## _cr09154 - 2008. Thereafter, the detailed assessment report and related ROSC will be available for purposes of this FSAP.

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---

### Key findings of the FSAP
- Liquidity position of the financial sector has improved in recent years due to a more favorable economic environment after the end of hostilities, higher remittance receipts, increased donor financing, and weak loan demand.
- Systemic risks presently appear manageable, but the banking system exhibits important weaknesses:
  - Sovereign risk is the most important weakness because claims on the government represent a significant part of banks’ assets and could not be considered risk free in light of fiscal stress.
- Improved fiscal discipline and regularization of public sector arrears and other debts to the central bank and local banks are prerequisites for CAR to be in a position to avail itself of the regional public debt market being established by the BEAC for CEMAC member countries.
- Significant structural impediments to financial-sector support for development:
  - Less than 1 percent of the population has access to banking sector services.
  - Weak legal and regulatory framework constrains SME lending.
  - Range of financial products offered by banks is not diversified.
  - Credit information is poor.

### Executive summary — principal findings and context
- Outstanding domestic arrears totaled 13 percent of GDP at end-2007; wages, pensions, and civil damages constitute 75 percent of these arrears; remainder is mainly commercial debt.
- Bank liquidity recovered since the 2006 regional FSAP, but private sector credit expansion remains sluggish.
- Government borrowing from the BEAC reached the statutory limit; authorities increasingly turned to commercial banks, crowding out private sector and increasing sovereign exposure.
- Banking sector stability improved after restructuring one of three commercial banks; all three banks made profits in 2006 and 2007.
- Vulnerability tests indicate:
  - Two banks would be able to withstand credit, liquidity, or foreign exchange shocks.
  - The third bank remains vulnerable.
  - All banks are vulnerable to government default risk.
- Access to financial services, including for SMEs, is extremely limited; priority: address legal, prudential, and judicial weaknesses and support microfinance development.
- Harmonization of domestic law with OHADA is incomplete; OHADA is not supplemented by domestic law provisions on organization and functioning of the commercial registry.

### Main policy recommendations (selected from Box 1)
- Liquidity and Debt Management (Priority: High; Timing: Short- to Medium-term)
  - Improve framework for government cash-flow forecasting and management; prepare medium-term cash-flow projections supported by a cash-flow committee with Treasury and BEAC representatives. (Short-term)
  - Eliminate direct borrowing from BEAC over time by relying on the regional government securities markets. (Medium-term)
  - Consolidate all government accounts at the BEAC to increase transparency and efficiency of liquidity management. (Short- to Medium-term)
  - Develop capacity to rely on regional government securities markets being prepared by the BEAC. (Short-term)
  - Develop a medium-term financing strategy for government debt. (Medium-term)
- Financial System Stability (Priority: High/Medium; Timing: Medium-term)
  - Continue efforts to recapitalize the banking system.
  - Monitor risk management practices and lending standards to address prudential risks.
  - Adopt regulations to facilitate leasing, factoring. (Medium)
  - Strengthen supervision of MFIs. (High; Medium-term)
- Legal and Judicial Framework (Priority: High; Timing: Short- to Medium-term)
  - Improve commercial and land registries. (Medium-term)
  - Strengthen the judicial system by introducing specialized judges in business law, providing additional resources, and enforcing regulations and laws. (Medium-term)
  - Complete harmonization of domestic law with OHADA. (Short-term)

### Macroeconomic environment and fiscal context
- Economy adversely affected by political struggles, armed conflict, drought, regional conflict, and declining terms of trade over past decade.
- Domestic tax resources: about 8.5 percent of GDP.
- Recent macro improvements:
  - Overall budget deficit moved from 8.5 percent of GDP in 2005 to a projected 2.7 percent in 2007.
  - Country reached decision point under the enhanced HIPC Initiative and could qualify for additional debt relief under the MDRI once at completion point.
- Productive base widening modestly: services (particularly telecommunications) and modest recovery in coffee and cotton production present diversification opportunities.
- Membership in CEMAC currency union contributed to macro stability; inflation contained at relatively low levels.

### Financial sector liquidity, credit, and sovereign exposure
- Overall liquidity improved markedly since early 2006:
  - BEAC has not had to refinance banks’ activities since mid-2006.
  - Banks’ deposits at BEAC increased; BEAC initiated deposit auctions to absorb excess liquidity.
- Credit expansion to private sector remains weak due to macro uncertainties, security issues for inland transportation, large stock of government arrears, lack of enterprise accounting transparency, and poor judicial debt collection.
- Crowding out by public sector:
  - BEAC statutory and exceptional advances to Government increased from CFAF 58 billion (6 percent of GDP) at end-2004 to an estimated CFAF 78 billion (7 percent of GDP) at end-2007.
  - Credit from commercial banks increased from CFAF 5 billion at end-2004 to CFAF 14.8 billion (1.8 percent of GDP) at end-September 2007.

### Outstanding government domestic debt (figures and composition)
- Outstanding government domestic debt: CFAF 182 billion (equivalent of 22 percent of GDP in 2007).
- Composition:
  - Domestic payment arrears (mostly salaries): CFAF 110 billion.
  - BEAC total advances and consolidated special financing: CFAF 57 billion.
  - Borrowings from commercial banks: CFAF 15 billion.

### Medium-term debt strategy and treasury arrangements
- Mission recommends development of a medium-term debt strategy with priorities to:
  - Reduce domestic payment arrears to enhance social stability.
  - Contain government reliance on high-cost commercial borrowing.
- Authorities agreed with BEAC on a schedule for repaying exceptional advances; authorities will likely seek external assistance to support repayment.
- Technical assistance planned:
  - MCM to provide TA to implement preconditions for orderly market access under a new financing strategy.
  - Formal Medium Term Debt Strategy required to guide debt management and to clear/refinance domestic commercial bank debt by issuing government securities.
  - Afritac Center to provide TA in FY 08 and additional assistance scheduled for FY09.
- Treasury cash-flow management:
  - Treasury committee created to manage weekly cash-flows; chaired by the President of the CAR; meetings every Thursday; attendance by all relevant Ministry officials.
  - Government holds multiple bank accounts including deposits outside the central bank, complicating liquidity management and BEAC monetary policy; CAR’s percentage of government deposits held at BEAC is the lowest among CEMAC countries.
  - Recommendation: consolidate all government accounts at the BEAC.

