Central African Republic: First and Second Reviews Under the Extended Credit Facility Arrangement and Request for Waivers of Non-observance of Performance Criteria —Debt Sustainability Analysis
Author:
International Monetary Fund. African Dept.
Search for other papers by International Monetary Fund. African Dept. in
Current site
Google Scholar
PubMedClose
Publication Date:
01 Feb 2021
eISBN:
9781513568157
ISBN:
9781513568157
Language:
English
Keywords:
ISCR; CR; asset declaration law; staff appraisal; staff statement; assessment of policy issue; CAR authorities; sustainability analysis; dynamics equation; debt stock; creating flow; SOE debt; Debt service; Debt sustainability analysis; Stress testing; Debt service ratios
Download PDF (466.4 KB)

First and Second Reviews Under the Extended Credit Facility Arrangement and Request for Waivers of Nonobservance of Performance Criteria-Press Release; Staff Report; Staff Statement; and Statement by the Executive Director for the Central African Republic

Abstract

First and Second Reviews Under the Extended Credit Facility Arrangement and Request for Waivers of Nonobservance of Performance Criteria-Press Release; Staff Report; Staff Statement; and Statement by the Executive Director for the Central African Republic

Public Debt Coverage

1. The coverage of public sector debt is in line with the previous DSA, exhibiting some gaps. Information is available on the central government’s contractual debt obligations. State and local governments do not borrow, there are no social security funds guaranteed by the public sector, and the government has not guaranteed other debt (Text Table 1).

Text Table 1.

Central African Republic: Coverage of Public Sector Debt and Design of the Contingent Liability Stress Test

article image

The default shock of 2% of GDP will be triggered for countries whose government-guaranteed debt is not fully captured under the country’s public debt definition (1.). If it is already included in the government debt (1.) and risks associated with SoE’s debt not guaranteed by the government is assessed to be negligible, a country team may reduce this to 0%.

Source: IMF staff estimates and country authorities

2. Compared to the last DSA, the end-2019 debt stock has been revised downward, while some moderate contingent liabilities are likely to materialize. The downward revision of the public debt, from 47.8 percent of GDP to 47.2 percent at end 2019, primarily reflects the latest debt restructuring from China, FIDA and Telco BG for a total of CFAF 8 billion.

3. 4 Since then, about CFAF 6 billion in additional arrears have been identified, including about CFAF 3 billion in pensions arrears, CFAF 2 billion in salary arrears to former state agents of Bangui Municipality and the Parliament, and CFAF 1 billion in commercial arrears.

4. The implementation of the new legal framework governing SOEs will improve their financial oversight, which, along with other steps, should lead to better debt coverage going forward. The implementing decrees of the new legal framework governing the functioning of public and quasi-public institutions and enterprises were adopted at the beginning of October and the debt unit continues to improve its capacity through training and better IT systems supported by development partners. Better communication between the debt unit and the Treasury should also help avoiding the recurrence of recent temporary delays in the repayment of external debt obligations.5

5. The contingent liabilities stress test assumes a shock of 15 percent of GDP for its tailored portion (Text Table 1). This significant amount reflects the uncertainty about non-guaranteed SOE debt and arrears, potential additional domestic arrears, and financial market risks. The contingent liabilities shock from SOE debt is set at 5 percent of GDP (instead of 2 percent for its default value) to reflect heightened risks associated with non-guaranteed SOE debt and potential expenditure arrears. The shock from domestic arrears is set at 5 percent of GDP to incorporate past and persisting shortcomings in the country’s public expenditure management systems. The financial market risk shock is kept at the minimum default value of 5 percent of GDP given the small size and depth and relatively robust financial position of the financial sector in C.A.R.

Background on Debt

6. C.A.R.’s public and publicly guaranteed (PPG) debt has continued to gradually decline. (Text Figure 1). The end-2019 public debt to GDP ratio is now estimated at 47.2 percent (compared to 50 percent a year earlier), with the external debt to GDP ratio remaining steady at 36.1 percent at end 2019 (Text Figure 1).6,7 However, the public debt to GDP ratio is now expected to slightly increase this year because of the Covid-19 pandemic, before resuming its downward trend from 2021 onwards.

