## cr18210 ## Source details **Canonical URL:** [cr18210](https://www.imf.org/-/media/files/publications/cr/2018/cr18210.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr18210.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr18210.pdf.json) --- ### Background - CEMAC region faces challenging social and political tensions: Cameroon’s Anglophone regions, deterioration in the Central African Republic, insecurity in areas such as the Lake Chad region and Congo’s Pool region, and social tensions linked to adjustment reforms. - Upcoming elections may test resolve for adjustment and reforms (parliamentary elections in Gabon and Chad later this year; presidential elections in October in Cameroon). - All CEMAC countries agreed with IMF staff on policies and macroeconomic frameworks underpinning the regional strategy to restore fiscal and external imbalances. - Implementation of IMF-supported programs: - Broadly satisfactory in first part of 2017; program reviews completed for Cameroon, Gabon and CAR in December 2017, and for Chad in April 2018 (following agreement in principle on restructuring of Chad’s debt to Glencore). - Mixed implementation since then: fiscal slippages at end-2017 in Cameroon and Gabon; Gabon accumulated new external arrears in early 2018. - Cameroon authorities agreed with IMF staff on policies to achieve program objectives going forward. - Gabon authorities confirmed commitment and continue to work with IMF staff to correct slippages. - Implementation with CAR and Chad continues to be broadly satisfactory. - A staff-monitored program with Equatorial Guinea was approved by IMF management in April 2018, potentially paving the way for an IMF-supported program by end-year. - Republic of Congo authorities reached agreement with IMF staff on policies that could underpin a possible three-year ECF arrangement to be submitted soon to the IMF Executive Board. ### Recent Economic Developments — Growth, Inflation, and External Sector - Growth - Growth was limited to just under 1 percent in 2017, reflecting fiscal consolidation and a contraction in oil production in all producing countries but Congo. - Growth is expected to increase in 2018 to about 2¾ percent. - Oil production rebound projected: +6 percent in 2018 after -3 percent in 2017. - Non-oil sector growth projected to remain about 2 percent. - Non-oil improvement in half the countries offset by slowdown in Cameroon and deeper recession in Equatorial Guinea. - Inflation - Inflation was less than 2 percent year-on-year in 2017 (less than 1 percent on annual average). - Inflation expected to remain below 2 percent in 2018. - External sector and reserves - Current account deficit contracted by more than 9 percent of GDP in 2017 (due to higher oil exports: +2.5 percent of GDP; and lower imports: - 6.3 percent of GDP). - Higher-than-expected FDIs helped net reserves accumulation despite larger apparent net capital outflows (including large negative errors and omissions) and delays in disbursements of external budget financing. - Net foreign assets (NFA) of the central bank declined slightly in Q1 2018 (below previous projections) due to larger government cash spending related to 2017 budget execution, resulting in lower government deposits with BEAC. - NFA projected to increase significantly during second half of 2018, surpassing previous projections, with gross reserves coverage projected at over 3 months of imports by end-2018—conditional on member states addressing recent fiscal slippages and reflecting higher oil exports and increased exceptional financing under IMF-supported programs. ### Fiscal Developments and Public Debt - Fiscal consolidation in 2017 - Continued significant efforts focused on rationalization of spending, particularly investment projects. - Expenditure cuts were smaller than expected in Cameroon, Chad and Congo; non-oil revenue performance was disappointing. - Higher oil revenue largely offset larger spending and lower non-oil revenue and grants. - Overall fiscal deficit on average across the region was just under 4 percent of GDP (vs. projected 3¾ percent of GDP), down from 7½ percent of GDP in 2016. - Adjustment in the non-oil primary balance was lower than programmed (by 2 percent of non-oil GDP). - Public debt - After increasing by more than 20 percentage points over the previous two years, public debt-to-GDP ratio increased by about 1 percentage point in 2017, to 54.5 percent, with significant differences across countries. - Government securities market - Access remained satisfactory, with a shift to shorter maturities. - Net issuances increased to about CFAF 70 billion during January–April 2018, with short-term securities amounting to just over two thirds of total government securities. - Interest rates declined slightly for maturities up to 6 months and were stable for longer maturities, with significant differences in yields between countries. ### Banking Sector and Financial Stability - Overdue loans and credit conditions - Ratio of overdue loans increased from an average of 15.0 percent in December 2016 to 17.5 percent in December 2017 and 19.7 percent in March 2018. - Ratio of overdue loans in March 2018 ranged from 15 to 32 percent across countries. - Increase reflects weak economic activity, large government arrears to the private sector, and financial difficulties of a few large firms. - Banks remained cautious in extending new credit; credit to the private sector declined further by - 3 percent y-o-y at end-March 2018. - Liquidity and capital - Overall liquidity of the banking system remained broadly stable in early 2018 following improvement in H2 2017. - Average capital ratio at 17.5 percent in March 2018, indicating a still strong capital position overall despite weaknesses. ### Outlook and Risks - Outlook improved with upward revision of oil price projections; restoration of fiscal and external sustainability depends on implementation of policy commitments. - Critical policy requirements - Continued tightening of fiscal policies by member states. - Adequate support by regional institutions, notably a sufficiently tight monetary policy stance and enforcement of foreign exchange regulation. - Assumptions and projections - Additional oil revenue in 2018–19 should be used to smooth fiscal adjustment paths and gradually repay domestic arrears and/or rebuild external and fiscal buffers more rapidly. - Non-oil primary deficit expected to decline more gradually than previously envisaged (to less than 5 percent of non-oil GDP by 2020). - Higher oil revenue in 2018–19 would allow bringing public debt back under 50 percent of GDP by 2020 (as previously envisaged). - Repayment of government arrears, higher private sector confidence from enhanced fiscal sustainability, reforms to improve business environment, and strengthening the financial sector would contribute to gradual recovery of non-oil growth to 4 ½ percent by [text ends]. ### Outlook and key projections - Current account deficit would converge to around 2½ percent of GDP from 2018 onward. - Lower current account deficits over 2018–20 would contribute to a more rapid increase in BEAC’s net foreign assets, with the reserves cover reaching 5 months of imports by 2022. - About 70 percent of these loans are to the private sector, with an average provisioning ratio of 86 percent; the rest being loans to the public sector, which are not provisioned in line with COBAC regulations. ### Major risks to the outlook - Possibly weaker fiscal consolidation due to political/social pressures (notably in countries holding elections this year), capacity constraints, or complacency following the recent rise in oil prices. - Fiscal slippages observed in Cameroon and Gabon are highlighted as a cause of concern and need prompt correction. - Delays in implementing PFM and tax administration reforms would jeopardize programs’ fiscal objectives: increasing non-oil revenue collection, avoiding additional government arrears, and bringing public debt to a declining path. - Monetary policy likely unable to offset fiscal slippages; smaller NFA accumulation could cast doubts about external sustainability and may derail the regional strategy, leading to a deeper financial crisis. - Recommendation: BEAC should continue to monitor access to the regional securities market and bank liquidity in any country incurring fiscal slippages. - Reversal in oil prices (e.g., stronger-than-expected U.S. shale gas or recovery of African oil production) could put additional pressure on fiscal and external balances and on the financial sector, especially in countries most dependent on oil revenue (including Republic of Congo and Equatorial Guinea). - If oil prices remain higher than assumed in the baseline, additional oil revenues would be largely saved (or used for additional arrears repayments) and contribute to more rapid accumulation of regional reserves. - Deterioration in the security situation (already worsened in the Central African Republic) could negatively affect economic activity and lead to increased military spending. - Lower-than-projected external budget support. - National authorities must ensure conditions for external aid are fulfilled promptly; staff will continue work with authorities and development partners to secure sufficient funding assurances. ### Current account, reserves, and financing needs (selected figures) - Current account, including grants (percent of GDP): - 2016: -9.9 - 2017: -5.0 - 2018: -4.3 - 2019: -5.2 - 2020: -2.6 - 2021: -1.5 - Gross official reserves (months of imports of goods and services): - 2016: 2.2 - 2017: 2.7 - 2018: 3.0 - 2019: 3.6 - 2020: 4.2 - 2021: 4.5 - Net foreign assets (annual change in billion CFAF): -3,294; -107; 259; 245; 125; ... - Total remaining external financing needs over 2018–20 are currently estimated at about CFAF 4 trillion (about US$ 7.6 billion) for the five CEMAC countries with IMF-supported programs in place or soon to be submitted to Executive Board consideration. - IMF resources are