### Regional government securities market preconditions and considerations
- Planned BEAC-led regional securities market could improve transparency and lower financing costs but requires key preconditions:
  - Close coordination with BEAC and other CEMAC countries; full support of regional government debt offices.
  - Credible government cash-flow framework with medium-term fiscal projections and capacity to estimate debt repayments and financing from securities issuance.
  - Liquidity committee composed of Government and BEAC officials to forecast market liquidity and maintain frequent market contacts.
  - Risk management framework to balance expected cost and risk in the government debt portfolio.
- Caution: considerable risk in issuing government securities before addressing key structural issues.
- Potential benefits of regional market:
  - Improvements in transparency and lower financing costs.
  - Greater BEAC involvement to coordinate issuance and ensure maturity profiles facilitate regional market absorption; centralized market assists BEAC in managing regional liquidity.
  - Broader array of marketable instruments for banks, other financial institutions, and households; enable money market, collateralized interbank market, and secondary market activities.

### Financial sector structure, concentration, and supervisory capacity
- Financial system overview (end-2007, as presented):
  - Banks: 3 (assets: 989112 [CFAF billion] as listed).
  - Microfinance institutions: 2 (assets: 440 [CFAF billion], End-2006).
  - Post office banks: 2 (assets: ......... ).
  - Social security agency: 1 (assets: ......... ).
  - Insurance companies: 2 (assets: 651 [CFAF billion]).
  - System total: 10 (assets: 10810013 [CFAF billion]).
  - Source: COBAC, individual institutions. 1/ End-2006. 2/ Not available.
- Structure and concentration:
  - No money market, no securities market, no foreign exchange market in the CAR.
  - Three commercial banks (all foreign; government minority shareholder): Eco Bank Centrafrique, Commercial Bank Centrafrique (CBCA), and Banque Populaire Maroco-Centrafricaine (BPMC).
  - Two MFIs: Crédit Mutuel de Centrafrique (CMCA) with 11 branches; Union Centrafricaine des Caisses d’Epargne et de Crédit (UCEC) with 14 branches.
  - Postal financial institutions: Caisse Nationale d’Epargne (CNE) and Centre des Chèques Postaux (CCP).
  - Insurance companies and social security: listed as Union Centrafricaine d’Assurance et de Réassurance, Union des Assurances Centrafricaines, and Office Centrafricain de Sécurité Sociale.
- Supervision and capacity:
  - COBAC supervises commercial banks and MFIs; limited resources focus supervision on commercial banks.
  - COBAC planned staff increase toward end-2008 to better apply regulatory framework established in 2002.
  - COBAC aims for general inspections every two years but staff shortages resulted in visits every three years on average; last general inspection in CAR dated 2006.
  - Recommendation: aim for inspections at least every 18 months for weak banks and establish a risk-based forecasting system.
  - Regional MFI supervision regulations (2002) not yet fully implemented; MFIs struggle to complete balance-sheet information.

### Bank liquidity, soundness, and stress-test findings (selected)
- Reserve requirement ratio kept at zero since 2003; banks invest excess liquidity at BEAC via deposit auctions.
- For first time since 2003, reserves held by banking system exceeded level that would be required under pre-2003 reserve requirements ratio.
- Stress tests indicate reimposition of reserve requirements would seriously affect the banking system; authorities should plan for re-introduction.
- Weak bank balance sheets impede credit growth despite recapitalization and provisioning efforts; one-third of loans are nonperforming.
- COBAC assessment indicates one bank critically undercapitalized; banks’ business concentrated with government (overdrafts) and few large trading/mining companies.
- Recommendation: further recapitalization and strengthened risk management; full provisioning warranted as soon as a loan becomes non-performing.
- Stress-test vulnerabilities: high vulnerability to sovereign risk; banks’ exposure to government default greater than to other shocks; banking sector liquidity could be stressed if government delays repayment.
- Two banks could withstand portfolio deterioration with provisioning and capitalization; one bank could become insolvent with increased NPLs.

### Stress-test numeric scenarios and results (selected)
- Prescribed minimum weighted capital adequacy ratio (CEMAC): 8 percent.
- NPL provisioning (COBAC rules): 75 percent (NPLs < 1 year), 100 percent (NPLs > 1 year).
- Liquidity-shock deposit withdrawal used in stress tests: 25 percent.
- Assumed reserve ratios if reintroduced by BEAC: 10.25 percent (demand deposits), 8.25 percent (time deposits).
- Central African Republic: Stress Test Results (Table 6) — Capital adequacy and liquidity scenarios:
  - Capital adequacy ratio: 15.4
  - Bank with CAR ratio below 2 percent: 1/ (three banks: A, B, and C; CAR for A is 7.3 percent; B, 10.4 percent; and C, 35 percent.)
  - Capital adequacy ratio after the shocks (selected):
    - Default of the largest individual risk: 3.1
    - Default of the largest risks 2/: -11.7 (2/ Defined as individual loans over 15 percent of capital.)
    - Default on credit to the government: -1.9
    - Downgrading of NPLs by one level: 12.2
    - 50 percent increase in NPLs: 3.1
  - Liquidity risk:
    - Liquidity ratio before shocks: 76.9
    - Liquidity ratio after shocks:
      - Reimposition of reserve requirements: 65.5
      - Delay in the payment of government debits 3/: 57.0 (3/ Liquidity ratio discounting the share of current asset, i.e., overdraft, which could not be recalled.)
      - Withdrawal of 25 percent of deposits: 13.9
      - Withdrawal of 40 percent of deposits: 0.2 (affects bank A)

### Foreign exchange and transformation risks
- Foreign exchange risk not tested because the variability exchange rate does not present short-term vulnerability.
- Exchange rate regime makes changes in CFA franc exchange rate vis-à-vis the euro unlikely; foreign exchange regulation limits external position.
- Main bank exposure would be long position in dollar; no data provided on composition of banks’ foreign assets.
- Transformation risk:
  - Demand deposits represent about 80 percent of all deposits in 2007.
  - Banks’ cost of funding is unlikely to be significantly impacted by macro shocks that would increase interest rates.

