Central African Republic: Request for a Three-year Arrangement Under the Extended Credit Facility—Press Release; Staff Report; Staff Supplement; and Statement by the Executive Director for the Central African Republic
Author: International Monetary Fund. African Dept.
Publication Date:
13 Jan 2020
eISBN:
9781513526041
ISBN:
9781513526041
Language:
English
Keywords:
ISCR; CR; CAR authorities; authority; fund financing to the C.A.R.; debt; financing; assessment of policy issue; ECF arrangement; C.A.R.'s request; staff's assessment; authorities of Central African Republic; Arrears; Global; Africa; debt management; anti-corruption strategy; financing government priority; government legitimacy; development effort; Credit
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Request for a Three-Year Arrangement under the Extended Credit Facility-Press Release; Staff Report; Staff Supplement; and Statement by the Executive Director for the Central African Republic

Abstract

Request for a Three-Year Arrangement under the Extended Credit Facility-Press Release; Staff Report; Staff Supplement; and Statement by the Executive Director for the Central African Republic

Context

1. Despite some recent progress, the Central African Republic (C.A.R.) continues to exhibit many deep-rooted dimensions of fragility, including a volatile security environment, limited administrative capacity, poor governance and weak government legitimacy, and lack of social cohesion. The government controls less than one third of the national territory, which hinders the implementation of development policies throughout the whole country and hampers developing capacity and data quality.1 This persistent fragility has contributed to (and has been reinforced by) very poor social outcomes, with CAR.’s HDI ranking of 188 out of 189 countries, a poverty rate estimated at 72.2 percent in 2017, and very high infant and under-five mortality rates (Text Table 1). The numbers of refugees and of internally displaced persons remain high, at around 600,000 and 580,000, respectively, in October (Text Figure 1). The number of persons in need of humanitarian aid was estimated at 2.9 million, or about 60 percent of total population, at end-July.

Text Table 1.

Selected Social Indicators (2017 or latest available)

article image
Sources: World Bank, United Nations and Staff calculations
Text Figure 1.
Text Figure 1.

Internally Displaced Persons (IDPs) and Refugees, 2013–19

(in thousands)

Citation: IMF Staff Country Reports 2020, 001; 10.5089/9781513526041.002.A001

Source: UNHCR

2. Progress under the February 2019 peace agreement remains fragile. While the number of violations of its provisions by the armed groups has gradually declined, violent outbursts may still occur, as illustrated by the clashes in September in Birao—a key center in the North—where 60 persons were killed. All the national and regional monitoring committees are now operational, while a first joint brigade is being established in the Western part of the country. Yet, there are still some concerns among the population about the recrudescence of criminal incidents and the lack of strict enforcement of sanctions against those who violate the peace initiative provisions.

3. Despite a difficult security context, the 2016–19 ECF-supported program has helped to stabilize macroeconomic conditions, catalyze budget support from development partners, and increase the authorities’ capacity to design and implement policies (Text Table 2).2 Following the 2013 crisis—which resulted in an estimated loss of one third of GDP—the economy has gradually recovered (though not fully to pre-crisis levels) while inflation has remained contained. Domestic tax revenue increased by 0.7 percent of GDP a year in 2016–18, contributing to a steady decline in the domestic primary fiscal deficit and a substantial reduction in public debt. These achievements fell somewhat short of the program’s initial objectives, reflecting the persistently difficult security situation and limited administrative capacity. Regarding structural reforms, notable progress has been accomplished in enhancing spending control, strengthening revenue and customs administrations, and promoting fiscal transparency. However, some reforms have experienced some delays (Text Figure 2), including the reform of parafiscal taxes, the reduction of the use of exceptional spending procedures, and the use of IT systems in the customs administration.

Text Table 2.

Key Macro Variables Before (2014–15) and During the Program (2016–18)

(average values)

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Sources: C.A.R. authorities and IMF staff estimates.
Text Figure 2.
Text Figure 2.

