December 20, 2022

On behalf of our CEMAC authorities, we would like to thank Executive Directors, Management, and staff for the continued support to the regional institutions and CEMAC member countries in the context of the second phase of their regional strategy aimed at strengthening internal and external stability while supporting growth. They appreciate the constructive policy discussions held with staff in Libreville and Yaoundé last month. They are of the view that the staff report provides an accurate account of those discussions.

Introduction

The regional and national authorities pursued in 2022 their efforts to strengthen macroeconomic stability and resilience against shocks, consistent with the policy commitments made in the June 2022 Follow-up to Letter of Support to the Recovery and Reform Programs Undertaken by the CEMAC Members Countries. Normalization of monetary and prudential policies continued as the Covid-related epidemiological situation improved and the regional economy recovered. Also, the multilateral surveillance framework continues to be strengthened. Furthermore, the net foreign assets (NFA) policy assurance for end-June 2022 has been met with a margin. The use of the 2021 SDR allocations has been broadly in line with staff recommendations. Although the oil price spike induced by geopolitical tensions has contributed to improving the macroeconomic situation in oil-producing countries and in the region overall, its corollary--high inflationary pressures—remains persistent and is exacerbating the cost of living, poverty, and inequalities. It is substantially augmenting food insecurity particularly in the Lake Chad Basin Region.

The CEMAC authorities remain committed to the regional strategy while taking the necessary steps to fight high inflation. They have reiterated their dedication to prudent policies in the updated letter of support to policies and reforms undertaken by the CEMAC member countries as annexed to the staff report.

Recent Developments, Outlook, and Risks

The macroeconomic situation of the region has improved markedly in 2022 thanks to favorable terms of trade shock and the lifting of Covid containment measures. Growth in the CEMAC region accelerated in 2022 and is expected to reach 3.4 percent, up from 1.2 percent in 2021, driven by higher oil production and supported by the removal of COVID-related restrictive measures. Inflationary pressures intensified in 2022 owing to higher prices of imported goods. Inflation is projected to pick up to 4.6 percent (end of period) from 2.6 percent in 2021. The fiscal and external positions improved in 2022 on the back of higher oil prices despite measures taken to mitigate the social impact of high fuel and food prices. While the non-oil fiscal deficit remains large notably due to food and fuel subsidies which country authorities had to adopt to ease the impact of elevated prices of those essential products on the populations, the overall fiscal deficit is projected to reach a surplus in 2022. Total public debt is set to decline to 52.8 percent of GDP down from 57.6 percent in 2021, well below the CEMAC convergence threshold of 70 percent. The current account balance is also expected to recover significantly, from a deficit position of 2.3 percent of GDP in 2021 to a surplus of 1.6 percent, reflecting the positive impact of higher commodity prices. Foreign exchange reserves should cover more than 3.5 months of imports of goods and services by the end of the year. Thanks to tighter monetary policy and improved overall fiscal balances, the external situation improved in the second quarter of 2022, resulting in an increase in NFAs since their low level at the end of 2021. Thus, regional NFA assurances for the end of June 2022 (EUR 2.81 billion) were reached with a margin of EUR 378 million.

The region’s macroeconomic outlook is favorable, supported by a strengthening of the economic recovery but is subject to heightened uncertainties. The CEMAC authorities acknowledge that the relatively high level of oil prices provides a favorable opportunity to further build resilience and achieve the objectives pursued under the regional strategy. However, they also recognize that the economic and financial environment —marked by the fragmentation stemming from geopolitical tensions, the fragility of the global economic recovery including on the back of indeterminate Covid developments, and the tightening of financial conditions at both the global and sub-regional level— presents significant downside risks. Rising global inflation could lead to higher fuel and food subsidy costs, which could weigh significantly on budgets, eroding gains from higher oil revenues, and ultimately affect the pace of reserve accumulation. In addition, domestic developments such as the persistence of security and socio-political tensions in some countries, could exacerbate food insecurity and severely set back the progress made in poverty reduction. Moreover, the outlook is conditional on maintaining prudence in managing the increase in oil revenues and accelerating the momentum of implementing reforms under IMF-supported programs to increase fiscal space, strengthen public financial management (PFM) and improve governance and transparency. National authorities in countries with a Fund-supported program have renewed their respective commitments in these areas. The regional authorities are looking forward to formal Fund-supported arrangements with Equatorial Guinea and Central African Republic (CAR) in 2023, which together with financial assistance from other development partners and progress in debt restructuring in Congo and Chad, will help meet the still large external financing needs of CEMAC.

The CEMAC region faces significant climate change challenges but also offers substantial mitigation potential. As staff rightly stresses in the risk assessment matrix, the region is already experiencing the effects of climate change including more frequent floods and droughts, increasing sea levels and shrinking lakes. These effects are contributing to compound already difficult lives and livelihoods in affected regions. The region also hosts large rainforests that CEMAC countries are strongly engaged to preserve for global climate change mitigation.

