Abstract
On behalf of our CEMAC authorities, we would like to thank Executive Directors, Management and Staff for their continued technical and financial support to the CEMAC regional institutions and member countries during this difficult pandemic time. The recent SDR allocation has provided much needed policy space which the national authorities are using to address urgent and priority health, social and investment spending, and reinforce debt sustainability. The regional authorities have appreciated the constructive discussions held with staff in October/November 2021 regarding common policies of member countries, and common policies in support of member countries’ reform programs.
On behalf of our CEMAC authorities, we would like to thank Executive Directors, Management and Staff for their continued technical and financial support to the CEMAC regional institutions and member countries during this difficult pandemic time. The recent SDR allocation has provided much needed policy space which the national authorities are using to address urgent and priority health, social and investment spending, and reinforce debt sustainability. The regional authorities have appreciated the constructive discussions held with staff in October/November 2021 regarding common policies of member countries, and common policies in support of member countries’ reform programs.
Implementation of the regional strategy set forth in December 2016 has advanced albeit a few setbacks recently which the regional authorities are addressing. Progress has been made in reforms to support the region’s external viability but the end-June 2021 target for NFAs was not met due to the direct and indirect effects of the global shock caused by the pandemic, mainly lower-than-expected external financing. Corrective actions, together with partial withdrawal of some policy easing measures and strong implementation of the foreign exchange regulation, have been taken to further support reserve accumulation.
A Summit of Heads of State of CEMAC countries took place in August 2021--with the appreciated participation of the IMF Managing Director-- to consolidate the progress made while launching a second phase of the regional strategy focused on raising growth and making it more inclusive. This summit took stock of the macroeconomic situation in CEMAC in the context of the COVID-19 pandemic, and identified appropriate measures to strengthen the economic resilience of the region and to accelerate its structural transformation, with a view to achieving sustainable and job-creating growth. The regional and national authorities agreed to give a new impulse to the regional strategy to strengthen the internal and external stability of CEMAC through a second generation of reform programs with the support of the Fund and other development partners. Consistent with the resolution of the summit, the regional institutions have renewed their policy assurances in support of members countries’ efforts in their November 2021 Follow-up to the Letter of Support to the Recovery and Reform Programs Undertaken by the CEMAC Member Countries.
Recent Economic Developments and Outlook
The epidemiological situation of the COVID-19 pandemic is still a source of concern in CEMAC although the rollout of vaccines is advancing. A second and third waves of contaminations have hit the CEMAC region in 2021, which has led to the reinstatement of movement restrictions in Congo, Gabon, and Equatorial Guinea. At the same time, vaccination has progressed in the CEMAC with a rate that has more than doubled in the past three months. However, this rate remains well below those achieved elsewhere on the African continent, due to difficult access to vaccines and high hesitancy. The rapid global spread of the new Omicron variant could lead to more stringent containment measures, stall the nascent economic recovery, and limit progress in the implementation of the regional strategy. It should be recalled that the health risk in CEMAC is concomitant with the high security-related risk in several countries of the region.
The macroeconomic situation in CEMAC is improving, supported by a favorable external environment but downside risks to the outlook warrant vigilance to preserve both stability and the recovery. Economic activity has been slowly recovering from the contraction last year with growth expected to reach 1.9 percent in 2021 and increase to 2.8 percent in 2022. A favorable external environment and the implementation of fiscal consolidation policies are expected to improve fiscal and debt sustainability. Public debt is projected to decline by 3.8 percentage points of GDP in 2021. The current account deficit should improve in 2021 and slightly increase with lower oil exports in 2022. Inflation has remained subdued in 2021 despite higher global inflation and freight charges, and should stay low in 2022, well below the regional 3-percent convergence criterion. That said, uncertainty about the path of the pandemic, slower than expected progress in vaccination and insufficient external support represent significant downside risks to the outlook. National authorities are doing their utmost efforts to scale up the vaccination rollout. Fund engagement in the form of UCT-quality programs is necessary to catalyze the important resources needed to complement the domestic policies—notably on the fiscal front—and regional efforts towards macro stability and growth.
