## Central African Economic and Monetary Community

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### Foreword — purpose, diagnosis, and recommended target
- Purpose: foster discussion on possible reserve management approaches in the Central African Economic and Monetary Community (CEMAC).
- Timing: published amid a Community-wide economic crisis stemming from the slump in international oil prices that began in the second half of 2014.
- Core problem: crude oil exports are CEMAC’s largest foreign exchange source; the decline in oil proceeds has adversely affected CEMAC’s economic performance and pooled international reserves at the regional central bank (BEAC).
- Medium-term horizon: assumes the current crisis has been surmounted and that CEMAC is stabilizing and building adequate and sustainable buffers. Explicitly not intended for crisis-mitigation policy or ongoing central bank safeguard reforms.
- Diagnosis highlights:
  - Reserve pooling principle breached: sizable—albeit dwindling—portion of member governments’ foreign currency assets held outside the Community, violating surrender requirements.
  - Reserve accumulation history: international reserves grew 18-fold in 2001–13; oil-price shock reversed prospects and reduced reserve adequacy.
  - Consequences: partial compliance and extensive use of statutory advances, combined with declining reserves, have hindered BEAC’s ability to conduct monetary and exchange rate policies and sustain the peg to the euro.
- Recommended pooled-reserve target:
  - Adopt a target of five months of import coverage of goods and services for pooled reserves.
- Fiscal implication:
  - Member states’ macroeconomic frameworks must be adapted to sustain the five-month target; oil-reliant countries need buffers to mitigate oil-price volatility and should consider strengthened fiscal rules.

### Proposed new reserve management framework — two pillars
- Pillar 1: common pooled foreign exchange reserves at the BEAC for exchange rate management and balance-of-payments purposes.
  - Objectives:
    - (1) provide market confidence in BEAC’s ability to meet external obligations and defend the peg;
    - (2) withstand an adverse external shock while mitigating policies are implemented.
  - Financing: each member state surrenders foreign currency proceeds to the BEAC per existing rules until it has provided sufficient foreign currency to cover five months of its imports on a continuous basis.
- Pillar 2: national stabilization funds (NSFs) for windfall revenues (foreign exchange earnings above the five-month import-coverage threshold).
  - Features:
    - Member states may deposit excess foreign exchange earnings in stabilization funds once threshold reached.
    - Each member state would have its own stabilization fund—managed by the BEAC—to meet its objectives; funds could include less liquid and higher-yielding investment assets.
- Replenishment and backstopping:
  - Establish clear replenishment rules for pooled reserves.
  - Design a mechanism so stabilization funds support BEAC’s pooled reserves in Pillar 1 if pooled reserves fall below the five-month import-coverage threshold.
  - Shortfalls due to inappropriate macroeconomic policy stance in one or several members should trigger an adjustment process.

### Implementation and institutional considerations
- Required actions:
  - Legal amendments to BEAC rules and regulations may be necessary.
  - Clear definition of respective responsibilities between the BEAC and member countries.
  - Design of a monitoring system and strengthening of reporting arrangements.
- Critical enablers:
  - Continued improvements in BEAC operations.
  - Increased transparency by member countries, particularly regarding foreign asset holdings.

### Key contextual facts and statistics (preserved exactly)
- Oil and economy shares (2013):
  - Oil accounted for 32 percent of regional GDP, 84 percent of merchandise exports, and 60 percent of fiscal revenue in 2013.
- Trade shifts:
  - European Union accounted for about 27 percent of CEMAC’s trade in 2015.
  - Developing Asia’s share rose from 3 percent in 1995 to 32 percent in 2015.
  - Intraregional trade: about 1¼ percent of CEMAC’s total trade in 2015.
- External public debt and outcomes:
  - At end-2016, CEMAC’s external public debt was equivalent to 23 percent of regional GDP.
  - Since 2016, Chad and the Republic of Congo classified as “in debt distress”; Gabon experienced incidents of external payment arrears.
- Historical reserve growth and shock timing:
  - International reserves increased 18-fold in 2001–13.
  - Oil-price slump began in the second half of 2014, triggering the downturn in foreign exchange inflows and fiscal revenues for the five oil-producing CEMAC countries.

### Table of selected reserve indicators (2011–16, preserved exactly)
- Reserves (US$ billion): 2011: 15.7; 2012: 17.5; 2013: 18.2; 2014: 15.3; 2015: 10.1; 2016: 4.2.
- Months of imports: 2011: 5.1; 2012: 5.7; 2013: 5.4; 2014: 5.7; 2015: 4.4; 2016: 1.9.
- Percent of short-term debt: 2011: 1,786; 2012: 1,680; 2013: 854; 2014: 741; 2015: 653; 2016: 171.9.
- Percent of broad money: 2011: 85.6; 2012: 88.7; 2013: 83.6; 2014: 65.9; 2015: 53.1; 2016: 23.1.
- IMF reserve adequacy matrix (US$ billion): 2011: 6.5; 2012: 6.4; 2013: 6.8; 2014: 7.3; 2015: 4.8; 2016: 4.3.
- Percent of reserve adequacy indicator: 2011: 242.3; 2012: 272.1; 2013: 269.2; 2014: 210.6; 2015: 211.5; 2016: 98.1.

---

### Annex 1 — Role of international reserves in a currency union: institutional rules and developments
- Parity since the 1994 devaluation: CFAF 655.957 per euro.
- Key institutional provisions:
  - Repatriation and surrender of all foreign currency assets held by all CEMAC resident entities to the BEAC.
  - Pooling of all CEMAC international reserves at the BEAC.
  - Obligation: BEAC to maintain at least 50 percent of its international reserves on the Operations Account and for its international reserves to represent at least 20 percent of its sight liabilities.
- Safeguards and rules:
  - Export proceeds must be repatriated and surrendered to the BEAC within 30 days of collection.
  - Cap on accumulated direct financing from the BEAC to individual member states fixed at 20 percent of the previous year’s ordinary fiscal revenue.
  - Emergency measures automatically triggered when foreign exchange cover ratio falls below 20 percent of the BEAC’s sight liabilities for three consecutive months.
  - Operations Account Agreement enables the BEAC to “recall” foreign exchange assets held by member states’ public and private sectors, inside or outside the region, beginning with countries that have debit positions in the pool (clause de ratissage).

### Developments in international reserves and composition (preserved figures)
- BEAC gross international reserves growth:
  - From US$1.1 billion (5 percent of CEMAC GDP) in 2001 to US$18.2 billion (19 percent of CEMAC GDP) in 2013.
- Composition shifts (2001 to 2013):
  - Republic of Congo share: from 6.4 percent to 27.4 percent.
  - Equatorial Guinea share: from 6.6 percent to 23.9 percent.
  - Cameroon imputed contribution: from 30.8 percent to 18.0 percent.
  - Central African Republic imputed contribution: from 11.0 percent to 1.0 percent.
- Post-2013 trend:
  - Foreign exchange reserves held at the BEAC were on a downward trend from their peak in 2013 to end-2016.
- Import coverage:
  - Community coverage rose from less than 1 month of prospective imports in 2000 to almost 6 months by end-2012.
  - Members’ individual imputed reserve coverage ranged from 9½ months for the Republic of Congo to 2¼ months for Chad.
- Oil-price shock impact:
  - Oil prices declined by some 52 percent between June 2014 and December 2016.
  - Official reserves declined to US$4.2 billion at the end of 2016, equivalent to 1.9 months of prospective import coverage.

### Foreign currency assets held outside the BEAC and repatriation issues
- Estimates: foreign currency assets held overseas may have represented up to 22 percent of the BEAC’s international reserves at end-2016, down from 36 percent at end-2009.
- Possible motivations for incomplete repatriation: need to satisfy counterparty fund deposits requested by development partners; desire to retain full ownership and control; desire to earn higher returns than from deposits at the BEAC; concerns about BEAC governance and past losses; concerns about a possible devaluation of the CFA franc; concerns about the free-rider issue.
- Operational consideration: BEAC studying opening foreign currency accounts with foreign central and commercial banks to facilitate operations and encourage full repatriation.

