## A Regional Approach to Enhancing Governance and Reducing the Potential for Corruption ## Source details **Canonical URL:** [A Regional Approach to Enhancing Governance and Reducing the Potential for Corruption](https://www.imf.org/-/media/files/publications/cr/2019/cr1902.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/cr1902.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/cr1902.pdf.json) --- ### Introduction and Rationale - Good governance, including the control of systemic corruption, is vital for macroeconomic stability and sustainable, inclusive growth. - Purpose: - Assess regional dimensions of a strategy to enhance governance in CEMAC. - Provide background, definitions, measurement approaches, impacts on growth, and sectoral assessments (PFM, AML/CFT, oil-sector governance). - Prepared by Sabrina Lando, Samuele Rosa, and Gwenaelle Suc; date on contents page: December 10, 2018. - Short- and medium-term policy objectives: - Short-term: restore external and domestic stability after the 2014 commodity price shock. - Medium-term: reduce dependency on oil and broaden the economic base. - Reform approach: gradual, sustained sequencing given capacity constraints and fragile-country contexts in CEMAC; many reforms are budgetary-neutral with potentially large payoffs. ### Regional Focus and Institutional Roles - Three priority areas with regional dimensions: - Public Financial Management (PFM): gaps in implementation of regional standards. - AML/CFT: strengthening regional frameworks to detect and deter proceeds of corruption. - Oil-sector governance: management and accountability of oil resources in a regional monetary union. - Institutional responsibilities: - CEMAC Commission: lead on regional PFM regulations, transparency, tax code implementation, and budgetary coverage of state funds. - COBAC: lead on AML/CFT regime strengthening (banking supervision). - BEAC: role in linking export commodity prices/volumes to foreign exchange accumulation and TSA operations. ### Definitions and Measurement Approaches - Definitions: - Corruption = “the abuse of public office for private gain.” - Governance per IMF (2017a): “institutions, mechanisms, and practices through which governmental power is exercised in a country, including for the management of public resources and regulation of the economy.” - Measurement approaches used: - PEFA indicators for PFM performance where assessments exist. - Gap analysis between CEMAC PFM Regulations and actual country practices. - Compliance indicators with FATF standards for AML/CFT. - Compliance with EITI standards and implementation of CEMAC PFM regulations for oil-sector governance. ### Impact of Governance and Corruption on Growth (evidence) - Meta-analysis findings (IMF 2017, 2018): - Meta-analysis covered 26 most-quoted studies (149 estimates on corruption impact) and 17 other studies (125 estimates on governance). - Most estimates of the impact on per capita growth from improving corruption perceptions by a quartile lie between -0.3 and -1.1 percentage point. - About 90 percent of the estimates point to a negative correlation, and 80 percent are statistically significant. - Distribution of growth impact estimates from a deterioration of the governance index by a quartile is mainly between -0.2 and -1.5 percentage point. - Improvements are particularly impactful for countries starting with relatively weak governance; correlation is significantly higher for low-income countries. - Elasticities from SGMM model (IMF, 2018) reported in figure labels (preserved): - 0.107 (GOVERNANCE (INCREASE)) - 0.02 (CORRUPTION (REDUCTION)) - 0.089 (ICR) - 0.09 (GICR) - 1.53 (Bottom 25th SSA country to SSA average) - 1.27 (Average SSA country to world average) - 3.79 (CEMAC) - 1.44 (GOVERNANCE (INCREASE) / CORRUPTION (REDUCTION) grouping shown in figure) ### Evidence on CEMAC Governance Performance - Third-party indicators (ICRG Governance Indicator, 2017; Corruption Perception Index, 2017) show: - Averages for available CEMAC countries are below SSA averages; SSA averages are below the rest of the world. - Bars in cited figures represent 95% confidence intervals for SSA countries with available observations based on standard deviations over the last five years. ### Public Financial Management (PFM): Regional Framework and Implementation - Architecture: six CEMAC directives form a coherent PFM framework covering roles/responsibilities, processes, reporting, internal/external controls and audits, public procurement, dissemination, and executive-legislative interaction. - Directive transposition process: - Member countries submit draft law to CEMAC Commission for conformity assessment; Commission recommendations embedded in finalized law; administrative acts define processes/procedures. - Transposition status and issues: - CEMAC directives on Governance and Transparency (06/2011) and on the budget law (01/2011) transposed by all CEMAC countries except Equatorial Guinea. - Three countries (Cameroon, Central African Republic, and Equatorial Guinea) have not transposed other directives into national legislation. - Transposition does not guarantee effective implementation; administrative, procedural, IT, and work-practice changes are required. ### Key Provisions of Directive CEMAC 06/2011 (Transparency and Good Governance) - Core requirements (selected): - Article 1: No public expenditure can be committed if not defined by legislative or administrative law, regularly published. - Articles 3, 4: Public tender regulations coherence; public goods selling disclosed and open to competitive bidding. - Article 5: All contracts between administration and enterprises related to exploitation of natural resources (and concessions) made available to the public; contracts controlled by the Court of Accounts and legislatures. - Article 8: Mandates publication in the budget law of detailed information on all revenues including those from natural resources. - Article 9: Nature and cost of all (tax) derogations included in the annual budget; validity presumed only for the year of presentation. - External control: creation of Court of Accounts obligatory for each member state; all operations involving public funds subject to external independent control. ### Implementation Gaps and Risks in PFM - Fiscal reporting on natural resources and extractive contracts not fully public or comprehensive. - Public procurement principles (open competition, complaints review) not systematically observed. - Transactions to/from SOEs (including PSA-related flows) not systematically covered by central government fiscal reporting. - Tax exemptions and tax expenditures rarely detailed or assessed in budget documentation; some maintained for years without clear legal basis. - TSA consolidation incomplete: - TSA not widely used for domiciliation of the state’s share in the extractive industry and some external financing. - Deposits of central government holdings sometimes kept in foreign accounts despite directive prohibiting deposit of public funds in commercial banks. - Fragmented banking arrangements outside the TSA reduce treasury oversight and weaken budget monitoring. - Expenditure controls not effective; proliferation of unorthodox procedures bypassing controls, contributing to arrears accumulation and weakening legislative budget oversight. ### PEFA-based Assessment - PEFA framework identifies 94 characteristics across 31 components and 7 pillars. - Based on PEFA indicators most closely related to governance in public resource management: - CEMAC countries (Gabon, Cameroon, Congo, and Central African Republic) generally below the SSA average and below the average for the rest of the world. - This pattern holds for both recent and pre-2013 PEFA indicators. ### PFM Policy Recommendations (regional and national) - Strengthen capacity of the CEMAC Commission to monitor and ensure implementation: - Assign dedicated resources to a unit to assess progress and issue periodic implementation reports. - Centralize petroleum contract information: - Require communication of petroleum contracts to a centralized unit within the CEMAC Commission to understand revenue implications and derogations. - Finalize convergence reports: - Require member countries to complete convergence reports describing three-year convergence paths and linking implementation of directives to expected resource flows. - Coordinate with BEAC to develop and operationalize Treasury Single Account (TSA): - Define responsibilities, policies (including interest on TSA balances), and information exchange; upgrade IT systems and procedures for active cash management. - Enhance transparency: - Regular public dissemination of budget documents and background reports required by CEMAC regulation. - Strengthen procurement, disclosure, and audit practices to reduce vulnerabilities to corruption. ### AML/CFT Framework: Status, Findings, and Recommendations - Regionalization and institutional setup: - AML/CFT regulation adopted in 2003, revised in 2010, replaced in 2016; 2016 regulation is of direct and immediate application. - Establishment of GABAC and AML/CFT supervisory function within COBAC; law enforcement and financial intelligence remain national responsibilities. - GABAC recognized as an FATF-style regional body in 2015. - Assessment timeline: - Assessments against the 2003 FATF recommendations found strategic weaknesses; first assessment against revised 2012 FATF standard is ongoing and scheduled to be completed by 2025. - Key deficiencies from FATF/GABAC assessments (2008–2015): - Legal and regulatory frameworks not aligned with international standards. - Strategic deficiencies in preventive measures: customer ID, PEP identification, suspicious transaction reporting, beneficial ownership transparency. - Institutional weaknesses: supervision for money transfer businesses, resource and technical gaps, limited sanctions implementation, weak financial intelligence units. - COBAC actions and constraints: - Offsite and onsite examinations, formal warnings, administrative sanctions; adopting a risk-based approach and conducting AML/CFT risk analysis with advisory note planned by end-2018. - AML/CFT recommendations: - Continue strengthening the regional AML/CFT framework and address pending shortcomings identified by GIABA. - COBAC should revise