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### EXECUTIVE SUMMARY — Context and Recent Developments
- Oil export proceeds and budget oil revenues "plummeted between 2014 and 2016."
- International reserves:
  - end-2014: US$15.5 billion.
  - December 2016: US$4.9 billion (2.3 months of imports).
  - end-April 2017: BEAC gross reserves US$4.5 billion (2.1 months of imports).
- Regional fiscal and external outcomes (2014–2016):
  - Regional primary deficit: 2.7 percent of GDP in 2014 → 5.7 percent in 2016.
  - Public debt: 29 percent of GDP in 2014 → 47 percent in 2016.
  - Non-oil growth: 4½ percent in 2014 → about 1½ percent in 2015 and 2016.
  - Region-wide growth in 2016: -1 percent.
  - Current account deficit: 3.9 percent of GDP in 2014 → 9.3 percent in 2016.
- BEAC net foreign assets cumulative change (2014–2016, billions of CFAF):
  - Total: -5,585; Cameroon -341; Central African Republic -28; Chad -837; Congo, Republic of -2,208; Equatorial Guinea -1,580; Gabon -856.
- Banking sector:
  - Loan arrears (LAs): around 10 percent in 2014 → 15 percent of total loans on average in 2016.
  - Banks’ liquidity declined sharply since end-2014; broad money declined since end-2015; credit growth to the economy fell.

### Regional Strategy to Address the Crisis
- Strategy objectives:
  - restore regional and national external stability;
  - maintain the peg of the CFA franc at its current parity and accumulate necessary reserves to support it;
  - improve the business environment for private sector investment and growth;
  - strengthen and deepen the financial sector;
  - enhance regional institutional and operational frameworks to strengthen regional safeguards mechanisms.
- Country-level components:
  - (i) sizable fiscal adjustment to avert depletion of and start rebuilding reserve assets in the short term;
  - (ii) structural reforms to strengthen public financial management and enhance the business environment, plus country-specific steps to restore sustainable growth.
- Regional actions:
  - (iii) tighten monetary policy and liquidity management consistent with external stability;
  - (iv) strengthen the financial sector.
- Policy anchor: unchanged exchange rate peg to the euro, guaranteed by France.

### Fiscal Adjustment, Monetary Policy, and Structural Reforms (Staff Recommendations)
- Fiscal adjustment:
  - Regional primary fiscal deficit projected to decline from 5.7 percent of GDP in 2016 to 1.6 percent in 2017 and turn into a surplus of 0.2 percent by 2019.
  - Initial adjustments to rest primarily on spending cuts (by 3 percentage points of GDP in 2017 on average), especially domestically financed capital expenditure.
  - Space preserved for social protection programs and gradual repayment of arrears.
- Monetary policy and liquidity management:
  - Credit conditions need to remain tight to reduce external pressures from the non-government sector and stabilize capital flows.
  - BEAC has increased its policy rate and may consider further increases if reserves deviate from the expected path.
  - Possible changes in reserve requirement rates considered depending on overall bank liquidity.
  - BEAC to introduce an active liquidity management framework by end-2017 to keep banks’ excess liquidity low and stable.
- Structural reforms:
  - Improve business climate and diversify economies to reduce revenue volatility and stabilize forex earnings.
  - CEMAC Commission to promote PFM reforms and implementation of regional directives for harmonized PFM systems.
  - Reforms to support broad financial sector development guided by the CEMAC Economic and Financial Reform Program (PREF CEMAC).

### Program Coverage, Outlook, and Risks
- Summit and program engagement:
  - Extraordinary summit of December 23, 2016: Heads of State committed to strong policy adjustment and to start discussions with IMF staff on possible Fund-supported programs (Cameroon, Congo, Gabon, Equatorial Guinea) or recalibrations (CAR and Chad).
  - Negotiations concluded at staff level with Cameroon, Gabon, and Chad; under way with Equatorial Guinea and Republic of Congo; second review under the ECF arrangement with CAR well advanced.
- Heterogeneity across members (2016 ranges):
  - Overall fiscal balances: from a deficit of 18 ¼ to a surplus of 1½ percent of GDP.
  - Current account deficits: from 28¾ to 3½ percent of GDP.
  - Public debt ratios: from 22 to 83 percent of GDP.
- Macroeconomic outlook (regional):
  - Non-oil GDP growth projected around 1½–2 percent in 2017, gradually picking up to around 4 percent by 2020.
  - Estimated output gap (using 2001–14 trend) projected to become increasingly negative over the next three years.
- Trade-offs and risks:
  - Adjustment will impose short-term costs (negative non-oil fiscal impulse); doing nothing would likely yield a more costly crisis.
  - Refinancing and foreign currency risks from issuance of Eurobonds should be carefully managed.

### Financial Sector Vulnerabilities and Supervision
- Banking sector stress:
  - Loan arrears: 15 percent of total loans on average in 2016 (from around 10 percent in 2014); deterioration concentrated in Chad, Equatorial Guinea, Gabon, Republic of Congo.
  - Banks’ liquidity and excess liquidity declined sharply; broad money down since end-2015.
  - Stress tests indicate increased vulnerabilities; solvency and liquidity may deteriorate further under macro risks.
- Supervision and safeguards:
  - BEAC to implement roll-over safeguards recommendations.
  - COBAC to strengthen banking supervision over the medium term and improve implementation of the supervisory framework.
  - COBAC actions: liquidate two banks in Gabon, conservatorship for a third; national authorities to propose resolutions for other insolvent banks.
  - Deposit insurance reform: revise FOGADAC rules in 2018 to align with international best practices.
- Targeted supervisory action plans (fall 2017 timeline):
  - (i) improve resolution of NPLs by commercial banks;
  - (ii) resolve banks in distress;
  - (iii) strengthen or revise prudential regulations (related party lending, provisioning, concentration of risks, governance, resolution);
  - (iv) review efficiency of corrective measures;
  - (v) upgrade onsite inspection program for all banks in the region.

### Box 1 — PREF-CEMAC: Overview, Pillars, and Financial Sector Implications
- PREF launched in 2016 to respond to oil and commodity price shock; contains "2.1 specific measures" organized around five pillars:
  - (i) Public finance policies: strengthen non-oil revenue, enhance quality of public spending, accelerate harmonized PFM directives.
  - (ii) Monetary and financial sector policies: stricter foreign exchange law implementation, elimination of accounts abroad by governments.
  - (iii) Structural reforms: activate Observatory on Business Environment, promote PPP, securitize domestic debt.
  - (iv) Regional integration: strengthen customs union, enhance cross-border transport infrastructure.
  - (v) International cooperation: enhanced coordination with IMF and other partners.
- Financial sector risks:
  - Adjustment may weigh on banks’ asset quality; repayments of government arrears to private suppliers would mitigate impacts.
  - Simplified stress-test: "an increase in loans in arrears by 5 percentage points would consume excess capital of almost one-fifth of the banks. This would come in addition to currently almost one-fifth of banks not respecting minimum capital requirements."
- Monitoring and oversight:
  - National Plans (PERs) to reflect reforms; PREF team to oversee consistency; Monitoring Committee (COPIL) to meet quarterly.

### Financing Needs, Projections, and Key Statistics (PREF / Box 1 Table)
- Regional current account deficit projected to decline "from 9.3 to 2.3 percent of GDP between 2016 and 2019."
- External financing needs (2017–20) for five CEMAC countries (excluding Equatorial Guinea): "CFAF 5.1 trillion (about US$8.4 billion)."
- IMF resources would cover "just below 30 percent" on average of these financing needs.
- Required access equivalent on average: "190 percent of quota."
- Other IFIs and creditors/donors would cover close to "55 percent" of aggregate financing needs.
- Reserves coverage of imports:
  - stabilize in 2017;
  - "3.2 months of imports by end-2019";
  - "3.9 months by 2021";
  - target considered appropriate for currency union: "5 months of imports" (PREF notes French Treasury guarantee as additional backing).
- Table (CEMAC: Financing Sources, 2017–20, Billions of CFAF):
  - 1. Financing gap: 2017 = 1,885; 2018 = 1,457; 2019 = 1,296; 2020 = 503; Total = 5,141
  - 2. IMF financing: 2017 = 514; 2018 = 396; 2019 = 375; 2020 = 152; Total = 1,437
  - 3. Budget support from other donors: 2017 = 1,155; 2018 = 858; 2019 = 711; 2020 = 163; Total = 2,887
  - 4. Other exceptional financing: 2017 = 216; 2018 = 203; 2019 = 211; 2020 = 188; Total = 818
  - Memorandum items:
    - IMF financing - Share of total financing: 2017 = 27; 2018 = 27; 2019 = 29; 2020 = 30; Total = 28
    - IMF financing - Percent of quota: 2017 = 68; 2018 = 52; 2019 = 50; 2020 = 20; Total = 190
  - Note: "Includes all CEMAC countries, except Equatorial Guinea. The scenario used for the Republic of Congo remains tentative."