Text Figure 1.
Text Figure 1.

Central African Republic: Evolution of Public Sector Debt, 2013–19

(percent of GDP)

Citation: IMF Staff Country Reports 2021, 028; 10.5089/9781513568157.002.A003

Sources: IMF staff estimates and country authorities

7. The government has not contracted any new loan since the last DSA. Beside the RCF disbursement already incorporated in the DSA of April 2020, there has been no new loan contracted or disbursed this year. The disbursements have been limited to US$ 9.5 million from the existing World Bank loan pertaining to the CEMAC transportation project, which has been extended to February 2020. The authorities temporarily accumulated some external debt arrears to IFAD, which have since been repaid. They are planning to strengthen their debt management procedures to avoid the accumulation of such arrears in the future.

8. Pre-HIPC arrears and debt owed to multilateral creditors continue to account for the bulk of external debt. Multilateral creditors, mainly the IMF and the World Bank, hold almost half of the external debt. Since April 2020, C.A.R. has benefited from a debt service relief from the IMF under the CCRT for an initial period of 6 months that was extended for another 6 months, for a total amount of US$ 8.1 million. Bilateral debt amounts to 6.7 percent of GDP, with China, Congo, India, and Saudi Arabia being the main creditors.8. The average nominal interest rate stood at 0.5 percent for external debt in 2020, reflecting the preponderance of concessional borrowing. More than half of the domestic debt consists of statutory and exceptional advances from the Central Bank, which have been consolidated into one loan to be repaid from 2022 onwards, in line with regional arrangements. The remainder mainly includes officially recognized arrears amounting to 2.9 percent of GDP.

Underlying Macroeconomic Assumptions

9. Compared with the RCF, short-term growth projections have been revised downward, reflecting the more protracted economic impact of the pandemic. Risks are tilted to the downside, owing to a large extent to the uncertainty surrounding the pandemic.

  • The current account balance is expected to deteriorate in 2020 owing to the pandemic and an increase in externally financed public investment but would improve over the medium term thanks to a gradual increase in exports.

  • After increasing sharply in 2020 owing to the impact of the pandemic on doemstic revenue and additional spedning to contain it, the domestic primary deficit would decline and stabilize at 2½ percent of GDP over the medium term. Grant financing would gradually decline.

  • After stagnating in 2020, real GDP growth is expected to recover gradually to 5 percent over the medium term

10. There has been no major changes to the long-term macroeconomic projections since the last DSA (Text Table 2).

  • External sector projections remain broadly unchanged. Current transfers are expected to decline and FDI to increase gradually from a low level. Overall, the non-interest current account deficit is expected to reach 3 percent of GDP in the long run owing to the expected increase in exports as a result of reforms geared to improving diversifications and adding value to exisitng exports.

  • Domestic revenues are assumed to follow a gradual upward trend, reaching 14 percent of GDP at the end of the projection period. The improvement of domestic revenue collection in the long run is attributed to the implementation of fiscal structural benchmarks (from digitalization to legislative strengthening) and receipt of technical assistance in improving data collection and standards. The fiscal primary surplus is expected to turn into a deficit of 1 percent of GDP over the long run as grant financing gradually declines.

  • After increasing sharply in the short run, budget grants are assumed to decline in the long run, from an average of 7.5 percent of GDP during 2020–25 to 2 percent of GDP by 2040. The financing needs in the short run are covered by deposit withdrawals while it is assumed that 80 percent of longer-term needs would be covered through external concessional borrowing—with a gradually decreasing degree of concessionality—and the remaining 20 percent through domestic borrowing.

  • Long-run growth projections (2026–40) have been revised slightly upward, from 3.6 percent in the previous DSA to 4.3 percent to better align them with those of comparator countries. This implies modest per-capita GDP growth as population growth is estimated at about 2.5 percent over the long term.

