## _cr06317 ## Source details **Canonical URL:** [_cr06317](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06317.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06317.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06317.pdf.json) --- ### Executive Summary — Overview - First formal discussions with the CEMAC in the context of the Article IV consultations with member countries; discussions also covered findings of the preceding regional FSAP missions. - Recent macroeconomic developments benefited from oil windfalls but structural problems continue to impede non-oil growth. ### Executive Summary — Macroeconomic developments and prospects - Fiscal and current account balances for the CEMAC region as a whole improved in 2005 largely—but not exclusively—because of oil-related inflows. - Fiscal revenue and expenditure changes: - Fiscal revenues to GDP increased from 21 percent in 2004 to almost 26 percent in 2005. - Expenditures fell from 19.3 percent to 17.9 percent of GDP despite higher investment in infrastructure. - About half the improvement in revenues was on the non-oil side due to tax base broadening and measures against fraud and tax evasion. - The fiscal surplus, excluding grants, quadrupled to 7.9 percent of GDP. - The regional non-oil fiscal deficit, excluding grants, was reduced by 2 percentage points to 11 percent of non-oil GDP. - External sector and reserves: - The regional external current account balance turned positive for the first time since 2000: a surplus of 2.7 percent of GDP in 2005 following a 2004 deficit of 3.1 percent. - Foreign reserves increased to 4 months of imports of goods and services from 2.4 months at end-2004. - Debt: - External debt fell from 59.8 of regional GDP in 2004 to 40.6 percent in 2005. - Domestic debt declined by about 1.5 percent of regional GDP. - Money, inflation, and exchange rates: - Oil-related reserve inflows helped accelerate regional broad money, increasing regional broad money growth to almost 18 percent from 10 percent in 2004. - Excess liquidity in the commercial banking sector increased to 18 percent of broad money by November 2005. - Inflation increased from about 1 percent to 3.8 percent, partly due to adverse weather raising food prices. - A modest appreciation of the real effective exchange rate (REER) continued for the fifth year in a row. - Growth and outlook: - Region-wide real GDP growth fell from 8.4 percent in 2004 to 4.3 percent in 2005. - Non-oil output growth declined from 4.4 percent in 2004 to 4.2 percent in 2005. - Real GDP growth is forecast to slow to 3.2 percent in 2006, with inflation expected to be about 3 percent. - The fiscal surplus (excluding grants) is expected to continue at about 9 percent in 2006. - Country heterogeneity: - Growth ranged across oil producers from 2.6 percent (Cameroon) to 9.2 percent (Republic of Congo) in 2005. - The Central African Republic (CAR), the only non-oil producer in CEMAC, had the lowest growth. ### Regional convergence and integration - Progress toward convergence criteria improved in 2005, driven more by oil windfalls than by targeted national policies for the monetary union. - Compliance: - Oil-exporting CEMAC countries complied with nearly all criteria, except Equatorial Guinea and Chad missed the inflation criterion and Republic of Congo missed the debt criterion. - The CAR missed three of four criteria, including the fiscal arrears criterion. - Integration shortfalls: - Intraregional trade is very low: 1.4 percent of total trade in 2005. - Markets remain shallow and segmented despite a common monetary and economic zone. - Important financial sector reforms remain incomplete (for example, full implementation of the single license for banks and the introduction of marketable official debt instruments). - Customs procedures are cumbersome and the common external tariff is relatively high at 30 percent for consumer goods. - Financial flows between countries are limited to intragroup transactions. ### Macroeconomic framework: exchange rates and international reserves - The fixed exchange rate of the CFA franc to the euro, in place for about 50 years, provides the nominal anchor for the regional economy. - In 2005, changes in the euro/US dollar exchange rate contributed to a slight appreciation of the REER. - Staff analysis of the equilibrium exchange rate and increases in international reserves supports the conclusion that the current level of the exchange rate is broadly appropriate, but structural factors constrain competitiveness. - Authorities and staff agreed that macroeconomic policies, a path for reserve accumulation from oil-related incomes, and efforts to avoid “Dutch disease” are required to keep the exchange rate regime consistent. ### Fiscal policy, oil-related inflows, and reserve management - Oil-related surpluses pose new challenges for macroeconomic policymaking, particularly coordination of national fiscal policies within the regional monetary union. - Convergence criteria do not provide adequate guidance for fiscal surpluses arising from oil inflows. - Policy needs identified: - Find a mechanism to divide oil inflows between spending and saving, and for savings between common reserves and country-owned financial funds. - The BEAC can play a role in investing countries’ long-term savings, but members should earn market-based remuneration. ### Monetary policy, liquidity management, and interest rates - Recent oil-related inflows contributed to rapid expansion of broad money and emerging inflationary pressures in some member countries. - Urgent policy actions recommended: - Mop up excess liquidity in the region, preferably using BEAC bills. - Move to single treasury accounts with the BEAC rather than keeping government balances with commercial banks to help absorb liquidity. ### Financial sector soundness and FSAP findings - FSAP highlights weaknesses in banks, including low capitalization. - Concerns about COBAC: - Limited independence and constrained human and financial resources of COBAC, the regional banking supervision agency. - Access to financial services identified as the key developmental challenge. ### Structural policies and regional market environment - Recommendations to deepen benefits from regional integration: - Reduce the region’s high external tariffs to enhance competition. - Remove informal barriers to intraregional and international trade. - Improve the general business climate to contribute to faster economic growth and trade. ### Key policy recommendations (summary) - Establish mechanisms to split oil inflows between spending and saving, and between common reserves and country-owned financial funds. - Ensure BEAC invests long-term savings with market-based remuneration to members. - Use BEAC bills to mop up excess liquidity and move to single treasury accounts with the BEAC. - Strengthen COBAC’s independence and capacity; address bank capitalization weaknesses. - Implement financial sector reforms (single banking license, marketable official debt instruments). - Reduce external tariffs, simplify customs procedures, and remove informal trade barriers to deepen regional integration. ### Reserve adequacy and reserve management (findings and recommendations) - Findings: - A common rule of thumb: optimal level of foreign exchange reserves should equal at least three months of imports. - A recent staff study found that, for the CEMAC, withstanding a two-standard deviation shock to the trade balance would require reserve coverage equal to 4.5 months of imports. - Reserves were reported as exceeding four months of imports and covering almost 100 percent of money supply. - Given the reserve position, there is room for some longer-term investment of oil-related inflows, but revised investment rules must ensure monetary reserves remain adequate. - Policy recommendations / observations: - Distinguish clearly between monetary reserves (safety and liquidity focus) and Funds for Future Generations (FFGs) and Oil-Income Stabilization Funds (OSFs) (longer-term instruments, higher return). - Remuneration of FFGs and OSFs should reflect investment returns to incentivize saving. - While BEAC reserve management capabilities are being built, secure help of a reputable outside investment manager. - Current rules: BEAC to invest 65 percent of its foreign exchange funds with the operations account at the French Treasury; the remainder can be invested by the authorities according to the BEAC’s reserve investment rules. ### Exchange rate, REER, and competitiveness (findings, methodology, policy) - Findings: - The REER appreciated by about 1 percent in 2005, but remains below its pre-devaluation level. - Staff research found a small, statistically insignificant, overvaluation of the REER at the end of 2005 and a recent decrease in the gap between the actual and the equilibrium REER. - At the end of 2005, the estimated deviation from the EREER was not statistically significant, suggesting the REER was broadly in line with its estimated long-run equilibrium level. - Trends in REERs across CEMAC members diverge significantly; countries with more appreciated REERs (notably Equatorial Guinea) and the Republic of Congo face more severe competitiveness challenges. - Staff study methodology and key coefficient signs (Box 1): - Approach: Edwards (1989) FEER and Johansen (1995) cointegration methodology; annual observations 1970-2005. - Fundamentals used: terms of trade (TOT), government consumption to GDP (CGR), investment to GDP (INV), technological progress (PROD), openness (OPEN). - Estimated cointegration equation (as presented): ln(REER) = 1.57 × ln(TOT) + 0.70 × ln(CGR) − 0.41 × ln(INV) + 0.21 × ln(PROD) − 0.59 × ln(OPEN). - Estimated elasticities: terms of trade and productivity have the highest