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Central African Republic—Letter of Intent and Technical Memorandum of Understanding

Bangui, November 19, 2001

The following item is a Letter of Intent and Technical Memorandum of Understanding of the government of the Central African Republic. It is being made available on the IMF website by agreement with the member as a service to users of the IMF website. This memorandum describes the policies that the Central African Republic is implementing in the framework of a staff-monitored program. A members's staff-monitored program is an informal and flexible instrument for dialogue between the IMF staff and a member on its economic policies. A staff-monitored program is not supported by the use of the Fund's financial resources; nor is it subject to the endorsement of the Executive Board of the IMF.

Mr. Horst Köhler
Managing Director
International Monetary Fund
700 19th Street, N.W.
Washington, D.C.  20431
U.S.A.

Dear Mr. Köhler,

1. On January 10, 2001, the Executive Board of the International Monetary Fund approved for the Central African Republic a second annual arrangement under the Poverty Reduction and Growth Facility (PRGF) in an amount equivalent to SDR 20 million (36 percent of quota) in support of the Government's economic and financial adjustment program for 2001. A first disbursement under this arrangement, in an amount equivalent to SDR 8 million, was made on January 23. A second disbursement, also in an amount equivalent to SDR 8 million, was to have been available on June 15, subject to completion of the first review under the arrangement and observance of the arrangement's performance criteria for March 31. A third disbursement, in an amount equivalent to SDR 4 million, was to have been available on November 30, subject to completion of the second review under the arrangement and observance of the performance criteria for September 30. The three-year PRGF arrangement expires on January 19, 2002.

2. Early in the year, the Government undertook a number of measures aimed at strengthening economic management. On January 1, a value-added tax (VAT) was introduced at a rate of 18 percent. Moreover, in the area of tax administration—and following the recommendations of Fund technical assistance—exemptions from VAT ceased being granted to nongovernmental organizations for local purchases, and discussions were undertaken to lift exemptions for imports. Also, the tax identification number started being used by the tax and customs administrations, as well as by the treasury.

3. Regarding other reforms, the consultant was selected for the study of the costs and economic impact of the advance payment of taxes and duties on sugar, with a view to dismantling this protective mechanism. Moreover, a National Statistics Law was adopted by the National Assembly, which permitted the establishment in October of a National Statistical Board to coordinate government statistical activities and provide a forum for producers and users of public statistics. In addition, the committee in charge of the review (and revision, if necessary) of the petroleum price structure became fully operational and began meeting on a monthly basis. Furthermore, the Government sold that part of the petroleum distribution network that had not previously been allocated ("Lot B") to Trans-Oil (a C.A.R. company), which adheres to all of the terms of the privatization framework that governs the import, storage, and distribution of petroleum products in the Central African Republic. TOTAL and Trans-Oil now have equal shares in the storage company (SOGAL), and, with the divestiture of public officials who held shares in Trans-Oil, the status of Trans-Oil has been changed to a limited liability company, with its capital to be distributed among local private operators and international companies. Recently, the liquidation of the state-owned petroleum company (PETROCA) was completed.

 

4. In the event, however, intermittent political turmoil and labor unrest contributed to significant slippages in other aspects of program implementation, as well as in overall program performance. As indicated in Table 1, at end-March only two of the program's performance criteria and benchmarks were observed. During a Fund mission to Bangui in May, we reached understandings on various measures to shore up the primary budget position and move forward with structural reforms. However, just hours after the mission's departure on May 27, an attempted coup d'état resulted in numerous casualties, thousands of displaced persons, and appreciable destruction of property. Moreover, information subsequently available indicated that the fiscal effort had already essentially collapsed in April and confirmed that the coup attempt and its aftermath had foreclosed any possibility for the Government to bring the PRGF-supported program for 2001 back on track. At end-June, government revenue was 26 percent short of the program target, and none of the program's benchmarks were met. It is in this context that the Government requests that the staff of the IMF assist it in monitoring the progress of reinforced adjustment efforts within the framework of a six-month staff-monitored program (SMP) for the period October 2001-March 2002. We hope that, once the Fund staff confirms that the SMP has been satisfactorily implemented through end-March 2002, a new three-year PRGF-supported program can be put in place as quickly as possible.

