## CEMAC: Regional Outlook, Policies, and Reform Implementation (Content unit 1caeea2023002) ## Source details **Canonical URL:** [CEMAC: Regional Outlook, Policies, and Reform Implementation (Content unit 1caeea2023002)](https://www.imf.org/-/media/files/publications/cr/2023/english/1caeea2023002.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2023/english/1caeea2023002.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2023/english/1caeea2023002.pdf.json) --- ### Executive summary: context, risks, and headline indicators - Context and recent performance: - Real GDP growth: 1.1 percent in 2021; 2.8 percent in 2022. - External reserves: 4.1 months of prospective imports at end-December 2022 (reserve adequacy metric for a resource-rich monetary union: 5 months). - Inflation: more than doubled to 6.5 percent at end-2022; non-food inflation rose to 4.7 percent at end-2022. - Downside risks highlighted: - Hydrocarbon prices volatility; WEO oil prices for 2023 are 15 percent lower than in the October forecast; recent short-lived fall of Brent to $71/barrel noted. - Food insecurity, financial stability risks, higher inflation persistence, funding squeeze, and debt vulnerabilities. - Summary policy recommendations (high level): - Monetary policy and reserves: stand ready to tighten further; mop up excess liquidity; complete transparent and consistent FX regulations implementation. - Fiscal policy and social protection: tackle fiscal slippages; save part of oil windfall; complete subsidy reforms and roll out targeted safety nets. - Financial stability: strengthen COBAC supervisory capacity; resolve non-viable banks; ensure banks adequately account for sovereign exposure and meet concentration limits. - Structural reforms and diversification: accelerate governance and productivity-enhancing reforms; broaden tax base beyond hydrocarbons; deepen regional trade integration. ### Fiscal and external balances: outcomes and trajectories - Fiscal balances and debt: - Overall fiscal balance (excl. grants): surplus of 2.1 percent of GDP in 2022 (from a deficit of 1.9 percent of GDP in 2021). - Public debt: 51.7 percent of GDP at end-2022, down from 56.5 percent of GDP in 2021; expected to increase to 52.1 percent of GDP in 2023 before declining to about 45 percent over the medium term. - Non-oil primary fiscal deficit (incl. grants): deteriorated by 0.7 percentage points of non-oil GDP during 2021–22. - External sector and reserves: - Current account balance: surplus of 2.3 percent of GDP in 2022 (from a deficit of 2 percent of GDP in 2021). - Gross FX: 4.1 months of prospective imports at end-December 2022. - Regional policy assurance on the NFA (end-December 2022): EUR 3.39 billion, estimated met by a margin of EUR 1.44 billion. - Drivers of FX overperformance: surge in gas export receipts (Equatorial Guinea and Cameroon), large donor support at end-2022 (Cameroon), delayed FX-based bank recapitalization, larger-than-projected FX repatriations amid stricter enforcement of FX regulations. ### Outlook and key macro projections - Short- and medium-term projections: - Real GDP growth: projected to reach 3 percent in 2023 (0.4 points lower vs prior vintage, due to slower hydrocarbon recovery in Equatorial Guinea; partly offset by new oil fields in Congo). - Inflation: projected to decelerate to 4.3 percent by end-2023 (1.2 percentage points upward revision relative to prior expectations); expected to return below the regional 3 percent convergence criteria by 2025. - Region’s overall fiscal balance (excluding grants) for 2023: projected at 0.4 percent of GDP (0.9 percentage points lower than projected in December 2022). - Non-oil primary fiscal deficit (including grants): projected to improve by 2.2 percentage points to 5.5 percent of non-oil GDP in 2023; expected around 4 percent of non-oil GDP in the medium term. - CAB: projected to deteriorate to -2.5 percent of GDP in 2023 and gradually revert to just above its historical average (-3 percent of GDP) over the medium term. - Public debt: expected to rise to 52.1 percent of GDP in 2023 (driven by validation of new domestic payments arrears in Congo) before declining to about 45 percent over the medium term. - Reserve coverage ratio: projected to rise to close to 4½ months of prospective imports in the medium term (staff adequacy target: 5 months). ### Balance of risks (categorized) - Overall balance: tilted to the downside. - External risks: - Commodity prices decline; stronger slowdown in global demand; global transition to low-carbon economies reducing demand for CEMAC exports. - Stronger-than-expected tightening in global financial conditions, including Eurozone, raising debt service and rollover risks. - Geo-economic fragmentation reducing concessional financing supply. - Domestic risks: - Fiscal: failure to improve spending efficiency or non-oil revenue collection could consume oil windfall and delay reserve accumulation; risk of programs going off-track. - Cost of living: persistently high inflation could weigh on growth, entrench expectations, and threaten food security; Sudan conflict spillovers. - Financial stability: materialization of macro risks could weaken bank balance sheets given tight bank-sovereign nexus and high NPLs. - Structural reforms: slow progress could delay donor support and growth benefits. - Socio-political and climate risks: security challenges, weak governance, AML/CFT weaknesses, and exposure to floods/droughts amplified by lack of a CEMAC-wide adaptation strategy. - Extractive sector upside: stricter FX compliance and possible higher oil prices from OPEC+ cuts could boost FX repatriation and resilience. ### Monetary policy, liquidity, and banking sector (actions and vulnerabilities) - BEAC monetary actions: - Policy rate: raised by cumulative 175 basis points since November 2021; raised by 50 bps to 5 percent on March 27 (March 2023). - Marginal financing window rate increased to 6.75 percent; 175-basis point corridor unchanged. - Discontinued weekly liquidity injections; switched to liquidity absorption operations; absorption rate rose by 55 basis points to 0.75 percent since February 2022, then slightly to 0.80 percent in March 2023. - Volumes at the marginal lending facility window increased by 16 percent between September and December 2022. - Liquidity and transmission challenges: - Persistent excess bank liquidity concentrated in a few banks impairs monetary policy transmission. - Staff recommends mopping up excess liquidity: significantly raise absorption rate closer to the main policy rate, increase auctioned amounts, build on AFBL, and switch to full allotment. - Banking sector soundness and risks: - Capital adequacy: stabilized at 14.1 percent in 2022Q4; several banks severely undercapitalized or insolvent. - Reported NPL ratio: 17.7 percent of total gross loans in 2022Q4. - Short-term liquidity ratio: 175 percent as of 2022Q4, but liquidity is segmented with several banks below 100 percent. - Loan portfolio: grew 6 percent year-on-year in 2022Q4. - Bank exposure to sovereign (loans and securities): about 30 percent of total assets at end-2022 (up from 10 percent at end-2015); several banks have exposure above 50 percent to CEMAC governments. - Supervisory and resolution recommendations: - Urgently strengthen COBAC’s supervisory capacity; step up onsite post-COVID inspections. - Trigger resolution of non-viable banks and tackle liquidity-stressed ones; ensure banks adequately account for sovereign exposure and meet concentration limits. - Conduct comprehensive asset quality reviews, estimate loan-loss provisions and capital shortfalls, and ensure undercapitalized banks submit credible recapitalization plans. ### Bank–sovereign nexus: scale, drivers, and implications - Key metrics: - Bank exposure to sovereign: around 30 percent of total assets in 2022 (from 10 percent in 2015). - Cross-country holdings and contagion risk increased since 2019 (home bias decreased, notably in Congo and Gabon). - Drivers: - Structural: lack of diversified investor base; end of central bank direct lending; banks’ appetite for perceived low-risk profitable securities. - Cyclical: increased bond issuance for pandemic spending; securitization of domestic arrears. - Regulatory: growing share of sovereign exposures benefiting from zero-risk weight; non-compliance with concentration limits. - Implications: - Reinforces a vicious circle linking bank soundness to public finances. - Crowding out of the private sector and impeded diversification. - Heightened cross-border contagion via banking groups. ### FX regulations, repatriation, and operational improvements - Enforcement outcomes: - FX surrendered to BEAC steadily surged; implementation of FX regulations boosted FX repatriations (near fourfold increase in volume surrendered between 2018 and 2022). - Dialogue and operational improvements reduced average FX request processing time to 24 and 48h in 2022 for regional and international transactions (from 20 days in 2017). - BEAC rolled out an IT platform (e-transfer) with e-tracking; set up hotline and monthly exchange framework with users. - Staff recommendations: - Continue transparent and consistent implementation of FX regulations; reduce technical delays. - Finalize Memorandum of Understanding listing recurrent private sector difficulties obtaining FX. - Strengthen capacity to map FX accounts held abroad by governments, SOEs and public entities to ensure greater repatriations. - Ensure consistency between national legislation and regional FX regulations. - Extractive sector arrangements: - BEAC awaits tripartite escrow account contract signature (extractive companies, national governments, BEAC) to secure repatriation timelines: over three years for accounts held abroad, immediate for those already held in CEMAC. ### Containing BEAC balance sheet risks and safeguards - Staff recommendations to BEAC: - Adjust haircuts on collateral based on market intelligence. - Establish exposure limits by bank and/or country and provision for potential losses. - Monitor repayments of past statutory advances and the stock of bonds bought under the COVID-related bond purchase program. - Monitor exposure to BDEAC. - Concerns on arrears securitization: - Possible unintended consequences: weakening fiscal discipline; reinforcing bank-sovereign nexus; excessive buildup of government securities on BEAC’s balance