## _cr05403

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### Macroeconomic developments and prospects
- Region-wide real GDP growth in 2004 reached 8.3 percent, a 10-year high, driven by the oil sector.
- Region-wide real oil GDP grew by more than 21 percent in 2004.
- Oil now accounts for nearly 80 percent of the region’s exports.
- Region-wide non-oil GDP growth slowed from 3.6 percent in 2003 to 3.2 percent in 2004.
- The Central African Republic grew by less than 1 percent in 2004.
- Inflation in the region declined to 1.7 percent in 2004; inflation in Equatorial Guinea reached 8 percent.
- Broad money growth was moderate; the BEAC’s net foreign assets almost doubled to more than US$3 billion in 2004.
- The CEMAC as a whole posted an overall fiscal surplus (excluding grants) estimated at 3.1 percent of GDP in 2004.
- About one-fourth of oil windfall receipts associated with price increases accrued to the budgets of oil producers; country budgetary impacts ranged from about half of additional revenues in Cameroon to less than 10 percent in Chad.
- Region-wide non-oil overall fiscal deficit (excluding grants) remained more than 12 percent of non-oil GDP.
- External current account deficit declined from more than 5 percent of GDP in 2003 to about 2 percent of GDP in 2004.
- Oil-related inflows in 2004 are estimated at more than 17 percent of region-wide GDP.
- Non-oil exports as a share of GDP remained constant at 13 percent.
- Intraregional trade stayed unchanged at 1.3 percent of total exports.
- The CFA franc—along with the euro—appreciated by 10 percent against the U.S. dollar and by about 3 percent in real effective terms.
- Growth in 2005 is forecast to remain strong at about 5 percent; the overall fiscal balance including oil is forecast to remain roughly constant.

### Monetary policy, instruments, and reserve management
- Fixed exchange rate regime provides the ultimate anchor for monetary policy in the region (CFA franc pegged to the euro at CFAF 656.34 per euro).
- Given remaining capital controls, authorities use a regional reserve money program to guide monetary policy.
- Implementation of common monetary policy constrained by a lack of instruments and shallow financial markets.
- Long-delayed abolition of statutory advances and replacement with treasury bills would have helped BEAC control its balance sheet; introduction of treasury bills delayed by member concerns about borrowing costs and technical constraints.
- Interim option: tradable central bank bills considered as a temporary measure, subject to maintaining BEAC profitability.
- BEAC liquidity-absorption tools: differentiated reserve requirements across member countries and, at its discretion, remunerated short-term deposits to commercial banks.
- BEAC had difficulty adhering to the common reserve money program in 2004 because it could neither adequately forecast nor control balance of payments flows and statutory advances to member governments.
- Foreign exchange reserves reached the equivalent of US$3.2 billion (end-2004), a 10-year high; coverage of reserve money reached 75 percent, exceeding the 20 percent coverage ratio mandated in the CFA franc agreement with France.
- Institutionally, BEAC required to keep at least 65 percent of its foreign assets in the operations account with the French Treasury and to maintain a foreign exchange cover of at least 20 percent of its sight liabilities.

### Fiscal policy, oil receipts, and fiscal frameworks
- CEMAC surveillance strengthened by taking longer-term considerations and structural balances into account.
- Formal convergence requirement: basic balance (overall balance minus grants and foreign-financed investment); basic structural fiscal balance uses the average oil revenue of the last five years.
- CEMAC monitors structural balances and “permanent income” from oil wealth and brings concerns to member countries even if no formal criterion violation occurs.
- Recommendation: track structural changes and consider further refinements in assessing underlying fiscal balances; present additional considerations transparently, possibly as supplementary criteria.
- 2004 fiscal response: much of the oil windfall was saved as higher net government deposits with the central bank; directors welcomed saving most windfall receipts as higher foreign exchange reserves while noting scope for cautious additional spending consistent with medium-term fiscal and debt sustainability and absorptive capacity.
- Mission and regional authorities agreed on creating country-owned oil stabilization funds and “funds for future generations” administered by the BEAC to maintain transparency while recognizing the special nature of oil receipts; any such funds must consider implications for the level of common reserves and follow international best practice for design, operation, and governance.
- Proposed change: part of oil export receipts will need to continue to form part of the common pool of reserves to ensure sustainability of the monetary arrangement.

### External sector, exchange rate, and reserve adequacy scenarios
- Exports (in U.S. dollars) increased sharply in 2004, mostly reflecting oil windfalls.
- Staff work suggested the real exchange rate might be slightly above its long-term equilibrium value; misalignment in the last three years not statistically significant at the 95 percent level.
- Table highlights (selected entries):
  - CEMAC gross reserves as a percent of GDP (end-2004) = 8.0; as a percent of imports = 52.1; as a percent of short-term debt = 2.5; other column entry = 165.9.
  - WAEMU: 16.3, 63.6, 6.6, 64.8.
  - ECCU: 19.2, 19.4, 2.9, 200.0.
- Projected 2005 reserve adequacy under oil price scenarios (selected entries):
  - Current WEO Oil price (US$46.5 pb): gross reserves as a percent of imports = 3.32; gross reserves as a percent of short-term debt = 29.7.
  - WEO price + 1 standard deviation: 5.14, 16.5.
  - WEO price - 1 standard deviation: 1.51, 23.5.
  - Ten year standard deviation = US$7.
- Dynamic risk illustration: A US$7 change in the oil price would imply a fall (increase) in reserve assets of US$2.33 billion, implying a significant deterioration (improvement) in reserve adequacy indicators.
- Forward-looking view: current reserve levels may need to be maintained or augmented because CEMAC’s production and export structure makes reserve holdings highly sensitive to oil price changes.

### Financial sector soundness, markets, and payments
- Important structural challenges persist: weak banking sectors in several member countries, low bank capital and risk diversification in some banks, and shallow, segmented regional money and financial markets.
- Nonperforming loans rose slightly to 14.6 percent in 2004.
- Capital adequacy ratio (CEMAC) = 11.4 percent (2004); provisions against NPL = 78.5 percent (2004); liquidity ratio = 206.8 percent (2004).
- Loans to the private sector stood at only 7 percent of the region’s GDP in 2004; about 3 percent of the population have accounts with commercial banks.
- Private sector lending to regional non-oil GDP in 2004 = 11 percent; average outstanding stock of bank loans to GDP for sub-Saharan Africa = 15 percent.
- Regional minimum saving deposit interest rate of 5 percent identified as an obstacle to financial deepening.
- Volume traded on the regional money market was 3 percent of broad money in 2004.
- BEAC and COBAC progress toward a regional payments platform expected to be operational by 2006.
- Ongoing reforms: payments system reform, regulation of microfinance, clarification of mortgage legal status, COBAC efforts to familiarize banks with syndication; authorities plan regional stock exchange in Libreville while staff stressed need to avoid duplication with the existing stock exchange in Cameroon.

