## 1caeea2021001

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### Economic impact and medium-term outlook
- Fiscal and external positions deteriorated sharply in 2020:
  - Fiscal deficit would deteriorate to 3.8 percent of GDP.
  - Public debt would increase to 57 percent of GDP.
  - Reserves equivalent to 3.5 months of imports of goods and services (headline).
- Outlook and projections:
  - Growth is expected to rebound in 2021 to 2.7 percent.
  - Growth is expected to continue to pick up gradually to around 3.5 percent in the medium term.
  - Reserves are projected to be re-built at a slower pace but should reach the equivalent of 5 months of imports by 2025.
  - Inflation is projected to stay at around 2.5 percent over the medium term.
  - External financing needs: around €6.6 billion for 2021–23.
- Medium-term baseline projections (selected):
  - Real GDP (CEMAC): -3.0 (2020 est.), 2.7 (2021 proj.), 2.2 (2022 proj.), 3.4 (2023 proj.), 3.8 (2024 proj.), 3.9 (2025 proj.)
  - Consumer prices (period average): 3.1 (2020 est.), 2.5 (2021 proj.), 2.4 (2022 proj.)
  - Total public debt: 57.0 (2020 est.), projected 56.0 (2021), 54.8 (2022), 52.5 (2023), 50.0 (2024), 46.9 (2025)

### Pandemic incidence and health-related indicators (as reported)
- At end-October 2020:
  - Cumulative cases: around 47,500.
  - New cases in the last 14 days: 1.25 new cases per 100,000 people.
  - Reported COVID-19-related deaths: 813.
  - Case mortality rate: around 1.7 percent.
- Vaccine acquisition/distribution:
  - "At present, there is no information available on plans for acquiring or distributing vaccines."

### Policy response and financial assistance
- Regional and national measures in 2020:
  - CEMAC governments announced various support measures to firms and households in revised budget laws.
  - BEAC eased monetary policy quickly and introduced accommodative measures to ensure adequate liquidity while aiming to balance internal and external stability.
  - COBAC eased prudential regulations to help banks delay pandemic-related losses.
- IMF support and financing in 2020:
  - First wave of Fund emergency assistance in April/May 2020: aggregate amount of $536 million.
  - Second wave in July and October 2020: $377 million.
  - Chad and the Central African Republic benefited from debt relief under the CCRT (SDR 23.1 million).
  - Four DSSI-eligible countries formally requested an aggregate amount of about U.S. $313 million.
  - Fund financing in 2020 exceeded the combined disbursements of the World Bank, AfDB, and bilateral partners (text statement).

### Fiscal performance, arrears, and public debt
- 2019 outcomes and 2020 impact:
  - Overall growth reached 1.9 percent in 2019.
  - Overall fiscal deficit for 2019: -0.3 percent of GDP.
  - Public debt rose to close to 52 percent of GDP in 2019 and to 57 percent of regional GDP in 2020.
- Fiscal projections:
  - Overall fiscal deficit would deteriorate to -3.8 percent of GDP (excluding grants) in 2020 on average.
  - Fiscal consolidation would reduce the overall deficit to -3.4 percent in 2021.
- Arrears clearance status (selected):
  - Chad: repayment of audited domestic arrears is ongoing.
  - Equatorial Guinea: audits of arrears at end-June 2019 finalized; repayment details being discussed.
  - Gabon: audit of 2015–17 domestic arrears concluded in June 2019 and payments have started.
  - Congo: some payments have been made.
  - Cameroon: a debt restructuring agreement reached in September 2020 between SONARA and local banks.
  - Central African Republic: audits are still ongoing.

### External sector, reserves, and financing needs
- External outcomes and projections:
  - External current account deficit projected to worsen to 6.5 percent of GDP in 2020.
  - Current account deficit projected to improve to around 4.8 percent of GDP in 2021 and to around 3 percent of GDP by 2023.
  - Reserves: gross official reserves (end of period) 8,204 (2020, in millions of U.S. dollars, Table 1 end-2020 estimate).
  - Months of imports of goods and services: 3.5 (2020, Table 1); projected to reach 5 months by 2025.
- Balance of payments financing needs (Billions of CFA francs, 2020–23):
  - Financing needs: 2248 (2020), 1921 (2021), 1475 (2022), 910 (2023)
  - Overall balance of payments: -2109 (2020), -1119 (2021), -871 (2022), -601 (2023)
  - Reserves assets (-accumulation): -139 (2020), -802 (2021), -604 (2022), -309 (2023)
  - Financing sources (selected): IMF support 582 (2020), 431 (2021), 88 (2022), 0 (2023); Budget support from other donors: 512 (2020), 454 (2021), 84 (2022), 0 (2023)
- External financing needs:
  - Still large external financing needs of about €6.6 billion—US$7.9 billion—over 2021–23.

### Monetary policy stance and BEAC operations
- Policy rate and liquidity:
  - BEAC kept its policy rate unchanged at 3.25 percent (after initial easing and a ¼ percentage point reduction in March 2020).
  - BEAC re-started weekly injections in March 2020 and conducted 3 long-term liquidity injections with a one-year maturity.
  - Long-term liquidity injections resumed in July 2020 for an amount of CFAF 150 billion.
- Securities purchase program:
  - Total purchases under the securities purchase program will be capped at CFAF 600 billion (1.1 percent of regional GDP).
  - So far only Gabon benefited from this program in November 2020.
  - BEAC could envisage extending the program for an additional 6 months if envelopes are not fully used by end-2020.
- Treasury Single Accounts (TSAs):
  - New software platform delayed by COVID-19; BEAC estimates it could take until mid-2021 to have the platform in place.

### Banking sector behavior, risks, and COBAC actions
- Banking sector indicators:
  - Broad money growth reached 9 percent at end-June 2020.
  - Credit to the private sector declined by 2.5 percent (y-o-y) at end-June 2020.
  - Banks’ NPLs ratio further increased in 2020 to 21 percent in September.
  - Non-performing loans (gross) to total loans (gross): 20.0 percent in 2020 (provisional), rising to 21.3 percent in Q2 2020.
  - Regulatory capital to risk-weighted assets: 12.6 percent in 2020 (provisional).
- Prudential easing and reporting:
  - COBAC temporarily eased prudential requirements in mid-2020 and restricted dividend payments for 2019 in April 2020.
  - Temporary measures adopted in July 2020 prevent all banks from distributing any dividend for the years 2020 and 2021.
  - Since July 2020 banks requested to report monthly on impaired and restructured loans and weekly on liquidity; as of end-September, two thirds of banks were reporting.
- Compliance and capacities:
  - Only 19 banks out of 51, representing half of total banking assets, comply with all prudential ratios based on regulatory capital.
  - At end-September 2020, 15 banks out of 51 accounting for a quarter of CEMAC banking assets had solvency ratios lower than 9.5 percent (the regulatory minimum).
  - COBAC conducted 7 inspections out of planned 42 in 2020.
- Recommendations:
  - SG-COBAC urged to accelerate risk-based supervision, increase banks’ compliance with prudential standards, apply the bank resolution framework, support NPLs reduction, and strengthen AML/CFT implementation.

### Sovereign–banks nexus and market development
- Key dynamics:
  - Since 2017, credit to the private sector has decreased by 1.5 percent on average per year, whereas holdings of government debt have grown by 21.9 percent on average per year.
  - Banks owned 95 percent of outstanding government securities at end-September 2020.
  - Banks’ exposure to the sovereign in mid-2020 amounted to 15 percent of banking assets.
  - Sovereign exposure projected to reach "2.7 times that of 2016 by end-2021" or "three and a half times banks’ regulatory capital" (text heading).
  - State ownership in the banking sector rose to 16 percent of total banking assets at end-September 2020 from slightly above 10 percent at end-2019.
- Action plan priorities (selected):
  - Reduce state involvement in the banking sector and establish privatization strategies for systemic banks the state owns.
  - Rapidly broaden the investor base for government securities; dedicate significant quota of issuances to non-bank investors.
  - Reduce bank appetite for sovereign exposure via leverage ratio introduction, elimination of zero-weight exceptions, and application of financial sanctions.
  - Increase banks’ incentives to lend to the private sector, finalize arrears repayment strategies, and improve financial inclusion.

### Structural reforms, regional strategy, and convergence framework
- Assessment of first phase (2014–19):
  - Strategy succeeded in avoiding a crisis and delivering macro stabilization by end-2019, but growth was weak and diversification limited.
  - Months of imports of goods and services: 2019: 3.5.
  - Key statistics (selected exact figures, 2014–19): Growth 2019: 2.0; Non-Oil growth 2019: 1.9; Inflation (eop) 2019: 1.9; Public Debt 2019: 51.8; Oil prices 2019: 64.0 (Brent).
- Second-phase priorities (six pillars):
  - Improve public financial management and implement CEMAC PFM regional directives.
  - Improve management of public investment projects.
  - Enhance oversight, management, and transparency of SOEs.
  - Improve the business climate, simplify tax structure, modernize tax and customs administration.
  - Promote digital financial services to accelerate financial sector development and inclusion.
  - Leverage regional market and agriculture sector potential and the African Continental Free Trade Area.
- Convergence criteria and plans:
  - Pandemic disrupted the work program; most countries expected to breach several convergence criteria in the crisis year.
  - Countries must design and implement credible three-year national convergence plans; so far only two countries have articulated such plans.
  - In the baseline scenario, while three countries would still breach the fiscal convergence criterion in 2021, all countries are expected to meet it by 2023.

### Risks to the outlook and contingency policies
- Downside risks (selected):
  - Persistence or resurgence of COVID-19 could trigger a large and sustained decline in oil prices.
  - Slower than projected recovery could weaken external sustainability.
  - Filling external financing needs for 2021–23 (around €6.6 billion, equivalent to about 8 ½ percent of 2020 regional GDP) may prove difficult.
- Upside risks:
  - Faster than expected progress on a COVID-19 vaccine and faster FX repatriation by oil and mining companies.
- Policy adjustments under downside scenarios:
  - Tightening of monetary policy and faster implementation of foreign exchange regulation for oil and mining sectors.
  - Acceleration and deepening of fiscal adjustment and structural reforms at national level.
  - Additional external financing, including from the Fund, would be required.
  - No reform scenario would cause significant disruptions including delays in external financing, larger drawdowns on government deposits, forced abrupt fiscal contraction, slowdown in growth, weakening of banks’ balance sheets, and deterioration of external stability.

### External position, REER, and competitiveness
- External position metrics:
  - Current account actual: -4.4%
  - Current Account Norm: -2.1%
  - CA Gap (Actual-Norm): -2.3%
  - Cyclically adjusted Current Account: -3.8%
- REER findings:
  - REER Gap: 10.0% (overvaluation)
  - Elasticity: -0.22
  - 2020 observation: REER appreciated by about 8 percent.
- Structural competitiveness constraints:
  - Innovation capability and product markets; lack of adequate infrastructure and ICT adoption; limitations of human skills; governance weaknesses (voice and accountability, corruption, rule of law).
- Recommended policies to attract capital inflows:
  - Implement long-overdue structural reforms and improve business climate.
  - Advance revenue mobilization.
  - Strengthen implementation of foreign exchange regulations.