marginal impact. - Policy implications: - Monitor competitiveness, but recognize exchange rate–based measures may not capture structural changes as oil sector expands. - Increased goods and factor mobility recommended to address price and REER divergences. ### Non-oil sector performance and diversification - Findings: - Shares of non-oil exports in total exports and in GDP have been declining since 1995. - Volumes of non-oil exports remained almost flat in the last two years. - Expansion in oil sectors has led to growing domestic cost pressures, including higher costs of labor and services, particularly in Equatorial Guinea and Chad. - Structural rigidities undermine non-oil export competitiveness: limited access to bank credit, high cost of collateral, inadequate legal framework, labor market rigidities. - Recent large increases in FDI were predominantly associated with investments in the oil sector; non-oil sectors did not benefit substantially. - Policy recommendations: - Focus on non-oil sector competitiveness and diversification within the relatively short horizon of oil production. - Regional measures proposed by authorities: tighten fiscal and revenue policies to avoid an inflationary spiral, improve energy and food supplies, promote FDI outside the energy sector, align export quality to international standards, and improve transportation and telecommunications. - Review labor market rigidities to help competitiveness. ### Fiscal policy and management of oil-related inflows - Findings: - In a monetary union some coordination of fiscal policies is needed to avoid negative spillovers. - The peg of the common currency to the euro imposes additional constraints on the policy mix. - Convergence criteria require a zero basic balance; while performance improved, relevance in the context of fiscal surpluses is diminished. - Fiscal policies in 2005 were conservative: most of the windfall was used to repay domestic and external debt or saved as higher government deposits at the BEAC. - Authorities considered part of the oil price increase to be permanent and planned to phase in higher spending as absorptive capacity increases. - Policy recommendations / proposals: - Safeguard part of additional oil revenue for future generations. - Consider a fiscal rule based on permanent instead of actual revenues to supplement the convergence criterion, while retaining flexibility to increase social and growth-critical expenditures. - Member countries should be guided by a broader view on fiscal policies, taking account of spending needs and absorptive capacity and longer-term implications after temporary revenues end. - Use regional coordination forums (e.g., biannual meeting of heads of states and finance ministers) or a more automatic formula in the medium term. - Caution against channeling large-scale investments through the regional development bank given its recent restructuring and untested new form. ### Monetary policy, liquidity management, and interest rates (findings and mission advice) - Findings: - BEAC has some monetary independence because of capital controls, but formulates a regional reserve money program. - Reserve inflows are high and BEAC has not undertaken substantial sterilization efforts, producing substantial excess liquidity. - Majority of CEMAC governments continue to hold their funds in commercial banks, substantially increasing liquidity and complicating monetary management. - Excess liquidity has coincided with recent sharp increases in bank lending and inflation in some member countries. - Mission advice and recommendations: - Mop up liquidity in excess of levels consistent with the monetary program. - Unify required reserves across members and lower currently excessive high levels. - Issue marketable central bank bills to support monetary policy implementation and financial market development. - Encourage members to move to single treasury accounts with the BEAC to improve monetary policy implementation, fiscal efficiency, and transparency. - Renew efforts to replace direct central bank advances by treasury bills to give BEAC better control over its balance sheet. - Given sterilization capacity limits, channel some funds into FFGs and OSFs (longer-term illiquid deposits with BEAC) to limit direct liquidity consequences. - Review investment and remuneration schemes for FFGs and OSFs; distinguish monetary reserves from FFGs and OSFs. - Authorities’ positions and cautions: - Authorities felt no additional sterilization necessary because excess liquidity did not currently threaten price stability and sterilization would be costly. - Agreed in principle with reforms but noted need for member-country level support. - Concerned about possible impact of marketable central bank bills on BEAC’s income position. - Supported greater transparency in accounting for and repatriation of export receipts and welcomed establishment of a permanent EITI secretariat at the BEAC. - Agreed to review investment options and to secure external investment management assistance while building BEAC capabilities. ### Interest rate policy (assessment) - BEAC recently lowered all policy as well as all controlled interest rates while euro interest rates were increasing. - Authorities argued the moves did not endanger the peg because the interest rate differential to euro retail rates remained positive, and they deemed the move necessary to raise investment. - Mission’s assessment: - The move did not seem justified given excess liquidity and evidence that bank lending did not seem constrained. - There were indications of increased private capital outflows. - The mission disagreed with continued controls on some deposit and lending rates (against the FSAP and the mission’s recommendations), noting those affected only a small fragment of the market. - Given low inflation, the authorities agreed that the minimum deposit rate could be lowered further. ### Financial soundness and financial sector development (FSAP findings and recommendations) - FSAP participation and findings: - FSAP outlined regional reform priorities for liquidity management, banking supervision, resolution of remaining weak banks, and strengthening CEMAC financial integration. - Shortcomings remain in prudential regulation, such as the level and calculation of the solvency ratio and limits to large exposures, and capacity and institutional independence of the regional banking commission. - A significant number of banks do not meet all prudential rules; COBAC has shown continued forbearance. - Stress tests show the banking sector is particularly vulnerable to credit risks: a relatively large number of banks are undercapitalized and there is a high sectoral concentration of bank loans. - Implementation of anti-money-laundering/combating financing of terrorism legislation is hampered by unclear assignment of responsibilities between regional agencies and national authorities. - Financial development constraints: - Very low household access to financial services—among the lowest in the world. - Banks reluctant to finance SMEs due to flaws in legal and judicial framework and poor corporate accounting and governance. - Imposition on banks of minimum deposit and maximum lending rates curtails access; banks mainly deal with a small number of large corporate clients. - Microfinance outreach has grown but remains relatively limited. - The OHADA accounting framework places an excessive burden on SMEs. - FSAP and mission recommendations: - Regional: Strengthen supervisory capacity and institutional independence of COBAC; revise OHADA legislation on debt collection and accounting practices; adjust administered interest rates to better align with market fundamentals. - National: Upgrade the judicial system; tackle governance issues; improve commercial and land registries; adopt a framework for appointing and training insolvency administrators. ### Trade and regional market integration - Intraregional trade and customs union: - Intraregional trade is lower than in any other free trade area on the continent. - Lack of complementarities and poor functioning of the CEMAC customs union hinder trade; national customs procedures and regulations do not comply with the common regime. - Remedial action has fallen behind a provisional 2003 roadmap for reform. - Progress noted: planned move of five members to ASYCUDA; efforts to facilitate transit trade from Cameroon to the CAR and Chad; a new study on rules of origin; road network connections supported by the EU, AfDB, and WB. - Authorities pointed to serious security problems obstructing transportation, such as highway robbers and armed cross-border rebels. - External trade restrictions and tariff policy: - The common external tariff (CET) is levied at 5, 10, 20, and 30 percent. - Mission proposed using WAEMU bands (0, 5, 10, and 20 percent) as a benchmark and reducing tariff dispersion. - Authorities said any revision would require review of experience since 1994 and assessment of proposed new rates; they called for foreign partners to help with studies. - IMF offered technical assistance and policy advice to identify alternative revenues as tariff receipts decline and to consider additional resources to cover adjustment costs for countries with a Fund-supported program. - Economic Partnership Agreement (EPA) with the EU: - Preliminary negotiations completed in December 2005; an agreement could be reached by the start of 2008. - São Tomé & Príncipe and the DRC have joined CEMAC in preparing the EPA proposal. - Authorities aware of possible adverse trade diversion effects and fiscal revenue repercussions from an EPA. - Mission encouraged liberal rules of origin, use of EPA to gain market access and support for institutional reforms, and parallel reductions