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Central African Republic—Letter of Intent

Bangui, May 17, 2002

The following item is a Letter of Intent 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 letter 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
Washington, DC 20431

Dear Mr. Köhler:

1. In a letter to you dated November 19, 2001 on behalf of the Government of the Central African Republic, I indicated that, despite the generally unfavorable domestic environment in 2001, the Government had undertaken a number of measures under the second annual arrangement under the Poverty Reduction and Growth Facility (PRGF) aimed at strengthening economic management and governance. Importantly, a value-added tax (VAT) was introduced, and the state-owned petroleum company (PETROCA) was liquidated.

2. Nevertheless, owing in part to social and political tensions, which included an attempted coup d'état in May, and a sharp deterioration in the Central African Republic's external terms of trade (almost 15 percent) (see Table 1), there were significant slippages in overall program performance. Under circumstances in which economic activity was stagnant, compared with a programmed increase of some 5 percent, at end-June 2001 government revenue was far short of the program target, and none of the program's quantitative and structural benchmarks were met. Moreover, it soon became clear that it would not be possible for the Government to bring the PRGF-supported program for 2001 back on track.

3. In October, with a view to securing the resumption of Fund financial assistance to the Central African Republic, the Government requested that the Fund staff assist in monitoring reinforced adjustment efforts within the framework of a six-month staff-monitored program (SMP) for the period October 2001-March 2002. The objectives, as well as the policies and other actions that would be executed to achieve them, were fully elaborated in my letter of November 19, 2001, which was circulated for information to the Executive Board of the Fund and placed on the IMF website.

4. As called for in the SMP, in April 2002 the Government and Fund staff conducted a quarterly review of performance over the period October-December 2001. Overall, despite our efforts, shortcomings were recorded in the financial and structural areas, as well as with respect to the normalization of the Central African Republic's relations with multilateral financial institutions (MFIs).

5. As indicated in Table 2, during the first three months of the SMP, the Government's primary budget surplus fell short of the target by CFAF 4.0 billion (2.3 percent of quarterly GDP). However, CFAF 3 billion of this underperformance reflected a mainly timing-related shortfall in rental income from the Mission of the United Nations in the Democratic Republic of the Congo (MONUC). In addition, revenue collections were somewhat dampened by a further, brief political-military disruption in November, and total revenue fell some CFAF 5 billion short of the program floor. Also, at end-December, net bank claims on the Government exceeded the program ceiling by CFAF 1.9 billion. Moreover, the program adjuster was not fully respected, as only CFAF 3.3 billion of the total resources available under the adjuster (CFAF 4.2 billion) was used for the specified program purposes: to service external debt; to scale down government wage payments arrears; and to reduce net bank credit to the Government. The remainder was devoted to cash settlements of domestic nonwage arrears, such as for scholarships, pensions, and equipment. However, the ceiling on the net change in government domestic payments arrears was respected, and the Government did not contract and/or guarantee any new nonconcessional external debt.

6. Regarding the SMP's structural benchmarks that should have been met by end-December 2001, compliance with the VAT was verified for 47 rather than 150 large companies, while the study on the economic impact of the trade regime for sugar imports was still three months short of completion.

7. With respect to progress toward the normalization of relations with MFIs, the Government cleared arrears with the World Bank in October 2001 and honored its obligations in November. However, after an anticipated credit from that institution failed to materialize, the Central African Republic ran up arrears on its debt-service obligations to the World Bank once again. Moreover, taking into account all of the developments mentioned above, no payments were made to the African Development Bank (AfDB), with which the Government had agreed in October 2001 to settle before end-2001 its obligations that were due in July 2001 (CFAF 1.6 billion).

8. More recently, as a result of a marked pickup in revenue collections in the first three months of 2002—including CFAF 2.2 billion in delayed MONUC receipts—total revenue at end-March is likely to have been within CFAF 1.8 billion of the SMP target. Even then, some CFAF 1.6 billion of the expected revenue shortfall at end-March would be accounted for by the unexpected termination of payments by the MONUC. Mainly owing to the pickup in revenue collections and the receipt in January of CFAF 1.2 billion from the second tranche of a loan from the Libyan Arab Foreign Bank, net bank claims on the Government had fallen by end-February below the end-March program ceiling.