projected to cover about 20 percent of these financing needs. - Other IFIs (World Bank and African Development Bank) and creditors/donors (France and EU), as well as debt restructuring in some countries, would cover the remaining financing needs. - Financing Sources, 2017–20 (Billions of CFAF) - 1. Financing gap: 1,499; 1,237; 1,747; 1,483; 774; 4,004 - 2. IMF financing: 372; 338; 304; 326; 162; 792 - of which: to be adopted: 00; 50; 75; 74; 199 - 3. Budget support from other donors: 1,024; 799; 985; 693; 254; 1,932 - 4. Other exceptional financing: 104; 100; 458; 464; 358; 1,280 ### Implementation of the regional strategy and fiscal sustainability - Agreement that fiscal slippages should be promptly addressed through corrective fiscal measures. - BEAC and COBAC committed to maintain an appropriate monetary policy stance, support build-up of regional reserves, and promote financial sector stability. - BEAC committed that, in the event of further underperformance of NFA, it would participate in joint consultations with IMF staff and national authorities to identify and implement necessary corrective measures. - Member states need to deliver fully on fiscal consolidation commitments to rebuild adequate international reserves. - Supplementary budget in Cameroon (strengthened expenditure controls and revenue-enhancing measures) should be adopted promptly. - In Gabon, the President asked the new government to enhance the tax system to mobilize more non-oil revenues, reduce the wage bill, and improve public finance and debt management. - Measures recommended: streamline non-priority expenditures while preserving social spending; increase non-oil revenue (including streamlining tax exemptions and strengthening tax and customs administration); adopt and implement gradual repayment plans for domestic arrears. - Non-oil revenue performance has been disappointing and should be significantly strengthened; an increase in non-oil revenue would also contribute to reducing inequality. ### Monetary policy stance and operational framework modernization - Monetary policy will continue to aim primarily at rebuilding an adequate level of foreign exchange reserves. - BEAC ready to tighten monetary stance should underperformance of reserve accumulation persist. - Given growth below potential, moderate inflation, sluggish credit to private sector, and fragile banking sector, staff judged a further increase in the policy rate does not appear warranted at this stage, though tighter liquidity management is required. - Preliminary staff analysis suggests BEAC’s current policy rate appears broadly adequate from a business cycle standpoint. - BEAC committed to consult with staff and national authorities and take corrective measures (which may include tighter monetary policy) if indications emerge that BEAC’s net foreign assets’ accumulation diverge from the envisaged path. - Progress in modernizing the monetary policy implementation framework: - Elimination of statutory advances finalized; existing balances converted into long-term loans; BEAC’s Charter amended in March 2018 to preclude future monetary financing of budgets. - Emergency liquidity assistance framework operational; one bank used it. - March 2018 Monetary Policy Committee approvals: - Unification of reserve requirement rates at their highest level; since mid-December these requirements are assessed based on monthly averages; reduction of exempted banks from four to one. - Removal of BEAC’s refinancing ceilings for government securities used as collateral; replaced by a system of progressive haircuts. - Banks can use repurchase agreements for interbank transactions. - BEAC to start in June 2018 basing liquidity management on forecasts of autonomous factors and providing liquidity through competitive multi-interest rate auctions; weekly Monetary Market Committee meetings began in early March. - Modernization to be completed by end-2018 with formal setting up of an interest rate corridor and new accounting scheme for monetary operations. - BEAC plans to deepen understanding of monetary policy transmission (build modeling capacity, collect additional data, design shock scenarios) and enhance coordination with fiscal policies. - BEAC to gradually absorb banks’ excess liquidity to bring it close to a neutral level by end-2019; caution against abrupt absorption that could push sound banks into liquidity crisis. - Staff suggested further (possibly remunerated) increase in reserve requirements or introduction of a standing deposit facility. ### Revision and enforcement of foreign exchange regulations - Non-compliance observed: weak repatriation of export receipts (particularly for oil companies); insufficient documentation for foreign exchange demands by banks; some banks keep foreign exchange assets abroad on behalf of clients in breach of regulations; many non-financial companies have bank accounts abroad. - Potential factors: past lax enforcement, exemptions in conventions between member states and extractive industry operators, reported delays in BEAC’s provision of foreign exchange to banks, lack of investment opportunities in the region. - BEAC will submit revised foreign exchange regulations to the UMAC ministerial committee by end-2018 to strengthen enforcement. - New regulations aim to: clarify repatriation of export receipts and investment revenue rules; clarify opening of accounts abroad by companies; clarify surrendering of foreign exchange by banks; strengthen reporting requirements; broaden scope of BEAC and SG-COBAC controls; include more realistic sanctions. - Staff encouraged additional measures to strengthen forex repatriation: - BEAC should continue efforts to obtain copies of conventions signed with oil companies and work with national authorities to align national extractive industries codes with community foreign exchange regulation. - BEAC to streamline internal procedures and enhance communication with banks to avoid undue delays for legitimate foreign exchange demands. ### Strengthening the banking sector - SG-COBAC actions and planned measures: - Rules of application of the 2017 CEMAC regulation on micro-finance institutions (MFIs) adopted in early 2018; some MFIs have begun compliance. - New regulation sets periodic penalty payments based on net banking income, increasing the cost of non-compliance. - Several regulations adopted to pave the way for application of Basel Committee rules: definition of systemically important institutions; identification of banking assets subject to liquidation rules; accelerated resolution of small MFIs. - In 2018, SG-COBAC plans (with Afritac and World Bank support) to adopt: legislation implementing the Deposit Guarantee Fund (being funded with banks contributions); a regulation on payment systems and electronic money; supervision on a consolidated basis; instructions on risk management; and formalized risk-based supervision practices. - Risk concentration regulation and exemptions - Staff noted banks reluctant to request the exemption introduced by SG-COBAC in October 2017 despite concerns about sovereign risk weights. - SG-COBAC and staff agreed the regulation should be preserved; staff suggested clarifying conditions for exemptions (including with regard to dividend payments). - In the medium term, after current fiscal imbalances are addressed, SG-COBAC could review implementation rules of sovereign risk weights to avoid sudden large changes. - Strengthening risk-based supervision and bank-level practices - Planned projects: "formalization of processes with IMF and the World Bank, new system for declarative statements in 2019" and COBAC inspection missions in 2018 "will be largely targeted on risk management." - SG-COBAC could more systematically identify and disseminate banks’ best practices in "risk management policy, rating instruments, treatment of overdue loans, and anti-money laundering processes." - Actions on overdue loans: enforce loan classification and provisioning rules; require banks to "strengthen their risk management policies, rating instruments, and processes to recover overdue loans." - SG-COBAC could consider "increasing capital requirements for banks with excessive overdue loans, and request clearance plans." - Alert national authorities on governance issues in the judicial systems; collect information on judicial problems; support training of judges specializing in banking disputes. - Resolution, infringement procedures, and prudential enforcement - Staff encouraged SG-COBAC "to set shorter deadlines for non-systemic banks which have been in distress for several years." - Prudential non-compliance remains high; SG-COBAC could review its infringement procedures "including to speed up processing and impose penalties more rapidly to recidivists." - AML/CFT and supervisory contributions - Banking supervision could further contribute to anti-money laundering and combating financing of terrorism (AML/CFT) efforts. - SG-COBAC plans to "adopt by end-2018 a regulation detailing the implementation procedures of the CEMAC AML / CFT regulation." - Staff offered IMF assistance (together with the World Bank) for updating/improving SG-COBAC’s expertise if needed. ### Development of financial markets and data infrastructure - Findings - Further efforts are needed to help develop financial markets. - The merger of the two existing stock markets is key to the development of equity financing in the region. - BDEAC’s governance issues need to be tackled promptly, as precondition for receiving additional financing from BEAC. - Policy recommendations and measures - Establishment of financial databases and of a credit bureau to help banks better assess credit and counterparty risks and strengthen credit supply. - Institutional priorities - Merge the two existing stock markets to support equity financing development. - Tackle BDEAC’s governance issues promptly to qualify for additional financing from BEAC. - BEAC progress on financial sector databases - Databases to include: "a database