IMFSurvey Magazine: Countries & Regions
IMPACT OF INSTABILITY
Central African Republic: Recovering from Conflict
IMF African Department
June 28, 2007
- IMF, global community support reform efforts offer prospect of debt relief
- Country focused initially on controlling expenditures and raising revenues
- Challenges include establishing fiscal credibility and building infrastructure
The Central African Republic (CAR) suffered from a lengthy conflict and political instability that exacted a heavy toll on its people and physical infrastructure, significantly eroding standards of living.
After the cessation of hostilities in March 2003, the transition government, with support from the international community, turned its attention to rehabilitating the economy and organizing parliamentary and presidential elections (see box).
Capital: Bangui; geography and area: 622,980 square kilometers; landlocked
Population: 3.9 million (2003 census); population growth rate: 2.5 percent a year; per capita income: $350 (2005)
Economic structure: subsistence agriculture represents about half of GDP; major exports: timber and diamonds (about 85 percent of total exports)
Regional relations: Economic and Monetary Community of Central Africa (CEMAC) and the Bank of Central African States (BEAC)
The 2005 elections, considered by international observers to be fair and free, brought in a new government and parliament. By this time, the IMF had begun supporting a post-conflict reform agenda, through its Emergency Post-Conflict Assistance (EPCA) policy, approved in mid-2004.
A nascent recovery has started to take shape. However, to sustain and strengthen economic growth, the CAR is making a strong push to address the challenging economic, institutional, and governance-related problems that are hindering its development.
Almost two decades of instability, including military conflict, social unrest, and regional uncertainty, had left the CAR in economic ruins. The impact of instability was compounded by the country's geography, adverse terms of trade movements, and poor economic management.
Real GDP per capita declined steadily from the mid-1980s until 2005, for a cumulative loss of about 35 percent. Meanwhile, all social and poverty indicators worsened, placing the country near the bottom of the 2006 United Nations Human Development Index (see Table 1).
Economic activity in many sectors was undermined by the buildup of significant government domestic arrears and irregular payment of civil service and military salaries. With the export sector disappearing, foreign assistance drying up, and government revenues shrinking, the country fell behind in paying its external creditors and soon found itself in debt distress.
Early steps to reform
The initial reform effort sought to correct macroeconomic imbalances and rebuild administrative capacity with donor technical assistance. Progress at first was slow, partly because the authorities were focused on the elections, but gained momentum under a second program supported by the EPCA policy, approved in January 2006 (see Table 2).
Under this program, the authorities' goal was to gain control over expenditures, particularly the wage bill, while enhancing domestic revenue mobilization, which had suffered severely during the conflict.
This effort, along with retrenchment in election-related expenditure, resulted in a major turnaround in the primary fiscal position of about 4 percent of GDP in 2006 (see Chart 1).
The government was able not only to stay current on its domestic financial obligations—including those arising from critical social expenditure—but also to start repaying domestic arrears accumulated during 2005.
The government also enhanced the transparency of its operations by establishing a website on which real, fiscal, and judicial information is published, and tackled corruption in the administration by strengthening the judiciary despite serious capacity and resource constraints. These actions helped allay serious concerns about transparency and governance.
Economic activity began to recover as economic operators regained confidence (see Chart 2). Timber and diamonds, the traditional exports, have mainly supported the recovery, but activity in the manufacturing and services sector has also revived. Together, these developments stabilized the political and social situation and brought a sense of normalcy back to the Central African Republic.
Intensified international engagement
As the country's economic management improved, development partners joined forces to clear its large external payments arrears. These efforts paved the way for the IMF to approve in December 2006 a new three-year arrangement under the Poverty Reduction and Growth Facility (PRGF) to support the authorities' reform program.
With contributions from bilateral donors, the CAR cleared its arrears to the World Bank and the African Development Bank in late 2006. In April 2007, the Paris Club also agreed to reschedule the country's debt and to a moratorium on all debt service for the duration of the PRGF arrangement.
With the intensified reengagement of the international community, the country is now in a position to benefit from further technical assistance and financing to support much-needed social and infrastructure spending. As its reform program progresses, the CAR is also set to be granted significant debt relief.
In March 2007, the World Bank and IMF Executive Boards formally found the country to be eligible for debt relief under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative. The country will also qualify for relief under the Multilateral Debt Relief Initiative after it meets debt relief criteria.
Although the Central African Republic has made progress toward recovery, it will take a determined and concerted reform effort to achieve sustained growth and poverty reduction. In addition to the fragile security situation in the northern border areas, which have exacerbated the plight of the population, the country must address a number of problems:
• a narrow export base that makes the country more vulnerable to adverse terms of trade movements;
• a decimated transportation infrastructure and relatively fragile security situation, particularly along the main transport routes, which complicate the public sector's ability to deliver social services to the sparse population and to trade within the country and with neighboring countries;
• limited and unreliable service delivery from public utilities;
• weak governance;
• a thin tax base, yielding one of the lowest tax revenue-to-GDP ratios in Africa;
• minimal administrative capacity in the public sector; and
• an underdeveloped banking sector, which plays only a limited role in financial intermediation.
Government sets priorities
Recognizing the problems, the government set out its priorities for addressing them in its draft Poverty Reduction Strategy Paper, scheduled to be finalized in mid-2007. The consolidation of peace and security figures prominently in the strategy, as do economic and social policies aimed at promoting private sector-led growth, rebuilding the economic infrastructure, and fighting poverty.
To reestablish the credibility of fiscal policy and build the confidence of domestic suppliers, the government aims to reduce its sizable domestic debt, especially the large payment arrears. At the same time, it needs to orient public expenditure toward priority social and infrastructure development programs.
These policies could be supported through administrative reforms in tax and customs administration to raise revenue and firmer public financial management. Assistance from development partners would help leverage the government's reform efforts by supplementing domestic revenue through grants and highly concessional loans and by building up administrative capacity.
Main export sectors
The government also plans a range of reforms to help revive the private sector, which has shrunk steadily over the past two decades. The regulatory frameworks for mining and forestry—the country's two main export sectors—need to be reformed to enhance transparency and strengthen management and efficiency.
Improving access to financial services, easing internal and external constraints to trade, and strengthening the operation and financial situation of public utilities would help alleviate important impediments to private sector growth.