## _cr16277

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### Growth, inflation, and monetary developments
- Regional growth:
  - Regional growth slowed to 1.6 percent in 2015 and is projected at 1.9 percent in 2016.
  - From 2017 onward, growth is expected to reach 3½ percent a year, “one percentage point below the average growth level of the past decade of high oil prices.”
- Money and credit:
  - Growth of money and credit to the economy turned negative in 2015 for the first time in a decade.
- Consumer prices (period average): 3.9 (2012), 2.1 (2013), 2.7 (2014), 2.3 (2015), 2.0 (2016), 2.7 (2017).
- Consumer prices (end of period): 3.2 (2012), 2.4 (2013), 2.6 (2014), 1.6 (2015), 2.7 (2016), 2.4 (2017).
- Broad money (annual changes): 16.6 (2012), 6.7 (2013), 9.4 (2014), -2.2 (2015), 3.6 (2016), 7.4 (2017).

### Fiscal and external balances and public finance
- “Twin” deficits:
  - Regional fiscal deficit: 6 percent of GDP in 2015.
  - Current account deficit: 9 percent of GDP in 2015.
  - Oil export proceeds fell by 32 percent (table narrative) and by 33 percent (paragraph 3).
- Projections:
  - Continued low oil prices and high public expenditure keep deficits at about 6 percent (fiscal) and 8 percent (current account) of GDP in 2016.
  - Gradual oil-price recovery and moderate fiscal consolidation should narrow deficits to 3 percent by 2021 (summary); regional fiscal deficit to 2½ percent by 2021 (paragraph 3).
- Selected fiscal indicators (percent of GDP):
  - Total revenue, excluding grants: 27.6 (2012), 26.8 (2013), 25.0 (2014), 20.2 (2015), 19.0 (2016), 18.8 (2017).
  - Government expenditure: 29.2 (2012), 30.3 (2013), 29.6 (2014), 26.6 (2015), 25.9 (2016), 23.8 (2017).
  - Overall fiscal balance, excluding grants: -1.6 (2012), -3.5 (2013), -4.6 (2014), -6.4 (2015), -6.8 (2016), -5.0 (2017).
- Non-oil and primary balances:
  - Non-oil overall fiscal balance, excluding grants (percent of non-oil GDP): -31.0 (2012), -29.1 (2013), -25.9 (2014), -18.0 (2015), -15.9 (2016), -13.6 (2017).
  - Primary fiscal basic balance (excluding grants and foreign-financed investment and interest payments): -0.6 (2012), -1.6 (2013), -2.5 (2014), -4.4 (2015), -2.9 (2016), -1.2 (2017).

### Reserves, external debt, trade, and oil
- Gross official reserves (end of period, Millions of U.S. dollars): 17,531 (2012), 18,222 (2013), 15,309 (2014), 10,139 (2015), 7,866 (2016), 7,634 (2017).
- Reserves measured in months of imports (less intra-regional imports): 5.7 (2012), 5.6 (2013), 6.1 (2014), 4.6 (2015), 3.4 (2016), 3.3 (2017).
- Reserves as percent of broad money: 88.7 (2012), 83.7 (2013), 64.3 (2014), 52.0 (2015), 38.5 (2016), 34.5 (2017).
- External public debt (percent of GDP): 13.1 (2012), 15.5 (2013), 18.5 (2014), 23.4 (2015), 25.6 (2016), 25.8 (2017).
- Exports of goods and nonfactor services (percent of GDP): 57.0 (2012), 53.7 (2013), 50.8 (2014), 41.5 (2015), 36.3 (2016), 37.0 (2017).
- Oil prices (US dollars per barrel): 105 (2012), 104 (2013), 96 (2014), 51 (2015), 44 (2016), 51 (2017).
- Oil represented 63 percent of CEMAC exports in 2015 (down from 80 percent in 2014).

### Financial sector and macrofinancial linkages
- Main transmission channel of macrofinancial risks: banks’ exposure to the public sector.
- Key vulnerabilities:
  - Shrinking public sector bank deposits with dwindling oil revenues.
  - Government payment delays and scaling down public investment could raise NPLs, especially in construction.
  - Potential to limit credit to the private sector and undermine non-oil GDP growth.
- Directors’ recommendations: develop macroprudential framework; implement remaining 2015 FSAP recommendations; broaden financial inclusion; strengthen AML/CFT framework.