### Trade, competitiveness, and integration
- Trade restrictions and uneven application of CEMAC rules constrain external and intraregional trade.
- Common External Tariff (CET) has four rates: 5, 10, 20, and 30 percent.
- Intraregional trade constrained by lack of complementarities in output, absence of harmonized tax structures (including VAT), imposition of tariffs on intraregional trade in violation of the common market agreement, and nontariff barriers (state-run monopolies, lengthy customs procedures, extensive physical inspection).
- Policy priorities: promote export diversification; reduce production costs; attract FDI; improve business environment; continue negotiations to gain access to foreign markets (e.g., EPA with the EU; eligibility for AGOA).
- EPA negotiations aim to establish a free trade zone between the CEMAC and the EU for 12 years starting in 2008; detailed negotiation plan signed in July 2004; negotiations expected to finish by 2007.
- Competitiveness: real effective exchange rate largely constant in 2004 after prior deterioration; appreciation prospects could weaken competitiveness and discourage export diversification; policy emphasis on rapid structural reforms to boost labor productivity and diversify production and exports.

### Regional institutions, surveillance, and governance
- Compliance with CEMAC convergence criteria improved significantly in 2004, helped by higher oil revenues; oil-exporting CEMAC countries complied with nearly all criteria for the first time since 1997 (exception: Equatorial Guinea missed the inflation criterion).
- The Central African Republic missed three out of four criteria in 2004, including the fiscal arrears criterion.
- Regional surveillance has improved; need to strengthen surveillance by raising awareness of regional consistency and introducing incentives and sanctions to encourage compliance.
- Institutional capacity uneven; BEAC well-established, other institutions face staff shortages and non-payment of contributions; COBAC lacks sufficient qualified supervisors.
- Financing arrangements for regional institutions (surcharge on external import tariffs and regional integration tax equivalent to 1 percent of region’s imports) not yet fully operational.
- Authorities welcomed proposed formalization of IMF surveillance over monetary unions and a regional FSAP planned to start in fall 2005.

### Outlook, staff appraisal, and main policy recommendations
- Outlook: With oil prices expected to remain high in the medium term, there could be scope for some cautious additional spending consistent with medium-term fiscal and debt sustainability and absorptive capacity.
- Primary challenge: improve competitiveness and broaden output base beyond oil to allow higher growth rates on a sustainable basis.
- Recommended policy directions:
  - Maintain fiscal discipline and prudent management of oil revenues.
  - Save a significant share of oil windfalls while reviewing any additional spending country-by-country.
  - Introduce market-based monetary instruments (treasury bills or central bank bills) to improve monetary control.
  - Strengthen banking supervision and raise capital adequacy and risk diversification.
  - Deepen and integrate regional financial markets and implement payments system reforms.
  - Improve enforcement of common trading rules, harmonize taxes (including VAT), and remove ad hoc fees and nontariff barriers.
  - Ensure transparent design, operation, and governance of oil stabilization funds and funds for future generations administered by the BEAC.
  - Strengthen regional surveillance, data quality (price and trade statistics), and institutional financing.

### Key statistics and selected figures (preserved exactly)
- Region-wide real GDP growth (2004) = 8.3 percent.
- Real oil GDP growth (2004) = more than 21 percent.
- Oil accounts for nearly 80 percent of the region’s exports.
- Region-wide non-oil GDP growth (2004) = 3.2 percent (2003 = 3.6 percent).
- Inflation (region, 2004) = 1.7 percent.
- BEAC net foreign assets (2004) = more than US$3 billion.
- CEMAC overall fiscal balance, excluding grants (2004) = 3.1 percent of GDP.
- Region-wide non-oil overall fiscal deficit (excluding grants) = more than 12 percent of non-oil GDP.
- External current account deficit (2004) = about 2 percent of GDP (2003 = more than 5 percent of GDP).
- Oil-related inflows (2004) = more than 17 percent of region-wide GDP.
- Intraregional trade = 1.3 percent of total exports.
- CFA franc and euro appreciation vs. U.S. dollar = 10 percent; real effective appreciation = about 3 percent.
- Reserve levels (gross official reserves, end-2004) = 3,188.7 (millions of U.S. dollars).
- Coverage of reserve money = 75 percent (end-2004).
- Ten year standard deviation (oil price) = US$7; US$7 change in oil price implies US$2.33 billion change in reserve assets.
- Selected table numbers (end-2004): CEMAC gross reserves as percent of GDP = 8.0; as percent of imports = 52.1; as percent of short-term debt = 2.5.
- Projected 2005 under WEO Oil price (US$46.5 pb): gross reserves as percent of imports = 3.32; gross reserves as percent of short-term debt = 29.7.
- Bank soundness indicators (CEMAC, 2004): capital adequacy ratio = 11.4 percent; nonperforming loans = 14.6 percent; provisions against NPL = 78.5 percent; liquidity ratio = 206.8 percent.
- Loans to private sector (2004) = 7 percent of GDP; population with bank accounts ≈ 3 percent.
- Nominal GDP (CEMAC, memorandum): 2004 = 19,271 (in billions of CFA francs); 2005 projection = 20,485.
- Oil prices (U.S. dollars per barrel): 1999 = 18.02; 2000 = 28.22; 2001 = 24.3; 2002 = 25.0; 2003 = 28.9; 2004 = 37.76; 2005 = 46.5.
- Gross official reserves (millions of U.S. dollars): 1999 = 595.2; 2000 = 1,318.9; 2001 = 1,143.3; 2002 = 1,678.2; 2003 = 1,908.3; 2004 = 3,188.7.
- Selected macro time series (highlights): GDP at constant prices 2004 = 8.3; oil GDP (annual % change) 2004 = 21.5; non-oil GDP (annual % change) 2004 = 3.2; consumer prices (average) 2004 = 1.7.
- CFA francs per U.S. dollar, average (2004) = 528.3.
- BEAC follow-up safeguards assessment completed on August 30, 2004.
- Executive Board Public Information Notice No. 05/151, November 1, 2005.