### Macroeconomic Outlook and Key Projections (Selected Tables)
- GDP at constant prices (annual percent change):
  - 2014: 4.6; 2015: 1.6; 2016: -0.9; 2017 (Estim.): 0.7; 2018 (Proj.): 3.2; 2019 (Proj.): 2.8; 2020 (Proj.): 3.5; 2021 (Proj.): 3.8
- Oil prices (US dollars per barrel): 2014 = 96; 2015 = 51; 2016 = 43; 2017 (Estim.) = 55; 2018 (Proj.) = 55; 2019 (Proj.) = 54; 2020 (Proj.) = 54; 2021 (Proj.) = 54
- Current account, including grants (percent of GDP): 2014 = -3.9; 2015 = -12.2; 2016 = -9.3; 2017 (Proj.) = -5.1; 2018 (Proj.) = -2.6; 2019 (Proj.) = -2.3; 2020 (Proj.) = -0.9; 2021 (Proj.) = 0.3
- Gross official reserves (Millions of U.S. dollars): 2014 = 15,525; 2015 = 10,354; 2016 = 4,881; 2017 (Proj.) = 5,610; 2018 (Proj.) = 6,465; 2019 (Proj.) = 7,427; 2020 (Proj.) = 8,422; 2021 (Proj.) = 9,421
- Reserves in months of imports: 2014 = 5.9; 2015 = 4.9; 2016 = 2.3; 2017 (Proj.) = 2.7; 2018 (Proj.) = 3.0; 2019 (Proj.) = 3.2; 2020 (Proj.) = 3.6; 2021 (Proj.) = 3.9
- Total Public Debt (percent of GDP): 2014 = 28.6; 2015 = 38.8; 2016 = 46.5; 2017 (Proj.) = 46.7; 2018 (Proj.) = 45.6; 2019 (Proj.) = 44.9; 2020 (Proj.) = 42.5; 2021 (Proj.) = 40.0

### Reserves Adequacy and External Sustainability (Annex I)
- Reserve adequacy metrics (2016):
  - Reserves to broad money: 27 percent.
  - Reserves to short-term liabilities: 196 percent.
  - Reserve adequacy ratio: 89 percent (below the 100-150 percent range considered broadly adequate).
  - Prospective-imports metric: 2016 coverage well below the 5 months of imports considered appropriate for a resource-rich currency union.
- Medium-term projection: reserve coverage projected to recover gradually to 3.6 months of imports by 2020, conditional on fiscal tightening (about 7 percent of GDP primary fiscal tightening over 2016–20).

### Policy Risks, Implementation Challenges, and Staff Assessment
- Main downside risks:
  - Free-rider behavior by any CEMAC country could undermine regional adjustment; upcoming elections may weaken political will.
  - Exogenous shocks: new sharp decline in oil prices; sudden increase in interest rates; geopolitical issues; sharp decline of capital inflow; slower-than-expected recovery in investor confidence.
  - Capacity constraints: poor program implementation could lead to continued arrears and undermined market confidence.
- Staff assessment:
  - Combination of substantial fiscal adjustment, tighter regional monetary policy and liquidity management, strengthened financial supervision, and sustained structural reforms is necessary to avert reserve depletion, restore external sustainability, maintain the CFA franc peg, and set stage for renewed inclusive growth.
  - Regional Letter of Policy Support signed by BEAC Governor (also Chairman of COBAC) backs national adjustment plans supported by IMF programs.
- Financing and external partners:
  - IMF, World Bank, African Development Bank, France, and EU expected to provide support; debt restructuring necessary in some cases.

### BEAC and COBAC Specific Commitments, Instruments, and Timelines
- BEAC monetary policy and instruments:
  - CPM decision (March 22, 2017): raised policy rate by 50 bps to 2.95 percent.
  - Further stepwise increases to be considered in conjunction with other instruments if reserves deviate from expected path.
  - Modernize liquidity management and simplify instruments by "end-2017": primary refinancing instrument plus two permanent facilities (deposit and loan); primary refinancing at minimum rate equal to BEAC policy rate; amounts limited consistent with reserves targets.
- Statutory advances:
  - Ceilings frozen based on 2014 fiscal revenue (2008 for CAR).
  - Full elimination of statutory advances by "2027"; repayments to start in "2018 at the latest."
  - Exceptional advances consolidated into long-term loans repaid and eliminated within same timeframe.
- Refinancing ceilings:
  - Government securities of one country brought by all banks to BEAC for refinancing cannot exceed "15 percent of budget revenues" of that country.
  - CPM decision (May 22, 2017): reduce banks’ refinancing ceilings in countries with low or negative imputed reserves positions.
- Emergency Liquidity Assistance (ELA):
  - BEAC to put in place an ELA mechanism by end-2017 with Fund assistance; preliminary framework by June 2017.
  - ELA collateral: (i) credit claims not eligible for monetary policy operations and (ii) government securities of members having reached their refinancing limit.
  - ELA provided at a higher interest rate than monetary policy operations; triggers enhanced supervision and financing plans.
- Transparency, safeguards, and governance:
  - BEAC Board adopted legal reforms end-March 2017 to strengthen governance and internal controls; transition to IFRS planned with a time-bound calendar report by end of first semester 2017.
  - BEAC to produce dashboard of weekly and monthly indicators from June 2017 for IMF monitoring.
- Banking supervision and resolution:
  - COBAC to enforce risk-weighting of exposures to member countries; banks in breach to implement corrective actions "by September 2017."
  - COBAC actions taken in March 2017: liquidate two Gabonese banks; conservatorship for a third; further supervisory measures for Cameroonian banks and others.
  - By end-August 2017: COBAC to quantify direct and indirect risks related to government arrears.
  - By end-2018: COBAC to assess whether corrective measures suffice and to gradually implement risk-based and consolidated supervision.

### Monitoring, Data Sharing, and BEAC Dashboard (Selected Items and Timings)
- Weekly and periodic indicators to be provided to IMF; selected timing examples:
  - Overall BEAC balance sheet and level of regional foreign exchange reserves — The following Wednesday (weekly).
  - 10-day middle office report on regional reserves — Every 10 days.
  - Balance of government deposits at BEAC — Every 10 days.
  - Monthly table of daily liquidity injections and withdrawals — 10 days after the end of the month.
  - Monthly table of treasury bonds (BTA) and treasury bills (OAT) by country — 10 days after the end of the month.
  - BEAC balance sheet with breakdown by country — 20 days after the end of the month.
  - Monetary situation of the Zone at the end of the month with country-allocations — 30 days after the end of the month.
  - Monthly table of financial stability indicators of the Zone and of each member state — 30 days after the end of the month (to IMF's CEMAC team).
  - Customer deposits, outstanding loans, and outstanding doubtful loans at end of the month — 30 days after the end of the month.

*International Monetary Fund — Monitoring of Regional Developments and Policies (CEMAC) — Extracted content unit*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Context and Recent Developments
- The sharp decline in oil prices has profoundly impaired the region’s external and fiscal balances.
- Oil export proceeds and budget oil revenues "plummeted between 2014 and 2016."
- The oil revenue shock and accommodative fiscal policy, supported by expansionary regional monetary policies, contributed to:
  - a fall in international reserves to a near critical point.
  - widened fiscal deficits and a substantially wider current account deficit.
- International reserves reached the equivalent of 2.3 months of imports in December 2016 (US$4.9 billion from US$15.5 billion at end-2014).
- At end-April 2017 BEAC’s gross reserves stood at US$4.5 billion (2.1 months of imports).
- Between 2014 and 2016:
  - the regional primary deficit rose from 2.7 percent of GDP in 2014 to 5.7 percent in 2016.
  - public debt increased from 29 to 47 percent of GDP.
- Non-oil growth declined from 4½ percent in 2014 to about 1½ percent in 2015 and 2016; region-wide growth in 2016 was -1 percent.
- The current account deficit widened from 3.9 percent of GDP in 2014 to 9.3 percent in 2016.
- BEAC’s net foreign assets cumulative change from 2014 to 2016: -5,585 (billions of CFAF) with country breakdowns: Cameroon -341, Central African Republic -28, Chad -837, Congo, Republic of -2,208, Equatorial Guinea -1,580, Gabon -856.
- Loan arrears (LAs) rose to 15 percent of total loans on average in 2016 from around 10 percent in 2014.
- Banks’ liquidity declined sharply since end-2014; broad money declined since end-2015 and credit growth to the economy fell relative to earlier periods.