### Policy assessment and recommendations
- Fiscal policy:
  - Fiscal consolidation is critical; directors urged continued consolidation.
  - Specific measures encouraged:
    - Expanding the non-oil tax base.
    - Rationalizing and improving the quality of spending to maximize economic returns and social protection.
    - Prudent borrowing and debt management; borrowing on concessional terms where possible.
    - Strengthening fiscal policy coordination and enforcement of fiscal discipline.
- Monetary policy and safeguards:
  - BEAC’s accommodative policy helped weather shocks but contributed to reserve declines and delayed fiscal consolidation.
  - Directors called for:
    - Greater prudence in further monetary policy easing.
    - Freezing statutory advances to national governments and avoiding indirect monetary financing.
    - Accelerating reforms to the monetary policy framework, including greater central bank independence.
    - Implementing remaining safeguards assessment recommendations and better pooling of reserves.
- Structural reforms and regional institutions:
  - Ambitious structural reforms to boost competitiveness, diversification, and private investment.
  - Plans for a medium-term savings rule encouraged to build fiscal buffers.
  - Strengthening regional institutions to enhance collaboration, macroeconomic management, regional integration, and compliance with the new convergence framework.

### Risks and outlook (high-level)
- Major risks: weaker-than-expected oil-price recovery; relapse in security conditions (notably the Lake Chad region); lower growth in China; insufficient policy response.
- Directors called for enhanced support from the Fund and other international partners.

### Executive Board assessment
- Directors agreed with staff appraisal, urged timely and decisive fiscal adjustment, rebuilding foreign reserves buffers, ensuring debt and external sustainability, and implementing region-wide structural reforms; welcomed progress on safeguards and FSAP but urged completion.

### Annex I — External position and reserves dynamics
- Reserve coverage and dynamics:
  - At end-2015, reserve coverage was 4.6 months of future imports and represented 52 percent of broad money.
  - Between December 2014 and March 2016, international reserves contracted by 41 percent in CFA francs.
  - By end-March 2016, reserve coverage dropped to 3.9 months of prospective imports (below the adequate level of 5 months).
  - Staff projects reserve coverage could shrink in 2016 to a decade low without policy adjustment.
- Exchange rate and competitiveness:
  - REER appears moderately overvalued by about 6 percent with respect to current account norms.
- Reserve management and BEAC balance sheet:
  - BEAC sold 37 percent of its investment portfolio (at market value) in 2015, realizing a significant profit, about one third of which was distributed as dividends.
  - Staff recommended retaining the full amount of future sales to boost BEAC’s balance sheet.
- Authorities’ stance:
  - Implemented reforms to enhance reserve management; working on pooling reserves via BEAC correspondent accounts.
  - Consider French Treasury guarantee as protection for the peg in a dramatic fall in reserves.

### Annex I — Urgency of fiscal consolidation and scenarios
- Fiscal strategy:
  - With a fixed exchange rate and weak monetary transmission, focus should be on fiscal consolidation and real-economy reforms.
  - Staff urged expansion of tax bases toward non-oil revenue objective of 17 percent of GDP; focus consolidation on expenditure quality and preserve priority social spending.
  - Emphasis on borrowing on concessional terms and containing debt.
- Banking sector financing limits:
  - Commercial banks’ capacity to finance deficits may have reached limits; prudential regulations constrain long-term government financing.
  - Stress tests indicate additional bank capital would be needed for safe sovereign lending increases.
- Economic outlook scenarios (IMF staff projections, GDP growth in percent):
  - Moderate adjustment scenario: 2016 1.9; 2017 3.3; 2018 3.8; 2019 4.1; 2020 3.4; 2021 3.7.
  - No adjustment scenario: 2016 2.5; 2017 3.4; 2018 2.9; 2019 3.5; 2020 2.9; 2021 3.2.
- Additional scenario indicators (selected):
  - Non-oil growth (Moderate): 2016 2.7; 2017 4.1; 2018 4.3; 2019 4.5; 2020 4.5; 2021 4.5.
  - Overall budget deficit (Moderate, percent of regional GDP): 2016 -6.8; 2017 -5.0; 2018 -4.1; 2019 -2.9; 2020 -2.7; 2021 -2.3.
  - Reserve coverage ratio (months of prospective imports, Moderate): 2016 3.4; 2017 3.3; 2018 3.2; 2019 3.3; 2020 3.5; 2021 3.9.
  - No adjustment reserve coverage ratio: 2016 3.3; 2017 2.7; 2018 2.5; 2019 2.4; 2020 2.4; 2021 2.4.
- Staff characterization:
  - Moderate adjustment assumes limited adjustment plus some structural reforms.
  - No adjustment assumes continuation of current policies leading to reserve deterioration, Dutch disease effects, repressed growth, and high un(der)employment.