sheet. - Progress on safeguards: - BEAC transitioned to IFRS and is implementing safeguards recommendations, particularly on internal audit and cyber security. ### Policy priorities and recommended actions (detailed) - Stepping up buffers and protecting poorer groups: - Continue saving part of the oil windfall; align with planned fiscal consolidation (2.2 percent of non-oil GDP) in 2023. - Improve non-oil tax revenue collection: broaden tax base; phase out tax exemptions; advance interest limitation rules; assert taxing rights on multinationals. - Fight tax and customs fraud; modernize revenue administration; improve VAT refund systems. - Enhance spending efficiency: phase out inefficient subsidies, roll out targeted social safety nets, rationalize wage bill and non-priority recurrent spending, manage SOE transfers. - Implement PIMA and consider Climate Change Assessments (CCA); adopt PPP and procurement strategies to manage fiscal risks. - Anchoring inflation expectations and shoring up external viability: - BEAC should stand ready to tighten further if inflation or reserves warrant; maintain a tightening bias given external uncertainties. - Mop up excess liquidity: raise absorption rates, increase auctioned amounts, use AFBL, and move toward full allotment. - COBAC, supported by BEAC, to tackle weak banks and strengthen supervision and capital adequacy. - Preserve financial stability amid prudential normalization: - Provide COBAC with adequate human and financial resources. - Escalate supervisory actions for undercapitalized banks; conduct asset quality reviews and enforce concentration limits. - Reduce zero-risk weight treatment on government exposure progressively. - Diversify investor base in government securities (pension funds, insurance companies, asset managers, diaspora, non-resident funds) and operationalize single central depository by end-2024. - Digital payments, crypto, and CBDC: - Develop capacity to monitor digital payments risks; advance crypto-related regulatory framework with coordination across BEAC, COBAC, COSUMAF, and GABAC. - Ensure tokenization and crypto initiatives preserve financial integrity, governance, consumer protection, and AML/CFT compliance. - Assess CBDC feasibility via cost-benefit analysis considering impacts on bank intermediation and dual payment system costs. - Regional surveillance and convergence: - Adopt sanction mechanism to strengthen enforceability of regional surveillance. - Preconditions for stronger compliance: updated post-COVID triennial convergence plans, operational national multilateral surveillance units, domestic arrears clearance and debt management strategies, transposition of regional tax and PFM directives, improved statistical reporting and a data portal. ### NFA policy assurance revision request and staff appraisal - BEAC request: - Upward revision of regional policy assurance on the NFA for end-June 2023 to EUR 4.47 billion (original end-June 2023 target set at EUR 3.93 billion). - Proposed end-December 2023 NFA target: EUR 4.32 billion. - Rationale: base effect from end-December 2022 overperformance partly discounted for downside factors totaling EUR 669.2 million (weaker-than-initially-expected CAB; likely budget support shortfalls in some member countries). - Staff appraisal and support: - Staff supports updated policy assurance on NFA accumulation to bring NFA to €4.47 billion (end-June 2023) and € 4.32 billion (end-December 2023). - Staff emphasizes renewed prudence in managing oil windfalls and calls for accelerated reserves build-up amid heightened uncertainties (oil volatility, inflation persistence, funding squeeze, global tightening, debt vulnerabilities, geo-economic fragmentation, Sudan-related spillovers). ### Fuel subsidy reforms: country actions and fiscal impacts - Country actions and fiscal effects (selected): - Cameroon (early February 2023): diesel +25 percent, gasoline +16 percent, kerosene +60 percent; accompanied by social mitigation (minimum wage increase, public wages increase, doubled cash transfers). - C.A.R. (early January 2023): diesel +70 percent, gasoline +50 percent, kerosene +78 percent; no social mitigation measures implemented. - Chad (mid-April 2023): diesel +27.7 percent at the pump; expected savings ~0.1 percent of GDP in 2023 and 0.2 percent of GDP in 2024. - Congo (early January 2023): gasoline and diesel +5 percent; mitigation: suspension of road tax payment, 50 percent reduction of the patent, reduced toll fees. - Gabon: removed fuel subsidies for businesses in September 2022; household subsidy decision pending. - Equatorial Guinea (March 2022): gasoline +3 percent, diesel +34 percent; generated savings of 0.1 percent of GDP. - Recommendations: - Complete initial subsidy reform steps to achieve planned savings. - Accelerate stakeholder consultations and roll out targeted social assistance, possibly with donor support. ### Conditionality and program linkages - The Fund’s share of external financing for the region is nearly at 50 percent in 2023. - Meeting proposed NFA policy assurances is critical for continuation or approval of Fund financial support for Fund-supported programs in CEMAC member countries. - Timely donor disbursements and completion of program reviews are essential to sustain recovery and reserve accumulation. *Source: IMF staff report content provided in the supplied PDF chapter/section (content unit 1caeea2023002).* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Context and risks - CEMAC benefited from favorable hydrocarbon prices in 2022, supporting a firmer economic recovery and a strengthened external position, with external reserves building up faster in recent months, although still below adequate levels. - Real GDP growth: 1.1 percent in 2021; 2.8 percent in 2022. - External reserves: reached 4.1 months of prospective imports at end-December 2022 (reserve adequacy metric for a resource-rich monetary union: 5 months). - Inflation: more than doubled to 6.5 percent at end-2022; non-food inflation rose to 4.7 percent at end-2022. - Downside risks include hydrocarbon prices volatility, food insecurity, financial stability risks, higher inflation, funding squeeze, and debt vulnerabilities. - Oil price caution: WEO oil prices for 2023 are 15 percent lower than in the October forecast; a recent short-lived fall of the Brent to $71/barrel is highlighted as a warning sign. ### Policy recommendations (summary) - Monetary policy and reserves - Stand ready to tighten monetary policy further to anchor inflation expectations. - Mop up excess liquidity. - Resolve pending challenges to a complete, transparent, and consistent implementation of the foreign exchange regulations. - Fiscal policy and social protection - Tackle recent fiscal slippages. - Save part of the oil windfall. - Bring subsidy reforms to completion and roll out targeted compensatory safety nets for poorest groups. - Financial stability - Urgently strengthen COBAC’s supervisory capacity. - Trigger resolution of non-viable banks and tackle liquidity-stressed ones. - Ensure banks adequately account for sovereign exposure and meet concentration limits. - Monitor emerging risks from new digital payments and cybersecurity. - Structural reforms and diversification - Accelerate governance and productivity-enhancing structural and regulatory reforms. - Broaden the tax base beyond the hydrocarbon sector. - Deepen regional trade integration. ### Background and recent developments - Reform progress - PREF-CEMAC’s annual report: 56 percent of the action matrix implemented as of end-2023Q1, up from 42 percent in 2022Q3. - Business plan for the single central depository for government securities adopted in January 2023; full operationalization rescheduled to end-2024. - Encouraging steps in economic diversification: creation of light local industries (textile, agro-industry, wood). - Regional directives adopted to deepen regional trade integration, but enforcement undermined by coordination challenges along borders and corridors. - Delays on endorsing/implementing regional PFM and tax directives (roll-out of treasury single accounts; debt management and arrears clearance strategies; strategy and directive on PPPs). - Fund-supported programs - Mixed progress with delays in completing some reviews. - New 3-year ECF arrangement approved for C.A.R. - Program reviews with Congo and Cameroon completed with delays. - Third review of Gabon’s program pending due to recurrent external debt arrears, fiscal slippages, and slower structural reform progress. - First and second program reviews with Chad completed at end-2022 after debt restructuring under the G20 Common Framework. - Discussions ongoing on a possible Fund arrangement in 2023H2 with Equatorial Guinea. ### Fiscal and external balances - Fiscal balances - Overall fiscal balance (excl. grants): surplus of 2.1 percent of GDP in 2022, up from a deficit of 1.9 percent of GDP in 2021 (improvement driven largely by higher oil revenue). - Public debt: 51.7 percent of GDP at end-2022, down from 56.5 percent of GDP in 2021. - Non-oil primary fiscal deficit (incl. grants): deteriorated by 0.7 percentage points of non-oil GDP during 2021–22, reflecting costly subsidies and slower non-oil revenue collection due in part to pandemic- or food-related tax exemptions. - Debt vulnerabilities remain elevated, notably in Cameroon, C.A.R., Chad, and Congo. - External sector - Current account balance: surplus of 2.3 percent of GDP in 2022, from a deficit of 2 percent of GDP in 2021. - Gross FX: 4.1 months of prospective imports at end-December 2022, 0.6 points higher than expected at the time of the last review. - End-December 2022 regional policy assurance on the NFA (EUR 3.39 billion) estimated to have been met by a margin of EUR 1.44 billion. - Drivers of FX overperformance: improved trade balance (surge in gas export receipts in Equatorial Guinea and Cameroon), large donor support at end-2022 (Cameroon), delayed FX-based bank recapitalization, larger-than-projected FX repatriations amid more rigorous enforcement of FX regulations. - FX surrendered to BEAC steadily surged in the past two years. ### Monetary and banking sector developments - Monetary policy actions - BEAC raised its policy rate by 50 bps to 5 percent on March 27 (a cumulative 175 basis points increase since November 2021). - Tightened banks’ refinancing conditions and discontinued weekly