### Regional Strategy to Address the Crisis
- Strategy objectives:
  - restore regional and national external stability;
  - maintain the peg of the CFA franc at its current parity and accumulate necessary reserves to support it;
  - improve the business environment for private sector investment and growth;
  - strengthen and deepen the financial sector;
  - enhance regional institutional and operational frameworks to strengthen regional safeguards mechanisms.
- Country-level strategy components:
  - (i) a sizable fiscal adjustment to avert depletion of and start rebuilding reserve assets in the short term;
  - (ii) structural reforms to strengthen public financial management and enhance the business environment, and other country-specific steps to restore sustainable growth.
- Regional actions to support country efforts:
  - (iii) tighten monetary policy and liquidity management consistent with external stability;
  - (iv) strengthen the financial sector.
- The strategy assumes an unchanged exchange rate (peg to the euro, guaranteed by France) as the regional policy anchor.

### Regional Policy Commitments and Actions by BEAC/COBAC
- Measures taken or planned by BEAC include:
  - BEAC has started to tighten the monetary policy stance with a first increase in its policy rate.
  - BEAC will gradually eliminate its statutory advances to member countries.
  - BEAC will ensure implementation of strict limits aimed at restricting bank refinancing using government securities as collateral.
  - BEAC will modernize its liquidity management framework and simplify its monetary policy instruments to improve monetary policy transmission.
  - BEAC has taken important steps in implementing roll-over safeguards recommendations.
- COBAC commitments:
  - COBAC will take measures to strengthen banking supervision over the medium term and ensure better implementation of the existing supervisory framework.
- Policy coordination:
  - National and regional policies are designed to restore the sustainability of each member and, in turn, the sustainability of the common currency.

### Fiscal Adjustment, Monetary Policy, and Structural Reforms (Staff Recommendations/Program Design)
- Fiscal adjustment:
  - The sum of countries’ efforts would result in the regional primary fiscal deficit declining from 5.7 percent of GDP in 2016 to 1.6 percent in 2017 and turning into a surplus of 0.2 percent by 2019.
  - Initial adjustments will rest primarily on spending cuts (by 3 percentage points of GDP in 2017 on average), especially domestically financed capital expenditure.
  - Space will be made for preserving social protection programs and gradual repayment of arrears.
- Monetary policy and liquidity management:
  - Credit conditions need to remain tight to reduce external pressures from the non-government sector and stabilize capital flows.
  - Following its recent increase, further possible increases in BEAC’s policy rate would be considered if reserves deviate significantly from the expected path.
  - Possible changes in reserve requirement rates would be considered depending on overall bank liquidity.
  - BEAC will introduce an active liquidity management framework by end-2017 to keep banks’ excess liquidity low and stable.
- Structural reforms:
  - Pursue reforms to improve the business climate and diversify economies to provide a less volatile revenue base and more stable forex earnings.
  - The CEMAC Commission can promote PFM reforms at the national level, including implementation of regional directives for harmonized PFM systems.
  - Reforms to support broad financial sector development are critical to remove impediments to growth.
  - Progress will be guided by the CEMAC Economic and Financial Reform Program (Programme de Réformes Economiques et Financières de la CEMAC - PREF CEMAC).

### Program Coverage, Outlook, and Risks
- Summit and program engagement:
  - At the extraordinary summit of December 23, 2016, CEMAC Heads of State committed to strong policy adjustment and to start discussions with IMF staff on possible Fund-supported programs (Cameroon, Congo, Gabon, Equatorial Guinea) or recalibrations (CAR and Chad).
  - Negotiations concluded at staff level with Cameroon, Gabon, and Chad; under way with Equatorial Guinea and Republic of Congo; second review under the ECF arrangement with CAR well advanced.
- Heterogeneity across members:
  - Fiscal and external imbalances and debt levels vary widely across countries (overall fiscal balances in 2016 ranged from a deficit of 18 ¼ to a surplus of 1½ percent of GDP; current account deficits from 28¾ to 3½ percent of GDP; public debt ratios from 22 to 83 percent of GDP).
  - Country programs are designed to reflect these varying adjustment needs.
- Macroeconomic outlook:
  - Regional non-oil GDP growth is projected at around 1½–2 percent in 2017, well below the 5–6 percent average during 2001–14, and gradually picking up to around 4 percent by 2020.
  - The estimated output gap (using trend growth over 2001–14 as potential growth) is projected to become increasingly negative over the next three years.
- Trade-offs and risks:
  - Adjustment will have unavoidable short-term costs (negative non-oil fiscal impulse weighing on non-oil growth through lower consumption and investment).
  - However, doing nothing would likely result in a much more costly crisis.
  - Restoring confidence with strong and credible policies should gradually boost private investment and growth.
  - The refinancing and foreign currency risks from issuance of Eurobonds should be carefully managed.

### Financial Sector Vulnerabilities and Supervision
- Banking sector stress:
  - Loan arrears rose to 15 percent of total loans on average in 2016 (from around 10 percent in 2014).
  - Deterioration more significant in the most oil-dependent countries: Chad, Equatorial Guinea, Gabon, and Republic of Congo.
  - Banks’ liquidity and excess liquidity have declined sharply; broad money down since end-2015.
  - Stress tests indicate increased bank vulnerabilities; solvency and liquidity may deteriorate further given macroeconomic risks.
- Supervision and safeguards:
  - BEAC to implement roll-over safeguards recommendations.
  - COBAC to strengthen banking supervision over the medium term and improve implementation of the supervisory framework.

### Staff Assessment
- The combination of substantial fiscal adjustment at the country level, tighter regional monetary policy and liquidity management, strengthened financial sector supervision, and sustained structural reforms is necessary to:
  - avert depletion of reserves;
  - restore regional external sustainability;
  - maintain the CFA franc peg;
  - set the stage for renewed, more inclusive growth.
- The regional Letter of Policy Support, signed by the BEAC Governor (also Chairman of COBAC), backs national adjustment plans supported by IMF programs.

*IMF staff discussions held in Yaoundé and Libreville from February 21–March 3, 2017 and in Washington DC from April 20–23, 2017; report dated June 6, 2017.*

### Box 1. CEMAC’s Program of Economic and Financial Reforms plan (PREF-CEMAC)

### Box 1. CEMAC’s Program of Economic and Financial Reforms plan (PREF-CEMAC)

### PREF overview and objectives
- Launched in 2016 under the leadership of Republic of Congo’s president to respond to the shock from the abrupt decline in the price of oil and other commodities.
- The PREF covers a rich set of time bound priority measures organized in a detailed matrix to support structural transformation of the region and reduce dependency on oil.
- The plan consists of "2.1 specific measures" organized around five pillars.

### Five pillars and illustrative specific measures
- (i) Public finance policies
  - Strengthening non-oil revenue collection.
  - Enhancing quality of public spending.
  - Accelerate the implementation of CEMAC harmonized PFM directives.
- (ii) Monetary and financial sector policies to rebuild reserves and promote a stronger financial sector
  - Stricter implementation of the foreign exchange law by foreign companies.
  - Elimination of accounts abroad by governments.
- (iii) Structural reforms to improve the business climate and promote a more inclusive and diversified regional economy
  - Activation of the Observatory on the Business Environment.
  - Promotion of Private Public Partnership (PPP).
  - Securitization of domestic debt.
- (iv) Regional integration to deepen the domestic market
  - Strengthen and make effective the customs union.
  - Enhance cross-border transport infrastructures.
- (v) International cooperation to better engage with the IMF and other bilateral/multilateral partners
  - Enhanced coordination between countries and CEMAC Commission staff to ensure Fund-supported programs cover mutually reinforcing reform objectives, through regular meeting and exchange of information on program implementation.

### National Plans, oversight, and monitoring
- Each member country elaborated a national Plan of Economic Revival (PER) specifying concrete measures and reforms to be reflected in their budget laws (e.g., priority public infrastructure spending and PPP carry-overs).
- The PREF team oversees consistency between national PERs and the regional PREF.
- A Monitoring Committee (Comité de Pilotage—COPIL), with participation by the Minister of Economy of each CEMAC country, meets every quarter to monitor and report on progress.

### Financial sector risks and implications of adjustment
- 13. The adjustment may weigh on banks’ asset quality and growth as companies under contract with the government sector (e.g., construction) could face difficulties servicing their bank loans; repayments of government arrears to private suppliers would mitigate this impact.
- While most banks have capital buffers to withstand a further increase in NPLs, several banks might require new capital in such a scenario.
- Continuous monitoring by the regional supervisor (COBAC) and national monetary authorities is central to program success.
- The BEAC is planning to develop an emergency liquidity assistance (ELA) framework to assist solvent banks and ease temporary liquidity constraints and will assess how to support the development of the interbank market to funnel excessive liquidity of certain banks to others in deficit.
- Simplified stress-test finding: "an increase in loans in arrears by 5 percentage points would consume excess capital of almost one-fifth of the banks. This would come in addition to currently almost one-fifth of banks not respecting minimum capital requirements."