*Source: IMF staff report text provided in content unit _cr05403.*

### Executive Summary ......................................................................................................

### Executive Summary

### Macroeconomic developments and prospects
- Region-wide real GDP growth in 2004 reached 8.3 percent, a 10-year high, driven by the oil sector.
- Region-wide real oil GDP grew by more than 21 percent in 2004.
- Oil now accounts for nearly 80 percent of the region’s exports.
- Region-wide non-oil GDP growth slowed from 3.6 percent in 2003 to 3.2 percent in 2004, the lowest level in five years.
- The Central African Republic grew by less than 1 percent in 2004.
- Inflation in the region declined to 1.7 percent in 2004; inflation in Equatorial Guinea reached 8 percent.
- Broad money growth was moderate; the BEAC’s net foreign assets almost doubled to more than US$3 billion in 2004.
- The overall fiscal position improved: the CEMAC as a whole posted an overall fiscal surplus (excluding grants) estimated at 3.1 percent of GDP in 2004.
- About one-fourth of oil windfall receipts associated with price increases accrued to the budgets of oil producers; budgetary impacts ranged from about half of additional revenues in Cameroon to less than 10 percent in Chad.
- The region-wide non-oil overall fiscal deficit (excluding grants) improved slightly but remains sizeable: at more than 12 percent of non-oil GDP.
- External current account deficit declined from more than 5 percent of GDP in 2003 to about 2 percent of GDP in 2004.
- Oil-related inflows in 2004 are estimated at more than 17 percent of region-wide GDP.
- Non-oil exports as a share of GDP remained constant at 13 percent.
- Intraregional trade stayed unchanged at 1.3 percent of total exports.
- The CFA franc—along with the euro—appreciated by 10 percent against the U.S. dollar and by about 3 percent in real effective terms.
- Growth in 2005 is forecast to remain strong at about 5 percent, below the 2004 rate; the overall fiscal balance including oil is forecast to remain roughly constant.

### Monetary policy and reserve management
- The fixed exchange rate regime provides the ultimate anchor for monetary policy in the region.
- Given remaining capital controls, the authorities use a regional reserve money program to guide monetary policy.
- Implementation of common monetary policy is constrained by a lack of instruments and shallow financial markets.
- The BEAC’s available liquidity-absorption tools include differentiated reserve requirements across member countries and, at its discretion, remunerated short-term deposits to commercial banks.
- The BEAC had difficulty adhering to the common reserve money program in 2004 because it could neither adequately forecast nor control balance of payments flows and statutory advances to member governments.
- The authorities agreed that the introduction of treasury bills or, at least temporarily, of central bank bills could facilitate monetary control and help financial market development.

### Fiscal policy, oil receipts, and fiscal frameworks
- CEMAC surveillance over member countries’ fiscal policies has been strengthened by taking longer-term considerations and structural balances into account.
- The mission and regional authorities agreed on saving some oil receipts in funds for future generations being established in the BEAC to maintain transparency while recognizing the special nature of oil receipts.
- In deciding on the possible size of these funds, authorities need to remain mindful of maintaining an adequate level of common reserves.

### External sector and trade integration
- External sector accounts improved despite the CFA franc appreciation; reserve positions strengthened.
- Exports (in U.S. dollars) increased sharply in 2004, mostly reflecting oil windfalls.
- Trade restrictions and uneven application of CEMAC rules constrain external and intraregional trade.
- Further trade growth and deeper regional integration will require renewed commitment to abiding by common trading rules.
- Broader economic reforms undertaken to gain access to foreign markets have the potential to also benefit regional trade.

### Structural challenges and financial sector development
- Important structural challenges persist: weak banking sectors in several member countries, low levels of bank capital and risk diversification in some banks, and shallow, segmented regional money and financial markets.
- The abolition of statutory advances to governments from the BEAC was postponed because member countries were concerned about their ability to place debt in the domestic market.
- There was continuing progress in payments system reform and regulation of microfinance, which could support financial sector development.
- Authorities view regional integration, possibly over an expanded area, as a key vehicle to achieve desirable non-oil growth rates and plan to press ahead with financial sector and legal reforms to support market integration.
- The mission noted that increasing the effectiveness of existing institutions and agreements is an important precondition for further widening the integration area.

### Policy convergence and compliance with rules
- Compliance with CEMAC convergence criteria improved significantly in 2004, helped by higher oil revenues.
- For the first time since the introduction of the convergence criteria in 1997, oil-exporting CEMAC countries were able to comply with nearly all criteria; the exception was Equatorial Guinea, which missed the inflation criterion.
- The Central African Republic missed three out of four criteria in 2004, including the criterion on fiscal arrears.

### Regional policy agenda (summary of main issues discussed)
- Establish a regional framework for designing and implementing appropriate macroeconomic policies consistent with the common currency.
- Create an enabling environment for market development by deepening and integrating financial markets, advancing payments system reforms, and strengthening banking sector soundness.
- Improve regional institutions and the integration process by enhancing the effectiveness of surveillance, legal and tax harmonization, and implementation of common rules to promote trade and integration.

*Source: Executive Summary of the CEMAC staff report (2004–2005).*

### 12.      The lack of monetary instruments could compromise the BEAC’s ability to

### _cr05403 - 12.      The lack of monetary instruments could compromise the BEAC’s ability to

### Monetary instruments and BEAC balance-sheet control
- Finding: The long-delayed abolition of statutory advances and their replacement with treasury bills would have helped the BEAC to gain greater control over its balance sheet.
- Finding: Treasury bills could have served as an instrument for open market operations.
- Constraint: Introduction of treasury bills has been delayed because member countries have been concerned about borrowing costs and technical constraints.
- Interim measure discussed: In the short term, given member states’ decision to delay the introduction of treasury bills, the BEAC agreed to review the mission’s suggestion of issuing tradable central bank bills, at least as an interim solution, subject to the need to maintain its overall profitability.
- Operational limitation: In the absence of longer-term instruments, short-term deposits with the BEAC are insufficient to sterilize the high level of banks’ free liquidity.

