## EXECUTIVE SUMMARY ## Source details **Canonical URL:** [EXECUTIVE SUMMARY](https://www.imf.org/-/media/files/publications/cr/2023/english/1caeea2023003.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2023/english/1caeea2023003.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2023/english/1caeea2023003.pdf.json) --- ### Context and risks - The CEMAC’s recovery gained momentum in 2022, supported by higher hydrocarbon prices. - The external position strengthened, with a rapid foreign reserve build-up, though still below adequate levels. - Recent weakening in external buffers requires more forceful action to tighten liquidity conditions, greater compliance of member countries with foreign exchange regulations and stronger fiscal discipline. - Underlying non-oil fiscal positions deteriorated, underscoring the need to accelerate structural reforms, address recent fiscal slippages, and bring policies back in line with Fund-supported program objectives and staff advice. - Critical risks to the region include hydrocarbon price volatility, financial instability, entrenched inflation, tighter financial conditions, food insecurity, domestic conflicts and insecurity, and climate-related events. ### Policy recommendations (summary) - Preserve price stability and strengthen external buffers: - Maintain a data-dependent monetary policy with a tightening bias. - Further increase interest rates on liquidity absorption and gradually converge towards the main policy rate, and switch to a full allotment procedure. - Resolve remaining issues to a complete and effective implementation of the foreign exchange regulations. - Ensure fiscal sustainability and a coherent policy mix: - Address recent fiscal slippages. - Keep saving part of the oil windfall. - Bring subsidy reforms to completion and develop effective, well-targeted social safety nets for the vulnerable. - Preserve financial stability: - Urgently strengthen COBAC’s supervisory capacity and strictly enforce regulations for non-compliance. - Trigger resolution of non-viable banks; tackle liquidity-stressed ones; and ensure governments do not delay bank recapitalization when needed. - Ensure banks adequately account for sovereign exposure. - Monitor emerging risks from new digital payments. - Lift potential growth and enhance economic diversification and resilience: - Accelerate structural reforms in areas of governance and regulation. - Promote productivity-enhancing investments. - Deepen regional trade integration. ### Background and institutional context - The CEMAC comprises six countries: Cameroon, Chad, Congo, Gabon, Equatorial Guinea, and Central African Republic. - The region’s reform agenda is framed around the August 2021 Heads of State (HOS) summit. - PREF-CEMAC reports 59 percent of the action matrix implemented as of end-2023Q3, up from 56 percent in 2023Q1. - Business plan for single central depository adopted January 2023; full operationalization rescheduled for end-2024. - Progress on economic diversification: establishment of local industries (textile, agro-industry, wood and construction), draft regional industrial policy, increase in the BDEAC guarantee fund, strengthened coordination to help finance SMEs. - Progress on financial inclusion: development of a regional financial inclusion strategy. - Regional directives adopted to deepen regional trade integration, though enforcement is undermined by coordination challenges along borders and corridors. - Delays on endorsing or implementing regional PFM and tax directives (treasury single accounts, debt management and arrears clearance strategies, strategy and directive on PPPs). - Progress on Fund-supported programs remains slow with delays in completing several reviews: - Program reviews with Cameroon and Congo completed in June and July 2023, respectively. - A new 3-year ECF arrangement approved for C.A.R. in April 2023; first review completed end-October 2023. - Third review of Chad’s program pending due to need to correct fiscal slippages and address weak banks. - Gabon’s program clouded by political transition and pre-existing setbacks (external debt arrears, fiscal slippages, slower structural reform progress). - Discussions ongoing on a possible Fund arrangement with Equatorial Guinea. ### Recent economic developments and key statistics - Real GDP growth: - 2021: 1.4 percent. - 2022: 3.0 percent (0.2 percentage point higher than expected in June 2023). - Growth driven by recovery in the non-oil sector, improved non-oil terms of trade, lifting of COVID-19 containment measures, and spillovers from high oil receipts. - Inflation: - End-2022: 6.7 percent (more than doubled). - February 2023: 6.9 percent y-o-y. - September 2023: 5.2 percent y-o-y (BEAC preliminary data). - Fiscal balances: - Non-oil primary fiscal deficit (incl. grants) widened from 7.1 percent of non-oil GDP in 2021 to an estimated 8.2 percent of non-oil GDP in 2022. - Overall fiscal balance (excl. grants) estimated to have turned into a surplus of 2.5 percent of GDP in 2022 from a deficit of 1.9 percent of GDP in 2021, mainly owing to higher oil revenue. - Public debt-to-GDP ratio dropped from 57.6 percent to 53.4 percent at end-2022 (partly reflecting revisions to historical debt data); debt vulnerabilities remain elevated in some member states. - Oil production: - Hydrocarbon production declined sharply in Equatorial Guinea due to a production accident at the Zafiro oil field. ### Monetary policy, liquidity, and BEAC actions - BEAC main policy rate left unchanged at 5 percent at the September 2023 meeting, after a cumulative 175 basis points increase between November 2021 and March 2023. - Marginal lending facility rate unchanged at 6.75 percent, keeping the 175-basis point corridor. - BEAC discontinued weekly liquidity injections at its main refinancing window at the beginning of March 2023. - Increase in average outstanding liquidity injections from about CFAF 530 billion in June to about CFAF 840 billion in September 2023, mainly from higher borrowing at the marginal lending facility (about CFAF 735 billion) and the special window. - Interbank market activity declined in September relative to June 2023. - Liquidity absorption operations and excess liquidity: - Weekly liquidity absorption volume increased from CFAF 28 billion in March 2023 to CFAF 120 billion in September 2023. - Associated interest rate increased marginally from 0.75 percent in March 2023 to 0.85 percent since June 2023. - Excess reserves about CFAF 1,000 billion at end-September 2023, down from about 1,200 billion in June 2023. - Autonomous factors of banking liquidity (AFBL) declined slightly between June and September 2023, mainly driven by lower NFA, partly offset by higher net credit to governments and other net items. - One-month liquidity absorption operations: auctioned volume increased from CFAF 49 billion in March 2023 to CFAF 120 billion in September; interest rate for such operations raised from 0.8 percent to 1 percent in June 2023; some auctions have failed. - Staff recommended BEAC maintain a data-dependent approach to changes to the main policy rate (TIAO) with a tightening bias to keep inflation expectations in check. - Staff urged meaningful increases in rates on liquidity-absorbing operations to converge toward the main policy rate within 9 to 12 months and to switch to a full allotment procedure. - Staff welcomed a recent 50 basis point increase in the interest rate on liquidity-absorbing operations. ### Banking sector exposure and vulnerabilities - Total exposure (loans and securities) to the sovereign increased from 10 percent at end-2015 to about 30 percent of total assets in June 2023. - Several banks have exposure above 50 percent to CEMAC governments. - Growing sovereign exposure accompanied by a notable lengthening of securities’ maturities, creating maturity mismatch risk as banks' liabilities remain dominated by deposits. - Liquidity of these securities remains very low in the absence of a dynamic secondary market. - Banking sector soundness (2023H1 and 2023Q2): - Capital adequacy slightly declined to 14 percent in June 2023; several banks are severely undercapitalized or insolvent. - Reported NPL ratio increased to 19.1 percent in 2023Q2 from 17.7 percent in 2022. - Short-term liquidity ratio at 187 percent as of 2023Q2, but liquidity is segmented with several banks below 100 percent. - Less than one-third of banks comply with all prudential requirements. - Banks’ total assets grew by 20 percent year-on-year in 2023Q2. - Banks’ loan portfolio grew by 4.2 percent. ### External position, reserves, SDRs, and FX developments - The estimated current account balance (CAB) reached a surplus of 2.8 percent of GDP in 2022, from a deficit of 1.0 percent of GDP in 2021. - Gross reserves reached 4.0 months of prospective imports in 2022. - The end-June 2023 regional policy assurance on the NFA (EUR 4.47 billion) was met with a significant margin (EUR 880 million). - The rise in NFA was reversed in 2023Q3, driven by a likely deterioration in the current and financial accounts, including a steep drop in FX repatriations by the public sector and a sharp increase in FX outflows (dividend payments by the banking and insurance sectors and higher foreign currency bill for wholesale intermediary services). - CEMAC member states used most of the 2021 allocated SDR. - Withdrawals in Cameroon and Gabon exceeded initial commitments (to save at least half of their allocation), driven by higher-than-expected borrowing costs and spending. - Staff recommended stricter enforcement of FX regulations, stepped-up surrender and repatriation requirements, and mapping of FX accounts held abroad by governments, SOEs, and other public entities. ### Outlook and projections (selected) - Brent oil price assumption: about US$82/bbl for 2023 (WEO), up from US$78/bbl assumed in June 2023. - Real GDP growth projected: - 2023: 2.6 percent (a 0.4 percentage point downward revision relative to the June projection). - Stabilize at around 3½ percent over the medium term (staff outlook). - Non-oil GDP expected to continue to recover, albeit at a slower pace than in 2022. - Inflation projected to decelerate to 4.9 percent by end-2023; forecast revised upward by about 0.6 percentage point relative to June 2023. - NOPFD (non-oil primary fiscal deficit including grants) projected to improve by 1.6 percentage points to 6.6 percent of non-oil GDP in 2023 (though 1.1 percentage points lower compared to the June 2023 projection). - The region’s overall fiscal balance (excluding grants) projected to deteriorate from 2.5 percent of GDP in 2022 to 0.4 percent of GDP in 2023—unchanged compared to June 2023 projections. - Public debt will rise to around 53.7 percent of GDP in 2023 from 53.4 percent of GDP in 2022; the public debt-to-GDP ratio is expected to decline to about 44 percent over the medium term. - The CAB projected to deteriorate from 2.8 percent of GDP in 2022 to -1.9 percent of GDP in 2023, and gradually weaken to about -4 percent of GDP over the medium term. - Reserve coverage ratio projected to rise to about 4.3 in 2023 and 4.7 in the medium term (staff-estimated adequacy target for a resource-rich monetary union: 5 months of prospective imports). - Staff projects GDP growth to slow to 2.6 percent in 2023, mainly owing to a contraction in hydrocarbon output (Equatorial Guinea). ### Principal risks (balance tilted to the downside) - External risks: - Commodity prices: adverse shock from sharp slowdown in global demand and transition to low-carbon economies. - Global financial conditions: protracted tightening or market tensions could raise debt service and rollover risks. - Geo-economic fragmentation: may reduce supply of external concessional financing. - Domestic risks: - Socio-political environment: political uncertainty (including events in Gabon), security challenges, weak governance, AML/CFT gaps, corruption, and rule of law shortcomings. - Fiscal policy: high risk of fiscal slippage; failure to raise spending efficiency or improve non-oil revenue collection could consume oil windfalls. - Cost of living: persistently high inflation could harm growth and food security. - Financial stability: materialization of risks combined with elevated global uncertainty and tight bank-sovereign nexus could weaken bank balance sheets and fuel capital outflows. - Structural reforms: slow progress or missed targets under Fund-supported programs may delay donor support. - Climate risks: vulnerability to floods, droughts, and natural disasters, amplified by absence of a CEMAC-wide adaptation strategy. - On the upside: stricter FX regulation compliance and possible higher oil prices linked to OPEC+ actions could boost repatriation of export proceeds and resilience if reforms accelerate. ### Policy recommendations — Safeguarding macroeconomic stability while protecting growth and the vulnerable A. Continuing the build-up of fiscal buffers to strengthen resilience to shocks - Renew prudence in managing oil windfalls and tackle recent fiscal slippages; adhere to ambitious fiscal consolidation paths consistent with Fund-supported programs and surveillance advice. - Improve non-oil tax revenue mobilization: - Phase out various tax exemptions. - Enhance progressivity of personal income tax. - Advance interest limitation rules. - Better assert taxing rights over income from multinationals. - Timely endorsement and implementation of new regional tax directives (income tax, tax expenditures and customs procedures) and the new VAT directive. - Use improved domestic revenue mobilization to allow appropriately sequenced reductions in high common external tariffs. - Better manage tax compliance risks in the extractive sector: - Set up dedicated teams within tax administrations with access to third-party information and comprehensive audits of multinationals, free of political interference. - Ensure systematic exchange of information between tax, customs, and sector ministerial authorities. - Enhance spending efficiency: - Gradually phase out inefficient subsidies while rolling out targeted social safety nets, possibly with donor support. - Seek savings from rationalizing the wage bill, non-priority recurrent spending and costly transfers to SOEs. - Systematize production of fiscal risk statements (FRS) in all member countries with a specific SOE section. - Conduct or update Public Investment Management Assessments (PIMA), possibly with Climate Change Assessments (CCA), and accelerate implementation of PIMA recommendations. - PFM modernization, governance, fiscal discipline, and debt management: - Low-income members should only resort to non-concessional external financing if consistent with debt sustainability and Fund program limits. - Enhance debt transparency, particularly on non-guaranteed SOE debt; avoid non-transparent collateralized debt and natural resource-backed loans. - Implement comprehensive domestic arrears clearance and medium-term debt management strategies; prevent resurgence of arrears through enhanced fiscal discipline and alignment of expenditure commitments with cash forecasts and procurement plans. - Strengthen in-year tracking of expenditures and report stocks of outstanding domestic payment arrears, new arrears, and arrears paid in fiscal reports; record all expenditure in IFMIS at the liquidation stage. - Urge BEAC to accelerate implementation of its IT platform (AMS/X solution) for the deployment of the