### Surveillance, timetable, and operational notes
- Discussions and schedule:
  - Discussions were held from November 3–December 1, 2020 in Libreville (Gabon) and Yaoundé (Cameroon).
  - Report date stamped: December 22, 2020.
  - Surveillance discussions with the CEMAC authorities will remain on a 12-month cycle.
- BEAC assurances and targets:
  - Proposed revised NFA projections (updated policy assurance): end-2020 NFA at €3.30 billion and end-June 2021 NFA at €3.40 billion.
  - Pace of donor disbursements forecast: 1.06 billion euros in the second half of 2020 and 1.08 billion euros in the first half of 2021 (contributing to objectives).
- Program engagement:
  - Continuation of external support underpinned by BEAC’s commitment to tight monetary policy and member states’ commitment to macro stability and structural reforms is critical to allow continuation or approval of Fund-supported programs.

*Source: CENTRAL AFRICAN ECONOMIC AND MONETARY COMMUNITY (CEMAC) STAFF REPORT ON THE COMMON POLICIES OF MEMBER COUNTRIES, AND COMMON POLICIES IN SUPPORT OF MEMBER COUNTRIES REFORM PROGRAMS (December 22, 2020).*

### 3.5 months of imports of goods and services. The fiscal deficit would deteriorate to

### 1caeea2021001 - 3.5 months of imports of goods and services. The fiscal deficit would deteriorate to

### Economic impact and medium-term outlook
- Fiscal and external positions deteriorated sharply in 2020:
  - Fiscal deficit would deteriorate to 3.8 percent of GDP.
  - Public debt would increase to 57 percent of GDP.
  - Reserves equivalent to 3.5 months of imports of goods and services (headline).
- Outlook and projections:
  - Growth is expected to rebound in 2021 to 2.7 percent.
  - Growth is expected to continue to pick up gradually to around 3.5 percent in the medium term.
  - Reserves are projected to be re-built at a slower pace than previously envisaged but should reach the equivalent of 5 months of imports by 2025.
  - Inflation is projected to stay at around 2.5 percent over the medium term.
  - Lower medium-term oil prices imply slower fiscal and external adjustments and downside risks.
  - External financing needs: around €6.6 billion for 2021–23.

### Pandemic incidence and health-related indicators (as reported)
- At end-October 2020:
  - Cumulative cases: around 47,500.
  - New cases in the last 14 days: 1.25 new cases per 100,000 people.
  - Reported COVID-19-related deaths: 813.
  - Case mortality rate: around 1.7 percent.
- Vaccine acquisition/distribution: "At present, there is no information available on plans for acquiring or distributing vaccines."

### Policy response and financial assistance
- Regional and national policy measures taken in 2020:
  - CEMAC governments announced various support measures to firms and households in revised budget laws.
  - BEAC eased monetary policy quickly and introduced accommodative measures to ensure adequate liquidity in the banking system, while aiming to balance internal and external stability.
  - COBAC eased prudential regulations to help banks delay pandemic-related losses.
- IMF support and financing in 2020:
  - First wave of Fund emergency assistance in April/May 2020: aggregate amount of $536 million.
  - Second wave in July and October 2020: $377 million.
  - Chad and the Central African Republic benefited from debt relief under the CCRT (SDR 23.1 million).
  - Four DSSI-eligible countries formally requested an aggregate amount of about U.S. $313 million.
  - Fund financing in 2020 exceeded the combined disbursements of the World Bank, AfDB, and bilateral partners (text statement).

### Institutional performance, implementation gaps, and vulnerabilities
- Pre-crisis and policy implementation notes:
  - The economic shock struck when the outlook for CEMAC was improving but reserves remained below appropriate levels for commodity-exporting economies.
  - Structural reforms lagged, with limited progress on non-oil revenue mobilization and no significant change in governance or the business environment.
  - Little progress in economic diversification left the region highly vulnerable to oil price shocks.
- Implementation delays and weaknesses:
  - Consultations with the extractive sector under the foreign exchange regulation were delayed until October 2020.
  - COBAC’s progress in bank resolution has been limited due to insufficient national authority support.
  - The CEMAC Commission’s work to strengthen regional surveillance (early warning system, draft sanction scheme) was delayed.
  - Banks’ compliance with prudential standards remains weak; resolution of problem banks slow; high non-performing loans persist.
  - BEAC was unable to fully implement the policy assurance on NFA accumulation at end-December 2019 and end-June 2020 due to external financing shortfalls and fiscal deficit over-runs; corrective measures taken and an updated policy assurance outlined in the December 2020 Follow-up Letter.

### Executive Board views and recommendations
- General assessment:
  - Directors agreed the crisis struck when the outlook was improving and that the crisis will have long-lasting effects, slowing fiscal and external adjustments.
  - The regional authorities’ policy response was judged pro-active and appropriate.
- Monetary and financial sector guidance:
  - BEAC should continue to strike the right balance between preserving internal and external stability and stand ready to tighten monetary policy if the external reserves position deteriorates further.
  - BEAC should continue to refrain from extending any type of direct monetary financing to member states.
  - BEAC is encouraged to continue implementation of the foreign exchange regulation and to engage with oil and mining companies to enforce the regulation in these sectors by end-2021 while accounting for their specificities.
  - Directors urged SG-COBAC to accelerate implementation of its strategic plan for moving towards risk-based supervision, increase banks’ compliance with prudential standards, apply the bank resolution framework, support NPLs reduction, limit further increases in banks’ sovereign exposure, and strengthen AML/CFT implementation.
  - Reinforcing SG-COBAC’s human resources was highlighted as key.
- Strategic direction:
  - The CEMAC is at a crossroads; the second phase of the regional strategy must decisively focus on implementing structural, transparency and governance reforms to lay the basis for diversified, inclusive and sustainable growth while aiming to rebuild fiscal and external buffers.
  - Program engagement with the Fund for new or ongoing IMF-supported programs should prioritize key reforms, increase non-oil fiscal revenue, improve public spending effectiveness, and address debt sustainability given pre-existing debt vulnerabilities.

### Key dates, meetings, and procedural notes
- Discussions were held from November 3–December 1, 2020 in Libreville (Gabon) and Yaoundé (Cameroon).
- Report date stamped: December 22, 2020.
- The views of Directors will form part of Article IV consultation discussions on individual members and the next discussion of CEMAC common policies is expected on the standard 12-month cycle.

*Source: CENTRAL AFRICAN ECONOMIC AND MONETARY COMMUNITY (CEMAC) STAFF REPORT ON THE COMMON POLICIES OF MEMBER COUNTRIES, AND COMMON POLICIES IN SUPPORT OF MEMBER COUNTRIES REFORM PROGRAMS (December 22, 2020).*

### 6.      Overall growth and inflation were slightly lower than expected in 2019. Slightly better

### 6. Overall growth and inflation were slightly lower than expected in 2019. Slightly better

### Growth and inflation developments
- Overall growth reached 1.9 percent in 2019, or 0.6 percentage point lower than projected, broadly reflecting non-oil growth dynamics.
- Slightly better than expected growth in Gabon did not offset disappointing performances in CAR and Congo (temporary technical disruptions in two oil fields).
- Inflation decelerated more than anticipated and came under 2 percent at end-December 2019.

### Fiscal performance in 2019
- Budget implementation broadly in line with objectives in 2019H1; deficits worsened in 2019H2.
- Fiscal balances for 2019 remained on average broadly unchanged from 2018, reaching an overall deficit of -0.3 percent of GDP.
- Underperformance concentrated in Cameroon, Congo and Gabon due to expenditure overruns and lack of progress in non-oil revenue mobilization.
- Public debt rose to close to 52 percent of GDP, with very challenging debt issues in some countries.

### External position and reserves
- Tight regional policies helped maintain an improved external position in 2019, but external reserves fell short of the end-2019 and end-June 2020 objectives.
- NFAs at end-December 2019 were €4.0 billion against €4.7 billion projected in the latest regional policy assurances (shortfall of €0.7 billion).
- Shortfall in external financing during 2019H2 was the equivalent of €0.4 billion; some fiscal deficit over-runs also contributed to the NFA shortfall.
- During 2020H1, NFA accumulation was in line with pre-COVID projections through June, but the end-June 2020 projection was missed as the end-2019 shortfall was not compensated.
- Reserves declined during Q3 2020 due to lagged effect of the decline in oil prices, erasing most (but not all) gains since December-2019.
- Gross reserves import cover was equivalent to 3.5 months of imports at end-September 2020.

### BEAC monetary policy response and liquidity measures
- BEAC loosened monetary policy with a ¼ percentage point reduction in its policy rate in March 2020 and eased bank liquidity provision.
- Additional measures in July 2020 included:
  - a new temporary (6-month) government securities purchase program from banks; and
  - resumption of longer-term liquidity injections up to one year for banks which commit to maintain their levels of credit unchanged.
- Total purchases under the securities purchase program will be capped at CFAF 600 billion for the region (1.1 percent of regional GDP), with indicative caps by country.
- So far only Gabon benefited from this program in November 2020.
- Staff concurred that the purchase program can provide useful temporary support while being consistent with the prohibition of direct monetary financing as per the BEAC’s Charter.
- Countries need to submit revised securities issuance plans in line with budget provisions to activate the program.

### Banking sector behavior and risks
- Banks remain cautious in extending new credit and accumulate liquid assets at the central bank.
- At end-June 2020:
  - Broad money growth reached 9 percent.
  - Credit to the private sector declined by 2.5 percent (y-o-y).
- Banks increased holdings of government securities; little demand for new BEAC liquidity injection operations.
- COBAC eased prudential requirements in mid-2020, making analysis of banks' portfolio quality more difficult.
- Banks’ NPLs ratio further increased in 2020 to 21 percent in September.
- Most of the actual impact from the pandemic on banks’ portfolio quality and solvency is expected to be reported in 2021.

### Medium-term outlook and baseline projections
- Outlook contingent on the evolution of the pandemic and its impact on international oil prices.
- Oil price assumptions (in line with latest WEO projections):
  - $41.7/barrel in 2020.
  - around $45/barrel in 2021 as the COVID-19 pandemic recedes.
- Assumptions on programs and financing:
  - Continuation of IMF-supported programs with Congo, CAR and Equatorial Guinea, some additional IMF emergency assistance for the region, and approval of three new IMF-supported programs (Cameroon, Chad, and Gabon) in 2021.
  - Gradual repayment of domestic government arrears as per agreed arrear clearance strategies.
- Growth and inflation projections:
  - Overall real GDP growth for CEMAC in 2020 projected to decline by about 6.5 percentage points relative to the pre-COVID-19 assessment, resulting in a recession of -3 percent.
  - Oil output projected 5.7 percent lower than pre-COVID-19 projections in 2020.
  - Non-oil GDP projected to contract by 3.3 percent in 2020.
  - Baseline forecasts a rebound in real GDP growth to 2.7 percent in 2021.
  - Growth projected to pick up gradually to around 3.5 percent by 2023.
  - Inflation expected to stay below 2½ percent in 2020 and increase slightly to 2.8 percent in 2021.
- Fiscal projections and public debt:
  - Overall fiscal deficit would deteriorate to -3.8 percent of GDP (excluding grants) in 2020 on average (compared with a projected balanced position pre-COVID-19).
  - Fiscal consolidation efforts would help reduce the overall deficit to -3.4 percent in 2021.
  - Public debt-to-GDP ratio projected to increase by more than 5 percentage points in 2020 (to about 57 percent of GDP) before gradually coming down to 50 percent of GDP in 2024.
- External sector projections:
  - External current account deficit projected to worsen to 6.5 percent of GDP in 2020 due to a decline in oil exports (by 7.8 percentage points of GDP compared to 2019).
  - Current account deficit projected to improve to around 4.8 percent of GDP in 2021, and to around 3 percent of GDP by 2023.
  - External reserves projected to stabilize at the equivalent of 3.5 months of imports at end-2020 and reach the equivalent of 5 months of imports by 2025 (vs. 2022 pre-COVID), considered adequate for CEMAC.
- External financing needs:
  - Still large external financing needs of about €6.6 billion—US$7.9 billion—over 2021–23.
  - It is crucial that additional financing be concessional resources from IFIs and bilateral donors, as well as grants and debt relief where needed to avoid deterioration in debt sustainability.