Text Table 2.

Central African Republic: Composition of Public Sector Debt, 2019

(percent of GDP)

article image
Source: IMF Staff calculations and country authorities
Text Table 3.

Central African Republic: Macroeconomic Assumptions

article image
Source: IMF Staff estimates and projections

11. The realism tools do not flag significant risks around the baseline scenario (Figures 3 and 4). Both external PPG and public debt projections are in line with the previous DSA. Factors contributing to debt dynamics appear broadly in line with historical contributions. Unexpected changes in external debt are not far from the median for all LICs. The envisaged fiscal path is in line with the historical performance and the experience in other LIC countries. It is also worth noting that, in the case of C.A.R., changes in the primary balance are not always a good indicator to gauge the impact of fiscal policy. Hence, owing to higher program grants, the primary balance is expected to be essentially the same in 2020 s in 2018, while fiscal policy is likely to prove more expansionary (with lower domestic revenue and significant higher spending).

Figure 1.
Figure 1.

Central African Republic: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2020–30

Citation: IMF Staff Country Reports 2021, 028; 10.5089/9781513568157.002.A003

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2030. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.2/ The magnitude of shocks used for the commodity price shock stress test are based on the commodity prices outlook prepared by the IMF research department.
Figure 2.
Figure 2.

Central African Republic: Indicators of Public Debt Under Alternative Scenarios, 2020–30

Citation: IMF Staff Country Reports 2021, 028; 10.5089/9781513568157.002.A003

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2030. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.
Figure 3.
Figure 3.

Central African Republic: Drivers of Debt Dynamics – Baseline Scenario

Citation: IMF Staff Country Reports 2021, 028; 10.5089/9781513568157.002.A003

1/ Difference between anticipated and actual contributions on debt ratios.2/ Distribution across LICs for which LIC DSAs were produced.3/ Given the relatively low private external debt for average low-income countries, a ppt change in PPG external debt should be largely explained by the drivers of the external debt dynamics equation.
Figure 4.
Figure 4.

Central African Republic: Realism Tools

Citation: IMF Staff Country Reports 2021, 028; 10.5089/9781513568157.002.A003

Text Table 4.

Central African Republic: Calculation of Composite Indicator and Thresholds

article image
Sources: IMF staff estimates, Word Bank Country Policy and Institutional Assessment, and country authorities

Debt Sustainability

A. External Debt Sustainability Analysis

12. Relative to the previous DSAs, the solvency has deteriorated as the PV of external debt-to-export ratio breaches the threshold under the current baseline scenario (Figure 1). Under the baseline scenario, the present values (PV) of the and debt-to-exports ratios breach the threshold and decline from their initial level over the projection period. The PV of the external debt-to-GDP ratio remains below the threshold under the baseline scenario and would breach the thresholds for the most extreme standardized stress test (a combination of a shock to growth, the primary balance, exports, other non-debt creating flows, and depreciation). Setting key variables to their historical average would result in a clear upward trend of both debt ratios, mainly because of the large shocks and conflicts that occurred in the past (such as the 2013 crisis).

13. Liquidity indicators of the external PPG debt breach their thresholds for about five years under the baseline scenario (Figure 1). The external debt service-to-exports ratio breaches the threshold from 2024–28, driven by a significant uptick of debt service during that period related to the end of the grace period of a loan, as well as significant repayments to the Fund. The trajectory of the external debt service-to-revenue ratio is similar, even if the breach is of a slightly lesser magnitude. While both breaches are similar to those in the previous DSA of April 2020, they have been accentuated by the RCF disbursement when compared to those at the time of the ECF request. These breaches have also been marginally accentuated compared to the previous DSA of April 2020, because of the increase in the debt service in 2022–24 following the debt service suspension (DSSI) that was postponed to these years, and of the lower revenue in years 2024–28 due to the compound effect of lower growth rates in 2020 and 2021 compared to the RCF DSA. Significant and persistent breaches of the external debt service-to-exports ratio and the external debt service-to-revenue ratio would happen under the historical scenario and the most extreme standardized stress test (standardized shocks to exports and to growth respectively).