its 2005 regulation to implement the 2016 CEMAC regulation. - Implement a risk-based supervisory approach: develop tools, risk profiles, and adapt supervision to residual ML/TF risks including laundering of proceeds of corruption. - Strengthen preventive measures implementation by credit institutions (customer ID, PEPs, beneficial ownership); publish guidance, conduct training, and target supervision. - Ensure dissuasive and proportionate sanctions on credit institutions; communicate sanctions to national financial intelligence units and prosecutors per the 2016 regulation. - Encourage CEMAC members to comply with UNCAC peer-review process. ### UNCAC Peer-Review Status (summary) - UNCAC membership: 186 states parties. - Peer-review first cycle nearly complete globally; not completed for three CEMAC countries: Chad, Equatorial Guinea, and Congo. - Table 6 examples (peer-review status from source): - Cameroon — 2017 — Procurement - Chad — Not reviewed - Central African Republic — 2016 — AML - Equatorial Guinea — Not reviewed - Gabon — 2015 — Not specific - Congo — Not reviewed ### Oil-sector Governance: Role, Risks, and Recommendations - Oil sector importance (preserved figures): - Oil accounts for about 20 percent of GDP. - Oil covers roughly 75 percent of the region’s exports of goods. - Tax and nontax revenues related to oil contribute to more than 40 percent of total revenues. - Fiscal regimes: - Two main arrangements: Profit Sharing Agreement (PSA) and concession schemes; best practice: model contracts and legislative frameworks with limited biddable parameters. - Capacity and measurement challenges: - State share under PSA requires complex calculations of cost-oil vs. profit-oil; building state capacity to audit and calculate shares takes time. - Regression evidence linking recorded oil exports and capital outflows: y = -0.1788x + 376.52; R² = 0.6218 (source regression preserved). - Signs of leakages and data discrepancies: - COMTRADE examples (Congo and Cameroon) show statistical discrepancy up to 60% for total exports; main contributor: lower export volume data (~43%) vs. partner data and lower implied unit prices. - BIS data: stock of CEMAC resident holdings with foreign banks about USD 5 billion as of end 2017, above notional allowed amounts under CEMAC foreign exchange regulation. - Concern: increases in oil prices through 2018 did not clearly translate into higher oil tax revenue and NFA accumulation; CEMAC Heads of State called in November 2018 to step up repatriation of export proceeds. - Transparency instruments and EITI engagement: - EITI membership and reconciliation can support transparency; four CEMAC countries engaged with EITI: Cameroon, Chad, Congo (full membership effective) and CAR (suspended); Gabon and Equatorial Guinea have committed to submit EITI applications. - EITI limitations: does not guarantee timely coverage of initial physical transactions; barter or commercial financing can produce opaque practices complicating reconciliation. - Customs and foreign exchange legal framework weaknesses: - Regulations require customs declarations and authorization before goods leave region; observed weaknesses include incomplete/inaccurate declarations and limited monitoring by customs. - Oil-sector recommendations: - CEMAC Commission should ensure full implementation of regional legal framework and enhance its capacity. - Member States should submit annual reports to CEMAC on status of implementation consistent with a customs union. - Use EITI membership to inform required published data to implement CEMAC directives. - Fully implement foreign exchange law: clarify banks’ responsibilities, strengthen ex-post customs verifications and sanctions; cover oil traders and settling banks. - Establish regional analytic capacity (ideally at BEAC) to assess link between oil prices/volumes and expected tax revenues and gross NFA inflows. - Revisit documentation requirements from petroleum companies to customs and BEAC reporting systems. - Create dedicated customs oil-and-gas units in largest exporters with specialist skills, intelligence, risk analysis, and SOE representation for reconciliation. - Strengthen implementation of transparency provisions in CEMAC Directive on Transparency and Governance (06/2013); provide complete reconciliation of oil production/export data with oil tax revenues included in budget documents. ### Customs: Standards, Risk-Based Model, and Capacity Building - Trade data and sharing: - Customs declarations must contain all information required for external trade statistics (Art. 120 of CC). - Implement regional framework to share customs-collected oil and gas export data with the Commission and Central Bank; conduct data-matching and gaps analysis; adopt a CEMAC directive to establish the framework. - Risk-based customs control techniques recommended: - Strong intelligence and analysis; approved places of loading; product flow measurement with calibrated equipment; an electronic declarative procedure to prevent unreported transactions; extensive use of Article 76–1 to obtain documentation; post-clearance audits (may cover three past years, Art. 76–2); enforce Customs Code sanctions. - Capacity building priorities: - Set up dedicated oil-and-gas customs units; specialist training and HR policy; provide adequate IT, communications, inspection, testing, and transport equipment. - Elevate control of oil and gas export as a core customs mission with specific performance indicators and incentives. - IMF may mobilize TA resources for national customs capacity building and regional framework development. ### Non-oil Revenue, Tax Effort, and Reform Priorities (selected findings and exact statistics) - Recent non-oil revenue trend: - 11.9 percent of non-oil GDP (non-oil revenues in 2011) - 14.3 percent of non-oil GDP (non-oil revenues in 2015) - 12.5 percent of non-oil GDP (non-oil revenues in 2017) - Declines between 1.4 and 6.9 percentage points of non-oil GDP in recession countries (Congo, Gabon, Equatorial Guinea). - Non-oil revenue-to-non-oil GDP range since 2000: 11¾–14¼ percent; average 13 percent. - SSA and WAMEU increases since 2000: 4 and 4½ percentage points, respectively. - Three countries below 10 percent of non-oil GDP in 2017: Central African Republic, Chad, Equatorial Guinea. - Congo non-oil revenue: 27.6 percent of non-oil GDP (2017). - Composition and trends: - Trade taxes declined by one percentage point of non-oil GDP since early 2000s. - Indirect taxes were around 40 percent of non-oil revenue in 2017. - Non-tax revenues remained below 1 percent of GDP. - Excise revenue averaged 0.5 percent of non-oil GDP in 2017 (range: about 0.1 percent in Chad to 1.1 percent in Cameroon). - WAEMU excise: 1.4 percent of non-oil GDP; SACU and EAC: 2–2½ percent of non-oil GDP. - Tax frontier gaps (estimates preserved): - CAR and Chad: ~2 percent of GDP tax gap. - Congo, Cameroon, Gabon: ~5.5 percent of GDP potential mobilization. - SSA average tax gap: ~3.3 percent of GDP. - Tipping point for tax-to-GDP ratio: about 13 percent (12.5 to 13 percent noted). - Direct and personal income tax specifics: - CEMAC direct taxes: 2.6 percent of GDP in 2002; around 3.6 percent of GDP in 2015. - CEMAC PIT average: 1 percent of GDP; SSA PIT average: 2.9 percent of GDP. - Inward FDI stocks: from 27 percent of GDP in 2007 to over 95 percent in 2017. - Regional VAT standard rate range: 15–19 percent; reduced rate range: 5–10 percent. - Excise directive ceilings: 25 percent (currently), WAEMU alcoholic beverages ceiling: 50 percent; tobacco new directive: 50 percent floor. ### Tax and Customs Administration Weaknesses and Priority Reforms - Common administrative weaknesses: - Weak capacity and high staff turnover; outdated IT systems; weak accounting procedures; limited risk-based control use. - Tax-specific: insufficient taxpayer segmentation, weak large taxpayer and public enterprise collections, unreliable taxpayer databases. - Customs-specific: systematic underestimation of imports, weak valuation, porous borders, weak implementation of the common external tariff. - Priority administration reforms: - Optimize taxpayer segmentation (large taxpayer offices, specialized units); consider raising thresholds. - Adopt risk-based approaches for controls, audits, inspections, refunds. - Strengthen VAT administration and refund mechanisms; consider deferred payment VAT at customs and a dedicated BEAC account for VAT receipts to facilitate refunds. - Increase excise taxes on alcohol, tobacco, passenger vehicles, and possibly sugar; implement new regional excise directive measures (minimum tobacco rate of 30 percent; eliminate maximum rates for alcohol and passenger vehicles; prohibit discrimination between imported and local products). - Reform CIT: address investment incentives, anti-abuse provisions, and transparency of special regimes; annually quantify and publish tax expenditures. - PIT reform: move toward dual or quasi-dual systems (progressive labor income schedule; low-flat rate final withholding on capital income); eliminate family quotient and presumptive deductions or replace with tax credits/caps. - Modernize IT systems and interconnect tax and customs databases for cross-checking. - Establish tax policy units to conduct analysis and publish annual tax expenditures. - Administrative cost note: - It takes on average 600 hours per year for a medium-size company to comply with mandatory tax payments in CEMAC versus less than 300 in sub-Saharan Africa. ### Revenue Impact Evidence from Fund-supported Programs - Empirical estimate: where Fund-supported programs included conditionality on tax policy and administration, tax revenues increased by approximately ½ percentage point of GDP in a given year in low-income countries; estimated increase of 0.4 percent of GDP for middle-income countries. ### Concluding Policy Themes and Regional Role - Two cross-cutting priorities: - Implement a “transparency shock” in production and sharing of documentation related to public resource management; an absolute priority aligned with CEMAC directives. - Translate the regional framework into consistent procedures and work practices within public institutions. - Specific lines of action: - Translate CEMAC PFM directives into work practices prioritizing transparency, full disclosures, ongoing reconciliation, and internal/external audit. - Deepen AML/CFT framework efforts in line with CEMAC directives. - Enforce checks and balances in the extractive sector: full disclosure and regular reconciliation of oil contracts and transactions; implement a stronger regional customs network with better governance and capacity. - Role of regional institutions: - CEMAC regional institutions should lead progress and support member countries to create coherent cross-country frameworks, generating synergies critical for the economic and monetary union. - Good governance of public resources and reduced perceived corruption are presented as the single most important elements to lay the ground for a diversified economy, a well-functioning regional market, and productive use of public resources. *Source: cr1902 (International Monetary Fund).