liquidity injections after scaling them back since June 2021. - Marginal financing window rate increased to 6.75 percent to keep the 175-basis point corridor unchanged. - Volumes at the marginal lending facility window increased by 16 percent between September and December 2022. - Higher auction participation in the main liquidity window and greater interbank market dynamism since 2022H2. - Persistent excess bank liquidity continues to impair monetary policy transmission. - Liquidity absorption and transmission - Absorption rate increased by only 55 basis points to 0.75 percent since February 2022, then slightly raised to 0.80 percent in March 2023. - Monetary policy transmission weak due to persistent excess bank liquidity concentrated in a few banks. - Autonomous factors of banking liquidity (AFBL) peaked at end-December 2022, driven by a sharp increase in the NFA amid high oil prices and lower net credit to governments. - Banking system soundness - Onsite inspections resumed after end of temporary COVID-related forbearance measures in July 2022; findings and an internal COBAC study point to a limited impact of COVID loans on system soundness, with heterogeneity across banks. - Capital adequacy: stabilized at 14.1 percent in 2022Q4, but several banks are severely undercapitalized or insolvent. - Reported NPL ratio: 17.7 percent of total gross loans in 2022Q4. - Short-term liquidity ratio: 175 percent as of 2022Q4, but liquidity is segmented with several banks below 100 percent. - Loan portfolio: grew 6 percent year-on-year in 2022Q4, supported by strong deposit growth. - Bank exposure to sovereign - Bank exposure to sovereign (loans and securities): about 30 percent of total assets at end-2022, up from 10 percent at end-2015. - Several banks have exposure above 50 percent to CEMAC governments, posing significant risks to financial stability (cross-country contagion, banking groups). - Drivers of increased sovereign exposure: - Structural: absence of a diversified investor base in the government bond market, end of central bank’s direct lending to governments, commercial banks’ appetite for profitable securities perceived as low risk. - Cyclical: increased bond issuances to finance pandemic-related spending; securitization of government domestic arrears. - Regulatory/supervisory: growing share of sovereign exposures benefit from a zero-risk weight; non-compliance with concentration limits by several banks. - Risk: potential crowding out of the private sector could impede diversification efforts. ### Surveillance, buffers, and reform priorities - Need to step up buffers build-up to cushion volatile oil prices while protecting poorer groups. - Anchor inflation expectations and shore up external viability through tighter monetary policy, liquidity management, and full implementation of FX regulations. - Preserve financial stability amid the normalization of prudential regulation by strengthening supervision, resolving non-viable banks, addressing sovereign concentration, and monitoring fintech/cybersecurity risks. - Press ahead with the regional surveillance framework and accelerate reforms for growth, inclusiveness, and diversification: governance and productivity-enhancing structural and regulatory reforms, broaden the tax base beyond hydrocarbons, and deepen regional trade integration. June 8, 2023 *Prepared by IMF staff for common policies in support of CEMAC member countries’ IMF-supported programs.* ### 11. CEMAC member countries used most of the 2021 allocated SDR (Figure 3). In most ### 11. CEMAC member countries used most of the 2021 allocated SDR (Figure 3). In most ### Use of SDRs - CEMAC member countries used most of the 2021 allocated SDR. - In most countries, SDRs were used broadly in line with staff guidance. - Cameroon and Gabon— which had committed to save at least half of their allocation— recently further drew down their SDRs on account of much higher borrowing costs unforeseen at the time of program design. - These additional withdrawals did not hamper the targeted NFA accumulation. - Figure note: Drawn 2022, and 2023 are BEAC projections. - Sources: Regional Authorities and IMF Staff Calculations ### Outlook and key macro projections - Real GDP growth is projected to reach 3 percent in 2023, or 0.4 points lower compared to the previous vintage owing to a slower-than-expected recovery in hydrocarbon production in Equatorial Guinea, partly offset by new oil fields expected to come on stream in Congo. - WEO oil price forecasts remain broadly favorable to CEMAC despite being lower than in the previous vintage. - Medium-term growth is expected to firm up, supported by stronger reform implementation, improved governance, business climate, and access to finance. - Inflation is projected to decelerate to 4.3 percent by end-2023, reflecting an assumed tightening of the policy mix and declining global energy and food prices; this represents a 1.2 percentage points upward revision relative to prior expectations. - Inflation is expected to return below the regional 3 percent convergence criteria by 2025. - The region’s overall fiscal balance (excluding grants) for 2023 is projected at 0.4 percent of GDP—0.9 percentage points lower than projected in December 2022—owing to policy recalibrations to cushion the social impact of fuel subsidy reforms. - The non-oil primary fiscal deficit (including grants) is projected to improve by 2.2 percentage points to 5.5 percent of non-oil GDP in 2023, and is expected to improve to around 4 percent of non-oil GDP in the medium term. - Public debt is expected to increase to 52.1 percent of GDP in 2023—driven by the validation of new domestic payments arrears in Congo—before declining to about 45 percent over the medium term. - The CAB is projected to deteriorate to -2.5 percent of GDP in 2023, driven by lower hydrocarbon exports; the CAB gradually reverts to just above its historical average (-3 percent of GDP) over the medium term. - Net capital inflows are expected to more than offset CAB deterioration and sustain reserve accumulation over the medium term through lower debt repayments from 2024 onwards (mostly by Congo and Chad) and higher FDI. - The Fund’s share of external financing for the region is nearly at 50 percent in 2023. - The reserve coverage ratio is projected to rise to close to 4½ months of prospective imports in the medium term, slightly below staff’s adequacy target for a resource-rich monetary union (5 months of imports). ### Balance of risks - Overall: balance of risks remains tilted to the downside. - External risks: - Commodity prices: A larger-than-forecast decline in commodity prices linked to a stronger slowdown in global demand, and the global transition to low-carbon economies, could lower demand for CEMAC exports, adversely affecting public finances, external stability, and social indicators. - Global financial conditions: Stronger-than-expected tightening, including in the Eurozone, or continued tensions in financial markets could sharpen risk premia and raise debt service and rollover risks. - Geo-economic fragmentation: Deepening fragmentation may reduce supply of external concessional financing, adding to budget support shortfalls and slowing external reserve accumulation. - Domestic risks: - Fiscal policy: Failure to raise spending efficiency or improve non-oil revenue collection—particularly should multiple Fund-supported programs in the region go off-track—could consume the oil windfall, delay reserve accumulation, heighten debt vulnerabilities, and necessitate more aggressive monetary policy tightening. This could also increase governments’ rollover and financing risks, especially given the nearly depleted 2021 exceptional SDR allocations, the more restricted access to international markets, and banks’ increasingly low take-up of governments’ issuances in the regional securities market. - Cost of living: Persistently high inflation could weigh on growth, entrench inflation expectations, and threaten food security; preexisting food security risks could be exacerbated by potential humanitarian spillover of the conflict in Sudan. - Financial stability: The materialization of the above risks, along with elevated global economic uncertainty, banking turmoil, and existing vulnerabilities (tight bank-sovereign nexus and high NPLs), could further weaken bank balance sheets. - Structural reforms: Slow progress on structural reforms and failure to adhere to targets under Fund-supported programs may delay donor support, heighten vulnerabilities, and postpone growth benefits. - Socio-political environment: Continued or worsening security challenges, weak governance and AML/CFT frameworks, higher corruption perceptions, rule of law weaknesses, and post-election instability may weigh on growth. - Climate risks: The region remains vulnerable to climate-related shocks and natural disasters (floods, drought, etc.), amplified by the absence of a CEMAC-wide adaptation strategy to climate change. - Extractive sector (upside): Stricter compliance with FX regulations and possible higher oil prices related to announced cuts in OPEC+ production could lead to greater repatriation of export proceeds; accelerated reforms could bolster resilience. ### Policy priorities: Preserving internal and external stability while sustaining recovery - Short-term priorities: keep inflation in check, continue building buffers, preserve financial stability, sustain nascent recovery, and protect vulnerable populations. A. Stepping up buffers and protecting poorer groups - Urgent need for renewed prudence in managing oil windfalls and tackling recent fiscal slippages. - Continue saving part of the oil windfall to strengthen fiscal and external sustainability, in line with planned fiscal consolidation (2.2 percent of non-oil GDP) in 2023. - Measures to meet fiscal objectives: - Properly manage tax compliance risks in the extractive sector, improve non-oil tax revenue collection, and enhance spending efficiency. - Improve non-oil tax revenue mobilization by broadening the tax base, phasing out tax exemptions, advancing interest limitation rules, and better asserting taxing rights over income from multinationals. - Raise potential additional revenue by stepping up the fight against tax and customs fraud, modernizing revenue administration, and improving VAT refund systems. - Timely endorsement of new regional tax