### New convergence framework (to enter into force January 1, 2017)
- Features:
  - (i) a new fiscal rule based on a three-year average overall budget deficit;
  - (ii) a public deficit ceiling, reinforced with a debt break;
  - (iii) a revised inflation criterion using three-year averages;
  - (iv) additional secondary criteria; consideration of a budgetary savings mechanism.
- Box specifics:
  - Budget rule: Rule = (Overall Balance)/GDP − α (oil revenues)/GDP; parameter α is the agreed share of oil revenues to be saved; based on three-year averages.
  - Debt ceiling: total public debt over GDP ceiling of 70 percent; mechanism to assess difference between three-year average debt and a long-term norm.
  - Inflation: three-year average criterion.
  - Accumulation of arrears: no change (no arrears allowed).
- Staff recommendations:
  - Complement framework with strengthened monitoring, mandate for the Commission to validate submitted data.
  - Support creating a fiscal savings mechanism.
  - Priorities: meet new fiscal criterion; develop data and forecasting capacity; implement six regional PFM directives.

### Monetary policy limits and BEAC actions
- Recent BEAC actions:
  - Re-instituted statutory advances at statutory level in August 2015, resulting in a 52 percent increase CEMAC-wide.
  - Approved exceptional additional advances to CAR and Chad (50 percent of their statutory ceiling); only Cameroon is below its statutory ceiling.
  - Lowered refinancing rate repeatedly; raised government paper refinancing ceilings for commercial banks.
  - In April 2016 halved the reserve requirement ratio, releasing the equivalent of one-fifth of outstanding statutory advances in additional bank liquidity.
  - Statutory advances ceiling set at 20 percent of previous year’s fiscal revenue.
- Staff recommendations:
  - Accommodative monetary policy had reached its limits and contributed to reserve loss.
  - Recommended freezing statutory advances at current level pending gradual elimination when circumstances allow.
  - BEAC should resist indirect monetary financing (raising refinancing ceilings or granting additional financing to BDEAC).
  - Adoption would signal need for fiscal adjustment to support the exchange rate.
- Monetary indicators:
  - Region has a net debtor position with the BEAC.
  - Output gap evidence: four countries representing some 85 percent of regional GDP had positive or virtually no output gaps in 2015; only two countries (~15 percent of GDP) had negative gaps.

### Banking sector performance, vulnerabilities, and supervisory recommendations
- Performance and liquidity:
  - Banks generally profitable; many rely on service fees.
  - Excess liquidity at BEAC: 12 percent of banks’ balance sheet in January 2016 (15 percent in September 2014).
  - Liquid assets and interbank deposits (excluding statutory reserves): 26 percent of total assets; with reserve requirement cut, liquidity should rise to close to 30 percent.
- Solvency and NPLs:
  - Capital to risk-weighted assets: about 13 percent at end-2015.
  - NPLs: 11.9 percent (September 2014) → 12.6 percent (January 2016).
  - Banks’ adjusted net capital unchanged given an 8 percent increase in banking sector equity.
  - MFIs NPLs: 13.3 percent (December 2014) → 14.0 percent (September 2015); COBAC reports NPLs could exceed 20 percent in some MFIs.
- Fragile institutions:
  - Eight of fifty-two banks have negative equity and do not comply with solvency norm; total assets of these banks < 5 percent of total bank assets.
- Sector concentration:
  - In Equatorial Guinea, credit to construction represented 57 percent of gross bank loans at end January 2016.
- Supervisory recommendations (COBAC and others):
  - Run additional stress tests for all member countries.
  - Increase solvency ratio for systematically important banks.
  - Develop consolidated supervision; strengthen risk-based supervision focusing on liquidity and FX risks.
  - Consider implementing Basel Pillar II; increase risk weights on weak guarantees.
  - Agree with BEAC and national authorities on timely resolution of troubled banks.
  - Strengthen microfinance supervision: raise minimum capital, restrict lending to non-members, improve governance and judicial enforcement.
- Financial inclusion:
  - Promote SMEs’ and households’ access to credit; support mobile banking growth with appropriate regulation and supervision.