* ### References ____________________________________________________________________________ 33 ### A Regional Approach to Enhancing Governance and Reducing the Potential for Corruption ### Introduction - Good governance, including the control of systemic corruption, is vital for macroeconomic stability as well as sustainable and inclusive economic growth. - IMF research shows that weak governance and systemic corruption is associated with lower growth and investment and higher inequality, (IMF, 2018). - Investing in good governance and reducing corruption is described as a largely budgetary-neutral reform to empower the private sector and expand opportunities for all. - Purpose of the note: - Assess regional dimensions of a strategy to enhance governance in CEMAC. - Provide background, definitions, measurement approaches, impact on growth, and assessments in public financial management, AML/CFT, and oil-sector governance. - Prepared by Sabrina Lando, Samuele Rosa, and Gwenaelle Suc. - Date on contents page: December 10, 2018. ### Background and Rationale - CEMAC was severely affected by a sharp decline in commodity prices after 2014, notably the reduction in oil prices. - At end-2016 authorities embarked on a coordinated and sizeable fiscal adjustment effort by member countries, supported by the IMF and other partners. - Short-term objective: restore external and domestic stability. - Medium-term objective: reduce excessive dependency on oil and lay the foundation for a broader economic base. - Addressing governance constraints—particularly in management of public resources and perceptions of corruption—is key to unlocking potential and regional market integration. - Recommendations recognize capacity constraints in CEMAC and call for gradual and sustained approaches that yield results over time. ### Regional Focus and Institutional Roles - Three key areas with distinct regional dimensions: - Gaps in implementation of regional standards for public financial management (PFM). - Standards to strengthen AML/CFT frameworks. - Management and accountability of oil resources. - Institutional responsibilities: - CEMAC Commission: lead on regional PFM regulations, transparency, and ensuring tax code implementation and budgetary coverage of state funds. - COBAC: lead on AML/CFT regime strengthening. - BEAC: role in understanding the link between export commodity prices/volumes and foreign exchange accumulation. - Rationale for focus: - Extractive sectors dominate exports and foreign exchange. - Public sector remains a dominant source of aggregate demand. - CEMAC banks play a central role in preventing safe havens for proceeds of corruption. ### Defining Governance and Corruption; Measurement - Definition used: corruption = “the abuse of public office for private gain.” - Governance defined per IMF (2017a) as the set of “institutions, mechanisms, and practices through which governmental power is exercised in a country, including for the management of public resources and regulation of the economy.” - Measurement approaches relied upon in the note: - Public Expenditure and Financial Accountability (PEFA) indicators for PFM performance where assessments exist. - Gap analysis between CEMAC PFM Regulations and actual practices at country level. - Compliance indicators with Financial Action Task Force (FATF) standards for AML/CFT. - Compliance with EITI standards and implementation of CEMAC PFM regulations for oil-sector governance. - Note: the word “governance” can be variously defined; the note follows IMF policy guidance on governance and corruption. ### Impact of Governance and Corruption on Economic Activity - Empirical findings summarized: - Corruption and weak governance are significantly associated with lower economic growth, higher inequality, and entrenched poverty. - Channels include reduced attractiveness for domestic and foreign investment; predatory tax behavior; poor infrastructure from inefficient spending; undermined human capital; and political instability. - Meta-analysis evidence (IMF 2017, 2018): - Meta-analysis covered 26 most-quoted studies (149 estimates on corruption impact) and 17 other studies (125 estimates on governance). - Findings: - Most estimates of the impact on per capita growth from improving corruption perceptions by a quartile lie between -0.3 and -1.1 percentage point. - About 90 percent of the estimates point to a negative correlation, and 80 percent are statistically significant. - Distribution of growth impact estimates from a deterioration of the governance index by a quartile is mainly between -0.2 and -1.5 percentage point. - Results are robust across measures of corruption perceptions and governance, estimation techniques, and institutional quality controls. - Improvements in governance and reductions in corruption are particularly impactful for countries starting with relatively weak governance; correlation is significantly higher for low-income countries. ### Evidence on CEMAC Governance Performance - Third-party indicators suggest CEMAC countries lag SSA peers and the rest of the world in governance and corruption indicators. - Figure references in the source: - Figure 1: CEMAC, SSA, and Rest of the World: Governance and Corruption Indicators (ICRG Governance Indicator, 2017; Corruption Perception Index, 2017). - Observations: - Averages for available CEMAC countries are below SSA averages. - SSA averages are below the average for the rest of the world countries covered by the survey. - Source for indicators referenced includes International Country Risk Guide, 2017 and Transparency International, 2017; bars represent 95% confidence intervals for SSA countries with available observations based on standard deviations over the last five years of observations. ### Areas of Specific Concern Highlighted in the Note - Public financial management: - Regional PFM regulations provide strong standards for transparency and accountability; weak implementation at country level creates risks for miscollection and misuse of resources. - PEFA assessments used to evaluate performance where available. - AML/CFT: - Effective AML/CFT regimes are essential to detect, deter, and prosecute proceeds of corruption. - Work led by COBAC to strengthen regional banking and financial safeguards. - Oil-sector governance: - State presence in extractive sector via SOEs and production sharing/profit-sharing agreements; consistency with regional foreign-exchange regulatory framework is required. - Responsibility shared across member countries, CEMAC Commission, and BEAC to ensure tax codes, budget coverage, and foreign exchange management are coherent. ### Implications and Strategic Orientation - Improving governance and reducing corruption: - Described as budgetary-neutral reforms with potential large payoffs for growth, investment, and inclusion. - Requires a regional approach to maximize synergies and coherence across member countries in an economic and monetary union. - Implementation considerations: - Reforms are largely in national remit but regional institutions should coordinate, steer, and support implementation where regional policy design affects country outcomes. - Capacity constraints and fragile-country contexts in CEMAC necessitate gradual, sustained reform sequencing. *Prepared by IMF staff; content based on the source PDF chapter provided.* ### 14. Improvements in the governance and corruption indicators are related with higher ### 14. Improvements in the governance and corruption indicators are related with higher ### Relationship between governance, corruption, and growth - Based on an SGMM model developed by staff (IMF, 2017) the elasticity of growth on improvement in the area of governance and corruption is significant. - The impact of reducing corruption in SSA is much higher than the average for the rest of the countries covered in the surveys. - This largely reflects that the corruption index shows higher variation for SSA, with countries in this group with better governance posting higher growth. - A simulated improvement in the governance or corruption index shows that the estimated impact on growth would be significant for SSA. - Given that governance and corruption indices are generally worst in CEMAC compared to the average of SSA, it is likely that the growth response could be higher in the case of CEMAC. - Elasticities reported (from SGMM model (IMF,2018) in figure labels): - 0.107 (GOVERNANCE (INCREASE)) - 0.02 (CORRUPTION (REDUCTION)) - 0.089 (ICR) - 0.09 (GICR) - 1.53 (Bottom 25th SSA country to SSA average) - 1.27 (Average SSA country to world average) - 3.79 (CEMAC) - 1.44 (GOVERNANCE (INCREASE) / CORRUPTION (REDUCTION) grouping shown in figure) ### The CEMAC Framework for Public Financial Management (PFM) - A strong and transparent framework for the management of public resources is the first line of defense against poor governance and potential corruption. - CEMAC has designed and adopted at the regional level relevant regulations to build this framework and improve efficiency in managing public resources. - The challenge is ensuring proper and full implementation of these principles at the national level, best achieved by regular assessments, reporting on implementation status, and supporting member countries. ### Assessment: architecture and directives - The architecture underpinning the regional PFM framework is rooted in six CEMAC directives that, taken together, form a coherent framework covering: - roles and