treasury single account (TSA); address technical problems to enable the platform to go live in the two advanced pilot countries (Cameroon and Gabon) by 2023Q3 and transfer banks’ treasury account balances to the TSA at BEAC by the end of the first half of 2024, then roll out to the other four treasuries. - Address structural governance and anti-corruption concerns to improve PFM efficiency. B. Preserving price stability and containing external pressures - Stay the course on preserving price, fiscal, external, and financial stability, while accelerating structural reforms to enhance resilience and sustaining the recovery and protecting the vulnerable. - Calibrate the short-term policy mix to cool aggregate demand, reverse downward reserve trends, and reduce the burden on monetary policy for containing inflation pressures. - Staff urged BEAC to: - Increase volumes and rates of liquidity-absorbing operations, converging rates toward the main policy rate within 9 to 12 months. - Switch to a full allotment procedure. - Tackle weak banks and strengthen supervision and capital adequacy to combat liquidity segmentation. - Continue adjusting haircuts on collateral and apply strict conditionality where needed. C. Preserving financial stability and market development - Urgently provide COBAC SG with adequate human and financial resources to step up onsite inspections. - Rigorously sanction or take supervisory corrective actions when banks are systematically non-compliant within a short timeframe. - Strictly enforce BEAC’s refinancing policies for liquidity-stressed banks. - Assess adequacy of NPE classification and provisioning rigorously and undertake comprehensive onsite supervision of credit portfolios of banks (at least systemically-important banks). - Ensure undercapitalized banks submit credible medium-term recapitalization plans within a short timeframe and establish a strategy for NPL reduction. - Recapitalize or resolve weak banks without delay by national governments. - Move away from zero-risk weight on government exposure and progressively enforce concentration limits. - Foster development of a secondary market in government securities and consider a local-currency bond market (LCBM) diagnostic and roadmap. - Advance a crypto-related regulatory framework and enhance coordination of laws/regulations; assess initiatives such as tokenization and explore CBDC implications via a cost-benefit analysis. - Encourage BEAC to unlock financial inclusion potential of mobile money while preserving financial integrity by revising tariffication and validating/adopting the revised pricing project by GIMAC by the end of April 2024. ### Authorities’ views and regional commitments - COBAC agreed with staff’s recommendations and indicated risk-based supervision is implemented; committed to complete regulatory projects including AML/CFT updates. - BEAC committed to address COBAC understaffing, continue tightening monetary policy where necessary, converge interest rates on liquidity-absorbing operations towards the policy rate before end-2024, and switch to a full allotment procedure. - BVMAC concurred that diversifying the investor base would help develop a secondary market; finalized a composite stock index. - Regional supervisors agreed on need to develop consistent regulatory frameworks and strengthen supervisory capacity for digital payments and assets. - BEAC confirmed IMF technical assistance request on CBDC and is examining consistency of C.A.R.’s tokenization law with regional frameworks. - Regional institutions committed to preserve internal and external stability and to produce a BEAC dashboard of weekly and monthly indicators starting December 2023. ### Annex highlights (selected) - Annex I — Risk of Entrenched Inflation: - Inflation peak: 7.6 percent y-o-y in November 2022; hovered around 7.2 percent y-o-y in 2023Q1. - BEAC’s core inflation reached 5.9 percent y-o-y in March 2023 from 3.4 percent y-o-y in March 2022. - Food shocks have larger and more persistent inflationary impacts than oil shocks; staff supports tightening bias. - Annex II — NFA and Oil Prices: - Oil exports represented 71 percent of total exports in 2022 (CEMAC aggregate shown as 72.1 percent in country table). - Historical average lag of NFA response to oil prices: around 9 months (Congo lag up to almost 18 months). - Projection using oil price forecast suggested slight upside to the end-December 2023 NFA target set in June 2023, but did not account for the September correction in NFA. - Annex III — Risk Assessment Matrix (principal risks, likelihoods, impacts, and responses) — examples: - Intensification of regional conflict(s): Likelihood: High. Expected Impact if Realized: High. - Commodity price volatility: Likelihood: High. Expected Impact if Realized: Medium. - Abrupt global slowdown or recession: Likelihood: Medium. Expected Impact if Realized: High. - Extreme climate events: Likelihood: Medium. Expected Impact if Realized: High. - Annex IV — External Sector Assessment: - External position moderately weaker than warranted by fundamentals at end-2022. - Gross foreign reserves at end-2022: US$11.1 billion — equivalent to 4.1 months of GNFS; adequacy benchmark: 5 months of GNFS. - EBA-lite CA gap implies REER overvaluation of 6.4 percent in 2022. - Reserves expected to reach 5 months of GNFS in 2028 under baseline; scenario-based optimal reserves could range between 6.3 to 9.7 months. ### Selected exact regional targets, dates, and statistics (preserved) - BEAC main policy rate (TIAO): 5.0 percent (as of September 2023 meeting). - Marginal lending facility rate: 6.75 percent. - Cumulative policy rate increase between November 2021 and March 2023: 175 basis points. - Weekly liquidity absorption volume: CFAF 28 billion (March 2023) → CFAF 120 billion (September 2023). - Excess reserves: about CFAF 1,000 billion at end-September 2023 (down from about CFAF 1,200 billion in June 2023). - Capital adequacy: 14 percent (June 2023). - NPL ratio: 19.1 percent (2023Q2). - Gross foreign reserves at end-2022: US$11.1 billion — 4.1 months of GNFS. - NFA at end-June 2023: EUR 5.35 billion; NFA at end-October 2023: EUR 3.86 billion. - Regional assurance on NFA at end-June 2023: EUR 4.47 billion (margin EUR 880 million). - Requested NFA target revision: end-December 2023 from EUR 4.32 billion to EUR 3.91 billion. - NFA target for end-June 2024: EUR 4.30 billion. - Brent oil price assumption for 2023 (WEO): about US$82/bbl. - Real GDP projections: 2023: 2.6 percent (2022: 3.0 percent; 2021: 1.4 percent). - Inflation projections: end-2023: 4.9 percent; staff projects inflation will fall below 3 percent in 2026 (BEAC expects in 2024). - Public debt: 53.4 percent of GDP at end-2022 → 53.7 percent of GDP in 2023; medium-term around 44 percent of GDP (other passages note approximately 43 percent in medium term). - TSA full migration target: end-June 2024. - BEAC to produce dashboard of weekly and monthly indicators starting December 2023. *Source: EXECUTIVE SUMMARY, December 5, 2023.* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Context and risks - The CEMAC’s recovery gained momentum in 2022, supported by higher hydrocarbon prices. - The external position strengthened, with a rapid foreign reserve build-up, though still below adequate levels. - Recent weakening in external buffers requires more forceful action to tighten liquidity conditions, greater compliance of member countries with foreign exchange regulations and stronger fiscal discipline. - Underlying non-oil fiscal positions deteriorated, underscoring the need to accelerate structural reforms, address recent fiscal slippages, and bring policies back in line with Fund-supported program objectives and staff advice. - Critical risks to the region include hydrocarbon price volatility, financial instability, entrenched inflation, tighter financial conditions, food insecurity, domestic conflicts and insecurity, and climate-related events. ### Policy recommendations - Preserve price stability and strengthen external buffers: - Maintain a data-dependent monetary policy with a tightening bias. - Further increase interest rates on liquidity absorption and gradually converge towards the main policy rate, and switch to a full allotment procedure. - Resolve remaining issues to a complete and effective implementation of the foreign exchange regulations. - Ensure fiscal sustainability and a coherent policy mix: - Address recent fiscal slippages. - Keep saving part of the oil windfall. - Bring subsidy reforms to completion and develop effective, well-targeted social safety nets for the vulnerable. - Preserve financial stability: - Urgently strengthen COBAC’s supervisory capacity and strictly enforce regulations for non-compliance. - Trigger resolution of non-viable banks; tackle liquidity-stressed ones; and ensure governments do not delay bank recapitalization when needed. - Ensure banks adequately account for sovereign exposure. - Monitor emerging risks from new digital payments. - Lift potential growth and enhance economic diversification and resilience: - Accelerate structural reforms in areas of governance and regulation. - Promote productivity-enhancing investments. - Deepen regional trade integration. ### Background and institutional context - The CEMAC comprises six countries: Cameroon, Chad, Congo, Gabon, Equatorial Guinea, and Central African Republic. - The region’s reform agenda is framed around the August 2021 Heads of State (HOS) summit. - PREF-CEMAC reports 59 percent of the action matrix implemented as of end-2023Q3, up from 56 percent in 2023Q1. - Delays remain on operationalization of the single central depository (business plan adopted January 2023; full operationalization rescheduled for end-2024). - Progress on economic diversification: establishment of local industries (textile, agro-industry, wood and construction), draft regional industrial policy, increase in the BDEAC guarantee fund, strengthened coordination to help finance SMEs. - Progress on financial inclusion: development of a regional financial inclusion strategy. - Regional directives adopted to deepen regional trade integration, though enforcement is undermined by coordination challenges along borders and corridors. - Delays on endorsing or implementing regional PFM and tax directives (treasury single accounts, debt management and arrears clearance strategies, strategy and directive on PPPs). - Progress on Fund-supported programs remains slow with delays in completing several reviews: - Program reviews with Cameroon and Congo completed in June and July 2023, respectively. - A new 3-year ECF arrangement approved for C.A.R. in April 2023; first review completed end-October 2023. - Third review of Chad’s program pending due to need to correct fiscal slippages and address weak banks. - Gabon’s program clouded by political transition and pre-existing setbacks (external debt arrears, fiscal slippages, slower structural reform progress). - Discussions ongoing on a possible Fund arrangement with Equatorial Guinea. ### Recent economic developments and key statistics - Real GDP growth: - 2021: 1.4 percent. - 2022: 3.0 percent (0.2 percentage point higher than expected in June 2023). - Growth driven by recovery in the non-oil sector, improved non-oil terms of trade, lifting of COVID-19 containment measures, and spillovers from high oil receipts. - Inflation: - End-2022: 6.7 percent (more than doubled). - February 2023: 6.9 percent y-o-y. - September 2023: 5.2 percent y-o-y (BEAC preliminary data). - Fiscal balances: - Non-oil primary fiscal deficit (incl. grants) widened from 7.1 percent of non-oil GDP in 2021 to an estimated 8.2 percent of non-oil GDP in 2022. - Overall fiscal balance (excl. grants) estimated to have turned into a surplus of 2.5 percent of GDP in 2022 from a deficit of 1.9 percent of GDP in 2021, mainly owing to higher oil revenue. - Public debt-to-GDP ratio dropped from 57.6 percent to 53.4 percent at end-2022 (partly reflecting revisions to historical debt data); debt vulnerabilities remain elevated in some member states. - Oil production note: - Hydrocarbon production declined sharply in Equatorial Guinea due to a production accident at the Zafiro oil field. - Monetary policy and liquidity: - BEAC main policy rate left unchanged at 5 percent at the September 2023 meeting, after a cumulative 175 basis points increase between November 2021 and March 2023. - Marginal lending facility rate unchanged at 6.75 percent, keeping the 175-basis point corridor. - BEAC discontinued weekly liquidity injections at its main refinancing window at the beginning of March 2023. - Increase in average outstanding liquidity injections from about CFAF 530 billion in June to about CFAF 840 billion in September 2023, mainly from higher borrowing at the marginal lending facility (about CFAF 735 billion) and the special window. - Interbank market activity declined in September relative to June 2023. - Liquidity absorption operations and excess liquidity: - Weekly liquidity absorption volume increased from CFAF 28 billion in March 2023 to CFAF 120 billion in September 2023. - Associated interest rate increased marginally from 0.75 percent in March 2023 to 0.85 percent since June 2023. - Excess reserves about CFAF 1,000 billion at end-September 2023, down from about 1,200 billion in June 2023. - Autonomous factors of banking liquidity (AFBL) declined slightly between June and September 2023, mainly driven by lower NFA, partly offset by higher net credit to governments and other net items. - One-month liquidity absorption operations: auctioned volume increased from CFAF 49 billion in March 2023 to CFAF 120 billion in September; interest rate for such operations raised from 0.8 percent to 1 percent in June 2023; some auctions have failed. - Banking sector soundness (2023H1 and 2023Q2): - Capital adequacy slightly declined to 14 percent in June 2023; several banks are severely undercapitalized or insolvent. - Reported NPL ratio increased to 19.1 percent in 2023Q2 from 17.7 percent in 2022. - Short-term liquidity ratio at 187 percent as of 2023Q2, but liquidity is segmented with several banks below 100 percent. - Less than one-third of banks comply with all prudential requirements. - Banks’ total assets grew by 20 percent year-on-year in 2023Q2, driven by high deposits mobilization. - Banks’ loan portfolio grew by 4.2 percent. ### Staff, mission, and report scope - Discussions held in-person during October 30–November 2, 2023, in Libreville (Gabon), and November 6–14 in Yaoundé (Cameroon) in person, and November 16 (virtually). - Staff team: Ms. Verdier (head), Messrs. Tapsoba, Bizimana, and Ms. Tiedemann (all AFR); Mr. Dehmej (MCM); and Ms. Neuteboom (SPR). Assisted by Messrs. Gomez and Staines (Resident Representatives in Gabon and Cameroon), Messrs. Nzebi and Ambassa (local economists in Gabon and Cameroon). Mr. Lluis Dalmau Taulés (AFR) supported from headquarters. Mr. Nguema Affane (OED) participated. - Meetings held with: Mr. Abbas Mahamat Tolli (Governor of BEAC and Chairman of COBAC); Mr. Baltasar Engonga Edjo (President of the CEMAC Commission); Mr. Michel Dzombala (Vice-Governor of BEAC); Mr. Maurice Christian Ouanzin (Secretary General of COBAC); Ms. Jacqueline Adiaba and Mr. Louis Banga Ntolo (Head of COSUMAF and BVMAC, respectively); Prof. Djiena Wembou (Secretary General of PREF-CEMAC); senior officials of BEAC, the CEMAC Commission, and COBAC; and representatives of the banking sector. - This staff report addresses common policies in support of CEMAC member countries’ IMF-supported programs; “authorities” refers to regional institutions responsible for common policies in the currency union. *Source: EXECUTIVE SUMMARY, December 5, 2023.