### Risks to the outlook
- Downside risks:
  - Persistence or resurgence of COVID-19 could trigger a large and sustained decline in oil prices, worsening fiscal and external balances and raising concerns about the monetary arrangement and capital flight.
  - Slower than projected recovery could weaken external sustainability.
  - Falling short of targets to increase non-oil fiscal revenue could derail fiscal consolidation and jeopardize debt sustainability.
  - Deterioration in security or social unrest could affect activity and undermine reforms (Cameroon, Chad, CAR).
  - Lack of progress on Fund-supported program negotiations, and delays in implementing reforms would delay IMF financing and could negatively impact external financing and reserves accumulation.
  - Reform fatigue could erode support for consolidation and structural reforms, delaying programs and negatively impacting external financing, reserves, and confidence.
  - Filling large external financing needs for 2021–23 (around €6.6 billion, equivalent to about 8 ½ percent of 2020 regional GDP) may prove difficult given limited additional funding availability and narrower borrowing capacity.
- Upside risks:
  - Faster than expected progress on a COVID-19 vaccine, leading to faster global recovery and higher oil prices.
  - Faster than expected progress on FX repatriation by oil and mining companies, especially regarding oil fields rehabilitation funds, resulting in larger reserve accumulation.

### Fiscal consolidation strategy and arrears
- Regional institutions and staff agree fiscal consolidation must resume post-crisis to bring debt to a sustainable path and support the regional external position.
- Projected adjustment aims to bring the primary non-oil fiscal deficit to 4 percent of non-oil GDP by 2023.
- Consolidation priorities:
  - Expand fiscal revenue base and rationalize current expenditure to create space for well-targeted social spending and growth-enhancing investments while achieving consolidation targets.
  - Emphasize non-oil revenue-enhancing measures, harmonized regional approach, improved revenue administration, expanding tax base, structural reforms for diversification, and streamlining exemptions.
  - Progress in governance reforms to maximize government oil revenues is critical.
- Arrears clearance:
  - Staff advised authorities to accelerate implementation of arrears clearance plans to relieve private and banking sectors.
  - Status by country:
    - Chad: repayment of audited domestic arrears is ongoing.
    - Equatorial Guinea: audits of arrears at end-June 2019 finalized; repayment details being discussed.
    - Gabon: audit of 2015–17 domestic arrears concluded in June 2019 and payments have started.
    - Congo: some payments have been made.
    - Cameroon: a debt restructuring agreement was reached in September 2020 between SONARA and local banks.
    - Central African Republic: audits are still ongoing.

*Source: IMF staff.*

### 17.      Staff discussed possible policy adjustments should downside scenarios materialize

### 17.      Staff discussed possible policy adjustments should downside scenarios materialize

### Downside scenarios and general policy adjustments
- Regional authorities would need to envisage a tightening of monetary policy and faster implementation of the foreign exchange regulation for the oil and mining sectors.
- National governments would possibly have to accelerate and deepen fiscal adjustment and structural reforms, while being mindful of the impact of national measures on regional stability.
- Additional external financing, including from the Fund, would be required.
- A no reform scenario would cause significant disruptions: delays in external financing, larger drawdowns on government deposits, a forced and abrupt fiscal contraction with a reduction in public investment spending, associated slowdown in growth, weakening of banks’ balance sheets, and deterioration of the region’s external stability.

### B. Monetary Policy Stance and Operations
- Staff and BEAC agreed the accommodative monetary policy stance was appropriate in the context of COVID-19 related uncertainties.
- BEAC faces a tension between declining foreign reserve levels and weak domestic demand due to economic recession, while inflation remains below the regional convergence criteria.
- Reserve coverage deterioration (measured in months of imports) is largely due to absorption of the large-scale shock.
- By keeping its policy rate unchanged at 3.25 percent, BEAC strikes a balance between preserving internal and external stability; staff supported the stance and recommended BEAC stand ready to tighten policy if the reserve position further deteriorates or if inflation pressures emerge.
- Liquidity injections:
  - BEAC re-started weekly injections in March 2020 and conducted 3 long-term liquidity injections, with a one-year maturity to support credit to the private sector.
  - The offered weekly amounts were not fully taken up but ensured transmission of the policy rate to the short-term interbank rate.
  - The banking system remains over-liquid overall; staff and BEAC agreed liquidity absorption operations should resume once recovery takes hold to reduce structural excess liquidity and stimulate the segmented interbank market.
  - Long-term liquidity injections should be phased out progressively to minimize a cliff effect at maturity; BEAC should gradually aim at reaching a neutral liquidity allocation as planned in June 2018 reform.
  - BEAC should monitor collateral amounts and quality at each bank and plan to reverse the reduction of haircuts implemented at the start of the crisis when effects ease.
  - BEAC to accelerate validation of refinancing plans of the two banks highly dependent on BEAC’s refinancing (delayed by the crisis).
- Treasury Single Accounts (TSAs):
  - Management of TSAs at BEAC not yet fully automated, causing operational delays.
  - New software platform within BEAC’s accounting system delayed by COVID-19; BEAC estimates it could take until mid-2021 to have the platform in place (about 6 months later than originally anticipated).
  - Swift TSA implementation is important to strengthen PFM transparency, treasury cash management, avoid arrears accumulation, reduce recourse to costly short-term borrowing, and help reduce banks’ excess liquidity.
- Fiscal financing and safeguards:
  - Staff supported BEAC’s refrain from direct monetary financing to member states despite larger government financing needs.
  - BEAC could envisage extending its securities purchase program for an additional 6 months if envisaged envelopes are not fully used by end-2020.
  - BEAC’s CFAF 90 billion approved credit line to BDEAC for COVID-19-related approved projects has not been drawn yet; countries should be mindful of impact on debt sustainability and respect conditionality on debt limits in Fund-supported programs.
  - An update safeguards assessment is due in 2021 in line with the four-year cycle for safeguards assessments of regional central banks under the IMF’s safeguards policy.

### C. Enforcement of the Foreign Exchange Regulation
- FX surrender requirement by domestic banks is largely applied and estimated to have reached 77 percent on average.
- BEAC lacks reliable estimates of implementation of the repatriation requirement.
- Staff emphasized national authorities should implement measures committed in support of stricter exchange regulation application, especially rapid repatriation of States' share in oil and mining revenues.
- Staff advised BEAC to seek confirmation that public entities do not hold deposits abroad.
- BEAC reduced processing time for FX transfers outside the monetary zone via the "e-transfer" platform implemented since September 2020, dematerializing transfer processes.
- In October, BEAC resumed bilateral consultations to bring oil and mining companies into compliance with FX repatriation regulations, targeting full implementation for end-2021.
  - Staff acknowledged the 12-month extension of the compliance deadline to end-2021 due to the pandemic and encouraged BEAC to establish a credible timetable.
  - With external consultant support, BEAC is determining the share of export revenues to be repatriated based on all oil contracts and pushing for speedy repatriation of funds saved by companies to cover oil fields rehabilitation costs, which could be transferred into foreign currency deposits at BEAC.

### D. Developing the Financial Markets
- Primary government securities market has absorbed significant financing needs resulting from the COVID-19 pandemic; staff encouraged BEAC to diversify the investor base.
- Outstanding stock of securities reached FCFA 2,850 billion at end-October 2020 (5 percent of regional GDP).
- Investors prefer shorter maturity issuances: increasing subscription rates for BTAs; yields on longer dated OTAs went up by 0.5 percent to 6 percent between December 2019 and October 2020.
- Secondary market activity remains sluggish with few recorded transactions due to development of interbank repo transactions.
- Banks owned 95 percent of outstanding government securities at end-September 2020; BEAC’s efforts to attract non-bank investors show increasing participation of institutional investors and individuals from low levels.
- BEAC’s financial transparency strategy:
  - Launch tender for a credit bureau before end-2020; aim to select the first one by mid-2021.
  - New financial statements’ repository of CEMAC companies consistent with SYSCO OHADA plan expected operational by end-2020.
  - Modernized credit register expected to be completed by end-2021.
- Regional financial inclusion strategy:
  - Launched in October; only Cameroon and Chad currently have national strategies.
  - BEAC started a stocktaking exercise and aims to formulate a first vision of the regional strategy by end-June 2021.
  - Strategy will determine a minimum list of free mandatory banking services and focus on full connectivity of payment systems and development of mobile banking.

### E. Strengthening the Banking Sector
- Prudential easing and reporting:
  - SG COBAC accompanied temporary easing of prudential framework in mid-2020 and restricted dividend payments for 2019 in April 2020.
  - Temporary measures adopted in July 2020 prevent all banks from distributing any dividend for the years 2020 and 2021 and put in place ad-hoc reporting to monitor financial stability.
  - Since July 2020 banks were requested to report monthly on impaired and restructured loans and weekly on liquidity based on a new template; as of end-September, two thirds of banks were reporting. SG COBAC aims for all banks reporting by end-2020 and launched a study to assess application of temporary measures.
  - Staff advised SG COBAC to prepare regular analysis of asset quality under temporary and permanent frameworks.
- Exit strategy and stress tests:
  - SG COBAC will wait until early 2021 to assess usefulness of temporary easing measures and will develop by mid-2021 guidelines for the exit strategy.
  - SG COBAC is conducting stress tests to estimate banks’ solvency at end-2021 and end-2022 under the permanent regulatory framework; pilot with three banks now and extension to whole sector in early 2021.
- Non-performing loans (NPLs) and domestic arrears:
  - Staff advised SG COBAC to alert stakeholders about rising NPLs and to regularly request inventories and audit reports of domestic arrears and clearance plans from national authorities and the CEMAC Commission.
  - Staff encouraged COBAC to ask banks to update their NPLs reduction strategies by end-2021 (last provided at end-2018).
- Compliance, resolution, and capacity:
  - Only 19 banks out of 51, representing half of total banking assets, comply with all prudential ratios based on regulatory capital.
  - At end-September 2020, 15 banks out of 51 accounting for a quarter of CEMAC banking assets had solvency ratios lower than 9.5 percent (the regulatory minimum).
  - Banks non-complying with minimum solvency, individual exposure limit and short-term liquidity requirements were 15, 22 and 3 at end-September against 14, 23 and 5 at end-2019 respectively.
  - No progress noted in compliance with governance and risk management requirements; staff suggested preparing a dashboard updated regularly.
  - Staff recommended selective use of the regulation on financial sanctions adopted by COBAC in 2019 during the crisis to strengthen regulatory compliance.
  - Staff reiterated need for COBAC to duly and timely apply the bank resolution framework; several of the 15 undercapitalized banks are under restructuring while others are being liquidated.
  - Staff welcomed the first successful intervention by the deposit insurance fund (FOGADAC) and recommended enhanced collaboration with liquidators while considering slight extensions of liquidation processes given pandemic-related difficulties.
  - Significant capacity improvements needed for COBAC: only 7 inspections out of planned 42 in 2020 were conducted; AML/CFT issues were covered only through self-assessment forms.
  - COBAC should develop mechanisms to conduct AML/CFT on-site inspections virtually and resume disciplinary sessions remotely to sanction breaches.
  - Staff welcomed SG COBAC plans to enhance data management systems, with World Bank support, to better monitor and improve reported data quality.
- Regulatory modernization:
  - SG COBAC adopted regulations in 2020 on concentration limits, nomination and remuneration of provisional administrators and liquidators, and consumer protection.
  - Due to the pandemic, slow progress on risk-based supervision and the Basel roadmap adopted in September 2019.
  - Most recommendations from 16 TA missions by AFRITAC-Centre since 2018 have reportedly been implemented or considered.
  - SG COBAC plans to prioritize and introduce the leverage ratio in early 2021.
  - SG COBAC intends to implement early the new regulation on concentration limits.
- Sovereign-bank nexus:
  - Banks’ exposure to the sovereign in mid-2020 amounted to 15 percent of banking assets (about three times that in WAEMU).
  - Some countries increased use of a secured issuance mechanism allowing bonds, upon COBAC approval, to have zero risk weights if minimum resources are kept in a fiduciary account at BEAC to cover annual bond servicing one year ahead.
  - Staff welcomed SG COBAC communication to set risk weights for government bonds for 2020–21 broadly in line with previous levels and the initiative to specify conditions for approving zero risk weight on secured bond issuances.
  - Staff encouraged SG COBAC to assess incentives for banks to sell bond holdings to customers to support BEAC’s investor base development.