### Regional institutions, governance, AML/CFT, and statistics
- Institutional capacity:
  - Strengthen CEMAC institutions to support diversification, budget management, financial sector development, and regional integration.
  - Commission displaced from headquarters since 2013, hindering capacity.
- BDEAC:
  - Lead coordination of regional infrastructure projects; implementing reforms after 2014 capital increase; preparing new regional investment strategy and seeking independent financial rating.
- BEAC safeguards and governance:
  - BEAC Board mandated governance improvements and transition to IFRS in early May 2016.
  - Progress welcomed but more effort needed on financial reporting and financial sector statistics.
- COBAC capacity:
  - Doubled inspectors; deployed a new financial information system; increased staff by 34 executives.
  - Should accelerate stricter regulation on connected loans and MFI supervision.
- AML/CFT:
  - Call for robust regional legal framework aligned with 2012 FATF standard; mobilize resources for risk-based supervision and enforcement.
  - GABAC working with FATF global network on assessments and technical assistance.
- Statistics:
  - Progress hampered by lack of resources and coordination; BEAC nearly completed a regional economic and financial data database to be operational later in 2016.

### Annex I — Risk Assessment Matrix (selected risks and mitigation)
- Sharper-than-expected global growth slowdown:
  - Likelihood: low short term, medium thereafter; expected impact: lower commodity prices, lower hydrocarbon revenues, weaker external financing for infrastructure.
  - Proposed policies: vigorous fiscal consolidation; develop regional debt market; ambitious structural reforms; diversify export markets; improve competitiveness.
- Lower commodity prices:
  - Likelihood: high in the medium term.
  - Expected impact: lower exports; threaten reserve adequacy; erode fiscal sustainability.
  - Proposed policies: eliminate oil subsidies; widen non-oil tax base; reform national oil companies; spur competition in non-oil import sector.
- Delays in reforms:
  - Likelihood: high short term.
  - Expected impact: hamper policy responsiveness; constrain private investment; undermine reserve pooling.
  - Proposed policies: implement BEAC modernization and FIN safeguards recommendations; push for transposition of PFM directives; improve business environment.
- Worsening Lake Chad security crisis:
  - Likelihood: medium short term.
  - Expected impact: displacement, investment/trade disruption, higher fiscal security costs.
  - Proposed policies: create fiscal buffers; widen non-oil tax base; eliminate oil subsidies; reform national oil companies where applicable.

### Annex IV — 2015 FSAP Recommendations (key items)
- Conference of Heads of State / Ministerial Committee:
  - Validate methodology for optimal reserves; streamline approval of CEMAC financial regulations; formalize crisis cooperation procedures; strengthen BEAC and COBAC autonomy and accountability.
- Regional agencies (BEAC, COBAC):
  - Increase BEAC transparency and adopt appropriate accounting framework; initiate asset quality review; finalize lender of last resort framework; accelerate monetary policy reform; strengthen prudential framework for connected lending; monitor financial inclusion.
- National authorities:
  - Improve governance of state-owned banks; streamline mortgage foreclosure procedures under OHADA; secure land rights; adopt AML/CFT prosecution policy; operationalize FIUs in Congo and Equatorial Guinea.
- Financial sector context:
  - January 2016: CEMAC banking assets CFAF 13 trillion (~US$22.5 billion; 29.9 percent of GDP).
  - About 85 percent of total assets belong to foreign banks.
  - Regional capital market small and fragmented; MFIs significant in Cameroon and Congo.