* ### 9. Bank exposure to the sovereign has remained excessively high. Total exposure (loans ### 9. Bank exposure to the sovereign has remained excessively high ### Banking sector exposure and vulnerabilities - Total exposure (loans and securities) increased from 10 percent at end-2015 to about 30 percent of total assets in June 2023. - Several banks have exposure above 50 percent to CEMAC governments, posing significant risks to financial stability, including cross-country contagion and risks to banking groups. - Growing sovereign exposure is accompanied by a notable lengthening of securities’ maturities (from short-term treasury bills to long-term bonds), creating maturity mismatch risk as long as banks' liabilities remain dominated by deposits. - Liquidity of these securities remains very low in the absence of a dynamic secondary market. - High bank-sovereign nexus and high NPLs are identified as key financial stability vulnerabilities. ### External position, reserves, and FX developments - The estimated current account balance (CAB) reached a surplus of 2.8 percent of GDP in 2022, from a deficit of 1.0 percent of GDP in 2021. - Gross reserves reached 4.0 months of prospective imports in 2022. - The end-June 2023 regional policy assurance on the NFA (EUR 4.47 billion) was met with a significant margin (EUR 880 million). - The rise in NFA was reversed in 2023Q3, driven by a likely deterioration in the current and financial accounts, including a steep drop in FX repatriations by the public sector and a sharp increase in FX outflows (dividend payments by the banking and insurance sectors and higher foreign currency bill for wholesale intermediary services). - Stricter enforcement of FX regulations and stepped-up surrender and repatriation requirements contributed to improved FX repatriations earlier in 2023. ### Use of SDRs - CEMAC member states used most of the 2021 allocated SDR. - Withdrawals in Cameroon and Gabon exceeded initial commitments (to save at least half of their allocation), driven by higher-than-expected borrowing costs and spending. - Higher interest rates on SDR drawings present a risk of tighter financial conditions on member countries’ balance sheets. ### Outlook and projections - Brent oil price assumption: about US$82/bbl for 2023 (WEO), up from US$78/bbl assumed in June 2023. - Real GDP growth is projected to slightly decelerate to 2.6 percent in 2023 (a 0.4 percentage point downward revision relative to the June projection). - Non-oil GDP growth is expected to continue to recover, albeit at a slower pace than in 2022. - Inflation is projected to decelerate to 4.9 percent by end-2023; the inflation forecast was revised upward by about 0.6 percentage point relative to June 2023. - NOPFD (non-oil primary fiscal deficit including grants) is projected to improve by 1.6 percentage points to 6.6 percent of non-oil GDP in 2023 (though 1.1 percentage points lower compared to the June 2023 projection). - The region’s overall fiscal balance (excluding grants) is projected to deteriorate from 2.5 percent of GDP in 2022 to 0.4 percent of GDP in 2023—unchanged compared to June 2023 projections. - Public debt will rise to around 53.7 percent of GDP in 2023 from 53.4 percent of GDP in 2022; the public debt-to-GDP ratio is expected to decline to about 44 percent over the medium term. - The CAB is projected to deteriorate from 2.8 percent of GDP in 2022 to -1.9 percent of GDP in 2023, and gradually weaken to about -4 percent of GDP over the medium term. - Reserve coverage ratio is projected to rise to about 4.3 in 2023 and 4.7 in the medium term (staff-estimated adequacy target for a resource-rich monetary union: 5 months of prospective imports). ### Risks (balance tilted to the downside) - External risks: - Commodity prices: adverse shock from sharp slowdown in global demand and transition to low-carbon economies could lower demand for CEMAC exports. - Global financial conditions: protracted tightening or market tensions could raise debt service and rollover risks; recent political transition in Gabon could push Eurobond yields up. - Geo-economic fragmentation: may reduce supply of external concessional financing and slow external reserve accumulation. - Domestic risks: - Socio-political environment: political uncertainty (including events in Gabon), security challenges (including conflict spillovers and refugee influxes), weak governance, AML/CFT gaps, corruption, and rule of law shortcomings. - Fiscal policy: high risk of fiscal slippage; failure to raise spending efficiency or improve non-oil revenue collection could consume oil windfalls, slow reserve accumulation, heighten debt vulnerabilities, and warrant more aggressive monetary tightening. - Cost of living: persistently high inflation could harm growth and food security, stoke social tensions. - Financial stability: materialization of risks combined with elevated global uncertainty and tight bank-sovereign nexus could weaken bank balance sheets and fuel capital outflows. - Structural reforms: slow progress or missed targets under Fund-supported programs may delay donor support and heighten vulnerabilities. - Climate risks: vulnerability to floods, droughts, and natural disasters, amplified by absence of a CEMAC-wide adaptation strategy. - On the upside: stricter FX regulation compliance and possible higher oil prices linked to OPEC+ actions could boost repatriation of export proceeds and resilience if reforms accelerate. ### Policy recommendations — Safeguarding macroeconomic stability while protecting growth and the vulnerable A. Continuing the build-up of fiscal buffers to strengthen resilience to shocks - Renew prudence in managing oil windfalls and tackle recent fiscal slippages; adhere to ambitious fiscal consolidation paths consistent with Fund-supported programs and surveillance advice. - Improve non-oil tax revenue mobilization: - Phase out various tax exemptions. - Enhance progressivity of personal income tax. - Advance interest limitation rules. - Better assert taxing rights over income from multinationals. - Timely endorsement and implementation of new regional tax directives (income tax, tax expenditures and customs procedures) and the new VAT directive. - Use improved domestic revenue mobilization to allow appropriately sequenced reductions in high common external tariffs. - Better manage tax compliance risks in the extractive sector: - Set up dedicated teams within tax administrations with access to third-party information and comprehensive audits of multinationals, free of political interference. - Ensure systematic exchange of information between tax, customs, and sector ministerial authorities. - Enhance spending efficiency: - Gradually phase out inefficient subsidies while rolling out targeted social safety nets, possibly with donor support. - Seek savings from rationalizing the wage bill, non-priority recurrent spending and costly transfers to SOEs. - Systematize production of fiscal risk statements (FRS) in all member countries with a specific SOE section. - Conduct or update Public Investment Management Assessments (PIMA), possibly with Climate Change Assessments (CCA), and accelerate implementation of PIMA recommendations. - PFM modernization, governance, fiscal discipline, and debt management: - Low-income members should only resort to non-concessional external financing if consistent with debt sustainability and Fund program limits. - Enhance debt transparency, particularly on non-guaranteed SOE debt; avoid non-transparent collateralized debt and natural resource-backed loans. - Implement comprehensive domestic arrears clearance and medium-term debt management strategies; prevent resurgence of arrears through enhanced fiscal discipline and alignment of expenditure commitments with cash forecasts and procurement plans. - Strengthen in-year tracking of expenditures and report stocks of outstanding domestic payment arrears, new arrears, and arrears paid in fiscal reports; record all expenditure in IFMIS at the liquidation stage. - Urge BEAC to accelerate implementation of its IT platform (AMS/X solution) for the deployment of the treasury single account (TSA); address technical problems to enable the platform to go live in the two advanced pilot countries (Cameroon and Gabon) by 2023Q3 and transfer banks’ treasury account balances to the TSA at BEAC by the end of the first half of 2024, then roll out to the other four treasuries. - Address structural governance and anti-corruption concerns to improve PFM efficiency. B. Preserving price stability and containing external pressures - Stay the course on preserving price, fiscal, external, and financial stability, while accelerating structural reforms to enhance resilience and sustaining the recovery and protecting the vulnerable. - Calibrate the short-term policy mix to cool aggregate demand, reverse downward reserve trends, and reduce the burden on monetary policy for containing inflation pressures. *International Monetary Fund — CEMAC staff report excerpt (selected findings, projections, risks, and policy recommendations).* ### 20. Staff recommended that BEAC maintain its data-dependent approach to changes to ### 20. Staff recommended that BEAC maintain its data-dependent approach to changes to the main policy rate (TIAO) with a tightening bias to keep inflation expectations in check. ### Monetary policy stance and inflation risks - Staff recommendation: maintain a data-dependent approach to changes to the main policy rate (TIAO) with a tightening bias to keep inflation expectations in check. - Rationale for tightening bias: - Increased risk of inflation becoming entrenched due to heightened uncertainty around global inflationary pressures, broadening domestic price pressures, and persistence of inflation in CEMAC. - Ongoing political instability in some countries. - Possible second-round effects of fuel subsidy reforms. - Significant narrowing of the BEAC-ECB policy rate spread compared to its historical average. - Authorities’ view: - BEAC concurred monetary policy decisions will be data-driven and a tightening bias is warranted. - Noted headline inflation has eased somewhat but remains at a high level; underlying inflation remains stubbornly high. - Supply-side domestic factors (including fresh foods and domestic gas price hikes) have overtaken external factors as main drivers of inflation. - Cautioned that full effects of past interest rate hikes have yet to materialize because of long lags in monetary policy transmission in the region. - Indicated risks to external stability appear limited with still comfortable reserve coverage, though foreign reserves show a downward trend since the third quarter. - Reiterated view that the BEAC-ECB policy rate spread has little influence on capital flows due to limited capital account integration. ### Liquidity absorption operations and interest rates - Staff urged BEAC to further increase the interest rates on liquidity absorption operations to effectively absorb excess liquidity. - Specific staff recommendations: - Increase volumes of weekly liquidity absorption operations and boost banks’ participation. - Meaningful increases in associated interest rates that should converge toward the main policy rate to signal monetary policy stance. - Given the significant initial gap, the rate increase should be gradual but much more significant than observed so far and take place within a short timeframe (9 to 12 months). - Switch to a full allotment procedure to absorb excess liquidity more effectively, strengthen monetary policy transmission, and support reserve accumulation. - Prompt action on liquidity critical to reverse recent downward trend in NFA. - Tackle weak banks and strengthen supervision and capital adequacy to combat liquidity segmentation across banks. - Staff welcomed the recent 50 basis point increase in the interest rate on liquidity-absorbing operations. - Authorities’ view: - BEAC agreed reducing excess liquidity would strengthen transmission. - Discontinuation of weekly liquidity injections at main refinancing window has pushed structurally liquidity-dependent banks to the marginal lending facility, increasing overall liquidity injections. - Acknowledged recent liquidity-absorbing operations have not been successful due to market fragmentation and concentration of excess liquidity among few banks not active in the interbank market. - Survey results: parent companies’ policies were main hurdles for participation of subsidiaries of banking groups in BEAC’s liquidity-absorbing operations and the CEMAC interbank market. - Open to exploring new instruments (including a fixed-rate full allotment procedure) but expressed reservations about success given fragmentation. - Contemplating targeted actions for banks with ample excess liquidity, including issuance of BEAC debt certificates and efforts to stimulate the interbank market. - Intends to continue draining liquidity via weekly and long-maturity liquidity absorbing operations and pursue consultations with excess-liquidity banks to boost participation. ### Engagement with liquidity-stressed banks and supervisory measures - Staff urged BEAC, in cooperation with COBAC, to continue to engage with banks facing high liquidity needs. - Staff recommendations: - Tackle liquidity needs swiftly before banks become structurally dependent on BEAC support. - Tighten BEAC’s conditionality for structurally liquidity-stressed banks (request credible refinancing plans). - In cooperation with COBAC, consider triggering resolution in case of continued non-compliance. - Effectively addressing banks’ liquidity stress depends on governments’ ability to find sustainable financing to settle domestic arrears. - Authorities’ view: - BEAC concurred and committed to engage proactively with liquidity-stressed banks, in collaboration with COBAC, to ensure timely submission of credible refinancing plans and appropriate restructuring or recapitalization if needed. ### Containing risks to BEAC’s balance sheet and collateral framework - Staff reiterated the need for BEAC to keep containing risks to its balance sheet. - Staff recommendations: - Continue to adjust haircuts on collateral based on market intelligence to reflect risks, and provision for potential losses. - Apply: (i) collateral framework in line with risk equivalence (including differential haircuts); (ii) no reserve requirement exemptions; (iii) funding plan framework in case of a bank’s excessive dependence on BEAC’s refinancing; and, if needed; (iv) ELA framework with appropriately strict conditionality and enhanced supervisory oversight. - Monitor unintended consequences of arrears securitization (weakening fiscal discipline, reinforcing bank-sovereign nexus, building up government securities on BEAC’s balance sheet through refinancing). - Monitor repayments of past statutory advances and the stock of bonds bought in the context of the COVID-related bond purchase program, which started maturing in 2022Q2. - Monitor exposure to the regional development bank (BDEAC). - Authorities’ view: - BEAC broadly agreed to continue adjusting haircuts and set exposure limits by bank and/or country. - Reiterated haircuts are set