on firms’ financial information, a payment incident database, a credit risk database." - These, along with the envisaged establishment of a private credit bureau, "will be key sources of financial information for credit institutions to strengthen their risk management tools." - Staff encouraged coordination with "Cameroon’s National Credit Council financial information project." - SG-COBAC audit of BDEAC - Identified weaknesses in "hiring, internal audit and control, provisioning, risk management, and financing." - BEAC should "wait for these reforms to be implemented before considering proceeding to the next disbursement under the 2015 agreement between the two institutions." ### Regional integration, convergence, and statistics - PREF implementation and country-specific actions - Cameroon: "quantify tax expenditures and gradually reduce them starting in 2019; and to audit regularly import declarations." - Chad: "non-oil revenue performance has been encouraging, reflecting efforts to channel revenues through banks and reforms to improve VAT collection." - Equatorial Guinea: "reforms are underway to simplify tax payment procedures." - Gabon: "work is progressing to establish a unified tax authority, which should help gradually increase non-oil revenue." - Member states to translate community directives into national legislations and implement them; step up efforts to enhance the business climate. - Regional surveillance, statistics, and capacity constraints - Commission hired consultants to help national authorities prepare "3-year convergence plans articulating their medium-term macroeconomic policies and reforms." - Staff emphasized these plans "should be finalized promptly (national authorities did not comply with the initial end-March 2018 deadline)." - Limitations: "(i) its limited human and financial resources (especially as member states’ contributions are not always paid on time); and (ii) the fact that the community regulation for compilation and provision of regular statistics is not fully enacted in national legislations." - BEAC faces a "relative weak regional data exchange framework," including not receiving "regularly high frequency data on budget execution," and difficulties in compiling BOP statistics. - Suggested actions: - Fast track measures to close the gap between community regulation in PFM and national legislation implementation. - Encourage BEAC to enhance BOP statistics, with IMF assistance. - Encourage the Commission to strengthen data collection and analysis capacity, "with the World Bank and EU assistance." - Re-establish the Treasury Operations Committees to "share and discuss budget execution data and assess/close gaps with regards to common statistical standards." ### Reserves adequacy, exchange rate, and external assessment (Annex I highlights) - Recent developments in external accounts - Regional current account balance deteriorated to -13.7 percent of GDP in 2016, from +3.3 percent of GDP in 2012. - In 2017, current account deficit declined to around 4.5 percent of GDP due to higher oil exports and reduced imports. - Cross-country heterogeneity in 2017: deficits ranged from 13 percent of GDP in Congo to less than 3 percent of GDP in Cameroon and Equatorial Guinea. - Medium-term projection: current account deficit projected to narrow to 2.5 percent of GDP in 2018 and stabilize around that level. - Official reserves projected to improve to close to 5 months of imports by 2022, from 2.4 months of imports at end-2017. - Reserves adequacy - Reserve coverage stabilized in 2017 at 2.4 months of imports at end-year. - This level is well below the benchmark of 5 months of imports considered appropriate for a resource-rich currency union. - Optimal range indicated between 5 and 12 months of imports depending on interest rate differential. - At end-2017, reserves amounted to no more than 50 percent of the IMF reserve adequacy metric (well below the 100–150 percent range deemed broadly adequate). - Broader ratios: reserves equaled 30 percent of broad money and 280 percent of short-term liabilities (thresholds: 20 and 100 percent). - Exchange rate assessment - REER appreciated by about 4 percent year-on-year in April 2018, mainly reflecting a strengthening of the euro with respect to the US dollar. - EBA-Lite results: - IREER suggests a modest undervaluation of 5 percent in 2017. - EBA-Lite Current Account model suggests an overvaluation of 16.6 percent in 2017 (2017 CA estimated at -4.5 percent of GDP vs. norm -0.5 percent of GDP, assuming elasticity -0.24). - Overall assessment: external position weaker than implied by fundamentals and desirable policies. - Policy recommendations: fiscal adjustment under IMF-supported programs; structural reforms to strengthen business environment, governance, and productivity. - Definition of desirable policies (projection base 2022): (i) accumulation of reserves equal to 1.3 percent of GDP per year, (ii) a fiscal deficit equal to 0.6 percent of GDP, and (iii) a private credit-to-GDP ratio equal to 15 percent. ### Excess liquidity in the financial sector (Annex II) - High levels of excess liquidity have impeded development of the interbank market and efficient transmission of BEAC’s monetary policy. - Excess liquidity timeline: decreased end-2014 and began picking up since mid-2017. - Heterogeneity across and within countries and between foreign and local banks. - End-March 2018 observations: - Elevated excess liquidity significant in Cameroon, Gabon and Equatorial Guinea. - Banks in Chad, Central African Republic and Equatorial Guinea relied more on BEAC’s refinancing operations. - Local banks, on average, displayed negative levels of excess liquidity (before refinancing); foreign banks showed high levels. - Since H2 2017 both groups saw increases in excess liquidity, steeper for foreign banks. ### Net foreign assets (NFA) projections, contingency measures, and cooperation - Baseline projected NFA path (relative to end-2017 level of euro 3.2 billion): - Decline by euro 0.1 billion by end-June 2018 (due to recent fiscal slippages). - Increase by a cumulative euro 0.6 billion by end-December 2018. - Increase by a cumulative euro 1.2 billion by end-2019. - Achieving these projections depends on: - Satisfactory implementation of fiscal adjustment programs and other national policies by CEMAC countries. - Disbursement of budget support pledged by international partners and other exceptional external financing as expected at euro 0.5 billion in the first half of 2018, euro 2.3 billion in 2018 as a whole, and euro 1.9 billion in 2019. - External factors such as international outlook, fluctuations in oil prices, and speed of entry into programs of the Republic of Congo and Equatorial Guinea. - Contingency measures - If deviations from NFA projections occur and if requested by IMF staff, BEAC stands ready to use all monetary policy tools within its jurisdiction while considering financial stability risks. - BEAC will participate in joint consultations with IMF staff and national authorities to identify and adopt additional corrective measures at national and/or regional policy levels to allow continuation of (or approval of new) IMF financial support. ### Monitoring, implementation, and institutional commitments - BEAC and COBAC to pursue efforts to facilitate close monitoring of developments and continue working closely with IMF staff to support the regional strategy. - Policy assurances and timelines critical for IMF support: - Complete by end-2018 the modernization of BEAC’s monetary policy operations framework (formal set-up of an interest rate corridor and new accounting scheme). - Submit revised foreign exchange regulations to the UMAC ministerial committee by end-2018. - Achieve the projected NFA accumulation based on monetary and fiscal commitments. - If deviation from NFA projections occurs, BEAC will "participate in joint consultations between IMF staff and the authorities of CEMAC member countries to identify and adopt additional corrective measures." - Semi-annual IMF staff assessments of regional developments and implementation of these policy assurances will be provided. ### Staff appraisal — key findings and policy recommendations - Economic and financial situation - CEMAC's situation "remains fragile." Growth "has picked up slightly but remains well below potential," inflation "is subdued." - Fiscal consolidation, rising oil prices, BEAC tighter monetary policy and stricter foreign exchange enforcement "have contributed to a significant reduction in the region’s fiscal and external imbalances." - Concerns: "fiscal slippages in some countries, the recent underperformance of international reserves, and the further increase in overdue loans." - Medium-term outlook: "predicst a further improvement in the economic and financial situation, assuming full implementation of policy commitments by CEMAC member states and regional institutions." - Risks: "weak program implementation, possible reversal in oil prices, and insufficient external financing." - Use of additional oil revenue - "The recent increase in oil prices should not lead to complacency." - Additional government revenue "should be mostly saved and used to finance the repayment of domestic arrears and/or rebuild fiscal buffers." - Recent fiscal slippages "should be addressed promptly," and measures taken to bring fiscal deficits "in line with previously envisaged consolidation paths." - Governments should "improve public finance management, including by following strictly expenditure and treasury single account procedures." - Monetary policy and reserves - Given "well below-potential economic activity and moderate inflation," staff judged "a further increase in the policy rate does not appear warranted at this stage." - BEAC should "start absorbing excess liquidity" to avoid undue pressure on reserves and to develop the interbank market. - BEAC should be ready to take corrective measures, potentially including "tighter monetary policy," if underperformance in NFA accumulation persists. - Banking sector actions - SG-COBAC should "strengthen some actions to address increasing weaknesses in the banking sector." - Continue development of risk-based supervision, including "identification and dissemination of best practices in key areas, including the treatment of overdue loans, credit risk or anti-money laundering." - Accelerate resolution of small insolvent banks to "protect member states from higher future resolution costs." - Strengthen and accelerate procedures to deal with breaches of prudential rules. - Staff encourages SG-COBAC to include these considerations in its 2019–21 strategy plan and "to support enhanced regional efforts on anti-money laundering and combatting financing of terrorism." - Regional convergence and data support - Strengthen the regional convergence framework to support lasting fiscal and external sustainability beyond IMF-supported programs. - "Preparation of three-year convergence plans should notably anchor member states’ fiscal policies consistently with regional external sustainability." - Member states need to help the Commission "financially and through better data dissemination" and contribute to strengthened regional integration through transcription and implementation of regional directives in PFM. *International Monetary Fund — IMF Staff estimates and projections as presented in the source content.