with the French Treasury, inherent to the peg arrangement, the medium-term capital controls policy objective is set at current level.

9

Caution is needed when interpreting the results given the small number of respondents, a limited geographical coverage, and standardized assumptions about business constraints and information availability.

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Cover IMF Staff Country Reports
Central African Economic and Monetary Community (CEMAC): Common Policies of Member Countries, and Common Policies in Support of Member Countries Reform Programs-Press Release; Staff Report; and Statement by the Executive Director
Author:
International Monetary Fund. African Dept.
Volume/Issue:
Volume 2019: Issue 001
Publisher:
International Monetary Fund
ISBN:
9781484392799
ISSN:
1934-7685
Pages:
67
DOI:
https://doi.org/10.5089/9781484392799.002

CEMAC: Net Foreign Assets excluding External Budget Support

(Billions of CFA francs)

CEMAC: NFA accumulation: Shortfall relative to end-2018 objectives 1

(Billions of CFA francs)

Current Account Deficit and Sources of Financing, 2016–20

(Percent of GDP)

Net Foreign Assets of the Central Bank, 2016–19

(Billions of CFA francs)

Policy Rate Corridor and Key Interest Rates

(as of October 31, 2018)

BEAC’s Monetary Operations

(Billions of CFA francs)

Required and Excess Reserves by Country

(as of September 30, 2018) (Billions of CFA francs)

Segmentation of the Interbank Market

(as of September 10, 2018) (Billions of CFA francs)
Figure 1.

CEMAC: Selected Economic Indicators, 2000–18
Figure 2.

CEMAC: Selected Economic Indicators, 2006–21
Figure 3.

CEMAC: Monetary Indicators
Figure 1.

CEMAC: Current Account, 2012–22

(Percent of GDP)
Figure 2.

CEMAC: External Sector Developments, 2000–18
Figure 3.

BEAC: International Reserves Coverage, 2012–18
Figure 4.

Oil Price and Reserve Coverage

(U.S. Dollar per barrel, and months of prospective imports)
Figure 5.

CEMAC: Change in Doing Business Distance to the Frontier (2015–18)

(A positive number indicates an improvement)
Figure 6.

CEMAC: Governance and Business Indicators