directives (income tax, tax expenditures and customs procedures) and implementation of the new VAT directive to boost revenue collection. - Enhance spending efficiency by gradually phasing out inefficient subsidies while rolling out targeted social safety nets; complete first phases of fuel subsidy reforms to yield expected savings over the medium term. - Seek further savings from rationalizing other outlays, including the wage bill, non-priority recurrent spending, and costly transfers to SOEs. - Secure efficiency gains on public investment management via Public Investment Management Assessments (PIMA), possibly combined with Climate Change Assessments (CCA), accelerate PIMA recommendations implementation, and systematize periodic regional follow-up. - Swiftly adopt draft strategies and directives on PPPs and public procurement to manage related fiscal risks and costs. - Extractive sector tax compliance: - Sustain efforts to strengthen capacity in international taxation (including transfer pricing) over the medium term. - Key steps: (i) set up a dedicated team within the tax administration; (ii) ensure access to third-party information and conduct comprehensive audits of multinational enterprises, free of political interference. - PFM and debt transparency: - Swiftly update and implement the regional action plan to support PFM reforms. - Adopt and implement comprehensive domestic arrears clearance and medium-term debt management strategies; prevent resurgence of new arrears through fiscal discipline and better alignment of expenditure commitments with cash forecasts and procurement plans. - Low-income member countries should only resort to non-concessional external financing if consistent with safeguarding debt sustainability and Fund program limits. - Enhance debt transparency, particularly on non-guaranteed SOE debt, and avoid non-transparent natural resource-backed borrowing contracts. - Treasury Single Accounts (TSA): - Progress in developing an IT platform at BEAC to facilitate roll-out of TSAs. - BEAC encouraged to ensure platform readiness for operationalizing TSAs in the two advanced pilot countries (Cameroon and Gabon) by 2023Q3. - Required actions: timely organization of a peer-learning workshop (BEAC, treasuries, public entities, banks) and signing a standard convention between BEAC and all Treasuries. - Once operational, TSAs should help ensure more efficient use of public resources. - SOE governance: - Monitor SOE governance and performance to limit fiscal risks; systematize fiscal risk statements in all member countries with a specific SOE section. B. Anchoring inflation expectations and shoring up external viability - Staff welcomed BEAC’s monetary policy tightening and recommended readiness to tighten further if needed to anchor inflation expectations. - Further tightening needed if inflation continues to rise or external reserves deviate from the targeted path; requires policy rate increases and more effective liquidity absorption. - A tightening bias is warranted given heightened external uncertainties, possible second-round effects of fuel subsidy reforms, and the significant narrowing of the BEAC-ECB policy rate spread compared to its historical average. - Authorities’ views (BEAC): - BEAC concurred that evidence of rising inflation or reserve deviations would warrant further tightening but cautioned against undercutting the nascent recovery with overtightened policy. - BEAC noted inflation in CEMAC remains far below peers, transmission lags from cumulative tightening since November 2021, and that domestic climatic factors (poor harvests linked to floods) have led inflation drivers. - BEAC argued the narrower BEAC-ECB spread is not a key driver of capital flow movements due to limited market integration from CEMAC’s restricted capital account. - BEAC highlighted recent overperformance of FX accumulation despite the narrower spread, while reserves remain below staff’s recommended target. - Liquidity management and banking sector measures: - Staff welcomed discontinuation of weekly liquidity injections and urged BEAC to mop up excess liquidity to improve monetary policy transmission. - The recent 5 bps increase in the absorption rate is not sufficiently attractive to absorb banks’ excess liquidity. - BEAC should significantly raise the rate on liquidity absorption operations until it gets closer to the main policy rate, increase auctioned amounts, build on AFBL, and ultimately switch to full allotment to strengthen transmission. - COBAC, supported by BEAC, should tackle weak banks, strengthen supervision and capital adequacy to shore up confidence. - Authorities’ views: BEAC agreed mopping up excess liquidity is pivotal and intends a gradual but meaningful increase in absorption rates and volumes, factoring in consultations with foreign banks and expected liquidity shifts from TSA roll-out. - Staff urged BEAC and COBAC to proactively engage with banks facing high liquidity needs: - Tackle liquidity needs before structural dependence on BEAC support emerges. - Tighten conditionality for structurally liquidity-stressed banks by requesting credible refinancing plans and continuous decline in dependence; consider triggering resolution for continued non-compliance. - Address root causes of banks’ liquidity woes, notably governments’ need to run primary fiscal surpluses or find sustainable financing to settle domestic arrears. *Sources: Regional Authorities and IMF Staff Calculations* ### 23. Staff encouraged BEAC to contain risks to its balance sheet. ### 23. Staff encouraged BEAC to contain risks to its balance sheet. ### Containing BEAC balance sheet risks - Staff recommendations: - Continue to adjust haircuts on collateral based on market intelligence to reflect risks. - Establish exposure limits by bank and/or country. - Provision for potential losses. - Monitor repayments of past statutory advances and the stock of bonds bought in the context of its COVID-related bond purchase program (which started maturing in 2022Q2). - Monitor exposure to the regional development bank (BDEAC). - Concerns reiterated by staff about arrears securitization: - Possible unintended consequences including weakening fiscal discipline, reinforcing the bank-sovereign nexus, and an excessive buildup of government securities on BEAC’s balance sheet through refinancing. - Authorities’ views: - BEAC agreed with staff’s advice and reiterated its readiness to keep adjusting haircuts on collateral and set exposure limits by bank and/or country. - BEAC was less forthcoming on applying larger haircuts to securities issued from arrears securitization to reflect the lower credit quality of the underlying assets. - BEAC reconfirmed that repayments are being made as scheduled on past statutory advances, its stock of COVID-related bonds, and its COVID-related credit line to the regional development bank (BDEAC). - Text Table 3. CEMAC: Past Domestic Arrears Securitization Experiences (Billions of CFAF) - CountryAmountMaturity (years)Valuation Date - 77.6 - 2-5 - 976-10 - 9711-15 - 14.7 - 2-5 - 1.26 - 92<= 1Dec. 17, 2021 & Jan. 1, 2023 - 682-5Dec. 17, 2021 & Mar. 16, 2022 - 150.62-5 - 217.26-9 - CongoMar. 31, 2022 & Fev. 14, 2023 - Cameroon - Dec. 31, 2021Equatorial Guinea - C.A.R.Dec. 04, 2020 - CEMAC - COVID-related program stocks and flows (as reported by staff): - COVID-related bonds stand at CFA 260 billion (end-April 2023), from a starting stock CFAF 430 billion. - COVID-related credit line to BDEAC stands at CFAF 49 billion (early May 2023), from a starting line o f CFA 150 billion. ### FX regulations enforcement and operational improvements - Findings: - Rigorous enforcement of FX regulations has continued to bear fruit, with FX surrendered to BEAC steadily rising, though room remains for more efficient enforcement. - Staff recommendations: - Continue to implement FX regulations transparently and consistently. - Pursue efforts to reduce technical delays. - Finalize the draft Memorandum of Understanding listing recurrent difficulties faced by the private sector for obtaining FX to ensure speedy processing. - Strengthen capacity to map out FX accounts held abroad by governments, SOEs and all public entities, possibly with support from the Bank of International Settlements, to ensure greater FX repatriations by the public sector. - Ensure consistency between national legislations and regional FX regulations. - Continue constructive dialogue with the extractive sector to ensure smooth enforcement of repatriation of funds dedicated to the rehabilitation of oil sites (RES). - Authorities’ views and operational progress: - Dialogue with banks and businesses, plus assignment of dedicated staff, reduced average FX request processing time to 24 and 48h in 2022 for regional and international transactions, respectively, from 20 days in 2017. - BEAC set up a hotline and a monthly exchange framework with users, and rolled out an IT platform (e-transfer) with an e-tracking module to provide real-time updates on processing status and rejection motives. - BEAC awaits a tripartite signature of the escrow account contract (extractive companies, national governments, and BEAC) to secure repatriation timelines: over three years for accounts held abroad, and immediately for those already held in the CEMAC. - Extractive sector concerns (noted by staff): - (i) agility and flexibility of use of the escrow account; (ii) remunerations; (iii) guarantee against seizure; and (iv) arbitration rules in case of litigation. ### Safeguards assessment and internal controls - April 2022 findings: - BEAC maintained strong governance arrangements and transitioned to international financial reporting standards (IFRS). - Areas for strengthening: internal audit mechanisms, risk management, cyber-resilience, and business continuity framework. - Progress: - BEAC is making progress toward implementing most safeguards recommendations, particularly on enhancing internal audit and cyber security. ### Preserving financial stability amid normalization of prudential regulation - Staff called for collective action to preserve financial stability, emphasizing the need to: - Provide COBAC with adequate human and financial resources. - Enforce BEAC’s refinancing policies for liquidity-stressed banks more strongly. - Recapitalize, when relevant, or resolve weak banks in a timely manner by national governments. - Accelerate