responsibilities, processes, reporting, internal and external controls and audits related to tax collection and public resource management; - consultation with civil society, dissemination of data, and executive-legislative interaction in budget preparation, execution, and reporting. - Principles in these directives reflect international standards and best practices to promote fiscal transparency and effective management of public funds. ### Transposition into national law and issues - Because CEMAC standards are defined by a “directive”, their provisions need to be transposed into national laws to become applicable. - Transposition process: - Member countries submit draft law to the CEMAC Commission for assessment of conformity. - Recommendations of the CEMAC Commission are embedded in the finalized law which can be approved. - Administrative acts follow approval to define processes, procedures, and specific obligations (data reports, audits). - Transposition is uneven: - CEMAC directives on Governance and Transparency (06/2011) and on the budget law (01/2011) have been transposed by all CEMAC countries, except Equatorial Guinea. - Implementation of other directives is partial; three countries (Cameroon, Central African Republic, and Equatorial Guinea) have not transposed these into national legislation. - Transposition into national legislation does not guarantee effective implementation; follow-up administrative steps, procedural and IT changes, and work practice adaptations are required. ### Directive CEMAC 06/2011 (Transparency and Good Governance) - Serves as the general framework for other directives; sets the ground in terms of: 1. attribution and responsibilities of each public institution; 2. the economic context for fiscal policy decisions; 3. elaboration and presentation of the budget law; 4. activities related to revenue collection and expenditure; 5. information to be provided to the public; 6. a participative process with civil society involvement. - Selected provisions (Article highlights): - Article 1: No public expenditure can be committed if it is not defined by a legislative or administrative law, regularly published. - Articles 3, 4: Public tenders regulations must be coherent with CEMAC 06/2011; selling of "public goods" disclosed and open for competitive bidding. - Article 5: All contracts between administration and enterprises related to exploitation of natural resources (and concessions) are made available to the public; these contracts are controlled by the Court of Accounts and competent legislative bodies. - Article 1 (other provisions): Allocation of competences, expenses, and public resources across levels of administration must be communicated comprehensively. - Article 1 (budget framework): Requires the budget law be encapsulated into a medium-term fiscal policy framework. - Article 8: Mandates publication in the budget law of detailed information on all revenues including those from natural resources. - Article 9: Nature and cost of all (tax) derogations included in the annual budget; validity presumed only for the year of presentation. - Article 3 (external control): All operations involving public funds are subject to external independent control of the Court of Accounts, whose creation is obligatory for each member state. - The directive structures: Section I - Legality and Publicity of Public Financial Operations; Section II - Attribution and Responsibilities of Institutions; Section III - Economic Framework; Section IV - Preparation and Presentation of Public Budget (Laws); Section V - External Control. ### Problems in actual implementation of CEMAC 06/2011 - Regional coverage is partial: Equatorial Guinea has not transposed the directive. - Even where transposed, crucial principles are not implemented in practice: - Fiscal reporting on natural resources management is problematic; contracts with the oil sector are not made fully available to the public. - Public procurement principles (open competition, complaints review mechanisms) are not systematically observed. - These implementation gaps create vulnerabilities to corruption in public investment management. ### Problems from limited implementation of the Budget Law directive (01/2011) - Transactions to and from SOEs, including those under profit sharing agreements in the extractive sector, are not systematically covered by central government fiscal reporting. - This weakens internal and external controls and makes tracking foreign exchange flows from extractive sectors difficult. - Tax exemptions and tax expenditures are rarely detailed or assessed in budget documentation or maintained for years without clear legal basis or economic justification, creating governance problems and potential favoritism. - Consolidation and full operationalization of the Treasury Single Account (TSA) is incomplete: - TSA not used extensively for domiciliation of the state’s share in the extractive industry and some external financing. - Holdings related to the central government are sometimes kept in foreign accounts. - Directive prohibits deposit of public funds in commercial banks; fragmented banking arrangements outside TSA reduce treasury oversight and weaken budget control and monitoring. ### Problems in implementing the Public Accounting directive - Expenditure controls are not effective or streamlined; exceptions to regular procedures have multiplied. - This creates incentives for expenses executed outside the normal spending chain, delinking budget execution from the approved resource envelope. - Resulting consequences include: - emergence of large stocks of arrears, especially when resource envelopes shrink due to commodity price declines; - weakened legislative input to budget orientation and fiscal policy. ### PEFA-based assessment and overall governance diagnosis - IMF and partners use the Public Expenditure and Financial Accountability (PEFA) framework, which identifies 94 characteristics across 31 components and 7 pillars. - Based on PEFA indicators most closely related to governance in public resource management: - CEMAC countries (Gabon, Cameroon, Congo, and Central African Republic) are in most cases below the average for sub-Saharan countries. - Both these groups (CEMAC and SSA) are below the average for the rest of the world. - This pattern holds for both recent and pre-2013 PEFA indicators. ### Recommendations (implied by assessment) - Ensure full transposition of CEMAC directives into national legislation (including Equatorial Guinea). - Complete administrative, procedural, and IT adaptations required for effective implementation after transposition. - Publish and make public contracts related to the extractive sector, in line with CEMAC 06/2011. - Strengthen public procurement practices to ensure open competition and complaints review mechanisms. - Detail and justify tax exemptions and tax expenditures in budget documentation with clear legal and economic basis. - Consolidate and operationalize the Treasury Single Account to centralize cash management and improve oversight. - Strengthen expenditure controls and reduce exceptions to regular procedures to limit arrears accumulation and improve legislative oversight. *Source: cr1902 - 14. Improvements in the governance and corruption indicators are related with higher (IMF).* ### 24. The CEMAC Commission is working on several fronts to address weaknesses in PFM. ### 24. The CEMAC Commission is working on several fronts to address weaknesses in PFM. ### Progress and core mandates on PFM - Core mandate: oversee full and effective implementation of CEMAC directives through ongoing interaction with member countries to facilitate full transposition into national legislation and assess compliance of work practices with the directives. - Specific area of assistance: gradual implementation of budget by program classification (examples: Gabon and Cameroon; partially Congo and Chad), benefiting from guidance from the CEMAC Commission. - Regional surveillance framework: provides a basis to relate outcomes in budget execution with the degree of implementation of CEMAC directives. ### Identified problems and impacts (as presented) - Directive 02/2011 – CEMAC Directive on Public Accounting (Règlement général sur la comptabilité publique) - Problem related to full implementation 1 / Expenditure controls are not streamlined / effective. - Possible impacts: - Unauthorized expenditure contributes to weak financial reporting and, de facto, internal controls. - They create or aggravate cash management problems (accumulation of arrears). - They reduce, ex post, fiscal space as defined in the budget law which went through the legislative approval procedure. - Problem related to full implementation 2 / Proliferation of unorthodox procedures, bypassing regular controls. ### PEFA-based diagnostics (summary) - PEFA scores and indicators (scores through 2013 and 2016) show weaknesses across governance-related indicators, including: - Financial reports of extra-budgetary units; Public access to information; Monitoring of public corporations; Monitoring of sub-national government (SNG); Recording and reporting of debt and guarantees; Approval of debt and guarantees; Transfer of revenue collections (timeliness, controls); Revenue accounts reconciliation; Consolidation of cash balances; Payroll controls; Procurement (quality of legislation, implementation); Internal controls on nonsalary expenditure; Internal audit effectiveness; Financial data integrity; Bank account reconciliation; Suspense accounts (recording, regularization); Advance accounts (recording, regularization); Coverage and comparability of reports; Timing of in-year budget reports; Accuracy of in-year budget reports; Completeness of annual financial reports; Accounting standards; Public access to key fiscal information; Effectiveness in collection of tax payments. - PEFA element scores are ranked between 1 (criteria severely not met) to 4 (criteria fully met) based on the PEFA classification applied since (June 2014) and earlier classification in force until June 2013. ### Policy recommendations to strengthen PFM - Strengthen capacity of the CEMAC Commission to monitor and ensure proper implementation of CEMAC directives. - Assign dedicated resources to a CEMAC Commission unit tasked to assess on a regular