9. However, during January and February 2002, wage payments fell some 20 percent short of commitments, and another CFAF 0.6 billion in domestic nonwage arrears was settled. As a consequence, it is likely that resources available during the first quarter of 2002 under the program adjuster were less than fully allocated to the specified program purposes. Through end-March, arrears to the World Bank continued to mount (to US$4.1 million), and, notwithstanding the agreement with the AfDB in October 2001 to fully service obligations falling due during the first quarter of 2002 (CFAF 1.5 billion), no payments were made. Also, the loan (EUR 10 million) from the Libyan Arab Foreign Bank, which was contracted before the beginning of the SMP on less than sufficiently concessional terms, is still being renegotiated.

10. With respect to the SMP's structural benchmarks, the study on the economic impact of the trade regime for sugar imports was completed in March 2002, with copies of the study provided to Fund staff; by end-March, compliance with the VAT for 75 large companies had been verified, with a list of these companies and their respective tax identification numbers provided to Fund staff; the selection process is under way for the consultant who will design the Petroleum Management Information System; bid documents for the selection of consultants who will undertake the diagnostic studies for the mining, health, and education sectors are being reviewed by the World Bank; and a World Bank forestry expert is scheduled to visit Bangui this month in connection with the study for the forestry sector.

11. In the coming weeks, the Government will conduct with Fund staff the second quarterly review under the SMP, at which time performance over the entire six-month program period will be assessed. The Government would hope that, based on that assessment, negotiations on a new three-year PRGF-supported program could start shortly thereafter.

12. For the six-month period beyond the SMP—and in the context of an expected rebound in economic growth to 4.3 percent in 2002—the Government has established quarterly quantitative and structural targets to help guide policy implementation in its continuing adjustment efforts. The quarterly targets are based on the principles underlying the SMP, namely, generating a primary budget surplus sufficient to at least cover domestic debt service due (see Table 3), taking into account seasonally weaker revenue collections; moving forward with structural reforms; and, depending on resource availabilities, making progress toward normalizing the Central African Republic's relations with MFIs. As shown in Table 2, targets have been set for the same quantitative indicators that were included in the SMP, and targets for progress on structural reforms relate to the ongoing privatization process. With respect to the latter, the completion of a report on the implementation of performance contracts for the public electricity company (ENERCA) and the telecommunications company (SOCATEL) is a target for end-June; in addition, privatizing the freight transport company (BARC) and bringing the sugar company (SOGESCA) to the point of sale are targets for end-September.

Sincerely yours,

/s/


Eric Sorongopé
Minister of State
Minister of Finance and Budget

 
Table 1. Central African Republic: Selected Economic and
Financial Indicators, 1998–2002

      1998 1999 2000 2001
2002
Proj.
        Prog. Actual

      (Annual percentage change, unless otherwise indicated)
National income and prices              
  GDP at constant prices 3.9 3.6 1.8   5.1 -0.0 4.3
  GDP at current prices 7.1 5.3 6.2   7.9 3.7 6.4
  GDP deflator 3.1 1.7 4.3   2.7 3.8 2.0
  Consumer prices  
    Yearly average -1.9 -1.4 3.2   3.3 3.8 2.8
    End of period -3.0 -5.5 8.1   2.5 2.5 4.7
                   
Central government finance              
  Total revenue 25.2 6.0 1.4   15.3 4.3 22.9
  Total expenditure 33.8 6.0 -8.9   16.7 -11.4 25.4
                   
Money and credit1              
  Net domestic assets 4.6 6.4 0.1   21.5 13.2 1.5
  Domestic credit 5.7 9.3 3.1   16.5 16.9 1.9
  Broad money -16.2 7.9 5.4   9.7 -1.1 6.4
  Velocity of broad money (average) 5.6 6.3 6.1   6.1 6.2 6.5
                   