per existing framework, monitoring changes in credit ratings and joint World Bank/IMF debt sustainability analysis. - Less inclined to apply larger haircuts to securities issued from arrears securitization, deeming them similar to sovereign securities issued by the same government. - Indicated balance sheet exposure to BDEAC's credit risk is gradually being reduced in line with repayments under facilities granted to BDEAC by the Central Bank. ### Text Table 3: Past Domestic Arrears Securitization Experiences (as presented in the source) - CountryAmountMaturity (years)Valuation Date - 77.62-5 - 976-10 - 9711-15 - 14.72-5 - 1.26 - 92<= 1Dec. 17, 2021 & Jan. 1, 2023 - 682-5Dec. 17, 2021 & Mar. 16, 2022 - 150.62-5 - 217.26-9 - Congo - Mar. 31, 2022 & Fev. 14, 2023 - Cameroon - Dec. 31, 2021 - Equatorial Guinea - C.A.R.Dec. 04, 2020 ### FX regulations, repatriation, and foreign assets - Staff commended progress on enforcement of FX regulations and resolving operational compliance challenges in the extractive sector, following the expiration of its grace period in October 2022. - Staff recommendations: - Continue constructive dialogue with the extractive sector to ensure efficient enforcement of repatriation of funds dedicated to rehabilitation of oil sites (RES). - Intensify efforts to ensure more complete, efficient, consistent, and predictable application of FX regulations, including closer monitoring of compliance by the public and extractive sectors with FX repatriation and surrender requirements. - Strengthen capacity to map out FX accounts held abroad by governments, SOEs, and other public entities, possibly with support from the Bank of International Settlements. - Establish consistency in application and enforcement of FX regulation to build market confidence. - Ensure consistency between national legislations and regional FX regulations. - Authorities’ view: - BEAC indicated engagement with banks and businesses led to more efficient verification and approval process for FX requests and is prepared to deploy additional staff if necessary. - Reported progress from discussions held in Paris in July 2023 with the extractive sector on draft model contract of escrow account attached to RES funds. - Noted agreement that model contract escrow accounts should be validated and signed by member states and extractive sector by October 21; by early November 2023 no signed model contract account had yet been transmitted to BEAC. - Discussions resumed in early November with extractive sector on unresolved points, including: (i) terms and conditions for remunerating escrow accounts attached to RES funds; and (ii) draft model contract escrow account attached to RES funds constituted as accounting provisions. ### Safeguards assessment - The 2022 safeguards assessment found that BEAC maintained strong governance arrangements. - A safeguards monitoring mission is planned before end-2023 to follow up with BEAC’s senior management on an external quality assessment of internal audit and implementation of remaining 2022 safeguards recommendations. ### Preserving financial stability: supervisory and fiscal actions needed - Staff stressed urgency of collective action from national and regional authorities to preserve financial stability amid heightened uncertainty and non-compliance of several banks. - Immediate actions advocated by staff: - Urgently provide COBAC SG with adequate human and financial resources to step up onsite inspections. - Rigorously sanction or take supervisory corrective actions when banks are systematically non-compliant within a short timeframe. - Strictly enforce BEAC’s refinancing policies for liquidity-stressed banks. - Assess adequacy of NPE classification and provisioning rigorously and undertake comprehensive onsite supervision of credit portfolios of banks (at least systemically-important banks) using a prioritized and risk-based approach. - Ensure undercapitalized banks submit credible medium-term recapitalization plans within a short timeframe and establish a strategy for NPL reduction. - Recapitalize without delay or resolve weak banks in a timely manner by national governments. - Accelerate implementation by national governments of comprehensive domestic arrears clearance and prevention strategy. - Insolvent banks cannot be sold to fit and proper investors without first being recapitalized. - COBAC should resist any temptation to relax prudential regulations. - Staff reiterated COBAC should ensure banks account adequately for sovereign risk: - Progressively enforce existing concentration limits and encourage prudent internal risk management. - Move away from zero-risk weight on government exposure. - Ensure primary dealers do not hold all new sovereign issuances and develop a sizeable non-bank investor base to prevent under-subscription risks. ### Market development: government securities and digital risks - Staff advice on government securities market: - Address segmentation of government issuance market as rising share of securities on regional stock exchange (BVMAC) creates market dualism that could hamper secondary market development and securities liquidity. - Foster development of a secondary market in government securities and consider a local-currency bond market (LCBM) diagnostic to identify bottlenecks and develop a roadmap. - Encourage BVMAC to raise investor appetite for stocks from 17 SOEs set to be listed on BVMAC. - Ensure company managing the single central depository is operationalized by end-2024 as scheduled. - Encourage member countries that have not yet submitted their SOEs to be listed to do so swiftly. - Digital payments and assets: - Regional supervisors (BEAC, COBAC, COSUMAF, GABAC) should advance a crypto-related regulatory framework and enhance coordination of laws/regulations to support innovation and inclusion while preserving stability and AML/CFT compliance. - Address consistency concerns between July 2022 regulation No-01-2022, BEAC’s mandate on payments, and COBAC Decision D-2022/071 prohibiting use of cryptocurrencies by entities under its remit. - Examine whether initiatives (such as C.A.R.’s law allowing tokenization via crypto assets) violate BEAC’s exclusive right to issue currency or affect financial integrity, governance, consumer protection, and AML/CFT compliance. - BEAC should account for risks posed by digital payments and assets on its operations and monetary policy implementation and adapt internal controls accordingly. - BEAC’s exploration of a CBDC—already requested Fund CD—should be based on cost-benefit analysis considering potential impacts on bank intermediation, dual payment system costs, and digital infrastructure. - Encourage BEAC to unlock financial inclusion potential of mobile money without undermining financial integrity by revising tariffication that burdens small transactions and validating/adopting the revised pricing project by GIMAC by the end of April 2024 as planned. *Source: Excerpt from IMF staff report (CEMAC section) contained in the supplied content unit.* ### 32. Authorities’ Views ### 32. Authorities’ Views ### Regional supervisory and regulatory developments - COBAC agreed with staff’s recommendations. - BEAC committed to address COBAC longstanding understaffing issues, which has worsened with continued decline in staff numbers. - COBAC expressed its view that a risk-based supervision is fully implemented. - COBAC indicated that several regulatory projects are currently being completed, including COBAC regulations on AML/CFT that have been revised to incorporate recent FATF developments, notably the risk-based approach. - COBAC indicated that it is working closely with national and regional authorities (GABAC, BEAC) to address the strategic AML/CFT deficiencies identified in the mutual evaluation of the CEMAC member countries. - COBAC stressed that the existing prudential regulatory framework can address the problems of weak banks, including through sanction mechanism in case of non-compliance, but noted cooperation with national authorities is paramount, particularly in cases of recapitalization and resolution of weak banks. - BVMAC concurred with staff that diversifying the investor base would help foster the development of a secondary market in government securities. - BVMAC noted it is working on the conditionality for the companies that will be listed on the stock exchange. - BVMAC indicated that it has finalized the creation of a composite stock index, which should help attract foreign investors. - BEAC stressed the continued rise in costs of government securities, highlighting this was related to higher interest rates, reflecting the tightening of monetary policy as well as market risk perception of countries, including issuance uncertainty. - BEAC indicated that it has developed a regulatory text on issuance calendar that will provide better visibility to market participants. - Regional supervisors agreed on the need to develop a consistent and appropriate regulatory framework and to strengthen supervisory capacity to monitor and manage new forms of risks posed by digital payments and assets. - BEAC confirmed that the IMF’s technical assistance will help explore the possibility of setting up a central bank digital currency (CBDC). This support could help strengthen the regulation and supervision of digital assets in the region, and modernize the financial and payment systems and further promote financial inclusion. - BEAC indicated that it is examining the consistency of C.A.R.’s recent law allowing the tokenization of its resource wealth with exclusive payment use of crypto assets for the transactions with regional legal/regulatory frameworks. - The new COSUMAF AML/CFT regulation entered into force on May 24, 2023 and aims at establishing a framework for the COSUMAF to apply a risk-based approach to AML/CFT supervision. - COSUMAF has requested Fund’s technical assistance to help identify potential areas of reforms to enhance financial market supervision and financial inclusion. ### Strengthening the regional surveillance framework - Staff urged the Commission to strengthen the credibility and enforceability of the regional surveillance framework. - Staff recommended the Commission step up concertation efforts with the UMAC ministerial council to swiftly bring back on track the adoption process of the draft sanction mechanism for breaches of regional surveillance rules, noting questioning of its merit by some member countries during the March 2023 ministerial council weakens enforceability and credibility. - Staff noted that only few countries met the convergence criteria in 2022, despite favorable hydrocarbon prices. - Staff suggested inclusion of the draft new sanction mechanism as a potential item for discussion at the next PREF-CEMAC COPIL session to help build consensus. - Staff urged the Commission to ensure that all member countries share their medium-term convergence plans. - Staff encouraged the Commission to finalize the first internal analysis of the early warning system on macroeconomic imbalances initiated through regional surveillance missions underway since August 2023 in the six member countries, whose reports are expected to be validated by the first quarter of 2024. ### Preconditions and technical priorities for convergence and statistics - Staff urged regional institutions and member countries to move ahead with previously identified key prerequisites for strengthening compliance with the regional convergence criteria, including: - (i) the need for member countries to submit updated post-COVID triennial convergence plans; - (ii) fully operationalizing national multilateral surveillance units; - (iii) adopting and implementing comprehensive and credible national domestic arrears clearance and debt management strategies; - (iv) transposing regional tax and PFM directives (internal and budget controls; switching into program-based budgeting; etc.) in a timely manner; - (v) making faster progress on the 2021–30 regional statistical program. - Staff stressed ongoing efforts to improve external statistics, including with recent and future Fund’s CD as well as World Bank support, are critical for accelerating BOP data collection and compilation, which would ultimately help reduce oil revenue and external flows forecasting errors. - Staff noted it is essential that COBAC and BEAC regularly report updated data on financial soundness indicators and monetary and financial Statistics data to the IMF for further dissemination. - Staff reiterated the need for the Commission to accelerate the establishment of the Observatory for the implementation of CEMAC customs and tax legislation to support the convergence of practices and results. - Staff advised operationalizing the technical sub-committee for trade facilitation created in December 2021 to accelerate implementation of trade facilitation measures. ### Multilateral stabilization fund and policy harmonization - Staff advised the Commission work with BEAC and the PREF-CEMAC Secretariat to put forward a harmonized view on the contemplated multilateral stabilization fund, emphasizing harmonizing views on feasibility and modalities for setting up such a fund that would be funded by part of oil windfalls. - Staff indicated the Fund stands ready to provide technical assistance on the matter if needed. ### Authorities’ stance on surveillance credibility and conditionality - The CEMAC Commission concurred with staff on the importance of strengthening the credibility and enforceability of the regional surveillance framework. - The Commission indicated it would intensify concertation efforts with the UMAC ministerial council to bring back on track the adoption process of the draft sanction mechanism for breaches of regional surveillance rules. - The Commission suggested that conditionality under individual CEMAC member countries’ Fund-supported programs be considered as an additional potential vehicle for accelerating the adoption of the new draft sanction mechanism. - The Commission noted it is working on ensuring that all member countries share their medium-term convergence plans and finalizing the internal analysis of the early warning system on macroeconomic imbalances. - The Commission highlighted progress on strengthening compliance with the regional convergence criteria, including with the support of the Fund’s technical assistance. ### Accelerating structural reforms, food security, and climate resilience - Staff called for accelerating structural reform implementation to bolster productivity and competitiveness, emphasizing reforms in governance, regulation, AML/CFT and anti-corruption frameworks, human capital, the business climate, the rule of law, financial inclusion, and regional infrastructure projects to enhance economic diversification and resilience, broaden the non-oil tax base, and deepen regional trade integration. - Staff welcomed the development of a regional financial inclusion strategy and encouraged member states to increase budgets allocated to improving human capital in line with commitments made at the African Heads of State Summit organized by the World Bank in July 2023 in Dar es Salaam. - Staff commended adoption of the financing plan for the regional food self-sufficiency strategy and called for intensified efforts to ensure its prudent implementation—while carefully avoiding FX or trade restrictions—to boost domestic agriculture production and strengthen food