### Weak legal framework for collateral (finding and implications)
- Main finding:
  - CEMAC’s weak legal framework and judicial challenges reduce the enforceability and actual value of financial collaterals and guarantees.
- Implications:
  - Reliance on collateral overstates credit protection; could increase NPLs and impair bank balance sheets amid declining public deposits and payment delays.
- Supervisory recommendation:
  - COBAC should account for weak enforceability when computing solvency ratios (example: increase provision rates for NPLs).

*Source: IMF staff report on CEMAC common policies (discussions held April 25–May 9, 2016; informational annex and FSAP material as provided in the source document).*

### 1.9 percent in 2016, as oil production and investment remain sluggish. From 2017 onward,

### CENTRAL AFRICAN ECONOMIC AND MONETARY COMMUNITY (CEMAC) — Staff Report on the Common Policies of Member Countries

### Growth, inflation, and monetary developments
- Regional growth slowed to 1.6 percent in 2015 and is projected at 1.9 percent in 2016, as oil production and investment remain sluggish.  
- From 2017 onward, growth is expected to reach 3½ percent a year, as oil prices gradually recover, “one percentage point below the average growth level of the past decade of high oil prices.”  
- Growth of money and credit to the economy turned negative in 2015 for the first time in a decade, contributing to keeping inflation low.  
- Consumer prices (period average): 3.9 (2012), 2.1 (2013), 2.7 (2014), 2.3 (2015), 2.0 (2016), 2.7 (2017).  
- Consumer prices (end of period): 3.2 (2012), 2.4 (2013), 2.6 (2014), 1.6 (2015), 2.7 (2016), 2.4 (2017).  
- Broad money (annual changes): 16.6 (2012), 6.7 (2013), 9.4 (2014), -2.2 (2015), 3.6 (2016), 7.4 (2017).

### Fiscal and external balances (“twin” deficits) and public finance
- Regional fiscal and current account deficits grew to 6 percent and 9 percent of GDP in 2015, respectively, as oil export proceeds fell by 32 percent (table narrative) and by 33 percent (paragraph 3).  
- Continued low oil prices and high public expenditure are projected to keep both deficits at about 6 percent and 8 percent of GDP in 2016, respectively.  
- The gradual recovery in oil prices and expected moderate fiscal consolidation should narrow the regional fiscal and current account deficits to 3 percent by 2021 (summary) and the regional fiscal deficit to 2½ percent by 2021 (paragraph 3).  
- Selected fiscal indicators (percent of GDP): Total revenue, excluding grants: 27.6 (2012), 26.8 (2013), 25.0 (2014), 20.2 (2015), 19.0 (2016), 18.8 (2017). Government expenditure: 29.2 (2012), 30.3 (2013), 29.6 (2014), 26.6 (2015), 25.9 (2016), 23.8 (2017). Overall fiscal balance, excluding grants: -1.6 (2012), -3.5 (2013), -4.6 (2014), -6.4 (2015), -6.8 (2016), -5.0 (2017).  
- Non-oil overall fiscal balance, excluding grants (percent of non-oil GDP): -31.0 (2012), -29.1 (2013), -25.9 (2014), -18.0 (2015), -15.9 (2016), -13.6 (2017).  
- Primary fiscal basic balance (excluding grants and foreign-financed investment and interest payments): -0.6 (2012), -1.6 (2013), -2.5 (2014), -4.4 (2015), -2.9 (2016), -1.2 (2017).

### Reserves, external debt, trade, and oil
- Gross official reserves (end of period, Millions of U.S. dollars): 17,531 (2012), 18,222 (2013), 15,309 (2014), 10,139 (2015), 7,866 (2016), 7,634 (2017).  
- Reserves measured in months of imports (less intra-regional imports): 5.7 (2012), 5.6 (2013), 6.1 (2014), 4.6 (2015), 3.4 (2016), 3.3 (2017).  
- Reserves as percent of broad money: 88.7 (2012), 83.7 (2013), 64.3 (2014), 52.0 (2015), 38.5 (2016), 34.5 (2017).  
- External public debt (percent of GDP): 13.1 (2012), 15.5 (2013), 18.5 (2014), 23.4 (2015), 25.6 (2016), 25.8 (2017).  
- Exports of goods and nonfactor services (percent of GDP): 57.0 (2012), 53.7 (2013), 50.8 (2014), 41.5 (2015), 36.3 (2016), 37.0 (2017).  
- Oil prices (US dollars per barrel): 105 (2012), 104 (2013), 96 (2014), 51 (2015), 44 (2016), 51 (2017).  
- Oil represented 63 percent of CEMAC exports in 2015 (down from 80 percent in 2014).