*Source: IMF staff report text provided.*

### 34.      Staff emphasized that adhering to the regional convergence criteria within a reasonable

### 1caeea2021001 - 34.      Staff emphasized that adhering to the regional convergence criteria within a reasonable

### Regional convergence criteria and national convergence plans
- Adhering to the regional convergence criteria within a reasonable timeframe is essential for the credibility of the regional surveillance framework.
- The pandemic disrupted the work program on the regional surveillance framework and most countries are expected to breach several of the convergence criteria this year:
  - 5 countries missing the fiscal convergence criterion.
  - Several countries expected to miss the arrears clearance criterion.
- The crisis does not justify a temporary suspension of the criteria; instead staff recommended entrenching credibility through action:
  - Countries must design and implement credible three-year national convergence plans as required by the regional framework.
    - So far, only two countries have articulated such plans, and these will need to be overhauled because of the COVID-19 crisis.
    - Staff stated these plans should be consistent with the recalibrated and new IMF programs.
    - In the baseline scenario, while three countries would still breach the fiscal convergence criterion in 2021, all countries are expected to meet it by 2023.
  - The CEMAC Commission should continue exploring an appropriate sanction mechanism for breaches of regional surveillance rules which should include strong implementation mechanisms (work ongoing, delayed by the crisis).
  - Adopt the early warning tool of macroeconomic imbalances:
    - Mechanism expected to be soon approved by the CEMAC council of ministers.
    - Introduction postponed by one year to 2022.
  - Monitor effective use of emergency spending for the pandemic and continue to promote budget transparency with national authorities, including on oil revenue management.

### Implementation of PREF and public financial management reforms
- Staff welcomed CEMAC Commission efforts to monitor implementation of key reforms under the CEMAC Economic and Financial Reform Plan (PREF).
- Transposition and PFM progress:
  - All countries but Equatorial Guinea have completed the transposition of the regional PFM directives.
  - Progress in strengthening transparency of public finance management, in particular:
    - Implementation of an annual budget calendar in all countries except Congo (currently being signed) detailing the preparation and adoption process of the draft budget law.
  - Except for Equatorial Guinea, all countries produce Medium-Term Budget Frameworks.
- Staff encouraged continued monitoring of effective implementation of these directives in individual countries.

### Promoting sustained and more inclusive growth — second phase of the regional strategy
- Staff and authorities agreed CEMAC’s growth performance is insufficient to lift standards of living of a growing population.
- Consensus to take stock of first-phase reforms and design a comprehensive reform agenda; structural, governance and transparency reforms are key.
- Main reform proposals grouped under 6 pillars:
  - improve public financial management, including the effective implementation of CEMAC PFM regional directives, in particular the umbrella directive on transparency and governance;
  - improve management of public investment projects, including through strengthening national institutional and legal frameworks;
  - enhance oversight, management, and transparency of SOEs;
  - improve the business climate with the simplification of the tax structure and the modernization of the tax and customs administration;
  - promote digital financial services to accelerate financial sector development and inclusion;
  - leverage the regional market and the high potential of the agriculture sector to strengthen economic resiliency and take advantage of the opportunities offered by the African Continental Free Trade Area.
- Communication, political commitment, institutional capacity, and active civil society involvement are required; preparation to convene a Heads of State Summit should begin as soon as possible.

### Monitoring regional developments, policy response, and support
- At the CEMAC tripartite meeting in July, focus was on policy response to the crisis and its financing; participants:
  - Appreciated rapid IMF support to four countries to cover financing needs from increased priority spending and significantly lower revenues.
  - Urged ways to deliver similar assistance to CEMAC members not yet receiving such assistance.
  - National authorities welcomed BEAC’s easing measures; BEAC and staff reiterated there should be no direct monetary financing of governments.
  - Consensus that second phase of regional strategy should focus on growth and development.
  - Authorities argued for larger borrowing space for investment projects; IFIs and development partners cautioned about debt sustainability.
  - Plan to hold a high-level conference to pave the way for a more ambitious structural reform program.

### Monetary policy, NFAs, and regional policy assurances
- BEAC and COBAC implementation of December 2019 policy commitments proceeded, but progress slower than expected due to COVID-19.
- NFAs and projections:
  - NFAs at end-December 2019: outcome €4.0 billion (vs projection €4.7 billion referenced in December 2019 regional policy assurances).
    - Shortfall due to a shortfall in external financing during 2019H2 (equivalent of €0.4 billion due to delays in meeting disbursements-related conditionality) and some fiscal deficit over-runs.
  - During 2020H1, NFA accumulation was in line with pre-COVID projections, but end-June 2020 projection was missed with a similar shortfall as at end-2019.
  - BEAC kept its policy rate unchanged at 3.25 percent (after an initial easing).
  - Proposed revised NFA projections (updated policy assurance) set end-2020 NFA at €3.30 billion and end-June 2021 NFA at €3.40 billion.
- BEAC commitments and actions:
  - Committed to maintain an appropriately tight monetary policy.
  - Will resume efforts to target a neutral liquidity stance once the economic recovery takes hold to reduce excess liquidity, stimulate the interbank market, and improve monetary policy transmission.
  - Will continue consultations with oil and mining companies to implement foreign exchange regulations and bring them into compliance during 2021.
- Conditionality for Fund support:
  - In the event of a deviation from stated NFA accumulation projections that would not be assessed by Staff as minor or temporary, commitment to identify and adopt additional corrective measures (including further tightening of monetary policy) to allow continuation or approval of new financial support as part of Fund-supported programs.

### Banking sector, COBAC measures, and financial stability
- COBAC responses to the crisis:
  - Temporarily amended prudential framework to facilitate loan restructuring and delay NPL classification.
  - Prevented banks from distributing dividends in 2020 and 2021 to strengthen capital and lending capacity.
  - Introduced new ad-hoc reporting to monitor asset quality monthly and liquidity weekly.
  - Stress tests being conducted should provide estimates of banks’ solvency at end 2021 and 2022.
- Staff assessment and recommendations:
  - Measures welcomed; will guide decisions in 2021 about the exit strategy from temporary prudential easing.
  - Implementation momentum of COBAC’s strategic plan (risk-based prudential and AML/CFT supervision, Basel roadmap) should resume as logistical challenges fade.
  - Key priorities: improve compliance with prudential standards; tackle high level of NPLs; limit further significant increase in banks’ sovereign exposure; progress on arrears clearance plans and avoid new arrears accumulation.
  - COBAC should strengthen risk-based prudential and AML/CFT supervision and, with World Bank support, improve data quality, process effectiveness, and address under-staffing issues with BEAC.

### Foreign exchange regulations and extractive sector compliance
- Progress in FX regulations:
  - Processing times for FX transfers outside the monetary zone reduced.
  - FX surrendering levels satisfactory.
  - Repatriation compliance of deposits held by public entities abroad remains unknown.
  - Consultations to bring oil and mining companies into compliance were delayed by the pandemic; discussions resumed in October 2020.
  - Given pressures on external reserves, aiming at full implementation of FX regulations by extractive sector companies by end-2021 is important while accounting for sectoral specificities.

### Staff appraisal — outlook, reserves, and reform priorities
- COVID-19 impacts on adjustment and reserve accumulation:
  - Pandemic expected to cause slower fiscal and external adjustments than pre-pandemic expectations.
  - CEMAC remains vulnerable to oil price shocks.
  - CEMAC’s goal of achieving an adequate level of reserves of 5 months of imports of goods and services would be delayed to 2025 vs. 2022 pre-pandemic.
  - A large share of projected reserves accumulation by 2025 would stem from borrowed funds.
  - Slower fiscal consolidation complicates debt sustainability issues.
- Policy responses and monetary stance:
  - Regional authorities’ policy response was pro-active and appropriate; governments announced support measures while limiting fiscal deterioration.
  - BEAC loosened monetary policy, eased bank liquidity provision, resumed longer-term liquidity injections up to one year, and introduced in July a new government securities purchase program from banks consistent with prohibition of direct monetary financing.
  - Staff supports BEAC’s resolve to refrain from direct monetary financing and to ensure the securities purchase program remains consistent with the charter.
  - BEAC should be ready to tighten monetary policy if external reserves deteriorate further or inflation pressures emerge.
- Liquidity management and TSAs:
  - Once recovery takes hold, liquidity absorption operations should resume to reduce structural excess liquidity and stimulate the interbank market; aim at a neutral liquidity allocation as planned in June 2018 reform.
  - Accelerate operationalization of Treasury Single Accounts (TSAs) by governments and BEAC.
- Structural reform imperative:
  - CEMAC at a crossroads; first phase restored macro stability but growth and standards of living remain too low.
  - New phase must decisively focus on structural, transparency and governance reforms to enable diversified, inclusive, sustainable growth.
  - Increasing non-oil fiscal revenue is key to insulate macro balances from oil price swings and create fiscal space for priority development and social spending.
  - Past reform attempts yielded little; reform bottlenecks need addressing within a coordinated strategy with strong commitment at the highest policymaking level.
  - CEMAC Commission should promote budget transparency via effective implementation of all CEMAC PFM directives and strengthen regional surveillance with an early warning system and a sanction scheme for non-compliant countries.
  - Accelerating financial sector reforms is essential to develop the private sector.
  - IMF program engagement must prioritize these key reforms to foster growth while rebuilding fiscal and external buffers.

