## cr17389

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### Background and recent developments
- Regional policy response and programs
  - CEMAC Heads of States at an extraordinary summit in December 2016 resolved to put in place a strong and coordinated policy response; each agreed to seek IMF support (see IMF Country Report No. 17/176).
  - Since then, three countries (Cameroon, Chad, and Gabon) adopted new IMF-supported programs; CAR recalibrated an existing one. Discussions with the Republic of Congo and Equatorial Guinea are ongoing.
  - Regional institutions (BEAC, COBAC) have begun implementing supportive policies to rebuild regional reserves and ensure financial sector stability; adjusted regional policies reflect past IMF staff recommendations.

- Growth, oil, and inflation
  - Growth declined sharply since 2014 to -1 percent in 2016, reflecting deterioration in oil production (-6 percent) and subdued non-oil GDP growth (around 1 percent).
  - Short-term outlook: growth projected at -½ percent in 2017 (down from +¾ percent in previous projections).
  - Inflation is low and projected to remain well below the regional convergence ceiling.

- Fiscal position and public debt
  - Average non-oil primary deficit is projected to fall to about 8½ percent of non-oil GDP in 2017 from 13½ percent in 2016 due to further reductions in budgetary expenditure.
  - Estimated total public debt-to-GDP ratio revised to just above 50 percent at end-2016, up from 28 percent at end-2014, reflecting large fiscal deficits and upward revisions in public debt data (including arrears).

- Monetary policy and liquidity
  - BEAC increased its policy rate by 50 bps in March 2017 and maintained strict control on bank refinancing; net domestic assets kept broadly stable since end-2016 and projected to remain so through end-2017.
  - Broad money declined by 5.4 percent y-o-y in September 2017.
  - Credit to the private sector declined by 2.1 percent y-o-y in September 2017.
  - Banks face low liquidity and have been cautious in buying government securities and extending credit.

- External reserves and external position
  - Reserves declined by about €700 million in the first half of 2017, then increased by about €600 million in the third quarter to reach about €4.6 billion by end-September 2017.
    - BEAC NFA accumulation between March and September 2017 was larger than previously projected.
    - IMF disbursements contributed about €270 million in the third quarter.
  - Current account deficit projected to decline from 10 percent of GDP in 2016 to about 5 percent of GDP in 2017.
  - With external budget support projected to attain about €1.5 billion in the last quarter of 2017, regional reserves are projected to increase to €5 billion by end-year, equivalent to about 2.7 months of imports (up from 2.2 months at end-2016).

- Financial sector vulnerabilities
  - Nonperforming loans increased from already high levels; deposits declined.
  - Accumulation of large domestic government arrears contributed to NPL increases.
  - Banks’ profitability remained stable in 2016 and the average capital adequacy ratio increased in 2017.
  - COBAC decisions include liquidation of two public Gabonese banks and placing a third under conservatorship.

### Outlook and key projections
- Assumptions for medium-term forecast
  - Full implementation of policy commitments by CEMAC member states and regional institutions.
  - Continued fiscal consolidation: about 6 percent of GDP improvement in the overall fiscal balance from 2016 to 2019.
  - Initial consolidation through cuts in non-priority public investment; second stage to increase non-oil budget revenue.
  - Monetary policy kept tight to support external stability and reserve accumulation.
  - Repayment of government arrears and efforts to improve business environment and financial sector to support credit to private sector.

- Main projections and path
  - Growth: increases gradually to 3 percent by 2019 and hovers at about 3¾ percent beyond.
  - Total public debt: reaching 52 percent of GDP in 2017, broadly stabilizing in 2018, and declining to about 47 percent of GDP by 2021.
  - Current account deficit: projected to gradually decline to about 1½ percent of GDP by 2021.
  - Reserves coverage: exceed 3½ months of imports by 2019, and be close to 4½ months of imports by 2021.

- Selected numerical indicators (from Text Table 1; current projections)
  - GDP at constant prices: 2016 -0.9; 2017 0.7; 2018 3.2; 2019 2.8; 2020 3.5.
  - Oil GDP: 2016 -8.2; 2017 -1.6; 2018 7.9; 2019 -1.4; 2020 0.2.
  - Non-oil GDP: 2016 1.3; 2017 1.8; 2018 2.7; 2019 3.5; 2020 4.1.
  - Consumer prices (period average): 2016 1.3; 2017 1.2; 2018 1.6; 2019 1.9; 2020 2.2.
  - Current account, including grants: 2016 -9.3; 2017 -5.1; 2018 -2.6; 2019 -2.3; 2020 -0.9.
  - Primary fiscal balance: 2016 -5.7; 2017 -1.4; 2018 -0.1; 2019 0.2; 2020 0.8.
  - Non-oil primary fiscal balance (percent of non-oil GDP): 2016 -12.9; 2017 -8.5; 2018 -6.9; 2019 -5.7; 2020 -5.0.
  - Total public debt (percent of GDP): 2016 46.5; 2017 46.7; 2018 45.6; 2019 44.9; 2020 42.5.
  - Gross official reserves (months of imports): 2016 2.3; 2017 2.7; 2018 3.0; 2019 3.2; 2020 3.6.
  - Net foreign assets (annual change in billion CFAF): 2016 -3,413; 2017 139; 2018 140; 2019 0257; 2020 ... (table entries as published).

### Risks
- Macroeconomic risks
  - Further drop in oil prices would pressure fiscal and external balances.
  - Strong fiscal consolidation combined with tight monetary policy could have a larger negative impact on non-oil growth than anticipated, weakening debt dynamics.
  - A weaker macroeconomic environment could further weaken the financial sector and add pressure on public and external accounts.

- Policy implementation risks
  - Weaker-than-expected adjustment due to capacity constraints and/or lack of political support.
  - Meeting ambitious fiscal adjustment will require far-reaching PFM reforms and increases in non-oil revenue collection.

- External financing and program risks
  - Shortfalls in external financing, including from debt restructuring, pose downside risk.
  - Uncertainty about IMF-supported programs with Equatorial Guinea and Republic of Congo: delays in program completion and external financing could deepen liquidity crises in those countries and reduce their contributions to regional reserve build-up.
  - Maintaining strong ring-fencing by BEAC is critical but prolonged ring-fencing may plunge some countries into deeper liquidity crises.

- Security risks
  - Precarious security in CAR, the Lake Chad region, and the Pool region in Congo could negatively affect activity and increase military spending.

### Implementation of the regional strategy and fiscal consolidation
- Regional coordination and monitoring
  - BEAC and COBAC actions to maintain monetary policy stance, support reserve build-up, and support financial sector stability; policy commitments laid out in BEAC’s Letter of Policy Support of June 2017 and being implemented.
  - Policy commitments will continue to be monitored closely by IMF staff.

- Fiscal consolidation strategy
  - National efforts focus on cuts in non-priority spending in 2017; from 2018 measures to increase non-oil revenue will play a more prominent role.
  - Objective: reduce overall fiscal deficit across member countries from 4.8 percent of GDP in 2017 to 0.7 percent of GDP in 2021, while preserving social protection programs.
  - Budget financing mix shifting toward external financing:
    - Domestic debt expected to decline from close to 20 percent of GDP at end-2017 to about 12½ percent at end-2021.
    - External debt expected to remain broadly stable.

- External financing needs and coverage
  - Total remaining external financing needs over 2017–20 for the four CEMAC countries with IMF-supported programs are estimated at about CFAF 4.0 trillion (about US$ 7.2 billion).
  - IMF resources projected to cover about 25 percent on average of these financing needs.
  - Other IFIs (World Bank and African Development Bank), creditors/donors (France and EU), and expected debt restructuring would cover remaining needs.

### Financing summary and numeric breakdown
- 1. Financing gap: 1,499 1,208 997 368 4,073
- 2. IMF financing: 372 290 260 93 1,014
- 3. Budget support from other donors: 1,024 685 544 115 2,355
  - World Bank: 317 212 207 40 777
  - African Development Bank: 493 261 119 78 80
  - European Union: 58 55 58 34 205
  - France: 154 154 150 34 493
  - Other: 2 129 0 12
- 4. Other exceptional financing: 104 233 194 161 692
- 5. Residual financing gap (1-2-3-4): 0 0 0 0 0

- Footnote highlights:
  - No changes in external financing for CEMAC program countries are expected for C.A.R., Cameroon, and Gabon relative to the June round; for Chad, budget support is expected to be slightly higher in 2017 due to higher WB and AfDB disbursement.
  - In 2019, mainly reflects a budget support to CAR from developing partners for which discussion is in advanced stage.

### Monetary policy and BEAC actions
- BEAC actions and commitments
  - BEAC increased policy rate by 50 bps in March 2017.
  - BEAC decision: eliminate statutory advances by end-2017, with revisions including a 4-year grace period and a 14-year repayment period; agreements to convert outstanding balances into long-term securities to be signed by end-2017 (agreements already signed with four countries by end-November).
  - BEAC to adopt necessary amendments to its charter by end-2017 to eliminate central bank advances to governments.
  - BEAC started implementing harmonized (non-country-specific) rules for banks’ reserve requirements on July 1, 2017.