5. The Government's inability to implement the recent program reflects a pattern observed over many years, especially difficulties in ensuring sustained adherence to responsible fiscal policies. Importantly, the Central African Republic has a very low government revenue-to-GDP ratio (about 9 percent), and the historically recurrent political and social crises have prevented the needed strengthening of administrative capacity (Table 2). Nevertheless, we strongly believe that our proposed strategy for the next six months, as set out below, shows our determination to establish a credible track record, particularly regarding the budget, and to enhance administrative capacity for the longer term. The Government is fully committed to these goals, notwithstanding the domestic disturbances during the first week of this month.

6. The principal financial objective of the SMP is a primary government budget surplus over the October 2001-March 2002 period of CFAF 10.8 billion, or 2.9 percent of semiannual GDP (Table 1 of the attached technical memorandum of understanding). In the first half of 2001, a primary budget deficit of CFAF 2.1 billion (0.6 percent of semiannual GDP) was recorded.

7. Regarding government revenue, a pickup in the pace of tax and customs collections in the remainder of this year should be facilitated by the gradual improvement in the domestic environment and a strengthening of administrative procedures (also as recommended by Fund technical assistance). In particular, as was agreed during the May mission, the Government has put into effect a new organizational structure for customs and tax administration; is extending the use of the customs management software (SYDONIA 2.7) to cover wholesale trade and companies legally exempted from customs duties; and is verifying the compliance of at least 150 large companies subject to the VAT. Moreover, the Government has recently leased a former French army base to the Mission of the United Nations in the Democratic Republic of the Congo (MONUC), and rental receipts anticipated this quarter (including retroactive obligations) are estimated at CFAF 7.5 billion (2.0 percent of semiannual GDP). Looking ahead to 2002, government revenues are expected to be buoyed by a rebound in the growth rate of real GDP to about 4 percent from the 1.5 percent now estimated for 2001, with a broadly based pickup in activity expected as the internal security situation continues to improve and the regional river transportation network returns to normal. A further strengthening of administrative capacity will be pursued, including through increased training and expanded computerization. Particular attention will be devoted to enhancing VAT collections, and, for this purpose, Fund technical assistance will be requested. MONUC-related receipts during the January-March 2002 period are projected at CFAF 0.7 billion (0.2 percent of semiannual GDP); thereafter, they are expected to continue at an annual rate of about CFAF 3.0 billion.

8. As for primary expenditure, the Government has reduced overall commitment levels through the end of 2001, as higher wage and salary outlays, particularly for the military and the judiciary, will be more than offset by lower domestically financed investment and reduced spending for transfers and subsidies, and goods and services. For 2002, the Government intends to maintain across-the-board restraint on primary outlays; institute strengthened budgetary controls, especially relating to the wage bill; and, with support from the World Bank, improve overall cash management. Despite the tight fiscal outlook, the Government intends to safeguard social spending, and, given our weaknesses in tracking outlays on health and education, we are anticipating Fund technical assistance shortly to foster improvements in this area.

9. To the extent that the realized primary budget surplus exceeds the domestic debt service due (CFAF 0.7 billion—largely to the Bank of Central African States (BEAC) and the Fund) and/or external, untied budgetary support becomes available, the additional resources will be used (i) to service external debt, notably the US$2.1 million that was due to the African Development Bank (AfDB) in July and the US$3.9 million that was due to the World Bank at end-September; and/or (ii) to reduce net bank credit to the Government, given the surge in the 16 months through July 2001 in government borrowing from commercial banks (CFAF 7.1 billion), which threatens the viability of an already stretched banking system; and/or (iii) to scale down government wage payments arrears (about CFAF 17 billion, or 2.3 percent of annual GDP, at end-August).

