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Central African Republic and the IMF

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Public Information Notice (PIN) No. 04/39
April 14, 2004
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Concludes 2003 Article IV Consultation with
the Central African Republic

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board.

On April 2, 2004, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Central African Republic.1

Background

The period since 2000 has been marked by poor economic performance, due in large part to military disturbances, but also weak administration and poor program implementation, and the conflict that ended in March 2003 shattered the Central African Republic's economy. Real GDP contracted by 7 percent in 2003, with the formal sector of the economy in a particularly dire state. Exports and imports fell dramatically in 2003, although the drop in exports was in part due to the suspension of mining and forestry permits following the March 2003 coup as the authorities attempted to clean up activity in these sectors. The weakened trade balance and a low level of international assistance led to a further deterioration of the overall balance of payments, despite the Central African Republic making almost no payments on its external debt. Monetary aggregates—with the exception of net credit to government—also fell. Average inflation in 2003 increased slightly and was higher than in most other countries belonging to the Economic and Monetary Community of Central Africa (CEMAC), largely due to higher food prices resulting from transport disruptions.

Public finances are likewise in a very distressed position. The deficit in the overall budget balance including grants widended by about 2 percent of GDP in 2003. Revenue fell by more than 30 percent in nominal terms, dropping from almost 11 percent of GDP in 2002 to 7½ percent in 2003, due in part to the economic downturn and a collapse of the private formal sector (although 2002 revenues were inflated by a growing recourse to advance tax payments and a large increase in mining and forestry licenses provided on a discretionary basis). In addition, the looting and dislocations from the conflict disrupted the tax agencies, as did an increase in fraud and continued rampant corruption.

The government continued accumulating domestic arrears, notably on civil servant salaries. In spite of the government's declared objective to ensure the regular payment of salaries starting in April 2003, by year-end, the government had failed to pay November and December wages. In this context, the financial system has been drained of liquidity. To help the liquidity situation, in May 2003 the Bank of the States of Central Africa (BEAC) temporarily suspended reserves requirements for Central African Republic banks. Furthermore, the deadline for repayment by the banks of part of the credit under the 2001-2002 aborted cotton campaign, which was refinanced by the central bank (and guaranteed by the government), has repeatedly been extended.

Administrative capacity has suffered enormously from the political instability, most notably from the destruction during the October 2002 to March 2003 conflict, further undermining the authorities' ability to provide public services. Administrative buildings, in particular of the tax agencies, were sacked in both Bangui and the provinces, while public officials fled from many conflict areas, further undermining the productivity of most government institutions. The private sector was directly affected as well, and a number of looted enterprises have ceased their activities.

Regarding foreign assistance, many donors pulled out of the Central African Republic in the wake of the conflict. Since then, donor support has been limited. However, China, France, and the Central African Republic's CEMAC neighbors provided some budgetary support during 2003, and France and the European Union (EU) are now providing technical assistance. A number of United Nations agencies are present in the Central African Republic and active with humanitarian assistance and support to the social sectors. Several international non-governmental organizations are also present.

The political and military developments in the Central African Republic in recent years have had a dire impact on social conditions, which, on the basis of anecdotal information, worsened further during the October 2002-March 2003 period. Public health and education services in particular have suffered, and are only starting to return in many areas of the country, and the incidence of HIV/AIDS continues to rise.

Executive Board Assessment

Executive Directors welcomed the gradual return of peace and security in the Central African Republic and the ongoing transition toward free elections. They noted that the country faces major challenges in the period ahead, including de-mobilization and re-integration of former combatants, the consolidation of peace and political stability, economic and social recovery from the devastation of years of military strife, and the reconstruction of public sector institutions and the government's administrative capacity. Directors agreed that timely and appropriate support from the international community, including technical and financial assistance and debt relief, will be crucial to the Central African Republic's reconstruction efforts. In this regard, they stressed that the authorities will need to demonstrate their ability and commitment to undertake a comprehensive economic recovery program to lay the basis for sustained economic growth and poverty reduction.

Against this background, Directors commended the authorities' initial steps to address the economic difficulties, and their intention to give high priority to the most pressing economic and social issues in 2004. They encouraged firm implementation of the set of priority actions agreed with the Fund staff, some of which have already been met. This will send a strong signal to the international community that the government is capable of implementing economic reforms effectively, and will help prepare the ground for an increase in international assistance to the Central African Republic

Directors stressed that fiscal consolidation is urgently needed to restore macroeconomic stability, put the public finances on a sustainable path, and enable public institutions to function effectively. They noted that the deteriorating public finances have led to continued accumulation of external and domestic payments arrears, including wage arrears. Directors agreed that an excessively low level of spending risks undermining the effective functioning of the state, and considered that public expenditure will need to be increased substantially in the coming years as part of the reconstruction effort. Therefore, Directors stressed that a strong effort will need to be made to mobilize revenue collection, and welcomed the measures introduced this year in that regard. They urged continued efforts to widen the tax base—including by bringing the informal sector into the tax net—and to strengthen tax administration and combat tax fraud.