### Access to financial services, geographic distribution, and microfinance (selected figures)
- Access and usage:
  - Bank account holders: less than 1 percent of population.
  - Population using bank credit facilities: ½ percent.
  - Members of microfinance institutions: just over 1 percent.
  - Postal financial institutions manage about 7,250 accounts (1,250 savings accounts and 6,000 postal checking accounts) belonging to civil servants.
- Geographic concentration:
  - 71 percent of all bank branches located in Bangui.
  - Branches per 1,000 km2: 0.01
  - ATMs per 1,000 km2: 0.00
  - Branches per 100,000 inhabitants: 0.18
  - ATMs per 100,000 inhabitants: 0
- Table 8 — Geographic Distribution of Bank Branches (Dec. 2007):
  - Urban: No. of Branches 7; No. of ATMs 0; Population 1,475,315; Branches and ATMs per 100,000 inhabitants 0.5
    - Bangui: 5 branches, 0 ATMs, Population 597,000, Branches and ATMs per 100,000 inhabitants 0.8
    - Berberati: 1 branch, 0 ATMs, Population 47,000, Branches and ATMs per 100,000 inhabitants 2.1
    - Bouar: 1 branch, 0 ATMs, Population 45,000, Branches and ATMs per 100,000 inhabitants 2.2
    - Other towns: 0 branches, 0 ATMs, Population 831,315, Branches and ATMs per 100,000 inhabitants 0.0
  - Rural: No. of Branches 0; No. of ATMs 0; Population 2,419,824; Branches and ATMs per 100,000 inhabitants 0.0
  - Total: No. of Branches 7; No. of ATMs 0; Population 3,895,139; Branches and ATMs per 100,000 inhabitants 0.2
- Microfinance sector (2006):
  - No. of branches: CMCA 10; UCACEC 14; Total 24
  - No. of branches in Bangui: CMCA 9; UCACEC 10; Total 19
  - No. of members: CMCA 31,505; UCACEC 4,575; Total 36,080
  - Total loans (millions of CFA francs): CMCA 1,176; UCACEC 24.03; Total 1,200
  - Average loans (CFA francs): CMCA 505,703; UCACEC 224,622; Total 730,325
  - Total deposits (millions of CFA francs): CMCA 3,440; UCACEC 171; Total 3,611
  - Average deposits (CFA francs): CMCA 110,141; UCACEC 37,439; Total 147,580
  - Profit/loss (millions of CFA francs): CMCA 23.8; UCACEC 12.7; Total 36.5
  - Total assets (millions of CFA francs): CMCA 3,581; UCACEC 275; Total 3,856

### Obstacles to SME finance and recommended measures
- Identified constraints:
  - SMEs and some larger borrowers do not keep reliable financial accounts.
  - No central database with reliable financial information on potential customers.
  - BEAC’s credit information center (Centrale des Risques-CR) is not reliable due to lack of single identification number and absence of standard harmonized addresses; long delays in recorded information.
  - No financial analysis center (Centrale des Bilans-CB) recording financial information on potential borrowers.
  - Delays in setting up payment problems information center (Centrale des Incidents des Paiements-CIP).
  - Ceiling of 15 percent on lending rates; banks add commissions and fees to cover SME lending risk.
- Policy recommendations:
  - Review functional architecture of credit bureaus and consider merging into a single center.
  - Encourage creation of private information centers when possible.
  - Bring limits on lending interest rates in line with market fundamentals to foster financial intermediation.

### Legal and judicial framework constraints and reform agenda
- OHADA uniform acts govern financial-sector activities; harmonization of domestic law with OHADA not completed.
- Pending OHADA-related issues include:
  - RCCM: OHADA Uniform Act not supplemented by domestic laws on organization and functioning to guarantee reliability, transparency, and integrity.
  - Organizing Securities: CAR has not identified domestic provisions to comply fully.
  - Simplified Recovery Procedures and Measures of Execution: need to update Central African Code of Civil Procedure.
  - Collective Proceedings for Wiping Off Debts: charters and regimes for appraisers/trustees not established; irregularities observed.
  - Arbitration Law: no structure in CAR for organizing arbitration proceedings.
  - Bank loan contracts remain subject to French Civil Code provisions in effect at independence in 1960 and have not been updated domestically.
  - Land tenure: precariousness of titles; under OHADA law only registered buildings can be mortgaged.
- Weaknesses to address:
  - Appoint magistrates specialized in business law; provide specialized training.
  - Implement law 03-001 of January 13, 2003 establishing charter of court bailiffs and implementing regulations.
  - Regulate appraisers and trustees involved in collective proceedings.
  - Provide materials and human resources for courts and RCCM and Land Registry staff.
- Recommended reforms:
  - Initiate reforms within the OHADA National Commission, update Code of Civil Procedure and land tenure laws.
  - Computerize RCCM and Land Registry to guarantee reliability and prevent irreparable loss.
  - Promote alternative dispute resolution (arbitration) for business disputes.
  - Ensure judicial decisions made within reasonable time frames and publish court decisions; increase court budgets; elect lay judges for commercial courts.