### Financing needs, projections, and key statistics
- Regional current account deficit projected to decline "from 9.3 to 2.3 percent of GDP between 2016 and 2019."
- External financing needs (2017–20) for five CEMAC countries (excluding Equatorial Guinea) are currently estimated at about "CFAF 5.1 trillion (about US$8.4 billion)."
- IMF resources would cover "just below 30 percent" on average of these financing needs.
- Given BOP need and envisaged adjustment programs, access equivalent on average to about "190 percent of quota" would be required.
- Other IFIs (World Bank and African Development Bank) and creditors/donors (France and EU) would cover close to "55 percent" of aggregate financing needs.
- Expected debt restructuring will help cover remaining financing needs in some countries.
- Reserves coverage of imports: stabilize in 2017, increase to "3.2 months of imports by end-2019" and to "3.9 months by 2021." This remains short of the level considered appropriate for a currency union of "5 months of imports," but the French Treasury’s unlimited guarantee for the convertibility of the CFA franc provides additional backing.
- Table: CEMAC: Financing Sources, 2017–20 (Billions of CFAF)
  - 1. Financing gap: 2017 = 1,885; 2018 = 1,457; 2019 = 1,296; 2020 = 503; Total = 5,141
  - 2. IMF financing: 2017 = 514; 2018 = 396; 2019 = 375; 2020 = 152; Total = 1,437
  - 3. Budget support from other donors: 2017 = 1,155; 2018 = 858; 2019 = 711; 2020 = 163; Total = 2,887
  - 4. Other exceptional financing: 2017 = 216; 2018 = 203; 2019 = 211; 2020 = 188; Total = 818
  - Memorandum items:
    - IMF financing - Share of total financing: 2017 = 27; 2018 = 27; 2019 = 29; 2020 = 30; Total = 28
    - IMF financing - Percent of quota: 2017 = 68; 2018 = 52; 2019 = 50; 2020 = 20; Total = 190
  - Note: "Includes all CEMAC countries, except Equatorial Guinea. The scenario used for the Republic of Congo remains tentative."

### Staff assessment on policies and required external financing
- 14. Staff view: Policies, including strong fiscal adjustments as the cornerstone, would provide a strong basis to restore external sustainability of the monetary union, but would still require large external financing to smooth the adjustment path.
- Combined adjustment in external current account deficit and exceptional financing would contribute to reserve stabilization and gradual increase, with larger increases if strengthened policy stance is maintained beyond 2019.

### Main downside risks to program success
- Risk of free-rider behavior: even one CEMAC country not pursuing appropriate adjustment policies could negatively impact the success of Fund-supported programs; upcoming elections in certain countries may undermine political will. Staff views policy measures in the BEAC policy support letter as minimizing these risks, including commitments by the BEAC not to extend new gross credit to governments and to implement strict limits on bank refinancing.
- Exogenous shocks or more negative macroeconomic outlook: main risk is a new sharp decline in oil prices; other risks include a sudden increase in interest rates, geopolitical problems, sharp decline of capital inflow, or slower-than-expected recovery in investor confidence that could require additional adjustment and financing.
- Poor program implementation due to capacity constraints or lack of support: sharp fiscal adjustment requires fast-tracking PFM reforms and increasing non-oil revenue collection; insufficient capacity may lead to continued arrears and undermined market confidence. Sustained capacity building in PFM and revenue administration with IMF technical assistance is recommended.

### BEAC and COBAC common policies to support reform programs
- BEAC and COBAC concurred with staff on priority policies needed to restore external stability and recognized risks of free-riders; intend to tailor monetary policy stance regionally and implement measures to mitigate free-rider risk.
- COBAC committed to strengthen banking supervision and enhance prudential regulations to mitigate risks of banking-sector deterioration.

BEAC specific actions and implementation timeline
- Tighten policy stance: CPM at its March 22, 2017 meeting "raised its policy rate by 50 bps (to 2.95 percent)." Further stepwise increases will be considered in conjunction with adjustments in other monetary policy instruments (including reserve requirements) if international reserves deviate substantially from expected path.
- Develop emergency liquidity assistance (ELA) framework to assist solvent banks and ease temporary liquidity constraints.
- Gradual elimination of statutory advances to member countries: ceilings frozen and BEAC aims to reach agreement with each member country on a schedule for gradual reduction and repayment of balances until full elimination of statutory advances by "2027." Repayments will be reflected in country programs after agreement expected by "end-2017." Exceptional advances consolidated into long-term loans will be repaid and eliminated within the same timeframe.
- Continue to implement ceilings on government securities used as collateral for bank refinancing; CPM decision on "May 22, 2017" to reduce bank refinancing ceilings in countries with low or negative imputed reserves positions.
- Modernize liquidity management and simplify monetary policy instruments by "end-2017": new framework to include a primary refinancing instrument and two permanent facilities (deposit and loan); primary refinancing provided competitively with minimum rate equal to BEAC’s policy rate and aggregated amounts limited to targets consistent with regional international reserves. The new approach will be based on autonomous liquidity factors rather than monetary programming and will be implemented with IMF technical assistance.
- Encourage repatriation of foreign currency deposits by governments and ensure greater transparency and compliance in application of foreign exchange regulations; BEAC requested copies of agreements between states and extractive operators to monitor compliance.

### Box 2 summary — Safeguards to support fiscal discipline
- Elimination of statutory advances: BEAC committed to eliminate statutory advances by "2027"; ceilings on advances frozen based on 2014 fiscal revenue (2008 for the CAR); BEAC will not extend new credit to five countries that have reached ceilings; agreement on schedule for gradual reduction and repayment to start in "2018 at the latest."
- Reduction of refinancing ceilings: BEAC charter provisions and strict compliance with prudential ceilings—government securities of one country brought by all banks to BEAC for refinancing cannot exceed "15 percent of budget revenues" of that country; BEAC reduced banks’ refinancing ceilings in countries with low imputed reserves and will explore additional options (e.g., large discounts at refinancing operations for non-complying governments).
- Implementation of regulatory compliance by commercial banks: COBAC to enforce risk-weighting of exposures to CEMAC member countries; banks in breach (e.g., holding sovereign bonds of countries running arrears or with low reserves) will be required "by September 2017" to implement corrective actions per CEMAC and COBAC regulations.
- Enhanced regional surveillance framework: revamped in 2016 and applied from 2017 outcomes onward; comprises four multilateral surveillance criteria—floor on overall budget balance augmented by oil revenue savings, ceilings on average annual inflation, total public and publicly-guaranteed debt, and arrears accumulation; deviations addressed through adoption and implementation of an adjustment program requested by the regional ministerial council.

*Box 1. CEMAC’s Program of Economic and Financial Reforms plan (PREF-CEMAC), IMF staff report text.*

### 19.      The BEAC intends to enhance the framework underpinning its emergency liquidity and

### 19.      The BEAC intends to enhance the framework underpinning its emergency liquidity and 

### Emergency Liquidity Assistance (ELA) and foreign exchange law
- The BEAC decided to fast-track work to put in place an ELA mechanism by the end of 2017, with assistance from Fund staff.
- A preliminary framework with appropriate conditionality to protect BEAC’s balance sheet should be in place by June 2017.
- The BEAC should continue its effort to finalize the full ELA framework soon after.

### Safeguards, governance, and financial reporting
- The BEAC has taken important steps to finalize the implementation of remaining priority recommendations as part of the IMF safeguards “rolling measures”.
- The BEAC Board of Directors adopted legal reforms to strengthen governance and is finalizing amendments to the BEAC’s Charter to:
  - reinforce collegiality in the decision-making process;
  - facilitate checks and balances at the corporate management level; and
  - strengthen internal controls.
- Preparations are under way for the BEAC’s full transition to the international financial reporting standards (IFRS) to strengthen financial transparency.

### Problem banks, COBAC actions, and deposit insurance
- Several small and non-systemic banks are in difficulty.
- COBAC decisions and planned actions:
  - In March 2017 COBAC decided to liquidate two banks in Gabon and put a third one under conservatorship.
  - COBAC will call on national monetary authorities to make definitive proposals to resolve other insolvent banks, either with restructuring plans or decisions for orderly liquidation.
  - COBAC will assess the opportunity to amend the regulation that commands the resolution of banks in distress by 2018 (in particular to facilitate the orderly resolution of non-systemic banks).
- Deposit insurance reform:
  - In 2018 the rules governing the functioning of the deposit insurance (Fonds de Garantie des Dépôts en Afrique Centrale (FOGADAC)) will be revised, to align them with international best practices.