External sector  
  Exports, f.o.b. (CFA franc basis) -6.0 0.9 25.9   11.2 -12.0 5.7
  Export volume -13.7 2.5 20.1   3.2 -7.5 13.1
  Imports, f.o.b. (CFA franc basis) 5.2 -6.5 7.8   18.7 13.7 5.5
  Import volume 7.4 -7.6 -5.1   15.2 1.8 6.2
  Terms of trade 11.2 -2.8 -7.8   4.6 -14.8 -5.9
  Nominal effective exchange rate 0.6 0.1 0.4   . . . 1.3 . . .
  Real effective exchange rate -2.6 -5.3 -0.2   . . . 0.9 . . .
       
      (In percent of GDP, unless otherwise indicated)
Gross national savings 5.1 9.9 7.3   10.2 1.2 3.0
  Of which: current official transfers 3.6 4.2 4.3   3.3 2.1 2.5
Gross domestic savings 3.8 6.9 4.6   9.3 0.6 2.3
  Government -0.3 -0.3 -0.4   0.1 0.4 0.9
  Private sector 4.1 7.3 5.1   9.2 0.2 1.4
Consumption 96.2 93.1 95.4   90.7 99.4 97.7
  Government 4.2 4.2 3.7   4.6 3.2 3.9
  Private sector 92.0 88.8 91.7   86.1 96.2 93.8
Gross investment 11.1 11.7 9.6   14.6 8.4 10.4
  Government 7.3 7.2 4.7   7.4 3.5 5.3
  Private sector 3.8 4.5 4.9   7.2 4.9 5.0
                   
Resource gap -7.3 -4.8 -4.9   -5.2 -7.9 -8.1
Current transfers and factor income (net) 1.3 2.9 2.7   0.9 0.6 0.8
External current account balance -6.0 -1.9 -2.3   -4.4 -7.3 -7.3
Overall balance of payments -5.2 -1.8 -1.9   -2.4 -3.9 -3.0
Central government finance              
  Total revenue 9.3 9.4 8.9   9.8 9.0 10.4
  Total expenditure -18.1 -18.2 -15.6   -18.2 -13.3 -15.7
  Overall balance (commitment basis)  
    Excluding grants -8.8 -8.8 -6.7   -8.4 -4.3 -5.3
    Including grants -0.0 -0.5 -1.8   -1.2 -0.9 -1.0
  Narrow primary balance2 0.6 -0.4 -0.2   1.1 0.4 1.1
  Basic balance3 -0.7 -1.8 -1.9   -0.3 -1.0 -0.1
                   
External public debt 85.7 84.7 83.9   75.9 83.4 77.7
Net present value of total debt 4 289.9 293.2 265.7   176.5 292.5 261.4
Scheduled debt-service ratio4 16.3 12.5 10.2   11.9 14.8 15.9
Scheduled debt-service ratio, excluding IMF5 23.2 20.8 21.7   23.6 27.4 26.3
Actual debt-service ratio4 9.5 7.0 5.5   11.9 7.3 15.9
Scheduled debt-service ratio (before debt relief)4 43.0 40.2 44.1   31.9 37.1 35.7
                   
Gross official foreign reserves
   (in millions of U.S. dollars)
147.9 139.8 130.8   143.1 121.3 129.6
Nominal GDP (in billions of CFA francs) 606.4 638.7 678.4   736.4 703.7 748.5
Exchange rate (CFA francs per U.S. dollar) 590.0 614.9 710.0   . . . 732.5 . . .

1In percent of broad money at beginning of the period.
2Excludes interest payments and foreign financed investment.
3Excludes foreign financed investment.
4In percent of exports of goods and services.
5In percent of government revenue (excluding grants).