- Liquidity management reforms and ELA
  - Objectives of new liquidity management framework (from early 2018): take a regional approach for the control of banks' liquidity; avoid build-up of significant excess liquidity; steer the interbank rate close to the policy rate.
  - The ELA scheme should enter into force in January 2018, after implementing regulations are finalized.
  - Staff recommendation: seriously consider an increase in reserve requirements when the new liquidity management framework is implemented and conduct stress tests to assess banks’ vulnerability to a possible further policy rate increase.

- Collateral and eligibility
  - Current ceiling on government securities eligible as collateral for BEAC refinancing fixed at 15 percent of the country’s budget revenue.
  - Staff advice: remove specific ceilings on government securities eligible for open market operations; establish a new set of haircut rules; make government securities in sovereign default or unsustainable debt ineligible for open market operations.

- Governance and reserves management
  - BEAC to prepare by end-2017, in consultation with the IMF, revisions to secondary legal instruments; adopt revisions by mid-2018; review and codify internal delegation framework by mid-2019.
  - Commit to full transition to IFRS beginning with the 2018 financial statements and reinforce accounting capacity.
  - Establish an independent risk management unit by mid-2018.
  - Prepare a new reserve management framework with IMF technical assistance and planned approval by end-2017.

### Banking sector vulnerabilities and supervisory actions
- Banking sector impacts and indicators
  - Non-performing loans (NPLs) are very high and rising.
  - Decline in deposits is putting pressure on banks’ liquidity.
  - Several banks are in breach of key prudential indicators.
  - Regulatory capital to risk-weighted assets: 2016 13.4; Jul-17 15.7.
  - Non-performing loans (gross) to total loans (gross): 2016 11.9; Jul-17 14.0.
  - Return on equity: 2016 16.4; Jul-17 23.5.

- COBAC and SG-COBAC actions and plan
  - Increase capital requirements progressively from 8 to 10.5 percent by 2019.
  - Reinforce implementation of provisioning rules in 2018; issue by end-2017 a regulation clarifying application of provisioning rules.
  - Finalize by end-2017 analysis of NPLs directly or indirectly caused by government arrears.
  - Organize targeted inspections in 2017 on connected party lending.
  - Modify penalty system by end-2017 to ensure large banks receive sufficiently constraining penalties and accelerate imposition procedures; review efficiency of corrective measures in 2018.
  - Resolution actions: appoint liquidators for some banks; request restructuring plans; set deadlines for recapitalization.

- Staff emphasis and recommendations
  - Urgent need to address high and increasing NPLs and quickly resolve banks in difficulty to restore lending capacity and preserve confidence.
  - Reinforce capacity to assess and monitor banks’ NPL resolution plans.
  - Require banks most at risk to provide detailed reports on the source of their NPLs and plans to address them.
  - Continue efforts to persuade the banking commission of the urgency of resolving all banks in distress.

### Regional surveillance, integration, and structural reforms
- Convergence framework reforms (2016 revisions)
  - Revision of the fiscal balance criterion to better account for oil revenues and debt dynamics.
  - Introduction of a debt break to limit medium-term debt accumulation.
  - Revision of the inflation criterion to a three-year average.
  - Introduction of additional secondary indicators; new convergence criteria to apply first for assessment of 2017 outcomes.

- Surveillance priorities and data needs
  - Strengthen implementation of the regional surveillance framework and credible mechanisms to bring countries back to convergence.
  - Help member-states prepare triennial convergence plans; consider reflecting fiscal convergence criteria in national budget laws; enhance fiscal data dissemination.
  - Strengthen framework to produce comparable macroeconomic statistics; advance implementation of six community directives (less than one third adopted by CEMAC countries to date).

- Structural competitiveness and growth
  - Doing Business indicators: CEMAC countries underperform relative to comparable countries, lagging behind WAEMU peers and comparable to SSA oil exporters.
  - Policy implication: urgent reforms to foster an enabling business environment and address non-price competitiveness weaknesses to support private sector growth and job creation.

### Reserve adequacy and external sector assessment (Annex V highlights)
- Recent developments and projections
  - Regional external current account widened to 10 percent of GDP in 2016 from a surplus of 3.3 percent of GDP in 2012.
  - Current account deficit projected to narrow to 5 percent of GDP in 2017 and reach 1½ percent of GDP by 2021.
  - Reserve coverage fell to 2.2 months of prospective extra-regional imports at end-2016.
  - Benchmarks: benchmark considered appropriate for a resource-rich currency union: 5 months of imports; optimal range between 5 and 12 months of imports.
  - At end-2016, reserves amounted to no more than 50 percent of the IMF reserve adequacy metric.

- External flows and FDI
  - Foreign direct investment (FDI) averaged 6¼ percent of GDP over the last 5 years and has been relatively stable.

### Implementation timelines and key numeric milestones
- BEAC decision date to abolish monetary financing: August 5, 2017.
- Timeline for signing conventions: remaining two countries to sign by end-December 2017 at the latest.
- Monetary policy reform expected from early 2018.
- ELA scheme should enter into force in January 2018.
- BEAC policy rate increase: 50 bps in March 2017.
- Reserve trajectory (selected): 2.2 months of imports at end-2016; projected 2.7 months of imports by end-2017; projected to reach 3.6 months of imports by end-2019 and about 4½ months by 2021.
- Current account deficit: 2016 about 10 percent of GDP; 2017 5 percent of GDP.

*IMF Country Report No. 17/176 (staff report excerpts).*

### 1. Selected Economic Indicators, 2000–17 _______________________________________________________ 21

### 1. Selected Economic Indicators, 2000–17 _______________________________________________________ 21

### Background and recent developments
- Regional policy response and programs
  - CEMAC Heads of States at an extraordinary summit in December 2016 resolved to put in place a strong and coordinated policy response; each agreed to seek IMF support (see IMF Country Report No. 17/176).
  - Since then, three countries (Cameroon, Chad, and Gabon) adopted new IMF-supported programs; CAR recalibrated an existing one. Discussions with the Republic of Congo and Equatorial Guinea are ongoing.
  - Regional institutions (BEAC, COBAC) have begun implementing supportive policies to rebuild regional reserves and ensure financial sector stability; adjusted regional policies reflect past IMF staff recommendations (see Annex II).

- Growth, oil, and inflation
  - Growth declined sharply since 2014 to -1 percent in 2016, reflecting deterioration in oil production (-6 percent) and subdued non-oil GDP growth (around 1 percent).
  - Short-term outlook: growth projected at -½ percent in 2017 (down from +¾ percent in previous projections).
  - Inflation is low and projected to remain well below the regional convergence ceiling.

- Fiscal position and public debt
  - Average non-oil primary deficit is projected to fall to about 8½ percent of non-oil GDP in 2017 from 13½ percent in 2016 due to further reductions in budgetary expenditure.
  - Estimated total public debt-to-GDP ratio revised to just above 50 percent at end-2016, up from 28 percent at end-2014, reflecting large fiscal deficits and upward revisions in public debt data (including arrears).

- Monetary policy and liquidity
  - BEAC increased its policy rate by 50 bps in March 2017 and maintained strict control on bank refinancing; net domestic assets kept broadly stable since end-2016 and projected to remain so through end-2017.
  - Broad money declined by 5.4 percent y-o-y in September 2017.
  - Credit to the private sector declined by 2.1 percent y-o-y in September 2017.
  - Banks face low liquidity and have been cautious in buying government securities and extending credit.

- External reserves and external position
  - Reserves declined by about €700 million in the first half of 2017, then increased by about €600 million in the third quarter to reach about €4.6 billion by end-September 2017.
    - BEAC NFA accumulation between March and September 2017 was larger than previously projected.
    - IMF disbursements contributed about €270 million in the third quarter.
  - Current account deficit projected to decline from 10 percent of GDP in 2016 to about 5 percent of GDP in 2017.
  - With external budget support projected to attain about €1.5 billion in the last quarter of 2017, regional reserves are projected to increase to €5 billion by end-year, equivalent to about 2.7 months of imports (up from 2.2 months at end-2016).

- Financial sector vulnerabilities
  - Nonperforming loans increased from already high levels; deposits declined (see Table 11).
  - Accumulation of large domestic government arrears contributed to NPL increases.
  - Banks’ profitability remained stable in 2016 and the average capital adequacy ratio increased in 2017.
  - COBAC decisions include liquidation of two public Gabonese banks and placing a third under conservatorship (see Annex IV).

### Outlook and key projections
- Assumptions for medium-term forecast
  - Full implementation of policy commitments by CEMAC member states and regional institutions.
  - Continued fiscal consolidation: about 6 percent of GDP improvement in the overall fiscal balance from 2016 to 2019.
  - Initial consolidation through cuts in non-priority public investment; second stage to increase non-oil budget revenue.
  - Monetary policy kept tight to support external stability and reserve accumulation.
  - Repayment of government arrears and efforts to improve business environment and financial sector to support credit to private sector.