### Strengthening banking supervision and targeted action plans
- Key supervisory implementation challenges include:
  - connected lending;
  - risk concentration;
  - proper rules for members of the board of a bank; and
  - provisioning of nonperforming loans.
- COBAC commitments and timeline:
  - COBAC is committed to strictly implement prudential norms in these areas.
  - From 2018, supervision would gradually be conducted based on risk and on a consolidated basis.
  - COBAC will assess by end-2018 whether its set of corrective measures is sufficient to ensure strict enforcement of prudential regulations.
- Fund staff assistance and action plans (timeline: fall of 2017):
  - Staff will assist COBAC in designing concrete measures to support financial stability and strengthening the financial sector in the CEMAC.
  - Action plans to include measures to:
    - (i) improve the resolution of NPLs by commercial banks;
    - (ii) resolve banks in distress;
    - (iii) strengthen application of or revise key prudential regulations (related party lending, provisioning, concentration of risks, governance, resolution of distressed banks);
    - (iv) review the efficiency of corrective measures; and
    - (v) upgrade the onsite inspection program of all banks in the region.
  - Staff will assist the authorities with developing a package of targeted measures as part of these action plans that will be ready in the fall of 2017, to be reflected in an updated letter of policy support.

### Monitoring, data sharing, and Fund engagement
- BEAC and COBAC agreed to very close and continuous engagement with Fund staff to monitor developments and discuss possible need for adjustments in regional policies.
- Authorities started to compile and share with staff at higher frequency various monetary and banking sector indicators and are committed to expand the coverage of these indicators, in particular as seen through the BEAC balance sheet.
- Regular engagement:
  - Regular exchanges with staff and regular visits by staff (quarterly if needed) to review developments and discuss policy stance.
  - The Fund would be in a position to assess on an ongoing basis the implementation of the assurances provided in the attached letter of policy support.
  - A favorable assessment of the implementation record would be needed to allow individual program reviews to be successfully completed.
  - Implementation of the assurances regarding ceilings on statutory advances and maintaining firm control over the extension of credit to banks would be of particular importance.
  - The letter of policy support would be updated semi-annually to inform the Executive Board’s consideration of the reviews under the individual IMF-supported programs.
- The next consultation on CEMAC common policies is tentatively planned for the fall of 2017.

### Staff assessment — macroeconomic shocks, risks, and financing needs
- Shocks and impacts:
  - CEMAC’s macroeconomic stability has been seriously undermined by two severe shocks since mid-2014: a lasting oil-price shock and the security crisis in the lake Chad region.
  - Insufficient policy response contributed to bring regional international reserves down to a critical point.
  - Any further deterioration of the economic context could jeopardize external sustainability and have lasting consequences for economic and social development of the region, affecting the most vulnerable parts of the population.
- Policy needs:
  - Bold and coordinated policies at national and regional levels are needed to avert reserves depletion and to support the monetary arrangement.
  - Possible Fund-supported programs are part of a regional strategy based on a significant fiscal adjustment, a return to sound monetary and financial sector policies, and implementation of ambitious structural reforms to improve regional business climate and diversify the economies.
- Financing and external partners:
  - The envisaged Fund-supported programs and regional policies will provide the basis to restore external sustainability but will require sufficient financing to smooth the adjustment path.
  - In addition to IMF financial support, program support is expected to be provided by the World Bank, the African Development Bank, France and the EU.
  - Debt restructuring will be necessary in some cases to cover the remaining financing needs.
  - Combined strong adjustment and adequate financing will be essential to bring regional reserves back to an adequate level.
- Risks and BEAC role:
  - A main risk is possible free-riding behavior of a CEMAC country lacking commitment to the adjustment path needed to restore external stability.
  - Past insufficient adjustment efforts by individual member countries were largely accommodated by lax monetary policy and weak enforcement of regional safeguards.
  - BEAC’s commitment not to accommodate slippage and to implement incentives for increased market discipline should help mitigate this risk.
  - Peer pressure among CEMAC countries, based on enhanced economic and financial data dissemination through regional institutions, will also play an important role.

### Monetary policy stance and operational guidance
- Policy priorities:
  - BEAC’s monetary policy will need to support achieving the targeted foreign reserves path.
  - The decision to reverse monetary financing of governments by phasing out BEAC’s statutory advances to member countries is an important first step.
  - It will need to be complemented by limiting banks’ refinancing to appropriate levels, using a combination of tools, including gradually higher policy rate and strict calibration of its main open market operations.
- Trade-offs and monitoring:
  - BEAC will need to closely monitor the effectiveness of monetary policy in terms of reserves accumulation against its potential costs.
  - In using its various monetary policy tools, BEAC will need to consider financial sector conditions to prevent any further negative effects on the banking sector.

### Supervisory enforcement and treatment of NPLs
- Progress achieved in BEAC safeguards reform is welcome and should ensure adequate implementation of regional policies.
- COBAC actions needed:
  - Reinforce the implementation of the most critical prudential rules (including connected lending and concentration risk).
  - Assess the effectiveness of (and if necessary review) its corrective measures to reduce the number of infractions of banks.
  - Play an active role, in coordination with national authorities, to resolve the situation of the non-systemic banks in distress.
  - Take a more active stance for the treatment of NPLs, either by identifying the key elements that hinder banks to treat their NPLs or by reinforcing credit risk supervision.

*International Monetary Fund — Monitoring of Regional Developments and Policies (CEMAC) — Extracted content unit*

### 32.      Staff welcomes CEMAC regional authorities’ commitment to continue a very close dialogue

### 32.      Staff welcomes CEMAC regional authorities’ commitment to continue a very close dialogue

### Overview and context
- Staff welcomes CEMAC regional authorities’ commitment to continue a very close dialogue to review developments and discuss the stance of regional policies needed to support achieving CEMAC countries’ programs objectives.
- Growth has slowed down markedly in the CEMAC over last years and has moved into negative territory for the first time in decades, largely due to a sharp decline in oil prices and uncoordinated initial cuts in public spending by some members.
- Sources cited: AFR Regional Economic Outlook, February 2016; CEMAC authorities; and IMF staff estimates.

### Growth, output composition, and outlook
- GDP at constant prices (annual percent change):
  - 2014: 4.6
  - 2015: 1.6
  - 2016: -0.9
  - 2017 (Estim.): 0.7
  - 2018 (Proj.): 3.2
  - 2019 (Proj.): 2.8
  - 2020 (Proj.): 3.5
  - 2021 (Proj.): 3.8
- Oil GDP (annual percent change):
  - 2016: -8.2
  - 2017 (Estim.): -1.6
  - 2018 (Proj.): 7.9
  - 2019 (Proj.): -1.4
  - 2020 (Proj.): 0.2
  - 2021 (Proj.): 0.3
- Non-oil GDP (annual percent change):
  - 2014: 4.4
  - 2015: 1.5
  - 2016: 1.3
  - 2017 (Estim.): 1.8
  - 2018 (Proj.): 2.7
  - 2019 (Proj.): 3.5
  - 2020 (Proj.): 4.1
  - 2021 (Proj.): 4.3
- Non-oil real GDP growth: Non-oil growth has been severely impacted due to spending cuts and large budget arrears, but is set to gradually pick up over the medium term.

### Oil prices and external sector
- Oil prices (US dollars per barrel):
  - 2014: 96
  - 2015: 51
  - 2016: 43
  - 2017 (Estim.): 55
  - 2018 (Proj.): 55
  - 2019 (Proj.): 54
  - 2020 (Proj.): 54
  - 2021 (Proj.): 54
- Exports of goods and nonfactor services (percent of GDP):
  - 2014: 44.8
  - 2015: 35.8
  - 2016: 31.3
  - 2017 (Estim.): 36.4
  - 2018 (Proj.): 37.7
  - 2019 (Proj.): 36.8
  - 2020 (Proj.): 38.9
  - 2021 (Proj.): 38.9
- Current account, including grants (percent of GDP):
  - 2014: -3.9
  - 2015: -12.2
  - 2016: -9.3
  - 2017 (Proj.): -5.1
  - 2018 (Proj.): -2.6
  - 2019 (Proj.): -2.3
  - 2020 (Proj.): -0.9
  - 2021 (Proj.): 0.3
- Balance on goods and nonfactor services (percent of GDP):
  - 2014: 3.1
  - 2015: -7.0
  - 2016: -4.0
  - 2017 (Proj.): 0.5
  - 2018 (Proj.): 3.6
  - 2019 (Proj.): 3.2
  - 2020 (Proj.): 5.4
  - 2021 (Proj.): 6.5

