Statement by Mr. Raghani, Mr. N’Sonde, and Mr. Bangrim Kibassim on Central African Republic July 1, 2019

Sixth Review Under the Extended Credit Facility Arrangement, Requests for Waivers of Nonobservance of Performance Criteria and Financing Assurances Review-Pres


Sixth Review Under the Extended Credit Facility Arrangement, Requests for Waivers of Nonobservance of Performance Criteria and Financing Assurances Review-Pres

1 The Central African Republic (C.A.R.) authorities seize the opportunity of the Sixth and final review of their economic and financial program under the Extended Credit Facility (ECF) to express their satisfaction of the engagement with the IMF. They welcome the constant support of the Executive Board, Management and Staff which has been instrumental to sustaining their policy and reform agenda.

2. The authorities’ successful efforts to restore macroeconomic stability with the assistance of the development partners, particularly the IMF, has laid the ground for economic growth and exit from armed conflict. Program performance has been satisfactory, despite security and administrative challenges. CAR’s macroeconomic indicators have substantially improved. This has resulted in a positive contribution to the CEMAC recovery strategy, in particular the regional efforts to rebuild foreign exchange reserves.

3. Progress has been made in restoring peace. The authorities consider the National Recovery and Peacebuilding Plan (RCPCA) and the recent Political Agreement for Peace and Reconciliation as major steps towards improving security conditions, restoring state authority, strengthening national cohesion, and expanding economic activities. To sustain this positive development, the authorities intend to maintain a close collaboration with the Fund going forward.

I. Recent Economic Developments, Program Performance, and Outlook

Recent Economic Developments

4. The economy recorded a slowdown in 2018 due to a decline in production in the forestry and diamond sectors and is estimated at 3.8 percent compared to 4.5 percent in 2017. In 2018, average inflation declined to 1.6 percent from 4.5 percent in 2017 resulting from a drop in food and manufacturing products prices. The current account deficit remained at a similar level as the year before at around 8 percent of GDP. CAR recorded a fiscal surplus of 0.4 percent of GDP in 2018 compared to a deficit of 1.1 percent in 2017. Public debt went down at 48.8 percent of GDP in 2018 from 49.4 percent in 2017.

Program Performance

5. The program performance has been satisfactory. All quantitative performance criteria (PC) except two have been met at end-December 2018, including the continuous criteria on contracting or guaranteeing new external non-concessional debt and on non-accumulation of external payment arrears. Among the two PCs that were not met, the one on domestic arrears repayment was missed by a very small margin. The level of priority social spending has been satisfactory and reached CFA 37 billion exceeding the target by CFA 7 billion. During the program, the ratio of spending through extraordinary procedures declined from 24 percent in 2017 to 10 percent in the first quarter of 2019 although it exceeded the 5-percent target.

6. At end-March 2019, two of the five structural benchmarks (SBs) were met. Among the remaining three SBs, two were implemented with delay notably the one regarding the legislation governing public agencies. Regarding the last SB on the elimination of parafiscal taxes without economic justification, the authorities intend to complete it by the end of the year.

Outlook and Risks

7. Going forward, the outlook is encouraging given the country’s economic potential. Real GDP is expected to average 5 percent over the medium-term owing to positive developments in forestry, agriculture, diamond, construction and telecommunications sectors. These activities will be sustained by increased investments in energy production. Inflation is projected to remain below the regional convergence criterion. That said, downside risks remain and include security conditions, weak human capacity, delays in development partners’ support, worsening global trade tensions and an increase in international oil prices. On the upside, risks include a successful implementation of the peace agreement, progress in the Disarmament, Demobilization and Reintegration (DDR) process and the restauration of state authority. This will catalyze the execution of investment projects and economic activities.

II. Policy and Reform Agenda for the Medium-Term

8. As the RCPCA and the new political agreement are being implemented, reinforcing efficiency and transparency by streamlining public financial management while focusing on governance and other structural issues, remain the focus of the Central African authorities.

Fiscal Policy

9. The government has submitted a draft supplementary budget to the parliament which targets a domestic primary fiscal deficit of 2.5 percent of GDP. It supports the implementation of a prudent fiscal policy considering the peace agreement, the military and defenses programming laws, and the deployment of public administration, among other priorities.