* ### 1. Selected Economic and Financial Indicators, 2015–22 _________________________________________ 24 ### 1. Selected Economic and Financial Indicators, 2015–22 ### A. Background - The CEMAC region is experiencing challenging social and political tensions: Cameroon’s Anglophone regions, deterioration in the Central African Republic, insecurity in some areas such as the Lake Chad region and Congo’s Pool region, and social tensions linked to adjustment reforms. - Upcoming elections may test resolve for adjustment and reforms (parliamentary elections in Gabon and Chad later this year; presidential elections in October in Cameroon). - All CEMAC countries agreed with IMF staff on policies and macroeconomic frameworks underpinning the regional strategy to restore fiscal and external imbalances. - Implementation of IMF-supported programs: - Broadly satisfactory in first part of 2017; program reviews completed for Cameroon, Gabon and CAR in December 2017, and for Chad in April 2018 (following agreement in principle on restructuring of Chad’s debt to Glencore). - Mixed implementation since then: fiscal slippages at end-2017 in Cameroon and Gabon; Gabon accumulated new external arrears in early 2018. - Cameroon authorities agreed with IMF staff on policies to achieve program objectives going forward. - Gabon authorities confirmed commitment and continue to work with IMF staff to correct slippages. - Implementation with CAR and Chad continues to be broadly satisfactory. - A staff-monitored program with Equatorial Guinea was approved by IMF management in April 2018, potentially paving the way for an IMF-supported program by end-year. - Republic of Congo authorities reached agreement with IMF staff on policies that could underpin a possible three-year ECF arrangement to be submitted soon to the IMF Executive Board. ### B. Recent Economic Developments — Growth, Inflation, and External Sector - Growth: - Growth was limited to just under 1 percent in 2017, reflecting fiscal consolidation and a contraction in oil production in all producing countries but Congo. - Growth is expected to increase in 2018 to about 2¾ percent. - Oil production rebound projected: +6 percent in 2018 after -3 percent in 2017. - Non-oil sector growth projected to remain about 2 percent. - Non-oil improvement in half the countries offset by slowdown in Cameroon and deeper recession in Equatorial Guinea. - Inflation: - Inflation was less than 2 percent year-on-year in 2017 (less than 1 percent on annual average). - Inflation expected to remain below 2 percent in 2018. - External sector and reserves: - Current account deficit contracted by more than 9 percent of GDP in 2017 (due to higher oil exports: +2.5 percent of GDP; and lower imports: - 6.3 percent of GDP). - Higher-than-expected FDIs helped net reserves accumulation despite larger apparent net capital outflows (including large negative errors and omissions) and delays in disbursements of external budget financing. - Net foreign assets (NFA) of the central bank declined slightly in Q1 2018 (below previous projections) due to larger government cash spending related to 2017 budget execution, resulting in lower government deposits with BEAC. - NFA projected to increase significantly during second half of 2018, surpassing previous projections, with gross reserves coverage projected at over 3 months of imports by end-2018—conditional on member states addressing recent fiscal slippages and reflecting higher oil exports and increased exceptional financing under IMF-supported programs. ### C. Fiscal Developments and Public Debt - Fiscal consolidation in 2017: - Continued significant efforts focused on rationalization of spending, particularly investment projects. - Expenditure cuts were smaller than expected in Cameroon, Chad and Congo; non-oil revenue performance was disappointing. - Higher oil revenue largely offset larger spending and lower non-oil revenue and grants. - Overall fiscal deficit on average across the region was just under 4 percent of GDP (vs. projected 3¾ percent of GDP), down from 7½ percent of GDP in 2016. - Adjustment in the non-oil primary balance was lower than programmed (by 2 percent of non-oil GDP). - Public debt: - After increasing by more than 20 percentage points over the previous two years, public debt-to-GDP ratio increased by about 1 percentage point in 2017, to 54.5 percent, with significant differences across countries. - Government securities market: - Access remained satisfactory, with a shift to shorter maturities. - Net issuances increased to about CFAF 70 billion during January–April 2018, with short-term securities amounting to just over two thirds of total government securities. - Interest rates declined slightly for maturities up to 6 months and were stable for longer maturities, with significant differences in yields between countries. ### D. Banking Sector and Financial Stability - Overdue loans and credit conditions: - Ratio of overdue loans increased from an average of 15.0 percent in December 2016 to 17.5 percent in December 2017 and 19.7 percent in March 2018. - Ratio of overdue loans in March 2018 ranged from 15 to 32 percent across countries. - Increase reflects weak economic activity, large government arrears to the private sector, and financial difficulties of a few large firms. - Banks remained cautious in extending new credit; credit to the private sector declined further by - 3 percent y-o-y at end-March 2018. - Liquidity and capital: - Overall liquidity of the banking system remained broadly stable in early 2018 following improvement in H2 2017. - Average capital ratio at 17.5 percent in March 2018, indicating a still strong capital position overall despite weaknesses. ### E. Outlook and Risks - Outlook improved with upward revision of oil price projections; restoration of fiscal and external sustainability depends on implementation of policy commitments. - Critical policy requirements: - Continued tightening of fiscal policies by member states. - Adequate support by regional institutions, notably a sufficiently tight monetary policy stance and enforcement of foreign exchange regulation. - Assumptions and projections: - Additional oil revenue in 2018–19 should be used to smooth fiscal adjustment paths and gradually repay domestic arrears and/or rebuild external and fiscal buffers more rapidly. - Non-oil primary deficit expected to decline more gradually than previously envisaged (to less than 5 percent of non-oil GDP by 2020). - Higher oil revenue in 2018–19 would allow bringing public debt back under 50 percent of GDP by 2020 (as previously envisaged). - Repayment of government arrears, higher private sector confidence from enhanced fiscal sustainability, reforms to improve business environment, and strengthening the financial sector would contribute to gradual recovery of non-oil growth to 4 ½ percent by [text ends]. *cr18210 - 1. Selected Economic and Financial Indicators, 2015–22* ### 2021. Reflecting higher oil exports in 2018–19, the current account deficit would already converge to ### cr18210 - 2021. Reflecting higher oil exports in 2018–19, the current account deficit would already converge to ### Outlook and key projections - Current account deficit would converge to around 2½ percent of GDP from 2018 onward. - Lower current account deficits over 2018–20 would contribute to a more rapid increase in BEAC’s net foreign assets, with the reserves cover reaching 5 months of imports by 2022. - About 70 percent of these loans are to the private sector, with an average provisioning ratio of 86 percent; the rest being loans to the public sector, which are not provisioned in line with COBAC regulations. ### Major risks to the outlook - Possibly weaker fiscal consolidation due to political/social pressures (notably in countries holding elections this year), capacity constraints, or complacency following the recent rise in oil prices. - Fiscal slippages observed in Cameroon and Gabon are highlighted as a cause of concern and need prompt correction. - Delays in implementing PFM and tax administration reforms would jeopardize programs’ fiscal objectives: increasing non-oil revenue collection, avoiding additional government arrears, and bringing public debt to a declining path. - Monetary policy likely unable to offset fiscal slippages; smaller NFA accumulation could cast doubts about external sustainability and may derail the regional strategy, leading to a deeper financial crisis. - Recommendation: BEAC should continue to monitor access to the regional securities market and bank liquidity in any country incurring fiscal