### Liquidity management, reserve requirements, and tools used
- Authorities’ assessment: They acknowledged challenges in implementing monetary policy but noted overall success in liquidity management.
- Tool used: Differentiated reserve requirements have been used to sterilize liquidity where the problem was most acute.
- Tool used: Short-term deposits with the central bank have been effective for steering liquidity, but their lack of tradability makes them less desirable to banks than central bank bills.
- Risk noted by mission: Given past fiscal slippages, government deposits remain a source of potential liquidity.

### Monetary policy framework and market integration
- Projection: Financial sector reforms and reform of the regional payments system should increase financial market integration in the zone.
- Expectation: Over time, even without full capital account liberalization, there is likely to be an increase in capital flows as banks increase exposures abroad and the regional capital market develops.
- Implication: BEAC’s operating environment will become more complex and will require the introduction of market-based instruments to allow the central bank to more directly influence interest rates in the zone.
- Supporting measure: The central bank is strengthening its macroeconomic forecasting unit to be better prepared for changes in its operating environment.

### Fiscal policies, convergence, and oil-related inflows
- Institutional arrangement: Fiscal policies remain under the control of member countries; fiscal convergence in support of the monetary union is a key CEMAC concern.
- Convergence criterion: The formal requirement remains the basic balance.
  - Note on basic balance: The basic fiscal balance is defined in the CEMAC as the overall balance minus grants and foreign-financed investment.
  - Basic structural fiscal balance uses the average oil revenue of the last five years instead of current oil revenues.
- Enhanced surveillance: CEMAC now also monitors structural balances and “permanent income” out of oil wealth and brings concerns to member countries even if no violation of the formal convergence criterion occurs.
- Recommendation: Keep track of structural changes and consider further refinements in assessing underlying fiscal balances; present additional considerations transparently, possibly as supplementary criteria.
- 2004 fiscal response: Fiscal policies remained conservative in 2004, with much of the oil windfall saved as higher net government deposits with the central bank.
- Guidance: Any additional spending justified by sustained high oil prices should be reviewed country-by-country and take into account longer-term fiscal and debt sustainability and limited absorptive capacity in some CEMAC countries.

### Options for safeguarding oil wealth
- Current arrangement: Most member countries’ oil income is subject to the BEAC’s repatriation requirement; oil-related inflows are reflected in increases in BEAC international reserves and CFA franc-denominated liquid deposits of member countries at the central bank.
- Concerns raised by members:
  - Need to save oil receipts in the form of alternative long-term assets to provide higher returns for future generations.
  - Present arrangement limits individual countries to holding a CFA franc-denominated asset with a low rate of remuneration while higher returns on the foreign exchange asset accrue to the region as a whole via BEAC profit distribution.
- BEAC perspective: Channeling all foreign exchange inflows through the BEAC increases transparency and accountability for oil income; reserve pooling is a key feature and element of solidarity in the monetary union.
- Mission recommendation: Establish for each oil-producing member an oil stabilization fund and a fund for future generations administered by the BEAC, ensuring design, operation, and governance are transparent and follow international best practice.
- Governance recommendation: BEAC should discuss investment arrangements openly with ministries of finance and disseminate bilateral agreements to interested member governments.
- Caution: Any change in the share of export receipts accruing to the common pool needs to consider implications for the level of reserves given the constraints of the exchange rate regime.

### Exchange rate regime and international reserves
- Observation: The exchange rate of the CFA franc along with the euro has appreciated against the U.S. dollar.
- Model result: Staff technical work using a traditional model suggested the real exchange rate might be slightly above its long-term equilibrium value (see Box 1); misalignment in the last three years is not statistically significant at the 95 percent level.
- Policy point: Continuous need for appropriate macroeconomic and structural policies consistent with the exchange rate regime; competitiveness should be discussed in a broader structural context, including measures to enhance factor productivity and improve the business environment.

### Reserve levels and adequacy
- Current level: Foreign exchange reserves have reached the equivalent of US$3.2 billion, a 10-year high.
- Coverage: The coverage of reserve money reached 75 percent, far exceeding the 20 percent coverage ratio mandated in the CFA franc agreement with France.
- Assessment: Commonly used measures of reserve adequacy do not seem to indicate, at this stage, excessive levels.
- Forward-looking view: Current reserve levels may need to be maintained or augmented because CEMAC’s production and export structure makes reserve holdings highly sensitive to oil price changes.
- Market perception: Financial markets might view the current level of reserves as a benchmark, since it reached, for the first time, the same levels as those of other fixed exchange rate regimes and monetary unions which traditionally had higher levels of foreign exchange reserves.
- Role of French guarantee: The mission felt the French guarantee is a safety net in an unlikely crisis but may play less of a role in day-to-day perceptions of reserve adequacy.

### Reserve adequacy indicators and volatility (from Box 2 and tables)
- Institutional constraints: BEAC required to keep at least 65 percent of its foreign assets in the operations account with the French Treasury and to maintain a foreign exchange cover of at least 20 percent of its sight liabilities.
- Table 1 highlights (as of end-2004), gross reserves as a percent of GDP, imports, and short-term debt for CEMAC members and aggregates (selected entries from the source):
  - CEMAC: 8.0 (Gross reserves as a percent of GDP), 52.1 (as a percent of Imports), 2.5 (as a percent of Short-term debt), 165.9 (other column entry in table)
  - WAEMU: 16.3, 63.6, 6.6, 64.8
  - ECCU: 19.2, 19.4, 2.9, 200.0
- Table 2 projected reserve adequacy indicators for 2005 under oil price scenarios (selected entries from the source):
  - Current WEO Oil price (US$46.5 pb): 3.32 (Gross reserves as a percent of Imports), 29.7 (Gross reserves as a percent of Short-term debt)
  - WEO price + 1 standard deviation: 5.14, 16.5
  - WEO price - 1 standard deviation: 1.51, 23.5
  - Note: Ten year standard deviation = US$7.
- Dynamic risk illustration: A US$7 change in the oil price (representing its 10-year standard deviation) would imply a fall (increase) in reserve assets of US$2.33 billion, implying a significant deterioration (improvement) in reserve adequacy indicators.