in tariff rates on a most-favored-nation basis vis-à-vis non-EPA members to boost trade and limit trade diversion. ### Regional institutions and surveillance - CEMAC Secretariat capacity: - Secretariat tasked with preparing common policies and surveillance, but has only about 60 professional staff. - Many members in arrears to institutions; Secretariat resources fall significantly short of needs to execute assigned tasks. - Declarations on regional integration: - Recent declarations welcomed; commitments include clearing arrears to CEMAC, ensuring better funding, enhancing regional policy coordination for oil-related inflows, and promoting regional projects. - Mission stressed that political will and national support are required for effective transformation (planned transformation of the Secretariat into a commission in 2008 would yield benefits only with greater national support and financial resources). - COBAC and BEAC: - BEAC is well staffed and professional; COBAC has limited autonomy and severe resource constraints. - FSAP called for more autonomy for COBAC and doubling the number of professional staff. - BEAC has administrative control over COBAC and favors gradual resource increases; mission called for significant acceleration of resource increases given long-standing problems. - Fund surveillance and technical assistance: - Regional discussions formalized as part of Article IV consultations per the Board Decision of January 6, 2006; the staff report and associated Board discussion will be integral to next Article IV consultations for CEMAC members. - Implementation of Fund advice has been limited; few proposed steps taken due in part to insufficient support and follow-up at the national level. - Data weaknesses: uneven quality, coverage, and timeliness of macroeconomic data; non-harmonized consumer price indices; lack of labor market and detailed financial sector data. - AFRITAC center in Libreville, Gabon, expected to open in January 2007; a needs assessment mission in June will identify priorities for regional and national technical assistance. The center will be financed mainly by CEMAC member countries and bilateral and multilateral donors. ### Staff appraisal (policy implications and priorities) - Macroeconomic context and structural priorities: - Improvements in macroeconomic performance in 2005 (oil-related inflows) offer an opportunity to address long-standing structural issues. - Per capita income in most CEMAC members is low and MDG challenges are large. - Structural problems remain: excess liquidity, shallow and inefficient money and financial markets, lacking regional infrastructure and transport, minimal intraregional and international trade integration, and constrained institutional capacity. - Recent political commitments could enable progress if implemented (e.g., clearing arrears, better funding, enhanced coordination, regional projects). - Fiscal and reserve policy related to oil inflows: - Recent agreement allowing member countries to save oil-related inflows in FFGs held in the BEAC should be amended to allow investment of these funds in longer-term assets and to ensure member countries receive returns more directly linked to the total return on investment. - Need to maintain sufficient monetary reserves to back the fixed exchange rate regime. - Fiscal policies must be coordinated to ensure sufficient reserve inflows are channeled to the common pool of reserves rather than to FFGs and OSFs. - Efforts to improve transparency of oil-related inflows include establishing a permanent secretariat for the Extractive Industries Transparency Initiative at the BEAC. - Medium-term sustainability and competitiveness: - Prudent macroeconomic policies and broad improvements in competitiveness required for medium-term financial sustainability. - Region vulnerable to terms-of-trade shocks and has limited known oil reserves; non-oil development must be supported. - To avoid future overvaluation under the fixed exchange rate, inflation must be kept low and fiscal spending restricted to absorptive capacity. - Improving competitiveness requires addressing regional structural rigidities through more flexible labor markets, freer trade, and a business environment conducive to private sector growth. ### Selected key statistics and projections (figures preserved exactly as in source) - Nominal GDP (CEMAC, 2001–06, percent of country's total nominal GDP; selected years): - Cameroon: 42.5 42.2 42.0 40.2 39.5 39.9 - CEMAC (aggregate): 26.9 26.6 26.5 32.6 38.1 40.6 - Nominal oil GDP (percent of country's total nominal GDP): - Cameroon: 3.3 3.2 2.8 2.7 3.1 3.0 - CEMAC: 26.9 26.6 26.5 32.6 38.1 40.6 - Oil exports (percent of value of country's total goods exports): - Cameroon: 58.3 46.5 39.7 42.1 47.8 47.0 - CEMAC: 78.4 76.0 74.5 79.5 84.5 85.7 - Fiscal oil revenue (percent of country's fiscal revenue): - Cameroon: 25.9 30.0 25.5 25.7 17.9 16.7 - CEMAC: 50.1 49.1 48.2 50.8 56.9 59.6 - Selected CEMAC macro aggregates (2001–06; Est./Proj. as labeled) - GDP at current prices (annual percent change): 4.8 6.0 4.4 14.1 16.3 11.4 - GDP at constant prices (annual percent change): 8.1 4.8 4.6 8.4 4.3 3.2 - Consumer prices (average): 3.7 4.6 1.8 1.0 3.8 3.1 - Gross domestic savings (percent of GDP): 36.1 26.2 37.0 39.4 47.2 48.2 - Gross domestic investment (percent of GDP): 27.8 25.2 27.3 24.4 22.6 21.2 - Total revenue, excluding grants (percent of GDP): 22.9 20.9 20.5 21.1 25.8 26.8 - Government expenditure (percent of GDP): 21.3 21.2 20.3 19.3 17.9 17.9 - Overall fiscal balance, excluding grants (percent of GDP): 1.6 -0.3 0.2 1.8 7.9 8.9 - Non-oil overall fiscal balance, excluding grants (percent of non-oil GDP): -13.5 -14.4 -13.2 -13.2 -11.0 -11.9 - Exports of goods and nonfactor services (percent of GDP): 45.7 43.3 43.3 49.7 58.4 61.7 - Imports of goods and nonfactor services (percent of GDP): 38.1 40.8 36.8 37.3 35.6 34.9 - Current account, including grants (percent of GDP): -6.6 -10.5 -7.0 -3.1 2.7 5.2 - External public debt (percent of GDP): 82.7 71.2 68.2 59.8 40.6 35.7 - Gross official reserves (end of period, in millions of U.S. dollars): 1,143.3 1,678.2 1,908.3 3,188.7 5,315.7 ... - In months of imports of goods and services: 1.4 1.8 1.6 2.4 3.9 ... - Monetary and banking indicators (selected, 2001–06) - Broad money (annual percent change): 7.2 14.4 1.7 10.3 17.8 ... - Net foreign assets (annual change as percent of beginning-of-period broad money): -11.3 10.3 -1.4 26.4 50.4 ... - Net domestic assets (annual change as percent of beginning-of-period broad money): 18.6 4.2 3.1 -16.1 -32.6 ... - BEAC repurchase rate (TIPP): 8.5 8.3 7.8 7.8 7.5 7.3 7.3 7.3 - Certificate of deposit (28-day maturity): 3.7 2.8 2.0 2.0 1.8 1.7 1.7 1.7 - Balance of payments (CEMAC, billions of CFA francs, 2001–06; selected lines) - Balance on current account (2001–06): -1,033 -1,760 -1,216 -621 624 1,345 - Exports of goods (2001–06): 6,449 6,460 6,787 9,059 12,566 14,863 - Imports of goods (2001–06): -3,356 -4,024 -3,584 -3,959 -4,333 -4,767 - Direct investment, net (2001–06): 1,205 1,601 1,612 1,691 1,590 1,702 - Reserve assets (accumulation -, 2001–06): 248 -322 -8 -554 -890 -1,432 - Nominal GDP (memorandum): 15,756 16,700 17,431 19,895 23,140 25,784 - Central bank and commercial banks (selected stock levels, billions of CFA francs) - BEAC base money (end-period, selected dates): 1,112 1,272 1,288 1,516 1,555 1,668 1,922 1,889 - Commercial banks broad money (end-period, selected dates): 2,297 2,628 2,673 2,948 3,057 3,283 3,472 3,442 - Currency cover ratio (gross official reserves as a percentage of base money): 65.0 68.3 66.3 74.6 80.9 82.3 88.2 87.8 - Compliance with convergence criteria (2001–06; selected items) - Basic fiscal balance (criterion: nonnegative) — number of countries violating: 2 3 3 2 1 0 - Consumer price inflation (criterion: not higher than 3 percent) — number of countries violating: 3 4 2 2 2 0 - Public debt (criterion: not higher than 70 percent of GDP) — number of countries violating: 3 2 2 2 2 0 - Total number of criteria violations (CEMAC aggregate): 11 12 11 9 6 0 ### Business environment and structural indicators (selected) - Starting a business — Number of procedures (selected series): 8 12 11 13 13 9 13 11 12 10 19 8 12 11 - Starting a business — Time (days) (selected series): 32 45 45 42 35 57 53 44 37 14 75 67 48 64 - Starting a business — Cost (percent of per capita income) (selected series): 191 150 134 191 465 109 218 208 173 212 361 289 259 215 - Starting a business — Min. capital (percent of per capita income) (selected series): 323 484 225 491 761 260 460 429 217 568 619 220 406 297 - Hiring and Firing Workers — Rigidity of Employment Index (selected series): 2 53 84 45 66 90 64 79 69 56 76 72 80 71 53 - Registering Property — Number of procedures (selected series): 3 8 7 5 5 6 6 6 5 3 6 6 5 7 - Getting Credit — Legal rights index (selected entries as in source): 3 44234 32 3 4 33 2 3 4 - Enforcing Contracts — Number of procedures (selected series): 6 49 41 25 28 33 33 37 35 58 45 52 47 51 36 - Closing a Business — Time (years) (selected series): 3 4 2 4 5 3 3 3 3 5 10 3 5 3 *Source: Executive Summary and sections: _cr06317* ### Executive Summary ...................................................................................................... ### Executive Summary ### Overview - First formal discussions with the CEMAC in the context of the Article IV consultations with member countries; discussions also covered findings of the preceding regional FSAP missions. - Recent macroeconomic developments benefited from oil windfalls but structural problems continue to impede non-oil growth. ### Macroeconomic developments and prospects - Fiscal and current account balances for the CEMAC region as a whole improved in 2005 