10. The government will strive to enhance domestic revenue mobilization notably by streamlining exemptions, strengthening VAT collection and reinforcing IT system (ASYCUDA and SYSTEMIF) in customs and tax administrations. In addition, administrative measures are being taken to upgrade customs offices and ensure an appropriate collection of timber exports revenue. In addition to these internal efforts, the authorities highly appreciate the budgetary support from partners and call on them to swiftly deliver on their commitments.

11. On the expenditure side, priority will continue to be given to social spending. The authorities also face the daunting humanitarian and fiscal challenges posed by the significant level of refugees and internally-displaced persons representing more than 20 percent of the population. This situation will be alleviated if security conditions are improved and peace restored, which requires an increased support of the international community.

12. The rationalization of parafiscal taxation is a critical reform under the current ECF supported program. The government is determined to transfer all taxes to the Treasury Single Account (TSA). However, the completion of the reform requires more time than expected, given the need to conduct audits of all public agencies. The authorities are confident that this reform will be completed by end-December 2019.

Debt Management

13. The authorities are making significant progress in strengthening the institutional and operational debt management frameworks. Aware of the country’s high risk of debt distress and although domestic and external vulnerabilities are declining, the government is committed to limit borrowing to highly concessional financing. Since the Fifth Review, no new non-concessional loan has been contracted by the government or state enterprises. In their efforts to clear remaining external arrears, the authorities are continuing negotiations with official creditors in good faith.

14. Regarding domestic debt, the government is making encouraging efforts to clear arrears as shown by the repayment of domestic arrears exceeding the target of CFA 7.5 billion by nearly 15 percent.

Financial Sector

15. The improved economy coupled with enhanced supervision of the regional banking supervisory body, COBAC (Commission Bancaire de l’Afrique Centrale) has helped strengthen CAR financial sector soundness. The banking system is liquid and well capitalized, and the clearance of domestic arrears has significantly contributed to reduce the level of non-performing loans to 15.6 percent in 2018 from 22.9 percent in 2017. In addition, banks have broadly complied with prudential and governance standards and continue to implement the recommendations set forth by COBAC to enhance their financial stability. Further progress is being made towards strengthening internal control mechanisms and addressing AML/CFT issues.

Capacity Building

16. Given the country’s weak administrative capacity and its fragile situation, capacity building provided by the IMF and development partners has effectively complemented the support under the ECF program. The authorities welcome the IMF’s technical assistance -particularly the Capacity Building Framework (CBF) pilot project – of which they are making an efficient use. They continue to seek assistance to strengthen customs administration, debt management, expertise of the High Authority for Good Governance (HAGG) and budgetary procedures.

Promoting Good Governance and an Attractive Business Climate

17. The authorities attach the highest importance to enhancing transparency, good governance and the business climate. Efforts are being pursued to implement the national strategy for good governance developed by the HAGG with support from the UNDP. Technical assistance from the IMF is been sought to adopt good practices and increase accountability, notably in the areas of fiscal governance, anti-corruption strategy and policies and AML/CFT. Moreover, a draft law for strengthening the regulation of asset declaration by senior officials is under preparation.

18. The authorities plan to implement reforms geared towards strengthening the judiciary system, simplifying the forestry taxation regime and enhancing transparency in the extractive industry, with the view to make the business environment more conducive and attract foreign direct investment. The creation of a credit bureau and an arbitration center, and the revision of labor and mining codes with support from the World Bank are additional steps being considered by the government to further improve the business climate.

III. Conclusion

19. The authorities have made significant inroads in the implementation of the ECF-supported program. Considering their achievements, the authorities are requesting Board support for the completion of the Sixth Review of the ECF Arrangement and waivers of non-observance of the end-December 2018 performance criteria. In order to consolidate the results gained from the successful implementation of the ECF arrangement, the authorities expressed their interest in a successor arrangement to continue to support the implementation of the economic development policies.

Central African Republic: Sixth Review Under the Extended Credit Facility Arrangement, Requests for Waivers of Nonobservance of Performance Criteria and Financing Assurances Review-Press Release; Staff Report; and Statement by the Executive Director for the Central African Republic
Author: International Monetary Fund. African Dept.