*Source: IMF staff report text provided in content unit _cr05403 - 12.      The lack of monetary instruments could compromise the BEAC’s ability to*

### 23.      The mission noted that in establishing oil-related “funds for future generations,”

### _cr05403 - 23.      The mission noted that in establishing oil-related “funds for future generations,”

### Oil-related funds and regional reserves
- Foreign assets held in oil-related “funds for future generations” would not constitute monetary reserves and are to be invested in longer-term assets that are not generally considered adequate for reserve management.
- Such funds, while maintained and managed by the BEAC, will be owned by member countries and therefore need to be taken off the BEAC’s balance sheet and cannot be considered part of international reserves.
- Given that present levels of reserves do not appear excessive, the establishment of funds for future generations may need to focus on forthcoming receipts, and exclude reserves already with the BEAC.
- Because of the predominance of oil receipts in total exports, the mission agreed that the common reserve pool will need to receive some share of oil export receipts to ensure the sustainability of the monetary arrangement.

### Financial sector soundness and development
- Despite strengthening prudential regulations, concerns about the health of the banking sector remain (Tables 14 to 18).
- Nonperforming loans rose slightly to 14.6 percent in 2004 (Table 16).
- Importance of raising capital adequacy levels, especially for the bottom third of institutions that do not yet comply with minimum requirements.
- The requirement on risk diversification has been missed by more than half of the institutions; implementation is hampered by the economic structure of member countries.
- Banking sector depth and access:
  - Loans to the private sector stood at only 7 percent of the region’s GDP in 2004.
  - About 3 percent of the population have accounts with commercial banks.
  - Private sector lending to regional non-oil GDP in 2004 amounted to only 11 percent in 2004; the average outstanding stock of bank loans to GDP for sub-Saharan Africa was equivalent to 15 percent.
- Regional minimum saving deposit interest rate of 5 percent was identified as an important obstacle to financial deepening by increasing banks’ cost of funds.
- Ongoing reforms expected to increase credit: clarification of the legal status of mortgages; COBAC efforts to familiarize banks with syndication.
- Authorities argued minimum deposit rates are needed for consumer protection and could be removed only after competition increases.

### Regional financial markets and payments
- Regional financial markets remain shallow and highly segmented (Table 17).
- Volume traded on the regional money market was 3 percent of broad money in 2004.
- Low trading volume reflects excess liquidity in banks in five member countries and lack of suitable technical payments system infrastructure between countries.
- Limited information on borrower creditworthiness constrains interbank and credit market development.
- BEAC and COBAC progress toward a regional payments platform expected to be operational by 2006.
- Authorities committed to promoting capital market development and opening a regional stock exchange in Libreville; staff stressed need to avoid duplication with the existing stock exchange in Cameroon.

### Trade and economic integration
- Trade restrictions and uneven application of CEMAC rules constrain external and intraregional trade.
- Common External Tariff (CET) has four rates: 5, 10, 20, and 30 percent.
- Individual countries continue to impose ad hoc fees and other administrative requirements.
- Intraregional trade suffers from:
  - Lack of complementarities in CEMAC countries’ output structure.
  - Absence of harmonized tax structures including for the value-added tax (VAT).
  - Imposition of tariffs on intraregional trade in violation of the common market agreement.
  - Nontariff barriers: state-run monopolies, lengthy and complicated customs procedures, extensive physical inspection of goods.
- Enforcement and compliance:
  - Limited institutional capacity at the central level complicates enforcement of agreed free-trade rules.
  - Several member countries maintain internal tariffs for fiscal reasons; finding alternative financing sources for governments is a priority.
- Policy priorities to support trade growth:
  - Promote export diversification.
  - Reduce production costs.
  - Attract foreign direct investment (FDI).
  - Improve the business environment.
  - Continue negotiations to gain access to foreign markets (e.g., Economic Partnership Agreement with the European Union; eligibility for the U.S. African Growth and Opportunity Act (AGOA) initiative).

### Economic Partnership Agreement (EPA) and regional integration (Box summary)
- EPA negotiations aim to establish a free trade zone between the CEMAC and the EU for 12 years starting in 2008; detailed negotiation plan signed in July 2004; negotiations expected to finish by 2007.
- Key preparatory areas:
  1. Tariff policy: eliminate distortions in CET implementation; assess double taxation from customs warehouse regime; verify coherence of national investment codes with the regional investment charter; measure impact of exemptions on member states’ revenue; harmonize VAT implementation.
  2. WTO customs valuation and rules of origin: strengthen customs capacity; ensure arbitration of transaction value differences; strengthen rules of origin.
  3. Trade and transit facilitation: promote integrated road program; rehabilitate port infrastructures; implement interconnection among customs administrations; limit number of documents needed at customs (Unique Administrative Document already adopted by the CEMAC); provide efficient transport to landlocked countries; harmonize freight weight regulations.
  4. Competitiveness: undertake business environment studies; reduce factor costs (transport, water, electricity, telecommunications); encourage professional training and financial sector diversification; assist enterprise restructuring and upgrading; establish competitiveness observatories.

### Competitiveness
- With predominance of oil exports, competitiveness is difficult to assess.
- Real effective exchange rate: competitiveness in 2004 largely remained constant after deterioration over the previous three years; gains from the 1994 CFA franc devaluation seem largely preserved.
- Export profitability:
  - Improvements in export profitability have resulted mainly from oil-price and output changes.
  - Indications that profitability of the non-oil sector has recently declined.
- Authorities noted exchange rate changes with respect to the U.S. dollar have had limited impact on exports because oil and other commodity export prices are invoiced in U.S. dollars.
- Mission noted prospects for a continuing appreciation of the CFA franc could weaken competitiveness and discourage export diversification.
- Broader agenda to improve competitiveness emphasized:
  - Rapid structural reform policies to boost labor productivity and diversify production and exports.
  - Implement regional integration measures: access to new technologies; improvements in road infrastructure, telecommunications, and energy.
  - Create conditions to attract additional domestic and foreign private investment, especially in the non-oil sector.
- Need to improve data on complementary indicators: FDI flows/unit labor costs, indices of production costs (transportation, energy, telecommunications), and evolution of market shares in main export markets.