largely—but not exclusively—because of oil-related inflows. - Fiscal revenue and expenditure changes: - Fiscal revenues to GDP increased from 21 percent in 2004 to almost 26 percent in 2005. - Expenditures fell from 19.3 percent to 17.9 percent of GDP despite higher investment in infrastructure. - About half the improvement in revenues was on the non-oil side due to tax base broadening and measures against fraud and tax evasion. - The fiscal surplus, excluding grants, quadrupled to 7.9 percent of GDP. - The regional non-oil fiscal deficit, excluding grants, was reduced by 2 percentage points to 11 percent of non-oil GDP. - External sector and reserves: - The regional external current account balance turned positive for the first time since 2000: a surplus of 2.7 percent of GDP in 2005 following a 2004 deficit of 3.1 percent. - Foreign reserves increased to 4 months of imports of goods and services from 2.4 months at end-2004. - Debt: - External debt fell from 59.8 of regional GDP in 2004 to 40.6 percent in 2005. - Domestic debt declined by about 1.5 percent of regional GDP. - Money, inflation, and exchange rates: - Oil-related reserve inflows helped accelerate regional broad money, increasing regional broad money growth to almost 18 percent from 10 percent in 2004. - Excess liquidity in the commercial banking sector increased to 18 percent of broad money by November 2005. - Inflation increased from about 1 percent to 3.8 percent, partly due to adverse weather raising food prices. - A modest appreciation of the real effective exchange rate (REER) continued for the fifth year in a row. - Growth and outlook: - Region-wide real GDP growth fell from 8.4 percent in 2004 to 4.3 percent in 2005. - Non-oil output growth declined from 4.4 percent in 2004 to 4.2 percent in 2005. - Real GDP growth is forecast to slow to 3.2 percent in 2006, with inflation expected to be about 3 percent. - The fiscal surplus (excluding grants) is expected to continue at about 9 percent in 2006. - Country heterogeneity: - Growth ranged across oil producers from 2.6 percent (Cameroon) to 9.2 percent (Republic of Congo) in 2005. - The Central African Republic (CAR), the only non-oil producer in CEMAC, had the lowest growth. ### Regional convergence and economic integration - Progress toward convergence criteria improved in 2005, driven more by oil windfalls than by targeted national policies for the monetary union. - Compliance: - Oil-exporting CEMAC countries complied with nearly all criteria, except Equatorial Guinea and Chad missed the inflation criterion and Republic of Congo missed the debt criterion. - The CAR missed three of four criteria, including the fiscal arrears criterion. - Integration shortfalls: - Intraregional trade is very low: 1.4 percent of total trade in 2005. - Markets remain shallow and segmented despite a common monetary and economic zone. - Important financial sector reforms remain incomplete (for example, full implementation of the single license for banks and the introduction of marketable official debt instruments). - Customs procedures are cumbersome and the common external tariff is relatively high at 30 percent for consumer goods. - Financial flows between countries are limited to intragroup transactions. ### Macroeconomic framework: exchange rates and international reserves - The fixed exchange rate of the CFA franc to the euro, in place for about 50 years, provides the nominal anchor for the regional economy. - In 2005, changes in the euro/US dollar exchange rate contributed to a slight appreciation of the REER. - Staff analysis of the equilibrium exchange rate and increases in international reserves supports the conclusion that the current level of the exchange rate is broadly appropriate, but structural factors constrain competitiveness. - The authorities and staff agreed that macroeconomic policies, a path for reserve accumulation from oil-related incomes, and efforts to avoid “Dutch disease” are required to keep the exchange rate regime consistent. ### Fiscal policy, oil-related inflows, and reserve management - Oil-related surpluses pose new challenges for macroeconomic policymaking, particularly coordination of national fiscal policies within the regional monetary union. - Convergence criteria do not provide adequate guidance for fiscal surpluses arising from oil inflows. - Policy needs identified: - Find a mechanism to divide oil inflows between spending and saving, and for savings between common reserves and country-owned financial funds. - The BEAC can play a role in investing countries’ long-term savings, but members should earn market-based remuneration. ### Monetary policy, liquidity management, and interest rates - Recent oil-related inflows contributed to rapid expansion of broad money and emerging inflationary pressures in some member countries. - Urgent policy actions recommended: - Mop up excess liquidity in the region, preferably using BEAC bills. - Move to single treasury accounts with the BEAC rather than keeping government balances with commercial banks to help absorb liquidity. ### Financial sector soundness and FSAP findings - The regional FSAP highlights weaknesses in banks, including low capitalization. - Concerns about COBAC: - Limited independence and constrained human and financial resources of COBAC, the regional banking supervision agency. - Access to financial services identified as the key developmental challenge. ### Structural policies and regional market environment - To draw further benefits from regional integration the report recommends: - Reduce the region’s high external tariffs to enhance competition. - Remove informal barriers to intraregional and international trade. - Improve the general business climate to contribute to faster economic growth and trade. ### Key policy recommendations (summary) - Establish mechanisms to split oil inflows between spending and saving, and between common reserves and country-owned financial funds. - Ensure BEAC invests long-term savings with market-based remuneration to members. - Use BEAC bills to mop up excess liquidity and move to single treasury accounts with the BEAC. - Strengthen COBAC’s independence and capacity; address bank capitalization weaknesses. - Implement financial sector reforms (single banking license, marketable official debt instruments). - Reduce external tariffs, simplify customs procedures, and remove informal trade barriers to deepen regional integration. *Source: Executive Summary, _cr06317* ### 12. The mission and the authorities welcomed the stronger reserve cushion and ### _cr06317 - 12. The mission and the authorities welcomed the stronger reserve cushion and ### Reserve adequacy and reserve management - Findings - A common rule of thumb: optimal level of foreign exchange reserves should equal at least three months of imports. - A recent staff study found that, for the CEMAC, withstanding a two-standard deviation shock to the trade balance would require reserve coverage equal to 4.5 months of imports. - Reserves were reported as exceeding four months of imports and covering almost 100 percent of money supply. - Given the reserve position, there is room for some longer-term investment of oil-related inflows, but revised investment rules must ensure monetary reserves remain adequate. - Policy recommendations / observations - Distinguish clearly between monetary reserves (safety and liquidity focus) and Funds for Future Generations (FFGs) and Oil-Income Stabilization Funds (OSFs) (longer-term instruments, higher return). - Remuneration of FFGs and OSFs should reflect investment returns to incentivize saving. - While BEAC reserve management capabilities are being built, secure help of a reputable outside investment manager. - Current rules: BEAC to invest 65 percent of its foreign exchange funds with the operations account at the French Treasury; the remainder can be invested by the authorities according to the BEAC’s reserve investment rules. ### Exchange rate, REER, and competitiveness - Findings - The REER appreciated by about 1 percent in 2005, but remains below its pre-devaluation level. - Staff research found a small, statistically insignificant, overvaluation of the REER at the end of 2005 and a recent decrease in the gap between the actual and the equilibrium REER. - Modeling the equilibrium exchange rate in CEMAC is particularly challenging because structural changes from oil income must be accounted for. - At the end of 2005, the estimated deviation from the EREER was not statistically significant, suggesting the REER was broadly in line with its estimated long-run equilibrium level. - Trends in REERs across CEMAC members diverge significantly; countries with more appreciated REERs (notably Equatorial Guinea) and the Republic of Congo face more severe competitiveness challenges. - Staff study methodology and key coefficient signs (Box 1) - Approach: Edwards (1989) FEER and Johansen (1995) cointegration methodology; annual observations 1970-2005. - Fundamentals used: terms of trade (TOT), government consumption to GDP (CGR), investment to GDP (INV), technological progress (PROD), openness (OPEN). - Estimated cointegration equation (as presented): ln(REER) = 1.57 × ln(TOT) + 0.70 × ln(CGR) − 0.41 × ln(INV) + 0.21 × ln(PROD) − 0.59 × ln(OPEN) [coefficients and t-statistics as reported in source figures]. - Estimated elasticities: terms of trade and productivity have the highest marginal impact. - Policy implications - Monitor competitiveness, but recognize exchange rate–based measures may not capture structural changes as oil sector expands. - Increased goods and factor mobility recommended to address price and REER divergences. ### Non-oil sector performance and diversification - Findings - Shares of non-oil exports in total