The external position has weakened in 2021 and external financing needs indeed remain substantial over the medium term. The end-June 2021 target for net foreign assets (NFAs) could not be met due to a lower-than-expected external financing from development partners. The decline of NFAs since June 2021 led this indicator to historically low levels in the second half of the year. As a result, the initial end-December 2021 target for NFAs is expected to be missed as well. The SDR allocation has helped maintain gross foreign assets above 3 months of imports, which nonetheless remain well below the 5 months considered adequate for the monetary union.
Monetary and Financial Sector Policies
Unconventional monetary and prudential policy measures were adopted during the pandemic to ensure sufficient liquidity in the banking system and support businesses affected by the pandemic. Those measures have proven useful in attenuating the impact of the crisis while limiting risks to financial stability. In so doing, the regional authorities refrained from monetary financing of the deficit despite large liquidity needs since the inception of the crisis.
Given fragile fiscal positions in CEMAC countries, the Central African Monetary Union (UMAC) Ministerial Committee decided in September 2021 a rescheduling of repayments of statutory advances set to start in 2022. This measure was deemed necessary to address the high risk of advance repayment default and its potential negative impact on the central bank’s balance sheet. The authorities recommended that member states use this space to reduce bank financing but agreed that this measure could also hinder reserve accumulation should member states decide to increase spending instead, absent other sources of financing. The UMAC Ministerial Committee could reconsider this decision if it deems it necessary.
In light of the persistent downward trend of net international reserves in the third quarter of 2021, the central bank followed through on its commitment to start a gradual normalization of monetary and prudential policies to support reserve accumulation. With the macroeconomic situation improving and liquidity tensions abating, the central bank stopped its asset purchase program in September 2021 as announced in June 2021. Noting that liquidity remains high, and refinancing is concentrated in a few banks, the monetary authorities started liquidity absorption operations in the third quarter of 2001, and the related interest rate has been regularly reviewed upwards to increase the attractiveness of those operations. Last month, the Monetary Policy Committee (CPM) increased the policy rate and the marginal lending rate by 25 basis points each, while keeping the refinancing rate unchanged. Also, the Money Market Committee (CMM) further increased the liquidity absorption rate by 30 basis points and also lowered liquidity injections by CFAF 20 billion. The authorities see merit in staff recommendation to adapt a differentiated access to BEAC refinancing based on financial indicators and will examine its feasibility.
As regard banking supervision, the regional banking commission (COBAC) is developing a strategy to phase out temporary prudential easing measures by June 2022. COBAC has carried out impact studies of the COVID crisis, and notes a significant increase in affected loans. Close monitoring of asset quality and bank liquidity will help finetune an exit strategy from easing measures.
Structural Reforms
The CEMAC authorities are advancing a wide range of structural, governance and transparency reforms to support the regional strategy. In particular, the foreign exchange regulation is set to be fully implemented starting in 2022, which should contribute to a significant increase in the BEAC’s foreign exchange reserves.
The central bank has reached an agreement with the oil and mining companies for the application of foreign exchange regulations to the extractive sector from January 2022. The agreement notably includes the repatriation of a significant portion of export earnings and the possibility for extractive sector companies to hold foreign currency accounts in CEMAC banks. Funds dedicated to the rehabilitation of extractive fields will also have to be repatriated to long-term foreign currency accounts in CEMAC within three years. The dialogue with oil and mining companies will continue to ensure that the implementation of the regulation remains appropriate to the operational constraints of the sector’s companies.