implementation by national governments of comprehensive domestic arrears clearance and prevention strategies. - Supervisory and regulatory recommendations: - COBAC should step up onsite post-COVID supervisory inspections and ensure a prudent approach to dividend distribution. - Conduct comprehensive and rigorous asset quality reviews to estimate needed loan-loss provisions and capital shortfalls. - Ensure undercapitalized banks submit credible medium-term recapitalization plans and establish NPL reduction strategies; escalate supervisory actions if delays occur, including early intervention or resolution powers. - Ensure banks reduce and adequately account for sovereign risk; progressively enforce existing concentration limits and move away from zero-risk weight on government exposure. - COBAC and BEAC should work together to ensure primary dealers do not hold all new sovereign issuances. - COBAC to prioritize its work agenda on: risk-based prudential and AML/CFT supervision, modernizing the regulatory framework (Basel II/III and AML/CFT), strengthening bank resolution framework, developing stress tests, and improving risk management and governance. - Market structure and issuance: - Staff highlighted rising share of government securities issued on the regional stock exchange (BVMAC), creating market dualism that could hamper secondary market development and liquidity. - Recommendations: intensify awareness campaigns on primary market improvements, lengthen government securities maturity, diversify investor base (pension funds, insurance companies, asset managers, diaspora, non-resident funds), step up financial literacy and awareness campaigns, and operationalize the company in charge of the single central depository by end-2024. - Encourage member countries to ensure BVMAC has adequate resources, including clearing arrears vis-à-vis BVMAC. ### Digital payments, crypto, and CBDC considerations - Staff recommendations and observations: - Regional supervisors should develop capacity to monitor and manage new risks posed by digital payments. - Welcome C.A.R.’s amended cryptocurrency law (Parliament: March 23) resolving institutional inconsistency from unilateral adoption of crypto as legal tender. - Advance a crypto-related regulatory framework and enhance coordination across BEAC, COBAC, COSUMAF, and GABAC when issuing laws/regulations. - Address clarity and consistency concerns between regulation No-01-2022 and BEAC/COBAC existing mandates and decisions (including COBAC Decision D-2022/071 prohibiting cryptocurrency use by entities under its remit). - Ensure tokenization initiatives do not compromise financial integrity, governance, consumer protection, and AML/CFT compliance. - BEAC should diligently account for possible impact of digital payments on operations and monetary policy; CBDC exploration should be based on cost-benefit analysis considering impacts on bank intermediation, dual payment system costs, and digital infrastructure quality and access. ### Regional surveillance, convergence criteria, and policy assurances - Sanction mechanism for regional surveillance: - Staff expressed concern about setbacks in operationalizing the draft sanction mechanism adopted by UMAC’s ministerial council in January 2021; only adoption by the Conference of Heads of States was pending, but some member countries questioned its merit in March 2023. - Staff urged swift adoption to strengthen enforceability and credibility of regional surveillance. - Preconditions to strengthen compliance with convergence criteria: - Member countries submit updated post-COVID triennial convergence plans. - Fully operationalize national multilateral surveillance units. - Adopt and implement comprehensive national domestic arrears clearance and debt management strategies. - Transpose regional tax and PFM directives and switch to program-based budgeting in a timely manner. - Make faster progress on the 2021–30 regional statistical program; improve external statistics and data transparency, including regular reporting of financial soundness indicators and monetary and financial statistics to the Fund. - Set up a data portal to disseminate key macroeconomic and financial data in all member countries. - Harmonize regional view and feasibility/modalities for a contemplated multilateral stabilization fund to channel part of oil windfalls. - Policy assurances and outcomes: - Regional authorities maintained tightening course of monetary policy and liquidity management, raising policy rate and discontinuing weekly liquidity injections. - BEAC stands ready to mop up excess liquidity by increasing rates and volumes of liquidity absorption within a relatively short timeframe. - Resolution of operational compliance challenges enabled more rigorous enforcement of FX surrender and repatriation requirements to the extractive sector after October 2022 grace period. - The regional policy assurance on the NFA set for end-December 2022 (EUR 3.39 billion) was met with a comfortable margin (EUR 1.44 billion). *Source: IMF staff report content provided in the supplied PDF chapter/section.* ### 40. BEAC requests an upward revision to the regional policy assurance on the NFA for ### 40. BEAC requests an upward revision to the regional policy assurance on the NFA for ### Revision request and rationale - BEAC requests an upward revision to the regional policy assurance on the NFA for end-June 2023 to EUR 4.47 billion to account for the overperformance at end-December 2022. - The original NFA target for end-June 2023 set at the December 2022 Board meeting was EUR 3.93 billion; an upward revision is warranted based on the base effect from the overperformance at end-December 2022, partly discounted for downside factors totaling EUR 669.2 million. - Downside factors identified: (i) a weaker-than-initially expected CAB; and (ii) likely budget support shortfalls in some member countries (Congo and Gabon). - Member countries stand ready to implement offsetting policy adjustments should external financing support fall short of expectations, consistent with commitments under Fund programs. - Staff and BEAC agreed that an accelerated external reserves build-up is needed before the positive outlook from favorable hydrocarbon prices fades. - Continued and more rigorous enforcement of FX regulations, including to the extractive sector once discussions are completed, is expected to continue ensuring greater FX repatriation. ### Proposed targets and timing - The attached follow-up letter (described in the text) proposes: - Revision of the end-June 2023 NFA target (proposed new assurance: EUR 4.47 billion). - A proposed end-December 2023 NFA target covered by updated policy assurances set at EUR 4.32 billion. - The lower proposed NFA target for end-December 2023 compared to end-June 2023 reflects an expected larger deterioration of the CAB in 2023H2 compared to 2023H1. - Rationale for stronger 2023H2 impact: oil prices started decreasing significantly in March 2023, and the usual 9–12-month transmission lag linked to forward oil sale contracts implies a stronger impact on oil export receipts in 2023H2 than in 2023H1. - In the medium term, gross reserves are projected to reach about 4½ months of imports. - The proposed NFA targets for end-June 2023 and end-December 2023 are subject to risks from heightened external uncertainties, including volatility in the oil market and donor support shortfalls. ### Staff appraisal—macroeconomic context and policy stance - Renewed prudence in managing oil windfalls before favorable oil prices dissipate is key to rebuilding adequate buffers to enhance CEMAC’s resilience to potential shocks. - Favorable hydrocarbon prices eased economic headwinds in CEMAC in 2022, helping to gradually firm up the nascent post-COVID recovery and strengthen its external position. - FX has accumulated faster in recent months, though gross reserves are still below adequate levels. - The positive outlook is broadly expected to prevail in 2023, predicated on persistently favorable oil prices, along with resolute correction of recent fiscal slippages. - Staff calls on the authorities to renew prudence in managing oil windfalls, consistently with Fund-supported program objectives and surveillance advice, given heightened uncertainties including: - volatility in oil markets, - risk of higher inflation persistence, - the funding squeeze, - a stronger-than-expected tightening of global financial conditions, - debt vulnerabilities, - the geo-economic fragmentation, - humanitarian and security-related spillovers from the ongoing conflict in Sudan. ### Monetary policy and liquidity management - BEAC tightened monetary policy and liquidity management since 2021; actions include: - Raising its policy rate by 50 bps to 5 percent at end-March 2023 to tame rising inflation and support external reserves accumulation—a cumulative 175 basis points increase since November 2021. - Tightening banks’ refinancing conditions and discontinuing weekly liquidity injections in the monetary market. - Staff advises BEAC to stand ready to tighten further if needed, guard against excessive gradualism, and react promptly to incoming data. - Staff welcomes BEAC’s intention to start a meaningful increase in the rate and volumes of its liquidity absorption within a relatively short timeframe to mop up excess liquidity and strengthen monetary policy transmission. - A transparent and consistent enforcement of FX regulations, including to the public sector and extractive companies, is expected to help ensure larger FX repatriations. ### Regional surveillance and governance concerns - The recent setback in operationalizing the draft new sanction mechanism for breaches of regional surveillance rules is concerning. - Recommendation: The CEMAC Commission should step up concertation efforts with the UMAC ministerial council to bring the adoption process back on track to strengthen enforceability and credibility of the regional surveillance framework. - The Commission should urge member countries to make faster progress on previously identified key prerequisites for ensuring greater compliance with the regional convergence criteria. ### Financial stability and prudential measures - Strong collective action from national and regional authorities is needed to preserve financial stability, focusing on: - Addressing COBAC’s longstanding understaffing