---

### Reserve adequacy assessment, projections, and model-based recommendations (preserved figures)
- End-2016 status:
  - BEAC international reserves (excluding non-repatriated assets): US$4.2 billion; 1.9 months of prospective imports.
- Projections and scenarios:
  - World Economic Outlook projects a modest price recovery to US$52 per barrel in 2021.
  - CEMAC oil production projected to decline from 941,000 barrels a day in 2015 to 901,000 barrels a day in 2021.
  - Including projected financial support from international financial institutions and possible repatriation, CEMAC’s reserves would recover to US$10.5 billion (4.4 months of prospective imports) at end-2021 under the stated projections.
  - If oil prices were to resume a declining trend, external stability could be jeopardized.
- Benchmarking and model results:
  - Baker and Nxumalo (2012) panel regression suggests required reserve levels about six months of imports.
  - Deléchat and Martijn (2008) find six months would cover a two-standard-deviation current account shock; they conclude four months should suffice for CEMAC considering pooling benefits.
  - Dabla-Norris, Kim, and Shirono (2011) model-based recommended coverage for an average opportunity cost of holding reserves of 4.6 percent for CEMAC: between 6.3 months and 7.8 months of imports.
  - Model results for various opportunity costs: 12.2 months (2 percent); 9.7 months (3 percent); 7.8 months (4 percent); 6.3 months (5 percent); 5.0 months (6 percent) of next year imports.
- Emerging consensus and recommendation:
  - International and regional assessments point to a recommended level of reserves equivalent to five months of imports.
  - BEAC’s 2015 intermediate risk coverage: five months of imports of goods and services and 100 percent of public external debt service.
  - Recommendation: CEMAC’s Committee of Finance Ministers should adopt five months of imports as the BEAC’s reserve target.
- End-2016 indicators (preserved exactly):
  - BEAC reserves equivalent to more than 171 percent of the short-term debt falling due in 2016.
  - Represented 23 percent of broad money.
  - Covered 114 percent of base money.
  - IMF reserve adequacy matrix ratio: 98 percent at end-2016 (below the adequate range of between 100 percent and 150 percent).

---

### Fiscal buffers, rules, and implications for reserve accumulation
- Historical fiscal linkage:
  - Consolidated annual fiscal surplus averaged 2.5 percent of regional GDP in 2000–13, enabling reserve accumulation.
- Equilibrium oil price for budget balance (four largest oil exporters: Chad, Republic of Congo, Equatorial Guinea, Gabon):
  - Equilibrium price rose from US$52 per barrel in 2008 to US$123 per barrel in 2013, then declined to US$93 per barrel in 2016.
- Fiscal rules and convergence criteria (since January 2017):
  - First criterion: adjusted fiscal deficit must not fall below −1.5 percent of GDP.
  - Second criterion: stock of total public debt (domestic and external) must be less than 70 percent of GDP.
  - Supplementary criterion applies to the non-oil primary balance.
  - New fiscal balance rule: the difference between the overall fiscal balance and a new commodity (oil) savings rule must be equal to or higher than −1.5 percent of GDP. The savings rule is defined as 20 percent of oil revenues of the current year adjusted by the average change in oil revenues during the past three years, with a coefficient of 80 percent.
- Policy implications:
  - Building adequate reserves implies appropriate fiscal rules to ensure fiscal stability and debt sustainability, considering resource exhaustibility, revenue volatility, consumption smoothing, scaling up of public investment, and intergenerational equity.
  - Fiscal stances need adjustment across member countries to rebuild fiscal buffers to support the peg and long-term wealth.

---

### Tiered savings framework, enforcement, and operational recommendations
- Principles for a new CEMAC savings framework:
  - Solidarity; Sovereignty; Fairness; Simplicity; Clarity of purpose; Rule of law; Transparency; Pragmatism.
- Two-tier structure (preserved roles and rules):
  - Tier I — Pooled international reserves:
    - Purpose: support common peg and external stability.
    - Ownership: BEAC owns pooled international reserves.
    - Management: BEAC invests pooled reserves with one-half deposited in the Operations Account at the French Treasury and the other half managed to preserve capital and maintain appropriate liquidity while minimizing risks.
    - Surrender rule: each member surrenders export proceeds until it has provided enough to cover five months of its imports on a continuous basis.
  - Tier II — National Stabilization Funds (NSFs):
    - Purpose: country-specific safety buffer and additional insurance against Community-wide tail risks.
    - Ownership: NSFs belong to respective countries.
    - Management: BEAC manages NSFs as fiduciary agent (no claim to ownership); NSFs may not be invested in assets located in, or issued by, agents of CEMAC except in emergencies under a sweeping clause.
    - Contributions: from excess export proceeds in boom years; disbursements guided by rules consistent with member’s fiscal rule and CEMAC’s convergence framework.
    - Alternative: a CEMAC-wide stabilization fund with country-specific ring-fenced sub-funds.
- Enforcement and free-rider mitigation:
  - Enforcement based on objective indicators of noncompliance; BEAC management should have ex officio right to initiate noncompliance procedure.
  - Findings of noncompliance require a decision by a majority of member states.
  - Remedial actions proportionate to the cause; limited remedial action for largely involuntary noncompliance; more restrictive measures (including sweeping clause application to a noncompliant country’s NSF) if noncompliance jeopardizes Community external stability.
  - Solidarity could be invoked only for a limited grace period and for limited amounts (for up to N months’ worth of imports) to allow defaulting member to restore compliance.
  - Mechanism should enable BEAC to recall part or all liquid assets in member NSFs, if warranted, to restore targeted reserve levels; repayments to members stepping in could be supplemented by interest payments.
- Operational recommendations and portfolio structure:
  - Target: pooled international reserves target of five months’ worth of imports of goods and services on a continuous basis.
  - Stable resources that may back pooled reserves: BEAC’s equity, currency in circulation, special drawing right allocations.
  - Member states’ deposits: CFAF 2,019 billion at the end of 2016 (liquidities that could buy foreign exchange and have drawn down international reserves).
  - BEAC could issue local currency sterilization instruments; part of member states’ deposits could be transformed into long-term resources.
  - Two-account investment strategy:
    - Management Account: Operations Account (mandatory amount at the French Treasury) and Liquidity Account (trading portfolio).
    - Investment Account: investment portfolio for reserves above target, managed for higher return with lower liquidity and higher risk; could be made up of individual NSFs.
  - Size of monetary and trading portfolios should always be at least equal to the target level of reserves; include automatic replenishment from less liquid to more liquid portfolio.
- Current portfolio issues and recommendations:
  - Substantial portion of international reserves held in long-term investments recorded as securities held to maturity; these do not meet liquidity requirements and should not be part of target reserves.
  - Ongoing discussions about restructuring or liquidation of that portfolio should be concluded and funding discontinued in favor of the proposed portfolios.
  - Strategic asset allocation should be annually reviewed and BEAC should strengthen its trading room for dynamic reserve management.
- Remuneration and incentives:
  - Governments’ contributions to NSFs should yield appropriate returns; NSFs should receive higher remuneration than required reserves to encourage compliance.
  - Illustration: remuneration of the Fonds de Réserve pour les Générations Futures was 0.40 percent between July 2014 and March 2016, whereas return on BEAC’s investment portfolio was 2.24 percent during the same period.

### BEAC simplified balance sheet snapshot (preserved figures, Billions of CFA francs)
- Assets 2015: 9,388; Assets 2016: 6,959.
- International reserves 2015: 5,900; International reserves 2016: 2,610.
- IMF 2015: 309; IMF 2016: 380.
- Bank refinancing 2015: 312; Bank refinancing 2016: 695.
- Loans to governments 2015: 2,214; Loans to governments 2016: 2,446.
- Fixed assets 2015: 28; Fixed assets 2016: 34.
- Other assets 2015: 370; Other assets 2016: 394.
- Liabilities 2015: 9,388; Liabilities 2016: 6,959.
- Currency in circulation 2015: 3,008; Currency in circulation 2016: 2,880.
- Governments’ deposits 2015: 1,921; Governments’ deposits 2016: 923.
- Banks’ deposits 2015: 1,613; Banks’ deposits 2016: 1,096.
- Banks’ required reserves 2015: 1,071; Banks’ required reserves 2016: 448.
- IMF and other deposits 2015: 602; IMF and other deposits 2016: 622.
- Equity and long-term financing 2015: 1,173; Equity and long-term financing 2016: 990.