### Progress in implementation of CEMAC Regional FSAP recommendations (selected)
- Financial sector supervision:
  - Reduce national authorities’ powers in bank licensing: N (ST)
  - Increase COBAC staffing: R-N (ST)
  - Enforce current regulations including AML-CFT: R-N (ST)
  - Strengthen consistency of prudential framework with international standards: R (MT)
  - Status: Partially Addressed (staffing at COBAC still an issue; AML/CFT assessment for CAR scheduled June 2008).
- Systemic liquidity management and recycling of fiscal surpluses:
  - Centralize government cash balances at BEAC: N (ST)
  - Reinforce use of market-based instruments: R (and) N (MT)
  - Establish framework for international reserves target: R (ST)
  - Status: Partially Addressed (BEAC started work on reserves target).
- Banking sector stability:
  - Increase minimum capital adequacy ratio for banks: R (MT)
  - Status: Not Addressed (minimum ratio not yet increased).
- Access to financial services:
  - Bring limits on deposit and lending interest rates in line with market fundamentals and eventually lift controls: R (ST) and R (MT)
  - Strengthen business environment and legal/judicial framework: R-N (MT)
  - Status: Not Addressed (interest rate restrictions still in place; legal/judicial strengthening incomplete).

*Source: _cr09154 - 2008 (IMF).*

### 2008. Thereafter, the detailed assessment report and related ROSC will be available for purposes of this

### _cr09154 - 2008. Thereafter, the detailed assessment report and related ROSC will be available for purposes of this FSAP.

### Key findings of the FSAP
- The liquidity position of the financial sector has improved in recent years. This reflects a more favorable economic environment following the end of hostilities, higher remittance receipts, increased donor financing, and a weak loan demand.
- Although systemic risks presently appear manageable, the banking system exhibits important weaknesses. The most important one is sovereign risk as claims on the government represent a significant part of banks’ assets and could not be considered risk free in light of fiscal stress.
- Improved fiscal discipline and regularization of public sector arrears and other debts to the central bank and local banks are prerequisites for CAR to be in a position to avail itself of the regional public debt market currently being established by the BEAC for CEMAC member countries.
- Significant structural impediments weigh on the capacity of the financial sector to support development:
  - Less than 1 percent of the population has access to banking sector services.
  - The scope for promoting SME lending is constrained by weaknesses in the legal and regulatory framework.
  - The range of financial products offered by banks is not diversified.
  - Credit information is poor.

### Executive summary — principal recommendations (selected)
- The repayment of domestic arrears (13 percent of GDP at end-2007) has become a key economic and political issue; wages, pensions, and civil damages constitute 75 percent of these arrears while the rest is mainly commercial debt.
- Although bank liquidity has recovered since the 2006 regional FSAP, credit expansion to the private sector remains sluggish.
- The government’s borrowing from the BEAC has reached the statutory limit, and authorities have increasingly turned to commercial banks for financing, leading to crowding out of the private sector and a high level of exposure to sovereign risk.
- Banking sector stability has improved with the restructuring of one of the country’s three commercial banks; all three banks made profits in 2006 and 2007. Vulnerability tests indicate:
  - Two banks would be able to withstand credit, liquidity, or foreign exchange shocks.
  - The third bank remains vulnerable.
  - All banks are vulnerable to government default risk.
- Access to financial services, including by SMEs, is extremely limited; priority should be given to addressing legal, prudential, and judicial weaknesses to support microfinance development.
- The harmonization of domestic law with OHADA has not been fully completed; OHADA is not supplemented by domestic law provisions on the organization and functioning of the commercial registry.

### Main policy recommendations (Box 1: Main Recommendations)
- Liquidity and Debt Management (Priority: High; Timing: Short- to Medium-term)
  - Improve the framework for government cash-flow forecasting and management. Prepare medium-term cash-flow projections, supported by a cash-flow committee made up of Treasury and BEAC representatives. (Short-term)
  - Eliminate direct borrowing from BEAC over time by relying instead on the regional government securities markets. (Medium-term)
  - Increase transparency and efficiency of liquidity management by consolidating all government accounts at the BEAC. (Short- to Medium-term)
  - Develop the capacity to be in a position to rely on the regional government securities markets currently being prepared by the BEAC in close cooperation with other CEMAC member countries. (Short-term)
  - Develop a medium-term financing strategy for government debt. (Medium-term)
- Financial System Stability (Priority: High/Medium; Timing: Medium-term)
  - Continue efforts to recapitalize the banking system.
  - Monitor risk management practices and lending standards to address prudential risks.
  - Adopt regulations to facilitate leasing, factoring. (Medium)
  - Strengthen the supervision of the MFIs. (High; Medium-term)
- Legal and Judicial Framework (Priority: High; Timing: Short- to Medium-term)
  - Improve commercial and land registries. (Medium-term)
  - Strengthen the judicial system (mainly, by introducing specialized judges in business law, providing additional resources, enforcing regulation and laws). (Medium-term)
  - Complete harmonization of domestic law with OHADA. (Short-term)

### Macroeconomic environment and financial situation — salient points
- The Central African Republic’s economy has been adversely affected by political struggles and armed conflict over the past decade; drought, regional conflict, and a decline in the terms of trade have further undermined economic performance.
- Domestic tax resources are about 8.5 percent of GDP.
- Recent macroeconomic improvements:
  - The overall budget deficit moved from 8.5 percent of GDP in 2005 to a projected 2.7 percent in 2007.
  - The country has reached the decision point under the enhanced HIPC Initiative and could qualify for additional debt relief under the MDRI once it reaches the completion point.
- The productive base shows modest widening: services (particularly telecommunications) and modest recovery in coffee and cotton production could provide diversification opportunities for banks.
- Membership in the CEMAC currency union has contributed to macroeconomic stability; inflation contained at relatively low levels.

### Financial sector liquidity, credit, and sovereign exposure
- Overall liquidity of the financial sector has improved markedly since early 2006:
  - BEAC has not had to refinance banks’ activities since mid-2006.
  - Banks’ deposits at the BEAC have increased and the BEAC has initiated deposit auctions to absorb excess liquidity.
- Credit expansion to the private sector remains weak due to:
  - Macroeconomic uncertainties, security issues for inland transportation, large stock of outstanding government arrears, lack of transparency in enterprise accounting, and a poor judicial system for debt collection.
- Crowding out by the public sector:
  - Statutory and exceptional advances by the BEAC to the Government increased from CFAF 58 billion (6 percent of GDP) at end-2004 to an estimated CFAF 78 billion (7 percent of GDP) at end-2007.
  - Credit from commercial banks increased from CFAF 5 billion at end-2004 to CFAF 14.8 billion (1.8 percent of GDP) at end-September 2007.