- Main projections and path
  - Growth: increases gradually to 3 percent by 2019 and hovers at about 3¾ percent beyond.
  - Total public debt: reaching 52 percent of GDP in 2017, broadly stabilizing in 2018, and declining to about 47 percent of GDP by 2021.
  - Current account deficit: projected to gradually decline to about 1½ percent of GDP by 2021.
  - Reserves coverage: exceed 3½ months of imports by 2019, and be close to 4½ months of imports by 2021.
  - Revisions to previous projections reflect:
    - recognition of extra-budgetary spending for the Republic of Congo;
    - lower oil production and revenues in some countries;
    - lower oil and non-oil growth in 2017 and 2018;
    - projected higher FDI in some countries related to newly identified projects.

- Selected numerical indicators (from Text Table 1; current projections)
  - GDP at constant prices: 2016 -0.9; 2017 0.7; 2018 3.2; 2019 2.8; 2020 3.5.
  - Oil GDP: 2016 -8.2; 2017 -1.6; 2018 7.9; 2019 -1.4; 2020 0.2.
  - Non-oil GDP: 2016 1.3; 2017 1.8; 2018 2.7; 2019 3.5; 2020 4.1.
  - Consumer prices (period average): 2016 1.3; 2017 1.2; 2018 1.6; 2019 1.9; 2020 2.2.
  - Current account, including grants: 2016 -9.3; 2017 -5.1; 2018 -2.6; 2019 -2.3; 2020 -0.9.
  - Primary fiscal balance: 2016 -5.7; 2017 -1.4; 2018 -0.1; 2019 0.2; 2020 0.8.
  - Non-oil primary fiscal balance (percent of non-oil GDP): 2016 -12.9; 2017 -8.5; 2018 -6.9; 2019 -5.7; 2020 -5.0.
  - Total public debt (percent of GDP): 2016 46.5; 2017 46.7; 2018 45.6; 2019 44.9; 2020 42.5.
  - Gross official reserves (months of imports): 2016 2.3; 2017 2.7; 2018 3.0; 2019 3.2; 2020 3.6.
  - Net foreign assets (annual change in billion CFAF): 2016 -3,413; 2017 139; 2018 140; 2019 0257; 2020 ... (table entries as published).

### Risks
- Macroeconomic risks
  - Further drop in oil prices (e.g., from lower global growth) would pressure fiscal and external balances.
  - Strong fiscal consolidation combined with tight monetary policy could have a larger negative impact on non-oil growth than anticipated, weakening debt dynamics.
  - A weaker macroeconomic environment could further weaken the financial sector and add pressure on public and external accounts.

- Policy implementation risks
  - Weaker-than-expected adjustment due to capacity constraints and/or lack of political support.
  - Meeting ambitious fiscal adjustment will require far-reaching PFM reforms and increases in non-oil revenue collection.

- External financing and program risks
  - Shortfalls in external financing, including from debt restructuring, pose downside risk.
  - Uncertainty about IMF-supported programs with Equatorial Guinea and Republic of Congo: delays in program completion and external financing could deepen liquidity crises in those countries and reduce their contributions to regional reserve build-up.
  - Maintaining strong ring-fencing by BEAC is critical but prolonged ring-fencing may plunge some countries into deeper liquidity crises.

- Security risks
  - Precarious security in CAR, the Lake Chad region, and the Pool region in Congo could negatively affect activity and increase military spending.

### Implementation of the regional strategy
- Regional coordination and monitoring
  - Staff discussed implementation of the regional strategy focusing on BEAC and COBAC actions to maintain monetary policy stance, support reserve build-up, and support financial sector stability; policy commitments laid out in BEAC’s Letter of Policy Support of June 2017 and being implemented.
  - Policy commitments will continue to be monitored closely by IMF staff (see Table 13).

- Fiscal consolidation strategy
  - National efforts focus on cuts in non-priority spending in 2017; from 2018 measures to increase non-oil revenue will play a more prominent role.
  - Objective: reduce overall fiscal deficit across member countries from 4.8 percent of GDP in 2017 to 0.7 percent of GDP in 2021, while preserving social protection programs.
  - Budget financing mix shifting toward external financing:
    - Domestic debt expected to decline from close to 20 percent of GDP at end-2017 to about 12½ percent at end-2021.
    - External debt expected to remain broadly stable.

- External financing needs and coverage
  - Total remaining external financing needs over 2017–20 for the four CEMAC countries with IMF-supported programs are estimated at about CFAF 4.0 trillion (about US$ 7.2 billion).
  - IMF resources projected to cover about 25 percent on average of these financing needs.
  - Other IFIs (World Bank and African Development Bank), creditors/donors (France and EU), and expected debt restructuring would cover remaining needs.
  - Delays in disbursements from other external creditors are putting severe pressures on treasuries’ cashflows and may delay repayments of arrears.

- BEAC monetary policy stance
  - BEAC committed to rebuilding a sufficient reserves buffer; given recent upturn in reserves, downward revision to growth and inflation, tightening of fiscal policies, and weak credit to the private sector, staff concluded a further increase in BEAC’s policy rate was not warranted at that stage.
  - BEAC should remain vigilant, monitoring domestic and external economic and financial conditions.

_Italic: IMF Country Report No. 17/176 (staff report excerpts)._

### 1. Financing gap1,4991,2089973684,073

### 1. Financing gap1,4991,2089973684,073

### Financing summary and numeric breakdown
- 1. Financing gap: 1,499 1,208 997 368 4,073
- 2. IMF financing: 372 290 260 93 1,014
- 3. Budget support from other donors: 1,024 685 544 115 2,355
  - World Bank: 317 212 207 40 777
  - African Development Bank: 493 261 119 78 80
  - European Union: 58 55 58 34 205
  - France: 154 154 150 34 493
  - Other: 2 129 0 12
- 4. Other exceptional financing: 104 233 194 161 692
- 5. Residual financing gap (1-2-3-4): 0 0 0 0 0

- Footnote 1: Relative to the June round, no changes in external financing for CEMAC program countries are expected for C.A.R., Cameroon, and Gabon; for Chad, budget support is expected to be slightly higher in 2017 due to higher WB and AfDB disbursement. 2018 onward, budget support is however slightly lower to du CFAF appreciation vis a vis the USD.
- Footnote 2: In 2019, mainly reflects a budget support to CAR from developing partners for which discussion is in advanced stage.

### Monetary policy and BEAC actions
- BEAC agreed on the need to closely monitor bank liquidity and use liquidity management instruments (required reserve rate and open market operations) to ensure consistency with domestic and external financial stability.
- An increase in reserves requirements now would push a number of banks into a liquidity crisis given existing ceilings on BEAC refinancing and on collaterals, absence of an operational emergency liquidity assistance facility, and money market imperfections.
- Staff recommendation: seriously consider an increase in reserves requirements when the new liquidity management framework is implemented.
- Staff underlined the need for authorities to conduct stress tests to assess banks’ vulnerability to a possible further policy rate increase.
- Monetary financing of budget deficits (statutory advances allowing the central bank to finance up to 20 percent of the reference year tax revenue) was a key factor delaying fiscal adjustment after the collapse in oil prices.
- BEAC decision: eliminate statutory advances by end-2017, with revisions including a 4-year grace period and a 14-year repayment period; agreements to convert outstanding balances into long-term securities to be signed by end-2017 (agreements already signed with four countries by end-November).
- BEAC to adopt necessary amendments to its charter by end-2017 to eliminate central bank advances to governments.

### BEAC collateral, foreign exchange, and governance reforms
- Current ceiling on government securities eligible as collateral for BEAC refinancing fixed at 15 percent of the country’s budget revenue; this has limited banks’ appetite for government securities but may hinder the modernized monetary policy approach and emergency liquidity assistance planned from early 2018.
- Staff advice: remove specific ceilings on government securities eligible for open market operations; establish a new set of haircut rules that take into account the level of sovereign risk and consider using compliance with CEMAC convergence criteria; make government securities in sovereign default or unsustainable debt ineligible for open market operations.
- To support reserve accumulation, BEAC will strengthen implementation of foreign exchange regulations, deepen analysis of foreign exchange transactions, obtain agreements between states and extractive industry operators regarding repatriation of foreign exchange, and continue stepped-up efforts to control documents required for foreign exchange purchases.
- BEAC to complete operational implementation of governance reforms from the 2017 safeguards assessment:
  - Prepare by end-2017, in consultation with the IMF, revisions to secondary legal instruments (By-Laws and codes of ethics and deontology).
  - Adopt revisions by mid-2018; review and codify internal delegation framework by mid-2019.
  - Commit to full transition to IFRS beginning with the 2018 financial statements and reinforce accounting capacity.
  - Establish an independent risk management unit by mid-2018.
  - Prepare a new reserve management framework with new governance arrangements and revised documentation (master document, Investment Policy, by-laws) with IMF technical assistance and planned approval by end-2017.
- IMF technical assistance view: current structure of BEAC foreign reserves’ investments poses no immediate major risk but the increase in relative exposure to gold should be monitored.