basis progress in the PFM area. - Ideally, such unit would issue a periodic report on the status of implementation, describing gaps and actions in countries. - Ensure the communication of petroleum contracts to a centralized unit within the CEMAC Commission. - Rationale: specific tax agreements in contracts often derogate from the CEMAC framework, reducing the tax basis; terms of benefit from profit sharing via SoEs or concessions are complex and confidential. - Action: CEMAC Commission will request national authorities to share such contracts and use this information to enhance understanding of the revenue accruing from them. - Require CEMAC member countries to finalize their convergence report. - Purpose: describe the convergence path over three years for unmet convergence criteria and relate full implementation of CEMAC Directives to expected flow of resources. - Current status: these reports have not been completed. - Coordinate with BEAC to develop and operationalize treasury single account (TSA) in CEMAC member countries. - Needs: interaction between BEAC and national treasuries to define responsibilities, policies (including interest rates on TSA balance), and information exchange requirements. - Prerequisites: upgrades of IT systems and procedures used by the BEAC to ensure active and timely cash management. - Enhance transparency across the governance agenda. - Issues: lack of disclosure of extractive sector contracts; incomplete recording in budget documents of transactions at subnational level and with state owned enterprises; budget documents often omit information on tax exemptions, their economic rationale, and estimated costs. - Initial step: regular public dissemination of the various budget documents and background reports that are expected by CEMAC regulation to be made available to the public. ### AML/CFT framework: scope and regionalization - Rationale: AML/CFT regime can support prevention, detection, investigation and prosecution of acts of corruption; FATF calls for mobilization of AML framework to combat laundering of proceeds of corruption and assist bribery investigations and prosecutions. - Relevant AML/CFT measures: enhanced due diligence for domestic politically-exposed persons (PEPs), identification of beneficial owners behind legal persons, and suspicious transaction reporting by financial institutions. - Regionalization steps: - AML/CFT regulation adopted in 2003, revised in 2010, replaced in 2016. The 2016 CEMAC regulation is of direct and immediate application in all member countries. - Establishment of the Groupe d’Action contre le Blanchiment d’Argent en Afrique Centrale (GABAC). - Creation of an AML/CFT supervisory function within the COBAC. - Some functions (law enforcement and financial intelligence) remain at the national level. - Assessment timeline and baseline: - Assessments of compliance with the 2003 FATF recommendations found strategic weaknesses in the 2003 and 2010 CEMAC regulation; most assessment criteria were non-compliant or partially compliant. - The 2012 FATF standard introduced new recommendations and emphasis on effectiveness; the first assessment of CEMAC countries against this revised standard is ongoing and is scheduled to be completed by 2025. - GABAC became recognized as an FATF-style regional body in 2015. ### Key findings from FATF/GABAC assessments (Box 3) - World Bank and GABAC assessed all CEMAC member countries against the 40+9 FATF recommendations between 2008 and 2015. - Overall result: CEMAC countries were found to be not compliant or partially-compliant with most FATF recommendations. - Main deficiencies identified: - Legal and regulatory frameworks not aligned with international standards. - Strategic deficiencies in preventive measures for financial institutions: identification of customers, politically-exposed persons, reporting of suspicious transactions, and transparency and beneficial ownership of legal persons. - Need for guidelines to the private sector to improve implementation of AML/CFT obligations. - Institutional weaknesses: lack of supervision mechanisms for money transfer and money exchange businesses; insufficient resources and technical expertise for supervision; limited evidence of effective implementation of sanctions; financial intelligence units needing stronger structure and capacity to assert independence and to support ML/TF investigations and prosecutions. ### COBAC role and actions - COBAC responsibility: AML/CFT banking supervision and ensuring the strength of regulatory framework and implementation of preventive measures by credit institutions. - Recent actions: offsite and onsite examinations of credit institutions; issuance of formal warnings and administrative sanctions when breaches were uncovered. - Capacity-building: COBAC is introducing a risk-based approach to supervision and strengthening capacity. - COBAC is conducting an analysis of AML/CFT risks and intends to publish an advisory note by end-2018. ### Importance of effective AML/CFT implementation - Effective risk-based supervision by COBAC will support anti-corruption efforts by ensuring credit institutions implement AML/CFT obligations to prevent and detect laundering of proceeds of corruption. - Improved implementation will increase useful suspicious transaction reports to financial intelligence units, potentially triggering corruption investigations. ### UNCAC (UN Convention Against Corruption) relevance and compliance - UNCAC is the only legally binding universal anti-corruption instrument; covers preventive measures, criminalization and law enforcement, international cooperation, asset recovery, and technical assistance and information exchange. - UNCAC membership: 186 states parties. - Peer review process: - Nearly entire membership completed the first cycle; not completed for three CEMAC member countries: Chad, Equatorial Guinea, and Congo. - Table 6: CEMAC country peer review status and examples of deficiencies - Cameroon — 2017 — Procurement - Chad — Not reviewed - Central African Republic — 2016 — AML - Equatorial Guinea — Not reviewed - Gabon — 2015 — Not specific - Congo — Not reviewed ### AML/CFT and anti-corruption recommendations - Continue to strengthen the regional AML/CFT framework, particularly measures relevant to the fight against corruption. - The 2016 CEMAC regulation is a positive step; CEMAC should address pending shortcomings to be identified in upcoming assessments by GIABA. - COBAC should revise its 2005 regulation to implement the 2016 CEMAC regulation. - Implement a risk-based approach to supervision to focus COBAC’s limited resources on highest-risk areas. - Develop risk-based onsite and offsite supervisory tools for credit institutions, deepen understanding of ML/TF risks, develop risk profiles of supervised credit institutions, and adapt supervision strategy to residual risks, taking into account laundering of proceeds of corruption. - Strengthen COBAC’s efforts to ensure AML/CFT preventive measures of high relevance to corruption prevention/detection are implemented by credit institutions. - 2016 CEMAC regulation establishes preventive measures on customer identification, PEPs, and beneficial ownership; private sector implementation remains a challenge and national financial intelligence units receive low levels of suspicious transaction reports. - Actions: publish guidance to the private sector, conduct training, and carry out more targeted supervision. - Ensure dissuasive and proportionate sanctions on credit institutions for AML/CFT breaches and reinforce cooperation with national authorities to ensure effectiveness of the regionalized regime. - COBAC should communicate administrative or disciplinary sanctions to national financial intelligence units and Prosecutor as per the 2016 CEMAC regulation. - Establish effective channels of communication and information exchange between regional and national levels to strengthen understanding of risks and follow-up on deficient institutions. - Encourage CEMAC members to comply with the UNCAC peer-review process as part of broader accountability infrastructure; peer reviews identify gaps in national legislation relevant to AML/CFT or procurement. *International Monetary Fund — content unit: 24. The CEMAC Commission is working on several fronts to address weaknesses in PFM.* ### 32. Oil extraction and export plays a major role in the economy of most CEMAC ### 32. Oil extraction and export plays a major role in the economy of most CEMAC countries. ### Role of oil in CEMAC economies - Oil accounts for about 20 percent of GDP. - Oil covers roughly 75 percent of the region’s exports of goods. - Tax and nontax revenues related to oil contribute to more than 40 percent of total revenues. - Given the size of this sector and its command of public resources, good management in the oil sector is key to ensure governance in the rest of the economy. ### Fiscal regimes and contractual arrangements - Two basic industry arrangements: - Profit Sharing Agreement (PSA): state (normally through a state-owned enterprise-SOE) and a foreign private company set up a partnership and agree on a profit sharing scheme; a certain amount of oil (cost-oil) pays exploration and extraction costs; the remainder (profit-oil) is shared per agreed formula; agreement considers investment cycle and depreciation. - Concession scheme: operator typically pays a royalty and an income tax for extraction and export rights; may include resource rent or additional profit taxes; fiscal terms typically specified in legislation rather than project-by-project negotiation. - Best practice recommendations: - Set fiscal terms initially in model contracts specifying which fiscal terms are biddable or negotiable; keep number of variable fiscal parameters to a minimum. - Legislative framework can be incorporated in income tax legislation or in stand-alone petroleum/mining codes (the latter is mostly used in the CEMAC). ### Complexity of quantification and state capacity - Quantification of the state’s share under PSA requires complex calculations depending on quantity produced/exported, selling price, and imputed costs; significant share of production is sold on future markets. - Building state capacity to manage, control, and audit contracts and to properly calculate its share takes time and steadfast