---

### Conclusion — design, implementation, and expected benefits
- Framework design and implementation:
  - Adoption of novel investment and asset allocation strategies for reserve management and clear burden-sharing rules to avoid free-rider issues.
  - Specification of how pooled international reserves would be replenished if they fall below target.
  - Supported by fiscal rules and stances to ensure macroeconomic sustainability, building on the existing regional convergence framework.
  - Operationalization likely requires legal amendments, clear responsibilities, enforceable obligations, stronger reporting, and improved BEAC operations and transparency.
- Definition and purpose of international reserves:
  - Liquid and freely usable assets controlled by monetary authorities for meeting balance of payments financing needs, intervention in exchange markets, maintaining confidence in the currency, and providing a basis for foreign borrowing.
- Gains and limits of reserve pooling:
  - Pooling can reduce costs via single management, pooling risks, and economies of scale, but gains are limited where external shocks are highly correlated (as with oil-price shocks), which reduces risk-sharing benefits and can make surrender requirements burdensome for large contributors.
- France’s guarantee and self-insurance:
  - France’s guarantee requires pooling of CEMAC’s reserves; long-term safety requires CEMAC to be essentially “self-insured” to withstand various shocks, with the French guarantee reserved for exceptional shocks.
- Expected benefits from adequate reserves and NSFs:
  - Provide a nominal anchor under the peg, signal sustainability, offer insurance against adverse shocks, and facilitate consumption smoothing and intergenerational equity via fiscal buffers and national stabilization funds.

*Source: IMF staff paper — Foreword, Annex 1, reserve management and savings framework, and Conclusion sections of the CEMAC reserve management paper.*

### Foreword ���������������������������������������������������������������������������������������������������������������

### Foreword — Central African Economic and Monetary Community

### Foreword: purpose and scope
- Purpose: foster discussion on possible reserve management approaches in the Central African Economic and Monetary Community (CEMAC).
- Timing: published amid a Community-wide economic crisis stemming from the slump in international oil prices that began in the second half of 2014.
- Core problem: crude oil exports are CEMAC’s largest foreign exchange source; the decline in oil proceeds has adversely affected CEMAC’s economic performance and pooled international reserves at the regional central bank (BEAC).
- Paper horizon: medium-term. Assumes the current crisis has been surmounted and that CEMAC has stabilized and is building adequate and sustainable buffers. Explicitly not intended for crisis-mitigation policy or ongoing central bank safeguard reforms.

### Overview: diagnosis of the problem
- Reserve pooling principle: CEMAC pools member countries’ international reserves at the BEAC, but a sizable—albeit dwindling—portion of member governments’ foreign currency assets have been held outside the Community, breaching surrender requirements.
- Reserve accumulation history: CEMAC’s international reserves grew 18-fold in 2001–13 due to buoyant oil production and high oil prices; the oil-price shock reversed prospects and reduced reserve adequacy.
- Consequences of noncompliance and shock:
  - Partial compliance and extensive use of statutory advances, combined with declining reserves, have hindered the BEAC’s capacity to conduct appropriate monetary and exchange rate policies and to sustain the common currency’s peg to the euro.
  - Weak external positions amplify risks from noncompliance.
- Recommended pooled-reserve target: adopt a target of five months of import coverage of goods and services for pooled reserves.
- Fiscal implications: member states’ macroeconomic frameworks must be adapted to ensure consistency with sustaining the five-month target. Oil-reliant countries need buffers to mitigate oil-price volatility; paper recommends considering strengthened fiscal rules.

### Proposed new reserve management framework (two pillars)
- Pillar 1: common pool of foreign exchange reserves at the BEAC for exchange rate management and balance-of-payments purposes.
  - Objectives: (1) provide market confidence in BEAC’s ability to meet external obligations and defend the peg; (2) withstand an adverse external shock while mitigating policies are implemented.
  - Financing: each member state surrenders foreign currency proceeds to the BEAC, per existing rules, until it has provided sufficient foreign currency to cover five months of its imports on a continuous basis.
- Pillar 2: national stabilization funds for windfall revenues (foreign exchange earnings above the five-month import-coverage threshold).
  - Features: once threshold reached, member states may deposit excess foreign exchange earnings in stabilization funds.
  - Management: each member state would have its own stabilization fund—managed by the BEAC—to meet its objectives; funds could include less liquid and higher-yielding investment assets.
- Replenishment and backstopping:
  - Clear replenishment rules for pooled reserves need establishment.
  - Design a mechanism so stabilization funds support BEAC’s pooled reserves in Pillar 1 if pooled reserves fall below the five-month import-coverage threshold.
  - A shortfall due to inappropriate macroeconomic policy stance in one or several members should trigger an adjustment process.

### Implementation and institutional considerations
- After adopting general principles, detailed implementation rules and procedures must be designed.
- Possible requirements:
  - Legal amendments to BEAC rules and regulations.
  - Clear definition of respective responsibilities between the BEAC and member countries.
  - Design of a monitoring system and strengthening of reporting arrangements.
- Critical enablers:
  - Continued improvements in BEAC operations.
  - Increased transparency by member countries, particularly regarding foreign asset holdings.

### Key contextual facts and statistics (as presented)
- Oil and economy shares (2013):
  - Oil accounted for 32 percent of regional GDP, 84 percent of merchandise exports, and 60 percent of fiscal revenue in 2013.
- Shift in trade partners:
  - European Union accounted for about 27 percent of CEMAC’s trade in 2015.
  - Developing Asia’s share rose from 3 percent in 1995 to 32 percent in 2015.
  - Intraregional trade: about 1¼ percent of CEMAC’s total trade in 2015.
- External public debt and outcomes:
  - At end-2016, CEMAC’s external public debt was equivalent to 23 percent of regional GDP.
  - Since 2016, Chad and the Republic of Congo classified as “in debt distress”; Gabon experienced incidents of external payment arrears.
- Historical reserve growth and shock timing:
  - International reserves increased 18-fold in 2001–13.
  - Oil-price slump began in the second half of 2014, triggering the downturn in foreign exchange inflows and fiscal revenues for the five oil-producing CEMAC countries.

*Source: IMF staff paper — Foreword and Overview sections of the CEMAC reserve management paper.*

### Annex 1 discusses the role of international reserves in a currency union.

### Annex 1 — Role of international reserves in a currency union

### Institutional framework and rules for reserves and convertibility
- Parity since the 1994 devaluation: CFAF 655.957 per euro.
- Key institutional provisions cited:
  - Repatriation and surrender of all foreign currency assets held by all CEMAC resident entities, including member states, to the BEAC.
  - Pooling of all CEMAC international reserves at the BEAC.
  - Obligation for the BEAC to maintain at least 50 percent of its international reserves on the Operations Account and for its international reserves to represent at least 20 percent of its sight liabilities.
- Safeguards and rules underpinning credibility:
  - Export proceeds must be repatriated and surrendered to the BEAC within 30 days of collection.
  - Multilateral surveillance mechanism imposes debt and budget rules to ensure coherence of member states’ fiscal policies with the common monetary policy and the fixed exchange rate regime.
  - BEAC statutes include safeguard provisions:
    - A cap on accumulated direct financing from the BEAC to individual member states fixed at 20 percent of the previous year’s ordinary fiscal revenue.
    - Each member state must ensure its position in the pool of foreign exchange reserves remains in credit.
    - Emergency measures automatically triggered when foreign exchange cover ratio falls below 20 percent of the BEAC’s sight liabilities for three consecutive months; measures include an increase in the BEAC’s interest rates and lower refinancing ceilings (stricter for countries with negative positions in the pool).
  - The Operations Account Agreement enables the BEAC, in the event of reserves depletion, to “recall” foreign exchange assets held by member states’ public and private sectors, inside or outside the region, beginning with countries that have debit positions in the pool (clause de ratissage or sweeping clause).