### Fiscal developments and public debt
- Total revenue, excluding grants (percent of GDP):
  - 2014: 24.0
  - 2015: 20.2
  - 2016: 16.7
  - 2017 (Estim.): 17.5
  - 2018 (Proj.): 18.0
  - 2019 (Proj.): 17.9
  - 2020 (Proj.): 18.0
  - 2021 (Proj.): 18.2
- Government expenditure (percent of GDP):
  - 2014: 27.9
  - 2015: 27.8
  - 2016: 24.3
  - 2017 (Estim.): 21.4
  - 2018 (Proj.): 20.3
  - 2019 (Proj.): 19.9
  - 2020 (Proj.): 19.3
  - 2021 (Proj.): 18.8
- Primary fiscal basic balance (excluding grants and foreign-financed investment and interest payments) (percent of GDP):
  - 2014: 2
  - 2015: -0.4
  - 2016: -4.6
  - 2017 (Estim.): -4.1
  - 2018 (Proj.): 0.2
  - 2019 (Proj.): 1.7
  - 2020 (Proj.): 2.1
  - 2021 (Proj.): 2.4
- Overall fiscal balance, excluding grants (percent of GDP):
  - 2014: -4.0
  - 2015: -7.7
  - 2016: -7.8
  - 2017 (Estim.): -4.0
  - 2018 (Proj.): -2.7
  - 2019 (Proj.): -2.2
  - 2020 (Proj.): -1.6
  - 2021 (Proj.): -0.6
- Overall fiscal deficit has widened due to the large terms of trade shock pushing the current account deficit to a level not consistent with the peg arrangement.
- Total Public Debt (percent of GDP):
  - 2014: 28.6
  - 2015: 38.8
  - 2016: 46.5
  - 2017 (Proj.): 46.7
  - 2018 (Proj.): 45.6
  - 2019 (Proj.): 44.9
  - 2020 (Proj.): 42.5
  - 2021 (Proj.): 40.0
- Non-oil overall fiscal balance, excluding grants (percent of non-oil GDP):
  - 2014: -24.6
  - 2015: -19.4
  - 2016: -15.3
  - 2017 (Proj.): -11.7
  - 2018 (Proj.): -10.0
  - 2019 (Proj.): -8.7
  - 2020 (Proj.): -7.8
  - 2021 (Proj.): -6.3

### Reserves, financing, and monetary policy
- Gross official reserves (end of period):
  - Millions of U.S. dollars:
    - 2014: 15,525
    - 2015: 10,354
    - 2016: 4,881
    - 2017 (Proj.): 5,610
    - 2018 (Proj.): 6,465
    - 2019 (Proj.): 7,427
    - 2020 (Proj.): 8,422
    - 2021 (Proj.): 9,421
  - Months of imports of goods and services (less intra regional imports):
    - 2014: 5.9
    - 2015: 4.9
    - 2016: 2.3
    - 2017 (Proj.): 2.7
    - 2018 (Proj.): 3.0
    - 2019 (Proj.): 3.2
    - 2020 (Proj.): 3.6
    - 2021 (Proj.): 3.9
- With the collapse of oil restricting fiscal space, countries have resorted in large central bank financing, close to statutory maximum ceilings.
- The accommodative monetary policy may have contributed to postpone the needed adjustment but has also put downward pressure on foreign exchange.
- At current policies, international reserves are on the path of fast depletion, calling for bold and coordinated adjustment supported by external financing.
- CEMAC: Statutory Advances, March 31, 2017 (CFAF billions): chart indicates statutory advances ceilings, use of statutory advances, and financing available (values shown in figures; details in tables).

### Balance of payments and financing gaps
- Balance on current account (CFAF billions, Table 2a):
  - 2014: -1,964
  - 2015: -5,490
  - 2016: -4,049
  - 2017 (Proj.): -2,328
  - 2018 (Proj.): -1,254
  - 2019 (Proj.): -1,126
  - 2020 (Proj.): -490
  - 2021 (Proj.): 154
- Overall Balance (CFAF billions):
  - 2014: -1,594
  - 2015: -3,396
  - 2016: -3,919
  - 2017 (Proj.): -1,705
  - 2018 (Proj.): -1,092
  - 2019 (Proj.): -822
  - 2020 (Proj.): 824
  - 2021 (Proj.): 23
- Reserve assets (accumulation -) financing (CFAF billions):
  - 2014: 1,440
  - 2015: 3,057
  - 2016: 3,487
  - 2017 (Proj.): -450
  - 2018 (Proj.): -530
  - 2019 (Proj.): -596
  - 2020 (Proj.): -616
  - 2021 (Proj.): -620
- Financing gap (CFAF billions):
  - 2014: 154
  - 2015: 340
  - 2016: 431
  - 2017 (Proj.): 2,155
  - 2018 (Proj.): 1,622
  - 2019 (Proj.): 1,418
  - 2020 (Proj.): 534
  - 2021 (Proj.): 197

### Financial sector indicators
- Regulatory capital to risk-weighted assets:
  - 2010: 14.8
  - 2011: 11.2
  - 2012: 12.4
  - 2013: 13.0
  - 2014: 13.7
  - 2015: 14.0
  - 2016: 13.4
  - 2017 (Feb): 13.8
- Non-performing loans (gross) to total loans (gross):
  - 2010: 6.9
  - 2011: 6.8
  - 2012: 6.4
  - 2013: 8.3
  - 2014: 9.1
  - 2015: 9.6
  - 2016: 11.9
  - 2017 (Feb): 11.8
- Liquidity: Ratio of liquid assets to short-term liabilities:
  - 2010: 188.6
  - 2011: 165.2
  - 2012: 182.5
  - 2013: 150.8
  - 2014: 156.3
  - 2015: 151.9
  - 2016: 141.3
  - 2017 (Feb): 135.2

### Country composition and oil dependence
- CEMAC: Nominal GDP, 2016 (national shares):
  - Cameroon: 40%
  - Central African Republic: 2%
  - Chad: 14%
  - Congo: 11%
  - Equatorial Guinea: 13%
  - Gabon: 19%
- CEMAC: Oil sector indicators (selected, percent of each country's nominal GDP or fiscal revenues):
  - CEMAC nominal oil GDP share (percent of CEMAC's nominal GDP):
    - 2014: 29.1
    - 2015: 20.9
    - 2016: 17.4
    - 2017 (Proj.): 19.5
    - 2018 (Proj.): 19.5
    - 2019 (Proj.): 18.5
    - 2020 (Proj.): 17.9
    - 2021 (Proj.): 17.7
  - Fiscal oil revenue (percent of each country's total fiscal revenues; CEMAC aggregate):
    - 2014: 55.1
    - 2015: 38.5
    - 2016: 29.8
    - 2017 (Proj.): 30.7
    - 2018 (Proj.): 29.8
    - 2019 (Proj.): 26.8
    - 2020 (Proj.): 26.6
    - 2021 (Proj.): 25.3
- Oil exports (percent of each country's total exports; CEMAC aggregate):
  - 2014: 81.6
  - 2015: 73.2
  - 2016: 68.9
  - 2017 (Proj.): 71.5
  - 2018 (Proj.): 71.9
  - 2019 (Proj.): 69.6
  - 2020 (Proj.): 66.0
  - 2021 (Proj.): 63.8

### Key messages and policy implications (as presented)
- The sharp decline in oil prices combined with insufficient fiscal adjustment led to a sharp widening of the deficit.
- As a result, the external balance for the region has worsened contributing to a quasi-depletion of the pooled international reserves.
- With the collapse of oil restricting fiscal space, countries have resorted in large central bank financing, close to statutory maximum ceilings.
- The accommodative monetary policy may have contributed to postpone the needed adjustment but has also put downward pressure on foreign exchange.
- At current policies, international reserves are on the path of fast depletion, calling for bold and coordinated adjustment supported by external financing.

*Source: IMF staff compilations; CEMAC authorities; AFR Regional Economic Outlook, February 2016; IMF staff estimates and projections.*

### Annex I. CEMAC: External Sustainability Assessment

### Annex I. CEMAC: External Sustainability Assessment

### A. Recent Developments in External Accounts
- Current account evolution:
  - 2014: current account at 3.9 percent of GDP.
  - 2015: current account widened to an estimated 12.2 percent of GDP.
  - 2016: current account declined to 9.3 percent of GDP (estimated).
- Drivers of deterioration:
  - Sharp drop in international oil prices from mid-2014 reduced oil export receipts.
  - Expansionary fiscal policies and large infrastructure spending contributed to worsening external positions.
  - Primary fiscal deficit increased to 6.4 percent of GDP in 2015 and remained high at 5.7 percent of GDP in 2016.
  - High import content of investment projects amplified current account deterioration.
  - Cross-country disparities: Republic of Congo current account deficit at 28 percent of GDP (largest); Cameroon deficit less than 4 percent of GDP.
- Medium-term outlook and assumptions:
  - Current account deficit projected to return below the pre-2015 level by 2018.
  - Projection predicated on a modest recovery in international oil prices and region-wide fiscal consolidation aiming to bring the region’s overall fiscal balance to about 1 percent of GDP by 2019 (down from 6.9 percent of GDP in 2016).
- External financing composition:
  - Foreign direct investment (FDI) averaged 5 percent of GDP in the last decade and is expected to remain close to this level in the medium term.
  - Official aid projected to average 1 percent of GDP in the medium term (up from 0.7 percent in 2005–15).
  - Portfolio investment on average contributed negatively (-0.3 percent of GDP).
  - Overall external financings fell short of financing needs in 2015–16, leading to reserve depletion.