### Banking sector vulnerabilities and supervisory actions
- Banking sector impacts:
  - Non-performing loans (NPLs) are very high and rising.
  - Decline in deposits is putting pressure on banks’ liquidity.
  - Several banks are in breach of key prudential indicators.
  - Flat credit growth could put pressure on future profits.
- SG-COBAC actions and plans:
  - Implement risk-based supervision with more inspections focused on provisioning policy.
  - Increase capital requirements progressively from 8 to 10.5 percent by 2019.
  - Prepare additional capital requirements for counter-cyclical risks and systemically important banks, and capital charges for operational and market risks.
- Staff emphasis:
  - Urgent need to address high and increasing NPLs and quickly resolve banks in difficulty to restore lending capacity and preserve confidence.
  - Banks in difficulty are non-systemic but their prolonged non-compliance undermines supervisory credibility and raises potential fiscal costs of restructuring.
- COBAC action plan highlights:
  - Addressing NPLs:
    - Reinforce implementation of provisioning rules in 2018, with an on-site inspection program focused on credit quality.
    - Issue by end-2017 a regulation clarifying application of provisioning rules.
    - Finalize by end-2017 analysis of NPLs directly or indirectly caused by government arrears.
    - Supervise implementation of the new regulation on internal control requiring banks to reinforce credit risk policies.
  - Strengthening prudential rule implementation:
    - Develop better understanding of factors contributing to systematic breaches, focusing on risk concentration and connected party lending.
    - One third of solvent banks are in breach of the CEMAC regulation on risk concentration.
    - A proposed very large increase (to 75–90 percent) in risk weights for debt of member-states missing convergence criteria could push more banks into breach; COBAC clarified conditions for temporary (1–2 years) case-by-case exemptions, granted only for government securities of countries under IMF-supported programs.
    - Organize targeted inspections in 2017 on connected party lending.
    - Modify penalty system by end-2017 to ensure large banks receive sufficiently constraining penalties and accelerate imposition procedures; review efficiency of corrective measures in 2018.
  - Resolution of banks in difficulty:
    - COBAC decisions range from appointing liquidators for two banks to requesting restructuring plans from others; some banks given delays to recapitalize.
    - SG-COBAC will push for speedy decisions on bank resolutions by the 12-member banking commission.
- Staff recommendations to SG-COBAC:
  - Aim for broader implementation of risk-based supervision and develop capacity to assess quality of banks’ credit risk instruments.
  - Reinforce capacity to assess and monitor banks’ NPL resolution plans.
  - Require banks most at risk to provide detailed reports on the source of their NPLs and plans to address them.
  - Continue efforts to persuade the banking commission of the urgency of resolving all banks in distress.
- Additional developments:
  - Risk-based supervision processes to be formalized with technical assistance from the World Bank and IMF AFRITAC.
  - Several regulations concerning institutions in difficulty to be adopted by December 2017.
  - Principles of operational, market and interest rate risks to be gradually introduced in COBAC’s regulatory corpus from 2018.
  - Adoption of a new regulatory framework for microfinance intended to consolidate institutions, increase regulatory capital thresholds, and lower single-counterparty credit ceilings.
  - Recommendation to rapidly adopt texts governing the deposit insurance fund (FOGADAC) to make it fully operational with clearly defined reimbursement conditions and procedures.

### Regional surveillance and integration reforms
- 2016 revisions to the regional convergence framework adopted by CEMAC heads of state include:
  - Revision of the fiscal balance criterion to better account for oil revenues and debt dynamics and allow for less pro-cyclical policies.
  - Introduction of a debt break to limit medium-term debt accumulation.
  - Revision of the inflation criterion to a three-year average.
  - Introduction of additional secondary indicators.
  - New convergence criteria to apply first for assessment of 2017 outcomes.
- Staff priorities and recommendations:
  - Strengthen implementation of the regional surveillance framework to reduce risk of recurring financial imbalances.
  - Address absence of credible mechanisms to bring countries back to convergence when they depart from it (example: each member-state missed at least 2 of the 4 primary convergence criteria in 2016 but none was asked to prepare an adjustment plan).
  - Help member-states prepare triennial convergence plans as the cornerstone of a rejuvenated surveillance framework; technical assistance provided by the EU.
  - Consider additional measures: reflect fiscal convergence criteria in national budget laws; enhance fiscal data dissemination including publication by the Commission of reports on each member-state’s fiscal situation and prospects; strengthen the Commission’s monitoring capacity; clarify potential sanctions for non-observance and their adoption process.
  - Commission to submit an action plan to the Monitoring Committee (Comité de Pilotage).
- Data and statistical framework needs:
  - Strengthen framework to produce comparable macroeconomic statistics for surveillance.
  - Six community directives (starting with fiscal transparency and accountability) define budget classification, expenditure chain elements, and statistical concepts such as arrears; less than one third adopted by CEMAC countries to date.
  - Recommendation: CEMAC Commission to advance implementation of directives and discuss with member-states a concrete implementation plan.
  - Interim suggestion: member countries be asked to send draft budget laws to the CEMAC Commission for ex-ante assessment of respect of convergence criteria.

_Italic: cr17389 - 1. Financing gap1,4991,2089973684,073 — https://www.imf.org/-/media/files/publications/cr/2017/cr17389.pdf_

### 26.      BEAC has been working to strengthen its liquidity management, addressing weaknesses

### 26.      BEAC has been working to strengthen its liquidity management, addressing weaknesses

### Liquidity management and monetary policy transmission
- Before the crisis, large liquidity was available in the system during the years of oil price boom, but BEAC did not take necessary actions to mop up the large excess liquidity.
- Large recourse to monetary financing by governments amplified excess liquidity; the interbank market was virtually non-existent.
- Lending rates to the private sector were mostly a function of the client’s status and did not necessarily reflect the cost of refinancing with the central bank.
- Result: the monetary transmission mechanism was very weak.
- The crisis changed the balance: systemic liquidity declined, banks became a little more active on the interbank market, helping to improve monetary policy transmission.
- Remaining problem: a not-very-active interbank market leaves a number of banks in great difficulty to access liquidity outside of BEAC, while other banks have some excess liquidity.
- Policy implication: BEAC should take steps to support interbank market development while ensuring that overall liquidity is tight.
- Structural constraint: the system of country-specific refinancing and collateral ceilings does not facilitate effective mopping-up of excess liquidity held by some banks without risking plunging a number of other banks into a liquidity crisis.

### Modernization of BEAC’s liquidity management and monetary policy instruments
- Authorities concurred with the analysis and resolved to modernize BEAC’s liquidity management and monetary policy instruments.
- Commitment: In line with the commitments presented in the June 2017 Letter of Policy Support, the BEAC will put in place a new monetary policy framework in early 2018 (see Annex III).
- Objectives of the new liquidity management framework:
  - Take a regional approach for the control of banks' liquidity.
  - Avoid the build-up of significant excess liquidity.
  - Steer the interbank rate close to the policy rate.
- The new set of monetary policy instruments to be used from early 2018 will be in line with best practices.
- BEAC will carry out its open market operations on a competitive basis.

### Reserve requirement framework
- On July 1, 2017, the BEAC started implementing harmonized (non-country-specific) rules for banks’ reserve requirements, which should allow for better liquidity management.
- The constitution of these reserve requirements will now be on average (over a month), which will facilitate liquidity management for banks.
- Staff recommendation: eliminate the current system of gradual constitution of reserves, as it would remove certain distortions among banks.
- Footnote: Only four Chadian banks with liquidity difficulties are exempt now.

### Emergency liquidity assistance (ELA)
- The BEAC intends to finalize by end-2017 its framework for emergency liquidity assistance (ELA).
- BEAC already provided ELA-like assistance to Chadian banks in June, to facilitate large roll-overs of Chadian government securities.
- The formal ELA framework will be in line with the commitments of the June 2017 Letter of Policy Support and the recommendations of the IMF's technical assistance missions.
- Following adoption of the master agreement by BEAC’s Board in August 2017, specific agreements between the BEAC and solvent banks under ELA will be required.
  - These agreements will provide the legal basis allowing the BEAC and COBAC to closely monitor banks' plans to redress their liquidity situation.
- A framework for evaluating the eligible assets used for ELA as well as the operating procedures relating to it were also developed.
- Timeline: The ELA scheme should enter into force in January 2018, after implementing regulations are finalized.
- Staff assessment: establishing the ELA will be a critical reform to address solvent banks with real temporary liquidity problems and assist them within properly calibrated conditionality.