slippages. - Reversal in oil prices (e.g., stronger-than-expected U.S. shale gas or recovery of African oil production) could put additional pressure on fiscal and external balances and on the financial sector, especially in countries most dependent on oil revenue (including Republic of Congo and Equatorial Guinea). - If oil prices remain higher than assumed in the baseline, additional oil revenues would be largely saved (or used for additional arrears repayments) and contribute to more rapid accumulation of regional reserves. - Deterioration in the security situation (already worsened in the Central African Republic) could negatively affect economic activity and lead to increased military spending. - Lower-than-projected external budget support. - National authorities must ensure conditions for external aid are fulfilled promptly; staff will continue work with authorities and development partners to secure sufficient funding assurances. ### Current account, reserves, and financing needs (selected figures from Text Table 1 and Text Table 2) - Current account, including grants (percent of GDP): - 2016: -9.9 - 2017: -5.0 - 2018: -4.3 - 2019: -5.2 - 2020: -2.6 - 2021: -1.5 - Gross official reserves (months of imports of goods and services): - 2016: 2.2 - 2017: 2.7 - 2018: 3.0 - 2019: 3.6 - 2020: 4.2 - 2021: 4.5 - Net foreign assets (annual change in billion CFAF): -3,294; -107; 259; 245; 125; ... - Total remaining external financing needs over 2018–20 are currently estimated at about CFAF 4 trillion (about US$ 7.6 billion) for the five CEMAC countries with IMF-supported programs in place or soon to be submitted to Executive Board consideration. - IMF resources are projected to cover about 20 percent of these financing needs. - Other IFIs (World Bank and African Development Bank) and creditors/donors (France and EU), as well as debt restructuring in some countries, would cover the remaining financing needs. - Text Table 2 (Financing Sources, 2017–20; Billions of CFAF): - 1. Financing gap: 1,499; 1,237; 1,747; 1,483; 774; 4,004 - 2. IMF financing: 372; 338; 304; 326; 162; 792 - of which: to be adopted: 00; 50; 75; 74; 199 - 3. Budget support from other donors: 1,024; 799; 985; 693; 254; 1,932 - 4. Other exceptional financing: 104; 100; 458; 464; 358; 1,280 ### Implementation of the regional strategy and fiscal sustainability - Agreement that fiscal slippages should be promptly addressed through corrective fiscal measures. - BEAC and COBAC committed to maintain an appropriate monetary policy stance, support build-up of regional reserves, and promote financial sector stability. - BEAC committed that, in the event of further underperformance of NFA, it would participate in joint consultations with IMF staff and national authorities to identify and implement necessary corrective measures. - Member states need to deliver fully on fiscal consolidation commitments to rebuild adequate international reserves. - Supplementary budget in Cameroon (strengthened expenditure controls and revenue-enhancing measures) should be adopted promptly. - In Gabon, the President asked the new government to enhance the tax system to mobilize more non-oil revenues, reduce the wage bill, and improve public finance and debt management. - Measures recommended: streamline non-priority expenditures while preserving social spending; increase non-oil revenue (including streamlining tax exemptions and strengthening tax and customs administration); adopt and implement gradual repayment plans for domestic arrears. - Non-oil revenue performance has been disappointing and should be significantly strengthened; an increase in non-oil revenue would also contribute to reducing inequality. ### Monetary policy stance and operational framework modernization - Monetary policy will continue to aim primarily at rebuilding an adequate level of foreign exchange reserves. - BEAC ready to tighten monetary stance should underperformance of reserve accumulation persist. - Given growth below potential, moderate inflation, sluggish credit to private sector, and fragile banking sector, staff judged a further increase in the policy rate does not appear warranted at this stage, though tighter liquidity management is required. - Preliminary staff analysis suggests BEAC’s current policy rate appears broadly adequate from a business cycle standpoint. - BEAC committed to consult with staff and national authorities and take corrective measures (which may include tighter monetary policy) if indications emerge that BEAC’s net foreign assets’ accumulation diverge from the envisaged path. Progress in modernizing the monetary policy implementation framework: - Elimination of statutory advances finalized; existing balances converted into long-term loans; BEAC’s Charter amended in March 2018 to preclude future monetary financing of budgets. - Emergency liquidity assistance framework operational; one bank used it. - March 2018 Monetary Policy Committee approvals: - Unification of reserve requirement rates at their highest level; since mid-December these requirements are assessed based on monthly averages; reduction of exempted banks from four to one. - Removal of BEAC’s refinancing ceilings for government securities used as collateral; replaced by a system of progressive haircuts. - Banks can use repurchase agreements for interbank transactions. - BEAC to start in June 2018 basing liquidity management on forecasts of autonomous factors and providing liquidity through competitive multi-interest rate auctions; weekly Monetary Market Committee meetings began in early March. - Modernization to be completed by end-2018 with formal setting up of an interest rate corridor and new accounting scheme for monetary operations. - BEAC plans to deepen understanding of monetary policy transmission (build modeling capacity, collect additional data, design shock scenarios) and enhance coordination with fiscal policies. - BEAC to gradually absorb banks’ excess liquidity to bring it close to a neutral level by end-2019; caution against abrupt absorption that could push sound banks into liquidity crisis. - Staff suggested further (possibly remunerated) increase in reserve requirements or introduction of a standing deposit facility. ### Revision and enforcement of foreign exchange regulations - Non-compliance with foreign exchange regulations observed: weak repatriation of export receipts (particularly for oil companies); insufficient documentation for foreign exchange demands by banks; some banks keep foreign exchange assets abroad on behalf of clients in breach of regulations; many non-financial companies have bank accounts abroad. - Potential factors: past lax enforcement, exemptions in conventions between member states and extractive industry operators, reported delays in BEAC’s provision of foreign exchange to banks, lack of investment opportunities in the region. - BEAC will submit revised foreign exchange regulations to the UMAC ministerial committee by end-2018 to strengthen enforcement. - New regulations aim to: clarify repatriation of export receipts and investment revenue rules; clarify opening of accounts abroad by companies; clarify surrendering of foreign exchange by banks; strengthen reporting requirements; broaden scope of BEAC and SG-COBAC controls; include more realistic sanctions. - Staff encouraged additional measures to strengthen forex repatriation: - BEAC should continue efforts to obtain copies of conventions signed with oil companies and work with national authorities to align national extractive industries codes with community foreign exchange regulation. - BEAC to streamline internal procedures and enhance communication with banks to avoid undue delays for legitimate foreign exchange demands. ### Strengthening the banking sector - SG-COBAC has strengthened banking regulations, consistent with its action plan: - Rules of application of the 2017 CEMAC regulation on micro-finance institutions (MFIs) adopted in early 2018; some MFIs have begun compliance. - New regulation sets periodic penalty payments based on net banking income, increasing the cost of non-compliance. - Several regulations adopted to pave the way for application of Basel Committee rules: definition of systemically important institutions; identification of banking assets subject to liquidation rules; accelerated resolution of small MFIs. - In 2018, SG-COBAC plans (with Afritac and World Bank support) to adopt: legislation implementing the Deposit Guarantee Fund (being funded with banks contributions); a regulation on payment systems and electronic money; supervision on a consolidated basis; instructions on risk management; and formalized risk-based supervision practices. *International Monetary Fund — IMF Staff estimates and projections as presented in the source content.