### Developments in international reserves
- BEAC gross international reserves growth:
  - Increased 18-fold in 2001–13.
  - From US$1.1 billion (5 percent of CEMAC GDP) in 2001 to US$18.2 billion (19 percent of CEMAC GDP) in 2013.
- Composition shifts (2001 to 2013):
  - Republic of Congo share in BEAC total reserves: from 6.4 percent to 27.4 percent.
  - Equatorial Guinea share: from 6.6 percent to 23.9 percent.
  - Cameroon imputed contribution: from 30.8 percent to 18.0 percent.
  - Central African Republic imputed contribution: from 11.0 percent to 1.0 percent.
- Post-2013 trend:
  - Foreign exchange reserves held at the BEAC were on a downward trend from their peak in 2013 to end-2016.
- Import coverage:
  - Community coverage rose from less than 1 month of prospective imports in 2000 to almost 6 months by end-2012.
  - Members’ individual imputed reserve coverage ranged from 9½ months for the Republic of Congo to 2¼ months for Chad.
- Oil-price shock impact:
  - Oil prices declined by some 52 percent between June 2014 and December 2016.
  - Official reserves declined to US$4.2 billion at the end of 2016, equivalent to 1.9 months of prospective import coverage.

### Foreign currency assets held outside the BEAC and repatriation issues
- Partial noncompliance with reserve pooling persisted, particularly among large oil exporters.
- Estimates suggest foreign currency assets held overseas may have represented up to 22 percent of the BEAC’s international reserves at end-2016, down from 36 percent at end-2009.
- Possible motivations for incomplete repatriation:
  - Need to satisfy counterparty fund deposits requested by development partners to guarantee financing.
  - Desire to retain full ownership and control.
  - Desire to earn higher returns than from deposits at the BEAC.
  - Concerns about BEAC governance and past losses.
  - Concerns about a possible devaluation of the CFA franc.
  - Concerns about the free-rider issue.
- Operational considerations:
  - Some member states maintain foreign currency accounts with foreign banks to manage FX operations, violating CEMAC conventions.
  - The BEAC is studying opening foreign currency accounts with foreign central and commercial banks to facilitate operations, enhance custodial role, speed transactions, and lower transaction costs—potentially encouraging full repatriation.

### Reserve adequacy assessment and targets
- End-2016 status:
  - BEAC international reserves (excluding non-repatriated assets): US$4.2 billion; 1.9 months of prospective imports.
- Projections and scenarios:
  - World Economic Outlook projects a modest price recovery to US$52 per barrel in 2021.
  - CEMAC oil production projected to decline from 941,000 barrels a day in 2015 to 901,000 barrels a day in 2021.
  - Including projected financial support from international financial institutions and possible repatriation, CEMAC’s reserves would recover to US$10.5 billion (4.4 months of prospective imports) at end-2021 under the stated projections.
  - If oil prices were to resume a declining trend, external stability could be jeopardized.
- Benchmarking challenges and recommended metrics:
  - Ratio of reserves to imports is primary reserve adequacy indicator for CEMAC given commodity exposure and import-intensive infrastructure investment.
  - Ratio of reserves to short-term debt captures solvency and liquidity risks.
  - Ratio of reserves to base money useful to benchmark BEAC against traditional currency boards and contractual coverage with France.
- Comparisons to recommended levels and model estimates:
  - Baker and Nxumalo (2012) panel regression of 71 low-income countries suggests required reserve levels about six months of imports.
  - Deléchat and Martijn (2008) find six months would cover a two-standard-deviation current account shock; they conclude four months should suffice for CEMAC considering pooled reserves benefits.
  - At end-2016, BEAC reserves:
    - Equivalent to more than 171 percent of the short-term debt falling due in 2016.
    - Represented 23 percent of broad money.
    - Covered 114 percent of base money (exceeding the coverage required for a currency board).
    - IMF reserve adequacy matrix ratio: 98 percent at end-2016 (below the adequate range of between 100 percent and 150 percent).
  - Model-based recommended coverage (Dabla-Norris, Kim, and Shirono, 2011):
    - For an average opportunity cost of holding reserves of 4.6 percent for CEMAC, recommended reserve coverage should be between 6.3 months and 7.8 months of imports.
    - More generally, model results show recommended optimal reserves for various opportunity costs: 12.2 months (2 percent), 9.7 months (3 percent), 7.8 months (4 percent), 6.3 months (5 percent), 5.0 months (6 percent) of next year imports.
- Emerging consensus and target recommendation:
  - International and regional assessments point to a recommended level of reserves equivalent to five months of imports.
  - The BEAC’s 2015 intermediate risk coverage: five months of imports of goods and services and 100 percent of public external debt service.
  - Recommendation: CEMAC’s Committee of Finance Ministers should adopt five months of imports as the BEAC’s reserve target.
  - Note: The BEAC’s charter metric (20 percent external coverage of the money supply, i.e., ratio of average foreign assets to average sight liabilities) may be a contractual minimum but may not suffice to preserve the peg in all circumstances.
- Table 3 (selected figures for 2011–16):
  - Reserves (US$ billion): 2011: 15.7; 2012: 17.5; 2013: 18.2; 2014: 15.3; 2015: 10.1; 2016: 4.2.
  - Months of imports: 2011: 5.1; 2012: 5.7; 2013: 5.4; 2014: 5.7; 2015: 4.4; 2016: 1.9.
  - Percent of short-term debt: 2011: 1,786; 2012: 1,680; 2013: 854; 2014: 741; 2015: 653; 2016: 171.9.
  - Percent of broad money: 2011: 85.6; 2012: 88.7; 2013: 83.6; 2014: 65.9; 2015: 53.1; 2016: 23.1.
  - IMF reserve adequacy matrix (US$ billion): 2011: 6.5; 2012: 6.4; 2013: 6.8; 2014: 7.3; 2015: 4.8; 2016: 4.3.
  - Percent of reserve adequacy indicator: 2011: 242.3; 2012: 272.1; 2013: 269.2; 2014: 210.6; 2015: 211.5; 2016: 98.1.

### Fiscal buffers, intergenerational considerations, and fiscal anchoring of reserves
- Historical fiscal position and link to reserves:
  - CEMAC’s consolidated annual fiscal surplus averaged 2.5 percent of regional GDP in 2000–13, allowing growth in government savings (including deposits with BEAC) and reduction in public debt ratios; BEAC international reserves rose sharply in this period.
  - Since then, infrastructure programs and the oil-price slump have eroded fiscal buffers.
- Equilibrium oil price for budget balance (four largest oil exporters: Chad, Republic of Congo, Equatorial Guinea, Gabon):
  - Equilibrium price rose from US$52 per barrel in 2008 to US$123 per barrel in 2013, then declined to US$93 per barrel in 2016.
- Fiscal rules and convergence criteria (since January 2017):
  - First criterion: adjusted fiscal deficit must not fall below −1.5 percent of GDP.
  - Second criterion: stock of total public debt (domestic and external) must be less than 70 percent of GDP.
  - A supplementary criterion applies to the non-oil primary balance.
  - The new fiscal balance rule requires that the difference between the overall fiscal balance and a new commodity (oil) savings rule must be equal to or higher than −1.5 percent of GDP. The savings rule is defined as 20 percent of oil revenues of the current year adjusted by the average change in oil revenues during the past three years, with a coefficient of 80 percent.
- Policy implications:
  - Building adequate reserves implies that appropriate fiscal rules must be put in place to ensure fiscal stability and debt sustainability, considering resource exhaustibility, revenue volatility, consumption smoothing, scaling up of public investment, and intergenerational equity.
  - Fiscal stances need adjustment across member countries to rebuild fiscal buffers to support the peg and to build long-term wealth.

*Source: Annex 1.*

### 1. Overall Fiscal Balance

### 45548-central-african-economic-and-monetary-community - 1. Overall Fiscal Balance

### 1. Overall Fiscal Balance
- Indicator: Overall Fiscal Balance (Percent of GDP)

### 2. Total Expenditure
- Indicator: Total Expenditure (Percent of GDP)

### 3. Total Revenue
- Indicator: Total Revenue (Percent of GDP)

*Source: 45548-central-african-economic-and-monetary-community - 1. Overall Fiscal Balance*

### 4. Non-Oil Revenue

### 4. Non-Oil Revenue

### Vulnerability of the status Quo
- Several member states are not complying with the full surrender requirement for export proceeds, a practice that became a major risk after the oil-price slump.
- The BEAC’s reserves are not deemed adequate under current projections and fall short of what would be needed to defend the peg credibly under adverse developments.
- The sweeping clause to mobilize additional reserves has never been tested and it remains unclear whether the BEAC can enforce it.
- Findings listed in figures and charts: WEO oil price (US$/barrel) series shown include the values 47.8, 53.8, 53.8, 59.9, 60.3, 54.2, 53.6, 45.4, 31.4, 97.0, 61.8, 79.0, 104.0, 105.0, 104.1, 96.2, 50.8, 42.8 for years 2008–16 as presented.