Monetary and Prudential Policies and Structural Reforms

Against the backdrop of accelerating inflation in 2022, BEAC continued the proactive tightening of its monetary policy, to preserve price stability and foreign exchange reserves, and stands ready to adjust this stance as needed. BEAC raised again its policy rate by 50 basis points in September 2022 to 4.5 percent. In addition, the liquidity absorption rate was increased by 25 basis points to 0.75 percent, but it has remained unattractive for banks with excess liquidity and hence has hampered monetary policy transmission. BEAC continued to reduce its weekly liquidity injections from their highest level of CFAF 250 billion in 2021 to CFAF 50 billion in November 2022 which contributed to greater dynamism in the interbank market. BEAC also ended the last of the three long-term liquidity injection operations in October 2022. Since November 2022, the two remaining banks in a situation of structural dependence on BEAC liquidity have only access to the marginal lending facility window, which has helped reduce the risks to the central bank’s balance sheet. In accordance with its statutes, BEAC refrained from providing direct monetary financing to member states. It stands ready to adjust further its monetary policy stance to safeguard internal and external stability.

Progress is being made in the reforms undertaken by the central bank. The implementation of the 2019 foreign exchange regulations aimed at strengthening external stability through the accumulation of buffers is advancing and has begun to bear fruit. Implementation issues are being addressed. In particular, the operational modalities of the repatriation funds for the rehabilitation of oil extraction sites are being strengthened, in collaboration with the oil and gas sector. The repatriation of export earnings, including by state-owned enterprises (SOEs), with the support and cooperation of member countries, will also help enhance the external stability. BEAC continued its actions aimed at contributing to more efficient public financial management (PFM), through notably the establishment of the IT platform to facilitate the deployment of treasury single accounts systems, which is in its implementation phase in pilot countries.

The regional banking commission (COBAC) has normalized prudential regulations since July 2022 and accelerated on-site supervision missions in recent months. As financial indicators are expected to deteriorate following the lifting of prudential easing measures, COBAC will monitor banks’ refinancing needs and accelerate the resolution procedures of banks that are undercapitalized and/or structurally dependent on BEAC refinancing, as appropriate. This action should support BEAC’s liquidity control efforts. In addition, COBAC will take a cautious case-by-case approach to dividend distribution. The authorities agree that ensuring financial stability in the region will require further progress in strengthening weak public banks, implementing domestic payment arrears clearance plans, and reducing sovereign risk on bank balance sheets.

Work on enhancing coherence of, and compliance with, the regulation on crypto assets is underway. Following the decision in May 2022 prohibiting the use of crypto-assets and strengthening the reporting requirements by institutions under COBAC jurisdiction, the CEMAC authorities entrusted BEAC with coordinating the development of a regulatory framework to resolve the inconsistency between the CAR’s law on cryptocurrencies and the regional regulation governing crypto-assets and digital payments. Work in this regard will be undertaken in close coordination with COBAC, COSUMAF (the capital markets regulator) and GABAC (the agency in charge of enforcing AML/CFT requirements).

The regional multilateral framework has been strengthened. The CEMAC Commission resumed its regional surveillance, and consultations with all six member countries have been completed. Until the sanction mechanism is adopted by the Conference of Heads of State, the Commission will continue to encourage transcription of regional PFM and VAT directives into national legislations and further progress in the implementation of domestic arrears clearance strategy. The first early warning exercise is planned to take place in 2023.

The regional authorities stress that renewed inflationary pressures highlight the need to accelerate the implementation of structural measures aimed at reducing member countries’ dependence on imported products and limiting pressure on foreign exchange reserves. In this respect, the recent adoption of a regional strategy for the import-substitution of raw products constitutes a crucial stage which will make it possible to foster intra-Community trade and create the conditions for strengthening the diversification of CEMAC economies. A regional brigade for the surveillance of CEMAC trade corridors has been set up to contain to the strict minimum the tariff and non-tariff barriers that hinder the development of intra-Community trade. The regional authorities concur with staff on the need to improve targeting of social protection programs to reduce subsidy costs.

The authorities remain committed to the regional strategy going forward. Faced with multiple challenges, the national authorities have reaffirmed their commitment to preserve the viability of their public finances and strengthen budgetary margins while also taking into account the need to support as adequately as possible the purchasing power of households and the smooth functioning of economic activity. The continuation of fiscal consolidation and the implementation of structural reforms along with enhanced transparency and governance by member countries should contribute to the consolidation of NFAs. The latter is also predicated on the effective delivery of budget support from development partners to CEMAC countries under Fund-supported programs. The regional institutions will diligently monitor the evolution of those programs to support the recovery of economic activity. BEAC stands ready to tighten monetary policy and liquidity management should high inflation persist or in the event of fiscal slippages or deviations from the targeted reserve path. Other factors, including ECB tightening, will also be considered in future monetary policy committee meetings. The authorities appreciate staff recommendations on a more active liquidity management to improve monetary policy transmission.

Policy Assurances

Recent developments and the outlook call for an adjustment of the policy assurances on NFAs. The regional authorities consider that the downward revision of oil prices, possible fiscal slippages due to fuel subsidies, potential delays in budget support disbursements, and a widening external financing requirement due to the higher-than-expected debt servicing could result in a slower accumulation of external reserves in the second half of 2022. Therefore, the target on NFAs in the region at the end of December 2022 has been reduced from EUR 3.73 billion to EUR 3.39 billion. As for the next six months, the NFA target at the end of June 2023 is set at EUR 3.93 billion.

Conclusion

The regional authorities have continued to implement policies consistent with their commitments to strengthen internal and external stability amid high inflationary pressures and a volatile global environment. Despite the heightened uncertainties around the growth outlook, they will continue to take the necessary measures to advance the regional strategy and have renewed policy assurances in the December 2022 Follow-up to the Letter of Support to Reform Programs Undertaken by CEMAC Members Countries.