10. The Government's near-term structural reform priorities remain essentially in line with understandings reached during the May mission, and the core structural reforms that we will endeavor to implement in the remainder of 2001 include the following: (i) the launching of an environmental assessment of existing facilities and processes for the import, storage, and distribution of petroleum products; (ii) the signing of performance contracts for the public electricity company (ENERCA) and telecommunications company (SOCATEL) in order to safeguard their financial and physical assets prior to their privatization; and (iii) the completion of a study on the economic impact of the advance payment of taxes and duties on sugar.

11. The Government has discussed with World Bank and Fund staff structural reforms to be implemented in 2002. The core component includes the following: (i) an acceleration of the privatization process, with the selection of private operators for ENERCA, SOCATEL, and the water utility (SNE), and the completion of the privatization of "second-tier" companies; (ii) the establishment of a petroleum management information system to provide up-to-date information on domestic supply and demand and on world market conditions, and to assist in the negotiations with domestic oil companies on monthly revisions to the price structure for petroleum products; (iii) the implementation of measures, including an appropriately flexible producer price policy consistent with international market trends, aimed at permanently eliminating the deficits of the public cotton agency (SOCOCA), which, in the past, had repeatedly exerted substantial fiscal pressures; and (iv) a liberalization of the trade regime for sugar, with a view to enhancing the efficiency of the national sugar enterprise (SOGESCA). The Government also intends to undertake various diagnostic studies in the mining, forestry, health, and education areas before launching reforms as part of its poverty reduction strategy. In this connection, the priorities identified therein will be critical inputs for our full poverty reduction strategy paper, which we expect to complete by mid-2002.

12. As an integral part of the SMP, the Government will work toward regularizing the Central African Republic's relations with external creditors, particularly multilateral financial institutions (MFIs), but also Paris Club and other bilateral donors, in the context of an overall debt-restructuring strategy. The plan will include an understanding with creditors on a timetable for the settlement of arrears, possibly involving rescheduling or deferral, and identify resources that could be used for the direct payment of arrears. In this vein, a renewed understanding would be required with the AfDB. In 2001, the Central African Republic has not been able to reduce its arrears to the AfDB, and, at end-September, overdue obligations to the AfDB stood at US$18.8 million. Other MFIs to which the Central African Republic has overdue obligations include, as indicated above, the World Bank, as well as the Development Bank of Central African States, the International Fund for Agricultural Development, and the OPEC Fund.

13. As for prospective new external financing, the World Bank has indicated that it may prepare a supplemental credit (equivalent to about US$15 million) to the existing Fiscal Consolidation Credit by end-2001 if it deems that sufficient progress has been made in the implementation of key structural reforms, and if the Central African Republic becomes current in its obligations to the World Bank. The Government is already seeking international support for the convening of a donors' conference in the last quarter of 2001 to mobilize assistance for the country's adjustment efforts. At the same time, the Government is renegotiating on appropriately concessional terms a EUR 10 million loan from the Libyan Arab Foreign Bank contracted early this year that was not included in the projections underlying the second annual PRGF-supported program.

14. The SMP will be monitored by means of the quantitative indicators for end-December 2001 and end-March 2002 as specified in Table 2 of the attached technical memorandum of understanding. These include (i) ceilings on net bank credit to the Government, excluding the counterpart of the use of Fund resources; (ii) ceilings on the contracting or guaranteeing of new nonconcessional external debt; (iii) floors on total government revenue; (iv) floors on the primary budget position; and (v) ceilings on the net change in government domestic payments arrears. Moreover, as indicated above, the Government is committed to allocating any primary budget surplus in excess of domestic debt service due and/or the receipt of any external, untied budgetary support to service external debt, and/or to reduce net bank credit to the Government, and/or to reduce government wage payments arrears. Observance of this commitment will be a subject of the two quarterly reviews that are planned to assess progress with regard to the quantitative indicators for end-December 2001 and end-March 2002, respectively. The reviews will also assess the Central African Republic's progress toward the regularization of relations with external creditors, particularly MFIs. In addition, as shown in Table 2 of the attached technical memorandum of understanding, the completion of a study on the economic impact of the trade regime for sugar imports and verification of the compliance with the VAT of at least 150 large companies are structural benchmarks for end-December 2001; and the establishment of a petroleum management information system and the completion of diagnostic studies in the mining, forestry, health, and education areas are structural benchmarks for end-March 2002.