exports and in GDP have been declining since 1995. - Volumes of non-oil exports remained almost flat in the last two years. - Expansion in oil sectors has led to growing domestic cost pressures, including higher costs of labor and services, particularly in Equatorial Guinea and Chad. - Structural rigidities undermine non-oil export competitiveness: limited access to bank credit, high cost of collateral, inadequate legal framework, labor market rigidities. - Recent large increases in FDI were predominantly associated with investments in the oil sector; non-oil sectors did not benefit substantially. - Policy recommendations - Focus on non-oil sector competitiveness and diversification within the relatively short horizon of oil production. - Regional measures proposed by authorities: tighten fiscal and revenue policies to avoid an inflationary spiral, improve energy and food supplies, promote FDI outside the energy sector, align export quality to international standards, and improve transportation and telecommunications. - Review labor market rigidities to help competitiveness. ### Fiscal policy and management of oil-related inflows - Findings - In a monetary union some coordination of fiscal policies is needed to avoid negative spillovers. - The peg of the common currency to the euro imposes additional constraints on the policy mix. - Convergence criteria require a zero basic balance; while performance improved, relevance in the context of fiscal surpluses is diminished. - Fiscal policies in 2005 were conservative: most of the windfall was used to repay domestic and external debt or saved as higher government deposits at the BEAC. - Authorities considered part of the oil price increase to be permanent and planned to phase in higher spending as absorptive capacity increases. - A consultative conference was planned for November 2006. - Policy recommendations / proposals - Safeguard part of additional oil revenue for future generations. - Consider a fiscal rule based on permanent instead of actual revenues to supplement the convergence criterion, while retaining flexibility to increase social and growth-critical expenditures. - Member countries should be guided by a broader view on fiscal policies, taking account of spending needs and absorptive capacity and longer-term implications after temporary revenues end. - Use regional coordination forums (e.g., biannual meeting of heads of states and finance ministers) or a more automatic formula in the medium term. - Caution against channeling large-scale investments through the regional development bank given its recent restructuring and untested new form. ### Monetary policy, liquidity management, and interest rates - Findings - BEAC has some monetary independence because of capital controls, but formulates a regional reserve money program. - Reserve inflows are high and BEAC has not undertaken substantial sterilization efforts, producing substantial excess liquidity. - Majority of CEMAC governments continue to hold their funds in commercial banks, substantially increasing liquidity and complicating monetary management. - Excess liquidity has coincided with recent sharp increases in bank lending and inflation in some member countries. - Policy recommendations / mission advice - Mission argued for more aggressive mopping-up of excess liquidity and more transparent and proactive BEAC monetary policy signaling. - Reiterate recommendations to: - Mop up liquidity in excess of levels consistent with the monetary program. - Unify required reserves across members and lower currently excessive high levels. - Issue marketable central bank bills to support monetary policy implementation and financial market development. - Encourage members to move to single treasury accounts with the BEAC to improve monetary policy implementation, fiscal efficiency, and transparency. - Renew efforts to replace direct central bank advances by treasury bills to give BEAC better control over its balance sheet. - Given sterilization capacity limits, channel some funds into FFGs and OSFs (longer-term illiquid deposits with BEAC) to limit direct liquidity consequences. - Review investment and remuneration schemes for FFGs and OSFs; distinguish monetary reserves from FFGs and OSFs. - Authorities’ positions and cautions - Authorities felt no additional sterilization necessary because excess liquidity did not currently threaten price stability and sterilization would be costly. - Agreed in principle with reforms but noted need for member-country level support. - Concerned about possible impact of marketable central bank bills on BEAC’s income position. - Supported greater transparency in accounting for and repatriation of export receipts and welcomed establishment of a permanent EITI secretariat at the BEAC. - Agreed to review investment options and to secure external investment management assistance while building BEAC capabilities. *Source: _cr06317 - 12. The mission and the authorities welcomed the stronger reserve cushion and* ### 24. The mission cited the importance of rationalizing interest rate policy. At a time of ### _cr06317 - 24. The mission cited the importance of rationalizing interest rate policy. At a time of ### Interest rate policy - BEAC recently lowered all policy as well as all controlled interest rates while euro interest rates were increasing (Figure 12). - Authorities argued the moves did not endanger the peg because the interest rate differential to euro retail rates remained positive, and they deemed the move necessary to raise investment. - The mission’s assessment: - The move did not seem justified given excess liquidity and evidence that bank lending did not seem constrained. - There were indications of increased private capital outflows. - The mission disagreed with continued controls on some deposit and lending rates (against the FSAP and the mission’s recommendations), noting those affected only a small fragment of the market. - Given low inflation, the authorities agreed that the minimum deposit rate could be lowered further. ### Financial soundness and financial sector development - Regional FSAP participation and findings: - The FSAP outlined regional reform priorities for liquidity management, banking supervision, resolution of remaining weak banks, and strengthening CEMAC financial integration. - Authorities agreed FSAP recommendations built on reform efforts already underway and would guide BEAC and COBAC’s reforms. - FSAP key vulnerabilities and findings: - Shortcomings remain in prudential regulation, such as the level and calculation of the solvency ratio and limits to large exposures, and capacity and institutional independence of the regional banking commission. - A significant number of banks do not meet all prudential rules; COBAC has shown continued forbearance. - Stress tests show the banking sector is particularly vulnerable to credit risks: a relatively large number of banks are undercapitalized and there is a high sectoral concentration of bank loans. - Implementation of anti-money-laundering/combating financing of terrorism legislation is hampered by unclear assignment of responsibilities between regional agencies and national authorities. - Financial development constraints: - Very low household access to financial services—among the lowest in the world. - Banks reluctant to finance SMEs due to flaws in legal and judicial framework and poor corporate accounting and governance. - Imposition on banks of minimum deposit and maximum lending rates curtails access; banks mainly deal with a small number of large corporate clients. - Microfinance outreach has grown but remains relatively limited. - The OHADA accounting framework places an excessive burden on SMEs. - FSAP and mission recommendations (regional and national): - Regional: - Strengthen supervisory capacity and institutional independence of COBAC. - Revise OHADA legislation on debt collection and accounting practices. - Adjust administered interest rates to better align with market fundamentals. - National: - Upgrade the judicial system (e.g., larger allocations and more training). - Tackle governance issues. - Improve commercial and land registries. - Adopt a framework for appointing and training insolvency administrators. ### Trade and regional market integration - Intraregional trade and customs union: - Intraregional trade is lower than in any other free trade area on the continent. - Lack of complementarities and poor functioning of the CEMAC customs union hinder trade; national customs procedures and regulations do not comply with the common regime. - Remedial action has fallen behind a provisional 2003 roadmap for reform. - Progress noted: planned move of five members to ASYCUDA, efforts to facilitate transit trade from Cameroon to the CAR and Chad, and a new study on rules of origin; road network connections supported by the EU, AfDB, and WB. - Authorities pointed to serious security problems obstructing transportation, such as highway robbers and armed cross-border rebels. - External trade restrictions and tariff policy: - The common external tariff (CET) is levied at 5, 10, 20, and 30 percent. - Mission proposed using WAEMU bands (0, 5, 10, and 20 percent) as a benchmark and reducing tariff dispersion. - Authorities said any revision would require review of experience since 1994 and assessment of proposed new rates; they called for foreign partners to help with studies. - IMF offered technical assistance and policy advice to identify alternative revenues as tariff receipts decline and to consider additional resources to cover adjustment costs for countries with a Fund-supported program. - Economic Partnership Agreement (EPA) with the EU: - Preliminary negotiations completed in December 2005; an agreement could be