* ### 20. Staff encouraged the SG-COBAC to clarify the regulation and rules for exemption on ### 20. Staff encouraged the SG-COBAC to clarify the regulation and rules for exemption on ### Risk concentration regulation and exemptions - Staff noted banks claim that "the weights applied on sovereign risk according to the regulation have reduced their appetite for sovereign securities," yet banks have been reluctant to request the exemption introduced by SG-COBAC in October 2017. - SG-COBAC and staff agreed the regulation is "important and effective in trying to induce market discipline on budget financing, and should therefore be preserved." - Staff suggested SG-COBAC could clarify further the conditions under which exemptions can be granted, "including with regard to dividend payments." - Staff noted that, "in the medium term, after current fiscal imbalances are addressed, SG-COBAC could review the implementation rules of sovereign risk weights to avoid sudden large changes in these weights." - Related reference: "SG-COBAC’s action was presented in Annex IV of IMF Country Report No. 17/389." ### Strengthening risk-based supervision and bank-level practices - Staff emphasized additional measures in areas identified by SG-COBAC’s action plan to better address the sector’s vulnerabilities; SG-COBAC welcomed the recommendations and will consider including them in its strategic plan for 2019–21, which it intends to finalize, after consultation with the IMF and the World Bank, "by end-2018." - Further progress towards risk-based supervision: - Planned projects: "formalization of processes with IMF and the World Bank, new system for declarative statements in 2019" and COBAC inspection missions in 2018 "will be largely targeted on risk management." - Identification and dissemination of best practices: - SG-COBAC could "more systematically identify the banks’ best practices, and disseminate them without being prescriptive." - Areas: "risk management policy, rating instruments, treatment of overdue loans, and anti-money laundering processes." - Strengthen actions on overdue loans: - Complement enforcing loan classification and provisioning rules by requiring banks to "strengthen their risk management policies, rating instruments, and processes to recover overdue loans." - SG-COBAC could consider "increasing capital requirements for banks with excessive overdue loans, and request clearance plans." - Alert national authorities on governance issues in the judicial systems: - SG-COBAC "alerted the OHADA on the recurring difficulties banks face in resolving their legal disputes, and began systematically collecting information on their judicial problems." - SG-COBAC should be ready to respond favorably to requests from national authorities "for training of judges specializing in banking disputes." ### Resolution, infringement procedures, and prudential enforcement - Ensure quick resolution of non-systemic institutions, and accelerate infringement procedures: - Staff encouraged SG-COBAC "to set shorter deadlines for non-systemic banks which have been in distress for several years." SG-COBAC noted that it "aims at as quick as possible resolution processes, within the existing regulations." - Prudential non-compliance remains high: - In addition to implementing its new regulation "increasing financial penalties," SG-COBAC could review its infringement procedures "including to speed up processing and impose penalties more rapidly to recidivists." ### AML/CFT and supervisory contributions - Banking supervision could further contribute to anti-money laundering and combating financing of terrorism (AML/CFT) efforts. - Context: "All CEMAC national authorities pledged to strengthen this fight in the Yaoundé declaration of November 2017." - SG-COBAC plans to "adopt by end-2018 a regulation detailing the implementation procedures of the CEMAC AML / CFT regulation." - Staff offered IMF assistance (together with the World Bank) for updating/improving SG-COBAC’s expertise if needed. - Staff encouraged SG-COBAC to "identify and disseminate best practices in the region, and ensure that non-compliant banks face injunctions and penalties." ### Development of financial markets and data infrastructure - Regional stock market unification and reform: - Heads of states’ October 2017 decision led to an action plan providing for: - "(i) the unification, by end-September 2018, of the existing two stock markets, two regulators, and three depositaries;" - "(ii) the subsequent implementation of reforms to align the practices of the three resulting institutions (which will be based in Douala, Libreville, and within BEAC, respectively) with best international standards by mid-2019." - BEAC progress on financial sector databases: - Databases to include: "a database on firms’ financial information, a payment incident database, a credit risk database." - These, along with the envisaged establishment of a private credit bureau, "will be key sources of financial information for credit institutions to strengthen their risk management tools." - Staff encouraged the BEAC to continue work, including coordination with "Cameroon’s National Credit Council financial information project." - SG-COBAC audit of BDEAC: - Identified weaknesses in "hiring, internal audit and control, provisioning, risk management, and financing." - Staff emphasized BEAC should "wait for these reforms to be implemented before considering proceeding to the next disbursement under the 2015 agreement between the two institutions." ### Promoting regional integration and PREF implementation - PREF implementation progress and need for coordination: - Member states adopting measures to enhance revenue collection and social spending. - Country-specific actions: - Cameroon: "quantify tax expenditures and gradually reduce them starting in 2019; and to audit regularly import declarations." - Chad: "non-oil revenue performance has been encouraging, reflecting efforts to channel revenues through banks and reforms to improve VAT collection." - Equatorial Guinea: "reforms are underway to simplify tax payment procedures." - Gabon: "work is progressing to establish a unified tax authority, which should help gradually increase non-oil revenue." - Staff reiterated need for member states "to translate community directives into national legislations, and, once done, to implement them; and to step up efforts to enhance the business climate." ### Regional surveillance, statistics, and capacity constraints - Regional convergence framework: - Commission hired consultants to help national authorities prepare "3-year convergence plans articulating their medium-term macroeconomic policies and reforms." - Staff emphasized these plans "should be finalized promptly (national authorities did not comply with the initial end-March 2018 deadline)." - Commission should not shy away from "proposing sanctions to the Ministerial Committee if some plans are not ambitious enough." - Regional statistics capacity constraints: - Limitations: "(i) its limited human and financial resources (especially as member states’ contributions are not always paid on time); and (ii) the fact that the community regulation for compilation and provision of regular statistics is not fully enacted in national legislations." - BEAC faces a "relative weak regional data exchange framework," including not receiving "regularly high frequency data on budget execution," and difficulties in compiling BOP statistics. - Suggested actions: - Fast track measures to close the gap between community regulation in PFM and national legislation implementation. - Encourage BEAC to enhance BOP statistics, with IMF assistance. - Encourage the Commission to strengthen data collection and analysis capacity, "with the World Bank and EU assistance." - Re-establish the Treasury Operations Committees to "share and discuss budget execution data and assess/close gaps with regards to common statistical standards." ### Monitoring of regional developments and policy assurances - BEAC and COBAC implementation of June 2017 and December 2017 commitments: - BEAC: "continued to implement a tight monetary policy, while strengthening controls on foreign exchange outflows." - BEAC finalized and adopted in its Charter in April 2018 "the elimination of statutory advances," and progressed in modernizing the monetary policy operational framework. - COBAC: "continued its efforts to enhance its supervision of the banking sector, including through the modernization of its penalties system, a stricter application of certain supervisory rules, and an intensification of its efforts to resolve banks in difficulty." - Policy assurances outlined in the attached follow-up letter include: - Completion by end-2018 "of the modernization of the monetary policy operation framework" following formal set-up of an interest rate corridor and start of usage of a new accounting scheme for recording monetary operations (policy assurance). - Submission (for adoption) to the ministerial committee by end-2018 of "revised foreign exchange regulations" (policy assurance). - Projections for NFA accumulation as the basis for IMF staff assessment of progress in restoring regional external sustainability. - BEAC commitment to implement "an adequately tight monetary policy aimed at rebuilding the level of reserves along the projected path," and member states’ commitment to contribute through adjustment policies in IMF-supported programs. - If deviation from NFA projections occurs, BEAC will "participate in joint consultations between IMF staff and the authorities of CEMAC member countries to identify and adopt additional corrective measures." - Staff will provide "semi-annually updated assessments of regional developments and implementation of these three policy assurances." ### BEAC safeguards, governance, and accounting transition - BEAC is implementing remaining recommendations of the 2017 safeguards assessment of the central bank. - Revisions to BEAC’s secondary legal instruments "(including by-Laws and codes of ethics and deontology), in consultation with IMF staff," are being finalized and expected to be adopted by its board of directors and the Ministerial Committee "in the coming weeks." - BEAC is "on track towards transitioning fully to IFRS, beginning with the 2018 financial statements." ### Staff appraisal — key findings and policy recommendations - Economic and financial situation: - CEMAC's situation "remains fragile." Growth "has picked up slightly but remains well below potential," inflation "is subdued." - Fiscal consolidation, rising oil prices, BEAC tighter monetary policy and stricter foreign exchange enforcement "have contributed to a significant reduction in the region’s fiscal and external imbalances." - Concerns: "fiscal slippages in some countries, the recent underperformance of international reserves, and the further increase in overdue loans." - Medium-term outlook: "predicst a further improvement in the economic and financial situation, assuming full implementation of policy commitments by CEMAC member states and regional institutions." (text preserves source spacing) - Risks: "weak program implementation, possible reversal in oil prices, and insufficient external