### Sovereign asset management in resource-rich countries
- When countries accumulate reserves in excess of precautionary targets, they should articulate short-term savings versus long-term investment strategies.
- Investment strategies should boost returns on foreign assets while maintaining a prudent risk profile and be supported by an appropriate governance structure.
- Key issues to address in designing investment frameworks:
  - (1) an assessment of required versus excess reserves,
  - (2) an articulated risk tolerance and investment strategy,
  - (3) an appropriate institutional arrangement to support implementation.
- A mechanism is critical to ensure timely replenishment of required reserves from excess reserves held in investment funds, when necessary.

### Principles for a new CEMAC savings Framework
- Community-wide principles a new framework must meet:
  - Solidarity: members act in concert to support common external stability.
  - Sovereignty: extraction and sale decisions remain the competence of member states; export receipts management limited to what is necessary for reserve rules.
  - Fairness: efforts requested proportional to abilities; noncompliance findings based on objective criteria and remedial actions peer-discussed.
  - Simplicity: rules should be straightforward, transparent, and easy to enforce.
  - Clarity of purpose: one policy objective per savings instrument.
  - Rule of law: compliance expected, supported by checks and balances and possible sanctions for persistent noncompliance.
  - Transparency: extraction of natural resources and related proceeds recorded, accounted for, and promptly shared with BEAC and other member states.
  - Pragmatism: regular reassessment and pragmatic adaptation of the framework.
- The framework should fairly reflect each member state’s contribution to pooled reserves and recognize liabilities of members unable to contribute fully; such liabilities should be reflected on the BEAC’s balance sheet as debt owed to the central bank.

### Structure for a new CEMAC savings Framework — two-tier proposal
- Rationale: distinguish pooled international reserves (common needs) from excess reserves (country-specific needs).
- Tier I — Pooled international reserves:
  - Purpose: support common peg and external stability.
  - Ownership: BEAC owns pooled international reserves.
  - Management: BEAC invests pooled reserves with one-half deposited in the Operations Account at the French Treasury and the other half managed to preserve capital and maintain appropriate liquidity while minimizing risks.
  - Surrender rule: each member surrenders export proceeds until it has provided enough to cover five months of its imports on a continuous basis, yielding a five-month import coverage for the Community as a whole.
- Tier II — National Stabilization Funds (NSFs):
  - Purpose: (1) safety buffer for country-specific shocks, (2) additional insurance against Community-wide tail risks; size tailored to country-specific risk (for example, oil dependence).
  - Ownership: NSFs belong to respective countries.
  - Management: BEAC manages NSFs as fiduciary agent (no claim to ownership), with governance distinguishing BEAC’s role as investment manager versus fiduciary agent; NSFs may not be invested in assets located in, or issued by, agents of CEMAC except in emergencies under a sweeping clause.
  - Contributions: from excess export proceeds in boom years; disbursements in leaner years guided by agreed-upon rule consistent with member’s fiscal rule and CEMAC’s convergence framework.
  - Alternative: a CEMAC-wide stabilization fund with country-specific ring-fenced sub-funds could be a cost-effective medium-term alternative.

### Enforcement and addressing free-rider risks
- Enforcement:
  - Based on objective indicators of noncompliance with the surrender requirement that can be continuously and easily monitored.
  - BEAC management should have an ex officio right to initiate a noncompliance procedure.
  - A finding of noncompliance should be the result of a decision by a majority of member states.
- Remedial action:
  - Should be proportionate to the noncompliance impact and whether it was beyond the member’s control.
  - Limited remedial action for largely involuntary noncompliance (major shock or downturn).
  - More restrictive measures, such as application of the sweeping clause to a noncompliant country’s NSF, if noncompliance jeopardizes Community external stability and results from policy discretion.
- Free-rider mitigation:
  - Solidarity could be invoked only for a limited grace period and for limited amounts (for up to N months’ worth of imports) to allow defaulting member to restore compliance (for instance, via NSF liquidation).
  - If default exceeds grace period or authorized import-months equivalent (N), corrective measures required under peer-reviewed, multilateral surveillance; time-bound gradualism may be built into adjustment rules.
  - A mechanism should enable BEAC to recall part or all liquid assets in member NSFs, if warranted, to restore targeted reserve levels; repayments to members stepping in could be supplemented by interest payments.

### Considerations for reserve management and operational recommendations
- Target: recommended pooled international reserves target of five months’ worth of imports of goods and services on a continuous basis.
- Stable resources backing pooled reserves:
  - BEAC’s equity (fonds propres/fonds de dotation, résultat, réserves), currency in circulation (billets et pièces en circulation), and special drawing right allocations may be considered stable resources.
  - Member states’ deposits (CFAF 2,019 billion at the end of 2016) are liquidities that could be used to buy foreign exchange and have drawn down international reserves.
  - BEAC could issue local currency sterilization instruments to manage liquidity if necessary; such instruments, if issued regularly, can be considered stable resources.
  - Part of member states’ deposits could be transformed into long-term resources (for example, blocked deposits or deposits incorporated into equity) to back pooled reserves up to target.
- Investment strategy and two-account framework:
  - Committee of Finance Ministers should endorse an investment strategy for international reserves to buttress the CFA franc’s peg, incorporating security, liquidity, and returns.
  - Two-account structure in order of diminishing liquidity:
    - Management Account: Operations Account (mandatory amount at the French Treasury) and Liquidity Account (trading portfolio) to meet immediate cash flow when Operations Account near mandatory minimum threshold (of 50 percent of total international reserves).
    - Investment Account: investment portfolio for reserves above target, managed for higher return with lower liquidity and higher risk; could be made up of individual NSFs.
  - The size of monetary and trading portfolios should always be at least equal to the target level of reserves; include automatic replenishment from less liquid to more liquid portfolio.
- Current portfolio issues and recommendations:
  - A substantial portion of international reserves is held in long-term investments recorded as securities held to maturity; these do not meet liquidity requirements and should not be part of target reserves.
  - Ongoing discussions about restructuring or liquidation of that portfolio should be concluded and funding discontinued in favor of the proposed portfolios; the existing investment portfolio should be treated as holding excess reserves only.
  - Strategic asset allocation should be annually reviewed and designed to meet liquidity objectives.
  - BEAC should strengthen its trading room for dynamic reserve management to increase liquidity and reduce market risk while not assuming greater credit or market risks.
- Remuneration:
  - Governments’ contributions to NSFs should yield appropriate returns; NSFs should receive higher remuneration than required reserves to make them financially attractive and promote compliance.
  - Distinction between accounts backing reserves up to target (low or nil remuneration) and NSF accounts (higher remuneration and risk) is necessary.
  - Illustration: remuneration of the Fonds de Réserve pour les Générations Futures was 0.40 percent between July 2014 and March 2016, whereas return on BEAC’s investment portfolio was 2.24 percent during the same period.
- Balance sheet snapshot (BEAC: Simplified Balance Sheet, 2015–16; Billions of CFA francs):
  - Assets 2015: 9,388
  - Assets 2016: 6,959
  - International reserves 2015: 5,900
  - International reserves 2016: 2,610
  - IMF 2015: 309
  - IMF 2016: 380
  - Bank refinancing 2015: 312
  - Bank refinancing 2016: 695
  - Loans to governments 2015: 2,214
  - Loans to governments 2016: 2,446
  - Fixed assets 2015: 28
  - Fixed assets 2016: 34
  - Other assets 2015: 370
  - Other assets 2016: 394
  - Liabilities 2015: 9,388
  - Liabilities 2016: 6,959
  - Currency in circulation 2015: 3,008
  - Currency in circulation 2016: 2,880
  - Governments’ deposits 2015: 1,921
  - Governments’ deposits 2016: 923
  - Banks’ deposits 2015: 1,613
  - Banks’ deposits 2016: 1,096
  - Banks’ required reserves 2015: 1,071
  - Banks’ required reserves 2016: 448
  - IMF and other deposits 2015: 602
  - IMF and other deposits 2016: 622
  - Equity and long-term financing 2015: 1,173
  - Equity and long-term financing 2016: 990
- Key recommended actions:
  - Reaffirm member states’ commitment to full compliance with reserve pooling provisions and publish high-frequency indicators to monitor developments.
  - Implement the proposed two-tier reserve management framework: preserve pooled Tier I reserves managed by BEAC and establish Tier II NSFs for country-specific self-insurance, managed by BEAC as fiduciary agent.
  - Establish objective monitoring, enforcement, and peer-reviewed remedial procedures to address noncompliance and free-riding.
  - Adjust BEAC’s strategic asset allocation, strengthen trading capacity, and ensure appropriate remuneration structures to encourage compliance.