### Financial sector structure, vulnerabilities, and development priorities
- Banking system: three commercial banks; reported soundness indicators show profits in 2006 and 2007, but stress tests show one bank is vulnerable and all banks are exposed to government default risk.
- Access to finance:
  - Less than 1 percent of the population has access to banking services.
  - SMEs face severe constraints: lack of information systems, judicial system weakness, poor credit information.
  - Priority actions: address legal, prudential, and judicial weaknesses; strengthen MFI supervision; facilitate leasing and factoring.
- Legal framework: incomplete harmonization with OHADA and absence of domestic provisions guaranteeing reliability, transparency, and integrity of the commercial registry.

*Source: _cr09154 - 2008 (IMF).*

### 7. Outstanding government domestic debt has reached about CFAF 182 billion or the

### 7. Outstanding government domestic debt has reached about CFAF 182 billion or the

### Outstanding government domestic debt and composition
- Outstanding government domestic debt: CFAF 182 billion (equivalent of 22 percent of GDP in 2007).
- Composition of domestic debt:
  - Domestic payment arrears (mostly salaries): CFAF 110 billion.
  - BEAC total advances and consolidated special financing: CFAF 57 billion.
  - Borrowings from commercial banks: CFAF 15 billion.

### Medium-term debt strategy and policy priorities
- Mission recommendation: develop a medium-term debt strategy.
- Priorities should aim at:
  - Reducing domestic payment arrears to enhance social stability.
  - Containing the government’s reliance on high-cost commercial borrowings.
- Authorities actions/agreements:
  - Authorities have agreed with BEAC on a schedule for repaying the exceptional advances provided to CAR.
  - Authorities will likely seek external financial assistance to support the repayment of advances.
- Technical assistance:
  - Given weak debt management infrastructure, technical assistance will be provided by MCM to implement preconditions for orderly market access under a new financing strategy.
  - A formal Medium Term Debt Strategy is required to guide implementation of a proper debt management/debt strategy framework and to clear/refinance domestic commercial bank debt by issuing government securities.
  - Technical assistance by Afritac Center provided in FY 08 and additional assistance scheduled for FY09.

### Treasury cash-flow management and institutional arrangements
- Government created a Treasury committee to better control budget execution under tight financial constraint.
  - Main responsibility: manage weekly cash-flows.
  - Chaired by: the President of the CAR.
  - Meeting frequency: every Thursday.
  - Objective: improve link between resource availability and commitment planning.
  - Attendance: all relevant officials of the Ministries.
- Government cash management complications:
  - Complicated by the number of bank accounts the government holds.
  - Government holds deposits outside the central bank, which:
    - Complicates liquidity management and BEAC’s implementation of monetary policy.
    - Adds considerable uncertainty to commercial banks due to volatility of these deposits.
  - Among CEMAC countries, CAR’s percentage of government deposits held at BEAC is the lowest.
- Recommendation: consolidate all government accounts at the BEAC to increase transparency and efficiency of cash-flow management.

### Regional government securities market and preconditions for issuance
- Planned introduction of a regional government securities market in the CEMAC under BEAC should facilitate more transparent and cost-effective government financing but requires efficient use.
- Key preconditions and considerations before issuing government securities:
  - Coordinate closely with BEAC and other CEMAC countries; require full support of all government debt offices of the region.
  - Establish a credible government cash-flow framework based on well-grounded, medium-term fiscal projections, including capacity to estimate/program debt repayments and financing from regional securities issuance; such exercises must be continuously updated.
  - Form a liquidity committee composed of Government and BEAC officials to forecast market liquidity; maintain frequent contacts with the market to appreciate market conditions.
  - Develop a risk management framework to identify and manage trade-offs between expected cost and risk in the government debt portfolio.
- Caution: considerable risk in issuing government securities before key structural issues are addressed.
- BEAC-led regional public debt market aims (Box 2: Potential Benefits):
  - Improvements in transparency and lower financing costs.
  - Greater BEAC involvement to coordinate debt issuance and ensure maturity profiles facilitate absorption by regional market; centralized market assists BEAC in managing regional liquidity.
  - Broader array of marketable instruments for commercial banks, other financial institutions, and households.
  - Enable development of a money market, a collateralized interbank market, and secondary market activities.

### Need to restore credibility and fiscal/monetary policy implications
- Policy goals:
  - Eliminate direct borrowing from the central bank over time.
  - Develop treasury securities markets to improve monetary policy effectiveness and implement a transparent government financing mechanism.
  - Restore credibility by clearing public sector arrears and reducing outstanding loans from commercial banks.