### Development of financial markets (Section C)
- Factors explaining underdevelopment of the money market and hampered monetary policy transmission:
  - Limited availability of financial information.
  - Reluctance of commercial banks to provide liquidity to competitors.
  - Excess systemic liquidity that prevailed until 2016.
  - Direct government borrowing from banks through non-marketable loans.
  - Banks’ willingness to keep government bonds on their balance sheet to benefit from good tax free revenues.
- To develop the money market, BEAC will need to effectively fully absorb the excess systemic liquidity, when it emerges.
- BEAC continues efforts to strengthen the quality of financial information.
- Capital market: remained embryonic and fragmented owing to the competition of two stock exchanges within the CEMAC, a regional stock exchange and a national stock exchange in Cameroon, supervised by a regional and national regulator, respectively.
- Decision of the heads of states on October 31, 2017 to merge the two stock exchanges and have a single regional regulator should help develop a truly regional CEMAC capital market over the medium term.

### Financial sector databases and information
- BEAC progress:
  - Establish a database covering financial information of firms by end 2017.
  - Establish a payment incident database starting in 2018.
  - Complete the IT upgrade of the credit risk database by mid-2019.
  - Move forward on the framework to establish a private credit bureau.
- These initiatives will help banks better assess credit and counterparty risks.
- Footnotes:
  - Progress in this area will depend on TA cooperation with the IFC and World Bank.
  - As Cameroon has also been developing a national credit bureau and payment incident database, cooperation with BEAC will be needed to avoid duplication of work and information for banks.

### Sovereign–bank interactions and macro-financial risks
- Strong interactions between banks and sovereigns create macro-financial risks in CEMAC, including:
  - Dominant position of governments in the economy.
  - Relatively large share of government assets in banks’ portfolio.
  - Almost exclusive use of government securities as collateral for bank refinancing.
  - Incidence of member states' compliance with regional convergence criteria on key prudential ratios.
  - Often-important role governments play in bank resolution.
- Staff suggestion: CEMAC institutions should keep a close eye on these links to reduce negative spillovers and strengthen financial stability.
- Reforms that could weaken some links:
  - New role of the FOGADAC could reduce governments’ involvement in bank resolutions.
  - Broadening the investors’ base for government securities (some insurance companies or pension funds hold significant unused liquidities) should be encouraged.

### Paving the way for more inclusive and sustained higher growth (Section D)
- Work continues under the regional Program of Economic and Financial Reforms (PREF) to reduce excessive dependency on oil export and related revenues.
- PREF organized around five main themes and outlines specific measures over 2017–19 to:
  - Enhance the business environment.
  - Accelerate the build-up of a common and integrated regional market.
- Examples of envisaged business-environment actions:
  - Establishment of trade courts to facilitate settlement of commercial disputes.
  - Creation of one-stop shops to reduce the time and cost for creating a new company.
  - Establishment of incubator centers to facilitate the creation of new businesses through sharing best practices.
- Actions aimed at deepening regional integration include measures to:
  - Harmonize and reduce custom exemptions through a revised Customs Code.
  - Ensure full implementation of the Common External Tarif.
  - Enact the freedom to establish companies.
- Recent policy: lifting of visa requirements for CEMAC residents by Equatorial Guinea and Gabon was an important symbolic decision to facilitate free movement of people within the region.

### Consistency, prioritization, and financing of reform
- Efforts needed to ensure consistency between the PREF and national reform plans, especially for:
  - Improving cross-border physical infrastructures.
  - Establishment of a single CEMAC broad-band platform.
- CEMAC Commission view: reforms need to be appropriately prioritized through a consistent approach by member-states, based on realistic financing envelopes.
- CEMAC Commission will emphasize the need to avoid tax competition among member-states (e.g., reduce ad hoc exemptions, improve excise performance, rationalize tax expenditures).
- Cooperation: Work advancing with the Foundation for Studies and Research on International Development (FERDI).
- Plan: Ad hoc exemptions are planned to be eliminated as part of 2019 budget laws.

### Monitoring of regional developments and policies
- BEAC and COBAC have implemented the assurances provided in the June 2017 Letter of Policy Support:
  - BEAC: pursued tighter monetary policy, maintaining firm control over extension of refinancing to banks; decided to eliminate statutory advances by end-2017; strictly implemented foreign exchange regulations.
  - COBAC: intensified efforts to resolve banks in difficulty, strengthen banking supervision, and prepared action plans to tackle outstanding financial sector issues.
- Continuous engagement with IMF staff allows close monitoring of developments and assessment of implementation.
- IMF role: provide updated assessments of regional developments and implementation of regional policies semi-annually to inform Executive Board’s consideration of reviews under individual IMF-supported programs.
- A favorable assessment of implementation of critical policies is needed to allow individual reviews to be successfully completed.
- Particular importance: implementation assurances on adequate monetary policy stance aiming at the build-up of external reserves, gradually bringing and maintaining banking liquidity to a level adequate for an efficient monetary policy transmission, planned elimination of statutory advances, and further advancement in resolution of insolvent banks.
- BEAC Governor committed to provide an updated letter of policy support if material policy or reform changes turn out to be necessary.

### Staff appraisal: macroeconomic outlook and policy evaluation
- CEMAC’s economic situation: remains fragile — growth is subdued, reflecting:
  - Sharp reduction in public spending.
  - Sizeable accumulation of domestic arrears.
  - Lower-than-expected oil production.
- Medium-term outlook: foresees gradual improvement assuming full implementation of policy commitments by CEMAC member states and regional institutions.
- External position: assessed to be weaker than implied by fundamentals and desirable policies; projected consolidation of the current account would bring the regional external position back to a sustainable position in the medium term.
- Main risks: deterioration of the global economic outlook; poor implementation of Fund-supported national programs owing to lack of ownership or capacity; further delays in concluding program agreements with remaining countries.
- Policy responses to date: initial response by CEMAC national authorities and regional institutions has been appropriate; fiscal consolidation plans broadly satisfactory and backed by tightening of monetary policy to support accumulation of regional reserves.
- Regional strategy caveat: remains incomplete until all CEMAC members have embarked on reform programs supported by development partners, including the IMF.
- Monetary policy stance:
  - Considered adequately tight at this stage.
  - BEAC commended for early decision to eliminate statutory advances and measures to protect reserves.
  - Given observed and expected accumulation of reserves after mid-2017, reduction of liquidity and credit in the system, and large fiscal adjustment underway, monetary policy does not need to be tightened further for now.
  - BEAC readiness to raise its policy rate if needed is welcome.
  - The elimination of statutory advances by end-2017 is a decisive step to help restore fiscal discipline.
  - Implementation in early 2018 of a modernized monetary policy operations framework and new instruments will be important for enhancing monetary policy transmission.
- Banking sector supervision (SG-COBAC):
  - Needs to implement more forcefully measures planned to address increasing weaknesses.
  - Planned actions: deal with ailing banks within a clear timeframe; enhance adherence to critical prudential norms (including connected lending and concentration of risk); strengthen the supervisory framework.
  - SG-COBAC plans to enhance support to treatment of NPLs, which have continued to increase from already high levels, through focused analysis of contributing factors and reinforcing credit risk supervision.
  - Additional measures: work with banks on NPLs reduction plans.
- Convergence framework:
  - The new convergence framework can help strengthen regional macroeconomic management and prevent build-up of domestic and external imbalances.
  - Success depends on substantially improving monitoring and enforcement mechanisms of the convergence criteria, involving regional and national authorities.
  - Authorities should strengthen regional coordination and harmonization in key macroeconomic statistics and fully implement the six CEMAC PFM directives.
- Safeguards and accounting:
  - BEAC is taking steps for implementation of outstanding safeguards recommendations.
  - BEAC preparing revisions to secondary legal instruments (including By-Laws and codes of ethics and deontology) to align with the Charter, already amended as per IMF recommendations.
  - BEAC progressing towards full transition to IFRS beginning with the 2018 financial statements.
- Capacity and statistics concerns:
  - Weak capacity of some regional institutions and shortcomings in regional statistics remain a concern.
  - Some institutions lack human and financial resources to contribute effectively to creating an integrated common market.
  - Important gaps remain in timely statistical information of good quality, essential for good policy implementation in the current difficult context.
- Overall staff view: BEAC and COBAC have implemented the policy assurances provided in the June Letter of Policy Support, including tighter monetary policy, elimination of statutory advances and maintaining firm control over the extension of credit to banks.

*IMF staff report excerpt.*

### 45.      The surveillance discussions with the CEMAC authorities will remain on a 12-month

### cr17389 - 45.      The surveillance discussions with the CEMAC authorities will remain on a 12-month

### Surveillance and regional dialogue
- Surveillance discussions with the CEMAC authorities will remain on a 12-month cycle in accordance with Decision No.13654-(06/1), adopted on January 6, 2006.
- Staff welcomes CEMAC regional authorities’ continued commitment to a very close and ongoing dialogue on the stance of regional policies needed to support achieving CEMAC countries’ programs objectives.
- Staff plans to report regularly on these discussions to support completion of country program reviews.