### Overall staff conclusions and conditional support
- Staff conclusions:
  - (i) BEAC and SG-COBAC were unable to fully implement the December 2019 NFA policy assurance due to a shortfall in external financing during 2019H2 and fiscal deficit over-runs.
  - (ii) BEAC and SG-COBAC have taken satisfactory corrective measures to address the end-June NFA underperformance given NFA accumulation during 2020H1 was in line with the policy assurance and monetary accommodation was very limited in response to COVID-19.
  - (iii) Staff supports the updated policy assurance on NFA accumulation to bring NFA to €3.30 billion and €3.40 billion at end-December 2020 and end-June 2021, respectively.
- Continued external support and commitments:
  - Continuation of external support will underpin projected NFA accumulation based on BEAC’s commitment to tight monetary policy and member states’ commitment to maintain macroeconomic stability through appropriate fiscal measures and rapid implementation of ambitious structural, transparency and governance measures.
  - Meeting the policy assurance is critical to allow continuation of (or approval of new) financial support under Fund-supported programs with CEMAC members.

*Source: IMF staff report excerpt (text provided).*

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

### 1caeea2021001 - 50.      The surveillance discussions with the CEMAC authorities will remain on a 12-month

### Surveillance schedule
- The surveillance discussions with the CEMAC authorities will remain on a 12-month cycle in accordance with Decision No. 13654-(06/1), adopted on January 6, 2006.

### Growth and sectoral GDP (2020)
- Real GDP is forecasted to contract by -3 percent in 2020, with recessions registered in all member countries.
- Non-oil GDP is estimated to shrink by 3.3 percent in 2020.
- Oil GDP is estimated to fall by 1.6 percent in 2020.
- The demand shock triggered by the COVID-19 pandemic led to lower revenue by about 2 percentage point of GDP.

### Fiscal outcomes and deficits (2020)
- Overall fiscal balance is projected to decline to -3.9 percent in 2020.
- The worsening of the non-oil fiscal deficit will reach -11.3 percent in 2020, reflecting the impact of the pandemic on the economy and weaker revenue mobilization.
- Total Public Debt increased to 57 percent of regional GDP in 2020 and is expected to gradually decline in the medium-term as the economic impact of the pandemic fades away and arrears repaid.

### External sector and reserves (2020)
- The current account deficit widened in 2020 to reach -6.5 percent of GDP as exports fell sharply while imports only decreased slightly.
- Reserves accumulation is forecasted to significantly deteriorate by the end of the year.
- The end-year oil prices forecast was revised downward and is now projected to reach $41.7 per barrel.
- Official reserves' coverage in months of imports is forecasted to reach 3.5 months at end-2020.

### Monetary developments and BEAC operations
- In June 2020, net foreign assets (NFA) reverted to their end-2019 level and stabilized throughout the third quarter of the year.
- Governments deposits at the BEAC remained stable throughout Q3-2020, whereas deposits of banks increased.
- BEAC’s refinancing to banks remains little changed.
- The banking sector’s excess reserves augmented until June 2020 and credit to the private sector recently improved.
- BEAC: reserves coverage indicators and levels (selected)
  - Gross official reserves (end of period): 8,204 (2020, in millions of U.S. dollars, Table 1 end-2020 estimate)
  - Months of imports of goods and services (less intra regional imports): 3.5 (2020, Table 1)
  - Reserve coverage of broad money (in percent, Table 7 memoranda): 46.4 (2020 pre-COVID19) and projected levels increase subsequently.

### Financial sector and soundness indicators
- Non-performing loans (gross) to total loans (gross): 20.0 percent in 2020 (provisional), rising to 21.3 percent in Q2 2020 (Table 9).
- Regulatory capital to risk-weighted assets: 12.6 percent in 2020 (provisional).
- Liquidity ratios improved: Ratio of liquid assets to short-term liabilities at 166.6 percent in 2020 (provisional); total deposits to total (noninterbank) loans at 115.4 percent in 2020 (provisional).
- Gross loan (banks' book): 7,773 (2020, bn FCFA); Q2 2020 gross loan level 8,235 (bn FCFA) with annualized growth rates showing contraction: -9.38 percent year-on-year and -23.34 percent for a specific Q2 comparison (Table 9).

### Balance of payments and financing needs (2020–23)
- Balance on current account (including grants) in 2020: -6.5 percent of GDP (Table 3b).
- Balance on goods and services in 2020: -2.6 percent of GDP (Table 3b).
- Total exports (2020, billions of CFA francs): 13,697 (Table 3a, 2020 estimate).
- Total imports (2020, billions of CFA francs): 14,998 (Table 3a, 2020 estimate).
- Financing needs and sources, 2020–23 (Table 10, Billions of CFA francs):
  - Financing needs: 2248 (2020), 1921 (2021), 1475 (2022), 910 (2023)
  - Overall balance of payments: -2109 (2020), -1119 (2021), -871 (2022), -601 (2023)
  - Reserves assets (-accumulation): -139 (2020), -802 (2021), -604 (2022), -309 (2023)
  - Financing sources: IMF support 582 (2020), 431 (2021), 88 (2022), 0 (2023)
  - Budget support from other donors: 512 (2020), 454 (2021), 84 (2022), 0 (2023)

### Key cross-cutting projections and notes
- Public debt dynamics: Public debt rose to 57 percent of regional GDP in 2020 and is projected to gradually decline as the pandemic impact fades and arrears are repaid.
- The large twin deficit in 2020 (fiscal and current account) is reversing public debt dynamics and will lead to lower external reserves.
- Selected Table 1 projections (CEMAC aggregates, percent changes / shares):
  - Real GDP (CEMAC): -3.0 (2020 est.), 2.7 (2021 proj.), 2.2 (2022 proj.), 3.4 (2023 proj.), 3.8 (2024 proj.), 3.9 (2025 proj.)
  - Consumer prices (period average, CEMAC): 3.1 (2020 est.), 2.5 (2021 proj.), 2.4 (2022 proj.), 2.4 (2023 proj.), 2.4 (2024 proj.), 2.3 (2025 proj.)
  - Total public debt (CEMAC): 57.0 (2020 est., percent of GDP), projected 56.0 (2021), 54.8 (2022), 52.5 (2023), 50.0 (2024), 46.9 (2025)

*Sources: CEMAC authorities; and IMF staff estimates and projections.*

### Annex I. Taking Stock of the First Phase of the Regional

### Annex I. Taking Stock of the First Phase of the Regional Strategy

### Overview
- The first round of Fund-supported programs completed around mid-2020 provides an opportunity to assess the first phase of the regional strategy and draw lessons for the second phase.
- Performance during the first phase was mixed: the strategy succeeded in avoiding a crisis and delivering macroeconomic stabilization by end-2019, but growth was weak and progress towards diversification from oil was limited.

### Background and initial conditions
- Following the oil price shock starting mid-2014, CEMAC was near crisis by end-2016:
  - International reserves fell to US$4.2 billion (around 2 months of import coverage) from US$15.3 billion at end-2014.
  - Real GDP growth was -1.6 percent.
  - Fiscal deficit was -7.1 percent of GDP.
  - All six countries breached regional convergence criteria.
  - Regional current account deficit was 12.6% of GDP.
- June 2017 CEMAC Staff Report on Common Policies key objectives:
  - Increase FX reserves up to 3.2 months of imports by end-2019.
  - Correct fiscal positions by 6 percent of GDP (3 percent of GDP in domestic revenue mobilization and 3 percent of GDP in expenditure reduction).
  - Improve monetary policy transmission.
  - Strengthen financial stability via stronger prudential regulations and resolution actions.
  - Adopt structural reforms to diversify economies and boost non-oil growth.

### Program design and implementation
- A comprehensive regional strategy with Fund-supported programs for all six countries aimed to restore external and fiscal sustainability:
  - CAR had an ECF-supported program as of July 2016 and entered a new ECF-supported program in January 2020.
  - Cameroon and Chad started three-year ECF-supported arrangements in June 2017.
  - Gabon started a three year EFF-supported program in June 2017.
  - Congo’s and Equatorial Guinea’s ECF- and EFF-supported programs started in July and December 2019, respectively.
- Despite delays and setbacks, the strategy enabled CEMAC to avoid a crisis and achieve macro stabilization at the regional level by end-2019.

### Macroeconomic outcomes (end-2019 and 2016–19 evolution)
- External stability and reserves:
  - FX reserves reached 3.5 months of imports by end-2019, exceeding the initial objective but below the assessed adequate level of 5 months for a resource-rich currency union.
  - Current account deficits were lower than initially projected, driven by larger import contraction.
- Fiscal performance:
  - Overall fiscal balance improved on average from about -6 percent of GDP in 2016 to -1 percent of GDP in 2019.
  - Adjustment was tilted toward spending cuts, disproportionately borne by capital expenditure.
- Monetary and financial sector reforms implemented regionally (selected measures):
  - Monetary policy stance tightened by 55 basis points to 3.50 percent in October 2018.
  - Elimination of statutory advances and conversion into long-term bonds in 2018.
  - Liquidity management based on autonomous factors forecasts and liquidity provided through competitive auctions.
  - Interest rate corridor (marginal deposit and borrowing facilities) formally established.
  - Regional securities market deepened and two regional stock exchanges were merged.
  - COBAC progressed toward risk-based supervision aligned with Basel standards and strengthened sanctioning frameworks, but compliance remains uneven.
  - Nonperforming loans (NPLs) steadily increased; bank resolution guidance and foreign exchange regulation changes were prepared/implemented; company compliance in extractive sectors remains ongoing.

### Diversification and structural reform outcomes
- Progress toward diversification from oil was limited; region remains highly dominated by oil price dynamics:
  - Five years after the collapse of oil prices, per capita incomes remained almost 7 percent below the pre-crisis level.
  - Growth (overall and non-oil) stayed below pre-oil price shock levels.
- Non-oil fiscal revenues did not recover to their 2016 level.
- Structural reform implementation was incomplete:
  - Less than half of structural benchmarks were met in a timely manner under most Fund-supported programs.
  - Very limited progress in improving governance since 2010.
  - Limited transparency in management of oil resources, including sharing operating conditions governing oil concessions (an obligation under CEMAC guidelines on public financial management).
  - Business environment unattractive relative to peer SSA countries: starting a business, enforcing contracts, and trade barriers are particularly cumbersome.

### Fiscal and financial sector challenges to address in phase two
- Debt dynamics:
  - Increasingly challenging due to growth underperformance, weak primary balances, and protracted debt restructurings (debt restructuring finalized for Chad only in 2018; still underway in Congo).
- Domestic payment arrears and NPLs:
  - High stock of domestic payment arrears from delays in repaying wages, subsidies, and private suppliers.
  - Slow clearance of arrears; stock remains significant, affecting private sector development and growth.
  - Arrears contributed to a large and increasing stock of NPLs, increasing financial sector vulnerability and constraining private lending.
- Need for sustained structural reforms to diversify growth, improve governance, and strengthen the business environment.