reached by the start of 2008. - São Tomé & Príncipe and the DRC have joined CEMAC in preparing the EPA proposal. - Authorities aware of possible adverse trade diversion effects and fiscal revenue repercussions from an EPA. - Mission encouraged liberal rules of origin, use of EPA to gain market access and support for institutional reforms, and parallel reductions in tariff rates on a most-favored-nation basis vis-à-vis non-EPA members to boost trade and limit trade diversion. ### Regional institutions and surveillance - CEMAC Secretariat capacity: - Secretariat tasked with preparing common policies and surveillance, but has only about 60 professional staff. - Many members in arrears to institutions; Secretariat resources fall significantly short of needs to execute assigned tasks. - Declarations on regional integration: - Recent declarations welcomed; commitments include clearing arrears to CEMAC, ensuring better funding, enhancing regional policy coordination for oil-related inflows, and promoting regional projects. - Mission stressed that political will and national support are required for effective transformation (planned transformation of the Secretariat into a commission in 2008 would yield benefits only with greater national support and financial resources). - COBAC and BEAC: - BEAC is well staffed and professional; COBAC has limited autonomy and severe resource constraints. - FSAP called for more autonomy for COBAC and doubling the number of professional staff. - BEAC has administrative control over COBAC and favors gradual resource increases; mission called for significant acceleration of resource increases given long-standing problems. - Fund surveillance and technical assistance: - Regional discussions formalized as part of Article IV consultations per the Board Decision of January 6, 2006; the staff report and associated Board discussion will be integral to next Article IV consultations for CEMAC members. - Implementation of Fund advice has been limited; few proposed steps taken due in part to insufficient support and follow-up at the national level. - Data weaknesses: uneven quality, coverage, and timeliness of macroeconomic data; non-harmonized consumer price indices; lack of labor market and detailed financial sector data. - AFRITAC center in Libreville, Gabon, expected to open in January 2007; a needs assessment mission in June will identify priorities for regional and national technical assistance. The center will be financed mainly by CEMAC member countries and bilateral and multilateral donors. ### Staff appraisal (summary of policy implications and priorities) - Macroeconomic context and structural priorities: - Improvements in macroeconomic performance in 2005 (oil-related inflows) offer an opportunity to address long-standing structural issues. - Per capita income in most CEMAC members is low and MDG challenges are large. - Structural problems remain: excess liquidity, shallow and inefficient money and financial markets, lacking regional infrastructure and transport, minimal intraregional and international trade integration, and constrained institutional capacity. - Recent political commitments could enable progress if implemented (e.g., clearing arrears, better funding, enhanced coordination, regional projects). - Fiscal and reserve policy related to oil inflows: - Recent agreement allowing member countries to save oil-related inflows in FFGs held in the BEAC should be amended to allow investment of these funds in longer-term assets and to ensure member countries receive returns more directly linked to the total return on investment. - Need to maintain sufficient monetary reserves to back the fixed exchange rate regime. - Fiscal policies must be coordinated to ensure sufficient reserve inflows are channeled to the common pool of reserves rather than to FFGs and OSFs. - Efforts to improve transparency of oil-related inflows include establishing a permanent secretariat for the Extractive Industries Transparency Initiative at the BEAC. - Medium-term sustainability and competitiveness: - Prudent macroeconomic policies and broad improvements in competitiveness required for medium-term financial sustainability. - Region vulnerable to terms-of-trade shocks and has limited known oil reserves; non-oil development must be supported. - To avoid future overvaluation under the fixed exchange rate, inflation must be kept low and fiscal spending restricted to absorptive capacity. - Improving competitiveness requires addressing regional structural rigidities through more flexible labor markets, freer trade, and a business environment conducive to private sector growth. *From: _cr06317 - 24. The mission cited the importance of rationalizing interest rate policy. At a time of* ### 42. The implementation of monetary policy is weak and financial sector deficiencies ### 42. The implementation of monetary policy is weak and financial sector deficiencies ### Monetary policy and financial sector findings - Based on the FSAP results, financial sectors in the region are "reasonably sound" but "still among the least developed in the world." - Excess liquidity exists that is not being absorbed effectively through market instruments. - Restrictions and structural features limiting financial deepening are identified: - Restrictions on interest rates. - Excessively high-required reserves. - Weak business environment impeding financial sector development. ### Policy recommendations to improve liquidity management and deepen markets - Absorb excess liquidity through marketable central bank bills to improve liquidity management and deepen financial markets. - Dismantle restrictions on interest rates. - Lower excessively high-required reserves. - Take measures to improve the business environment generally. ### Regional integration and trade recommendations - Accelerate CEMAC integration and further internal and external trade liberalization to meet the region’s development goals. - Remove bottlenecks to internal markets, including nontariff barriers and other impediments to the free movement of goods and factors. - Promote deeper financial integration to allow member countries to take full advantage of the common currency and larger regional market. ### Key statistics and projections (selected figures preserved exactly as in source) - Nominal GDP (CEMAC, 2001–06, percent of country's total nominal GDP; selected years): - Cameroon: 42.5 42.2 42.0 40.2 39.5 39.9 - CEMAC (aggregate): 26.9 26.6 26.5 32.6 38.1 40.6 - Nominal oil GDP (percent of country's total nominal GDP): - Cameroon: 3.3 3.2 2.8 2.7 3.1 3.0 - CEMAC: 26.9 26.6 26.5 32.6 38.1 40.6 - Oil exports (percent of value of country's total goods exports): - Cameroon: 58.3 46.5 39.7 42.1 47.8 47.0 - CEMAC: 78.4 76.0 74.5 79.5 84.5 85.7 - Fiscal oil revenue (percent of country's fiscal revenue): - Cameroon: 25.9 30.0 25.5 25.7 17.9 16.7 - CEMAC: 50.1 49.1 48.2 50.8 56.9 59.6 - Selected CEMAC macro aggregates (2001–06; Est./Proj. as labeled) - GDP at current prices (annual percent change): 4.8 6.0 4.4 14.1 16.3 11.4 - GDP at constant prices (annual percent change): 8.1 4.8 4.6 8.4 4.3 3.2 - Consumer prices (average): 3.7 4.6 1.8 1.0 3.8 3.1 - Gross domestic savings (percent of GDP): 36.1 26.2 37.0 39.4 47.2 48.2 - Gross domestic investment (percent of GDP): 27.8 25.2 27.3 24.4 22.6 21.2 - Total revenue, excluding grants (percent of GDP): 22.9 20.9 20.5 21.1 25.8 26.8 - Government expenditure (percent of GDP): 21.3 21.2 20.3 19.3 17.9 17.9 - Overall fiscal balance, excluding grants (percent of GDP): 1.6 -0.3 0.2 1.8 7.9 8.9 - Non-oil overall fiscal balance, excluding grants (percent of non-oil GDP): -13.5 -14.4 -13.2 -13.2 -11.0 -11.9 - Exports of goods and nonfactor services (percent of GDP): 45.7 43.3 43.3 49.7 58.4 61.7 - Imports of goods and nonfactor services (percent of GDP): 38.1 40.8 36.8 37.3 35.6 34.9 - Current account, including grants (percent of GDP): -6.6 -10.5 -7.0 -3.1 2.7 5.2 - External public debt (percent of GDP): 82.7 71.2 68.2 59.8 40.6 35.7 - Gross official reserves (end of period, in millions of U.S. dollars): 1,143.3 1,678.2 1,908.3 3,188.7 5,315.7 ... - In months of imports of goods and services: 1.4 1.8 1.6 2.4 3.9 ... - Monetary and banking indicators (selected, 2001–06) - Broad money (annual percent change): 7.2 14.4 1.7 10.3 17.8 ... - Net foreign assets (annual change as percent of beginning-of-period broad money): -11.3 10.3 -1.4 26.4 50.4 ... - Net domestic assets (annual change as percent of beginning-of-period broad money): 18.6 4.2 3.1 -16.1 -32.6 ... - BEAC repurchase rate (TIPP): 8.5 8.3 7.8 7.8 7.5 7.3 7.3 7.3 - Certificate of deposit (28-day maturity): 3.7 2.8 2.0 2.0 1.8 1.7 1.7 1.7 - Balance of payments (CEMAC, billions of CFA francs, 2001–06; selected lines) - Balance on current account (2001–06): -1,033 -1,760 -1,216 -621 624 1,345 - Exports of goods (2001–06): 6,449 6,460 6,787 9,059 12,566 14,863 - Imports of goods (2001–06): -3,356 -4,024 -3,584 -3,959 -4,333 -4,767 - Direct investment, net (2001–06): 1,205 1,601 1,612 1,691 1,590 1,702 - Reserve assets (accumulation -, 2001–06): 248 -322 -8 -554 -890 -1,432 - Nominal GDP (memorandum): 15,756 16,700 17,431 19,895 23,140 25,784 - Central bank and commercial banks (selected stock levels, billions of CFA francs) - BEAC base money (end-period, selected dates): 1,112 1,272 1,288 1,516 1,555 1,668 1,922 1,889 - Commercial banks broad money (end-period, selected dates): 2,297 2,628 2,673 2,948 3,057 3,283 3,472 3,442 - Currency cover ratio (gross official reserves as a percentage of base money): 65.0 68.3 66.3 74.6 80.9 82.3 88.2 87.8 - Compliance with convergence criteria (2001–06; selected items) - Basic fiscal balance (criterion: nonnegative) — number of countries violating: 2 3 3 2 1 0 - Consumer price inflation (criterion: not higher than 3 percent) — number of countries violating: 3 4 2 2 2 0 - Public debt (criterion: not higher than 70 percent of GDP) — number of countries violating: 3 2 2 2 2 0 - Total number of criteria violations (CEMAC aggregate): 11 12 11 9 6 0 *Source: IMF staff estimates and projections as presented in the CEMAC country and regional tables and analysis.