---

### Financial sector structure and vulnerabilities (relevant implications for debt and financing)
- Financial system overview (end-2007):
  - Banks: 3 (assets: 989112 [CFAF billion] as listed in Table 1).
  - Microfinance institutions: 2 (assets: 440 [CFAF billion], End-2006).
  - Post office banks: 2 (assets: ......... ).
  - Social security agency: 1 (assets: ......... ).
  - Insurance companies: 2 (assets: 651 [CFAF billion]).
  - System total: 10 (assets: 10810013 [CFAF billion]).
  - Source: COBAC, individual institutions. 1/ End-2006. 2/ Not available.
- Structure and concentration:
  - Financial sector dominated by commercial banks; no money market, no securities market, no foreign exchange market in the CAR.
  - Three commercial banks: Eco Bank Centrafrique (formerly Banque Internationale pour le Centrafrique), Commercial Bank Centrafrique (CBCA), and Banque Populaire Maroco-Centrafricaine (BPMC). All three are foreign; government is minority shareholder in each.
  - Two MFIs: Crédit Mutuel de Centrafrique (CMCA) with 11 branches; Union Centrafricaine des Caisses d’Epargne et de Crédit (UCEC) with 14 branches.
  - Postal financial institutions: Caisse Nationale d’Epargne (CNE) and Centre des Chèques Postaux (CCP).
  - Insurance companies: Union Centrafricaine d’Assurance et de Réassurance and Union des Assurances Centrafricaines.
  - Social security: Office Centrafricain de Sécurité Sociale.
- Supervision:
  - Central African Banking Commission (COBAC) supervises commercial banks and MFIs; limited resources focus supervision on commercial banks.
  - COBAC planned staff increase toward end-2008 to better apply regulatory framework established in 2002.
- Bank liquidity and resilience:
  - Reserve requirement ratio kept at zero since 2003; banks invest excess liquidity at BEAC (deposit auctions).
  - For first time since 2003, reserves held by banking system exceeded level that would be required under pre-2003 reserve requirements ratio.
  - Stress tests indicate reimposition of reserve requirements would seriously affect the banking system; authorities should start planning for re-introduction of reserve requirements.
- Bank soundness and credit risks:
  - Weak bank balance sheets impede credit growth to private sector despite recapitalization and provisioning efforts.
  - One-third of loans extended by banks are nonperforming.
  - COBAC assessment (Table 2) indicates one bank viewed as critically undercapitalized.
  - Banks’ business concentrated with government (overdraft facilities) and a few large trading/mining companies.
  - Recommendation: further recapitalization and strengthened risk management capacity; full provisioning warranted as soon as a loan becomes non-performing.
- Stress tests and vulnerabilities:
  - Stress tests point to high vulnerability to sovereign risk; banks’ exposure to government default greater than to other shocks.
  - Banking sector liquidity could be stressed if government delays repayment.
  - Two banks could withstand portfolio deterioration with provisioning and capitalization; one bank could become insolvent with increased NPLs.
- Supervision capacity gaps:
  - COBAC aims for general inspections every two years but staff shortages result in visits every three years on average; last general inspection in CAR dates back to 2006.
  - COBAC should aim for inspections at least every 18 months for weak banks and establish a risk-based forecasting system.
  - Regional regulations for supervision of MFIs adopted in 2002 have not yet been fully implemented; MFIs struggle to complete balance-sheet information.

### Financial system development and access to services
- Access to financial services: extremely limited.
  - Bank account holders: less than 1 percent of the total population.
  - Population using bank credit facilities: ½ percent.
  - Members of microfinance institutions: just over 1 percent.
  - Postal financial institutions manage about 7,250 accounts (1,250 savings accounts and 6,000 postal checking accounts) belonging to civil servants.
- Geographic concentration and social consequences:
  - 71 percent of all bank branches located in Bangui.
  - Government cash-flow pressures have led to accumulation of wage arrears ranging from 7 to 36 months.
- Range of financial services limited:
  - Little diversification of financial products; operations in securities, foreign exchange, leasing, and remittances are marginal.
  - Savings products: demand deposits (interest set freely), time deposits, and passbook savings accounts with mandatory interest of 4.25 percent.
- Constraints to SME and rural access:
  - SMEs face difficulty obtaining credit due to weakness of judicial system and absence of information system on promoters.
  - Banks hold substantial claims on government, which are profitable due to higher interest rates, reducing incentive to lend to SMEs.
  - Rural sector access is almost nil; commercial banks withdrew from agricultural credit after overdue obligations in cotton and coffee sectors and cessation of coffee production.
  - Microfinance sector remains underdeveloped.
  - Postal financial institutions have recorded sizable deficits since creation in 1995 and lack analytical accounting; full evaluation warranted to determine financial, economic, and social viability.
- Policy implications:
  - Macroeconomic and political stability critical to expanding access to financial services.
  - Effective enforcement of legal and judicial system and efficient practices for guarantees (mortgages, pledges) and collection procedures are crucial to encourage bank lending to SMEs.

*Source: IMF staff report (excerpt)._cr09154 - 7. Outstanding government domestic debt has reached about CFAF 182 billion or the*

### 27. In addition, the financial system lacks the diversification needed to meet the

### _cr09154 - 27. In addition, the financial system lacks the diversification needed to meet the

### Financial-sector structure and constraints
- Absence of leasing, licensed venture capital or equity investment financial institutions, and factoring companies.
- Development of specialized institutions hampered by lack of necessary legal, prudential, and regulatory frameworks.
- Development of the MFI sector hampered by CAR’s unfavorable business climate and institutional weaknesses.
- Lack of valuable collateral is impeding the financing of SMEs.  
- Several banks reported matters pending before the courts for more than five years.

### Legal and judicial framework for the financial sector (OHADA-related issues)
- OHADA uniform acts govern financial-sector activities, particularly credit provisions, in the CAR.
- Harmonization of domestic law with OHADA uniform acts has not been completed. Pending issues include:
  - OHADA Uniform Act on General Business Law (commercial registry — RCCM): improvement over former system exists, but the OHADA act is not supplemented by domestic laws on organization and functioning of the RCCM to guarantee reliability, transparency, and integrity.
  - OHADA Uniform Act on Organizing Securities: CAR has not identified domestic provisions to add or remove to comply with the OHADA act.
  - OHADA Uniform Act Organizing Simplified Recovery Procedures and Measures of Execution: referrals to OHADA law call for harmonization, in particular updating the Central African Code of Civil Procedure.
  - OHADA Uniform Act on Organizing Collective Proceedings for Wiping Off Debts: charters and regimes of entities involved (appraisers, trustees) not yet established; irregularities and abuses observed (measures without consulting all eligible creditors; insufficient transparency).
  - OHADA Uniform Act on the Arbitration Law: no structure in place in the CAR for organizing arbitration proceedings; creditors must resort to Central African State’s jurisdictional authorities, which have major deficiencies.
  - Bank loan contracts: currently subject to provisions of the French Civil Code in effect at independence in 1960; these provisions have not been updated in the CAR for almost five decades despite reforms in France.
  - Land tenure: precariousness of titles, scarcity of land titles, litigation and disputes; very few titles registered although registration procedure is relatively easy; under OHADA law, only registered buildings can be mortgaged.