*Source: IMF staff, "Central African Economic and Monetary Community," chapter on reserve management and savings framework.*

### Conclusion

### Conclusion

### New reserve-management framework: design and implementation
- The new framework requires adoption of novel investment and asset allocation strategies for reserve management.
- It entails defining clear rules on burden sharing to avoid free-rider issues if a member fails to contribute its required share to the common pool of reserves.
- It requires specifying how the pooled international reserves would be replenished if they fall below the targeted threshold.
- The definition of such rules should be supported by appropriate fiscal rules and stances to ensure the Community’s macroeconomic sustainability, building on the existing regional convergence framework.
- A first step could entail the adoption of the general principles of the proposed framework by CEMAC member states and the BEAC, followed by negotiations to determine operational aspects.
- Operationalization would likely require:
  - Possible legal amendments to CEMAC’s agreements and the BEAC’s charter.
  - A clear definition of respective responsibilities between the BEAC and member countries.
  - Proper safeguards and enforceable obligations to abide by the new rules.
  - Stronger reporting arrangements.
  - Continued improvements in the BEAC’s operations and increased transparency by member countries, in particular concerning their foreign asset holdings.

### Definition, purpose, and benefits of international reserves
- International reserves are liquid and freely usable assets, controlled by the monetary authorities, used for mitigating the temporary effects of external shocks.
- According to the IMF’s Balance of Payments Manual, international reserves are external assets readily available to and controlled by monetary authorities for:
  - meeting balance of payments financing needs,
  - intervention in exchange markets to affect the currency exchange rate,
  - other related purposes (such as maintaining confidence in the currency and providing a basis for foreign borrowing).
- Reserves help:
  - meet transactional needs (import financing and exchange rate operations),
  - signal a country’s ability to meet financial needs, including short-term debt obligations,
  - mitigate effects of terms-of-trade shocks on output and consumption,
  - cope with liquidity risks and volatility of capital flows.
- Countries with fixed exchange rate regimes use reserves to defend the peg.
- Empirical evidence suggests countries with higher reserves are better able to cope with external shocks.

### Reserve pooling within a currency union: gains and limits
- Holding common reserves within a currency union can reduce each member country’s costs and mitigate risks through:
  - a single reserve management framework,
  - pooling of risks,
  - reduction in volatility of reserves,
  - economies of scale via lower overhead costs,
  - buffering seasonal variations in members’ foreign exchange receipts.
- In the absence of pooling, individual members would need to maintain higher reserves compared with required contributions to the pool if country-specific shocks are less than perfectly correlated.
- However, reserve accumulation comes at a cost:
  - From a financial perspective, cost is often calculated as the difference between the return on risk-free reserves and the interest rate of the country’s long-term debt; this difference is usually negative and may translate into quasi-fiscal losses if the term premium is large.
  - Accumulating reserves may imply forgone investment and consumption, particularly relevant for countries with significant development needs.
  - Forgone benefits from investing in sovereign wealth funds or financing development projects are costs from a consumption-smoothing perspective.
- Some studies find limited benefits of reserve pooling for most CEMAC members because external shocks tend to be highly correlated (primarily oil-price shocks), reducing risk-sharing gains.
- With little gain from pooling, the surrender requirement that constrains use of foreign assets could be perceived as burdensome, especially by large contributors to the pool.

### France’s guarantee, the BEAC, and self-insurance
- France’s guarantee of the CFA franc’s peg requires pooling of CEMAC’s reserves as an institutional setup to reduce France’s risk in providing the guarantee.
- The paper assumes that sustainable, long-term safety of CEMAC requires it to be essentially “self-insured” to withstand various shocks, diminishing risk assumed by the French Treasury and reserving the guarantee for exceptional shocks.
- CEMAC benefits from accumulating international reserves by:
  - providing a nominal anchor under the peg,
  - signaling sustainability of the regime and confidence in authorities’ commitment,
  - providing insurance to members by reducing potential losses in adverse shocks,
  - facilitating consumption smoothing and intergenerational equity via fiscal buffers and national stabilization funds.

### Foreign exchange transaction and payment arrangements
- Administration of foreign exchange regulations is the responsibility of CEMAC Ministers of Finance, who may delegate authority to the BEAC, COBAC, and licensed intermediaries.
- Export proceeds collected in foreign currencies must be repatriated through the domiciling bank and surrendered to the BEAC within 30 days of collection.
- Specific rules:
  - Exchange regulations do not limit access to foreign exchange for payment of merchandise imports.
  - No exchange restrictions on service-related transactions.
  - No restrictions on most capital flows between CEMAC and non-CEMAC countries, subject to laws prohibiting drug financing and trafficking.
  - Certain loans and direct investments (capital inflows) are subject to administrative controls.
  - Regarding capital outflows, CEMAC residents may purchase bonds, securities, and collective investment securities abroad, subject to BEAC and national ministry of finance approval when the total outstanding debt of the nonresident issuer exceeds CFAF 100 million (about US$180,000).
  - Subject to prior approval by COSUMAF, regulations allow purchases and sales of securities on markets outside CEMAC for collective investment funds and open-ended investment companies.
- Export-related reporting and domiciliation thresholds:
  - All export-related transactions must be reported to administrative authorities.
  - All those exceeding CFAF 5 million must be domiciled at a licensed CEMAC / WAEMU bank.
  - Export proceeds originating in non-CEMAC or WAEMU member states must be collected and repatriated within 30 days of the contract date, through the domiciling bank, with the BEAC acting as intermediary.
  - Export proceeds collected in foreign currencies must be surrendered to the BEAC / BCEAO within 30 days of collection.

### Comparative surrender and repatriation practices
- Currency unions outside the CFA franc zone do not require members to surrender all foreign exchange assets to the common central bank.
- Example provisions noted:
  - The surrender requirement to the Central Bank of West African States applies only to foreign exchange earnings from current account, not capital account transactions.
  - In the euro area, participating national central banks provide the ECB only part of their international reserves; the ECB may call on up to € 50 billion in additional international reserves from national central banks if needed.
  - The euro is a freely floating currency; comparison with CEMAC is only partially relevant.

### BEAC’s international reserve-management framework and instruments
- Under CEMAC’s monetary cooperation arrangement with France, all member countries are required to surrender their foreign assets to the BEAC; the BEAC calculates foreign assets imputed to each member for monitoring.
- In exchange for the French guarantee, the BEAC must deposit at least half of its net foreign assets in its Operations Account at the French Treasury in euros; the French Treasury guarantees the positive balance of the Operations Account against risk of euro depreciation vis-à-vis the SDR.
- The BEAC may invest foreign currency assets not deposited with the French Treasury in financial assets suitable for international reserves, following the December 2006 amendment of Article 11 of the BEAC’s charter:
  - (1) deposits with financial institutions with a minimum A+ rating,
  - (2) debt securities issued by public or private entities with a minimum AA rating,
  - (3) debt securities issued by international financial institutions with a minimum AA rating,
  - (4) debt securities guaranteed by countries with a minimum AA rating,
  - (5) related hedging transactions.
- If foreign assets are backed by government deposits of more than one year with the BEAC, they are excluded from the basis for the share to be deposited with the French Treasury.
- The BEAC may outsource management of a portion of reserves to external specialized institutions.
- Strategic benchmarks (horizon, return, risk) for management of all investments are defined by an internal committee at the BEAC.
- Since 2006, the BEAC has invested in long-term bonds held to maturity, issued by public or private entities with a minimum AA rating.
- Since 2006, the BEAC has been offering three interest-bearing facilities to member countries with different maturities:
  - Conventional Special Deposits (CSDs),
  - Budget Revenue Stabilization Mechanism (BRSM),
  - Reserve Fund for Future Generations (RFFG).
- These facilities are remunerated at rates set by the Monetary Policy Committee, based on remuneration of the Operations Accounts.
- Interest rates paid by the BEAC on member states’ local currency deposits may be negative in real terms. In July 2014, the annual interest rates on CSDs and deposits in the BRSM and the RFFG were 0.00 percent, 0.05 percent, and 0.40 percent, respectively, below CEMAC’s annual inflation rate.