Implementation of Structural Benchmarks

(percent)

Citation: IMF Staff Country Reports 2020, 001; 10.5089/9781513526041.002.A001

The National Recovery and Peacebuilding Plan (RCPCA)

  • The RCPCA is a five-year (2017–21) recovery plan, adopted by the government of C.A.R. in October 2016 and supported by the European Union, the United Nations, and the World Bank to enhance sustainable peace and economic recovery. The plan is articulated around the following three pillars: (1) supporting peace, security, and reconciliation; (2) renewing the social contract between the state and the government; and (3) promoting economic recovery and boosting productive sectors.

  • The financial needs for the RCPCA were estimated at US$3,161 million for five years, and US$1,700 million for the first three years. The requirements for the three pillars account for 14.7, 42.0, and 38.7 percent, respectively, of the five-year needs—with the remainder devoted to the plan-related capacity building. Until June 2019, most projects have been implemented in the Western part of the country, while the Eastern and Northeastern regions, where insecurity is highest, benefited from fewer projects and financing (map below).

  • Out of the US$1,700 million for 2017–19, 99 percent had been approved by the bilateral and multilateral donors during the round table in Brussels in November 2016. However, until June 2019, only US$736 million (43 percent) had been effectively disbursed. Moreover, the rate of completion of the various projects varies widely. For example, only 7 of the 35 sectoral committees have been set up. Similarly, the progress on the disarmament, demobilization, reintegration, and repatriation (DDRR, pillar 1) has been slow, with only 261 demobilized fighters in the western regions out of the initial target of 5000 as of January 2019. On the positive side, several projects related to health (pillar 2) have been completed and some road construction projects (pillar 3) have made significant progress.

  • According to development partners, the low disbursement and delays in the completion of numerous projects reflect several constrains such as: insecurity and the continued presence of armed groups; the lack of leadership and coordination; the heavy regulation on the work of NGOs; weak accountability and linkages between the peace agreement sealed in February 2019 (APPR) and the RCPCA; and the low level of domestic resource mobilization. The authorities are determined to address these issues.

  • Following the APPR, the government has decided to refocus and extend the RCPCA until 2023, again with the support of the technical and financial partners. Indeed, the APPR offers a crucial opportunity to reach the most remote regions of the country, speed up project execution, and reach out to the most vulnerable populations. The strategy note that articulates the RCPCA extension is expected to be officially validated by the government in the first quarter of 2020.

4. The authorities have requested a successor arrangement to help address C.A.R.’s protracted external financing needs. The new arrangement will help C.A.R. contribute to the regional efforts to rebuild an adequate level of international reserves while gradually improving its current account balance (excluding grants). Consistent with the Fund’s Country Engagement Strategy (Annex I), the new arrangement will also support the implementation of the peace agreement and of C.A.R.’s development strategy, the National Recovery and Peacebuilding Plan (RCPCA, Box 1). Building on the achievements of the last ECF arrangement, the new arrangement would notably continue to provide a macroeconomic framework for the government’s economic policies and reforms and catalyze donor financing. It would also contribute to the further strengthening of fiscal institutions and overall governance, which are key to establishing the legitimacy of the state and social cohesion. Protecting the most vulnerable, through an increase in resources allocated to key social sectors, will be an important priority of the program, pursued in consultation with other development partners.

Recent Developments

5. Recent economic developments have been broadly in line with expectations (Table 1). Economic growth is expected to recover to 4½ percent this year, driven by the mining, forestry and construction sectors. At end-September, diamond and gold productions had already surpassed their 2018 annual levels, while wood production increased by around 10 percent y-o-y. As the inflationary pressures that resulted from the blockade of the main trade route between Bangui and Cameroon in March have abated, inflation is expected to be limited to 3¼ percent on average this year and less than 3 percent next year, helped by C.A.R.’s membership in CEMAC. The current account deficit is expected to narrow to 5.6 percent of GDP in 2019, thanks primarily to an increase in official transfers (Figure 1).

Table 1.

Central African Republic: Selected Economic and Financial Indicators, 2017–24

article image
Sources: C.A.R. authorities and IMF staff estimates and projections.