B. Public Debt Sustainability Analysis

The total PPG debt indicator remains well below its benchmark under the baseline scenario (Figure 2). In addition, the PV of the debt-to-revenue ratio is declining over the projection period. The debt-service-to-revenue and grants ratio is set to rise until 2025 reflecting the start of repayments of exceptional and statutory advances to BEAC and higher external debt service payments. A standardized shock to growth would trigger a breach of the treshold for the PV of the debt-to-GDP ratio and lead to a significant increase of the PV of the debt-to-revenue ratio.9 It is also worth noting that public debt indicators could worsen owing to contingent liabilities. Adding domestic debt to the analysis does not change the overall risk of debt distress.

Conclusion

14. C.A.R remains at high risk of external debt distress and overall high risk of debt distress. The solvency indicators have deteriorated relative to the previous DSAs. C.A.R.’s capacity to service debt is severly constrained by its low revenue mobilization and weak export base, with the external debt service-to-export and external debt service-to-revenue ratios breaching their respective thresholds under the baseline scenario.

15. A number of other considerations support the high-risk assessment. Macroeconomic projections are highly uncertain, as a resurgence of the pandemic cannot be excluded and the security environment remains voltile. Standardized stress tests also underline the sensitivity of the debt indicators to assumptions. Lower export growth or further revisions to real GDP would trigger a significant deterioration of debt sustainability indicators with multiple threshold breaches. In addition, sizeable contingent liabilities, mostly related to the SOEs, could materialize.

16. The authorities broadly agreed with this assessment. They shared the view that C.A.R.’s capacity to service debt is limited and are committed to strengthening debt monitoring, to mobilizing domestic revenues and grant financing to cover their financing needs to the largest extent possible.

Table 1.

Central African Republic: External Debt Sustainability Framework, Baseline Scenario, 2017–40

(Percent of GDP, unless otherwise indicated)

article image
Sources: Country authorities; and staff estimates and projections. 1/ Includes both public and private sector external debt. 2/ Derived as [r – g – ρ(1 +g) + εα (1 +r)]/(1 +g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, ρ = growth rate of GDP deflator in U.S. dollar terms, ε=nominal appreciation of the local currency, and α= share of local currency-denominated external debt in total external debt. 3/ Includes exceptional financing (Le, changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments For projections also includes contribution from price and exchange rate changes 4/ Current-year interest payments divided by previous period debt stock. 5/ Defined as grants, concessional loans, and debt relief. 6/ Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt). 7/ Assumes that PV of private sector debt is equivalent to its face value. 8/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.
Table 2.

Central African Republic: Public Sector Debt Sustainability Framework, Baseline Scenario 2017–40

(Percent of GDP, unless otherwise indicated)

article image
Sources: Country authorities; and staff estimates and projections. 1/ Coverage of debt: The central, state, and local governments plus social security, central bank, government-guaranteed debt . Definition of external debt is Residency-based. 2/ The underlying PV of external debt-to-GDP ratio under the public DSA differs from the external DSA with the size of differences depending on exchange rates projections. 3/ Debt service is defined as the sum of interest and amortization of medium and long-term, and short-term debt. 4/ Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period and other debt creating/reducing flows. 5/ Defined as a primary deficit minus a change in the public debt-to-GDP ratio ((-): a primary surplus), which would stabilizes the debt ratio only in the year in question. 6/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.
Table 3.

Central African Republic: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2020–30

article image
Sources: Country authorities; and staff estimates and projections.

A bold value indicates a breach of the threshold.

Variables include real GDP growth, GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Includes official and private transfers and FDI.

Table 4.

Central African Republic: Sensitivity Analysis for Key Indicators of Public Debt, 2020–30

article image
Sources: Country authorities; and staff estimates and projections.

A bold value indicates a breach of the benchmark.