* ### 1. Starting a business Number of procedures ### _cr06317 - 1. Starting a business Number of procedures ### 1. Starting a business - Number of procedures: - 8 - 12 - 11 - 13 - 13 - 9 - 13 - 11 - 12 - 10 - 19 - 8 - 12 - 11 - Time (days): - 32 - 45 - 45 - 42 - 35 - 57 - 53 - 44 - 37 - 14 - 75 - 67 - 48 - 64 - Cost (percent of per capita income): - 191 - 150 - 134 - 191 - 465 - 109 - 218 - 208 - 173 - 212 - 361 - 289 - 259 - 215 - Min. capital (percent of per capita income): - 323 - 484 - 225 - 491 - 761 - 260 - 460 - 429 - 217 - 568 - 619 - 220 - 406 - 297 ### 2. Hiring and Firing Workers - Rigidity of Employment Index: - 2 - 53 - 84 - 45 - 66 - 90 - 64 - 79 - 69 - 56 - 76 - 72 - 80 - 71 - 53 - Firing costs (weeks of wages): - 35 - 57 - 68 - 81 - 76 - 38 - 66 - 60 - 40 - 37 - 21 - 42 - 35 - 53 ### 3. Registering Property - Number of procedures: - 3 - 8 - 7 - 5 - 5 - 6 - 6 - 6 - 5 - 3 - 6 - 6 - 5 - 7 - Time (days): - 50 - 107 - 369 - 44 - 49 - 114 - 212 - 135 - 93 - 69 - 44 - 103 - 77 - 118 - Cost (% of property value): - 15 - 16 - 14 - 20 - 14 - 18 - 8 - 15 - 19 - 17 - 21 - 22 - 20 - 13 ### 4. Getting Credit - Legal rights index: - 3 - 44234 32 - 3 - 4 33 - 2 - 3 - 4 - Credit information index: - 4 - 11111 11 - 1 - 2 22 - 2 - 2 - 2 ### 5. Protecting Investors - Disclosure index: - 5 - 56666 74 - 6 - 8 ...3 - 4 - 5 - 5 ### 6. Enforcing Contracts - Number of procedures: - 6 - 49 - 41 - 25 - 28 - 33 - 33 - 37 - 35 - 58 - 45 - 52 - 47 - 51 - 36 - Time (days): - 570 - 446 - 525 - 340 - 330 - 485 - 535 - 462 - 585 - 660 - 526 - 560 - 583 - 439 - Cost (% of debt): - 30 - 95 - 48 - 35 - 42 - 24 - 24 - 42 - 36 - 72 - 55 - 43 - 52 - 42 ### 7. Closing a Business - Time (years): - 3 - 4 - 2 - 4 - 5 - 3 - 3 - 3 - 3 - 5 - 10 - 3 - 5 - 3 - Cost (% of estate): - 7 - 14 - 9 - 18 - 18 - 18 - 7 - 14 - 14 - 14 - 76 - 63 - 24 - 44 - 20 - Recovery rate (cents on the dollar): - 10 - 6 - 15 - 6 - 3 - 19 - 16 - 11 - 24 - 0 - 0 - 19 - 11 - 16 *Source: World Bank, Doing Business Database 2006, and IMF staff calculations.* ### 59.8 percent of regional GDP in 2004 to 40.6 percent—half the 2000 level—in 2005. Domestic ### _cr06317 - 59.8 percent of regional GDP in 2004 to 40.6 percent—half the 2000 level—in 2005. Domestic ### Macroeconomic developments and fiscal balances (2004–2005) - Regional external debt ratio changed from "59.8 percent of regional GDP in 2004 to 40.6 percent—half the 2000 level—in 2005." - Domestic debt declined by about 1.5 percent of regional GDP. - Oil-related inflows supported: - Reserve accumulation and external current accounts. - Reduction in external debt levels. - Improved compliance with macroeconomic convergence criteria in 2005. ### Monetary conditions, liquidity, and inflation - Oil-related reserve inflows accelerated regional broad money growth. - No active sterilization policy: oil-related liquidity was only partly absorbed through government deposits at the central bank. - By November 2005 excess liquidity in the commercial banking sector increased to 18 percent of broad money. - Regional broad money growth increased to almost 18 percent from 10 percent in 2004. - Inflation increased from about 1 percent to 3.8 percent; adverse weather conditions contributed to higher food prices. - The pick-up in inflation accounted for a further one percent real appreciation of the REER, following appreciating REERs in the past four years. - Directors recommended: - Dismantling restrictions on interest rates. - Lowering the excessively high-required reserves. - Absorbing excess liquidity through marketable central bank bills, with careful monitoring of the BEAC’s income position. - Ensuring effective implementation of AML/CFT legislation. ### Growth, poverty, and structural issues - Region-wide real GDP growth fell from 8.4 percent in 2004 to 4.3 percent in 2005, mainly because oil production in Chad and Equatorial Guinea steadied after recent rapid expansions. - Non-oil output growth declined from 4.4 percent in 2004 to 4.2 percent in 2005. - Low per capita growth and limited regional integration remain concerns. - Five CEMAC countries still rank in the lowest third of the U.N. Human Development Index. - Directors urged authorities to use improved macroeconomic conditions to address long-standing structural issues to raise non-oil growth and employment and reduce poverty. - Structural reforms highlighted as priorities: - More flexible labor markets. - Trade facilitation and liberalization. - Business and legal environment reforms to support private sector growth. - Mobilizing alternative fiscal revenues alongside trade reforms. ### Macroeconomic prospects for 2006 and risks - Forecasts and expectations: - Real GDP growth is forecast to slow to 3.2 percent in 2006. - Inflation is expected to be about 3 percent. - External current account surplus (including grants) expected to increase to 5 percent of GDP. - Fiscal surplus (excluding grants) expected to continue at about 9 percent. - Identified risks to the forecast: - A further exchange rate appreciation. - Lack of significant steps to ease structural constraints to non-oil growth. - Strong wage pressures in some countries. ### Financial sector assessment (FSAP) findings and regional financial stability - Regional participation in the joint World Bank/IMF Financial Sector Assessment Program (FSAP) in 2006. - FSAP findings: - Financial sector soundness had improved, but important stability and developmental challenges remained. - Key weaknesses include: - Protracted noncompliance by several banks with critical prudential norms. - Insufficient capitalization to cope with credit risks. - Limited independence and constrained human and financial resources of the regional banking supervision agency (COBAC). - Limited access to financial services for households and medium-sized enterprises (SMEs). - FSAP outlined regional reform priorities: - Liquidity management by the regional central bank. - Banking supervision strengthening. - Resolution of remaining weak banks. - Strengthening CEMAC financial integration to support stability and enhancement of the regional financial system. - Implementing FSAP recommendations will require concerted actions at both regional and national levels. - Directors emphasized addressing commercial banks’ low capitalization relative to credit risk and enhancing the institutional independence and staffing of the Central African Banking Commission. ### Regional policy coordination, savings, and transparency of oil inflows - Directors stressed balancing critical spending needs against limited absorptive capacity and possible risks of Dutch disease. - Regional coordination required for fiscal policies and careful investment of oil-related savings. - Recent agreement welcomed allowing member countries to save oil-related inflows in country-owned Funds-For-Future-Generations and Oil-Stabilization-Funds at the BEAC. - Directors recommended amending rules to allow these funds to be invested in longer-term assets, while ensuring that their remuneration reflects actual investment returns. - Importance of maintaining sufficient monetary reserves to support the continued credibility of the fixed exchange rate regime. - Directors welcomed establishing a permanent secretariat for the Extractive Industries Transparency Initiative at the BEAC to improve transparency of oil-related inflows. ### Trade, regional integration, and institutional funding - Directors noted very low degree of trade and financial integration and constraints from lack of infrastructure and insufficient financing for some regional institutions. - Recent commitments at the highest political level to strengthen regional integration were welcomed, including: - Clearing arrears to the CEMAC. - Ensuring better funding of regional institutions. - Enhancing regional policy coordination in the face of oil-related inflows. - Promoting regional projects. - Directors called for renewed focus on promotion of trade to realize benefits from economic integration. - Trade reform recommendations: - Overcome difficulties in applying agreed trade policies within the customs union. - Adopt a more ambitious external trade reform, including lowering the common external tariff. - Design trade reforms to minimize trade distortions and accompany them with efforts to mobilize alternative fiscal revenues. *Statement by Damian Ondo Mañe, Executive Director on Common Policies of Member Countries of the Central African Economic and Monetary Community July 10, 2006* ### Introduction ### Introduction ### Opening acknowledgements - Authorities of the Central African Economic and Monetary Community (CEMAC) thank IMF staff for the comprehensive set of papers and for the constructive dialogue during the first formal Article IV discussions and the Regional Financial Sector Assessment Program (FSAP). - Authorities express appreciation for exchange of views with the Board travel group and Management, and thank the Managing Director for attendance at the CEMAC summit in March 2006 in Bata. - Authorities welcome policy advice from the regional seminar “Sources of Growth in CEMAC region” organized in the context of the summit. ### Growth strategy and structural reforms - Oil sector has boosted recent economic growth, but authorities recognize the need to diversify the economy and broaden the export base to achieve strong and sustainable growth and reduce poverty. - Authorities