### 2017 outlook and medium-term projections
- Economic activity is expected to contract in 2017, reflecting a decline in oil production and a limited acceleration in non-oil activity in a context of continued fiscal consolidation efforts.
- Non-oil real GDP growth (CEMAC regional aggregates, Table 1 / Figure 2):
  - 2014: 4.3
  - 2015: 0.9
  - 2016: 1.1
  - 2017 (Est.): 1.3
  - 2018 (Proj.): 1.9
  - 2019 (Proj.): 3.9
  - 2020 (Proj.): 4.6
  - 2021 (Proj.): 5.0
- Oil GDP (annual percent change, Table 1):
  - 2014: 3.6
  - 2015: 2.5
  - 2016: -6.2
  - 2017 (Est.): -1.6
  - 2018 (Proj.): -3.7
  - 2019 (Proj.): 7.0
  - 2020 (Proj.): 1.7
  - 2021 (Proj.): 0.3
- Consumer prices (period average, Table 1):
  - 2014: 2.7
  - 2015: 2.8
  - 2016: 1.3
  - 2017 (Est.): 1.2
  - 2018 (Proj.): 1.1
  - 2019 (Proj.): 1.5
  - 2020 (Proj.): 1.8
  - 2021 (Proj.): 2.2
- Oil prices (US dollars per barrel, Table 1, memorandum):
  - 2014: 96.25
  - 2015: 50.84
  - 2016: 42.85
  - 2017 (Est.): 50.3
  - 2018 (Proj.): 50.3
  - 2019 (Proj.): 50.2
  - 2020 (Proj.): 55.1
  - 2021 (Proj.): 51.9

### Fiscal consolidation and public debt dynamics
- Consolidation efforts will continue to rely primarily on a reduction in capital expenditure and, over the medium term, on both expenditure rationalization and non-oil revenue-enhancing measures.
- Non-oil overall balance (percent of non-oil GDP, Table 1):
  - 2014: -25.6
  - 2015: -18.3
  - 2016: -15.5
  - 2017 (Est.): -11.7
  - 2018 (Proj.): -12.0
  - 2019 (Proj.): -9.8
  - 2020 (Proj.): -8.1
  - 2021 (Proj.): -7.0
- Overall fiscal balance, excluding grants (percent of GDP, Table 1):
  - 2014: -5.2
  - 2015: -7.2
  - 2016: -7.9
  - 2017 (Est.): -4.0
  - 2018 (Proj.): -4.8
  - 2019 (Proj.): -2.9
  - 2020 (Proj.): -1.8
  - 2021 (Proj.): -1.2
- Total Public Debt (percent of GDP, Table 1):
  - 2014: 28.3
  - 2015: 42.7
  - 2016: 50.4
  - 2017 (Est.): 46.7
  - 2018 (Proj.): 52.1
  - 2019 (Proj.): 52.5
  - 2020 (Proj.): 51.4
  - 2021 (Proj.): 49.2
- Table 4a (selected country fiscal balances, percent of GDP) highlights large country heterogeneity; CEMAC aggregate overall fiscal balance (excluding grants) trending from -7.9 in 2016 to -4.0 in 2017 (Est.) and improving further in projections.

### External sector, reserves, and central bank financing
- Import contraction and financing from donors are expected to contribute to a sizeable reduction in the current account deficit and, along with financing, to stabilization in BEAC’s net foreign assets.
- Current account, including grants (percent of GDP, Table 1):
  - 2014: -1.5
  - 2015: -13.0
  - 2016: -9.9
  - 2017 (Est.): -5.1
  - 2018 (Proj.): -5.0
  - 2019 (Proj.): -4.3
  - 2020 (Proj.): -5.2
  - 2021 (Proj.): -2.6
- Gross official reserves (end of period, millions of U.S. dollars, Table 1):
  - 2014: 15,823
  - 2015: 10,344
  - 2016: 4,969
  - 2017 (Est.): 5,610
  - 2018 (Proj.): 5,890
  - 2019 (Proj.): 7,199
  - 2020 (Proj.): 8,422
  - 2021 (Proj.): 10,003
- Months of imports of goods and services (less intra regional imports, Table 1):
  - 2014: 5.8
  - 2015: 4.8
  - 2016: 2.2
  - 2017 (Est.): 2.7
  - 2018 (Proj.): 2.7
  - 2019 (Proj.): 3.0
  - 2020 (Proj.): 3.6
  - 2021 (Proj.): 4.2
- Figure 3 / accompanying text:
  - Reserves declined substantially with the sharp reduction in oil prices and export proceeds from past peak levels, bringing reserve coverage at about 2 months of imports through mid-2017, but have stabilized and started to increase.
  - With declining oil revenue, budget execution increasingly resorted to direct financing by the BEAC in 2015-16, but this has stopped in 2017.
  - Government deposits declined to a point where some governments are now cash constrained.
  - BEAC stepped up its refinancing operations as liquidity generated by oil exports declined. Banks’ excess reserves have remained broadly stable in 2017 after having strongly declined since 2014.

### Monetary, banking, and financial sector indicators
- Monetary aggregates and BEAC balance sheet (Table 7 / Table 8):
  - Broad money (CFAF billions, Table 7):
    - 2015: 11,522
    - 2016: 10,954
    - 2017 (Est.): 10,517
    - 2018 (Proj.): 11,322
    - 2019 (Proj.): 12,020
  - Net foreign assets of BEAC (CFAF billions, Table 7 / Table 9):
    - 2015: 5,548 (BEAC component in Table 7)
    - 2016: 2,254
    - 2017 (Est., year-end BEAC stock, Table 9): 2,254 (Dec. 2016 baseline), with monthly and quarterly variations reported through 2017.
- Banking sector soundness (Table 11):
  - 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
    - Jul-17: 15.7
  - 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
    - Jul-17: 14.0
  - Return on equity:
    - 2010: 18.2
    - 2011: 23.9
    - 2012: 23.9
    - 2013: 23.2
    - 2014: 17.2
    - 2015: 20.3
    - 2016: 16.4
    - Jul-17: 23.5

### Policy recommendations, commitments, and reforms (Table 13, selected measures)
- Monetary policy
  - Maintain appropriately tight monetary policy; BEAC to stand ready to increase policy rate should reserves fall short of policy objectives. (Continuous) — Status: Monetary policy stance appropriately tight so far.
  - Eliminate statutory advances; monetary financing from the regional central bank to be eliminated and existing balances converted into long-term instruments. (Deadline: End-2017) — Status: Conventions between the BEAC and the member states are being signed. Amendment of the BEAC charter will be adopted by end-2017.
  - Introduce an emergency liquidity assistance (ELA) facility under strict conditionality. (Deadline: End-January 2018) — Status: Work on eligible collateral finalized; regulation in preparation; work based on extensive IMF TA.
  - Enhance transparency in application of foreign exchange regulation; require repatriation of assets held overseas. (Continuous) — Status: Exemption conventions not provided by member states; BEAC stepped up internal control and plans new regulation.
  - Reduce refinancing ceiling to protect regional reserves and analyze strengthening ring-fencing mechanisms; apply BEAC charter mechanisms including Article 11.2. (Continuous) — Status: Refinancing ceiling reduced for Chad and Equatorial Guinea in May 2017; MCM TA to explore haircuts on government securities used as collateral.
  - Enhance liquidity management; modernize liquidity management framework by calibrating monetary policy operations based on autonomous factor forecast. (Deadline: By March-2018) — Status: Substantial preparatory work finalized.
  - Enhance data sharing from the BEAC with IMF staff (Continuous) — Status: BEAC is providing on a regular basis the full set of agreed indicators.
- Bank supervision
  - Ensure strict compliance of prudential regulations on NPL classification, provisioning, restriction of connected lending, and verification of credit risk policies. (Continuous, starting in 2018) — Status: COBAC's 2018 work program adopted to reflect enhanced compliance.
  - Enhance risk-based supervision with more frequent and stronger onsite inspections. (Continuous, starting in 2018) — Status: COBAC's 2018 work program adopted.
  - Resolution of distressed banks: give specific deadlines for resolution or initiate liquidation. (Continuous, starting in 2018) — Status: COBAC Commission adopted several decisions in 2017 including appointing liquidators and requesting restructuring plans; deadlines set for recapitalization.
  - Enhance data sharing from COBAC with IMF staff. (Continuous, starting in 2018) — Status: Data and updates provided regularly; strategic priorities and actions description provided after October 2017 mission.

*Sources: CEMAC authorities; BEAC; COBAC; United Nations Sustainable Development Goals; and IMF Staff estimates and projections.*

### Annex I. Risk Assessment Matrix

### Annex I. Risk Assessment Matrix

### Risk assessment framework
- The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff).
- The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline:
  - “low” is meant to indicate a probability below 10 percent;
  - “medium” a probability between 10 and 30 percent; and
  - “high” a probability between 30 and 50 percent.
- The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities.
- Non-mutually exclusive risks may interact and materialize jointly.
- “Short term” and “medium term” are meant to indicate that the risk could materialize within 1 year and 3 years, respectively.