investments. - Spreadsheet/project-by-project modeling can forecast tax revenue and foreign exchange implications given fiscal terms, production cost projections, and production quantities; feasible for a limited number of fields and useful to assess order of magnitude and potential revenue collection/foreign exchange problems. ### Data, measurement issues, and signs of leakages - Analysis of CEMAC balance of payments data suggests a strong correlation between recorded oil export and recorded capital outflows; higher recorded oil export correlates with higher estimated capital outflows — likely indicating part of the counterpart to oil export is not repatriated and is recorded as capital outflow. - Regression shown: y = -0.1788x + 376.52; R² = 0.6218 - Under-invoicing / under-reporting: - Other studies suggest the oil export sector is plagued by under-invoicing; exporting country records are sometimes lower than partner import data. - COMTRADE data (Congo and Cameroon example) show statistical discrepancy up to 60% for total exports; larger contributor is lower export volume data compared with partner data (discrepancy about 43%) and a smaller extent lower implied unit prices. - If indicative broadly, suggests miss-invoicing may be under-reporting of actual export volumes, pointing to customs capacity and governance issues at the customs level. - Deposits abroad by CEMAC residents: - BIS data suggest stock of CEMAC resident holdings with foreign banks is about USD 5 billion as of end 2017, above notional allowed amounts under CEMAC foreign exchange regulation. - Some of these holdings may relate to unrecorded oil export earnings proceeds. - Policy concern noted: increase in oil prices through 2018 did not clearly translate into higher oil tax revenue (and NFA accumulation); at an extraordinary meeting in November 2018, CEMAC Heads of State called for stepping-up efforts to repatriate export proceeds, particularly by state-owned enterprises part of PSA. ### Governance instruments and engagement - Extractive Industry Transparency Initiative (EITI) is cited as an international standard to enhance and report on governance in extractives; EITI membership is by countries only; strong synergy exists between EITI requirements and CEMAC PFM guidelines. - EITI engagement in CEMAC: - Four CEMAC countries have a form of engagement with EITI: Cameroon, Chad, Congo (full membership effective) and CAR (suspended). Gabon and Equatorial Guinea have committed to submit EITI applications. - Reported corrective actions for Cameroon and Congo include issues on contract transparency, license registration, state-participation, in-kind revenues, SOE transactions, and other areas. - Caution: EITI does not guarantee commercial part of oil (initial physical transactions) is covered in a timely manner; barter transactions or commercial financing can produce opaque practices complicating reconciliation. ### Customs role, legal framework, and observed weaknesses - CEMAC customs and foreign exchange laws require: - Prior declaration to customs and authorization before goods leave the region. - Customs declarations (including invoice) and provision of additional information to verify plausibility of declarations. - Information on expected timing and domiciliation of oil exports to comply with foreign exchange law. - Observed weaknesses: - Customs administrations have weak capacity for this complex sector; declarations often incomplete or incorrect; strict monitoring is limited. - Assumption that presence of the state in benefit-sharing agreements reduces need for customs scrutiny has been problematic. - Regulatory citations: - Regulation 05/01–UEAC-097–CM-06 of August 3, 2001 establishing the revised Customs Code (CC) of the CEMAC (articles cited: Art. 94; Art. 110–1; Art. 110–3; Art. 127–1; combined Art. 84–2 and 145; Art. 146; Art. 62; Art. 2). ### Recommendations and capacity-building priorities - Regional legal framework implementation: - CEMAC Commission should ensure full implementation of regional legal framework, including enhancing the Commission’s capacity in this area. - Option: Member States submit an annual report to CEMAC on status of implementation of CEMAC guidelines consistent with a customs union. - Use of EITI: - Membership in the EITI can inform data to be published to implement CEMAC directives; EITI and CEMAC guidelines both require full disclosure and transparency of contracts and extractive-sector activity. - Foreign exchange law enforcement: - Fully implement foreign exchange law, including clarifying banks’ responsibilities and strengthening ex-post customs verifications and sanctions; cover oil traders and banks involved in settling transactions. - Regional analytic capacity: - Establish capacity at regional level (ideally BEAC) to assess link between oil prices/volumes and expected tax revenues to determine whether tax revenues and gross NFA inflows are justified or if policy adjustments (monetary at CEMAC level, fiscal at country level) are needed. - Revisit adequacy of documentation model to be provided by petroleum companies to customs and the BEAC reporting system. - National customs specialization: - Establish in customs administrations of largest oil exporters a dedicated unit with specialty knowledge of the oil sector, intelligence and risk analysis capabilities, and central role in directing, supporting, and monitoring customs controls. - Dedicated unit should define exact information required from oil exporters to monitor governance risk, create a cartography of risks for mis- or non-reporting, and direct controls accordingly. - Unit would benefit from representation of state-owned oil companies (SOEs) to obtain critical data. - Transparency reconciliation: - CEMAC Commission should strengthen implementation of transparency provisions in CEMAC Directive on Transparency and Governance (06/2013). - Urge member countries to provide complete reconciliation of oil production and export data with oil tax revenues included in budget documents to lay ground for EITI participation. *Source: cr1902 - 32. Oil extraction and export plays a major role in the economy of most CEMAC countries.* ### Box 5. Customs: An Assessment of Standards (concluded) ### Box 5. Customs: An Assessment of Standards (concluded) ### Trade Data Collection, Sharing and Analysis - Customs declarations must contain all information required for the establishment of external trade statistics (Art. 120 of CC). - Given the strategic importance of the oil and gas sector in CEMAC, implement a regional framework to: - Share customs-collected oil and gas export data with the Commission and the Central Bank; - Conduct data-matching of physical flows with capital and revenue flows and economic indicators; - Conduct gaps analysis. - A CEMAC directive should be adopted to establish this framework. ### Moving to an Efficient, Risk-Based Customs Control Model - Customs administrations should ensure export declarations are correct regarding nature and volume of products, export value, and payment arrangements. - Modern techniques adapted to oil and gas transactions should be used, including: - Strong intelligence and analysis capabilities to detect compliance risks; - Receiving details of approved places of loading; - Product flow measurement through properly located, installed and calibrated equipment, sending stream data to Customs; - A well-designed electronic declarative procedure that prevents unreported transactions and facilitate unannounced risk-based inspection and quality testing; - Extensive use of Article 76–1 of CC to obtain further documentation from any party involved in the transaction; - A post-clearance audit program (which may cover three past years, Art. 76–2 of CC); - Enforcement of Customs Code sanctions (Title XII, Chapter VI) for non-compliance with formalities and control or misdeclaration (even if no customs duty has been compromised). ### Building Customs Capacity - Member States’ customs administrations need to significantly strengthen capacity to ensure effective and credible interventions in the oil and gas sector and to support the proposed control framework, focusing on: - Setting up a dedicated oil and gas unit; - Specialist training for unit staff combined with an adequate HR management policy; - Providing adequate IT, communications, inspection, testing, and transportation equipment. - Elevate control of oil and gas export as a core customs mission (even though customs revenue is not directly collected); reflect this in specific performance indicators and incentives. - The IMF may mobilize TA resources to help build capacity in national customs administrations and develop the regional framework. ### Concluding Policy Themes (I. Conclusion: Enhancing Growth Through Better Governance) - Two cross-cutting themes: - Implement a “transparency shock” in regular production and sharing of basic documentation related to public resource management; this is an absolute priority and aligned with CEMAC directives on transparency and governance. - Continuously translate the CEMAC regional framework into consistent procedures and work practices within public institutions. - Specific lines of action: - Translate CEMAC PFM directives into work practices prioritizing transparency, full disclosures, ongoing reconciliation, and internal and external audit of public sector transactions. - Deepen efforts to enhance the AML/CFT framework in line with CEMAC directives. - Forcefully implement the checks and balances provided in CEMAC legislation in the extractive sector, including full disclosure and regular reconciliation of oil contracts and transactions, and rigorous implementation of a stronger network of CEMAC customs with better governance and capacity. - Role of regional institutions: - CEMAC regional institutions must lead progress and support member countries’ efforts to create a coherent framework across countries, generating synergies critical for the success of the economic and monetary union. - Good governance of public resources and reduction of perceived widespread corruption are presented as single most important elements to lay the ground for a diversified economy, well-functioning regional market, and productive use of public resources. *International Monetary Fund — Box 5. Customs: An Assessment of Standards (concluded) and Conclusion material as provided in the source content.