### Reserve adequacy assessment: metrics and models
- Reserve adequacy should be assessed against all resources available to mitigate shocks, given external vulnerabilities.
- Adequacy depends on:
  - a country’s monetary and exchange rate arrangements,
  - its macroeconomic policies and prudential practices,
  - the size, nature, and frequency of its balance of payments needs,
  - the level of indebtedness.
- Adequacy is assessed by capacity to minimize effects of external shocks; other foreign assets or contingent credits may complement reserves, but not all assets held as reserves are readily available in turbulent times.
- Important distinction: required reserves (adequate amount for protection) versus excess reserves (beyond required reserves for purposes beyond temporary self-protection).
- Common assessment approaches:
  - Traditional metrics focusing on selected aspects of external vulnerability:
    - current account norms (e.g., reserve coverage in months of imports of goods and services),
    - capital account norms (e.g., ratio of reserves to short-term debt by remaining maturity),
    - monetary norms (e.g., ratio of reserves to broad or base money).
  - These benchmarks reflect precautionary motives and may not capture output losses, natural disasters, emergencies, or wealth aspects.
  - Cost-benefit models estimating the extent to which a given level of reserves is sufficient to smooth required adjustment during severe shocks; cost of holding reserves measured by forgone alternative investment opportunities.
  - Model-based estimates provide a lower bound of adequate reserves under risk-neutrality assumptions; actual holdings are compared with model-based adequate estimates.
- Validity of benchmarks depends on trade openness, degree of international capital mobility, access to international financial markets, and liquidity risks.

*Source: Conclusion section of the provided IMF content unit.*

### Annex Table 6.1. Selected Reserve Adequacy Benchmarks

### Annex Table 6.1. Selected Reserve Adequacy Benchmarks

### Reserve adequacy benchmarks (table summary)
- Gross international reserves (GIR) to prospective imports of goods and nonfactor services
  - Benchmark: Three months for low-income countries; five months and more for fixed peg currency unions
  - Vulnerability: Current account
  - Description: Relevant for low-income countries and countries without access to international capital markets. The benchmark can be made country specific, depending on past and expected future volatility of current account flows (for example, high concentration of exports).
- GIR to broad money
  - Benchmark: No uniform benchmark
  - Vulnerability: Capital flight
  - Description: Relevant for countries whose financial systems are subject to rapid shifts in market sentiment, often associated with an overvalued currency, a weak banking system, or unpredictable shifts in asset preferences.
- GIR to short-term external debt (based on remaining maturity)
  - Benchmark: 100 percent
  - Vulnerability: Liquidity
  - Description: Relevant for countries with market access, substantial private external borrowing, or large public debt service payments.
- GIR to short-term external debt plus short-term foreign-currency-denominated public domestic debt (based on remaining maturity)
  - Benchmark: No uniform benchmark
  - Vulnerability: Liquidity
  - Description: Relevant for countries in the category above and those with a large fraction of their domestic debt denominated in foreign currency.
- GIR to short-term external debt plus current account deficit
  - Benchmark: No uniform benchmark
  - Vulnerability: Current account and liquidity
  - Description: Relevant for countries with large current account deficits and limited international capital market access.
- Consolidated banking sector reserves to short-term debt (based on remaining maturity) plus residents’ foreign exchange deposits
  - Benchmark: No uniform benchmark
  - Vulnerability: Liquidity
  - Description: Relevant for dollarized economies.

### Fiscal channel and reserve accumulation — key findings
- International reserves are accumulated as a result of balance of payment surpluses; the external current account balance is heavily influenced by the government’s saving-to-investment balance (equivalent to the overall fiscal balance).
- Governments’ fiscal rules to deal with the volatility of resource revenue can have important impacts on international reserve accumulation, but the size of the impact also depends on governments’ “below-the-line” operations (choices between holding external vs. domestic assets and contracting external vs. domestic debt).
- Consistency between fiscal policy and international reserve accumulation is critical and requires attention to:
  - (1) the design of the fiscal framework and associated targets, and
  - (2) the links between the fiscal position and stabilization savings fund flows.

### Fiscal policy design and operational guidance
- Fiscal policy should support the exchange rate arrangement by contributing appropriately to required reserves.
- Resource-exporting countries can use various fiscal anchors, including non-resource balance rules or resource-price-based rules.
- Fiscal targets need to be consistent with required reserve coverage ratios, based on projected resource revenue; if resource revenue is higher than projected, excess reserves are accrued and can support stabilization objectives or scaled-up spending plans.
- Flows into stabilization funds should be generated principally from fiscal surpluses; rigid inflow rules independent of the fiscal position can be unsustainable and may force governments to borrow to meet savings rules (empirical evidence and IMF 2007a cited).
- Stabilization funds should be used for short-term stabilization and long-term wealth accumulation. A value-at-risk analysis can inform the appropriate size of a stabilization fund to cover shock-induced revenue shortfalls and protect planned budget execution.

### Fiscal anchor options for resource-rich countries (descriptions)
- Bird-in-hand framework
  - Rule: Expend all natural-resource-related revenue to accumulate financial assets; use only the yield from accumulated financial assets for expenditure.
  - Characteristics: Very conservative; appropriate for countries with short resource horizons or advanced development; restrictive initially when yield is low. Norway’s sovereign wealth fund is based on this approach.
- Permanent income hypothesis (PIH) framework
  - Rule: Sustain a constant consumption flow over current and future generations.
  - Characteristics: Risk averse; appropriate where no pressing development needs exist; may be too restrictive for low-to-middle-income countries with significant infrastructure gaps.
- Modified PIH framework
  - Rule: Allow initial front-loading of capital expenditure (investment scaling up), followed by scaling back spending to preserve long-term savings at the PIH level.
  - Characteristics: More flexible than PIH; allows immediate development needs to be addressed. Timor-Leste uses this approach.

### Resource-price-based rules and expenditure-growth rules
- Resource-price-based rules
  - Approach: Determine expenditure based on smoothed resource revenue using a moving average of past, present, and future prices; weights depend on desired smoothing.
  - Examples: Ghana uses a seven-year moving average that includes three projected years. Weighting past prices more heavily yields smoother revenue projections; placing higher weights on future prices increases responsiveness to trends but may increase volatility.
  - Uses: Mitigate price volatility, create fiscal buffers; commodity reference prices can be calculated by formulas or an independent committee (as in Chile).
- Expenditure-growth rules
  - Purpose: Limit nominal or real growth of government spending, or growth as a percentage of non-resource GDP, to address absorptive capacity constraints and limit procyclicality.
  - Examples: Peru and Mongolia use expenditure-growth rules.

### Choice of fiscal indicators (anchors)
- Overall fiscal balance
  - Commonly used but can be procyclical in resource-dependent countries and does not allow analysis of sustainability as resources are depleted; can indicate change in net wealth and gross financing needs.
- Non-resource primary balance (NRPB)
  - Key indicator of fiscal stance in resource-dependent countries; helps delink fiscal policy from revenue volatility and smooth expenditures; can be anchored by a PIH calculation; may create misperception of fiscal deterioration when capital budgets expand (even if consistent with macro stability).
- Structural primary balance
  - Definition: Primary balance with revenue stripped of cyclical component using smoothed resource price (average of past, present, future resource prices).
  - Suitability: More appropriate for countries with relatively long resource horizons; reduces transmission of resource-price volatility; more intuitive than NRPB; supports solvency via prudent forecasting and deliberate under-projection of structural resource price.
- Basic fiscal balance
  - Previously used by CEMAC for fiscal convergence; measures direct fiscal effort but excludes externally financed capital expenditure—thereby not providing a strong anchor for fiscal stance or long-term sustainability and can mask procyclicality.