 
Table 2. Central African Republic: Quantitative Indicators and Structural Benchmarks Under the Staff-Monitored Program, Fourth Quarter 2001 and First Quarter 2002;
and Quantitative and Structural Targets, Second and Third Quarters 2002
(In billions of CFA francs; ceilings, unless otherwise indicated)
  2001
Dec.
  2002
    Mar. Jun.    Sep.   
  Prog. Actual   Prog. Targets Targets

Quantitative indicators and targets            
Net bank claims on the Government, excluding the
   counterpart use of Fund resources (end of period)1
30.5 32.4   30.2 29.6 29.3
Contracting and/or guaranteeing of new
      nonconcessional external debt by the central
      government (including leasing)2
         
   With maturities of more than one year with a grant
      element of less than 50 percent3
0.0 0.0   0.0 0.0 0.0
   With maturities of less than one year4 0.0 0.0   0.0 0.0 0.0
Floor on total government revenue256 24.6 19.5   44.2 59.7 77.2
Floor on the primary budget position26 8.5 4.5   10.8 11.0 11.5
Net change in government domestic payments arrears12 . . . -0.2   . . . . . . . . .
             
Adjuster1,2            
Resources to be used according to program adjuster . . . 4.2   . . . . . . . . .
Resources used according to program adjuster . . . 3.3   . . . . . . . . .
             
Memorandum items:            
Disbursements of external, untied program assistance
   (including IMF)1,2,7
7.6 0.0   13.3 1.2 1.2
Domestic debt service due1,2 -0.4 -0.4   -0.7 -2.3 -2.8
External debt service (cash)1,2 . . . 3.4   . . . . . . . . .
Net change in government wage payments arrears1,2 . . . 0.5   . . . . . . . . .
             
Structural benchmarks and targets            
Completion of a study on the economic impact of the trade
   regime for sugar imports
X Not done        
Verification of the compliance with the value-added tax of
   at least 150 large companies
X Not done        
Establishment of a petroleum management information
   system Completion of diagnostic studies in the mining,
   forestry, health, and education sectors
      X    
Completion of a report on the implementation of
   performance contracts for ENERCA and SOCATEL
        X  
Privatization of BARC           X
Bringing SOGESCA to the point of sale           X

1To the extent that the primary budget surplus exceeds the amount that is due in domestic debt service, and/or that external, untied budgetary support becomes available, these resources are to be used to service external debt and/or reduce the stock of net claims of the banking system on the Government, excluding the counterpart of the use of Fund resources, and/or reduce government wage payments arrears.
2Cumulative from October 1, 2001.
3This quantitative indicator applies not only to debt, as defined in point No. 9 of the "Guidelines on Performance Criteria with Respect to Foreign Debt," adopted August 24, 2000 (see the annex to the technical
memorandum of understanding for the staff-monitored program), but also to commitments contracted or guaranteed for which value has not been received. Excluded from this quantitative indicator are rescheduling arrangements and borrowing from the Fund. For purposes of this quantitative indicator, the term  "nonconcessional" means that the debt has a grant element of less than 50 percent, calculated by using  currency-specific commercial interest rates that are based on the OECD commercial interest reference rates (CIRRs).
4This quantitative indicator applies not only to debt, as defined in point No. 9 of the "Guidelines on Performance Criteria with Respect to Foreign Debt," adopted August 24, 2000 (see the annex to the technical memorandum of understanding for the staff-monitored program), but also to commitments contracted or guaranteed for which value has not been received. Excluded from this quantitative indicator are rescheduling arrangements, borrowing from the Fund, and normal import-related credits. For purposes of this quantitative indicator, the term "nonconcessional" means that the debt has a grant element of less than 50 percent, calculated by using currency-specific commercial interest rates that are based on the OECD CIRRs.
5Including withholding taxes on government salaries, earmarked revenue, and taxes and duties on project-related imports.
6If total government revenue exceeds the respective quantitative indicator in a given quarter, the quantitative indicator for the primary budget position is adjusted upward by the additional revenue collected.
7Cash basis, based on the actual use of counterpart funds in case of disbursements from the European Union and France.