### Key statistics from 2014–19 (selected exact figures from Text Table 1)
- Growth: 2014: 4.9; 2015: 0.9; 2016: -1.6; 2017: 0.5; 2018: 0.8; 2019: 2.0 (annual change, in percent).
- Oil growth: 2014: 3.5; 2015: 1.9; 2016: -7.7; 2017: -4.8; 2018: -0.8; 2019: 2.7.
- Non-Oil growth: 2014: 5.2; 2015: 0.7; 2016: 0.0; 2017: 1.7; 2018: 1.1; 2019: 1.9.
- Inflation (eop): 2014: 2.6; 2015: 1.5; 2016: 0.3; 2017: 1.2; 2018: 3.0; 2019: 1.9.
- Current Account Balance (percent of GDP): 2014: -2.1; 2015: -12.6; 2016: -12.7; 2017: -4.6; 2018: -3.2; 2019: -3.2.
- Gross foreign Assets (end of period, Billions CFAF): 2014: 8,417; 2015: 6,238; 2016: 3,093; 2017: 3,218; 2018: 3,777; 2019: 4,362.
- Months of imports of goods and services: 2014: 5.8; 2015: 4.4; 2016: 2.3; 2017: 2.3; 2018: 2.7; 2019: 3.5.
- Revenue and Grants (percent of GDP): 2014: 24.5; 2015: 20.4; 2016: 16.6; 2017: 16.5; 2018: 17.8; 2019: 18.2.
- Oil Revenue (percent of GDP): 2014: 13.4; 2015: 7.5; 2016: 5.4; 2017: 5.7; 2018: 7.3; 2019: 7.3.
- Non-Oil Revenue (percent of GDP): 2014: 9.9; 2015: 11.3; 2016: 10.5; 2017: 10.0; 2018: 9.8; 2019: 10.1.
- Expenditure (percent of GDP): 2014: 28.2; 2015: 26.8; 2016: 23.7; 2017: 20.1; 2018: 18.1; 2019: 18.5.
- Capex (percent of GDP): 2014: 14.0; 2015: 12.2; 2016: 9.0; 2017: 6.6; 2018: 5.4; 2019: 5.3.
- Fiscal Balance (percent of GDP): 2014: -3.6; 2015: -6.5; 2016: -7.1; 2017: -3.6; 2018: -0.2; 2019: -0.3.
- Public Debt (percent of GDP): 2014: 28.3; 2015: 42.3; 2016: 49.9; 2017: 51.0; 2018: 50.2; 2019: 51.8.
- Oil prices (Brent, U.S. dollars per barrel): 2014: 96.25; 2015: 50.84; 2016: 44.05; 2017: 54.47; 2018: 71.16; 2019: 64.0.

### Implications for the second phase (priorities identified)
- Strengthen efforts to diversify away from oil to build resilience to oil price swings and support sustainable growth.
- Raise non-oil revenues to secure stable financing for growth-enhancing reforms and investment.
- Improve governance and transparency, particularly in management of oil resources and concessions.
- Deepen and accelerate implementation of structural reforms to improve business environment (starting a business, enforcing contracts, reducing trade barriers).
- Address long-standing fiscal issues: manage worsening debt dynamics, accelerate debt restructurings where needed, and resolve domestic payment arrears.
- Reduce NPLs and strengthen banking sector resilience through better enforcement of prudential and AML/CFT regulations, improved supervision, and resolution frameworks.

*IMF staff compilation based on Annex I: Taking Stock of the First Phase of the Regional Strategy.*

### 2.7 times that of 2016 by end-2021 or three and a half times banks’ regulatory capital, a level

### 1caeea2021001 - 2.7 times that of 2016 by end-2021 or three and a half times banks’ regulatory capital, a level

### Sovereign–Banks Nexus: key findings
- Since 2017, credit to the private sector has decreased by 1.5 percent on average per year, whereas holdings of government debt have grown by 21.9 percent on average per year.
- Banks still own about 95 percent of the government bond portfolio in the region against almost 100 percent three years ago.
- The sovereign exposure evolution places CEMAC’s banking sector at risk, with exposures projected to reach "2.7 times that of 2016 by end-2021" or "three and a half times banks’ regulatory capital" (text heading).
- Several non-systemic banks, accounting for over 10 percent of banking assets in CEMAC, have negative capital; almost no such banks were resolved in the last decade.
- State ownership in the banking sector rose to 16 percent of total banking assets at end-September 2020 from slightly above 10 percent at end-2019 (in one country the government acquired a majority in one systemic bank).
- The fragile situation of some banks led to deposit withdrawals and liquidity stress, particularly in poorly governed public banks or banks with high NPLs to government contractors.
- SMEs remain reportedly reluctant to bring assets to banks due to mistrust in banks and country authorities.

### Recent regional measures and regulatory settings
- BEAC measures:
  - Implemented communication campaigns and transaction platforms to broaden the investor base.
  - Set a refinancing exposure ceiling of 10 percent of a bank’s total assets in 2019; banks above this ceiling must provide a plan to reduce refinancing exposure.
  - Strictly applies CEMAC regulation and rejects bank refinancing requests backed by securities from a State in arrears on outstanding T-bills/-bonds.
  - Announced a bond purchase program on the secondary market with a renewable six-month program started in August 2019, allowing purchases from banks of parts of new T-bonds issued by governments up to a total regional ceiling of CFAF 600 billion under certain safeguards, including a minimum uptake by banks.
- COBAC measures:
  - Lowered risk weights of bank claims on governments in 2020 to the range of 65-85 percent against 65–95 percent previously.
  - Working on specifying conditions under which “secured issuances” can benefit from a zero-risk weighting by banks.
  - Extended in 2020 an exception rule for another three years allowing individual banks, under strict conditions, to apply temporarily for a waiver on risk weights; two banks have used this option so far.
  - Adopted regulations on financial sanctions in 2019 and a new regulation in 2020 strengthening concentration limits (recommended to be operationalized and cautiously implemented).

### Impacts on credit and inclusion
- Historical pattern: banks favor lending to sovereigns or sovereign-related agents (government suppliers, civil servants, credit guaranteed by governments) because of preferential supervisory treatment (e.g., exposure weighted at 50 percent for strategic firms).
- Credit to other sectors, particularly small and medium sized enterprises, has remained limited even when bank liquidity was abundant, constraining financial inclusion.
- Nonperforming loans trends and claims on government figures (figures displayed in source) show rising NPLs and increasing claims of commercial banks on the government as a percent of total commercial banks' assets.

### Prioritized action plan (five areas)
- Action 1: reduce state involvement in the banking sector
  - In the short term, states should establish privatization strategies for systemic banks they own.
  - At most, states could maintain majority ownership in a very few non-systemic institutions only if a strong governance framework guarantees management independence from the government.
- Action 2: rapidly broaden the investor base
  - BEAC should continue providing advice and technical facilitation, including completing the BEAC/CRCT electronic platform for centralizing government bonds secondary transactions.
  - Governments should dedicate a significant quota of their issuances to non-bank investors, including institutional (e.g. insurance, pension schemes) and individuals.
  - SVTs should play an active market maker role, provide market prices on request and serve clients seeking to buy government bonds; non-cooperation would be fined by the CRCT and repeated non-cooperation would be sanctioned by SVT license withdrawal.
- Action 3: reduce bank appetite for sovereign exposure
  - In the short term, COBAC should rapidly implement a new regulation on the leverage ratio to ensure a minimum capital requirement for any category of bank asset, including zero-weighted government bonds, and specify the conditions for weighing such bonds at zero.
  - In the medium term, COBAC should eliminate the zero-weight exception and ensure all issuances are weighted similarly.
  - COBAC could review the rationale guiding risk weighting and propose a risk weight system based on credit risk rather than convergence criteria.
  - Short-term operational steps: (i) implement financial sanctions regulations adopted in 2019; (ii) cautiously and gradually implement the 2020 regulation strengthening concentration limits.
  - Whenever possible, set dissuasive, and in any case much higher, risk weights for direct loans to sovereigns compared to bonds, and set progressive provisioning obligations on sovereign-backed corporate loans.
  - Eliminate exemption rules allowing some banks not to weigh government bonds at all; the central bank should decide whether an SVT failing minimum solvency, concentration limits or placement obligations should be allowed to continue participating in issuances.
- Action 4: increase banks’ incentives to lend to the private sector
  - In the short term, governments should finalize and implement domestic arrears repayment strategies, possibly in close coordination with COBAC.
  - GIMAC should continue working to achieve full interoperability of mobile and digital payments to improve deposit collection and bank funding capacity.
  - In the medium term, the central bank and governments should develop and implement consistent regional and national financial inclusion strategies.
  - Governments should focus on improving public governance and finance management, judiciary capacity and the overall business environment to diversify economies and generate bankable private sector projects.
- Action 5: strengthen regional institutional capacity and coordination
  - In the short term, significantly improve the capacity of regional institutions—specifically staffing, processes and systems of COBAC.
  - Enhance coordination between BEAC and COBAC.

### External sector assessment – summary findings and projections
- The regional external current account deficit is estimated to deteriorate to 6.5 percent of GDP in 2020 due to the COVID-19 pandemic impact, but is expected to improve in 2021 and continue to narrow in the medium term.
- Regional gross reserves slightly increased in 2020, mainly due to the Fund emergency financing support, and are projected to increase steadily but remain below levels appropriate for oil exporting economies according to reserve adequacy metrics.
- Gross reserves are estimated to remain broadly constant at 3.6 months of imports at end-2020, mainly supported by Fund emergency assistance.
- Staff project reserves to increase but remain below the 5 months of imports threshold by 2023.
- The benchmark of 5 months of prospective imports is considered appropriate for CEMAC; optimal precautionary reserves could oscillate from 6.3 to 9.7 months depending on scenario, but the French Treasury guarantee offsets some need for higher buffers.
- Broad money and short-term liability ratios were respectively at 35 and 175 percent in 2019, compared to minimum thresholds of 20 and 100 percent.
- Rebuilding reserves buffers in the medium term requires fiscal consolidation, adequately tight monetary policy, implementation of structural reforms for higher and diversified growth, and full implementation of the strengthened FX regulation.

### External assessment methodology and calibration notes
- The Revised EBA-Lite Current Account (CA) model was used to compare the regional current account balance with a model-estimated CA norm.
- Model calibration assumptions include:
  - a projected cyclically adjusted fiscal balance reflecting recommended medium-term fiscal objectives;
  - public health expenditures at 2 percent of regional GDP;
  - a revised desired change in reserves positioning CEMAC to reach 5 months of import coverage at end-2025;
  - private sector credit level at 17 percent of GDP reflecting member countries’ fundamentals;
  - assumption of less restrictive regional capital controls.
- The elasticity of the current account to REER is set at -0.22 (average of countries’ elasticities).
- An adjustor for the temporary oil shock of -0.021 in 2020 was introduced, calculated as 0.6 times the temporary portion of the change in oil balances.

*Sources: COBAC and IMF staff estimates.*

### 4.4 percent of GDP. This implies a gap of -2.3 percent of GDP under current policies, equivalent to an

### 1caeea2021001 - 4.4 percent of GDP. This implies a gap of -2.3 percent of GDP under current policies, equivalent to an

### External position and real exchange rate (REER)
- Current account actual: -4.4%
- CA Model (fitted) results and components:
  - Current Account Norm: -2.1%
  - CA Gap (Actual-Norm): -2.3%
  - Cyclical Contributions (from model): -0.5%
  - Cyclically adjusted Current Account: -3.8%
  - Natural disasters and Conflicts: -0.1%
  - Policy Gap: 2.7% (CA Model), -0.8% (REER Model)
  - Residual: -4.9%
- REER Model:
  - REER Gap: 10.0% (overvaluation)
  - REER Model undervaluation: -3.8%
  - Elasticity: -0.22
  - 2020 observation: REER appreciated by about 8 percent, reflecting the nominal appreciation of the Euro vis-à-vis the US dollar.
- Interpretation:
  - The combination of the CA and REER models suggests the overall end-2020 external position is moderately weaker than warranted by fundamentals and desirable policy settings.
  - Historical note: the REER has been broadly stable since the late 1990s after the 1994 devaluation, with year-to-year fluctuations not exceeding 10 percent; the 1994 devaluation’s price competitiveness gains appear preserved over the last decades.