financing." - Use of additional oil revenue: - "The recent increase in oil prices should not lead to complacency." - Additional government revenue "should be mostly saved and used to finance the repayment of domestic arrears and/or rebuild fiscal buffers." - Recent fiscal slippages "should be addressed promptly," and measures taken to bring fiscal deficits "in line with previously envisaged consolidation paths." - Governments should "improve public finance management, including by following strictly expenditure and treasury single account procedures." - Monetary policy and reserves: - BEAC progress on monetary policy transmission and governance measures noted. - Assuming fiscal slippages are addressed and given "well below-potential economic activity and moderate inflation," staff judged "a further increase in the policy rate does not appear warranted at this stage." - BEAC should "start absorbing excess liquidity" to avoid undue pressure on reserves and to develop the interbank market. - BEAC should be ready to take corrective measures, potentially including "tighter monetary policy," if underperformance in NFA accumulation persists. - Foreign exchange regulations: - Member states need to support regional efforts to strengthen and better enforce foreign exchange regulations. - Member states should provide regional institutions with "all their conventions with the extractive industries," and ensure conventions and national codes are consistent with community foreign exchange regulations. - Staff welcomes BEAC’s plan to revise foreign exchange regulation "by end-2018" to strengthen centralization at BEAC of foreign reserves and enhance BEAC and COBAC powers to enforce regulations. - Banking sector actions: - SG-COBAC should "strengthen some actions to address increasing weaknesses in the banking sector." - Continue development of risk-based supervision, including "identification and dissemination of best practices in key areas, including the treatment of overdue loans, credit risk or anti-money laundering." - Accelerate resolution of small insolvent banks to "protect member states from higher future resolution costs." - Strengthen and accelerate procedures to deal with breaches of prudential rules. - Staff encourages SG-COBAC to include these considerations in its 2019–21 strategy plan and "to support enhanced regional efforts on anti-money laundering and combatting financing of terrorism." - Regional convergence and data support: - Strengthen the regional convergence framework to support lasting fiscal and external sustainability beyond IMF-supported programs. - "Preparation of three-year convergence plans should notably anchor member states’ fiscal policies consistently with regional external sustainability." - Member states need to help the Commission "financially and through better data dissemination" and contribute to strengthened regional integration through transcription and implementation of regional directives in PFM. *IMF staff summary based on the content of the provided chapter/section.* ### 39. Further efforts are needed to help develop financial markets. By helping banks to better ### cr18210 - 39. Further efforts are needed to help develop financial markets. By helping banks to better ### Findings - Further efforts are needed to help develop financial markets. - The merger of the two existing stock markets is key to the development of equity financing in the region. - BDEAC’s governance issues need to be tackled promptly, as precondition for receiving additional financing from BEAC. ### Policy recommendations and measures - By helping banks to better assess credit and counterparty risks, the establishment of financial databases and of a credit bureau should help strengthen credit supply. ### Institutional priorities - Merge the two existing stock markets to support equity financing development. - Tackle BDEAC’s governance issues promptly to qualify for additional financing from BEAC. *Source: cr18210 - 39. Further efforts are needed to help develop financial markets. By helping banks to better* ### 40. Overall, staff considers that BEAC and SG-COBAC have implemented the policy ### cr18210 - 40. Overall, staff considers that BEAC and SG-COBAC have implemented the policy ### Implementation assessment and key commitments - Staff considers that BEAC and SG-COBAC have implemented the policy commitments provided in the June Letter of Policy Support and December Follow-up Letter. - The new policy assurances in the June 2018 BEAC Letter in support of CEMAC countries’ IMF-supported programs are considered adequate. - Implementation of previous commitments included: - tighter monetary policy; - the elimination of statutory advances; - maintaining firm control over the extension of credit to banks. - The BEAC is in the process of implementing the remaining recommendations of the 2017 safeguards assessment. ### Net foreign assets, reserves, and corrective actions - Regional net foreign assets (NFA) accumulation up to December 2017 was in line with projections. - Corrective actions addressing recent fiscal slippages are being implemented to put NFA accumulation back on a desired upward path, following the underperformance in early 2018. - Achieving the projected NFA accumulation depends on: - BEAC’s commitment to implement an adequately tight monetary policy; - the commitment by member states to implement adjustment policies in the context of IMF-supported programs. ### New policy assurances and timeline (critical for IMF support) - The new policy assurances include commitments to: - complete by end-2018 the modernization of BEAC’s monetary policy operations framework; - submit to the UMAC ministerial committee for adoption revised foreign exchange regulations by end-2018; - achieve the projected NFA accumulation based on the monetary and fiscal commitments noted above. - These actions "will be critical for the continuation of (or approval of new) IMF financial support as part of the IMF-supported programs with CEMAC members." ### Medium-term macroeconomic outlook and policy priorities (summary findings) - After a limited recovery in 2017, economic activity is expected to accelerate in 2018 due to a rebound in oil production and the impact of expected large domestic arrear repayments by governments. - Fiscal consolidation approach: - Achieved primarily through large cuts in non-priority spending in 2016–17; - From 2018 onward, consolidation will also rely on revenue-enhancing measures to further reduce deficits and stabilize public debt. - External stability and reserve dynamics: - Fiscal consolidation will support a sizeable reduction in the current account deficit. - Along with financing from donors and BEAC’s tight monetary policy and enforcement of foreign exchange regulations, this will contribute to stabilizing BEAC’s net foreign assets and reserve coverage. *Source: cr18210 - 40. Overall, staff considers that BEAC and SG-COBAC have implemented the policy* ### Annex I. CEMAC: External Sector Assessment ### Annex I. CEMAC: External Sector Assessment ### A. Recent Developments in External Accounts - The regional current account balance deteriorated to -13.7 percent of GDP in 2016, from +3.3 percent of GDP in 2012, driven by weak commodity prices and expansionary fiscal and monetary policies. - In 2017, the current account deficit declined to around 4.5 percent of GDP on the back of higher oil exports and a reduction in imports. - Cross-country heterogeneity in 2017 current account deficits: ranging from 13 percent of GDP in Congo to less than 3 percent of GDP in Cameroon and Equatorial Guinea. - Factors helping narrow deficits in most member countries in 2017: tighter fiscal and monetary stance and weak domestic demand. - Medium-term projection: current account deficit projected to narrow to 2.5 percent of GDP in 2018 and stabilize around that level in the medium term, supported by strong fiscal consolidation, tight monetary policy, enforcement of foreign exchange regulations, and recovery in international oil prices. - Official reserves projected to improve to close to 5 months of imports by 2022, from 2.4 months of imports at end-2017. - Footnote country detail: Congo’s current account volatility over 2014–17 due to oil-price shock, declining oil production up to 2016, and increased oil-sector related imports; expected improvement over 2017–19 driven by compression in oil-sector related imports and significant increase in oil production (exploitation of a new field). - Footnote projection caveat: In 2021, the current account balance is projected to decline temporarily to about 4 percent of GDP owing to the one-off import (financed by FDI) of a floating LNG vessel in Equatorial Guinea. - External financing composition and developments: - FDI averaged 6.5 percent of GDP over the last 5 years and has been relatively stable, driven mainly by reinvested earnings. - Crisis-era uncertainties and fear of devaluation led to non-repatriation of export proceeds and possibly capital outflows, particularly in 2017. - Recovery in foreign reserves depends on implementation of sound macroeconomic policies and stricter enforcement of foreign exchange regulations. ### B. Reserves Adequacy - Reserve coverage stabilized in 2017 at 2.4 months of imports at end-year, after sharp falls in previous years. - This level is well below the benchmark of 5 months of imports considered appropriate for a resource-rich currency union. - 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. - Consideration: the guarantee of the French Treasury for the convertibility of the CFA Franc could imply a lower optimal reserve level. - At end-2017, reserves amounted to no more than 50 percent of the IMF reserve adequacy metric, well below the range of 100–150 percent deemed broadly adequate for precautionary purposes. - Broader reserve adequacy ratios were relatively more favorable: reserves equaled 30 percent of broad money and 280 percent of short-term liabilities (compared to minimum thresholds of 