 
Table 3. Central African Republic: Elements of a Quarterly Cash-Flow Plan,
Fourth Quarter 2001 Through Third Quarter 2002
(In billions of CFA francs, cumulative from October 1, 2001)
      2001
December

  2002
        March June  September
      Prog. Actual   Prog. Targets Targets

Government revenue (cash, excluding grants)1 20.9 16.9   36.8 51.0 64.6
  Of which: UN Mission in Democratic Republic of Congo 7.5 4.4   8.2 6.6 6.6
Primary expenditure1 -12.3 -12.3   -26.0 -40.0 -53.1
  Current primary expenditure -11.7 -11.7   -24.3 -37.1 -48.9
    Of which: wages and salaries2 -6.9 -6.9   -13.8 -20.7 -27.6
  Domestically financed investment3 -0.6 -0.6   -1.8 -2.9 -4.1
    Primary balance 8.5 4.5   10.8 11.0 11.5
Debt service due -11.7 -11.6   -17.9 -23.4 -28.1
  Domestic -0.4 -0.4   -0.7 -2.3 -2.8
    Of which: IMF 0.0 -0.0   0.0 -0.2 -0.2
  External4 -11.3 -11.3   -17.2 -21.1 -25.4
    Of which: World Bank -4.1 -4.1   -6.3 -7.6 -10.1
    Of which: AfDB -1.6 -1.6   -3.2 -3.0 -4.5
Net change in payments arrears5 . . . 7.7   . . . . . . . . .
  Domestic5 . . . -0.2   . . . . . . . . .
    Of which: earmarked external financing 1.2 0.0   1.2 0.0 0.0
    Of which: wages and salaries5 . . . 0.5   . . . . . . . . .
  External5 . . . 7.9   . . . . . . . . .
    Cash balance . . . 0.6   . . . . . . . . .
 Financing5 . . . -0.6   . . . . . . . . .
  Domestic5 . . . -0.6   . . . . . . . . .
    Bank financing5 . . . -0.3   . . . . . . . . .
       Central bank, excluding IMF5 . . . -0.9   . . . . . . . . .
          Of which: counterpart funds of disbursements from
         external donors (European Union)
3.2 0.0   3.2 0.0 0.0
          Of which: earmarked for settlement of domestic
         nonwage payments arrears
1.2 0.0   1.2 0.0 0.0
       IMF 0.0 0.0   0.0 0.0 . . .
       Commercial banks5 . . . 0.6   . . . . . . . . .
    Nonbank financing 0.0 -0.3   0.0 . . . . . .
  External 5.6 0.0   11.3 1.2 1.2
    Of which: World Bank 5.6 0.0   11.3 0.0 0.0
                 
Memorandum items:            
Primary balance exceeding domestic debt service due5 8.1 4.2   10.1 8.7 8.8
External, untied financing5 7.6 0.0   13.3 1.2 1.2
Maximum values consistent with adjuster5            
  Net change in government wage payments arrears 0.0 . . .   0.0 0.0 0.0
  Net change in external arrears 11.3 . . .   17.2 20.3 24.6
  Stock of external arrears (end of period) 36.5 . . .   42.4 45.5 49.8
  Bank financing 2.8 . . .   2.5 -3.2 -3.5
Total government revenue6 24.6 19.5   44.2 59.7 77.2

1Excluding withholding taxes on government salaries, earmarked revenue, and taxes and duties on project-related imports.
2Excluding withholding taxes on government salaries.
3Excluding earmarked revenue and taxes and duties on project-related imports.
4After the application of traditional debt-flow relief mechanisms, and including overdue debt service in 2001 to the World Bank and the African Development Bank.
5According to paragraph 4 of the technical memorandum of understanding for the staff-monitored program, 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, these resources will be used to service external debt and/or reduce the stock of net claims of the banking system on the Government, excluding the counterpart of the use of Fund resources, and/or reduce government wage payments arrears.
6Government cash revenue, withholding taxes on government salaries, earmarked revenue, and taxes and duties on project-related imports.

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