### Regional institutions, surveillance, and harmonization
- Regional surveillance:
  - CEMAC has increased efforts to discuss policy issues with member countries; surveillance process has improved and coordination of CEMAC and IMF surveillance is advanced.
  - Need to further strengthen regional surveillance by raising awareness of regional consistency, and introducing incentives and sanctions to encourage compliance with convergence criteria and region-wide regulations.
- Institutional capacity and financing:
  - Quality and financial sustainability of regional institutions are uneven.
  - BEAC is well-established and recognized; other institutions face working conditions constrained by shortages of qualified staff and non-payment by member states of agreed contributions.
  - COBAC suffers from an insufficient number of qualified supervisors.
  - CEMAC institutions meant to be financed through a surcharge on external import tariffs; most members do not yet fully participate in financing.
  - Member states agreed in 2002 to put in place a regional integration tax equivalent to 1 percent of the region’s imports; although member countries have started collecting the tax, the accrued revenues have not yet been fully transferred to the CEMAC’s accounts.
  - Financing of regional institutions other than BEAC and COBAC, which rely mostly on surcharges over import tariffs, may need review in the context of ongoing trade liberalization.
- Integration with ECCAS:
  - Recent efforts to integrate the CEMAC into the ECCAS; authorities mindful of potential duplication of tasks and inconsistencies between ECCAS and CEMAC regulations.
- Legal, tax, and institutional harmonization:
  - 2004 council of ministers of the CEMAC adopted initiatives in transportation, statistics, fiscal, and funding for regional institutions; many regional policies could not be implemented due to lack of political will or financial resources.
  - 2005 regional policy initiatives to focus on streamlining investment codes, adopting a single administrative document to limit customs forms, eliminating double taxation of goods in member countries, and applying region-wide laws.
- Fund surveillance and statistics:
  - Authorities welcomed proposed formalization of IMF surveillance over monetary unions and the recent agreement on a regional FSAP.
  - Authorities desire to link Fund surveillance activities more closely with the CEMAC review of member countries’ policies, including through overlapping missions.
  - Regional FSAP viewed as appropriate vehicle to review current challenges to financial stability and financial sector development.
  - Data gaps: price and trade statistics need improvement; BEAC is working with national statistical agencies to update and harmonize consumer price indices; CEMAC is working with member countries to strengthen customs agencies to improve registration of trade flows.

### Staff appraisal and macro-financial context
- Economic developments in 2004 dominated by increases in oil output and oil prices.
- Oil-related inflows, including significant windfalls from higher than expected oil prices, contributed to:
  - a ten-year high in real growth and income,
  - improved fiscal performance in most oil-exporting countries,
  - significant accumulation of international reserves.
- Non-oil growth rate weakened slightly and progress on structural reforms was uneven.
- Central African Republic, a post-conflict and sole non-oil economy in the region, differed significantly from the regional pattern.
- Region’s management of the 2004 oil windfall judged prudent:
  - Saving most windfall receipts as higher reserves allowed reserve levels more in line with needs implied by the exchange rate regime and vulnerabilities related to oil price fluctuations.
  - With oil prices expected to remain high in the medium term, there could be scope for some cautious additional spending consistent with medium-term fiscal sustainability criteria.

*Source: IMF staff report text provided in the content unit.*

### 40.      The proposed changes in the treatment of oil receipts must take into account the

### _cr05403 - 40.      The proposed changes in the treatment of oil receipts must take into account the

### Oil receipts and reserves
- Proposed changes in the treatment of oil receipts must take into account the need to maintain an adequate level of reserves.
- Efforts to direct some receipts into country-owned “funds for future generations” at the BEAC are described as a welcome and transparent way of addressing intergenerational concerns from oil exploitation.
- The usefulness of such funds is contingent on resolving remaining technical considerations on accounting, asset composition, and remuneration.
- With oil overwhelmingly dominating exports, a part of oil export receipts will need to continue to form part of the common pool of reserves.

### Regional integration and structural progress (CEMAC)
- In 2004, the CEMAC region made little progress in key structural areas, especially in trade and financial market integration.
- While all CEMAC members reaffirmed in principle their support for regional integration, the lack of implementation of agreed measures is identified as a serious obstacle to moving forward with actual deepening of common markets.
- The differences between pronouncements and implementation could send mixed signals to markets and reduce the credibility of the political process.
- Ongoing efforts should be directed at increasing the effectiveness of existing institutions and agreements.
- Any widening of the area or integrating the CEMAC with a broader group of countries should proceed with caution.
- Changes to the regional integration pattern would need to avoid inconsistencies among the policies pursued in relation to the different country groups.

### Regional surveillance and IMF engagement
- The regional surveillance process has improved but continues to be hampered by a lack of resources and adequate follow-up on findings.
- Further changes should be directed at strengthening the framework, including by introducing appropriate incentives and sanctions.
- The proposed formalization of IMF surveillance over monetary unions is expected to strengthen the effectiveness of the Fund’s surveillance and its links with the region.
- Close cooperation of CEMAC institutions in the process is likely to support the internal CEMAC surveillance process.

*Source: _cr05403 - 40.      The proposed changes in the treatment of oil receipts must take into account the*

### 43.      Looking forward, the key challenge for the CEMAC will be to improve

### _cr05403 - 43.      Looking forward, the key challenge for the CEMAC will be to improve

### Outlook and key challenges
- Primary challenge: improve competitiveness and broaden output base beyond oil to allow higher growth rates on a sustainable basis.
- Structural constraints noted:
  - Exchange rate regime (CFA franc pegged to euro at the rate of CFAF 656.34 per euro).
  - Volatility of oil receipts.
  - Expected depletion of oil reserves in several member countries over the medium term.
- Policy directions recommended:
  - Insulate the real economy from fluctuations of oil prices.
  - Broad-based efforts to diversify exports to foster non-oil activities as a basis for economic growth beyond the horizon of oil production.
  - Implementation of measures proposed under ongoing trade initiatives—"if implemented in earnest—have the potential to promote important progress in this area."