15. The Government believes that the economic and financial policies described in this letter are adequate to achieve the objectives of the SMP. Nevertheless, it will maintain close relations with the staff of the Fund and consult with it, of its own accord or at your request, on its economic and financial policies, including any further measures that may prove necessary to achieve the program objectives.

Sincerely yours,

/s/
Eric Sorongopé
Minister of State
Minister of Finance and Budget


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CENTRAL AFRICAN REPUBLIC

Technical Memorandum of Understanding

1. This memorandum describes the quantitative indicators and structural benchmarks adopted to monitor execution of the six-month staff-monitored program (SMP) for the period October 2001-March 2002 as set forth in the letter of intent (LOI) of November 19, 2001 from the Minister of Finance of the Central African Republic to the Managing Director of the International Monetary Fund. The quantitative indicators and structural benchmarks are listed in Table 2.

A. Quantitative Indicators

2. The quantitative indicators are the following:

    (a) ceilings on the end-of-period stock of net claims of the banking system on the Government, 1 excluding the counterpart of the use of Fund resources;

    (b) cumulative ceilings on the contracting or guaranteeing of new nonconcessional external debt 2 with original maturity of one year or more than one year by the Government, from October 1, 2001 onward;

    (c) cumulative ceilings on the contracting or guaranteeing of new nonconcessional external debt2 with original maturity of less than one year, from October 1, 2001 onward;

    (d) cumulative floors on total government revenue, including taxes on wages, earmarked revenues, and duties and taxes on projects, from October 1, 2001 onward;

    (e) cumulative floors on the narrow primary budget position, from October 1, 2001 onward; and

    (f) cumulative ceilings on the net change in government domestic payments arrears, from October 1, 2001 onward.

Adjusters

3. If total government revenue exceeds the quantitative indicator (2d) in a given quarter, the quantitative indicator for the primary budget position (2e) will be adjusted upward by the additional revenue collected.

4. To the extent that the primary budget surplus will exceed the amount that is due in domestic debt service, and/or that external, untied budgetary support will become available, the authorities will use these resources to

    (a) service external debt; and or

    (b) reduce the stock of net claims of the banking system on the Government, excluding the counterpart of the use of Fund resources; and/or

    (c) reduce government wage payments arrears.

Definitions and computation

5. The end-of-period stock of net claims of the banking system on the Government, excluding the counterpart of the use of Fund resources, is valued in accordance with the accounting framework currently used by the BEAC. As of end-July 2001, these claims amounted to CFAF 24.873 billion, broken down as follows:

Net banking system claims on government, excluding the counterpart
   of the use of Fund resources (in billions of CFA francs)

24.873

   BEAC current (statutory) advances

13.617

   Consolidated advances

14.552

   Less: deposits with the BEAC

10.432

   Commercial bank advances

7.538

   Less: deposits with commercial banks

0.402

6. Quantitative indicators for external indebtedness are cumulative ceilings on new nonconcessional external debt contracted or guaranteed by the Government. Loans of one year or more than one year are those with initial terms—recorded in the original loan agreement—of at least one year. Cumulative ceilings are also established for external debt contracted or guaranteed by the Government with a maturity of under one year, excluding normal import financing (for example, documentary credits). Loan concessionality is assessed on the basis of the commercial interest reference rates (CIRRs) established by the OECD. A loan is said to be on concessional terms if, on the initial date of disbursement, the ratio of the present value of the loan, calculated on the basis of the reference interest rates, to its nominal value is less than 50 percent (i.e., a grant element of at least 50 percent). For example, CIRRs for the period February 15-August 14, 2001 were as follows:

 

Term of less than
15 years

Term of 15 or more years


(Annual percentage rate)