* ### 8. Over the last few years, the fall in fiscal revenue also reflects the poor performance ### 8. Over the last few years, the fall in fiscal revenue also reflects the poor performance ### Non-oil revenue: recent and long-term trends - After increasing from 11.9 percent of non-oil GDP in 2011 to 14.3 percent of non-oil GDP in 2015, non-oil revenues fell to 12.5 percent of non-oil GDP in 2017. - The 2015–17 decline appears primarily cyclical, coinciding with a sharp decline in non-oil growth and a regional recession in 2016. - Countries experiencing recessions (Congo, Gabon, Equatorial Guinea) saw declines between 1.4 and 6.9 percentage points of non-oil GDP. - Non-oil revenue increased in Central African Republic (recovering from the 2012–13 crisis) and in Chad; it declined only mildly in Cameroon. - Fiscal consolidation and the accumulation of domestic arrears compounded the slowdown’s impact on economic agents’ finances. - Longer-term (since 2000) non-oil revenue-to-non-oil GDP ratio in CEMAC has fluctuated in a narrow range (11¾–14¼ percent) around an average of 13 percent, showing little progress compared with median SSA and WAMEU increases of 4 and 4½ percentage points respectively. - In 2017, three CEMAC countries (Central African Republic, Chad, and Equatorial Guinea) had non-oil revenues below 10 percent of non-oil GDP. - Congo’s non-oil revenue amounted to 27.6 percent of non-oil GDP in 2017. ### Composition and drivers of non-oil revenue changes - The trend primarily reflects the decline in trade taxes, which have fallen by one percentage point of non-oil GDP since the early 2000s (reflecting trade liberalization). - Over the same period: - Direct taxes have been broadly stable, except a cyclical increase in 2013–15. - Non-tax revenues have remained particularly low, below 1 percent of GDP. - Indirect taxes are the only non-oil revenue category that has increased over the last 10/20 years, by more than 1 percentage point of non-oil GDP. ### Reasons behind the low level of non-oil revenue (tax effort and constraints) - CEMAC performance is well below SSA and WAEMU averages, reflecting underexploited tax revenue potentials, including VAT. - Tax frontier analysis (Fenochietto and Pessino (2013); IMF (2018) using 2002–16 panel data) findings: - Central African Republic and Chad (tax collection rates below the 13 percent ‘tipping point’) have an estimated tax gap of about 2 percent of GDP. - Congo, Cameroon and Gabon appear far from their tax frontiers (around 5.5 percent of GDP), much higher than SSA average of 3.3 percent of GDP; potential mobilization of up to 5.5 percent of GDP in additional revenues with reforms and improved collection efficiency. - Factors explaining low tax effort: - widespread tax exemptions, special regimes, and discretionary tax incentives (such as bilateral tax conventions); - underusage of taxes (e.g., excise taxes, property tax); - absence of an adequate institutional setting for tax policy making; - insufficiency of anti-abuse provisions against profit shifting by multinational enterprises; - weak tax and customs administrations; - tax avoidance/evasion, large informal sectors, and weak compliance; - collection of extra-budgetary revenue by some public entities not transferred to the budget/single treasury account (notably in CAR); - difficult security conditions in some areas (notably in CAR and Cameroon); - governance and corruption challenges; - deficiencies in the current tax coordination framework. ### Indirect taxation: VAT and excise taxes - Indirect taxes were the largest source of non-oil revenue in 2017 (around 40 percent) but remain below potential, evidenced by low VAT c-efficiency and excise productivity. - VAT specifics: - Member states generally follow the regional directive framework, with standard rates of 15–19 percent and reduced rates of 5–10 percent. - The directive’s exemptions are broad (health, education, financial services, much of domestic agriculture, many basic foodstuffs, certain construction equipment, household water/electricity/gas, etc.), impairing VAT neutrality and reducing revenue. - Weak refund mechanisms lead companies with VAT credits to seek exemptions or offset credits against other tax liabilities (noted in Cameroon, Congo, CAR), encouraging use of non-registered suppliers and sustaining informality. - Excise taxes: - Excise revenue averaged 0.5 percent of non-oil GDP in 2017, ranging from about 0.1 percent of non-oil GDP in Chad to 1.1 percent of non-oil GDP in Cameroon. - This is significantly lower than WAEMU (1.4 percent of non-oil GDP) and other unions (SACU and EAC at 2–2½ percent of non-oil GDP). - Contributing factors: - regional directive ceilings set at 25 percent for key goods such as alcoholic drinks and tobacco (WAEMU sets a 50 percent ceiling on alcoholic beverages and newly-adopted tobacco directive sets a 50 percent floor); - protectionist measures favoring domestic suppliers via lower rates/reduced bases, inconsistent with WTO commitments and externality concerns; - poor measurement/monitoring of imported and domestically produced quantities and porous borders enabling smuggling; - lack of political appetite to reform excise practices (domestic brewers’ influence and concerns over consumer price pass-through noted). ### Direct taxation (CIT and PIT) - Direct taxes remain a key challenge: - Direct taxes were 2.6 percent of GDP in 2002 in CEMAC; by 2015 direct tax ratios were around 3.6 percent of GDP in CEMAC and 4 percent in WAEMU. - These remain low relative to Ghana (5.5 percent), Rwanda (6.3 percent), Kenya (8.1 percent), South Africa (14.1 percent). - Measured against non-resource GDP, CEMAC direct tax ratio is 4.2 percent of GDP (or 3.1 percent excluding Congo) versus just over 4.5 percent for WAEMU. - Heterogeneity across countries: Congo and Gabon relatively strong; Equatorial Guinea and CAR weak. - Corporate income tax (CIT) issues: - Regional directive requires a single statutory rate between 25 and 40 percent; most CEMAC states use 25 or 30 percent and some use multiple rates for agriculture or to capture rents (e.g., Gabon). - The directive’s tax base is inadequate to guard against international tax avoidance (transfer pricing, deductibility of intra-group interest, royalties, service fees). - Stocks of inward FDI rose from 27 percent of GDP in 2007 to over 95 percent in 2017, increasing relevance of international tax issues. - Special regimes and tax incentives (including tax holidays) are common and risk eroding the CIT base; concentration of CIT among multinationals’ subsidiaries lowers CIT productivity (examples: CAR 3.6 percent, Congo 6.3 percent, Cameroon 7.5 percent). - Personal income tax (PIT) issues: - CEMAC raises an average of 1 percent of GDP from PIT versus SSA average of 2.9 percent. - Cameroon (1.8 percent) and Gabon (1.5 percent) have the highest PIT ratios in the region. - CEMAC’s global income PIT approach (aggregate seven income categories) is complex to administer and challenging with weak tax administrations. - Suggested desirable reform: move towards dual or quasi-dual income tax regimes—apply a progressive schedule to labor income (wages and pensions) and a low-flat rate to capital income (interest, dividends, royalties) through final withholding at source—to simplify PIT, enhance transparency, improve compliance, and strengthen administration. ### Key statistics (selected, preserved exactly as in source) - 11.9 percent of non-oil GDP (non-oil revenues in 2011) - 14.3 percent of non-oil GDP (non-oil revenues in 2015) - 12.5 percent of non-oil GDP (non-oil revenues in 2017) - declines between 1.4 and 6.9 percentage points of non-oil GDP in recession countries - non-oil revenue-to-non-oil GDP ratio range since 2000: 11¾–14¼ percent; average 13 percent - SSA and WAMEU increases since 2000: 4 and 4½ percentage points, respectively - three countries below 10 percent of non-oil GDP in 2017: Central African Republic, Chad, Equatorial Guinea - Congo non-oil revenue: 27.6 percent of non-oil GDP (2017) - trade taxes declined by one percentage point of non-oil GDP since early 2000s - indirect taxes ~40 percent of non-oil revenue in 2017 - non-tax revenues: below 1 percent of GDP - excise revenue averaged 0.5 percent of non-oil GDP in 2017 (range: about 0.1 percent in Chad to 1.1 percent in Cameroon) - WAEMU excise: 1.4 percent of non-oil GDP; SACU and EAC: 2–2½ percent of non-oil GDP - tax frontier gaps: CAR and Chad ~2 percent of GDP; Congo, Cameroon, Gabon ~5.5 percent of GDP; SSA average ~3.3 percent of GDP - tipping point for tax-to-GDP ratio: about 13 percent (12.5 to 13 percent noted as tipping point) - inward FDI stocks: from 27 percent of GDP in 2007 to over 95 percent in 2017 - CEMAC direct taxes: 2.6 percent of GDP in 2002; around 3.6 percent of GDP in 2015 - CEMAC PIT average: 1 percent of GDP; SSA PIT average: 2.9 percent of GDP - regional VAT standard rate range: 15–19 percent; reduced rate range: 5–10 percent - excise directive ceilings: 25 percent (currently), WAEMU alcoholic beverages ceiling: 50 percent; tobacco new directive: 50 percent floor *Source: International Monetary Fund (CEMAC chapter excerpt).