### Financial sector and macrofinancial linkages
- Banks appear to have weathered the economic downturn thus far, but banks’ exposure to the public sector is the main transmission channel of macrofinancial risks.  
- With dwindling oil revenues, public sector bank deposits have shrunk; government payment delays and scaling down of public investment programs could increase non-performing loans (NPLs), especially in construction, which could limit credit to the private sector and undermine non-oil GDP growth.  
- Directors urged development of a sound macroprudential framework, implementation of remaining 2015 FSAP recommendations, measures to broaden financial inclusion, and strengthening the AML/CFT framework.

### Policy assessment and recommendations
- Fiscal policy: Fiscal consolidation is critical. Directors stressed continued fiscal consolidation to address widening fiscal and current account deficits and to maintain macroeconomic stability. They encouraged:  
  - Expanding the non-oil tax base.  
  - Rationalizing and improving the quality of spending to maximize economic returns and social protection.  
  - Prudent borrowing and debt management policies, and borrowing on concessional terms where possible.  
  - Strengthening fiscal policy coordination among members and enforcement of fiscal discipline.  
- Monetary policy and safeguards: The BEAC’s accommodative monetary policy helped weather shocks but contributed to reserve declines and delayed fiscal consolidation. Directors called for:  
  - Greater prudence in further monetary policy easing.  
  - Freezing statutory advances to national governments and avoiding indirect monetary financing.  
  - Accelerating reforms to the monetary policy framework, including greater central bank independence.  
  - Implementation of remaining safeguards assessment recommendations and better pooling of reserves across members.  
- Structural and real-economy reforms: Directors and staff recommended ambitious structural reforms to boost competitiveness and diversification, improve the business environment, and boost private-sector investment. Plans for a medium-term savings rule were encouraged to build fiscal buffers for future commodity shocks.  
- Regional institutions: Strengthening regional institutions was emphasized to enhance collaboration, macroeconomic management, regional integration, and compliance with the newly approved convergence framework (including consideration of a lower debt ceiling and stronger monitoring mechanisms).

### Risks and outlook
- Major risks identified: a weaker-than-expected oil price recovery; a relapse in security conditions (notably the Lake Chad region); lower growth in China that could dampen commodity prices; and insufficient policy response.  
- CEMAC medium-term prospects are challenging: a weaker oil-price recovery or security deterioration could undermine macroeconomic stability and private investment. Stronger regional institutions are necessary to promote regional integration and support growth.  
- Executive Directors called for enhanced support from the Fund and other international partners to help address current economic difficulties.

### Executive Board assessment (summary of views)
- Directors agreed with the staff appraisal and expressed concern about deteriorating economic prospects from multiple shocks. They strongly encouraged timely and decisive fiscal adjustment, rebuilding foreign reserves buffers, ensuring debt and external sustainability, and implementing region-wide structural reforms. Directors welcomed progress on safeguards and FSAP recommendations but urged completion of remaining reforms.

*Source: IMF staff report on CEMAC common policies (discussions held April 25–May 9, 2016; report dates and detailed tables as provided in the source document).*