20 and 100 percent, respectively). - Recent BEAC reserve developments: - BEAC reserves reached an inflection point in mid-2017 and increased until February 2018, partly due to IMF disbursements for Cameroon, Gabon and CAR at end-2017 and adjustment efforts. - Reserves appeared to decline during the subsequent 2 months amid fiscal slippages in Cameroon and Gabon. - Medium-term outlook: reserves projected to recover gradually as fiscal consolidation and tighter monetary policy take hold, but 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. Exchange Rate Assessment - REER developments: after being broadly stable in 2016 and first half of 2017, the REER appreciated by about 4 percent year-on-year in April 2018, mainly reflecting a strengthening of the euro with respect to the US dollar. - Two assessment approaches and results: - EBA-Lite’s Index Real Effective Exchange Rate (IREER): comparison of fitted IREER and norm indicates a modest undervaluation of 5 percent in 2017, though the model does not fit REER evolution well. - EBA-Lite’s Current Account model (preferred): suggests an overvaluation of 16.6 percent in 2017. - 2017 current account estimated at -4.5 percent of GDP against a norm of -0.5 percent of GDP (assuming an elasticity of the current account to REER of -0.24). - Memorandum items (percent of GDP): 2017 CA estimation -4.5; CA norm -0.5; CA gap -4.0; of which Policy gap -1.1. - Overall assessment: the external position is weaker than implied by fundamentals and desirable policies. - Policy actions recommended to address the weaker external position: - Fiscal adjustment as envisaged under IMF-supported programs to dampen aggregate demand and imports. - Structural reforms to strengthen the business environment, governance, and productivity to support investment and exports. - Definition of desirable policies (projection base 2022): (i) accumulation of reserves equal to 1.3 percent of GDP per year, (ii) a fiscal deficit equal to 0.6 percent of GDP, and (iii) a private credit-to-GDP ratio equal to 15 percent. ### D. Structural Competitiveness - World Bank “Doing Business Indicators” signal that CEMAC countries underperform relative to comparable countries, indicating ample room for strengthening the business environment. - Doing Business trends (2015–2017): progress uneven across CEMAC countries; Cameroon achieved some progress while others showed little progress or deterioration. - Major impediments identified across Doing Business sub-components: - Starting a business - Getting electricity - Enforcing contracts - Trading across borders - Additional structural challenges: lack of adequate infrastructure, unreliable energy supply, cumbersome procedures for paying taxes and registering properties. - Governance indicators: - CEMAC countries trail WAEMU peers and emerging economies on World Bank “Governance Indicators”. - Governance improved by a smaller margin over the last 15 years than in other country groups. - Governance is weaker in CEMAC even after accounting for income per capita levels. ### Annex II. Excess Liquidity in the Financial Sector - High levels of excess liquidity have impeded development of the interbank market and efficient transmission of BEAC’s monetary policy. - Historical drivers: before the fall in oil prices, excess liquidity mainly due to large financial inflows related to oil exports. - Timeline: excess liquidity started decreasing end-2014 and began picking up since mid-2017. - Heterogeneity: aggregate excess liquidity masks significant differences across and within countries and between foreign and local banks. - End-March 2018 observations: - Elevated excess liquidity particularly significant in Cameroon, Gabon and Equatorial Guinea. - Banks in Chad, Central African Republic and Equatorial Guinea relied more on BEAC’s refinancing operations to address liquidity shortages. - Bank-type divergence: - Local banks, on average, displayed negative levels of excess liquidity (before refinancing operations). - Foreign banks showed high levels of excess liquidity. - Since the second part of 2017 both groups saw increases in excess liquidity, but the rise was very steep for foreign banks and much more subdued for local banks. ### Appendix I. Follow-up to the Letter of Support (June 15, 2018) - BEAC and COBAC reported significant progress on commitments to support recovery and reform programs, including areas of monetary policy, removal of statutory advances, reform of the monetary policy framework and its implementation, and strengthening of the banking sector. - Reported results and institutional measures: - Tightening of monetary policy and strict enforcement of foreign exchange regulations, combined with member states’ fiscal adjustment, contributed to recovery of external accounts and stabilization of BEAC's foreign exchange reserves. - BEAC finalized and adopted removal of statutory advances in its charter in March 2018. - Reforms to the monetary policy framework and implementation: - Operationalizing the emergency liquidity assistance system. - Allowing the use of repo operations in interbank transactions. - Simplifying the required reserves’ coefficient structure and increasing the coefficients, resulting in an overall increase in required reserves. - Dropping the rule establishing a refinancing objective for each country. - Reforming the collateral framework for BEAC's bank refinancing operations to better reflect state-specific risks by adopting in March 2018 a new discount system on government securities in substitution of the 35-percent ceiling rule on the refinancing of public securities. - Developing calibration of monetary policy operations on the basis of autonomous liquidity factors forecasts. *Source: cr18210 - Annex I. CEMAC: External Sector Assessment* ### introduction of a multi-interest rate auction system for BEAC’s interventions. In this way, the entry ### cr18210 - introduction of a multi-interest rate auction system for BEAC’s interventions. In this way, the entry ### Monetary policy framework and instruments - Introduction of a multi-interest rate auction system for BEAC’s interventions. - Formal set-up of an interest rate corridor and the use of a new accounting scheme for recording monetary operations will make the monetary policy operation framework effective by end-2018. - BEAC will continue to provide foreign currency to banks without undue delays for legitimate and well-documented transactions after the usual required controls. - BEAC reaffirms its commitment to implementing the remaining priority safeguards recommendations. ### Foreign exchange regulation and centralization of reserves - A draft revised foreign exchange regulation will be submitted by end-2018, after consulting IMF staff, to the UMAC ministerial committee for adoption. - The new regulation aims to: - Strengthen provisions relating to export receipts repatriation. - Strengthen the powers of BEAC and COBAC to better enforce regulations. - Support centralization of foreign exchange reserves at the BEAC and limit transactions not in line with regulations. ### Net foreign assets (NFA) projections and conditionalities - Baseline and projected NFA path (relative to end-2017 level of euro 3.2 billion): - Decline by euro 0.1 billion by end-June 2018 (due to recent fiscal slippages in some CEMAC countries). - Increase by a cumulative euro 0.6 billion by end-December 2018. - Increase by a cumulative euro 1.2 billion by end-2019. - Achieving these NFA accumulation projections depends on: - Satisfactory implementation of fiscal adjustment programs and other national policies by CEMAC countries (the convention governing the Central African monetary union notes the responsibility of member states for ensuring a positive level of regional foreign exchange reserves). - Disbursement of budget support pledged by international partners and other exceptional external financing as expected at euro 0.5 billion in the first half of 2018, euro 2.3 billion in 2018 as a whole, and euro 1.9 billion in 2019. - Other external factors outside BEAC’s control such as the international outlook, fluctuations in oil prices, and the speed of entry into programs of the Republic of Congo and Equatorial Guinea. ### Contingency measures and cooperation with IMF - In case of deviations from the NFA accumulation projections and if requested by IMF staff, BEAC stands ready to: - Use all monetary policy tools within its jurisdiction while taking into account risks related to financial stability. - Participate in joint consultations with IMF staff and the authorities of CEMAC member countries to identify and adopt additional corrective measures at national and/or regional policy levels to allow the continuation of (or approval of new) IMF financial support. ### Banking sector supervision and COBAC actions - COBAC continued efforts to strengthen the banking sector through: - Modernization of its penalties system. - Stricter application of certain supervisory rules. - Intensification of efforts to resolve banks in difficulty. - Issuance of numerous regulations to better supervise the microfinance sector. - The General Secretariat of COBAC will: - Continue implementing action plans aimed at correcting the most important vulnerabilities of the CEMAC banking system. - Prepare by the end of the year a strategic plan for 2019–21 including continuation of risk-based supervision, strengthening the fight against money laundering and financing of terrorism, and modernization of certain prudential rules. ### Monitoring, implementation, and commitment - BEAC and COBAC will: - Pursue efforts to facilitate close monitoring of developments. - Continue to work closely with IMF staff to support the regional strategy. - The letter authorizes the IMF to make a legal and pertinent use of the letter, notably to publish it. *Source: cr18210 - introduction of a multi-interest rate auction system for BEAC’s interventions. In this way, the entry* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18210.pdf_