security. - Staff reiterated the need for coordinated action to enhance resilience to climate shocks, advising the Commission to perform a climate change risk assessment to define a regional climate adaptation strategy, intensify forest and water conservation efforts, and explore distributional impacts and socio-economic benefits. - Staff indicated the Commission would benefit from accelerating work on a regional climate change adaptation strategy, in collaboration with the World Bank. ### Monitoring regional policy assurances and NFA targets - Regional authorities moved forward with policy commitments from the June 2023 follow-up to the Letter of support to member countries’ recovery and reform programs. - BEAC maintained the tightening path of monetary policy and liquidity conditions (¶6–7 and 20–21) and discontinued weekly liquidity injections at its main refinancing window. - BEAC started mopping up excess liquidity by increasing the rate and volumes of its liquidity absorbing operations. - Resolution of operational challenges in the extractive sector has improved compliance with the surrender and repatriation requirements of the FX regulations. - Discussions are ongoing on the draft model contract for the escrow account for funds set aside for rehabilitation of oil sites. - CEMAC national authorities have started to take action to preserve financial stability, including under Fund-supported programs, by making plans to address weak banks and appropriately tackle the bank-sovereign nexus. - The regional policy assurance on the NFA set for end-June 2023 (EUR 4.47 billion) was met with a significant margin (EUR 880 million) (¶10). - BEAC requested a downward revision to the regional policy assurance on the NFA for end-December 2023 (to EUR 3.91 billion) to account for the reversal of the exceptional overperformance at end-June 2023 and the decreasing trend in early 2023H2. - The overperformance observed at end-June 2023 (EUR 880 million) was due to one-off factors that reversed in the following months. - High frequency data on FX reserves and transfers point to a correction in the third quarter, driven by a likely deterioration in the current and financial accounts (¶10). - Staff and BEAC agreed that an accelerated external reserves build-up is needed before the positive outlook offered by favorable hydrocarbon and oil prices fades away. - Member countries stand ready to implement offsetting policy adjustments, should external financing support fall short of expectations, consistent with commitments under Fund-supported programs. - BEAC will step up efforts to monitor compliance of the public and extractive sectors with the FX regulations; member countries should ensure all public entities fully repatriate their deposits held abroad. - The decline in NFAs justifies accelerating the tightening of liquidity. - Staff and BEAC agreed that an accelerated external reserves build-up is needed before the positive outlook offered by favorable hydrocarbon and oil prices fades away. - The attached follow-up letter describes the proposed end-December 2023 NFA target, the proposed June 2024 NFA target, and associated regional institutions’ policy intentions in support of national programs. - Consistent with staff projections, which accounts for the downward revised end-December 2023 owing to the above-mentioned factors (¶10), the proposed end-June 2024 NFA target covered by the updated policy assurances was set at EUR 4.30 billion (Text Table 4). - The higher proposed NFA target for end-June 2024 compared to the proposed end-December 2023 NFA target reflects an expected smaller deterioration of the CAB in 2024H1 compared to 2023H2. - Given that oil prices started increasing in the third quarter of 2023, the impact on oil export receipts is expected to be felt in 2024H1, on account of the usual 9–12-month transmission lag linked to forward oil sale contracts. - In the medium term, gross reserves are projected to reach 4.7 months of imports. - These proposed NFA targets for end-December 2023 and end-June 2024 are subject to risks from heightened external uncertainties, including volatility in the oil market and donor support shortfalls, as well as domestic macroeconomic and political risks. ### Staff appraisal and priority policy recommendations - The CEMAC’s recovery gained strength in 2022, supported by higher hydrocarbon prices; FX reserves accumulated rapidly but remain below adequate levels. - Staff projects GDP growth to slow to 2.6 percent in 2023, mainly owing to a contraction in hydrocarbon output (Equatorial Guinea), and stabilize at around 3½ percent over the medium term. - Staff recommends a more prudent approach to managing oil windfalls and prioritizing tackling recent fiscal slippages to enhance resilience to potential shocks. - Key downside risks listed by staff include: declining commodity prices; tighter financial conditions; heightened political uncertainty; further fiscal slippages; entrenched inflation; financial instability; slow progress on structural reforms; food insecurity; and climate-related events. - To strengthen resilience, staff advised policies be brought back in line with ambitious fiscal consolidation paths consistent with Fund-supported programs, including efforts to: intensify non-oil tax revenue collection, enhance spending efficiency, phase out inefficient energy subsidies while ensuring adequate targeted safety nets. - On monetary policy, staff advised a data-dependent approach to changes to the main policy rate (TIAO) with a tightening bias to keep inflation expectations anchored. - BEAC left the policy rate unchanged at 5 percent at the September 2023 meeting, following a cumulative 175 basis points increase between November 2021 and March 2023. - Staff reiterated its call for further increases in the interest rate on liquidity-absorbing operations to converge toward the main policy rate within a relatively short timeframe. - The 50 basis-point hike in the interest rate on liquidity absorbing-operations in November 2023 is noted as a welcome first step. - Swiftly switching to a full allotment procedure will allow BEAC to absorb excess liquidity more effectively, strengthen monetary policy transmission, and support reserve accumulation. - More efficient, transparent, and consistent enforcement of the FX regulations—especially for the public sector and extractive industry—is expected to help ensure greater FX repatriations. - To preserve financial stability, staff called for strong collective action from national and regional authorities, focusing on: - (i) urgently addressing COBAC’s longstanding understaffing issues; - (ii) rigorously sanctioning or taking supervisory corrective actions when banks are systematically non-compliant with regulations; - (iii) rigorously enforcing BEAC’s refinancing policies for liquidity-stressed banks; - (iv) assessing the adequacy of non-performing exposures’ classification and provisioning, and subsequent potential capital shortages in case of insufficient loan-loss provisioning; - (v) recapitalizing or resolving weak banks by national governments; - (vi) implementing comprehensive domestic arrears clearance and prevention strategy by national governments. - COBAC should pursue efforts to ensure that undercapitalized banks submit credible medium-term recapitalization plans and establish a strategy for NPL reduction within a short timeframe. - COBAC’s ongoing progress related to the risk-based prudential supervision and the regulatory framework for AML/CFT supervision is welcome; COBAC should continue to work closely with national and regional authorities (GABAC, BEAC) to address strategic AML/CFT deficiencies identified in the mutual evaluation of the CEMAC member countries. - COBAC should accelerate the implementation of Basel II/III and ensure that banks account adequately for sovereign risk. *Source: 32. Authorities’ Views* ### 47. The delay in the adoption of new sanction mechanism for breaches of regional ### 47. The delay in the adoption of new sanction mechanism for breaches of regional ### Delay in adoption of sanction mechanism - Finding: The delay in the adoption of new sanction mechanism for breaches of regional surveillance rules raises concerns. - Recommendation: The CEMAC Commission should intensify coordination efforts with the UMAC ministerial council to swiftly bring its adoption process back on track, to enhance the enforceability and credibility of the regional surveillance framework. - Recommendation: The Commission should urge member states to make faster progress on previously identified key prerequisites for ensuring greater compliance with the regional convergence criteria. ### Enhancing supervisory framework and capacity for digital risks - Finding: Enhancing the supervisory framework and capacity is needed to appropriately monitor and manage new forms of risks posed by digital payments and assets. - Recommendation: Regional supervisors need to advance the crypto-related regulatory framework and enhance coordination of the issuance of laws and regulations. - Consideration: Confirm that initiatives, such as C.A.R.’s recent law allowing the tokenization of its resource wealth with exclusive payment use of crypto assets for the transactions, does not violate BEAC’s exclusive right to issue currency in the CEMAC or come at the expense of financial integrity, governance, consumer protection, and compliance with AML/CFT standards. - Recommendation: BEAC should diligently account for potential effects of digital payments and assets on its operations and the conduct of monetary policy. - Recommendation: BEAC’s exploration of the feasibility of a CBDC should be based on a cost-benefit analysis. ### Accelerating structural reform implementation - Finding: Accelerating structural reform implementation is essential to boost the region’s potential growth, and enhance diversification and inclusiveness. - Recommendation: Faster progress on longstanding governance, transparency, and corruption frameworks, and regulatory reforms, and measures to improve human capital, the business climate, financial inclusion, and regional infrastructure projects would help bolster economic diversification and inclusiveness, and enhance resilience to shocks, including climate-related events. *Source: IMF content unit 1caeea2023003 - 47.* ### 50. Overall, staff: (i) notes that BEAC met the policy assurance on the NFA provided in the ### Overall staff assessment on NFA and macroeconomic outlook (Content unit: 1caeea2023003 - excerpt) ### Staff findings on NFA and policy assurances - Staff notes that BEAC met the policy assurance on the NFA provided in the July 2023 follow-up letter, reflecting the improved trade balance, greater FX repatriation and tighter monetary policy. - Staff supports the updated policy assurance on NFA accumulation to bring NFA to €3.91 billion and €4.30 billion at end-December 2023 and end-June 2024, respectively. - 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. ### Required actions to meet NFA targets and reverse 2023H2 trend - BEAC to step up its efforts to monitor the compliance of the public and extractive sectors with the repatriation and surrender requirements of the FX regulations. - Member countries to tackle recent fiscal slippages in line with Fund-supported programs and staff advice. - An accelerated tightening of liquidity conditions, with meaningful increases in the interest rates on liquidity-absorbing operations. ### Broader policy recommendations and conditionalities - Anchored by Fund-supported programs and surveillance advice, member countries should stand ready to maintain macroeconomic stability, including through appropriate fiscal policy measures, and to implement structural reforms. - Priority structural reforms and governance measures include: governance, regulation, AML/CFT and anti-corruption frameworks, combined with ambitious policies to improve human capital and the business climate to enhance economic diversification and resilience. - FX reserve build-up will depend on timely disbursements of external financing. ### Key projections and selected indicators (as reported) - Real GDP is projected to decelerate to 2.6 percent in 2023, from 3.0 percent in 2022, mainly reflecting a sharp contraction in economic activity in Equatorial Guinea. - The overall fiscal balance is projected to deteriorate from 2.5 percent of GDP in 2022 to 0.4 percent of GDP in 2023, mainly because of lower hydrocarbon revenue and spending overruns in some member countries. - The current account balance is projected to deteriorate from 2.8 percent of GDP to -1.9 percent of GDP in 2023, mainly reflecting a decline in hydrocarbon exports. - The oil price path was revised up to $82.4 per barrel on average in 2023. - Higher oil prices led to higher oil export receipts of about 9 percentage points of GDP in 2022. - Public debt is expected decline to around 53.7 percent of GDP in 2023, and 43 percent of GDP in the medium term. *Source: Excerpt from IMF staff report (CEMAC) as provided in the supplied content.* ### 1. External financing needs ### 1. External financing needs ### Key figures from external financing summary table - 1 After projected/targeted change in gross reserves. - 2 Refers to the projections of the IMF SR 23/245. - 3 Includes external financing from the BDEAC in CFAF. - Row data (as presented): - 1 External financing needs: 126912111077175748113140628390564797592307275582 - 2 Net IMF Financing: 307265237224141354201711477334814452-2429 - 3 Budget suport from other donors: 798684665451291411306725553438560091196287 - World Bank: 26150291123031252315114117516424129153 - African development Bank: 33827018422013454910887913789354277 - European Union: 455716683400333361320 - France: 154149174111359563313136946321648 - Other: 1158029020002980298000 - 4 Commercial borrowing: 1120-795954560000000000 - 5 Debt relief: 000285104700-1-1-1-1000 - 6 External arrears: 006729-57-100-35-35-35-350-1-1 - 7 Residual financing gap: -1161297-258-26-3150-1060-710-177-67-67-133 - Time labels visible: 2022 2024 2023 (as presented near the table header) ### Notes on table provenance - The table appears in the CEMAC section of the IMF staff report and is accompanied by the footnotes above. --- ### Annex I — The Risk of Entrenched Inflation in CEMAC: Key findings - Headline and recent levels: - Inflation reached its peak since 2009, at 7.6 percent year-on-year (y-o-y) in November 2022. - Inflation hovered around 7.2 percent y-o-y in the first quarter of 2023. - Drivers and dynamics: - The initial surge in headline inflation was largely driven by the spike in global food and energy prices associated with post-pandemic global supply chain disruptions and the fallout of Russia’s invasion of Ukraine. - There are signs of broadening price pressures, increasing the risk of inflation becoming entrenched. - Measures of underlying inflation: - BEAC’s measure of core inflation (excluding food and non-alcoholic beverages and transport) reached 5.9 percent y-o-y in March 2023 from 3.4 percent y-o-y in March 2022. - Staff’s trimmed mean CPI inflation and the weighted median increased by around 1.7 percentage points between March 2022 and March 2023. - More than two-thirds of the CPI basket contained items with inflation rates above 3 percent in March 2023, up from less than 10 percent at the beginning of the year; some items have prices increasing by more than 5 percent. - Econometric and