issues. - Resolutely resolving weak banks or ensuring faster government decisions on banks’ recapitalization where relevant. - Stepping-up the roll-out of comprehensive domestic arrears clearance and prevention strategies. - Properly tackling the tightening bank-sovereign nexus. - On the bank-sovereign nexus, COBAC should reduce and eventually shift away from zero-risk weight on government exposure to ensure banks account adequately for rising bank-sovereign risk. - COBAC should maintain prudence in approving dividend distribution given persistent prudential breaches (capital adequacy and concentration limits) and high and likely rising NPLs. - Strengthening COBAC’s supervisory capacity is pivotal for ensuring faster progress on Basel II/III implementation and strengthening risk-based prudential and AML/CFT-compliant supervision. ### Digital payments, crypto, and supervisory coordination - Strengthening the supervisory framework and capacity is necessary to appropriately monitor and manage new forms of risks posed by digital payments. - Regional supervisors should enhance coordination on laws or regulations issuance to ensure consistency across regulatory frameworks related to the use of digital assets. - A consistent crypto-related regulatory framework would help ensure that initiatives such as C.A.R.’s envisaged tokenization of its resource wealth via crypto assets do not come at the expense of financial integrity, governance, consumer protection, and compliance with AML/CFT standards. - BEAC should diligently account for possible impacts of digital payments on its operations and monetary policy conduct. - Pros and cons should be diligently assessed when weighing CBDC feasibility, including potential impacts on bank intermediation, costs of maintaining a dual payment system, and the quality and access to digital infrastructure. ### Fiscal and structural policy recommendations - Strengthening CEMAC’s resilience to potential shocks requires tackling recent fiscal slippages, improving non-oil primary balances, and accelerating reforms. - The recent drops in the price of Brent, coupled with the needed green transition to a low-carbon world economy, renew the urgency to accelerate external and fiscal buffers build-up before favorable oil prices dissipate. - Policies should be brought back in line with ambitious fiscal consolidation paths consistent with Fund-supported programs and surveillance advice, including: - Stepping up non-oil tax revenue collection. - Enhancing spending efficiency. - Phasing out inefficient energy subsidies. - Rolling out targeted social safety nets to protect vulnerable populations. - Accelerating structural, governance and regulatory reforms is essential to enhancing growth diversification and inclusiveness, including faster progress on human capital, business climate, financial inclusion, and regional infrastructure projects. - Implement the regional food self-sufficiency strategy carefully—mindful of avoiding FX or trade restrictions—and combine with research and development activities and coordinated action to enhance resilience to climate shocks to boost domestic agriculture production and food security. *Source: 1caeea2023002 - 40. BEAC requests an upward revision to the regional policy assurance on the NFA for* ### 49. Overall, staff: (i) notes that BEAC met the policy assurance on the NFA provided in the ### 1caeea2023002 - 49. Overall, staff: (i) notes that BEAC met the policy assurance on the NFA provided in the ### Staff assessment and updated policy assurance - Staff notes that BEAC met the policy assurance on the NFA provided in the December 2022 follow-up letter, reflecting: - the improved trade balance, - greater FX repatriation, - tighter monetary policy, - strong donor support, and - delayed FX-based bank recapitalization. - Staff supports the updated policy assurance on NFA accumulation to bring NFA to €4.47 billion and € 4.32 billion at end-June 2023 and end-December 2023, respectively. ### Macroeconomic stability and policy readiness - Member countries, anchored by Fund-supported programs and surveillance advice, stand ready to maintain macroeconomic stability, including through: - tackling recent fiscal slippages, and - maintaining prudence in managing oil windfalls. - Building up FX will depend on timely donor support disbursements. - Member countries stand ready to implement offsetting policy adjustments, should donor support fall short of expectations. ### Conditionality for Fund financial support - Meeting the proposed policy assurances on the NFA is critical for allowing the continuation of (or approval of new) financial support as part of the Fund-supported programs with CEMAC member countries. *Source: IMF staff text as provided in the content unit.* ### 1. External financing needs 1/115512137812020630734471406390763797 ### 1. External financing needs ### External financing and budget support (key figures) - Net IMF Financing: 321281251577151391371201147378348 - Budget support from other donors: 79868466545129368319130255386385 - World Bank: 261502911230849325151191175 - African development Bank: 33827018422013102116498891137 - European Union: 4557166834403203 - France: 154149174111310410456136969 - Other 3/: 1158029075200150 - Commercial borrowing: 00-79595456000000 - Debt relief: 000285104770-1-1-1 - External arrears: 006729-57-38-10-350-35 - Residual financing gap: -1161041130-2520000 Notes: - 1/ After projected/targeted change in gross reserves. - 2/ Refers to the projections of the IMF SR 23/01. - 3/ Includes external financing from the BDEAC in CFAF. ### Fuel subsidy reforms: actions, fiscal impact, and recommendations Findings and country actions: - Most CEMAC member countries have started phasing out fuel subsidies following the surge in global oil prices linked to the war in Ukraine. - Cameroon: - In early February 2023, the government increased domestic retail fuel prices: diesel by 25 percent, gasoline by 16 percent, and kerosene by 60 percent (first increase in seven years). - Accompanied by social mitigation measures: increase in the minimum wage and public wages; and doubling of cash transfers to the vulnerable. - C.A.R.: - In early January 2023, prices increased: diesel by 70 percent, gasoline by 50 percent, kerosene by 78 percent. - No social mitigation measures implemented. - Chad: - In mid-April 2023, government approved a 27.7 percent increase in the price of diesel at the pump. - The measure is expected to yield savings of about 0.1 percent and 0.2 percent of GDP in 2023 and 2024, respectively. - Congo: - In early January 2023, gasoline and diesel prices at the pump increased by 5 percent. - Mitigation measures included suspension of the road tax payment, 50 percent reduction of the patent, and reduction of toll fees. - Gabon: - Government removed fuel subsidies for businesses in September 2022; no decision yet on household subsidies. - Equatorial Guinea: - In March 2022, retail gasoline and diesel prices increased by 3 percent and 34 percent, respectively; kerosene unchanged. - This was the first change in 15 years and generated savings of 0.1 percent of GDP. Fiscal-cost table excerpts (percent of GDP; "Implied fiscal effort" excludes effect from future changes in oil prices): - Cameroon: 2.2 1.2 0.8 0.7 0.4 0.0 0.4 - C.A.R.: 0.1 0.7 N/A 0.6 N/A 0.5 N/A - Chad: 1 1.2 1.2 N/A 1.2 N/A 1.1 N/A - Republic of Congo: 3.2 1.5 0.9 0.7 0.0 0.8 0.0 - Equatorial Guinea: 0.9 0.4 0.4 0.4 0.4 0.4 0.4 - Gabon: 1.4 1.1 0.0 0.9 0.0 0.7 0.0 - CEMAC aggregate lines include: 1.8 1.1 -0.8 -0.4 - Country note: - Chad aggregate estimate does not include implicit fuel subsidies and only includes direct transfer to the national electrical company to produce electricity financed by fuel subsidies. Size of implied policy action is not available due to limited data on actual fuel subsidy distributed by the government. Recommendations and program guidance: - Complete the initial subsidy reform steps to achieve planned savings. - Accelerate stakeholder consultations in countries at early stages of reform to ensure timely phasing out of energy subsidies. - Accompany subsidy reforms with appropriate mitigating measures to cushion social impact and run communication campaigns on merits of reforms. - Accelerate development of targeted social assistance, possibly with donor support. Sources: Regional authorities and IMF staff calculations. Subsidy costs reflect the impact of policy actions taken (C.A.R., Cameroon, and Congo) for 2023 and policy commitments under Fund-supported programs for 2024–25. ### Bank–sovereign nexus: exposure, risks, and implications Key metrics and evolution: - Bank exposure to sovereign risk (loans and government securities) stood at around 30 percent of total assets in 2022, up from 10 percent in 2015. - Significant heterogeneity exists between countries and banks. - Drivers of increased exposure: - Structural factors: absence of diversified investor base in government bond markets; end of central bank’s direct lending to governments; commercial banks’ appetite for profitable securities perceived as low risk. - Cyclical factors: increased bond issuances to finance pandemic-related spending; securitization of government domestic arrears. - Regulatory and supervisory factors: growing share of sovereign exposures benefit from a zero-risk weight; non-compliance with concentration limits by several banks. Macro-financial implications: - High exposure reinforces a potential vicious circle linking bank soundness to public finances, and contributes to macro-financial vulnerabilities. - In absence of a strong financial safety net and ample buffers, banks have limited ability to absorb commodity price shocks. - Over-reliance on government securities as a business model crowds out the private sector, weakening private-sector growth and economic diversification. - Some CEMAC countries rank high relative to other sub-Saharan Africa and global peers on bank-sovereign nexus metrics. Cross-country holdings and contagion risk: - Strong increase in cross-country holding of government securities since 2019, amid large increase of issuances and significant decrease in home bias (particularly in Congo and Gabon). - Banking groups operating across several countries could transmit shocks from one subsidiary or branch to others, amplifying contagion risks. Regulatory detail (COBAC risk weights): - In