### Membership status and IMF relations
- Membership facts:
  - Five CEMAC members joined the IMF in 1963; Equatorial Guinea joined in 1969.
  - The region accepted Article VIII on June 1, 1996.
- Country-level Fund relations (selected exact facts):
  - Cameroon: three-year PRGF arrangement expired in December 2004; last review completed was the fourth review in December 2003. Cameroon reached the Decision Point under the enhanced HIPC initiative in October 2000, but is currently not receiving interim debt relief assistance as the country does not have a formal program with the Fund. At the time of the conclusion of the last Article IV consultation (April 22, 2005), Cameroon requested monitoring by Fund staff of its economic program for 2005. Cameroon is on a 12-month consultation cycle.
  - Central African Republic (CAR): received assistance under an economic post-conflict assistance program (EPCA) approved in July 2004. CAR is eligible for assistance under the enhanced HIPC initiative but has not yet reached the Decision Point. Last Article IV consultation concluded on April 2, 2004. CAR is on a standard 12-month consultation cycle.
  - Chad: three-year PRGF arrangement approved on February 16, 2005. Previous PRGF expired in January 2004. Reached the Decision Point under the enhanced HIPC initiative in May 2001 and is benefiting from interim debt relief assistance. Last Article IV consultation concluded on March 19, 2004. Chad is on a 24-month consultation cycle.
  - Congo, Republic of: Executive Board approved three-year PRGF arrangement equivalent to SDR 54.99 million (about US$84.4 million) in December 2004. Eligible for enhanced HIPC assistance but has not reached the Decision Point. Last Article IV consultation concluded on June 6, 2004. Congo is on a 24-month consultation cycle.
  - Equatorial Guinea: last financial arrangement (an ESAF) expired in 1996. Not expected to seek Fund financial assistance over the next few years. Not eligible for HIPC assistance. Last Article IV consultation concluded on April 25, 2005. Equatorial Guinea is on a 12-month consultation cycle.
  - Gabon: receives support under a 14-month stand-by arrangement approved in May 2004. Third review completed on March 29, 2005. Not eligible for HIPC assistance. Last Article IV consultation concluded on March 28, 2005. If current program expires without a successor arrangement in July 2005, Gabon will revert to a 12-month Article IV consultation cycle.

### Safeguards assessment of BEAC
- Follow-up safeguards assessment completed on August 30, 2004.
- Findings: BEAC implemented a number of measures since the earlier 2001 assessment, but further progress needed in key areas.
- Main recommendations (applicable to BEAC as an institution):
  - Prepare financial statements in full accordance with an internationally recognized accounting framework, initially the ECB guidelines.
  - Publish full financial statements, together with the auditor’s report, starting with the 2003 financial statements.
  - Formulate Board-approved formal guidelines under which the BEAC Governor is authorized to make exceptional advances to BEAC member countries.
  - Annual review by BEAC internal audit department of the process of program data reporting of member countries to the IMF.
  - Implement a risk-based audit approach, and finalize a charter for the internal audit function.
  - Systematic follow up of all recommendations pertaining to BEAC's system of internal controls to be coordinated by the internal audit department, with regular reporting to the Audit Committee and the BEAC Governor.

### Exchange system and regional consultations
- Currency and peg:
  - Regional currency: CFA franc.
  - Peg history: from 1948 to 1999 pegged to the French franc; since the introduction of the euro in 1999 pegged to the euro at CFAF 656.34 per euro.
- Restrictions: Despite Article VIII status, restrictions maintained on certain invisible transactions and certain current transfers, including limits and documentary requirements for trade and investment-related payments, payments for travel, and family maintenance.
- Regional consultations: annual consultations with CEMAC/BEAC. Executive Board discussed staff report for 2003 regional consultation on November 12, 2003. Authorities welcomed proposed formalization of IMF surveillance of monetary unions, which would make regional consultations a formal part of Article IV discussions.

### FSAP, ROSCs, and technical assistance
- FSAP/ROSCs:
  - Two individual country FSAPs: Cameroon (2001) and Gabon (2002).
  - No regional ROSCs undertaken to date. A regional FSAP planned to start in fall 2005.
- Technical assistance to BEAC (selected missions and timing):
  - 2000–2005: Five visits by MFD expert on banking supervision.
  - 2001–2004: Two MFD expert visits and one mission on payments system.
  - 2002–present: Visits by MFD foreign exchange reserve management expert.
  - 2004: MFD AMLT and CFT advisor.
  - 2005: MFD mission on internal audit.
  - 2001, 2004: IMF safeguards assessments.
  - 2001: STA mission on monetary and financial statistics.

### Key economic developments and indicators (selected figures preserved exactly)
- 2004 regional outcomes:
  - Region-wide real GDP growth in 2004 reached 8.3 percent.
  - Real oil GDP grew by more than 21 percent.
  - Oil prices increased by over 30 percent during the year.
  - Oil accounts for nearly 80 percent of the region’s exports.
  - Region-wide non-oil GDP growth slowed from 3.6 percent in 2003 to 3.2 percent in 2004.
  - Inflation in the region declined to 1.7 percent.
- Table highlights (selected exact numbers from tables and text):
  - CFA franc peg: CFAF 656.34 per euro.
  - BEAC follow-up safeguards assessment completed on August 30, 2004.
  - Nominal GDP (CEMAC, memorandum): 2004 = 19,271 (in billions of CFA francs); 2005 projection = 20,485.
  - Oil prices (in U.S. dollars per barrel): 1999 = 18.02; 2000 = 28.22; 2001 = 24.3; 2002 = 25.0; 2003 = 28.9; 2004 = 37.76; 2005 = 46.5.
  - Gross official reserves (end of period, in millions of U.S. dollars): 1999 = 595.2; 2000 = 1,318.9; 2001 = 1,143.3; 2002 = 1,678.2; 2003 = 1,908.3; 2004 = 3,188.7.
  - Regional fiscal outcome (CEMAC overall fiscal balance, excluding grants): 2004 = 3.5 (percent of GDP).
  - Current account balance, including grants (CEMAC): 2004 = -2.3 (percent of GDP).
  - Balance on goods and nonfactor services (CEMAC): 2004 = 13.5 (percent of GDP).
  - Bank soundness indicators (CEMAC, 2004):
    - Capital adequacy ratio (CEMAC) = 11.4 percent (2004).
    - Nonperforming loans (NPL) relative to gross loans (CEMAC) = 14.6 percent (2004).
    - Provisions against NPL (CEMAC) = 78.5 percent (2004).
    - Liquidity ratio (CEMAC) = 206.8 percent (2004).