Directors noted that, given the limited budgetary resources, fiscal adjustment will continue to rely on expenditure restraint in the short term. They thus commended the initial measures taken to improve expenditure control and fiscal transparency—particularly those to contain the public sector wage bill. They suggested that a comprehensive medium-term civil service reform to reduce the wage bill relative to total revenue and spending will be fundamental to achieving fiscal sustainability. Directors urged that public expenditure management be strengthened, tight control be maintained on non-essential spending, and public spending be re-directed toward the social sectors and poverty reduction. They welcomed the authorities' efforts to ensure that all related revenue would be placed in a unified account at the Treasury.

Directors observed that the regional monetary and exchange rate arrangement has served the Central African Republic well, by keeping inflation low and maintaining external competitiveness. They encouraged the authorities to observe the monetary union's macroeconomic convergence criteria and to enforce vigorously the regional prudential banking norms. They welcomed the authorities' determination to implement the new regional regulatory framework for the microfinance sector. Directors stressed that an improved fiscal position will be critical to alleviating the liquidity shortage in the banking sector and permitting adequate growth of credit to the private sector. Directors commended the authorities' commitment to trade liberalization and regional integration, and encouraged further progress in this area.

Directors underlined the importance of strengthening governance to improve public administration and the business climate. They were encouraged by the measures recently taken to address corruption, including the enhancement of transparency in the forestry and mining sectors. Directors also urged the authorities to strengthen the judicial system's competencies in financial and commercial matters to reduce corruption as well as to underpin the efficient functioning of the economic system.

Directors encouraged the authorities to push ahead with structural reforms to help stimulate economic activity, particularly in the mining and forestry sectors. They welcomed the authorities' efforts to improve the financial position of the public enterprises, and urged stronger efforts in this regard to reduce the drain on the budget. They encouraged private sector participation in the operations of the public utilities.

Directors noted that the Central African Republic will need considerable technical assistance from the donor community in the period ahead, including the Fund, particularly in fiscal management and reform and in the production of economic and social statistics. They considered that the quality, coverage, and timeliness of the statistics produced require substantial improvement to meet the needs of surveillance and program design and monitoring, especially in the fiscal and real sectors.

Directors urged the authorities to aim at normalizing financial relations with their external creditors to resolve the large stock of external arrears and the heavy debt burden. They also recommended that the government seek agreement with its social partners and suppliers of goods and services regarding the settlement of its domestic arrears.

Directors indicated that the Central African Republic is a candidate for support under the Fund's Emergency Post Conflict Assistance policy, in the context of a concerted international effort, with a number of Directors underlining that the authorities need to continue to demonstrate their capacity to put in place and sustain the elements of an economic recovery program. They stressed that a solid track record of policy implementation would allow the Central African Republic to move toward a medium-term economic program supported by the Poverty Reduction Growth Facility (PRGF). Directors also noted that, given its heavy debt burden, the Central African Republic could be in a position to benefit from debt relief under the Heavily Indebted Poor Country (HIPC) initiative. Against this background, Directors welcomed the authorities' commitment to completing the preparation of a well thought-out Poverty Reduction Strategy Paper in a timely manner.


Central African Republic: Selected Economic Indicators 2000-06


 

2000

2001

2002

2003

2004

2005

2006

 

 

 

 

Est.


Projections

 

(Annual percentage change, unless otherwise indicated)

Production

 
               

Real GDP

1.8

0.3

-0.6

-7.3

2.5

4.4

4.2

Consumer price (yearly average)

3.2

3.8

2.3

4.2

2.2

3.3

2.1

 

(In percent of GDP, unless otherwise indicated)

Public finance (central government)

             

Overall balance (cash, excluding grants)

-7.0

-5.3

-2.0

-0.5

-2.4

-2.5

-2.6

Overall balance (commitments, excluding grants)

-6.6

-4.3

-5.0

-4.6

-2.4

-2.5

-2.6

Narrow primary balance 1/

-0.2

0.3

1.0

-2.1

0.6

1.1

1.6

 

(Annual change in percent of beginning period broad money)

Money and credit

             

Net foreign assets

5.3

-14.3

-7.3

-6.7

4.8

...

...

Broad money (M2)

5.4

-1.1

-4.3

-4.8

6.1

...

...

Credit to the economy

-1.3

3.2

6.3

-1.3

3.2

...

...

Net credit to central government

6.9

8.7

-0.9

3.9

-1.8

...

...

External sector

             

Current account balance (in percent of GDP)

-3.0

-2.5

-2.4

-4.8

-2.7

2.0

-1.5

NPV of debt/exports of nonfactor goods and services

250.3

376.2

455.6

557.9

409.4

360.9

342.3

Actual debt -service ratio 2/

5.6

7.3

0.8

0.3

24.9

25.5

20.0

Exchange rate (CFA francs per U.S. dollars)

710.1

732.4

694.8

580.1

...

...

...


Sources: C.A.R. authorities; and IMF staff estimates and projections.

1/ Excludes interest payments and foreign-financed investment.

2/ In percent of exports of goods and services.


1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.



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