### Weaknesses to be addressed (judicial and institutional)
- Appoint magistrates at all levels of jurisdiction who are specialized in business law, by providing specialized training.
- Implement law 03-001 of January 13, 2003 establishing the charter of court bailiffs as well as implementing regulations.
- Regulate appraisers and trustees involved in collective proceedings to eliminate irregularities.
- Provide materials and human resources for courts so all levels can execute justice on commercial matters.
- Provide sufficient resources for staff of the RCCM and the Land Registry for proper functioning.

### Recommended legal and institutional reforms (to align with OHADA and strengthen credit)
- Start reform efforts within the OHADA National Commission (recently established by presidential decree), including updating/overhauling certain codes and laws such as the Code of Civil Procedure and land tenure laws.
- Computerize the RCCM and the Land Registry to prevent irreparable loss in the event of destruction and to complement current paper-based archives; design a framework to guarantee registry reliability, transparency, and integrity.
- Apply the law establishing the legal status and regime of bailiffs and its implementing regulations as soon as possible; ensure better enforcement of court decisions.
- Initiate measures to promote alternative dispute resolution in business, such as arbitration, to offer creditors a credible alternative for protecting their rights.
- Provide basic and continuing training for judges in commercial courts.
- Ensure judicial decisions are made within reasonable time frames and publish court decisions under penalty of disciplinary sanctions.
- Increase budgets of the courts to provide adequate operational resources.
- Elect lay judges to sit on the commercial court by the Chamber of Commerce as soon as possible to ensure collegiality.
- Computerize the Land Registry and improve file conditions.

### Banking-sector prudential and stress-test findings
- Short-term vulnerability from exposure of the banking sector to sovereign risk: default on credit to the government would make the whole banking sector insolvent.
- Extensive recourse to overdrafts exposes banks to liquidity stress if the government does not timely honor obligations.
- Increasing bank capital would improve risk coverage, but government financing would need to be diversified or reduced to significantly lower short-term risk.
- Stress tests were performed on individual data of the three banks operating in the CAR, based on COBAC data.

Credit-risk stress-test assumptions:
- The prescribed minimum weighted capital adequacy ratio of 8 percent in the CEMAC includes banks’ claims on the government because CAR does not observe the CEMAC convergence criteria.
- Non-performing loans (NPLs) are provisioned per COBAC rules: 75 percent for NPLs of less than a year and 100 percent for NPLs of more than a year.
- Large major exposures examined are those equal or above 15 percent of capital.

Liquidity-risk stress-test assumptions:
- Liquidity shocks included a withdrawal of 25 percent of deposits (a ratio observed during banking crisis in the CEMAC in the past).
- Banks in the CAR are currently not subject to reserve requirements. Assumed reserve ratios if applied: 10.25 percent for demand deposits and 8.25 percent for time deposits.
- Government overdrafts are the first beneficiary of banks’ overdraft facilities; if debits are not paid back timely, the claim should be excluded from liquid assets.

### Key numeric indicators (selected, as presented)
- Banks: three banks operating in the CAR (stress tests based on individual data).
- Prescribed minimum weighted capital adequacy ratio (CEMAC): 8 percent.
- NPL provisioning (COBAC rules): 75 percent (NPLs < 1 year), 100 percent (NPLs > 1 year).
- Liquidity-shock deposit withdrawal used in stress tests: 25 percent.
- Assumed reserve ratios if reintroduced by BEAC: 10.25 percent (demand deposits), 8.25 percent (time deposits).
- Courts: several banks had matters pending before the courts for more than five years.
- Legal reform law referenced: law 03-001 of January 13, 2003.

*Source: IMF staff summary based on the provided content unit.*

### 36. The foreign exchange risk is not tested because the variability exchange rate does not

### 36. The foreign exchange risk is not tested because the variability exchange rate does not

### Foreign exchange risk and exchange rate regime
- The foreign exchange risk is not tested because the variability exchange rate does not resort as a short-term vulnerability.
- The exchange rate regime makes unlikely changes in the CFA franc exchange rate vis-à-vis the euro and the foreign exchange regulation limits external position.
- The main bank exposure would be long position in dollar; however, no data were made available to the staff regarding the composition of banks’ foreign assets.

### Transformation risk (cost of resources)
- Demand deposits represent about 80 percent of all deposits in 2007.
- Banks’ cost of funding is unlikely to be significantly impacted by macroeconomic shocks that would lead to an increase in interest rates.

### Central African Republic: Stress Test Results (Table 6) — Capital adequacy and liquidity scenarios
- Capital adequacy ratio: 15.4
- Bank with CAR ratio below 2 percent: 1/
  - Note: There are three banks in the CAR (A, B, and C). The CAR for A is 7.3 percent; B, 10.4 percent; and C, 35 percent. (footnote 1/)
- Capital adequacy ratio after the shocks:
  A. Credit risk
  - Default of the largest individual risk: 3.1
  - Default of the largest risks 2/: -11.7
    - 2/ Defined as individual loans over 15 percent of capital.
  - Default on credit to the government: -1.9
  - Downgrading of NPLs by one level: 12.2
  - 50 percent increase in NPLs: 3.1
  B. Liquidity risk
  - Liquidity ratio before shocks: 76.9
  - Liquidity ratio after shocks:
    - Reimposition of reserve requirements: 65.5
    - Delay in the payment of government debits 3/: 57.0
      - 3/ This is the liquidity ratio discounting the share of current asset, i.e., overdraft, which could not be recalled.
    - Withdrawal of 25 percent of deposits: 13.9
    - Withdrawal of 40 percent of deposits: 0.2 (affects bank A)