committed to: - Strengthen governance. - Improve effectiveness of public investment. - Expedite structural reforms to create an environment conducive to private sector expansion. - Push ahead with privatization of State Owned Enterprises (SOEs). - Improve transportation infrastructure within the region to promote intraregional trade. - Intraregional trade remains low due mainly to deficiencies in transportation infrastructure, causing high costs and long delays, especially during the rainy season; development partners’ assistance is crucial. - Recent security developments in some member countries (including CAR and Chad affected by the crisis in Darfur) are of concern for growth and regional integration. ### Recent Macroeconomic Developments — key statistics and trends - CEMAC composition: five oil producers (Cameroon, Chad, Republic of Congo, Equatorial Guinea, Gabon) and the Central African Republic. - Export receipts in 2005 increased by more than 20 percent, while import growth slowed. - Fiscal outcomes: - Fiscal surplus, excluding grants, representing almost 8 percent of GDP. - Non oil fiscal deficit reduced to 11 percent of GDP. - Current account and reserves: - Regional current account surplus of 2.7 percent of GDP. - Foreign reserves amounted to 4 months of imports of goods and services against 2.4 months at-end of 2004. - Inflation and growth: - Consumer prices increased to 3.8 percent from 1 percent previously (due to rise of food prices reflecting poor harvests). - Real GDP growth for the CEMAC region declined from 8.4 to 4.3 percent in 2005 and diverged widely across countries. - Non-oil sector declined in 2005, continuing a trend since 2001. - Fiscal revenue and expenditure: - Fiscal revenue to GDP increased to 26 percent in 2005 from 21 percent in 2004. - Public expenditure stood at 17.0 percent of GDP from 19.3 percent in 2004 despite higher capital investment. - Debt reduction: - External debt reduced to 40.6 percent of GDP from 59.8 percent in 2004. - Domestic debt declined by 1.5 percent of regional GDP. - Authorities emphasize need for further structural reforms to boost non-oil sector growth, diversify the economy, and raise labor productivity through improvements in education and health. ### Regional Convergence - 2005 performance: important progress meeting regional convergence criteria due to oil windfalls. - Specifics: - All criteria met overall, but inflation criterion missed in Equatorial Guinea and Chad (due mainly to high domestic demand). - Debt criterion not satisfied by the Republic of Congo. - Central African Republic failed to meet three out of four criteria, including the fiscal arrears criterion. - Authorities note structural obstacles in regional trade and the financial sector impede deeper integration and meeting convergence criteria. - Authorities committed to coordinating macroeconomic policies more effectively and to pursue financial sector reforms to accelerate meeting regional convergence criteria. - Authorities welcome IMF regional surveillance to identify bottlenecks and develop appropriate policies. ### Transparency and Governance - All CEMAC oil exporters have subscribed to the EITI and are implementing action plans with World Bank assistance; a permanent EITI Secretariat established at the BEAC. - World Bank prepared a Report on ROSC for anti-money laundering and combating the financing of terrorism for the region in the context of the FSAP. - Assessment reviewed legal and institutional frameworks and implementation capacity; while significant progress has been made, authorities recognize the need to step up efforts to promote good governance and fight corruption. - Authorities publish economic and financial indicators for the region. ### Monetary Issues - CFA Franc is the common currency managed by BEAC and pegged to the Euro at a fixed exchange rate. - Exchange regime assessment: - Exchange regime has delivered benefits on inflation, policy coordination, and resilience to shocks (including changes in the REER from Euro–US dollar exchange rate movements). - Average inflation in the region remains low and under control despite domestic pressures and large oil revenue inflows. - Official reserves since 2004 increased sharply to cover four months of imports of goods and services. - Monetary management challenges: - Authorities recognize challenges for BEAC in implementing prudent monetary policy with current instruments. - Authorities agree to review the recommendation to introduce marketable central bank bills, while concerned about the impact on BEAC’s income position. - Market remuneration of government funds: - Concerns about market remuneration base of government funds held with BEAC, including Funds for Future Generations (FFGs) and Oil-Income Stabilization Funds (OSFs). - High-level discussions underway among member countries and partners to find satisfactory solutions and to put in place a credible, modern framework in line with international standards. - Treasury and interest policy: - Authorities see merit in encouraging member countries to move to single treasury accounts with BEAC and hope to receive technical assistance from the Fund and other partners. - Authorities recently lowered the bank’s interest rate to encourage investment but consider necessary continued control of some deposit and lending rates affecting a small fragment of the market. ### Financial Issues - Authorities welcome the CEMAC regional FSAP as a means to improve financial sector stability. - Financial sector observations: - Sector is sound but fragmented; stability exposed to some risks; access to financial services is very low. - Need to strengthen legal and institutional frameworks at regional and national levels. - FSAP recommendations and reform priorities: - Enhance supervisory capacity and independence of la Commission Bancaire (COBAC). - Upgrade the judicial system. - Improve commercial and land registries. - Revise OHADA legislation on debt collection and accounting practices. - Improve business environment in areas such as bankruptcy and collateral registration to widen access to financial services. - Improve transparency in credit institutions to guarantee financial system integrity. - Authorities recognize potential benefits from deeper regional financial markets for economies of scale and better risk diversification. ### Trade and Regional Integration - Authorities recognize need to increase intraregional trade to accelerate economic integration. - Obstacles to trade and integration: - High levels of restrictions. - Poor transportation and telecommunication infrastructure. - Trade policy stance: - Authorities see merit in more ambitious external trade reform, including lowering the common external tariff, but insist reforms be based on a review of the 1994 regime and assessment of proposed new rates. - Authorities request Fund and donor assistance for studies and reforms. - EU Economic Partnership Agreement (EPA) negotiations: - Authorities completed preliminary negotiations with the EU in December 2005 and are hopeful an EPA would be reached at the beginning of 2008. - Authorities expect adverse trade diversion effects and repercussions on fiscal revenues from an EPA, while noting potential market access gains and institutional reform support to strengthen external competitiveness. - Competitiveness improvements required at national and regional levels include more flexible labor markets, freer trade, and a more conducive environment for private sector growth. ### Fund Surveillance and Technical Assistance - Authorities pleased regional discussions have been elevated to formal status as part of Article IV consultations, per the Board Decision in January. - Formal regional status intended to strengthen Fund relationship and improve follow-up on policy recommendations and regional initiatives. - Statistical improvements: further improvements in statistical systems and data collection needed to enable effective surveillance. - Capacity constraints: - Slow pace of improving regional monetary policy effectiveness, trade and financial market integration, and competitiveness attributed to lack of human and institutional capacity. - AFRITAC: - Fund, donors, and CEMAC members agreed to establish a regional technical assistance center (AFRITAC) in Libreville, Gabon. - Authorities grateful to Fund and donors for the decision and financing contributions. - AFRITAC expected to build capacity in banking supervision, payments systems, foreign exchange, public finance and debt management, and statistics—addressing severe human resources constraints at BEAC and COBAC. ### Conclusion and forward agenda - Important progress made in fiscal management and external account balances. - Authorities acknowledge much remains to be done to derive greater benefits from regional agreements and are fully committed to pursuing the reform agenda as stressed in the final communiqué of the Heads of State meeting in Bata. - Actions underway: - Conducted an external audit of regional institutions. - Set up a high level follow-up committee with a mandate to design and monitor a regional program of reforms to be implemented through March 2008. - Authorities emphasize channeling oil receipts back to the region has energized regional integration efforts. - Given large resources needed to implement common policies, authorities call for strong support from the international community and look forward to strengthening cooperation with the Fund and donor community, notably on structural reforms for export diversification, financial market integration, competitiveness strengthening, and human and institutional capacity improvement. *Source: _cr06317 - Introduction* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06317.pdf_