U.S. dollar

6.09

7.35

Euro

5.73

7.13

Pound sterling

6.11

8.38

Japanese yen

1.58

3.75

7. Government revenues are valued on a cash basis and include offsetting operations in current revenue and expenditure. Revenues are shown in the consolidated government operations table (Tableau des opérations financières de l'État—TOFE) and include earmarked revenues, customs checks for project-related customs duties, and withholdings from civil service wages and salaries. Revenues for 2000 were estimated at CFAF 60.5 billion, broken down as follows:

Fiscal revenue (TOFE basis, in billions of CFA francs)

60.5

  Cash receipts (customs directorate, tax directorate, treasury)

50.6

  Earmarked revenue (road fund, Central African Economic and
     Monetary Community (CEMAC))

3.1

  Withholding taxes on government salaries

2.9

  Customs duties on projects (treasury checks)

3.9

8. The primary budget position is calculated as the difference between government revenues as defined in the previous paragraph and primary government expenditure. Primary government expenditure, that is, total government expenditure excluding interest payments and externally financed investment, is valued on a commitment basis. Government commitments include all expenditure for which commitment vouchers have been approved by the central offices of the Ministry of Finance; automatic expenditures (such as salaries, utilities, pensions, and other expenditures for which payment is centralized); expenditure by means of offsetting operations; and budgetary contributions in the form of treasury checks in payment of customs duties on projects. Expenditure for 2000 was valued at CFAF 61.9 billion, broken down as follows:

Primary government expenditure (TOFE basis; in billions of CFA francs)

    61.9

  Current expenditure

51.6

     Wages and salaries

28.9

      Other goods and services

14.5

      Subsidies and transfers

8.2

  Domestically financed capital expenditure

10.3

As a consequence, the primary budget position for 2000 was valued at CFAF -1.4 billion.

9. The net change in government domestic payments arrears corresponds to the difference during the period between liabilities contracted by the Government, excluding external debt operations, and payments made. This change corresponds to a net reduction of arrears when the amount is negative and to a net accumulation of arrears when the amount is positive. Government liabilities include all expenditure for which commitment vouchers have been approved by the central offices (Direction des services centraux) of the Ministry of Finance; automatic expenditures (such as salaries, utilities, pensions, and other expenditures for which payment is centralized); and expenditure committed by project managers. Government payments include treasury cash payments and offsetting operations. The net change in government domestic payments arrears is estimated by its components, including cash operations and the net balance of central government accounts, excluding the treasury accounts; this amount should also ensure a balanced supply and use of funds in the TOFE. For 2000, the net change in arrears was CFAF -8.7 billion (i.e., a net reduction), broken down as follows:

Net change in government domestic payments arrears (in billions of CFA francs)

-8.7

   Current expenditure

1.6

      Wages and salaries

6.5

      Transfers and subsidies

1.9

      Goods and services

-6.8

   Domestically financed capital expenditure

-4.5

   Other

-5.8


10. A net change in government wage payments arrears corresponds to the difference during the period between government wage payment commitments and wage payments made. The commitments comprise those for all staff (permanent and temporary) of the civil service and the armed forces, including withholdings on behalf of the national tax directorate. These cover wages, salaries, and bonuses for the current period, even when advices for the period are not issued by the payroll directorate owing to the payment lag. For a net reduction in arrears, the difference between commitments and cash payments is negative; for a net accumulation, it is positive. For 2000, the net change in government wage payments arrears was CFAF 6.5 billion (i.e., a net accumulation).

11. External debt service consists of cash payments made to settle external debt-service obligations falling due during the period under consideration, and comprise interest and principal payments, including penalty interest if appropriate. In 2000, CFAF 7.3 billion in external debt-service payments were made, with the following allocation among creditor types:

 

(In billions of
CFA francs)

Multilateral creditors

6.9

Bilateral creditors, Paris Club

0.4

Bilateral creditors, non-Paris Club

0.0

Other (including short term)

0.0

B. Structural Benchmarks

12. The structural benchmarks are as follows:


    (a) completion of a study to evaluate the economic impact of the trade regime for sugar imports, a copy of which will be provided to IMF staff by December 31, 2001;

    (b) verification of the compliance with the value-added tax of at least 150 large companies by December 31, 2001, as confirmed by the Ministry of Finance and Budget with a list of the companies inspected;

    (c) establishment, as confirmed by the relevant decree, of a petroleum management information system to provide up-to-date information on domestic supply and demand and on world market conditions, by March 31, 2002; and

    (d) completion of diagnostic studies in the mining, forestry, health, and education sectors by March 31, 2002.