transmission evidence: - Global price shocks (shipping costs, oil and food prices), after controlling for domestic factors (expectations and economic slack), are positively and significantly correlated with headline inflation. - Headline inflation exhibits strong persistence; lagged inflation terms have highly significant large coefficients. - Impact of shocks: - Food commodity price shocks: impact on inflation is more gradual, but larger and more persistent than oil price shocks (reflecting the large share of food items in the consumption basket: around 40 percent). - Oil price shocks: significant but less persistent than food shocks in staff analysis. - Shipping cost shocks: more modest effect and build up more gradually than oil and food price shocks but are persistent. - Policy implications and recommendations: - A data-dependent approach to monetary policy decisions, with a tightening bias, is appropriate. - BEAC’s decision to tighten monetary policy by increasing policy rates several times since November 2021 is supported to prevent inflation expectations from being de-anchored. - BEAC should remain data-dependent, monitor domestic and external price pressures closely, keep a tightening bias, and tighten further liquidity conditions. - Fiscal policy should complement a tight monetary stance by constraining aggregate demand to reduce inflationary pressures. --- ### Annex II — Net Foreign Assets (NFA) and Oil Prices: Key findings - Oil dependence: - In 2022, oil exports represented 71 percent of total exports for the region (note: the text also shows country heterogeneity and a CEMAC aggregate of 72.1 percent in the country table). - Country oil exports as percent of own exports (table entries): - CAR 0.0 - Cameroon 40.1 - Congo 82.2 - Gabon 72.2 - Equatorial Guinea 92.8 - Chad 81.0 - CEMAC 72.1 - Stylized facts on NFA dynamics: - NFA accumulation broadly follows movements in global oil prices, but with a lag and heterogeneity across countries. - Staff statistical analysis suggests that historically, changes in NFA in the CEMAC region respond to changes in oil prices with an average lag of around 9 months. - Heterogeneity example: in Congo the lag stretches to almost 18 months. - After 2016, Equatorial Guinea’s oil export volumes stopped moving in tandem with oil prices, reflecting depletion of oil fields and underinvestment. - Congo has not accumulated reserves in line with their oil export receipts since 2016; following the 2014–2016 oil price slump (about 70 percent drop) the CAB switched from a surplus of around 0.1 percent of GDP in 2014 to a deficit of about 40 percent of GDP in 2015 and 45 percent of GDP in 2016. - Projections and risks: - Staff analysis points to some upside risks to the end-December 2023 NFA target set in June 2023. - Using a simple regression model (controlling for lags of NFA) with estimated elasticities and the WEO oil price forecast, projected NFA buildup slightly exceeds the December 2023 NFA target set in June (EUR 4.32 billion), owing in part to upward revisions in oil prices. - The projection does not account for the September correction in NFA or other idiosyncratic factors (e.g., temporary disturbances in oil production during the coup d’état in Gabon). - An agreement between the extractive sector and BEAC on operational modalities for repatriation of funds dedicated to rehabilitation of oil sites would constitute an upside risk to NFA accumulation. - Methodological note: - The staff uses a pooled OLS/WLS and fixed effects (within) regression model with Driscoll and Kraay standard errors; the model specification and caveats are presented in the source. --- ### Annex III — Risk Assessment Matrix: Principal risks, likelihoods, expected impacts, and recommended policy responses - Intensification of regional conflict(s). Likelihood: High. Expected Impact if Realized: High. - Recommended Policy Response: - Accelerating fiscal adjustment, raising the policy rate to curb inflation, and seeking affordable external financing and mobilize additional grants and concessional loans, would support reserves and the currency peg. - Provide targeted support to vulnerable households to mitigate the impact of higher fuel and food prices. - Commodity price volatility. Likelihood: High. Expected Impact if Realized: Medium. - Expected effects enumerated: - High oil prices partially offset rising food and fertilizer prices and buoy fiscal and external positions, but inflation pressures could build up and fiscal positions could worsen if food security is addressed through price controls and subsidies. - Upside: High commodity prices boost income from oil and commodity production. - Downside: Costly food imports negatively affect urban middle-class spending and endanger food security in poor households; high fertilizer prices affect agriculture and future harvests; inflation builds up and threatens the recovery. - Recommended Policy Response: - Keep fiscal spending in line with program deficit targets to contain inflation, lower debt, and build back fiscal space for the next commodity downturn; streamline and target spending, including through PFM. - Prioritize targeted social spending to the most vulnerable. Where social safety nets are not well developed and price controls are needed, offset spending by strengthening collection, broadening tax bases, and phasing off exemptions. - Implement structural reforms and encourage intra-region trade to diversify and reduce reliance on oil and commodity prices. - To help decouple reserve accumulation from oil revenue, BEAC should continue discussing constructively with the extractive sector to ensure a smooth enforcement of the repatriation of funds dedicated to the rehabilitation of oil sites (RES). - Abrupt global slowdown or recession. Likelihood: Medium. Expected Impact if Realized: High. - Expected effects: Weaker global growth → lower oil prices → worsening fiscal and current account positions in oil-dependent CEMAC → pressure on reserves. - Recommended Policy Response: - Enforce the FX regulations; strengthen repatriation efforts, including from SOEs. - Design fiscal contingency plans to address deterioration of the current account. - Implement structural measures to diversify the economy, enhance competitiveness, and deepen regional integration. - Monetary policy miscalibration. Likelihood: Medium. Expected Impact if Realized: Medium. - Expected effects: Premature rate cuts by major central banks could result in premature loosening by BEAC, increasing inflation and damaging BEAC credibility. - Recommended Policy Response: - BEAC should keep monetary policy on hold with a tightening bias, to anchor expectations and support reserves. - Maintain a prudent fiscal policy stance to protect the peg and alleviate crowding-out in the regional market. - Accelerate implementation of structural reform agenda to support capital flows (in particular FDI) and confidence. - Systemic financial instability. Likelihood: Medium. Expected Impact if Realized: Medium. - Expected effects: Tightening global financial conditions and spiking risk premia would raise borrowing costs and increase debt vulnerabilities, with knock-on effects on growth and financial access. - Recommended Policy Response: - Enhance banking supervision and enforce prudential regulations. - Improve processes and procedures for collection of debts and collateral. - Create fiscal space to absorb financial shocks. - BEAC (in cooperation with COBAC) should engage proactively with banks facing high liquidity needs. - COBAC should ensure undercapitalized banks submit credible medium-term recapitalization plans and establish a strategy for NPL reduction. - Social discontent. Likelihood: Medium. Expected Impact if Realized: High. - Expected effects: High inflation, real income loss, and spillovers from crises worsen inequality, trigger social unrest, and exert financing pressures. - Recommended Policy Response: - Use oil windfalls to reduce macroeconomic instability and rebuild external and fiscal buffers to maintain market confidence and attract private investment. - Maintain effective social dialogue, protect social spending and build social safety nets to reduce poverty. - Increase social investment in health, education, welfare, and youth upskilling. - Deepening geoeconomic fragmentation. Likelihood: High. Expected Impact if Realized: Medium. - Expected effects: Trade restructuring and deglobalization may reduce imports and exports, increase costs for imported goods and capital, and affect growth; access to international capital markets may fragment. - Recommended Policy Response: - Boost the resilience of the economy and key supply chains, including through diversification. - Cyberthreats. Likelihood: Medium. Expected Impact if Realized: Medium. - Expected effects: Impact on public services that rely on digital infrastructure. - Recommended Policy Response: - Create contingent plans for cyberattacks. - Assess risk and impact of cyberattacks on public services, including IT systems of public institutions. - Extreme climate events. Likelihood: Medium. Expected Impact if Realized: High. - Expected effects: More frequent floods and droughts (CAM, TCD); rising sickness and poor harvests (CAR, EQN); higher sea levels and dry rivers/lakes (GAB, EQN, TCD); displacement and destruction of capital; fiscal pressures. - Recommended Policy Response: - Invest in climate adaptation and improve shock response mechanisms to cope with floods and droughts. - Enhance food security, including through irrigation and productivity in agriculture. - Mitigate the impact on the poor through targeted fiscal transfers and other public spending. - Improve the business climate to boost investment and encourage diversification. - Free up fiscal space to invest in mitigation and adaptation infrastructure. - Work with partners to identify vulnerable populations and regions, conduct risk assessments, and plan disaster mitigation measures. - Disorderly energy transition. Likelihood: Medium. Expected Impact if Realized: Medium. - Expected effects: Lower hydrocarbon demand renders the engine of growth (oil) obsolete, narrowing the window for competing in non-oil sectors; potential increase in poverty and wealth disparities. - Recommended Policy Response: - Implement deep governance, structural, and growth-enhancing reforms. - Invest in education/upskilling, business climate and infrastructure (including for digital development) to improve competitiveness. - Accelerate efforts to establish social safety nets to protect vulnerable populations from future shocks and transitions. - Domestic: Intensified security risks, including regional spillovers. Likelihood: High. Expected Impact if Realized: High. - Expected effects: Large adverse effects on investment, activity, public finances, and policy implementation; vulnerability to sudden regime changes. - Recommended Policy Response: - Promote security, strengthen social safety nets, and facilitate job creation in the private sector. - Create fiscal space by accelerating revenue mobilization reforms and reprioritizing non-priority spending. - Ensure the pace of medium-term consolidation is gradual, but consistent with fiscal stability. *Source: IMF staff report excerpts (CEMAC section) as presented in the supplied content.* ### Annex IV. CEMAC External Sector Assessment ### Annex IV. CEMAC External Sector Assessment ### Overall assessment - The external position of CEMAC is moderately weaker than the level implied by fundamentals and desirable policies at end-2022. - CEMAC’s current account balance (CAB) recovered from the 2015 oil shock trough to 3.6 percent of GDP at end-2022. - The CA surplus in 2022 was buoyed by higher hydrocarbon prices and real depreciation against the U.S. dollar through most of the year. - The CAB is projected to be -1.1 percent of GDP in 2023. - The quantitative assessment using the Fund’s EBA-lite Current Account methodology suggests an over-valuation of CEMAC’s real effective exchange rate (REER) of 6.4 percent in 2022. - The CAB is expected to revert to its historical average in the medium term while reserves are expected to increase and reach the benchmark considered adequate for a resource-rich monetary union exposed to volatile commodity prices (5 months) on the medium term. ### Foreign assets, liabilities, and reserves adequacy - Gross foreign reserves at end-2022: US$11.1 billion — equivalent to 4.1 months of imports of goods and non-factor services (GNFS). - Adequacy benchmark for CEMAC (resource-rich monetary union exposed to volatile commodity prices): 5 months of GNFS. - Reserves increased from 3 months of GNFS in 2021 to 4.1 months in 2022 due to: - improvement in the CAB driven by higher hydrocarbon export receipts; - stepped-up enforcement of FX regulations; - tighter monetary policy and fiscal surpluses; - availability of emergency financing and IMF-supported program disbursements; - the SDR allocation. - BEAC foreign liabilities: 5.6 percent of GDP in 2022. - IMF financing for the region: 0.6 percent of GDP in 2022. - SDR drawings: 0.4 percent of GDP in 2022. - NIIP data are not available union-wide, precluding the use of the External Sustainability approach. - Assessment and outlook: - Despite accelerated accumulation in 2022, reserves at end-2022 (4.1 months of GNFS) are below the adequacy target and pose a risk to external sustainability given oil price volatility and global uncertainties. - Reserve coverage expected end-2023: 4.6 months of GNFS. - Reserves expected to reach 5 months of GNFS in 2028. - Cost-benefit scenario analysis note: the optimal level of reserves for CEMAC could range between 6.3 to 9.7 months of imports depending on the scenario; to cover a two standard deviation current account shock, import coverage should amount to about 7 months of imports for the average country. ### Current account, REER, and capital flows - Historical CAB trajectory: - Trough after the 2015–2016 oil shock: -14.4 percent of GDP. - Temporary dip to -2.5 percent in 2020 due to COVID-19. - CAB at end-2022: 3.6 percent of GDP. - Oil exports: - Oil exports as percent of GDP: 28.8 in 2022 compared to 19.7 in 2021. - Medium-term projections: - CAB projected to deteriorate to -1.1 percent of GDP in 2023 (1.4 percentage point of GDP less compared to the projection in June 2023). - CAB gradually reverts to -4.1 percent of GDP over the medium term (above its historical average of -3 percent of GDP). - Average CAB for CEMAC over the medium term projected at -3.4 percent of GDP. - Non-oil CAB over the medium term projected at -4.2 percent of GDP. - REER and competitiveness: - REER depreciated in 2022 but saw a gradual appreciation in the first half of 2023. - Non-price competitiveness measures (governance and doing business) remain weak with little improvement in recent years. - Elasticity of the current account to REER: -0.23 (average of countries’ elasticities). - Capital flows: - Pre-GFC FDI peak: 8.8 percent of GDP. - Current FDI: 3.6 percent of GDP. - Other investment: -5.1 percent of GDP in 2022. - Medium-term outlook expects net capital inflows to increase, aided by lower external debt repayments from 2024 onwards (mostly by Congo and Chad) and higher FDI. - Official financing, including balance of payments support from the Fund, other IFIs and bilateral donors, is expected to continue at least until 2024. - Capital flows remain subject to significant uncertainty reflecting downside risks. ### EBA-Lite