### Capital inflows, financial account, and financing risks
- 2020 changes and drivers:
  - Net capital inflows decreased by 1.4 ppt of GDP from 2019.
  - This decrease is estimated to be reflected on by 1 ppt of GDP decrease in the positive balance of the financial account.
  - Decrease driven by lower direct investment and other investment outflows due to higher global uncertainty (despite more official support).
- Medium-term baseline projections:
  - Portfolio outflows are expected to surpass inflows.
  - FDI inflows are projected to spike in 2021 and remain relatively constant at the 2020 level afterwards.
- Risks:
  - Net capital inflows may remain durably lower; outflows could surpass inflows in the wake of the COVID-19 crisis.
  - Concerns about debt sustainability and fragility of the economic recovery may complicate return of Eurobond issuers to international markets.
  - Official creditors may not provide as much financing in the coming years as they did during the COVID-19 crisis.
- Policy recommendations to attract more capital inflows in the medium term:
  - Implement long-overdue structural reforms and improve the business climate.
  - Advance revenue mobilization (to improve the debt service capacity).
  - Strengthen the implementation of the foreign exchange regulations.

### Structural competitiveness
- Main constraints for CEMAC region competitiveness:
  - Innovation capability and product markets are the most pronounced constraints.
  - Lack of adequate infrastructure and difficulties for ICT adoption.
  - Limitations of human skills, likely linked to poor performance of the health indicator.
  - Prominent lag on governance indicators, especially voice and accountability, corruption and rule of law.
  - Governance indicators for the CEMAC region worsened from 2010 to 2019.
- Comparative indicators referenced:
  - Global Competitiveness indicators (World Economic Forum) suggest CEMAC countries included do not perform very differently from some regional peers (WAEMU), but a few CEMAC countries (e.g., Chad) are among the worst performers globally.

### Risk Assessment Matrix — key risks, likelihoods, impacts, and mitigation
- Conjunctural shocks and scenarios (shorter horizon, 12 to 18 months):
  - Unexpected shift in the COVID-19 pandemic
    - Likelihood: High
    - Expected impact: Downside — requires more containment, impacts economic activity; insufficient monetary and fiscal policy response amid dwindling policy space could lead to cascading debt defaults, capital outflows, depreciation pressures, and inflation.
    - Proposed policies: Increase public health measures, including testing capacity and follow WHO guidelines.
  - Demand for contact-intensive sectors remains low for longer
    - Likelihood: High
    - Expected impact: Dampened demand for contact-intensive sectors.
  - Markets reassess real economy risks unmasking debt-related vulnerabilities, weakening banks and forcing credit reduction
    - Likelihood: High
    - Expected impact: Further weigh on growth.
  - Oversupply and volatility in the oil market
    - Likelihood: Medium
    - Expected impact: High for CEMAC — protracted and large decline in oil prices could undermine the monetary framework.
    - Proposed policies:
      - Successfully complete and communicate full implementation of the new foreign exchange law, including with extractive industries.
      - Strengthen efforts to repatriate foreign exchange held abroad, including by SOEs.
      - Impress on the need to implement structural measures to diversify the economy, enhance competitiveness and deepen regional integration.
  - Intensified geopolitical tensions and security risks
    - Likelihood: High
    - Expected impact: Medium — socio-economic and political disruption, disorderly migration, commodity price effects, lower confidence.
    - Proposed policies: Keep effective social dialogue; ensure priority spending in social sector is protected.
- Structural risks (longer horizon):
  - Delays in implementation of regional reforms
    - Likelihood: High
    - Expected impact: High — possible delays for new Fund-supported programs, limited financial support, reform fatigue, negative impacts on external financing and reserves, and investor confidence.
    - Proposed policies:
      - Seek renewed high-level commitments from heads of states to an ambitious reform agenda.
      - Step up the Fund’s catalytic role with the international financial community to secure needed external financing.
      - Define key parameters for possible additional debt operations where needed.
      - Deepen dialogue on needed reforms to improve governance and enhance transparency, based on joint World Bank/IMF staff work.
      - Redefine under programs the role of public institutions in the economic area and address wide-spread perception of corruption.

### Response to past IMF advice (2019 Regional Consultation) — summary of authorities’ response and implementation status
- Fiscal policy and structural reforms:
  - IMF recommendation: Achieve fiscal consolidation targets and reduce non-oil primary deficit from 8 percent of non-oil GDP in 2018 to less than 6 percent in 2020; implement government arrears clearance; structural reforms to diversify the economy.
  - Authorities’ response: After good performance in 2019H1, slippages observed across all CEMAC countries except Equatorial Guinea in second half of 2019. Fiscal response to COVID-19 was broadly appropriate but widened deficits. Some progress in Gabon and Chad; PREF implementation lagging with gaps in strengthening governance of tax authorities and business environment.
- Monetary policy and safeguards:
  - IMF recommendation: Consider tightening monetary stance if reserve accumulation falls short; tighten liquidity management; explore simplified rules for repatriation and surrendering of foreign exchange receipts; engage oil and mining companies for compliance.
  - Authorities’ response: BEAC maintained tight stance to support reserve accumulation until March 2020, then eased slightly to mitigate COVID-19 slowdown. BEAC tightened liquidity management but resumed injections to ease bank liquidity stress following COVID outbreak. BEAC and COBAC strengthened enforcement of foreign exchange regulations; little progress on repatriation requirement enforcement, but FX surrendering by domestic banks largely applied. BEAC initiated direct consultations with oil and mining companies to finalize discussions by end November.
- Macrofinancial and financial sector recommendations:
  - IMF recommendation: Move towards risk-based supervision; revise short-term liquidity prudential ratio; support NPL reduction strategies; strictly implement resolution framework at COBAC and explore time limits for small bank resolution.
  - Authorities’ response: A new sanction mechanism adopted but procedures remain long, especially for state-owned banks. Relaxation of prudential regulation to ease pandemic impact limited bank resolutions in 2020.
- Regional integration and convergence framework:
  - IMF recommendation: Strengthen enforcement of the regional surveillance framework.
  - Authorities’ response: Limited progress after preparing a draft sanction scheme for non-compliant countries and an early warning system.

### Appendix I — BEAC letter highlights and macro outlook (excerpted)
- BEAC Office of the Governor letter dated Yaoundé, December 22, 2020 — update on assurances for recovery and reform programs undertaken by CEMAC member countries (discussions with IMF staff from November 3 through November 23, 2020).
- Macroeconomic projections and outcomes reported:
  - Expected regional recession in 2020: 3 percent.
  - External current account deficit would widen to reach 6.5 percent of GDP in 2020 due to a sharp drop in oil exports.
  - Inflation projected to remain contained below the regional convergence criteria at 2.5 percent.
  - Regional net foreign assets (NFA) projection for December 2019 endorsed by IMF Executive Board was not met: actual €4.0 billion instead of €4.7 billion, with shortfall driven by delays in securing external financing (€0.4 billion) and fiscal slippages.
- Policy actions taken in response to COVID-19:
  - Member states passed revised budget laws to free resources to support businesses and households while seeking to keep deficits under control.
  - BEAC eased monetary policy and implemented accommodative measures to facilitate financing for member states and ensure banking liquidity.
  - COBAC relaxed prudential regulations to allow banks to absorb losses due to the pandemic.
  - Emergency financing by the Fund to four CEMAC countries contributed to easing the shock on the regional economy.

*International Monetary Fund — content excerpt from 1caeea2021001 (selected passages).*

### 2020. However, the end-June 2020 target was not met, as the end-2019 shortfall could not

### 1caeea2021001 - 2020. However, the end-June 2020 target was not met, as the end-2019 shortfall could not

### Pandemic impact and disruption of reforms
- The COVID-19 pandemic disrupted the pace of reform implementation in: foreign exchange regulations, domestic arrears repayment strategy, single treasury accounts, and banking supervision.
- The end-June 2020 target was not met, as the end-2019 shortfall could not be compensated.
- Authorities committed to continue efforts during the crisis and accelerate progress once the pandemic is firmly behind them.

### Monetary policy stance, liquidity operations, and contingencies
- Prior commitment: BEAC to gradually move towards a neutral liquidity allocation to guarantee the external stability of the currency.
- Actions taken end-2019 / early 2020:
  - Reduced liquidity injection volumes at end-2019.
  - Started liquidity absorption operations in February 2020 to drain excess liquidity.
- Pandemic response measures:
  - Adopted a series of measures to support demand and prevent potential banking liquidity crises.
  - Measures were welcomed despite banks’ liquidity needs remaining low and credit levels continuing to decline.
  - Disrupted monetary transmission channels and slowed development of the interbank market in 2020.
- Additional measures in July 2020:
  - Long-maturity liquidity injection operations resumed for an amount of CFAF 150 billion to help credit institutions cover short- and medium-term needs.
  - Bond purchase program for government securities on the secondary market with a ceiling of CFAF 600 billion, or CFAF 100 billion per country within their financing needs limits and for a 6-month renewable period.
  - BEAC remains committed to refrain from providing direct monetary financing to countries, in accordance with its statutes.
- Withdrawal and exit considerations:
  - BEAC will closely monitor the pandemic and its economic impact to decide modalities and timing for gradual withdrawal of exceptional measures.
  - Plan to reduce liquidity injections and eventually resume liquidity absorption operations once recovery takes hold to absorb structural excess liquidity and stimulate interbank market development.
  - Monetary policy stance to remain accommodative for the duration of the crisis; BEAC stands ready to tighten monetary policy should the external sector's position deteriorate further.

### Foreign exchange regulations and extractive sector compliance
- Progress made on foreign exchange surrender requirements by banks for assets repatriated by all economic agents despite pandemic disturbances.
- Delays in processing currency transfers outside the monetary zone now resolved in part due to implementation of the "e-transfer" platform since September 1, 2020, which dematerializes transfer processes.
- All contracts between CEMAC countries and extractive industries companies submitted to BEAC, supported by Groupement BDO Tunisie Consulting, for compliance study with foreign exchange regulations.
- Bilateral consultations with companies operating in extractive sectors started beginning of October 2020 and will continue until the beginning of 2021, focusing on:
  - (i) treatment of site rehabilitation funds, including possible opening of foreign currency accounts at BEAC for these funds; and
  - (ii) assessment of the share of export earnings to be repatriated, taking into account oil and mining sector specificities.
- Compliance timeline adjustment:
  - All oil and mining companies granted an additional delay until end-December 2021 for bringing them into compliance with the foreign exchange regulations due to pandemic-related delays.