### 6.      The medium-term outlook is fraught with risks (Annex I). A weaker-than-expected oil

### _cr16277 - 6.      The medium-term outlook is fraught with risks (Annex I)

### A. An external position at risk
- Reserve coverage and reserve dynamics
  - At end-2015, reserve coverage was 4.6 months of future imports and represented 52 percent of broad money.
  - Between December 2014 and March 2016, international reserves contracted by 41 percent in CFA francs.
  - By end-March 2016, reserve coverage dropped to 3.9 months of prospective imports (below the adequate level of 5 months for a resource-rich monetary union with a fixed exchange rate).
  - Staff projects that, without policy adjustment, reserve coverage could shrink in 2016 to a decade low.
- Exchange rate and competitiveness
  - Despite the depreciation of the euro in 2014–15, both the nominal and real effective exchange rates (REERs) appreciated during the 12 months to April 2016 because of the inflation differential and CFA franc appreciation vis-à-vis the currencies of trade partners.
  - Model-based assessments indicate the REER appears to be moderately overvalued by about 6 percent with respect to current account norms.
  - Large structural competitiveness challenges persist.
- Reserve management and repatriation
  - Staff called for repatriation of foreign assets and improved reserve management; recommended measures from the 2015 FSAP including:
    - (i) definition of the optimal level of reserves;
    - (ii) a better reserve portfolio structure to meet new liquidity requirements;
    - (iii) a new method to manage member states’ deposits and ensure that foreign reserves are backed by long-term resources (Selected Issues Paper—SIP—1).
  - Higher remuneration of reserves should increase incentives for foreign asset repatriation.
- BEAC balance sheet considerations
  - To maintain required liquid reserves, the BEAC sold 37 percent of its investment portfolio (at market value) in 2015, resulting in a significant realized profit, about one third of which was distributed to member states as dividends.
  - Given continuing reserve declines, the BEAC may be required to pursue similar operations in 2016; staff recommended retaining the full amount of future sales to boost the BEAC’s balance sheet.
- Authorities’ views
  - Authorities implemented reforms to enhance reserve management and promote repatriation, and are working on pooling reserves without requiring full repatriation by creating BEAC correspondent accounts.
  - They consider that the French Treasury’s guarantee will protect the peg in the event of a dramatic fall in reserves.
  - Governments and private companies, especially oil companies, should fully comply with reserve pooling requirements.

### B. Urgency of fiscal consolidation
- Rationale and recommended focus
  - With a fixed exchange rate and weak monetary transmission, policy response should focus on fiscal consolidation and real-economy reforms.
  - Staff recommended CEMAC-wide fiscal retrenchment including measures to increase non-oil revenue and rein in spending.
  - Staff urged expansion of tax bases to move toward the CEMAC objective of non-oil revenue of 17 percent of GDP.
  - Fiscal consolidation should focus on expenditure quality, preserve priority social spending (e.g., education, health), and finish well-advanced infrastructure projects that demonstrably support development.
- Fiscal positions and debt concerns
  - National fiscal policies varied: Gabon’s overall fiscal deficit in 2015 was 1 percent of GDP; Congo had a deficit of 18 percent of GDP.
  - Staff emphasized need to contain debt and urged borrowing on concessional terms where possible; rapid accumulation of debt would delay adjustment and lower regional reserves when external debt service begins (SIP 2).
  - Staff suggested the BEAC consider creating a regional debt issuance agency similar to West Africa’s UMEOA Titres.
- Banking sector and financing limits
  - Capacity of commercial banks to finance budget deficits may have reached its limits; prudential regulations constrain long-term government financing.
  - Staff stress tests indicate additional bank capital would be needed for safe increases in sovereign lending.
- Scenarios and projections (Text Table 1: CEMAC: Economic Outlook Scenarios, 2016–21; IMF staff projections)
  - GDP growth (In percent)
    - Moderate adjustment scenario: 2016 1.9; 2017 3.3; 2018 3.8; 2019 4.1; 2020 3.4; 2021 3.7
    - No adjustment scenario: 2016 2.5; 2017 3.4; 2018 2.9; 2019 3.5; 2020 2.9; 2021 3.2
  - Non-oil growth (In percent)
    - Moderate adjustment scenario: 2016 2.7; 2017 4.1; 2018 4.3; 2019 4.5; 2020 4.5; 2021 4.5
    - No adjustment scenario: 2016 3.1; 2017 4.1; 2018 3.4; 2019 3.9; 2020 4.0; 2021 4.0
  - Overall budget deficit (In percent of regional GDP)
    - Moderate adjustment scenario: 2016 -6.8; 2017 -5.0; 2018 -4.1; 2019 -2.9; 2020 -2.7; 2021 -2.3
    - No adjustment scenario: 2016 -8.6; 2017 -6.9; 2018 -5.8; 2019 -3.7; 2020 -3.4; 2021 -3.1
  - External current account deficit (In percent of regional GDP)
    - Moderate adjustment scenario: 2016 -7.7; 2017 -5.2; 2018 -4.7; 2019 -4.0; 2020 -3.6; 2021 -3.1
    - No adjustment scenario: 2016 -8.3; 2017 -6.3; 2018 -5.7; 2019 -4.1; 2020 -3.7; 2021 -3.1
  - Reserve coverage ratio (In months of prospective imports)
    - Moderate adjustment scenario: 2016 3.4; 2017 3.3; 2018 3.2; 2019 3.3; 2020 3.5; 2021 3.9
    - No adjustment scenario: 2016 3.3; 2017 2.7; 2018 2.5; 2019 2.4; 2020 2.4; 2021 2.4
  - Staff characterization:
    - Moderate adjustment assumes limited adjustment policies and some structural reforms to spur non-oil growth (streamlining regulation, tax harmonization, intra-Community trade facilitation).
    - No adjustment envisages continuation of current policies leading to reserve deterioration and low reserve levels; in the absence of reforms, Dutch disease effects would perpetuate repressed growth, high un(der)employment, and poverty.
    - Non-oil growth in both scenarios is partly pulled by large infrastructure programs, many coming on stream starting in 2017; this model relies on sizable, non-concessional borrowing and may be difficult to sustain.
- Authorities’ views
  - Authorities concurred on the challenging outlook and the need for country-level consolidation but noted regional authorities cannot impose fiscal discipline on member states.
  - They considered staff’s oil-price projections too pessimistic and believed regional markets could absorb additional public debt if needed.
  - They viewed a regional public debt issuing institution as useful long term but preferred short-term measures such as better coordination among national Treasuries and harmonization of procedures in regional depositories.