accordance with COBAC regulation R-2010/01, and unless banks’ claims on member-states are backed by escrow accounts, risk weights range between 0 and 100 percent depending on member-states’ observance of convergence criteria: - accumulation of arrears (65 percent), - negative budget balance (20 percent), - stock of debt above 70 percent of GDP (10 percent), - rate of inflation greater than 3 percent (5 percent). Sources: COBAC and Dehmej (2023). Sources for cross-country holdings: CRCT/BEAC and IMF Staff Calculations. ### Monetary and fiscal policy follow-up (BEAC and regional authorities) Monetary policy tightening and liquidity management: - Inflation: year-on-year inflation accelerated to approximately 6.5 percent at the end of 2022 (above the 3 percent convergence criteria). - BEAC actions: - Continued proactive tightening initiated end-2021 to preserve price stability and external reserves. - Raised its main policy interest rate (the auction rate—TIAO) by 50 basis points to 5.0 percent in March 2023 (a cumulative increase of 175 basis points since November 2021). - Increased the rate for liquidity absorption operations by 5 basis points to 0.8 percent. - Suspended weekly liquidity injections on the money market at the beginning of March 2023 and began weekly liquidity absorption operations immediately. - In March 2023, two banks structurally dependent on BEAC liquidity only had access to the marginal lending facility window. - BEAC has not provided direct monetary financing to member countries (in accordance with its Charter). - BEAC stands ready to tighten monetary policy further should inflation pressures persist. - BEAC committed to tightening liquidity management, including liquidity absorptions in larger amounts, and to starting a meaningful increase in the rate and volumes of liquidity absorption operations to converge towards the policy rate. - Given the substantial initial gap, this increase should be gradual but significant and should take place within a short timeframe. Fiscal outcomes: - Fiscal balances improved in 2022, largely on account of higher oil revenue. - The region’s overall fiscal balance, excluding grants, recorded a surplus of 2.1 percent of GDP in 2022, as opposed to a deficit of 1.9 percent in 2021. - However, the non-oil primary deficit (including grants) widened (text truncated in source). Policy commitments and assurances: - The appendix contains a follow-up letter dated Yaoundé, June 8, 2023, renewing assurances from Community Institutions in support of recovery and reform programs undertaken by CEMAC member countries and reflecting commitments from regional consultations held May 2–16, 2023 between IMF staff and CEMAC Institutions. *Source: IMF staff and regional authorities as presented in the original content unit.* ### 0.7 percentage points of non-oil GDP in 2022, on account of fuel subsidies and a slower improvement ### 0.7 percentage points of non-oil GDP in 2022, on account of fuel subsidies and a slower improvement ### Fiscal developments - Non-oil fiscal balance weakened by 0.7 percentage points of non-oil GDP in 2022, on account of fuel subsidies and a slower improvement in non-oil revenue. - Structural fiscal measures recommended: - Mobilization of non-oil revenue. - Greater control and efficiency in public expenditure. - More effective public financial management. - Reduction of nontargeted subsidies. - Budget outcome and debt dynamics: - Budget surplus (excluding grants) of around 2.1 percent of GDP in 2022 (from a deficit of 1.9 percent of GDP in 2021). - Total public debt declined by 4.8 percentage points to 51.7 percent of GDP at end-2022. - Public debt expected to rise to 52.1 percent of GDP in 2023 reflecting recognition of new domestic payment arrears in Congo, then subsequently decline to approximately 45 percent of GDP in the medium term. - Recommendations for member countries: - Implement plans to clear domestic payment arrears based on transparency and strengthened PFM to avoid recurrence. - Reduce sovereign risk to bank balance sheets through fiscal and PFM measures. ### External position, reserves, and net foreign assets (NFA) - Current account balance: - Improved from a deficit of 2.0 percent of GDP in 2021 to a surplus of 2.3 percent of GDP in 2022. - Expected to deteriorate in 2023 due to a decline in oil exports linked to lower oil prices, but private capital inflows including FDI in the extractive sector should offset this deterioration. - Reserves and NFA: - Foreign exchange reserves increased to cover 4.1 months of imports of goods and services in 2022. - Regional policy assurance on NFA at end-December 2022: EUR 3.39 billion, met with a margin of EUR 1.44 billion. - Requested NFA target revisions for 2023: - Upward revision of end-June 2023 NFA target from EUR 3.93 billion to EUR 4.47 billion. - NFA target for end-December 2023 set at EUR 4.32 billion. - Downside risk factors accounted for in targets total about EUR 669.2 million (linked to stronger-than-expected decline in oil prices; possible FX-based recapitalization of some banks; anticipated delays in budget support disbursement). ### Monetary policy, FX regulations, and BEAC actions - Monetary policy: - Tightening of monetary policy in response to persistently high inflation; inflation reached 6.5 percent at end-2022. - BEAC will continue to implement measures required to strengthen internal and external stability and to take corrective measures, including in monetary policy, if adverse developments occur. - FX regulations and enforcement: - More rigorous enforcement of FX regulations led to greater FX repatriations and contributed to strengthening the currency’s external stability. - Ongoing dialogue with banking and private sectors to ensure FX requests are processed smoothly, speedily, and efficiently, especially after the expiration of the grace period in October 2022. - Procedures to authorize opening of FX accounts in the extractive sector continuing; more than 500 accounts already approved to facilitate larger repatriation of export revenue. - Expectation that RES funds held outside CEMAC will be repatriated to BEAC escrow accounts within three years once a tripartite agreement is reached; funds already held in CEMAC banks to be repatriated immediately. ### Extractive sector transparency and escrow (RES) arrangements - Ongoing discussions to finalize escrow account contracts for funds set aside for rehabilitation of oil sites (RES), covering: - Operational modalities for repatriation and use of RES funds. - Agility of access before the life cycle end of oil sites, remuneration conditions, protection against seizure, and arbitration rules. - BEAC and member countries, along with extractive companies, expected to reach tripartite agreements to repatriate RES funds. - BEAC to discuss with IMF and World Bank staff efforts to increase the extractive sector’s compliance with FX regulations to enhance transparency. ### Banking supervision, financial stability, and crypto developments - Banking supervision: - In July 2022 COBAC lifted temporary prudential forbearance measures applied during COVID-19 normalization. - First post-COVID on-site supervision missions and a COBAC study (sample of CEMAC banks) pointed to a rather limited but heterogeneous pandemic impact on asset quality. - COBAC to intensify on-site supervision, accelerate resolution procedures for undercapitalized banks, and strengthen AML/CFT supervision and regulatory framework. - COBAC will adopt a prudent approach to dividend distribution following normalization. - BEAC working to address COBAC’s longstanding understaffing to support intensified supervision. - Support needed: - Member countries’ support essential to strengthen publicly owned banks and implement arrears clearance plans. - Member countries’ support essential to reduce sovereign risk in bank balance sheets. - Crypto asset-related risks and digital currency assessment: - Central African Republic amended its Cryptocurrency Law on March 23 to remove bitcoin’s legal tender status and convertibility of cryptocurrencies. - UMAC’s ministerial council meeting in July 2023 will be an opportunity to confirm whether amendments resolved institutional inconsistency. - A multidisciplinary working group (BEAC, COBAC, COSUMAF, GABAC) to be established to develop regulatory framework for digital payment risks and to assess feasibility and modalities of a digital central bank currency; BEAC has requested IMF technical assistance. ### Macroeconomic outlook and risks - Growth and inflation: - Growth reached 2.8 percent of GDP in 2022 (from 1.1 percent in 2021), supported by recovery of non-oil activity and high oil prices. - Inflation reached 6.5 percent at end-2022. - Drivers of the outlook: - Gradual strengthening of post-COVID recovery, slower than previously projected due to weaker recovery in oil and gas production in Equatorial Guinea; recovery expected to be driven mainly by firming non-oil sector and new oil fields in Congo. - Key uncertainties and downside risks: - Volatility of oil markets. - Persistent inflationary pressures. - Stronger-than-expected tightening of global financial conditions exacerbating refinancing and debt distress risks. - Food insecurity and financial instability risks. - Security and sociopolitical situations in Cameroon, Central African Republic, and Chad; humanitarian and security spillovers from conflict in Sudan. - Successful completion of ongoing Fund-supported program reviews and timely disbursement of budget support from development partners are critical for recovery and external financing needs. - Policy priorities to sustain recovery: - Maintain prudence in managing oil windfall. - Tackle recent fiscal slippages in some member countries. - Accelerate reform implementation under Fund-supported programs and surveillance. - Strengthen transparency and governance, including adoption and transposition of regional directives on taxation and PFM. - Governments and donors should work together to ensure greater predictability of budget support disbursement. ### Governance, surveillance, and regional coordination - Convergence and sanctions mechanism: - BEAC will work with the CEMAC Commission to resume adoption of the draft new sanction mechanism for breaches of convergence rules after questions raised in March 2023 UEAC Ministerial Council. - Adoption and entry into force of the mechanism considered essential to strengthen credibility and enforceability of multilateral surveillance. - Monitoring and collaboration with IMF: - BEAC will monitor CEMAC countries’ programs and provide updates to BEAC’s Executive Board, UMAC Ministerial Committee, and PREF-CEMAC. - BEAC will continue close collaboration with IMF staff to support regional strategy and commit to notify and consult IMF staff by end-June and December 2023 on developments likely to affect external stability. *Statement dated June 26, 2023, as presented by Abbas Mahamat Tolli and CEMAC authorities.