C. Program Monitoring

13. Monitoring the quantitative indicators and structural benchmarks will be the subject of a monthly evaluation report, prepared within six weeks following the end of each month. This document will assist with assessing performance in terms of the program's quantitative and structural objectives.

14. The Standing Technical Committee responsible for program monitoring (CTP-PAS) will regularly report the data and other information required for program monitoring to the IMF's African Department by fax or e-mail. This will include the following information:

    (a) a monetary survey, central bank survey, and commercial bank accounts;

    (b) fiscal operations, based on the cash-flow table, the expanded table (bridge from cash-flow table to and TOFE), and the TOFE;

    (c) a breakdown of cash outlays on current expenditure and on domestically financed capital expenditure according to whether these outlays correspond to expenditure commitments for 2002, for 2001, for 2000, or for earlier years, respectively;

    (d) a breakdown of revenue office receipts, including the monthly report on the reconciliation of customs payments with data from the import certification agency (SGS);

    (e) a breakdown of public expenditure growth, on both a cash and commitment basis;

    (f) a breakdown of external debt service and external debt arrears, including by interest and principal, and by principal creditors (the most important being 3 the African Development Bank, Kuwait, Switzerland, Taiwan Province of China, the World Bank, and Yugoslavia);

    (g) the amount of new nonconcessional external debt contracted or guaranteed by the Government;

    (h) actual disbursements of nonproject external financial assistance, and external debt relief granted by the external creditors;

    (i) indices assisting with an assessment of overall economic trends, such as the household consumer price index, import and export flows (in volume and value), activity in the forestry sector and in industry, etc.; and

    (j) a review of the implementation of structural measures.

15. In addition, the Standing Technical Committee will provide the IMF's African Department with the following specific information, to be sent not later than 15 days after the end of the respective month:

    (a) a monthly report on petroleum prices;

    (b) a monthly report on the provision of petroleum free of charge or at concessional prices; and

    (c) a bimonthly report on the implementation of specific measures at the tax directorate and the customs directorate, as recommended by technical assistance missions of the IMF.

16. The Standing Technical Committee will also provide the IMF's African Department with any information deemed necessary or requested by Fund staff for purposes of program monitoring.

17. Two quarterly reviews with IMF staff are planned for February and May 2002 to assess progress with regard to the quantitative indicators for end-December 2001 and end-March 2002, respectively. The reviews will also assess the Central African Republic's progress toward the regularization of relations with external creditors, particularly multilateral financial institutions.


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Definition of Debt Set Forth in No. 9 of the Guidelines

The definition of debt set forth in No. 9 of the Guidelines on Performance Criteria with Respect to foreign Debt reads as follows: (a) For the purpose of this guideline, the term "debt" will be understood to mean a current, i.e., not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. Debts can take a number of forms, the primary ones being as follows: (i) loans, i.e., advances of money to the obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans and buyers' credits) and temporary exchanges of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements); (ii) suppliers' credits, i.e., contracts where the supplier permits the obligor to defer payments until some time after the date on which the goods are delivered or services are provided; and (iii) leases, i.e., arrangements under which property is provided which the lessee has the right to use for one or more specified period(s) of time that are usually shorter than the total expected service life of the property, while the lessor retains the title to the property. For the purpose of the guideline, the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement excluding those payments that cover the operation, repair or maintenance of the property. (b) Under the definition of debt set out in point 9(a) above, arrears, penalties, and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt are debt. Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.


1 The term "government" is understood to include the treasury and all autonomous bodies that are defined as part of central government agencies by the Bank of Central African States (BEAC).
2 The definition of debt excludes leases with a net present value of less than CFAF 20 million.
3 CFAF 0.5 billion or more is due in debt service to each of these creditors during the program period.

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