### Policy implications and recommendations for CEMAC
- Careful weighing of trade-offs and additional analysis are needed before choosing the most appropriate fiscal rule for CEMAC.
- A structural primary balance rule based on hydrocarbon price smoothing appears particularly appropriate for CEMAC:
  - Rationale: Would help address volatility and fiscal procyclicality and could be applied more homogeneously across the Community than an NRPB rule.
  - Calibration: Needs country-level calibration to suit specific needs and to ensure long-term sustainability and monetary union stability; for example, setting a zero or slightly positive structural primary balance target for CEMAC as a whole would likely ensure Community stability but could be too restrictive for countries with large oil wealth and unmet development needs.
- Objectives for stabilization funds should complement any fiscal rule to provide sufficient buffers against large negative oil-price and revenue shocks with a high degree of confidence.
  - Finding: Value-at-risk analysis, coupled with a structural primary balance rule, indicates member countries would need to build significantly larger fiscal savings than currently held.
  - Need: Development of appropriate investment vehicles for savings and proper governance within the monetary union.

*Source: Baker and Nxumalo 2012; IMF (2007a, 2012b, 2013b, 2014b) as cited in the provided content.*

### Bibliography

### Central African Economic and Monetary Community - Bibliography

### IMF institutional reports and policy papers
- ———. 2011b. “Central African Economic and Monetary Community: Staff Report on Common Policies of Member Countries; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for the Central African Economic and Monetary Community.” IMF Country Report 11/329, Washington, DC.
- ———. 2012a. “Central African Economic and Monetary Community: Staff Report on Common Policies of Member Countries; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for the Central African Economic and Monetary Community.” IMF Country Report 12/244, Washington, DC.
- ———. 2012b. “Fiscal Frameworks for Resource-Rich Developing Countries.” IMF Staff Discussion Note 12/04, Washington, DC.
- ———. 2012c. “Macroeconomic Policy Frameworks for Resource-Rich Developing Countries.” IMF Policy Paper, Washington, DC.
- ———. 2012d. “Macroeconomic Policy Frameworks for Resource-Rich Developing Countries—Background Paper 1—Supplement 1.” IMF Policy Paper, Washington, DC.
- ———. 2013a. “Assessing Reserve Adequacy–Further Considerations.” Staff Report Prepared by the Strategy, Policy, and Review Department, Washington, DC.
- ———. 2013b. “Central African Economic and Monetary Community (CEMAC): Staff Report on Common Policies for Member Countries.” IMF Country Report 13/322, Washington, DC.
- ———. 2014a. “Central African Economic and Monetary Community (CEMAC): Selected Issues.” IMF Country Report 14/305, Washington, DC.
- ———. 2014b. “Sovereign Asset-Liability Management—Guidance for Resource-Rich Countries.” IMF Policy Paper, Washington, DC.
- ———. 2015. “Central African Economic and Monetary Community (CEMAC): Staff Report on Common Policies and Challenges of Member Countries.” IMF Country Report 15/222, Washington, DC.
- ———. 2016. “Central African Economic and Monetary Community (CEMAC); Common Policies of Member Countries-Press Release; Staff Report; and Statement by the Executive Director.” IMF Country Report 16/277, Washington, DC.
- ———. 2017. “Gabon Request for an Extended Arrangement under the Extended Fund Facility-Press Release; Staff Report; and Statement by the Executive Director.” IMF Country Report 17/205, Washington, DC.

### Reserve adequacy, accumulation, and sovereign asset-liability management
- Jeanne, Olivier, and Romain Rancière. 2006. “The Optimal Level of International Reserves for Emerging Market Countries: Formulas and Applications.” IMF Working Paper 06/29, International Monetary Fund, Washington, DC.
- Mwase, Nkunde. 2012. “How Much Should I Hold? Reserve Adequacy in Emerging Markets and Small Islands.” IMF Working Paper 12/205, International Monetary Fund, Washington, DC.
- Wijnholds, J. Onno, and Lars Søndergaard. 2007. “Reserve Accumulation: Objective or By-Product?” European Central Bank Occasional Paper 73, European Central Bank, Frankfurt, Germany.
- Levy Yeyati, Eduardo. 2010. “What Drives Reserve Accumulation (and at What Cost)?” VOX website. http:// www .voxeu .org/ article/ what -drives -reserve -accumulation -and -what -cost.
- Laurens, Bernard, and Alexander Attié. 2007. “Bank of Central African States – Foreign Asset Management: Short and Medium-Term Issues.” Technical Assistance Report, Monetary and Capital Markets Departments, International Monetary Fund, Washington, DC. Unpublished.
- Laurens, Bernard, Gueye Coumba, and Durré Alain. 2009. “Bank of Central African States – Reserve Management, Research, and Regional Public Debt Market.” Technical Assistance Report, Monetary and Capital Markets Departments, International Monetary Fund, Washington, DC. Unpublished.
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### Fiscal frameworks, resource-rich country policy, and cyclicality
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- ———. 2012c. “Macroeconomic Policy Frameworks for Resource-Rich Developing Countries.” IMF Policy Paper, Washington, DC.
- ———. 2012d. “Macroeconomic Policy Frameworks for Resource-Rich Developing Countries—Background Paper 1—Supplement 1.” IMF Policy Paper, Washington, DC.
- Mpatswe, Gaston, Sampawende Tapsoba, and Robert York. 2012. “The Cyclicality of Fiscal Policies in the CEMAC Region.” In Oil Wealth in Central Africa: Policies for Inclusive Growth, edited by Bernardin Akitoby and Sharmini Coorey. International Monetary Fund, Washington, DC.
- Wiegand, Johannes. 2004. “Fiscal Surveillance in a Petro Zone: The Case of the CEMAC.” IMF Working Paper 04/8, International Monetary Fund, Washington, DC.

### Regional monetary unions, reserve pooling, and comparative studies
- Schipke, Alfred. 2012. “Snapshot of Another Monetary Union – The Eastern Caribbean Currency Union.” Finance and Development 49 (1).
- Schipke, Alfred, Aliona Cebotari, and Nita Thacker. 2013. Eastern Caribbean Economic and Currency Union: Macroeconomics and Financial Systems. International Monetary Fund, Washington, DC.
- van Beek, Frits, Jose Roberto Rosales, Mayra Zermeno, Ruby Randall, and Jorge Shepherd. 2000. “The Eastern Caribbean Currency Union: Institutions, Performance, and Policy Issues.” IMF Occasional Paper 195, International Monetary Fund, Washington, DC.
- Williams, Oral, Tracy Polius, and Selvon Hazel. 2001. “Reserve Pooling in the Eastern Caribbean Currency Union and the CFA Franc Zone: A Comparative Analysis.” IMF Working Paper 01/104, International Monetary Fund, Washington, DC.
- Yéhoué, Étienne B. 2005. “International Risk Sharing and Currency Unions: The CFA Franc Zone.” IMF Working Paper 05/95, International Monetary Fund, Washington, DC.
- Iossifov, P., N. Kinoshita, M. Takebe, R. York, and Z. Zhan. 2009. “Improving Surveillance across the CEMAC Region.” IMF Working Paper 09/260, International Monetary Fund, Washington, DC.
- Len, Stephen. 2010. “Sovereign Wealth Fund Investment Strategies: Complementing Central Bank Investment Strategies.” In Economics of Sovereign Wealth Funds – Issues for Policymakers, edited by Udaibir S. Das, Mazarei Adnan, and Han van der Hoorn. International Monetary Fund, Washington, DC.

*Bibliography from the source PDF: 45548-central-african-economic-and-monetary-community - Bibliography*

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_Source: https://www.imf.org/-/media/files/publications/dp/2018/45548-central-african-economic-and-monetary-community.pdf_