### Sharper-than-expected global growth slowdown
- Source / Likelihood:
  - Medium
  - Likelihood: low in the short term, medium thereafter.
- Expected Impact:
  - Significant China slowdown. Efforts to rein in financial sector risks, expose vulnerabilities of indebted entities and reduce near-term growth.
  - Over the medium term, overly ambitious growth targets lead to unsustainable policies, reducing fiscal space, and further increasing financial imbalances.
  - A sharp adjustment could entail weak domestic demand, lower commodity prices, roil global financial markets, and reduce global growth.
  - Lower growth in China will continue to depress commodity prices, including oil, and will have a negative impact on regional exports.
  - Lower commodity revenues will further undermine fiscal sustainability in most CEMAC countries.
- Proposed Policies to Mitigate Risks (short-term):
  - Ensure solid implementation of fiscal and monetary adjustment policies across the region to reduce the twin deficits, collectively, and ensure external sustainability.
  - Develop the regional debt market to cover CEMAC members’ financing needs.

### Persistently lower energy prices
- Source / Likelihood:
  - High
  - Likelihood: high over the medium term.
- Expected Impact:
  - Persistently lower energy prices, driven by stronger-than-expected U.S. shale and/or recovery of oil production in the African continent.
  - A “permanent” downward price shock on oil and other commodity prices will lower regional exports.
  - Lower hydrocarbon revenues will erode fiscal sustainability further in most CEMAC countries and will hinder efforts to re-build an adequate foreign reserve buffer.
- Proposed Policies to Mitigate Risks (short-term):
  - Launch reforms to widen the non-oil tax base, notably excises, and reduce VAT-related and other exemptions.
  - Ensure prompt repatriation of oil export proceed, in line with the foreign exchange law.
  - Spur competition in the non-oil import sector.
  - Improve external competitiveness through structural reforms to improve the regional business climate and deepen the regional market.

### Delays in the implementation of regional reforms
- Source / Likelihood:
  - High
  - Likelihood: medium in the short term.
- Expected Impact:
  - Weak implementation capacity and bureaucratic delays at the regional and national levels hamper the pace of reforms.
  - In a low oil price environment and eroded buffers, CEMAC countries may find it even more challenging to find resources and support for regional integration.
  - Delays in reforms to address BEAC/CEMAC governance and operational weaknesses could adversely affect policy responsiveness.
  - Lackluster momentum for financial sector reform could prevent regional authorities from taking decisive actions to deal with weak financial institutions and cause fiscal liabilities.
  - The absence of significant progress in public finance and financial sector reforms could constrain private investment and undermine efforts to diversify the regional economy.
  - The lack of progress in rebuilding regional reserves could lead to capital outflows, and strain the CFA franc’s peg to the Euro.
- Proposed Policies to Mitigate Risks:
  - Establish credible and time-bound plans to implement much delayed reforms in key regional institutions.
  - For the BEAC, the priority is to finalization it enhanced monetary policy and liquidity management.
  - The CEMAC Commission should enhance processes and fill legislative gaps to implement the new regional surveillance framework, including full transposition of CEMAC’s public finance directives by member states.
  - Coordinate national and regional efforts to jump-start measures to enhance the business environment.

### Lack of commitment on adjustment efforts by some member(s)
- Source / Likelihood:
  - High
  - Likelihood: medium in the short term.
- Expected Impact:
  - Possibility of free-rider behavior, if even just one CEMAC country does not pursue appropriate adjustment policies needed to restore regional external stability; this would negatively impact the success of individual Fund-supported programs.
  - This behavior could undermine regional cooperation and the other countries’ willingness to pursue adjustment efforts, thereby jeopardizing external sustainability.
- Proposed Policies to Mitigate Risks:
  - Intensify regional peer pressure on the authorities of any free-rider country to pursue adequately strong policies.
  - Enhance mechanisms to address countries which derail from the agreed adjustment path both at the BEAC and CEMAC Commission level.

### Deterioration of the security in the region
- Source / Likelihood:
  - Medium
  - Likelihood: medium in the short term.
- Expected Impact:
  - Possible deterioration of the security situation in the region, already fragile and exacerbated by the challenging economic situation and the impact of fiscal consolidation on the poorest.
  - This could undermine the already fragile economic recovery, affect negatively expectations of the private sector, and weaken the business environment.
- Proposed Policies to Mitigate Risks:
  - Keep effective social dialogue, ensure that priority spending in social sector is protected.

*International Monetary Fund — Annex I. Risk Assessment Matrix*

### Annex V. External Sector Assessment

### Annex V. External Sector Assessment

### A. Recent Developments in External Accounts
- The regional external current account deteriorated, widening to 10 percent of GDP in 2016 from a surplus of 3.3 percent of GDP in 2012.
- Cross-country heterogeneity: the sharp worsening in Congo’s external accounts in 2015–16 weighed on the regional current account, partly due to exceptional imports associated with a large investment in the oil sector in 2015–16.
- Country responses:
  - Import substitution, tighter fiscal stance and weak domestic demand helped narrow the current account deficit in Cameroon, Chad and Equatorial Guinea.
  - Fiscal restraint was not strong enough in Gabon, leading to a wider current account deficit in 2015-16.
- Medium-term projections and drivers:
  - Current account deficit projected to narrow to 5 percent of GDP in 2017.
  - Current account deficit projected to reach 1½ percent of GDP by 2021.
  - Reserve levels projected to improve to about 4½ months of imports by 2021, from 2.2 months of imports at end-2016.
  - Drivers of improvement: strong fiscal consolidation, tighter monetary policy (in the context of IMF-supported programs), and a modest recovery in international oil prices.
- External financing and capital flows:
  - Foreign direct investment (FDI) averaged 6¼ percent of GDP over the last 5 years and has been relatively stable.
  - FDI largely driven by reinvested earnings; projected to increase in the medium term as commodity prices recover and structural reforms take hold.
  - Non-repatriation of export proceeds and fear of devaluation have recently put pressure on the capital account and possibly led to capital outflows.
  - Policy implication: implementation of sound macroeconomic policies and stricter enforcement of foreign exchange regulations should support recovery in foreign reserves.

### B. Reserves Adequacy
- Reserve coverage fell to 2.2 months of prospective extra-regional imports at end-2016, down by more than half over the previous 2 years.
- Benchmarks and comparisons:
  - Benchmark considered appropriate for a resource-rich currency union: 5 months of imports.
  - Cost-benefit analysis indicates optimal range between 5 and 12 months of imports, depending on the interest rate differential with the rest of the world.
  - At end-2016, reserves amounted to no more than 50 percent of the IMF reserve adequacy metric (compared to a broadly adequate range of 100–150 percent).
  - Broad money and short-term liability ratios appeared more favorable: 27 percent (broad money) and 184 percent (short-term liabilities) versus minimum thresholds of 20 and 100 percent, respectively.
- Outlook and policy mix:
  - Reserve coverage expected to recover gradually in the medium term with fiscal consolidation and tighter monetary policy, while being mindful of growth and financial stability.
  - Data up to September 2017 suggest BEAC reserves reached an inflection point, aided partly by disbursement of IMF loans in July 2017 to Cameroon, Gabon, Chad and CAR, and by adjustment efforts.
  - Even if current projections materialize, medium-term reserve coverage would remain somewhat lower than adequate for a resource-rich currency union, leaving the region vulnerable to adverse external shocks.

### C. Exchange Rate Assessment
- Recent REER developments:
  - REER broadly stable in Jan-Dec 2016; appreciated by about 1 percent year-on-year in August 2017, reflecting mainly a strengthening of the euro versus the US dollar.
- Two standard assessment approaches and outcomes:
  - EBA-Lite’s Index Real Effective Exchange Rate (IREER): comparison of fitted IREER and the norm indicates a modest overvaluation of 5 percent in 2017.
  - EBA-Lite’s Current Account (CA) model: compares underlying current account balance with model-estimated norm and suggests a moderate overvaluation by 13 percent in 2017.
    - 2017 projected current account deficit: 5 percent of GDP.
    - Model-estimated current account norm: 1.8 percent of GDP (assuming an elasticity of the current account to REER of -0.24).
- Overall assessment: the external position of the CEMAC region is weaker than implied by fundamentals and desirable policies.

### D. Structural Competitiveness
- Doing Business indicators:
  - CEMAC countries underperform relative to comparable countries, lagging behind WAEMU peers and comparable to SSA oil exporters.
  - Between 2005 and 2017, progress was uneven: some progress in Cameroon; little progress or deterioration in other countries.
  - Pronounced impediments: starting a business, getting electricity, enforcing contracts, trading across borders.
  - Additional challenges: lack of adequate infrastructure, unreliable energy supply, cumbersome procedures for paying taxes and registering properties.
- Governance indicators:
  - CEMAC countries trailed WAEMU and emerging economies on World Bank “Governance Indicators”.
  - Governance improved in the last 15 years by a smaller margin than in other country groups.
  - Governance is weaker in CEMAC even after accounting for income per capita levels.
- Policy implication: urgent reforms are needed to foster an enabling business environment and address non-price competitiveness weaknesses to support private sector growth and job creation, reduce reliance on public spending-led growth, and tackle poverty durably.