model results and assessment metrics (2022) - EBA-Lite CA model setup highlights: - Calibrated to reflect projected cyclically-adjusted fiscal balance (average of individual countries); - Public health expenditures set at 2 percent of regional GDP (average of individual countries); - No desired change in reserves (assumes reach 5 months of import coverage at end-2028); - Private sector credit level around 25 percent of GDP; - Assumption of stable regional capital controls (no loosening over the medium-term). - Estimation includes cyclical contributions and a measure of potential impact of natural disasters and conflicts. - 2022 model estimates and adjustments: - EBA-Lite CA model estimate of CA norm for 2022: -1.3 percent of GDP. - Cyclically adjusted CA for 2022: -2.7 percent of GDP. - Implied gap under current policies: -1.5 percent of GDP (moderately weaker external position than warranted by fundamentals and desirable policies). - Implied REER overvaluation (from CA gap): 6.4 percent in 2022. - REER model indicates an undervaluation of 11.3 percent (final assessment anchored on the CA model). - Given exceptional high CAB in 2022 buoyed by hydrocarbon prices, an additional temporary/statistical adjuster of 5 was applied to align the Adjusted CAB with medium-term projections. ### Policy recommendations and potential policy responses - Macro-policy mix: - Maintain prudent fiscal and monetary policies to support a strong external position and adequate reserve buffers alongside sustainable capital inflows in the medium term. - Fiscal and reserve-strengthening measures: - Sustained fiscal consolidation in line with IMF-supported programs to restrain deposit drawdown and prevent loosening elsewhere. - Stronger compliance with existing foreign exchange (FX) regulations, particularly by state-owned enterprises where compliance is weak. - Reach an agreement with the extractive sector on model contracts of the escrow account attached to the funds set aside for the rehabilitation of oil sites (RES) to strengthen reserves. - Timely completion of Fund-supported program reviews to catalyze donor support and diversify the region’s financing mix. - Additional donor support will be needed to close any residual external financing gap. - Structural and competitiveness reforms: - Boost non-hydrocarbon sector output and productivity through reforms to the business environment, governance, financial sector, and human capital. - Remove trade restrictions within the union to spur growth in non-oil sectors (such as agriculture) and lower dependence on food imports. - During periods of high oil prices, use oil windfalls to steadily ramp up public investment and gradually boost the stock of public capital and non-oil output. - Monetary and FX operations: - Enforce FX regulation to ensure full repatriations of export proceeds, notably by the public sector. - Strengthen BEAC dialogue with banks and businesses and finalize tripartite escrow account contracts (extractive companies, national governments, and BEAC) to enable repatriation of RES funds. - Structural governance and financial sector actions: - Implement deep structural and governance reforms to improve productivity, competitiveness, and diversification. - Strengthen prudential supervision, address bank sovereign exposures, and bolster COBAC staffing and supervisory capacity. *IMF staff assessment as summarized in Annex IV. CEMAC External Sector Assessment.* ### Appendix I. Follow-up to the Letter of Support to the Recovery ### Appendix I. Follow-up to the Letter of Support to the Recovery and Reform Programs Undertaken by the CEMAC Member Countries ### Overview and commitments - Renewal of assurances provided in June 2023 by the community Institutions in support of the economic recovery and reform programs initiated by CEMAC member countries; reflects commitments from regional consultations between IMF staff and CEMAC Institutions (October 30–November 16, 2023). - BEAC and regional institutions commit to preserving internal and external stability of the currency, tightening monetary policy further if inflationary pressures persist or net foreign assets (NFA) deviate from targeted paths. - BEAC committed to: (i) converge interest rates on liquidity-absorbing operations towards the policy rate before end-2024 (gradual but significant given the substantial initial gap); (ii) switch swiftly to a full allotment procedure; (iii) produce and send to IMF staff a dashboard of relevant weekly and monthly indicators starting in December 2023. ### Macroeconomic developments and outlook - Economic recovery that began in 2022 strengthened in H1 2023 and expected to continue through 2023, supported by high hydrocarbon prices. - Inflation and monetary stance: - High inflation of around 6.5 percent year-on-year at end-2022 (above the 3 percent convergence criterion). - Year-on-year inflation declined from 7.2 percent in March to 6.0 percent in June 2023. - Main policy rate (Tender Interest Rate, or TIAO) increased by 175 basis points since November 2021, reaching 5.0 percent in March 2023. - Interest rate on liquidity absorption operations increased by 5 basis points to 0.85 percent in June 2023. - A 50 basis-point increase in the interest rate on liquidity absorbing-operations occurred in November 2023. - Growth and risks: - Outlook marked by gradual strengthening of post-COVID recovery in 2023, but slower than previously projected due to declines in oil and gas production in Equatorial Guinea and Cameroon; partly offset by stronger rebound in Congo and new oil fields. - Key risks: oil market volatility, persistent inflationary pressures, tighter global financial conditions, escalation of geopolitical tensions, food insecurity, financial instability, security and sociopolitical risks in Cameroon, CAR, Gabon, and Chad, humanitarian and security spillovers from Sudan conflict and political crisis in Niger. ### Monetary policy actions and liquidity management (BEAC) - Actions taken: - Maintained data-dependent approach with a tightening bias. - Suspended weekly liquidity injections on the money market (beginning of March 2023) to focus on weekly liquidity absorption operations. - Gradually increased weekly liquidity absorption operations from CFAF 50 billion in March 2023 to CFAF 150 billion in June 2023. - Allotted CFAF 50 billion in longer-term liquidity (one month) absorption operation in August 2023. - BEAC has not provided direct monetary financing to member countries (in accordance with its Charter). - Future intent: - Ready to tighten monetary policy further if needed. - Committed to a more significant increase in interest rates on liquidity-absorbing operations to converge toward the policy rate. - Will swiftly switch to a full allotment procedure. - Will monitor NFA and monetary and financial developments closely and notify/consult IMF staff in a timely manner on developments likely to affect external stability by end-December 2023 and June 2024. ### Fiscal and external positions - Fiscal outcomes: - Region’s overall fiscal balance, excluding grants, recorded a surplus of 2.5 percent of GDP in 2022 (versus a deficit of 1.9 percent in 2021). - Non-oil primary deficit (including grants) widened by 1.1 percentage points of non-oil GDP in 2022 due to fuel subsidies and slower improvement in non-oil revenue. - Total public debt declined by 4.2 percentage points to 53.4 percent of GDP at end-2022; expected to rise to 53.7 percent of GDP in 2023 and subsequently decline to approximately 43 percent of GDP in the medium term. - External sector: - Current account balance improved from a deficit of 1.0 percent of GDP in 2021 to a surplus of 2.8 percent in 2022 (high hydrocarbon prices and real depreciation of the CFA franc against the U.S. dollar). - External position strengthened in H1 2023 with an increase in NFAs due to monetary tightening, improved fiscal balances, and more rigorous enforcement of FX regulations. - Regional assurance on NFA at end-June 2023 (EUR 4.47 billion) was met with a comfortable margin of EUR 880 million. - NFAs fell from EUR 5.35 billion at end-June 2023 to EUR 3.86 billion at end-October 2023 (driven by sharp decline in public sector FX repatriations and sharp increase in FX outflows, including dividend payments and higher foreign currency for wholesale trade intermediaries’ services). ### FX regulations, repatriation, and extractive sector measures - Enforcement and compliance: - Extension of FX regulations to all economic sectors led to greater-than-projected FX repatriations; enforcement continues. - Noted sharp drop in FX repatriation by the public sector in first nine months of 2023; will strengthen cooperation with member states to monitor compliance by public and extractive sectors. - Member states should ensure all public entities fully repatriate deposits held abroad. - Extractive sector engagements: - Draft model contracts of the escrow account attached to RES funds (funds set aside for rehabilitation of oil sites) finalized; expected to be approved and signed by member states and extractive sector shortly. - Outstanding issues under discussion: (i) terms and conditions for remunerating escrow accounts attached to RES funds; (ii) treatment of RES funds constituted in the form of accounting provisions. - Once agreement signed, RES funds set up before January 1, 2022 expected to be repatriated to escrow accounts at BEAC at a rate of at least one third (1/3) per year from January 1, 2022 and immediately repatriated for those set up after that date. - RES Funds expected to be set up directly in accounts opened in CEMAC once agreement is signed. - BEAC will continue to discuss with IMF and World Bank staff efforts to increase extractive sector compliance with FX regulations to enhance transparency. ### Banking supervision, financial stability, and crypto-asset monitoring - Banking supervision: - COBAC lifted temporary prudential forbearance measures in July 2022 and lifted suspension of dividend distribution in June 2023 (authorizing dividend distribution for 15 banks). - Banking sector soundness indicators deteriorated slightly in H1 2023; sector remains fragile with breaches of prudential standards. - COBAC to intensify on-site supervision, accelerate resolution for undercapitalized banks, strengthen AML/CFT supervision and regulatory framework, escalate sanctions gradually, and require recapitalization plans for undercapitalized banks within a short timeframe. - BEAC and COBAC committed to tightening conditionality of refinancing and closely monitoring banks’ sovereign exposure; will examine refinancing plans of banks structurally dependent on BEAC refinancing. - State-owned banks and arrears: - Member countries’ support essential for strengthening state-owned banks and implementing domestic arrears clearance plans based on transparency and strengthened public financial management. - Crypto-assets and CBDC: - Regional supervisors (BEAC, COBAC, COSUMAF, GABAC) will promote a regulatory framework for crypto-assets and coordinate on laws/regulations. - BEAC (with other supervisors) will issue an opinion on initiatives such as CAR’s law authorizing tokenization of natural resources with exclusive payment use of crypto-assets, assessing implications for BEAC’s exclusive right to issue currency, financial integrity, governance, consumer protection, and AML/CFT compliance. - BEAC set up a working group in September 2023 to consider a central bank digital currency (CBDC) and will concert with regional supervisors to develop a consistent regulatory framework; has requested IMF technical assistance. ### NFA targets and requested revisions - NFA developments: - End-June 2023 regional assurance on NFA: EUR 4.47 billion; margin EUR 880 million. - NFAs fell from EUR 5.35 billion at end-June 2023 to EUR 3.86 billion at end-October 2023. - Requested target revisions: - Requesting downward revision of region’s NFA target for end-December 2023 from EUR 4.32 billion to EUR 3.91 billion. - NFA target for end-June 2024 set at EUR 4.30 billion (taking into account projected deterioration in current account balance in 2024 linked to projected decline in hydrocarbon export earnings and offsetting measures). ### Structural reforms, public financial management, and Treasury Single Account (TSA) - Structural fiscal measures to improve fiscal balances in 2023: mobilization of non-oil revenue, greater control and efficiency in public expenditure, more effective public financial management, and reduction of nontargeted subsidies. - Public debt strategy and transparency: - Total public debt below community threshold of 70 percent of GDP. - Plans to adopt and implement regional directives on taxation and PFM to strengthen transparency and governance. - TSA and IT platform: - Implementation of IT platform to facilitate deployment of TSA systems is in pilot phase in Cameroon and Gabon; experienced technical delays. - Full migration to TSA system planned by end-June 2024, to be subsequently extended to other member countries’ treasuries. ### Surveillance, sanctions mechanism, and data reporting - Convergence rules and sanction mechanism: - BEAC will work with CEMAC Commission and PREF-CEMAC Permanent Secretariat to resume adoption process of draft new sanction mechanism for breaches of convergence rules (process stalled after ministerial questioning in March 2023). - Adoption and entry into force of the mechanism considered essential to strengthen credibility and enforceability of multilateral surveillance framework. - Data sharing and monitoring: - BEAC and COBAC to expand economic and financial statistics and expedite sharing with IMF staff to closely monitor NFA and monetary/financial developments. - Starting December 2023, BEAC will produce and send to IMF staff a dashboard of relevant weekly and monthly indicators. - COBAC will provide IMF staff with appropriate information to enable close monitoring of banking system soundness. - Commitment to oversight: - BEAC will diligently monitor developments in CEMAC country programs and provide regular updates to competent authorities (BEAC’s Executive Board, UMAC ministerial Committee, and the PREF-CEMAC). - BEAC will continue to collaborate closely with Fund staff to support the regional strategy to sustain economic recovery and take corrective measures, including in monetary policy, if adverse developments occur. ### Selected exact statistics and dates (preserved) - Inflation around 6.5 percent year-on-year at end-2022. - Inflation fell from 7.2 percent in March to 6.0 percent in June 2023. - TIAO increased by 175 basis points since November 2021, reaching 5.0 percent in March 2023. - Interest rate on liquidity absorption operations: 0.85 percent in June 2023; increased by 5 basis points in June 2023; 50 basis-point increase in November 2023. - Weekly liquidity absorption operations volumes: CFAF 50 billion in March 2023; CFAF 150 billion in June 2023. - Longer-term liquidity absorption allotment: CFAF 50 billion in August 2023. - Overall fiscal balance (excluding grants): surplus of 2.5 percent of GDP in 2022 (versus deficit of 1.9 percent in 2021). - Non-oil primary deficit widened by 1.1 percentage points of non-oil GDP in 2022. - Total public debt: 53.4 percent of GDP at end-2022; expected 53.7 percent of GDP in 2023; approximately 43 percent of GDP in the medium term. - Current account: deficit of 1.0 percent of GDP in 2021 to surplus of 2.8 percent in 2022. - Regional assurance on NFA at end-June 2023: EUR 4.47 billion; margin EUR 880 million. - NFAs: EUR 5.35 billion at end-June 2023; EUR 3.86 billion at end-October 2023. - Requested NFA target revision: end-December 2023 from EUR 4.32 billion to EUR 3.91 billion. - NFA target for end-June 2024: EUR 4.30 billion. - TSA full migration target: end-June 2024. - BEAC dashboard production to IMF: starting December 2023. *Appendix I. Follow-up to the Letter of Support to the Recovery and Reform Programs Undertaken by the CEMAC Member Countries (Yaoundé, December 1, 2023).