### Obstacles to SME finance (identified constraints)
- Most SMEs (and a few larger borrowers) do not keep reliable financial accounts and do not provide all the information required for decision making by the commercial banks.
- While the CAR has adopted a chart of accounts for enterprises that recognizes the constraints faced by SMEs, their ability to produce this information needs to be strengthened.
- Financial institutions cannot rely on a central database with reliable financial information on potential customers.
  - BEAC’s credit information center (Centrale des Risques-CR) is not reliable, in part due to the lack of a single identification number and the absence of standard harmonized addresses.
  - There are long delays for the availability of information that is recorded by the CR.
- There is no financial analysis center (Centrale des Bilans-CB) recording financial information on potential borrowers.
  - A major constraint on implementation of the BEAC plan in this regard is the absence of financial statements by SMEs.
- There have been major delays in setting up the payment problems information center (Centrale des Incidents des Paiements-CIP), which would facilitate the establishment of sound market discipline for potential borrowers from credit institutions.
- The limits on lending rates are another obstacle to SME financing.
  - A ceiling of 15 percent is in place on lending rates.
  - To cover the risks related to SME lending, banks charge commissions and other fees to their customers.
  - The ceiling is a binding limit given that banks are required to add those fees to the actual cost of lending.

### Policy recommendations (SME finance and credit information)
- Review the functional architecture of credit bureaus, with a view to merging them into a single center to process information that can be used by the financial institutions.
- Encourage the creation of private information centers whenever possible.
- As recommended in the regional CEMAC FSAP, and in order to foster financial intermediation, bring the limits on lending interest rates in line with market fundamentals.

### Geographic and demographic banking density (selected figures)
- CAR:
  - Branches per 1,000 km2: 0.01
  - ATMs per 1,000 km2: 0.00
  - Branches per 100,000 inhabitants: 0.18
  - ATMs per 100,000 inhabitants: 0
- Table 8 — Central African Republic: Geographic Distribution of Bank Branches (Dec. 2007)
  - Urban: No. of Branches 7; No. of ATMs 0; Population 1,475,315; Branches and ATMs per 100,000 inhabitants 0.5
    - Of which: Bangui: 5 branches, 0 ATMs, Population 597,000, Branches and ATMs per 100,000 inhabitants 0.8
    - Berberati: 1 branch, 0 ATMs, Population 47,000, Branches and ATMs per 100,000 inhabitants 2.1
    - Bouar: 1 branch, 0 ATMs, Population 45,000, Branches and ATMs per 100,000 inhabitants 2.2
    - Other towns: 0 branches, 0 ATMs, Population 831,315, Branches and ATMs per 100,000 inhabitants 0.0
  - Rural: No. of Branches 0; No. of ATMs 0; Population 2,419,824; Branches and ATMs per 100,000 inhabitants 0.0
  - Total: No. of Branches 7; No. of ATMs 0; Population 3,895,139; Branches and ATMs per 100,000 inhabitants 0.2

### Microfinance sector data (2006)
- No. of branches:
  - CMCA: 10
  - UCACEC: 14
  - Total: 24
- No. of branches in Bangui:
  - CMCA: 9
  - UCACEC: 10
  - Total: 19
- No. of members:
  - CMCA: 31,505
  - UCACEC: 4,575
  - Total: 36,080
- Total loans (in millions of CFA francs):
  - CMCA: 1,176
  - UCACEC: 24.03
  - Total: 1,200
- Average loans (in CFA francs):
  - CMCA: 505,703
  - UCACEC: 224,622
  - Total: 730,325
- Total deposits (in millions of CFA francs):
  - CMCA: 3,440
  - UCACEC: 171
  - Total: 3,611
- Average deposits (in CFA francs):
  - CMCA: 110,141
  - UCACEC: 37,439
  - Total: 147,580
- Profit/loss (in millions of CFA francs):
  - CMCA: 23.8
  - UCACEC: 12.7
  - Total: 36.5
- Total assets (in millions of CFA francs):
  - CMCA: 3,581
  - UCACEC: 275
  - Total: 3,856

### Progress in implementation of the CEMAC Regional FSAP recommendations (selected items)
- Financial sector supervision — Recommended actions and status:
  - Reduce further the powers of the national authorities in the issuance or withdrawal of bank licenses: N (ST)
  - Increase staffing levels at the COBAC: R-N (ST)
  - Enforce fully current regulations, including for AML-CFT: R-N (ST)
  - Strengthen further the consistency of the prudential framework with international standards: R (MT)
  - Status: Partially Addressed
    - Although the influence of national authorities was reduced, staffing at COBAC is still an issue.
    - The AML/CFT assessment for the CAR will be conducted in June 2008.
- Systemic liquidity management and recycling of fiscal surpluses — Recommended actions and status:
  - Centralize government cash balances at the BEAC: N (ST)
  - Reinforce the use of market-based instruments for monetary and public debt management: R (and) N (MT)
  - Establish a framework to assess a desirable target for international reserves: R (ST)
  - Status: Partially Addressed
    - The BEAC has started work to assess a desirable target for international reserves.
- Banking sector stability — Recommended actions and status:
  - Increase the minimum capital adequacy ratio for the banks so that they can better absorb shocks: R (MT)
  - Status: Not Addressed
    - The minimum capital adequacy ratio for banks in CAR has not yet been increased above the minimum level.
- Access to financial services — Recommended actions and status:
  - Foster financial intermediation by bringing the limits on deposit and lending interest rates in line with market fundamentals: R (ST) and ultimately lifting all interest rate controls R (MT)
  - Strengthen the business environment by enhancing the proper functioning of the legal and judicial framework and strengthening financial infrastructure: R-N (MT)
  - Status: Not Addressed
    - Restrictions on interest rates are still in place.
    - Strengthening the business environment by enhancing the proper functioning of the legal and judicial framework is not completed.

*Source: COBAC, BEAC, World Bank, and Staff estimates as presented in the original document.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09154.pdf_