Expenditure is on a cash basis.

Excludes grants, interest payments, and externally-financed capital expenditures.

Comprises government debt to BEAC, commercial banks, and government arrears.

Figure 1.
Figure 1.

Central African Republic: Recent Economic Developments, 2014–19

Citation: IMF Staff Country Reports 2020, 001; 10.5089/9781513526041.002.A001

Source: CAR authorities and IMF staff calculations

6. Government revenue and spending have been significantly lower than projected over the last few months (Text Table 3). Domestic revenue amounted to CFAF 86.1 billion through end-September, significantly lower than projected at the time of the 6th review (CFAF 99.3 billion). While significant discrepancies between the revenue estimates provided by the tax and customs departments and those of the Treasury obscure the reasons for this underperformance, the latter seems to reflect primarily: further delays in transferring parafiscal taxes to the Treasury Single Account (TSA); delays in the accounting of revenue from provinces; fewer controls by the tax department; and the granting of exemptions going beyond what is provided under the investment charter.3 Spending was also low (CFAF 116.9 billion versus CFAF 132.2 billion), reflecting primarily low transfers to public agencies (in direct compensation for the non-transfer of the parafiscal taxes to the TSA) and delays in public investment (Text Figure 3). At CFAF 35.6 billion, social spending was, however, higher than projected (CFAF 30 billion). Spending through exceptional procedures declined further, to 5.7 percent from 11 percent at end-December 2018.

Text Table 3.

Fiscal Outturn, 2018–19

(percent of GDP)

article image
Text Figure 3.
Text Figure 3.

Domestically Financed Capital Spending

(CFAF billions)

Citation: IMF Staff Country Reports 2020, 001; 10.5089/9781513526041.002.A001

7. End-2017 and -2018 public debt estimates were revised upward by around 0.9 and 1.5 percent of GDP, respectively. This owed primarily to the past misclassification as grants of disbursements under a World Bank project loan to finance the modernization of the main road between Bangui and Cameroon. Disbursements under this loan—contracted in 2012 and due to expire next June—are projected at CFAF 5.7 and 9.2 billion in 2019 and 2020, respectively. The authorities have continued their good faith efforts to resolve external arrears. In June, China forgave CFAF 1.6 billion in loans. Discussions with Taiwan, province of China, have restarted, while talks with Libya, Equatorial Guinea, Argentina, Chad and the private company from Montenegro have continued.

8. The banking sector remains well capitalized, liquid, and profitable (Table 9).4 However, credit to the private sector declined by 3 percent y-o-y in September 2019. Also, after declining sharply in the second half of 2018 (from 22 to 15.6 percent), non-performing loans (NPLs) have since rebounded somewhat (to 19.1 percent at end-August) owing to the failure of one big company to honor its debt and the technical reclassification of some loans following a COBAC inspection mission. These NPLs remain adequately provisioned.

Table 2a.

Central African Republic: Central Government Financial Operations, 2017–24

(Billions of CFAF)

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Sources: C.A.R. authorities and IMF staff estimates and projections.

Expenditure is on a cash basis

Excludes grants, interest payments, and externally-financed capital expenditure.

Budget support loans to be identified from 2023 to 2024

Loan agreements with commercial banks.

Including arrears and on-lending of IMF resources.

Table 2b.

Central African Republic: Central Government Financial Operations, 2017–24

(Percent of GDP)

article image
Sources: C.A.R. authorities and IMF staff estimates and projections.

Expenditure is on a cash basis.

Excludes grants, interest payments, and externally-financed capital expenditure.

Budget support loans to be identifed from 2023 to 2024

Loan agreements with commercial banks.

Including arrears and on-lending of IMF resources.

Table 3.

Central African Republic: Monetary Survey, 2017–24

article image
Sources: C.A.R. authorities and IMF staff estimates and projections.
Table 4a.

Central African Republic: Balance of Payments, 2017–24

(Billions of CFAF)

article image
Sources: C.A.R. authorities and IMF staff estimates and projections.