### B. Reserves Adequacy
- Reserve levels and coverage:
  - Regional official reserves fell from 4.9 months of prospective extra-regional imports at end-2015 to 2.3 months at end-2016.
- Reserve adequacy metrics (2016):
  - Reserves to broad money: 27 percent.
  - Reserves to short-term liabilities: 196 percent.
  - Reserve adequacy ratio: 89 percent (below the 100-150 percent range considered broadly adequate for precautionary purposes).
  - Prospective-imports metric: 2016 coverage well below the 5 months of imports considered appropriate for a resource-rich currency union.
  - Cost-benefit analysis indicates optimal reserves between 5 and 12 months of imports (depending on interest rate differential), implying current reserves are below the optimal range.
  - Note: French Treasury’s unlimited guarantee for CFA Franc convertibility may imply a lower optimal reserve level for CEMAC.
- Medium-term projections and policy implications:
  - Reserve coverage projected to recover gradually to 3.6 months of imports by 2020, aided by fiscal tightening primarily via unwinding public investment spending.
  - Projected adjustment would involve a significant tightening in the primary fiscal balance of about 7 percent of GDP over 2016-20.
  - Even with projected recovery to 3.6 months, medium-term reserve coverage would remain somewhat lower than what is deemed adequate for a resource-rich currency union, leaving the region vulnerable to adverse external shocks.

### C. Price Competitiveness
- REER and NEER developments:
  - REER remained broadly unchanged in 2016, having appreciated by only 1.7 percent.
  - NEER appreciation (CFA franc vis-à-vis the US dollar and other currencies) partly offset by negative inflation differential vis-à-vis trading partners.
- Country-level divergences in 2016:
  - Chad: real depreciation.
  - Gabon, Cameroon, Equatorial Guinea: relatively stable REER.
  - Central African Republic: sharp real appreciation.
- Model-based assessments:
  - Some model-based and other assessments indicate a moderate overvaluation by up to 10 ½ percent (see Box 1).

### D. Structural Competitiveness
- Doing Business and governance findings:
  - World Bank “Doing Business Indicators” show large scope for improvement across CEMAC countries.
  - CEMAC countries lag behind WAEMU peers and more broadly in sub-Saharan Africa, though marginally better than SSA oil exporters.
  - Change in Doing Business ranking (2005–2017): Cameroon and Chad marginally improved; CAR and Equatorial Guinea stagnated; Congo and Gabon’s rankings fell noticeably.
  - Most pronounced impediments: starting a business, getting electricity, enforcing contracts; additionally, inadequate infrastructure and unreliable energy supply; cumbersome procedures for paying taxes and registering properties.
  - Governance indicators worsened over the last 15 years; CEMAC countries trail peers on World Bank “Governance Indicators” even after accounting for income per capita.

### Box 1 — Model-based Current Account and REER Assessments
- Methods applied and key numeric findings (2016):
  - EBA-Lite Current Account (CA) model: indicates a 9 percent overvaluation of the REER in 2016.
  - EBA-Lite Index Real Effective Exchange Rate (IREER): indicates a 2016 REER close to equilibrium (0.4 overvaluation).
  - Bems and Carvalho’s real annuity method (accounts for natural resource windfalls): points to an overvaluation of 7.3 to 10.6 percent in 2016 (trade elasticity assumptions noted).
  - Araujo et al. model (accounts for natural resource revenue, investment needs, real and financial frictions): indicates a 1.8–3 percent REER overvaluation in 2016, depending on cost overrun assumptions in the model (60 percent and 40 percent).
- Trade elasticity and cost overrun notes:
  - Bems and Carvalho, and Araujo et al. results referenced using a 0.4 trade elasticity baseline.
  - Alternative calculations based on 0.6 trade elasticity are noted.
- Overall interpretation:
  - Taking into account CEMAC-specific factors (monetary union and French Treasury guarantee), results point to an overall moderate REER overvaluation, conditional on the current account deficit narrowing as expected in the medium term.

### E. Policy Support and Authorities’ Position (BEAC and COBAC Letter of Policy Support)
- Context and timing:
  - Discussions between IMF and CEMAC Institutions occurred from February 20 to March 3, 2017 in Yaoundé and Libreville.
  - CEMAC Heads of State, at an extraordinary summit in December 2016, decided to restore macroeconomic stability and preserve the exchange rate regime.
- Key policy commitments and assessments:
  - Recognition that the region faces a serious crisis due to falling oil prices, security crises, and insufficient adjustment efforts; BEAC foreign reserves declined significantly over the last two years.
  - Statement that only ambitious adjustment by CEMAC governments and appropriately tight monetary policy can avoid a regional balance of payments crisis.
  - Heads of State committed to pursuing strong adjustment programs to:
    - Maintain the exchange rate peg.
    - Restore national fiscal positions.
    - Contribute to rebuilding BEAC’s external reserve position.
    - Preserve adequate social protection and promote economic development.
  - Agreement that each member state would seek IMF assistance to support adjustment efforts.

*Source: Annex I. CEMAC: External Sustainability Assessment (IMF country report content).*

### 3.      Against this background, the BEAC and COBAC commit to supporting the recovery and

### cr17176 - 3.      Against this background, the BEAC and COBAC commit to supporting the recovery and

### Regional commitment and objectives
- BEAC and COBAC commit to supporting the recovery and reform efforts of all CEMAC countries through appropriate monetary and banking policies in their core areas of responsibility while facilitating coordination of policy actions across countries.
- Priority commitment: support rebuilding regional international reserves to levels consistent with providing strong backing for the current exchange rate regime.
- BEAC and COBAC will act vigorously, cooperating with national governments as needed, to help maintain financial sector stability in member countries.

### International reserves targets and path
- End-2016: BEAC foreign reserves Euros 4.6 billion (2.3 months of projected imports of goods and services).
- End-2017 (expected if national programs implemented and external support provided): Euros 5.3 billion (2.7 months of import coverage).
- Stabilization scenario: reserves anticipated to stabilize at Euros 4.5 billion by end-June 2017, contingent on fiscal plans materializing and appropriate monetary policy.
- 2018–19 intention: continue accumulating reserves, reaching Euros 7.0 billion (3.2 months of import cover) by end-2019.

### Monetary policy stance and instruments
- Recent expansionary policies contributed to significant decline in reserves; continuation could jeopardize the fixed exchange rate of the F. CFA.
- CPM action: raised BEAC policy rate by 50 bps to 2.95% at meeting of March 22, 2017.
- Further measures: stepwise increases in the policy rate and adjustments in other instruments (including reserves requirements) if international reserves trend diverges substantially from target.
- Governance of responses: closer monitoring, extraordinary CPM meetings between regular quarterly meetings for rapid policy responses.

### Statutory advances and government financing
- Objective: eliminate BEAC statutory advances to member states by 2027 at the latest.
- Ceilings frozen based on 2014 fiscal revenue (2008 for the CAR) following December 2016 Heads of State decision.
- CPM instruction (March 2017): BEAC Government to agree with each member country on schedule for gradual reduction in statutory advances ceilings and repayment starting in 2018 at the latest, until full elimination by 2027.
- Exceptional advances (also frozen) to be repaid and eliminated within same timeframe.
- Reform to be formalized through suppression of overdraft facilities in the BEAC charter.
- Complementary measure: develop regional government securities market to provide alternative domestic financing; BEAC will seek technical assistance to develop options for improving the regional bond market.

### Reform of liquidity management and market development
- Transition from monetary programming to calibrating monetary policy operations based on autonomous liquidity factors forecasts by end-December 2017, with IMF technical assistance.
- By October 2017: analyze obstacles to development of the interbank market and propose an action plan for 2018 (examples: strengthen legal framework for repurchase agreements, reduce transaction costs, expand publication of financial information for credit institutions).
- Simplified monetary policy instruments: primary refinancing instrument plus two permanent facilities (deposit and loan).
  - Primary refinancing: provided on competitive basis with minimum rate equal to BEAC policy rate; aggregate amounts limited to be consistent with regional reserves targets.
  - Corridor between permanent facilities to be sufficiently broad to encourage money market development and price discovery.
  - New standardized methods for calculating required reserves on average to allow better liquidity management by banks.