Other reforms at the regional level are also advancing, notably to improve public financial management, enhance risk management, and reinforce financial supervision. BEAC has pursued the modernization of its IT system to support the operationalization of countries’ Treasury Single Account. Likewise, the central bank has continued the implementation of its financial transparency policy by shortlisting two candidates for the establishment of a credit bureau and launching a pilot of its new risk credit registry in Gabon. COBAC resumed on-site inspection missions in 2021 after switching to virtual missions during the heights of the health crisis. The reform of processes and tools for risk-based supervision and for bringing several prudential rules into conformity with Basel standards is continuing.
Reforms are underway to ameliorate regional surveillance. The CEMAC Commission has continued its work to strengthen the regional surveillance framework. In addition to the adoption of an early warning system and the sanction scheme for countries breaching the regional convergence framework, regional directives were harmonized and adopted. The Commission will encourage further compliance with regional directives and support the implementation of reforms under the region’s economic and financial reforms program (PREF CEMAC). An action matrix with performance indicators and a detailed timeline has been developed, reflecting reform commitments from the Heads of State Summit, and taking into account the recommendations from the World Bank and the Fund. As staff indicated, a dedicated unit at the national level will be set up in each CEMAC country to oversee fiscal issues, IMF-supported reforms, and the national structural reform agendas.
Policy Assurances
Going forward, while recognizing that the health situation remains challenging, regional policies will remain focused on the main objective of ensuring the internal and external stability of the currency. The regional institutions will maintain close monitoring of global and regional economic and health developments and adapt policies accordingly. They stand ready to step up net international reserve accumulation in case the declining trend persists. In particular, the regional authorities commit to further adjust monetary policy as needed and support fiscal consolidation policies pursued in Fund-supported programs. To support monetary policy, monthly liquidity absorption operations will continue by gradually raising the related interest rate if needed, until the excess liquidity is mopped up.
As temporary prudential measures are lifted, COBAC will ensure that banks comply with the asset classification and provisioning rules and submit recapitalization plans, if necessary. It will closely monitor the development of non-performing loans (NPLs) and ensure that banks have put in place mechanisms to reduce their level, in particular by relying on the implementation of government arrears clearance strategies. Also, to guarantee the stability of the financial sector, COBAC will ensure close monitoring of recapitalization procedures, speed up bank resolution procedure, strengthen the application of the related prudential regulations, and watch closely the evolution of banks’ exposure to sovereign risk.
The regional authorities expect that these measures will contribute to the consolidation of net foreign assets. Those measures together with the pursuit of fiscal consolidation, the implementation of structural reforms, the strengthening of transparency and governance in CEMAC countries, and budgetary support from development partners should make it possible to reach 2.20 billion euros at the end of December 2021, and to consider a significantly higher reserve target, around 2.78 billion euros at the end of June 2022.
The effective implementation of Fund-supported reform programs is critical to the success of the regional strategy. Fund engagement with CEMAC countries is uneven so far, with only two countries having active arrangements with the Fund and a third one expecting to have an arrangement approved in a few days. The authorities agree that lower-than-projected Fund support and limited catalytic effect on additional external financing from development partners will certainly trigger higher use of the SDR allocation for budgetary purposes, and hence, further weaken the international reserve position in 2022. BEAC and COBAC will continue to work closely with IMF staff to support the regional crisis exit strategy. The CEMAC Commission will spare no effort to encourage countries with Fund-supported programs to submit their convergence plans based on agreed macroeconomic frameworks with the Fund.
Conclusion
Despite the pandemic and security shocks, progress has been achieved in the implementation of the regional strategy to improve the internal and external stability and further policy commitments made to support countries’ reform programs. To meet stability objectives, monetary and prudential policies were tightened recently, and some support measures withdrawn to reverse the downward trend of NFAs observed since June 2021. In November 2021, the BEAC authorities have reiterated their policy commitments with revised targets for NFAs in the Follow-up to the Letter of Support to the Recovery and Reform Programs Undertaken by the CEMAC Member Countries. They stand ready to notify and consult IMF staff in due course on economic developments likely to affect the external stability of CEMAC.