*IMF Regional Consultation with the Central African Monetary and Economic Union (CEMAC), Public Information Notice No. 05/151, November 1, 2005.*

### 3.1 percent of GDP. The positive fiscal outcomes were in part due to windfall revenues from higher

### _cr05403 - 3.1 percent of GDP. The positive fiscal outcomes were in part due to windfall revenues from higher

### Fiscal outcomes and oil windfalls
- Positive fiscal outcomes in 2004 were in part due to windfall revenues from higher oil prices.
- For the region as a whole about one-fourth of oil windfall receipts associated with the price increases accrued to the budgets of oil producers.
- Budgetary impacts across member countries ranged from about half of the additional revenues in Cameroon to less than 10 percent in Chad.
- Region-wide non-oil overall fiscal deficit (excluding grants) improved slightly, even though in Cameroon the non-oil fiscal balance deteriorated by 1 percent of non-oil GDP.
- The non-oil deficit remained more than 12 percent of non-oil GDP.
- Directors welcomed that most of the increased oil revenue was saved in the form of higher foreign exchange reserves, while noting scope for some cautious additional spending on infrastructure and poverty-reduction programs provided it is consistent with medium-term fiscal and debt sustainability and absorptive capacity.
- Directors supported the creation of country-owned oil stabilization funds and “funds for future generations” under regional central bank management, provided this does not weaken the BEAC’s external position and funds are managed efficiently and with full transparency.
- Directors recommended that a part of oil export receipts continue to be placed in the common pool of reserves.

### External sector, reserves, and exchange rates
- Despite a strengthening of the CFA franc by about 3 percent in real effective terms, the current account deficit declined from more than 5 percent in 2003 to about 2 percent of GDP in 2004.
- The BEAC’s net foreign assets almost doubled in 2004 to more than US$3 billion as a result of strong oil-related inflows and reserve pooling arrangements.
- The region’s exports (in U.S. dollars) increased sharply, mostly reflecting oil windfalls estimated at more than 17 percent of region-wide GDP.
- Non-oil exports as a share of GDP remained constant at 13 percent.
- Intraregional trade stayed unchanged at 1.3 percent of total exports.
- Real exchange rate (REER) appreciation was most pronounced in Equatorial Guinea; REERs in other members stayed largely constant or appreciated slightly.

### Growth prospects and outlook
- Real GDP growth in 2004 reached 8.3 percent against 4.5 percent in 2003.
- Growth in 2005 is forecast to remain strong at about 5 percent, yet below the 2004 rate.
- The overall fiscal balance, including oil, is forecasted to remain roughly constant in 2005.
- With oil prices expected to remain high, there could be further favorable oil export and budget windfalls.
- Prospects for strengthening the non-oil sectors in the short term are described as slight.

### Executive Board assessment — main messages and policy recommendations
- Directors welcomed positive macroeconomic developments in CEMAC in 2004 while noting variation across member countries.
- Directors stressed the need to improve competitiveness of the non-oil sector and diversify the output base to sustain higher overall growth rates.
- Fiscal discipline: Directors underscored importance of fiscal discipline and prudent management of oil revenues; scope exists for cautious additional spending consistent with medium-term fiscal and debt sustainability and absorptive capacity.
- Reserves and oil revenue management: Directors welcomed increased international reserves but noted they may need to increase further given the fixed exchange rate regime and economic vulnerabilities. They supported country-owned stabilization and future generations funds if they do not weaken BEAC’s external position and are transparent and efficiently managed.
- Monetary policy: Directors commended BEAC’s measures to strengthen its monetary policy framework and progress toward a regional payments platform; they stressed gradual shift to market-based instruments and urged abolition of statutory advances in favor of treasury bills.
- Banking sector and financial development: Directors noted weaknesses including high non-performing loans and some banks failing to meet capital adequacy standards; they stressed strengthening the regional supervisory agency, developing a sound and competitive financial sector, and using a regional FSAP to guide comprehensive reform.
- Regional integration: Directors expressed concern that obstacles to trade and financial market integration led to low intra-regional trade and capital flows (intraregional trade at 1.3 percent of exports); they emphasized commitment to and compliance with convergence criteria and strengthening regional institutions before broader integration.
- Surveillance: Directors commended improvements in regional surveillance and suggested further strengthening through incentives and sanctions, harmonized legal and institutional frameworks, and formalization of IMF regional surveillance integrated with Article IV consultations. They warned that lack of resources for continuous regional surveillance and follow-up needs to be addressed.

### Selected economic and financial indicators (highlights, 1999–2005)
- GDP at constant prices: 1999 -0.4; 2000 3.4; 2001 6.2; 2002 4.9; 2003 4.5; 2004 8.3; 2005 5.2
- Oil GDP (annual % change): 1999 -0.5; 2000 -0.5; 2001 5.9; 2002 1.6; 2003 6.9; 2004 21.5; 2005 6.1
- Non-oil GDP (annual % change): 1999 -0.3; 2000 4.9; 2001 6.2; 2002 6.2; 2003 3.6; 2004 3.2; 2005 4.7
- Consumer prices (average): 1999 1.2; 2000 1.2; 2001 3.6; 2002 4.3; 2003 1.9; 2004 1.7; 2005 2.6
- Overall fiscal balance, excluding grants (in percent of GDP): 2000 3.0; 2001 0.4; 2002 -0.6; 2003 1.3; 2004 3.1; 2005 3.5
- Non-oil overall fiscal balance, excluding grants (in percent of non-oil GDP): 1999 -15.5; 2000 -13.2; 2001 -17.0; 2002 -16.0; 2003 -12.6; 2004 -12.1; 2005 -16.2
- Current account, including grants (in percent of GDP): 1999 -5.7; 2000 2.7; 2001 -6.6; 2002 -12.0; 2003 -5.4; 2004 -2.3; 2005 -1.2
- External public debt (in percent of GDP): 1999 102.2; 2000 89.0; 2001 86.5; 2002 75.3; 2003 66.8; 2004 44.9; 2005 38.4
- Gross official reserves (end of period, in millions of U.S. dollars): 1999 595.2; 2000 1,318.9; 2001 1,143.3; 2002 1,678.2; 2003 1,908.3; 2004 3,188.7
- Oil prices (in U.S. dollars per barrel): 2000 18.0; 2001 28.2; 2002 24.3; 2003 25.0; 2004 28.9; 2005 37.8; 2005 projection 46.5
- Memorandum: Nominal GDP (in billions of CFA francs): 1999 11,774; 2000 14,175; 2001 14,894; 2002 15,871; 2003 16,830; 2004 19,271; 2005 20,485
- CFA francs per U.S. dollar, average: 1999 615.7; 2000 712.0; 2001 733.0; 2002 697.0; 2003 581.2; 2004 528.3

*Source: _cr05403 - 3.1 percent of GDP. The positive fiscal outcomes were in part due to windfall revenues from higher*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05403.pdf_