Public Information Notice No. 00/90

Public Information Notice: IMF Concludes Article IV Consultation with the Central African Republic

October 27, 2000

On July 12, 2000, the Executive Board concluded the Article IV consultation with Central African Republic.¹

Background

In 1998, the C.A.R. authorities launched an economic and financial program, which received support from the IMF through a three-year arrangement under the Poverty Reduction and Growth Facility (PRGF). Overall, the authorities made limited progress in raising government revenue and implementing structural reforms in 1998–99. Discussions on a new program to be supported by a second annual arrangement under the PRGF could not be concluded because of delays in implementing key prior actions and insufficient external aid commitments to cover the residual financing gap.

After recovering strongly in 1997–98, real GDP growth slowed to an estimated 3½ percent in 1999. The cash crop sector was depressed, mainly reflecting the contraction of cotton output, but this was largely offset by an increased supply of food crops. Activity in the forestry sector rose strongly, as new companies started operation, even though exports were hampered by transport difficulties. Diamond mining, manufacturing, and trade grew only marginally in 1999. Overall GDP deflator inflation remained low, at about 1½ percent.

Fiscal management improved during the first half of 1999 but weakened in the run-up to the presidential elections in September 1999. Revenue collection suffered from persistent evasion of customs duties and a large-scale fraud on petroleum taxes and duties. There were also expenditure overruns, stemming in part from higher-than-projected pension payments. The primary budget balance (defined narrowly as the difference between government revenue and noninterest outlays, excluding foreign-financed investment) turned into a deficit of 0.3 percent of GDP, compared with a projected surplus of 1 percent of GDP. External debt-payment arrears rose to the equivalent of 3 percent of GDP at end-1999.

The drop in broad money observed in 1998 began to reverse in 1999, and the C.A.R. contribution to the international position of the Bank of Central African States (BEAC) improved. The external current account deficit narrowed, as private sector imports fell. Total exports rose marginally, as lower cotton exports were more than offset by increased shipments of diamonds and timber.

Depressed world market prices aggravated the difficulties of the cotton sector in 1999. To contain the projected deficit of the cotton parastatal (SOCOCA) in the 1999/2000 crop year, the authorities eliminated input subsidies, lowered the producer price, and closed one of the six ginning plants. However, because of serious difficulties in launching the crop campaign in late 1999, the ginning plant was reopened in April 2000.

On structural reforms, major progress was recorded in restructuring the banking system, and the two largest commercial banks were privatized in 1999. However, progress in other areas was slow, especially with regard to the privatization of petroleum distribution. The agreement to sell the petroleum distribution network was signed in April 1999, but as of June 2000 private investors were still in the process of taking over distribution operations. The privatization or leasing out of public enterprises in the electricity and telecommunications sectors was postponed, partly because of delays in the provision of technical assistance. The National Assembly approved the new civil service statute in November 1999, but its entry into force has been delayed out of concerns over a possible uncontrolled wage drift.

Since early June 2000, short-term prospects have been clouded by shortages of petroleum products in Bangui, which could hamper economic activity and translate into large budget revenue shortfalls. The problem has arisen partly out of an insufficient buildup of stocks during the period through December 1999, as well as difficulties in resuming fuel imports through Kinshasa (Democratic Republic of the Congo). Moreover, the availability of fuel from alternate sources has been limited owing to logistic constraints, as Northern Cameroon and Chad have also been facing fuel shortages.

Executive Board Assessment

Executive Directors noted that progress in economic and financial management in the Central African Republic since 1998 had been limited, in part owing to the difficult political and social situation, and that the main objectives set under the Fund-supported program in 1999 had not been achieved. Nevertheless, they welcomed the progress achieved in revenue collection during the early months of this year and the authorities’ commitment to economic reform as evidenced by the ambitious program for 2000 aimed at further strengthening economic and financial management. Directors stressed that strong and sustained implementation of economic and financial policies and acceleration of structural reforms will be critical to address the challenges of raising medium-term economic growth and reducing poverty.

Directors agreed that the key challenge facing the authorities is to strengthen fiscal management and, in particular, raise government revenue collections substantially. They noted the authorities’ determination to address tax evasion and fraud, and commended them for the measures taken against the individuals involved in the illegal sale of tax-free petroleum products. Directors considered, however, that much remained to be done to fight corruption and to improve compliance at the tax and customs departments from the current low levels. While recognizing the factors that led to the recent decision to defer introduction of the value-added tax, they encouraged the authorities to implement it as soon as feasible. Directors also noted the delays in the implementation of several recommendations from the Fund’s technical assistance missions, on tax and customs administration, and considered that their timely implementation would further contribute to the objective of strengthening public finances on a more sustainable basis.

Directors urged the authorities to strengthen expenditure control in order to ensure adherence to the expenditure priorities, especially on health, education, and poverty alleviation, which will help reduce the burden of adjustment on the poor and further facilitate a consensus in favor of reforms. They stressed the need to monitor budget execution closely, both on a commitment and on a cash basis, to avoid a further buildup of domestic arrears.

Directors expressed concern over the continued increase in external debt-payment arrears, including vis-à-vis international organizations, and encouraged the authorities to settle their arrears with these creditors, including the African Development Bank, so as to pave the way for a resumption of much needed external financial support.

Directors welcomed the progress made in restructuring the financial system. They called on the authorities to consolidate the progress achieved to date through a lasting stabilization of the macroeconomic situation as well as a strict implementation of the prudential requirements in close collaboration with the regional banking supervisory agency.

Directors regretted the recurrent delays in the implementation of the authorities’ structural reform agenda, although they recognized that this was in part due to the Central African Republic’s weak administrative capacity and the resource constraints it faces. They encouraged the authorities, in close cooperation with the World Bank, to step up their efforts to privatize or lease out the large public enterprises in the energy and telecommunications sectors, and to complete the liberalization of the petroleum sector and the sale of the network of service stations to private operators. Directors stressed the importance of finding lasting solutions to the fuel shortage problem. They also encouraged the authorities to make progress in the privatization of the cotton sector.

Directors regretted that discussion on a second annual arrangement under the Poverty Reduction and Growth Facility (PRGF) could not be concluded as planned. They encouraged the authorities and the staff to work expeditiously on a credible program that could lay the basis for a resumption of external support, including under the PRGF. Many Directors felt that, in view of the country’s daunting circumstances, appropriate flexibility would be needed in finalizing such a program. Directors welcomed the progress made in preparing an Interim Poverty Reduction Strategy Paper (PRSP) which, they hoped, would provide a good basis for the development of a comprehensive poverty reduction program.

Directors commended the authorities for adopting a work program to improve statistics, following the recent multisector technical assistance mission from the Fund. They encouraged the authorities to proceed speedily with the implementation of the program, giving high priority to the setting up of a poverty database. In view of the country’s limited resource capacity, Directors encouraged the authorities to request the needed technical assistance.