### Banking supervision, COBAC, and prudential framework
- COBAC faced constraints from travel bans and delays necessary to set up a remote supervision system.
- Recognized shortcomings:
  - Compliance with prudential standards remains insufficient.
  - Problem banks resolution procedures are experiencing delays.
  - Monitoring of banks’ non-performing loans reduction plans has not been possible.
- Adaptations and improvements:
  - Temporary adaptation of the prudential framework to address pandemic effects.
  - Strengthened reporting system to allow close monitoring of changes in credit quality and banking liquidity.
  - Continued reform of processes and tools for modern risk-based supervision and modernization of certain prudential rules based on Basel standards.

### Regional objectives, reserve targets, and financing assumptions
- Combined measures, Member States' fiscal consolidation programs, second generation Fund arrangements, implementation of foreign exchange regulations to the extractive sector by end-June 2021, and budget support from development partners expected to help net foreign assets increase to:
  - 3.30 billion euros at the end of 2020
  - 3.40 billion euros at the end of June 2021
- Achievement caveats:
  - Outcomes do not depend only on BEAC actions; oil market volatility since the start of the pandemic significantly increases uncertainty.
  - Pace of disbursements of budget support from external partners (other than the IMF), including other exceptional external financing net of change in arrears, forecast at:
    - 1.06 billion euros in the second half of 2020
    - 1.08 billion euros in the first half of 2021
  - These disbursements would contribute to achieving the stated objectives.

### Coordination with IMF, monitoring, and commitments
- BEAC and COBAC will:
  - Maintain efforts to closely monitor development of programs in CEMAC countries.
  - Work in close cooperation with IMF staff for the success of the regional strategy.
  - Notify and consult Fund staff in a timely manner on economic developments likely to affect CEMAC’s external stability by June 2021.
- Authorities remain available to work alongside the IMF and CEMAC member states to restore macroeconomic balances.

### Relations of CEMAC member countries with the IMF — selected program and emergency financing figures
- Cameroon:
  - Three-year ECF arrangement approved June 26, 2017 for SDR 483 million.
  - Fifth review completed January 22, 2020 enabled disbursement of SDR 55.2 million; total disbursements under arrangement SDR 427.8 million.
  - ECF program expired September 2020; Cameroon requested a new program.
  - RCF disbursements: SDR 165.6 million (May 4, 2020) and SDR 110.4 million (October 21, 2020); total RCF SDR 276 million.
- Central African Republic:
  - Three-year ECF approved December 20, 2019 for SDR 83.55 million.
  - RCF disbursement SDR 27.85 million on April 20, 2020.
  - Eligible for up to SDR 13 million under CCRT (debt service relief) subject to availability.
- Chad:
  - Three-year ECF approved June 30, 2017 for SDR 224.32 million.
  - Fifth review completion December 13, 2019 enabled SDR 28.04 million disbursement; total disbursements SDR 196.28 million.
  - ECF program cancelled July 2020; Chad requested a new program.
  - RCF disbursements: SDR 84.12 million (April 14, 2020) and SDR 49.07 million (July 22, 2020); total RCF SDR 133.19 million.
  - Eligible for up to SDR 10 million under CCRT subject to availability.
- Republic of Congo:
  - Three-year ECF approved July 11, 2019 for SDR 324 million.
- Equatorial Guinea:
  - Three-year EFF approved December 18, 2019 for SDR 205 million.
- Gabon:
  - Three-year EFF approved June 19, 2017 for SDR 464.4 million.
  - Fourth and fifth reviews completed December 23, 2019 enabled immediate disbursement of SDR 89.34 million; total disbursements SDR 375.06 million.
  - EFF program expired June 2020; Gabon requested a new program.
  - RFI disbursements: SDR 108 million (April 9, 2020) and SDR 108 million (July 31, 2020); total RFI SDR 216 million.

### Safeguards, exchange system, and surveillance
- Safeguards Assessment:
  - Full safeguards assessment for BEAC completed August 2017 under the four-year regional central bank cycle.
  - BEAC implemented all priority recommendations from the 2017 assessment, including alignment of secondary legal instruments with its Charter and publication of FY 2019 audited financial statements in full compliance with IFRS.
- Exchange system:
  - CEMAC currency is the CFA franc; pegged to the euro at the rate of CFAF 655.957 per euro since 1999.
- Article IV consultations:
  - Last Article IV consultation discussion on common policies of CEMAC members concluded December 18, 2019; consultations held on a 12-month cycle.

### Technical assistance (2012–20) — selected items and dates
- BEAC and regional institutions received technical assistance across monetary operations, supervision, reserve management, IFRS implementation, and PFM directives implementation. Selected entries include:
  - October 2020: AFC: Implementation of the RBS strategic plan.
  - October 2020: AFC: Review of the sanctioning process and the CEMAC regulation 02–14.
  - June 2020: AFC: WAH Virtual (COVID) TA Review of the SYSCO 2 bank-rating model.
  - January 2020: AFC-COBAC (CEMAC) - Briefing Paper: TA Review of COBAC’s Supervisory Processes Relating to Addressing Prudential Infringements and Sanctioning Banks and MFIs.
  - September 2019: AFW/AFC/MCM Regional Seminar on Cybersecurity in the banking sector.
  - June 2019: MCM Extension of Resident Advisor at BEAC on Monetary Operations.
  - April 2019: AFC Methodological guidance on on-site control of liquidity risk.
  - June 2017: MCM TA on Reserve Management and on the BEAC framework for lender of last resort/emergency assistance facility.
  - February 2016: MCM technical assistance on IFRS implementation.
  - March–April 2012: MCM advisory mission on central bank accounting, monetary operations, and stress testing.

*Prepared by The African Department (In Consultation with other Departments) — informational annex excerpts.*

### 3.5 months of imports as of September 2020 compared to a few weeks of imports four

### 3.5 months of imports as of September 2020 compared to a few weeks of imports four

### Economic impact of the pandemic and recent macro developments
- External buffers: international reserves after increasing in the first half of 2020 declined in the third quarter owing to lower oil revenues.
- Growth and inflation:
  - Economic growth in 2020 is expected to decline by almost 5 percentage points of GDP to -3 percent.
  - Inflation should remain below the regional convergence criterion of 3 percent.
- Fiscal and debt:
  - Fiscal balances are projected to worsen in 2020 owing to adverse impact of the pandemic on oil revenues and the cost of pandemic-related support measures.
  - Debt vulnerabilities have increased with weaker fiscal positions.
- Banking and monetary transmission:
  - The pandemic disrupted monetary transmission channels and delayed implementation of reforms related to single treasury accounts, development of capital markets, and strengthening of the regional surveillance framework by the CEMAC Commission.
  - The central bank pursued a neutral liquidity management to enhance monetary policy transmission prior to disruptions.

### Policy adjustments and measures taken by CEMAC authorities
- Fiscal measures:
  - National budget laws were revised to accommodate higher health and social spending and tax relief measures and account for lower fiscal revenue, notably oil revenue.
  - Authorities are committed to unwind support measures and resume a gradual fiscal consolidation when the crisis subsides.
- Monetary and prudential measures:
  - Monetary policy was eased at the regional level to facilitate financing for member states and provide sufficient liquidity to the banking system.
  - The central bank introduced unconventional measures, notably a bond purchase program for government securities on the secondary market.
  - Prudential regulations were relaxed to allow banks to absorb losses caused by the pandemic; analyses will guide the withdrawal of relaxed prudential measures.
  - A new sanction mechanism to improve regulatory compliance in banking supervision was adopted.
- Foreign exchange and external receipts:
  - Foreign exchange regulation has been enhanced and enforced with domestic banks which are now compliant with FX surrender requirements.
  - BEAC has started consultations with oil and mining companies on the application of the FX repatriation requirement and postponed the deadline for the extractive sectors to comply with the regulation by one year to end-2021.
  - Compliance by oil and mining companies with the new regulation following ongoing consultations is expected to help boost international reserves well above the target of 5 months of imports.
- Financial inclusion and supervision:
  - BEAC will carry out the development of the regional financial inclusion strategy initiated in October 2020.
  - Banking supervision and resolution frameworks will continue to be enhanced under the oversight of SG COBAC; compliance will be further enforced to contain risks to financial stability.

### Fund engagement, emergency financing, and debt relief
- External support received and requested:
  - Measures have been supported by external financing, especially from the Fund in the form of emergency financing, augmentation of access under active arrangements and debt relief under the Catastrophe Containment and Relief Trust (CCRT).
  - Requests for emergency support by the Republic of Congo and Equatorial Guinea have yet to be considered to date.
  - Requests for debt relief under the G20’s Debt Service Suspension Initiative (DSSI) were made by the four eligible countries in the region (Cameroon, CAR, Chad and the Republic of Congo).
- Programmatic engagement:
  - Continued engagement with the Fund to support a second generation of programs remains of paramount importance.
  - A successor arrangement with CAR has already been approved.
  - Three other countries (Cameroon, Chad, Gabon) have expressed an interest in new arrangements following the recent expiration of their respective Fund-supported medium-term programs.
  - The Fund arrangements with the Republic of Congo and Equatorial Guinea might need to be recalibrated as they were approved a few months prior to the pandemic and the first reviews have yet to be concluded.
  - Regarding the Republic of Congo, the authorities have requested an extension of the 2019-2022 ECF arrangement.
- Authorities’ appeal:
  - The authorities strongly urge the Fund to exercise flexibility regarding the two countries seeking emergency assistance, noting the exceptional and unprecedented shock and corrective actions taken to address public financial management, governance, and debt vulnerabilities.

### Regional strategy, reforms, and medium-term priorities
- Near-term priorities:
  - Mitigating the impact of the pandemic and supporting economic recovery remain top priorities.
  - The national authorities and regional institutions will maintain the current policy mix adopted during the crisis and stand ready to adjust policies as needed.
- Structural reforms and regional integration:
  - Authorities recognize delays in key structural reforms aimed at economic diversification, resilience to shocks, accelerating regional integration, and improving attractiveness to private investment and intend to accelerate implementation over the medium-term.
  - The CEMAC Commission adopted a regional industrialization strategy and decided to reduce exports of logs to develop domestic wood processing industries.
  - Implementation of regional integration projects will proceed in partnership with the private sector.
- Fiscal strategy and governance:
  - Second-generation programs should prioritize supporting recovery, increasing regional integration, and improving living and social conditions.
  - Fiscal adjustment should focus more on domestic revenue mobilization, including through rationalization of fiscal expenditures and widening of the tax base, to increase fiscal space for social and infrastructure spending.
  - Improving revenue mobilization is critical to advance clearance of domestic payment arrears and reduce vulnerabilities in domestic banking systems.
  - Strengthening social safety nets and addressing governance weaknesses and transparency gaps in public financial management are priorities.

### Conclusion and outlook
- Outlook:
  - The macroeconomic situation of the region is expected to improve in 2021, but new, more rapidly transmissible variants of the novel coronavirus have increased uncertainties and downside risks to the growth recovery outlook.
- Assessment:
  - Progress was made between 2017 and 2020 in implementing the regional strategy to restore macroeconomic balances, but the pandemic has limited further progress and threatens to roll back gains.
- Commitments:
  - Key measures pertaining to foreign exchange regulations and governance will be accelerated.
  - The authorities are committed to phasing out current shock mitigation measures once the crisis subsides.
  - Continued Fund support to a second generation of economic and financial programs will be essential to advance the regional strategy given higher financing needs due to the pandemic.

*Source: IMF content unit 1caeea2021001*

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_Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1caeea2021001.pdf_