### Emergency liquidity assistance (ELA)
- BEAC to define ELA framework by end-December 2017 with IMF technical assistance.
- ELA purpose: help solvent banks with liquidity issues, mindful of monetary tightening and members’ recovery plans.
- ELA collateral and conditions:
  - Provided against (i) credit claims not eligible for monetary policy operations and (ii) government securities of members having reached their refinancing limit.
  - ELA provided at a higher interest rate than the one for monetary policy operation.
  - ELA request triggers enhanced control of banks’ financing needs (financing plan), enhanced supervision, and specific supervisory measures until ELA repaid.

### Financial information and registers
- Upgrade credit register (“la centrale des risques”) by December 2018 with new IT platform; expand information to cover credit history, current loans, and microfinance institutions.
- Establishment of the register of balance sheets to be finalized before December 2017; will include financial statements of main CEMAC companies.
- Foundations for creation of private credit bureau: new credit contracts from July 2017 to include borrower authorization for credit institutions to transfer credit information to credit bureau.

### Exchange regulations and repatriation of foreign exchange earnings
- BEAC will seek increased transparency in application of existing foreign exchange regulations and repatriation rules.
- Specific focus: conventions between certain states and extractive industry operators that may grant exemptions on repatriation of export revenues.
- May 2017: BEAC sent requests to obtain copies of these conventions, including information on compliance with exchange regulations.
- Based on received information, BEAC will require resident operators to repatriate assets held overseas and provide documentation of compliance.
- BEAC will encourage governments to repatriate foreign currency deposits.

### Safeguard measures and transparency
- BEAC finalizing implementation of remaining priority recommendations as part of IMF safeguards “rolling measures”.
- End-March 2017: BEAC Board adopted legal reforms, with CEMAC Ministerial Committee approval, amending BEAC’s Charter focusing on governance provisions to facilitate checks and balances and strengthen internal controls.
- Preparations underway for BEAC’s full transition to IFRS; a cabinet selected to support reform; a report with a time-bound calendar for IFRS implementation planned by end of first semester in 2017.
- BEAC will strictly apply charter mechanisms to protect regional reserves (Article 11.2): Governor can request authorities and CEMAC Ministerial Committee to design and implement adjustment measures when a country shows a debit balance in the operations account at the central bank.
- CPM decision (extraordinary meeting May 2017): reduce banks’ refinancing ceilings in countries with too low reserves.
- Other options for protecting reserves under discussion: apply large discounts at refinancing operations to securities issued by governments that do not comply with regional convergence criteria or lag in adopting adjustment programs.

### Challenges and comprehensive package for banking supervision
- Since 2014, financial sector deterioration due to weakening fiscal balances and decline in economic activity.
- Main problems: increase in nonperforming loans (mainly due to domestic arrears by CEMAC governments) and rapid reduction in liquidity due to reduced deposits.
- Commitment: comprehensive package of measures to strengthen resilience of financial system, upgrade banking supervision framework, and reinforce financial safety net.

Key supervisory actions and timelines:
- By end-August 2017: COBAC to quantify direct and indirect risks related to government arrears.
- Credit institutions to decide on loan restructuring types, implemented according to Chapter UU of COBAC Regulation R 2014/01.
- Treatment of banks in difficulty to follow CEMAC Regulation 02/14; COBAC to take decisions depending on each bank’s situation.
  - COBAC actions (meeting March 20, 2017): withdraw license and liquidate two Gabonese banks; place a third under controlled administration; extend controlled administration of one Cameroonian bank until September 30, 2017 at the latest; start disciplinary procedure against a second Cameroonian bank.
  - For other distressed banks: shareholders to submit restructuring plans; COBAC commissioners to assess credibility and decide measures per regulation.
- COBAC enforcement priorities: (i) related party lending; (ii) prudential provisions; (iii) exposure diversification; (iv) bank governance rules; (v) risk-weighting of exposures to CEMAC member states. Banks breaching regulations to implement corrective actions.
- By end-2018: analyze effectiveness of corrective measures and penalties; starting 2018 gradually include risk-based supervision in on-site annual inspections; AFRITAC supporting implementation.
- Between now and end-2018: COBAC to examine strengthening regulations on (i) exposure diversification (maintain or gradually reduce maximum exposure) and (ii) provisioning and risk-weighting of secured loans and NPLs to better reflect limited economic value of collateral.
- Microfinance supervisory framework regulation drafted to be adopted by CEMAC Ministerial Committee before end-2017.
- Structural reforms in 2018–19: introduce (i) risk-based supervision; (ii) supervision on a consolidated basis; (iii) control of financial holding companies; (iv) supervision of electronic payment services; (v) integration of operational and (if material) market risks in capital requirement calculations.
- Additional regulatory initiatives: requirement that financial groups operating through separate banks be structured around a holding company (subject to consolidated supervision and COBAC resolution framework); regulation on designation of systemically-important credit institutions; regulation on sound management of interest rate risk on banks’ banking books.

### Financial safety net strengthening
- By end-2017: adoption of implementation law for Regulation 02/14 on treatment of institutions in difficulty as part of COBAC 2016–18 strategic plan; specific measures for special restructuring to be defined in 2018.
- First review of implementation to be carried out at end-2018; adjustments may be submitted to UMAC Ministerial Committee following BEAC Board assent.
- COBAC to consider revising Regulation 02/14 in 2018 to correct deficiencies and clarify treatment of non-systemic institutions.
- Improve effectiveness of deposit insurance fund (FOGADAC) to address 2015 FSAP shortcomings:
  - By end-2017: COBAC to launch procedures to make FOGADAC more operational; COBAC regulation organizing FOGADAC procedures and mechanisms for compensation and intervention to complement current system.
- Improve crisis preparedness and coordination among safety net participants:
  - Include FOGADAC as a member of the Financial Stability Committee of Central Africa (FDA-CA) by end-2017; pending formal admission, FOGADAC invited to Committee meetings along with Financial Market Commission of Cameroon.
  - By end-2018: FDA-CA to define operational rules and procedures to strengthen risk management function.

### Monitoring, reporting, and IMF coordination
- From June 2017: BEAC to produce and send to IMF staff a dashboard of pertinent weekly and monthly indicators for close monitoring of macroeconomic developments.
- COBAC to provide IMF staff all appropriate information to allow close monitoring of CEMAC banking system.
- IMF staff to share studies and analyses based on provided information.
- Ongoing dialogue: video-conferences and correspondence supplemented by quarterly visits by IMF staff to CEMAC regional institutions.
- Consultation with IMF staff to occur within a very short timeline if regional reserves deviate substantially from expected path.

### BEAC Dashboard: Selected indicators and transmission timing (as specified)
- Overall BEAC balance sheet, including level of regional foreign exchange reserves, by type of external asset, at each end of week — The following Wednesday (BEAC DC).
- 10-day middle office report on regional reserves prepared for BEAC Government — Every 10 days, after the end of the end of the decate (BEAC DOF).
- Balance of government deposits at BEAC — Every 10 days (BEAC DC).
- Balance of banks deposits (reserve requirements, current accounts and deposits and investments) at BEAC — Every 10 days (BEAC DC, DCMCCB).
- Monthly table of daily liquidity injections and withdrawals vis-a-vis financial institutions with intervention rates — 10 days after the end of the month (BEAC DCMCCB).
- Monthly table of treasury bonds (BTA) and treasury bills (OAT) by country, including new issuances and repayments — 10 days after the end of the month (BEAC DCMCCB).
- BEAC balance sheet with breakdown by country at the end of the month — 20 days after the end of the month (BEAC DC).
- Monetary situation of the Zone at the end of the month with country-allocations — 30 days after the end of the month (BEAC DESF).
- Monthly statement of entries and exits of foreign exchange by economic agent (public, private and other sectors) — 30 days after the end of the month (BEAC DSMP).
- Monthly table of the financial stability indicators of the Zone — 30 days after the end of the month, send them to the IMF's CEMAC team (COBAC DRE).
- Monthly table of the financial stability indicators of each member state — 30 days after the end of the month, send them to the IMF's CEMAC team (COBAC DRE).
- Customer deposits at the end of the month — 30 days after the end of the month (COBAC DREC).
- Outstanding loans at the end of the month — 30 days after the end of the month (COBAC DRE).
- Outstanding doubtful loans at the end of the month — 30 days after the end of the month (COBAC DRE).

*Source: Letter and program commitments of BEAC and COBAC (as provided in the content unit).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17176.pdf_