*IMF staff: Annex V. External Sector Assessment*

### 2.7 months of imports at end-2017, before reaching 3.6 months of imports at end-2019.

### 2.7 months of imports at end-2017, before reaching 3.6 months of imports at end-2019.

### Recent developments and macroeconomic context
- Growth for 2017 should be flat due to decreased investment spending and further declining oil production; inflation remains subdued.
- Current account deficit for the region improved to 5 percent of GDP in 2017 from about 10 percent in 2016.
- Foreign reserves are projected to reach a level equivalent to 2.7 months of imports by year-end against 2.2 months at end-2016.
- Fund financial support to programs for four member countries contributed to stabilizing foreign exchange reserves which started to increase anew in the second half of 2017.

### Policy actions taken by regional authorities
- The elimination of statutory advances:
  - BEAC's Board of Directors decided on August 5, 2017 to abolish the monetary financing of member states by the end-2017.
  - Four countries (Central African Republic, Republic of Congo, Equatorial Guinea, Chad) have already signed conventions on the consolidation of BEAC’s advances to these states and the conversion of existing advances into long-term loans.
  - The two other countries will sign this convention by end-December 2017 at the latest, and BEAC’s Charter will be amended accordingly.
- Monetary policy framework reform (expected from early 2018) will include:
  - the simplification of monetary policy instruments;
  - the calibration of monetary policy operations on the basis of forecasts of autonomous liquidity factors;
  - the establishment of an emergency liquidity assistance facility.
- BEAC monetary policy actions in 2017:
  - increased its policy rate by 50 bps in March 2017;
  - the Monetary Policy Committee decided early November 2017 to maintain unchanged the interest rates applicable to banks and national treasuries as well as the required reserves rate;
  - modified the method of constituting required reserves to align with the new monetary policy operational framework, providing banks more flexibility in liquidity management and promoting interbank operations;
  - put a halt to statutory advances.
- BEAC will monitor banking liquidity and use instruments at its disposal to bring it to and maintain it at a level adequate for efficient monetary policy transmission.

### Banking sector measures and financial stability
- The Secretariat General of COBAC has prepared an action plan to strengthen the banking sector focused on:
  - resolution of banks in difficulty;
  - addressing non-performing loans;
  - strengthened enforcement of several supervision rules.
- COBAC actions taken since July 2017 include:
  - putting two public banks under liquidation;
  - placing another bank under conservatorship and extending the conservatorship of a fourth bank;
  - requiring two additional banks to provide restructuring plans;
  - obtaining from another bank a commitment to recapitalization.
- Banking sector performance and risks:
  - The banking sector remains profitable while banks’ capital adequacy ratios have improved.
  - Significant risks and vulnerabilities persist, notably large non-performing loans (NPLs) and declining deposits, linked to the sovereign-banks nexus in CEMAC.

### Regional strategy, implementation priorities, and requests to partners
- Regional strategy objectives (adopted December 2017) include:
  - tackling macroeconomic imbalances;
  - rebuilding reserves to a level conducive to the stability of the currency union and exchange rate;
  - enhancing financial sector stability;
  - strengthening resilience to future shocks through diversification and greater integration.
- Implementation priorities going forward:
  - Pursuing fiscal consolidation: rationalization of public spending and measures to raise domestic revenues starting in 2018; additional fiscal space expected to help clear government payment arrears and improve public debt trends.
  - Rebuilding and safeguarding reserves: maintain a tight monetary policy stance as appropriate; complete elimination of statutory advances; keep bank liquidity under check; use required reserve ratio and open market operations as needed.
  - Continued coordination and close dialogue between BEAC, COBAC, member states, and IMF staff on policy options and implementation challenges.
- Request to development partners:
  - Disbursements from some development partners are behind schedule, making achievement of country program objectives more difficult.
  - The authorities request IMF encouragement of other development partners to unblock delayed disbursements and provide additional support if necessary to safeguard the sustainability of programs in the short and medium term.

### Key statistics and timelines (preserved exactly as reported)
- Foreign reserves: projected to reach 2.7 months of imports by year-end (2.2 months at end-2016).
- Reserve trajectory referenced in title: 2.7 months of imports at end-2017, before reaching 3.6 months of imports at end-2019.
- BEAC decision date to abolish monetary financing: August 5, 2017.
- Timeline for signing conventions: remaining two countries to sign by end-December 2017 at the latest.
- Monetary policy reform expected from early 2018.
- BEAC policy rate increase: 50 bps in March 2017.
- Fiscal impact: reduction of non-oil primary deficit equivalent to about 5 percentage points of non-oil GDP in 2017 relative to last year.
- Current account deficit: reached 5 percent of GDP in 2017 from about 10 percent in 2016.

*CENTRAL AFRICAN ECONOMIC AND MONETARY COMMUNITY (CEMAC) STAFF REPORT — November 29, 2017*

### 13. BEAC has launched a multi-pronged strategy to modernize its monetary policy framework,

### 13. BEAC has launched a multi-pronged strategy to modernize its monetary policy framework,

### Monetary policy framework modernization
- BEAC has launched a multi-pronged strategy to modernize its monetary policy framework, comprising:
  - (i) a reform of policy instruments in line with best practices, with the view to enhance monetary policy transmission;
  - (ii) a sound liquidity management framework and an emergency liquidity assistance (ELA) available to eligible banks facing liquidity problems; and
  - (iii) a revised collateral framework to accompany the new liquidity management tools.
- The implementation of the revised monetary policy framework is planned for early 2018.

### Safeguards, governance, and accounting reform
- The central bank will complete the implementation of the priority recommendations designed under the 2017 safeguards assessment, which is progressing well.
- BEAC is revising its By-Laws and codes of ethics and deontology following the completion of amendments to its Charter to strengthen the central bank governance.
- Steps are also being taken to transition to international financial reporting standards (IFRS) as early as 2018.
- BEAC will enhance its accounting and risk management capacities through training and professional certification.
- The authorities appreciate Fund technical assistance that supported their efforts to prepare the new reserve management framework.

### Strengthening the banking sector
- The Secretariat General of COBAC’s action plan to strengthen the banking sector will aim to:
  - reinforce the application of provisioning rules to address NPLs;
  - enhance inspection documentation to better comprehend the reasons behind improper classification or provisioning of credit; and
  - supervise the application of the new regulation on banks’ internal control.
- The action plan also strives to:
  - improve compliance with prudential rules—notably on risk concentration and lending to connected parties—and
  - enhance penalty-based incentives for compliance.
- The authorities will continue to address the situation of banks in difficulty. Several banks are expected to present recapitalization plans.
- Decisions on bank resolutions are ultimately taken by the 12-member banking commission.
- The Secretariat General of COBAC stands ready to further improve its action plan to address the sector’s vulnerabilities, with Fund advice and technical assistance.
- The CEMAC authorities appreciate the staff’s analysis of the sovereign-bank nexus in the region, and the options proposed to further reduce those links and the risks of negative feedback loops (Selected Issues paper). They will closely monitor macro-financial risks and stand ready to adopt measures to reduce them.

### Developing financial markets
- Along with strengthening the banking sector, the BEAC authorities will pursue efforts to promote financial markets in the region. This includes:
  - merging the two stock exchanges and
  - enhancing the quality of financial information, notably through a database on firms’ financial information, a payment incident database, the modernization of the credit risk database, and the creation of a private credit bureau.

### Enhancing the regional surveillance framework
- The CEMAC authorities fully share staff’s proposals to strengthen the regional surveillance framework, with the view to preventing the build-up of imbalances and favor integration going forward.
- Reform options being contemplated by the authorities include:
  - (i) the preparation of triennial convergence plans;
  - (ii) the requirement to reflect the fiscal convergence criteria in national budget laws;
  - (iii) dissemination of fiscal data;
  - (iv) improving the monitoring and other capacities of the CEMAC Commission; and
  - (v) the establishment of clear sanction incentives for the observance of convergence criteria.

### Conclusion and implementation outlook
- The CEMAC authorities are determined to pursue common policies to address the challenges facing the economies in the region.
- While recent progress is encouraging, there remain important risks emanating from global economic developments, policy implementation, external financing, and security challenges.
- The authorities plan to maintain a collaborative approach under the CEMAC’s Program of Economic and Financial Reforms (PREM-CEMAC).
- They are hopeful that the ongoing bilateral negotiations between the Fund and the remaining two countries will promptly conclude, thus increasing the likelihood of success of the regional strategy.
- The CEMAC authorities stress the importance for development partners to fulfill their pledges on a timely basis to provide necessary financing for adjustment policies, while continued Fund technical assistance will help implement their reform agenda in an effective manner.

*cr17389 - 13. BEAC has launched a multi-pronged strategy to modernize its monetary policy framework,*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17389.pdf_