Variables include real GDP growth, GDP deflator and primary deficit in percent of GDP.

Includes official and private transfers and FDI.

1

This DSA has been prepared jointly by the IMF and World Bank, following the revised LIC-DSF Framework and Guidance Note (2017) in effect as of July 1, 2018.

2

Country Report No. 20/137, April 2020.

3

With a score of 2.42, C.A.R.’s composite indicator signals a weak debt-carrying capacity (Text Table 3).

4

Excluding the pre-HIPC arrears, the public debt stock amounted to 37.9 percent of GDP at end-2019.

5

The WB’s SDFP supports government’s effort to strengthen the governance and oversight of SOEs, including audit of SOEs’ financial statements and reporting of debt.

6

External debt is defined on a residency basis with the exception of BEAC advances, which are considered domestic debt as in the last DSA for C.A.R. Mechanically, the CFAF-denominated debt held by the BEAC would weaken the external debt sustainability indicators if they were considered external debt, but the risk from this debt is lower than foreign currency denominated debt owing to the lack of currency risk, strong institutional ties, and the relative ease of rescheduling. All outstanding T-bills are held by domestic banks and included in domestic debt.

7

Excluding pre-HIPC arrears, the external debt stock amounted to 26.8 percent of GDP at end-2019. Pre-HIPC arrears are owed to Non- Paris Club creditors (Argentina, Equatorial Guinea, Iraq, Libya, and Taiwan, province of China). These arrears are expected to be rescheduled on HIPC terms. Authorities are pursuing their good faith efforts in contacting those Non-Paris Club creditors.

8

India, China, and Saudi Arabia participated in the G20 Debt Service Suspension Initiative to C.A.R., along with Kuwait for an amount of US$ 3.5 million from May to December 2020.

9

The shock assumes real GDP growth of one standard deviation below its historical average in the second and third year of the projection period.

Same Series

Other IMF Content

Other Publishers

  • Collapse
  • Expand
Cover IMF Staff Country Reports
Central African Republic: First and Second Reviews Under the Extended Credit Facility Arrangement and Request for Waivers of Nonobservance of Performance Criteria-Press Release; Staff Report; Staff Statement; and Statement by the Executive Director for the Central African Republic
Author:
International Monetary Fund. African Dept.
Volume/Issue:
Volume 2021: Issue 028
Publisher:
International Monetary Fund
ISBN:
9781513568157
ISSN:
1934-7685
Pages:
100
DOI:
https://doi.org/10.5089/9781513568157.002
  • <sup><xref ref-type="fig" rid="RA03fig01">Text Figure 1.</xref></sup>
    View in gallery
    Text Figure 1.

    Central African Republic: Evolution of Public Sector Debt, 2013–19

    (percent of GDP)

  • <sup><xref ref-type="fig" rid="RA03fig02">Figure 1.</xref></sup>
    View in gallery
    Figure 1.

    Central African Republic: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2020–30

  • <sup><xref ref-type="fig" rid="RA03fig03">Figure 2.</xref></sup>
    View in gallery
    Figure 2.

    Central African Republic: Indicators of Public Debt Under Alternative Scenarios, 2020–30

  • <sup><xref ref-type="fig" rid="RA03fig04">Figure 3.</xref></sup>
    View in gallery
    Figure 3.

    Central African Republic: Drivers of Debt Dynamics – Baseline Scenario

  • <sup><xref ref-type="fig" rid="RA03fig05">Figure 4.</xref></sup>
    View in gallery
    Figure 4.

    Central African Republic: Realism Tools

Text Figure 1.

Central African Republic: Evolution of Public Sector Debt, 2013–19

(percent of GDP)
Figure 1.

Central African Republic: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2020–30
Figure 2.

Central African Republic: Indicators of Public Debt Under Alternative Scenarios, 2020–30
Figure 3.

Central African Republic: Drivers of Debt Dynamics – Baseline Scenario
Figure 4.

Central African Republic: Realism Tools