* ### 19. Further actions can also be taken to enhance PIT’s revenue productivity, equity, and ### cr1902 - 19. Further actions can also be taken to enhance PIT’s revenue productivity, equity, and ### Personal Income Tax (PIT) reform: findings and recommendations - Move away from the “family quotient” deduction scheme (e.g., Gabon and Chad), which is costly in revenue foregone and disproportionately benefits higher income individuals.21 - Most straightforward alternative: adoption of an income tax credit. - Other option: eliminate the family quotient and integrate its effect into lower PIT rates and revised brackets. - Reconsider presumptive deductions based on a specified percentage of income (e.g., general deduction, deduction for professional fees); if such deductions cannot be eliminated or replaced by an income tax credit, the benefit they confer should at a minimum be capped.22 - PIT reform priorities: - Move towards a dual or quasi-dual income tax system (including in Gabon, Cameroon, Chad): progressive taxation of labor income and proportional taxation of capital income through final withholding at source. - Eliminate family quotients and other presumptive deductions based on income or move toward a credit-based approach. ### Tax and customs administration: weaknesses and priorities - Common weaknesses across tax and customs administrations: - Weak capacity (including excessive staff turnover). - Need to update IT systems. - Weak accounting procedures. - Insufficient recourse to a risk-based approach for controls and audits. - Tax administration additional weaknesses: - Insufficient segmentation of taxpayers. - Weak collection from public enterprises. - Insufficient reliability of taxpayer databases. - Customs administration weaknesses: - Systematic underestimation of imports (including illegal exemptions and reduced rates by customs officers). - Weak implementation of the common external tariff.23 - Lack of collaboration and information sharing between tax and customs administrations creates fragmentation in revenue collection and long-standing coordination challenges (example: differing codified VAT provisions in ASYCUDA vs. tax code in one member state). - Priority reform actions for tax administration: - Optimize taxpayer segmentation (large taxpayer offices, specialized units); consider increases in minimum thresholds (e.g., for VAT or large taxpayer offices). - Adopt a risk-based approach for controls, audits, on-site inspections, and refunds. - Strengthen VAT administration and collection from public enterprises. - Streamline parafiscal/extrabudgetary revenue and include them and corresponding expenditures in the budget. - Strengthen control of domestic and foreign income sources of wealthy individuals. - Modernize and simplify procedures, including for small enterprises. - Strengthen administration and collection of tax liabilities. - Modernize IT systems: update taxpayer databases, enable digital tax payments, exhaustive recording of operations, strengthen monitoring of tax arrears. - Strengthen human resources via training and reduced staff turnover. - Priority reform actions for customs administration: - Implement fully the common external tariff. - Strengthen valuation function and reduce abuse of reduced rates and duty suspension through automation/digitalization and enhanced ex-post valuation controls. - Strengthen management of import exemptions: harmonize exemption categories, enforce codification of exemptions, automatize exemptions authorization, improve control of exempted goods. - Develop a risk-based approach for controls with closer monitoring of infractions. - Establish a customs single window. - Modernize IT systems, including broader use of ASYCUDA World. - Strengthen collaboration and rapid exchange of information between tax and customs IT systems to allow cross-checking of taxpayer and importer information. ### Other institutional and administrative constraints - Absence of an adequate institutional setting for tax policy making: tax policy often conducted ad hoc by tax/customs officials rather than by a dedicated tax policy unit advising the Minister of Finance. - CEMAC Commission deficiencies: - Lacks financial and human resources to monitor revenue mobilization and propose prompt changes to tax coordination framework. - May lack capacity or willingness to enforce member states’ commitments under regional instruments (e.g., through sanctioning mechanisms). - Prevalence of parafiscal taxes and extra-budgetary spending: - Multiple public entities collect revenue for their expenditures without transferring to the single treasury account; results in fragmentation of tax policy and undermines the Ministry of Finance. - Example: over 50 such agencies in CAR alone; a process to bring these revenues into the general budget is under way.24 - High compliance costs for firms: - It takes on average 600 hours per year for a medium-size company to comply with mandatory tax payments, against less than 300 in sub-Saharan Africa. - Figure 27 indicates yearly hours spent by a medium-size company to pay taxes: CEMAC average shown relative to SSA and member countries (exact bar values presented in source figure). ### Ways to increase non-oil revenue — tax policy guidance - Choice of revenue-enhancing measures should account for: - Country-specific factors: size of fiscal adjustment needs, existing tax structure, revenue administration weaknesses. - Potential impact on growth: corporate income taxes have the most negative effect on growth, followed by labor income taxes, then indirect taxes, and finally property taxes; rent taxes are most neutral. - Equity considerations: direct taxation—and perhaps property taxation—are most promising for better equity outcomes. - Need for a proper tax reform strategy with priorities and timeline. - Current tax/customs administration challenges: tax evasion/avoidance, informality, taxpayer confidence, corruption. - VAT and excise tax reforms: - Closing VAT policy and compliance gaps can improve revenue collection and neutrality. - Political concerns exist about indirect taxes’ regressivity; VAT exemptions on foodstuffs are widespread though tax expenditure mostly benefits the rich (e.g., in Chad 46 percent of revenue foregone from VAT exemptions on foodstuffs benefits individuals in the top-two deciles, while only 7 percent benefit the bottom-two deciles25). - Address regressivity via targeted pro-poor spending (e.g., conditional cash transfers) or direct tax reforms (e.g., income-tested benefits). - If eliminating VAT exemptions is too politically sensitive, consider reduced VAT rates to facilitate transition to the standard rate. - Pre-condition for efficient VAT: refunding of credits. Lack of prompt cash repayment of VAT credits harms neutrality, business cash flow, and taxpayer confidence. - Options: adopt deferred payment VAT procedure at customs (in lieu of exemptions) and set up a dedicated account at the BEAC funded by a specified share of VAT collected at customs.26 - Effective implementation should facilitate elimination of VAT exemptions currently used as investment incentives and hampering taxation of the informal sector. - CEMAC countries currently do not refund credits or adopt compensation schemes for unrefunded VAT credits (e.g., Cameroun, Congo, CAR). - Increase excise taxes on alcohol, tobacco, passenger vehicles, and possibly sugar: can raise revenue and address public health/environmental objectives; current low rates provide room for incremental increases without smuggling risk. - New regional directive under consideration would: require member states to apply higher tobacco rates (minimum of 30 percent, instead of existing maximum of 25 percent); set minimum rates and eliminate maximum rates on products such as alcoholic beverages and passenger vehicles; prohibit discrimination between imported and locally produced products to broaden the excise tax base. - Direct taxes: - Fundamental reform should begin now. CIT reforms should target investment incentives and international taxation. PIT reforms should aim for simplicity and equity. - Reforms to small-taxpayer regimes may be needed to avoid supporting informality or encouraging artificial fragmentation. - Tax incentives are often redundant, not efficient or effective, lack transparency, and can be discretionary and abused. The regional Investment Charter limits incentives but has not prevented generous incentives through investment codes, special zone regimes, or bilateral tax conventions. - Recommendations: unify national investment promotion systems; repatriate tax incentives to the tax code or a single derogatory regime; systematically assess fiscal cost and economic merits of exemptions; remove non–cost-efficient exemptions; annually quantify and publish all tax expenditures. - International taxation: adopt modern anti-abuse provisions balanced against administrative capacity and multinationals’ tax planning; high-level expertise needed to target abusive cases while protecting legitimate investment. - Other reforms: - Property taxation: under-exploited but can improve fairness; requires fundamentals (land registers) and offers limited revenue potential (example: property taxes in South Africa raise only about 1 percent of GDP). - Reform of taxes on fuel and petroleum products could be considered, integrated with reforms of price-subsidy schemes. - Establish an adequate institutional framework for tax policy analysis: set up and staff a dedicated tax policy unit (TPU) to advise the Minister of Finance and undertake qualitative, quantitative, and distributional analysis, including an annual tax expenditures report.31 - Continue updating and strengthening regional instruments (PIT, CIT, VAT, excises) with IMF technical assistance; immediate priority: amend and approve new excise tax and VAT directives. - Better exploit the tax coordination framework to address harmful tax competition and support a common market; consider reviewing the role, resources, and enforcement powers of the CEMAC Commission for regional instruments. ### Revenues impact evidence and administrative reforms - Empirical estimate: where Fund-supported programs included conditionality on tax policy and administration, tax revenues increased by approximately ½ percentage point of GDP in a given year in low-income countries; estimated increase of 0.4 percent of GDP for middle-income countries.33 - Simplification of laws and procedures reduces taxpayer compliance costs and can enhance revenue mobilization, efficiency, and fairness. ### Conclusion and policy implications - CEMAC member states have significant potential to increase non-oil revenue by combining tax policy measures with stronger tax and customs administration and complementary structural reforms to improve the business environment and governance. - Reforms need to be intensified and harmonized regionally (starting with adoption of the new directive on excise taxes) to enhance efficiency and minimize tax competition. - To sustain reforms and mitigate social impact, consider financing well-targeted social expenditures (such as conditional cash transfers) with part of the increased revenue and pursue structural reforms to diversify economies and expand the tax base. *International Monetary Fund — CEMAC chapter (text as supplied).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/cr1902.pdf_