* ### 3.0 months in 2021. In particular, net foreign assets (NFA) increased by 123 percent. As a result, the ### CEMAC: Regional Outlook, Policies, and Reform Implementation ### Macroeconomic Outlook and Risks - Growth projection: 3.0 percent in 2023, supported notably by new oil production in Republic of Congo. - Inflation: expected to decline with lower global inflation and continued tight monetary policy but should remain above the convergence criterion of 3 percent. - Current account: will decrease with oil price normalization. - Reserve coverage: should remain elevated around the current level. - Key uncertainties and risks: - global growth - the war in Ukraine - continuation of restrictive monetary policies - commodity price volatility - humanitarian and security spillovers from the conflict in Sudan - social crises linked to high costs of living - security tensions in certain countries - adverse climate events - recent increase in fuel prices to lower related subsidies could further exacerbate inflationary pressures and generate social discontent - mobilizing external financing amid increasing debt-related vulnerabilities and tighter international financial conditions ### External Position and Net Foreign Assets (NFA) - NFA increased by 123 percent between 2018 and 2022 (text: "net foreign assets (NFA) increased by 123 percent"). - Regional policy assurance on the NFA at end-December 2022: EUR 3.39 billion; met with a margin of EUR 1.44 billion. - Positive NFA trend continued through the first quarter of 2023, highlighting positive contribution of the new foreign exchange regulations. - Regional authorities request an upward revision to the regional policy assurance on the NFA target at end-June 2023 from EUR 3.93 billion to EUR 4.47 billion. - NFA target for end-December 2023 is set at EUR 4.32 billion, reflecting notably a stronger-than-expected decline in oil prices and anticipated delays in the disbursement of some budget support from development partners. ### Fiscal and Structural Policy Recommendations - Timely completion of Fund-supported program reviews and disbursements from other donors remain essential to strengthen macroeconomic stability. - Steady implementation of current Fund-supported programs (Cameroon, Congo, Gabon, Chad, Central African Republic) is essential to: - strengthen domestic revenue mobilization - improve efficiency of spending - limit fiscal risks - enhance governance and transparency - preserve financial stability, including by gradually clearing domestic arrears - Lower fuel subsidies—accompanied by support measures targeted to vulnerable populations—should improve nonoil fiscal balances and increase fiscal space for social and development expenditures. - Continued structural fiscal reforms should underpin fiscal sustainability. - Authorities encourage the Fund and Equatorial Guinea to speed up discussions on a new arrangement to ensure all CEMAC countries contribute to regional adjustment and help catalyze additional external financing. - Fund support under the Resilience and Sustainability Facility (RSF) will be important to strengthen resilience to climate change and preserve environmental riches; note: to date, no CEMAC country has benefited from the RSF. - Timely disbursements from other donors are critical to close the financing gap and support reserve accumulation. ### Monetary Policy and BEAC Actions - BEAC has tightened monetary policy amid persistent high inflation. - Policy interest rate (TIAO) and marginal lending rate were raised in March 2023 (the third time since November 2021) by 50 basis points to 5.0 percent and 6.75 percent, respectively. - Given high excess liquidity in the banking system, BEAC suspended active liquidity injections into the money market. - Since March 2023, BEAC started weekly liquidity absorption operations to improve monetary policy transmission and bank liquidity management, and will gradually achieve a meaningful increase in the rate and volume of liquidity absorptions. - Authorities note monetary policy alone cannot solve rising prices due to importance of imported goods in the price index and increasing domestic supply-side constraints; greater coordination of fiscal and monetary policies and urgency of structural reforms are highlighted. ### Foreign Exchange Regulations and Treasury Reforms - Implementation of the 2019 foreign exchange (FX) regulations yielded near fourfold increase in volume of foreign currency surrendered to the central bank between 2018 and 2022. - FX regulations implementation to the extractive sector since expiration in September 2022 of the grace period for extractive companies to comply with surrender and repatriation requirements should support further NFA accumulation. - Central bank working with banks and private sector on implementation issues; support and cooperation of member countries essential to ensure repatriation of export proceeds by state-owned enterprises and national treasuries. - Implementation of the IT platform to facilitate the deployment of Treasury Single Account (TSA) systems is in pilot phase in Cameroon and Gabon, with full migration to the TSA system expected by end-September 2023; other member countries’ treasuries will follow later. - BEAC will continue progress in implementing safeguards recommendations. ### Banking Supervision and Financial Stability - COBAC is strengthening supervision following lifting of pandemic-related prudential measures in July 2022. - Findings from first post-COVID on-site supervision missions and a COBAC study indicate a limited but heterogeneous impact of the pandemic on asset quality in the CEMAC banking system. - COBAC prepared actions: - intensify on-site supervision missions - accelerate resolution procedures for undercapitalized banks - strengthen AML/CFT supervision and regulatory frameworks - provide BEAC with supervision information required to examine refinancing plans of banks structurally dependent on BEAC’s refinancing - closely monitor financial stability risks, including those from the growing bank-sovereign nexus - adopt a prudent approach to dividend distribution in line with banking regulations following prudential normalization - BEAC is working to address COBAC’s longstanding understaffing issues. ### Regional Financial Market Development and Crypto Regulation - Regional stock exchange merger in 2019 (two stock exchanges into BVMAC under regulator COSUMAF) and actions are underway to enhance and deepen financial markets through institutional and regulatory reforms to strengthen COSUMAF and ensure market functioning. - Transactions in financial markets increased notably in 2022, although from a very low base. - Authorities agree on need to develop a vibrant secondary market for sovereign securities issuance to attract investors beyond banks. - Crypto assets regulation: - Central African Republic (CAR) Parliament adopted amendments to Cryptocurrency Law on March 23, 2023, aiming to remove bitcoin’s legal tender status and convertibility of cryptocurrencies. - Upcoming July 2023 meeting of the monetary union’s ministerial council will confirm whether these amendments resolve institutional inconsistency with the regional regulation governing crypto-assets and digital payments. - A multidisciplinary working group comprising BEAC, COBAC, COSUMAF and GABAC will soon be established to develop a consistent regulatory framework for digital payment risks. ### Regional Surveillance, Integration, and Supply-Side Reforms - Regional surveillance resumed in April 2022 after a 2-year hiatus due to the pandemic. - National authorities emphasize compliance with regional convergence criteria but note lack of flexibility in exceptional stresses and have called for reflection on criteria application. - CEMAC Commission tasked with reviewing sanction mechanism for non-compliance to ensure relevance and enforceability; Commission will encourage transposition and implementation of regional directives on taxation and harmonized public financial management into national legislation. - Authorities appreciate staff recommendation to adopt a regional strategy to strengthen resilience to climate shocks and reinforce water and forest conservation efforts. - PREF-CEMAC implementation review shows an achievement rate of almost 55 percent in relation to the 2022 targets for all expected objectives. - Eight of twelve priority sub-regional integration projects presented at the Paris Roundtable in November 2020 have begun, mobilizing pledges of nearly 3.8 billion euros. - March 2023 CEMAC Heads of State Conference adopted another program of 13 sub-regional integration projects to foster diversification and structural transformation. - Conference adopted implementation plan for sub-regional import-substitution strategy to strengthen food security, advance diversification, encourage intra-Community trade, and support external stability; authorities call on technical and financial partners, including the IMF, for technical assistance and financing. ### Policy Assurances (June 2023 Follow-up) - CEMAC authorities reiterated policy commitments in the June 2023 Follow-up to Letter of Support to the Recovery and Reform Programs Undertaken by the CEMAC Members Countries. - Regional policies and reforms to be pursued: tight monetary policy, application of FX regulations, prudence in managing oil windfalls. - Progress in IMF-supported programs, coupled with budget support from development partners, should contribute to further NFA build-up. - Authorities request upward revision of end-June 2023 NFA target from EUR 3.93 billion to EUR 4.47 billion and set end-December 2023 NFA target at EUR 4.32 billion. *Source: Excerpt from IMF PDF chapter/section (content unit 1caeea2023002).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1caeea2023002.pdf_