Public Information Notice No. 07/128

Public Information Notice: IMF Executive Board Concludes 2007 Article IV Consultation with the Central African Republic

October 12, 2007

On September 28, 2007, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Central African Republic (C.A.R.).¹

Background

Over the past several decades political struggle and armed conflict have adversely affected domestic stability in the C.A.R., slowing growth and causing a deterioration of living standards. The economy has also been buffeted by exogenous shocks, such as droughts and regional instability, and a long-term decline in the terms of trade. A coup d'état in 2003, followed by elections in 2005, marked the end of generalized conflict and the beginning of economic and institutional recovery.

A recent improvement in the political and social situation and economic policies has provided a firm basis for economic recovery. In this context, reengagement of the international financial community has helped in providing technical assistance to strengthen capacity, but foreign aid has been unpredictable and insufficient.

For its part, the Fund provided Emergency-Post Conflict Assistance to the C.A.R. in July 2004 and January 2006 and approved a three-year Poverty Reduction Growth Facility (PRGF) arrangement in December 2006. In March 2007, the Fund's Board also agreed that the country is eligible for debt relief under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative. The C.A.R. will qualify for the Multilateral Debt Relief Initiative once it reaches the HIPC completion point.

Real GDP grew by 4.1 percent in 2006, compared with 1.3 percent in 2004 after the conflict ended. Private consumption and investment picked up, as did diamond and timber exports, and for the first time in years, agriculture made a modest contribution to growth. Though inflation was relatively high in 2006, it has declined recently—the 12-month rate was 1.6 percent through June 2007—as food prices moderated. With strong export growth and higher official transfers related to recent external arrears clearance, the external current account deficit narrowed significantly, from about 6½ percent of GDP in 2005 to 2.7 percent last year.

The fiscal position has improved during the past several years, owing to firm expenditure control and the government's efforts to enhance domestic revenue mobilization. A strengthening of public expenditure management and a decline in the civil service wage bill have helped on the spending side, allowing room for an increase in priority outlays for growth-enhancing and poverty-reducing social policies. Meanwhile improvements in tax and customs administration and some new tax measures have supported an increase in the tax revenue ratio, which, however, remains low compared with other low-income countries. Together, these factors have led to a decline in the overall fiscal balance (excluding grants) from about 8½ percent of GDP in 2005 to 4.7 percent in 2006, with further consolidation projected for this year.

The authorities are making progress on structural reform. Along with efforts to enhance public expenditure management and revenue mobilization, the government has taken measures to improve governance and transparency, address financial and commercial crime, and develop the private sector through changes to the regulatory framework in the forestry and mining sectors, and implementing the legal framework supported by the Organization for the Harmonization of Business Laws in Africa.

Executive Board Assessment

Directors commended the Central African authorities for their recent efforts to consolidate peace and security, and pursue macroeconomic stabilization and structural reforms. Despite difficult conditions, performance under the PRGF-supported program was generally satisfactory, demonstrating the authorities' commitment to move the economy from post conflict to sustained recovery. These efforts are beginning to bear fruit as the economic recovery has strengthened and the base of growth has broadened. However, daunting challenges remain, including pervasive poverty, susceptibility to shocks, and security and capacity constraints. Looking ahead, Directors stressed that policies need to focus on accelerating growth and increasing the economy's resilience, with the private sector playing an increasing role.

Directors welcomed that real GDP growth recently reached its highest level in a decade and inflation moderated, which bodes well for the authorities' fight against poverty. They noted that problems in donor coordination, which led to delays in aid disbursements, are being addressed, and they welcomed the international community's reengagement in the Central African Republic. Directors stressed the need for further financial assistance on highly concessional terms, together with technical assistance to strengthen capacity, to support the authorities' firm resolve to achieve their policy objectives.

Directors agreed with the need to continue with fiscal consolidation to reduce the overhang of domestic debt and accelerate efforts to mobilize more domestic revenue, especially in light of the very low tax take. Although the budget provides for only a minimal level of social services, prudent fiscal management is needed to ensure that domestic payments arrears are settled and new ones do not emerge, as this has been an important source of past social discontent. Directors recognized the authorities' efforts to reform tax and customs administration, but encouraged them to broaden the tax base, by eliminating exemptions, capturing more of the informal sector, and improving taxation in the mining and forestry sectors. Strengthening the management of the natural resources sector, and improving the transparency of the revenues from natural resources, will be crucial.

Directors took note of the authorities' interest in tapping the regional financial market to help improve debt sustainability by refinancing domestic bank debt on more favorable terms. While acknowledging that there could be potential benefit from such a refinancing operation, most Directors cautioned against issuing bonds on commercial terms to finance higher expenditures, in light of the country's efforts to attain debt sustainability.

Directors concurred with the authorities' structural reform agenda, which should help enhance the country's external viability and accelerate growth through private sector development. In this context, they stressed the importance of reducing the cost of doing business, enhancing governance and combating corruption, and updating legislation in key areas such as forestry and mining to attract investment.

Directors also underlined the need to accelerate structural reforms to improve the country's international competitiveness, which is critical under the CEMAC region's fixed exchange rate regime. In this context, they welcomed the authorities' intention—along with their CEMAC partners—of intensifying regional integration through the free movement of people and goods, the removal of nontariff barriers to trade, and upgrading the region's infrastructure. Directors also encouraged the authorities to aim for further integration in the global economy, through the liberalization of trade on a wider basis, while seeking ways to diversify the economy.

Directors agreed that the Central African Republic had fulfilled the requirements to reach the decision point under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative, thereby qualifying for HIPC debt relief. They welcomed the progress achieved in the authorities' discussions with Paris Club and other bilateral and commercial creditors, and urged all creditors to participate fully in the debt relief efforts. Directors observed that the Central African Republic could reach its floating completion point following at least one year's implementation of its Poverty Reduction Strategy (which is to be finalized shortly), continued satisfactory performance under the PRGF arrangement, and implementation of the other HIPC triggers. Directors supported the coverage and content of the HIPC triggers, and urged the authorities to implement them as soon as possible.

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.