* ### 2006. Regional Reports on Observance of Standards and Codes (ROSCs) were done in the areas of ### 2006. Regional Reports on Observance of Standards and Codes (ROSCs) were done in the areas of ### IMF Capacity Development to CEMAC Institutions, 2018–24 (selected activities and timeline) - November 2024: FAD: Workshop - Reinitiate medium-term engagement - April 2024: FAD: STX - Implementation of Technical Committee on Customs Enforcement - [December] 2023: MCM: Central Bank Digital Currency and Digital Finance for the Economic and Monetary Community of Central Africa - September 2023: MCM: Debt Management - July 2023: FAD: LTX mission to participate in CEMAC Customs Committee - July 31 - AFC Phase 3 - May 2023: FAD: LTX Tax mission 2nd validation workshop. - March 2023: STA: Strengthen compilation and dissemination of external sector statistics - February 2023: FAD: LTX tax -participation in joint CD identification. - January 2023: MCM: Payments and Infrastructure - December 2022: MCM: Debt Management - October 2022: FAD: LTX tax-participation in workshop validation - July 2022: FAD: STX Customs - Assisting the CEMAC Committee in the consolidation of its legal framework - May 2022: AFC: General Macroeconomic Analysis-Macroframeworks. - March 2021: CEMAC workshop on debt management strategy implementation - March 2021: AFC: CEMAC Virtual Workshop to validate regional tax procedures code and discuss implementation of the legislation - February 2021: AFC Development of the LCR (Basel framework implementation). - February 2021: AFC: Strengthening revenue administration, management, and governance arrangements - February 2021: STX: Upgrading tax and customs procedures. - February 2021: STA: Enhancing External Sector Statistics - February 2021: MCM: Enhancing government securities issuance coordination in the CEMAC - January 2021: MCM: Strengthening Financial Soundness indicators. - January 2021: AFC: Drafting methodological guidance for on-site supervision of payment institutions - December 2020: FAD: Harmonization of Regional custom procedures code for improved revenue performance and business climate in the region - December 2020: FAD: Draft a new Personal Income tax Directive - December 2020: AFC: Enhancing Government Securities Issuance Coordination in the CEMAC - November 2020: FAD: Regional coordination/harmonization on revenue administration. - November 2020: IT/Cyber Security - October 2020: AFC: Implementation of the RBS strategic plan - October 2020: AFC: Review of the sanctioning process and the CEMAC regulation - September 2020: FAD: Revision of the Personal Income Tax Directive - July 2020: FAD: Regional revenue administration procedures; STA: Validation workshop for the draft directive and the draft guide to material accounting - June 2020: Virtual (COVID) TA Review of the SYSCO 2 bank-rating model - June 2020: FAD: Customs STX (two missions listed) - May 2020: AFC: Review of the SYSCO bank-rating model. - January 2020: FAD: Seminar on the development of a good governance framework. - January 2020: AFC: Review of COBAC’s Supervisory Processes Relating to Addressing Prudential Infringements and Sanctioning Banks and MFIs - November 2019: AFC: Joint seminar (AFC – Afristat – CEMAC) on macrofiscal forecasting - September 2019: FAD: Revising the corporate income tax directive workshop - September 2019: AFW/AFC/MCM: Regional Seminar on Cybersecurity in the banking sector - September 2019: AFC: Roadmap for Basel framework Implementation - September 2019: AFC: Methodological guidance for on-site control of credit risk. - July 2019: FAD: scoping mission on harmonization of tax procedures, functioning of the customs union, and role of the Commission in monitoring implementation of tax and customs rules by Member States - June 2019: AFC/SPR/WB: Joint Regional Seminar on Public Debt Management - April 2019: AFC: Methodological guidance on on-site control of liquidity risk - March 2019: FAD: Assessment and advice on regional coordination of VAT (follow-up) workshop - February 2019: AFC: Upgrading the supervisory process of fragile microfinance institution. - January 2019: AFC: Banking Regulation and Supervision Seminar on the Supervision of Governance in Credit Institutions - December 2018: FAD: Assessment and advice on regional coordination of VAT workshop - September 2018: MCM: Central Bank Communications - August 2018: FAD: VAT in CEMAC countries - July 2018: AFC: Public Debt Management Regional Seminar - July 2018: AFC: Banking Regulation and Supervision Seminar - May 2018: MCM/LEG: Review of Foreign Exchange Regulations - March 2018: FAD: Coordination of Excise Taxes ### Statement by CEMAC Executive Directors (December 18, 2023) — main messages - Objective of second phase of regional strategy: support inclusive and resilient growth while strengthening internal and external stability. - Authorities appreciate staff report as accurate account of discussions in Libreville and Yaoundé (October–November 2023). - Authorities continued implementation of regional strategy in 2023, consistent with policy commitments in the June 2023 Follow-up Letter of Support to the Recovery and Reform Programs Undertaken by CEMAC Member Countries. - Macroeconomic stability improvements pursued; economic recovery strengthening; preliminary data indicate inflationary pressures are easing. - Net foreign assets (NFA) accumulated in first half of 2023 because of positive terms-of-trade shock and further application of FX regulations; downward trend in NFA in second half of year noted as concern. - Domestic revenue mobilization has been subpar; authorities committed to scale up efforts and rationalize spending, notably by withdrawing nontargeted subsidies. - Monetary and financial policies aimed at strengthening price and financial stability; priority on tackling troubled banks, scaling up supervision (including resourcing COBAC), and addressing sovereign-bank nexus. - Structural reforms under PREF-CEMAC advancing; roundtable in Paris garnered pledges to finance second program of integration projects to reduce infrastructure deficit, promote intra-community trade, and contribute to diversification. - Authorities committed to pursuing critical policies and reforms under Fund-supported programs; regional institutions eager to support through policies to strengthen the stability and resilience of the monetary and economic union. - IMF continued assistance considered essential. ### I. Recent Developments and Outlook — key economic indicators and projections - Political: Major development—political regime change in Gabon on August 30, 2023; new authorities expressed interest in continued IMF engagement; Article IV mission scheduled next month. - Growth: - 2021: 1.4 percent - 2022: 3.0 percent - 2023 projection: 2.6 percent (deceleration owing to higher-than-expected decline in oil production) - Inflation: - February 2023 peak: 6.9 percent (year-on-year) - Year-end 2023 projection: 4.9 percent - BEAC view: expects inflation to fall below regional criterion of 3 percent in 2024 - IMF staff view: projects inflation will fall below 3 percent in 2026 - Fiscal: - Overall fiscal surplus: 2.5 percent of GDP in 2022 → projected 0.4 percent of GDP in 2023 (reflecting lower oil revenue in Equatorial Guinea) - Nonoil primary fiscal deficit (NOPFD): 8.2 percent of nonoil GDP in 2022 → projected 6.6 percent in 2023 (improvement with higher nonoil revenue mobilization and rationalization of petroleum subsidies) - Public debt: 53.4 percent of GDP in 2022 → 53.7 percent of GDP in 2023 (rise due to newly audited and validated domestic arrears in Congo and Equatorial Guinea); expected to resume declining to around 44 percent of GDP over the medium-term - External: - Reserves at the Central Bank covered over 4 months of prospective imports in 2022 - NFA build-up in 2023H1; end-June 2023 NFA: EUR 5.35 billion - NFA at end-October 2023: EUR 3.86 billion (decline from EUR 5.35 billion driven by lower FX repatriations by public sector and higher FX outflows, including dividend payments after lifting of 3-year suspension of dividend distributions by COBAC in July 2022) - Current account balance: expected to deteriorate over the medium-term due to lower oil and gas export receipts - Despite deterioration, lower debt repayments and higher FDI expected to support reserve accumulation above the 5-month reserve adequacy threshold recommended for the monetary union - Risks: Uncertainty around global economy and financial conditions, oil price volatility, insecurity in the Lake Chad region ### II. Regional Policies in Support of Reform Programs — policy actions and technical measures - Monetary policy and BEAC actions: - Policy interest rate (TIAO) and marginal lending rate raised in March 2023 by 50 basis points to 5.0 percent and 6.75 percent, respectively (third increase since November 2021) - Monetary policy tightening paused as inflationary pressures ease and full effects of past hikes have not yet materialized - BEAC suspended liquidity injections and ramped up liquidity absorption operations to improve monetary policy transmission and bank liquidity management - BEAC stands ready to tighten monetary policy further if inflationary pressures resume or NFA deviates from planned trajectory - BEAC will increase liquidity absorption operations by gradually increasing the related interest rate and bringing it closer to the policy interest rate; will reach out to banks with excess liquidity to increase participation - FX regulations and TSA implementation: - BEAC continuing efforts for full, transparent, efficient, and predictable implementation of FX regulations; resolving processing issues in concertation with banking and business sectors - Decrease in FX repatriation in first nine months of 2023 by public sector; BEAC to strengthen cooperation with member states to monitor compliance by public and extractive sectors with FX repatriation and surrender requirements - Progress on RES funds (rehabilitation of oil sites): draft model contracts for escrow accounts finalized and expected to be approved and signed by member states and extractive companies in coming weeks - Outstanding RES issues: (i) terms and conditions for remunerating escrow accounts; (ii) treatment of RES funds constituted as accounting provisions - BEAC resolving IT project technical issues for Treasury Single Account (TSA) systems; pilot phase in Cameroon and Gabon; full migration now expected by end-June 2024 (previously end-2023), then extended to other treasuries - Financial sector stability and supervision: - Normalization of prudential regulations continued; banking system fragility requires resolute collective actions - COBAC prepared to intensify on-site supervision, accelerate resolution procedures for undercapitalized banks, and strengthen AML/CFT supervision and regulatory frameworks - COBAC to require undercapitalized banks to submit credible recapitalization plans in compliance with existing regulations - BEAC and COBAC to jointly examine refinancing plans of banks structurally dependent on BEAC and tighten conditionality of refinancing for those banks - Both institutions will closely monitor banks’ sovereign exposure - Addressing COBAC understaffing critical for adequate financial sector supervision - Member countries’ support essential to contain financial stability risks, strengthen state-owned banks, and advance domestic debt clearance and public financial management reforms to avoid recurrence of payment arrears - Regional financial market development: - BVMAC finalized creation of its composite index; working on listing requirements for the main market; needs to diversify investor base - COSUMAF requested Fund TA to enhance financial market supervision and financial inclusion via mobile money - AFRITAC Center provided TA to BEAC to develop a secondary market for government securities - Digital assets and CBDC: - Regional supervisors (BEAC, COBAC, COSUMAF, GABAC) to work on legal and regulatory frameworks for digital assets, including crypto-currencies and CBDC - BEAC to issue an opinion on compliance of initiatives (e.g., law in Central African Republic authorizing tokenization of natural resources) and assess unintended effects on financial integrity, governance, consumer protection, and AML/CFT compliance - BEAC requested IMF TA to support multidisciplinary working group on CBDC to develop regulatory framework to monitor and manage risks from digital payment mechanisms - Regional governance and surveillance: - CEMAC Commission initiated internal analysis of early warning system during regional surveillance mission in six countries in August 2023; related reports expected in 2024Q1 - Commission outreach to member countries to encourage submission of convergence plans, operationalization of multilateral surveillance units, transposition of regional tax and PFM directives into domestic legislation, and compliance with regional convergence criteria - Commission will pursue advancement of regional statistical program to improve external statistics - BEAC to work with the Commission and PREF-CEMAC Permanent Secretariat to resume adoption process of draft new sanction mechanism for breaches of convergence rules (delayed after March 2023 UEAC Ministerial Council concerns) - Structural transformation and regional integration: - Authorities committed to diversification and structural transformation to achieve resilience to external shocks - Completion of regional import-substitution strategy (adopted by PREF-CEMAC Steering Committee) expected to develop intraregional trade, promote diversification, and limit external stability pressures - Implementation of second program of integration projects (financing pledges secured) critical for regional integration ### III. Policy Assurances — commitments and revised targets - Authorities reaffirmed commitment to regional strategy and policy assurances in the December 2023 Follow-up to Letter of Support to the Recovery and Reform Programs Undertaken by the CEMAC Members Countries. - Policies and reforms expected to contribute to further NFA build-up in 2024: tightening bank liquidity, enforcing compliance of public entities with FX regulations, prudence in managing oil windfalls, continued reforms under Fund-supported programs, and budget support from development partners. - Authorities requested revision of regional NFA policy assurance at end-December 2023: - Previous target: EUR 4.32 billion - Revised target requested: EUR 3.91 billion - NFA target for end-June 2024 set at EUR 4.30 billion, taking into account expected deterioration in current account balance in 2024 linked to decline in hydrocarbon export earnings, partially offset by stronger FX regulations and further tightening of liquidity conditions. *IMF staff report (content unit 1caeea2023003).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1caeea2023003.pdf_