### C. A new convergence framework for regional stability
- New framework features (to enter into force January 1, 2017)
  - (i) a new fiscal rule based on a three-year average overall budget deficit;
  - (ii) a public deficit ceiling, reinforced with a debt break;
  - (iii) a revised inflation criterion using three-year averages;
  - (iv) additional secondary criteria; and consideration of a budgetary savings mechanism to build buffers.
- Specifics from Box 1: CEMAC: New Convergence Framework
  - Budget rule: based on overall balance with an oil revenues savings rule:
    - Rule = (Overall Balance)/GDP − α (oil revenues)/GDP
    - Parameter α will be the agreed share of oil revenues to be saved for each country.
    - The rule will be based on three-year averages to smooth short-term fluctuations.
  - Debt ceiling: total public debt over GDP ceiling of 70 percent; mechanism to assess difference between three-year average debt levels and a long-term norm to limit rapid debt accumulation.
  - Inflation: new criterion using the three-year average instead of the yearly index.
  - Accumulation of arrears: No change (i.e., no arrears are allowed).
- Staff recommendations and monitoring
  - Staff welcomed the framework as progress but recommended complementing it with strengthened monitoring for primary and secondary criteria, including a mandate for the Commission to validate submitted data.
  - Staff supported creating a fiscal savings mechanism.
  - Implementation priorities: meet the new fiscal criterion, develop comprehensive data and technical forecasting capacity, and implement six regional public finance management (PFM) directives (SIP 3 and SIP 4).
  - Promote harmonized tax policies to reduce dependence on foreign trade and broaden domestic taxes given expected reductions in customs tariffs.
- Authorities’ views
  - The CEMAC Commission will bring the new framework to CEMAC Heads of State for endorsement; ministers of finance had already adopted it.
  - Approval by presidents would reinforce legitimacy and aid implementation of mechanisms like the budgetary savings instrument.
  - Commission plans to enhance cooperation with the BEAC to share macroeconomic data and to have PFM directives incorporated into national legislation, with expected significant progress by end-2017.

### D. A monetary policy reaching its limits
- Recent BEAC monetary actions
  - Re-instituted statutory advances at statutory level in August 2015, resulting in a 52 percent increase in such advances CEMAC-wide.
  - Approved exceptional additional advances to CAR and Chad (50 percent of their statutory ceiling); currently only Cameroon is below its statutory ceiling.
  - Lowered its refinancing rate repeatedly and raised government paper refinancing ceilings for commercial banks.
  - In April 2016, it halved the reserve requirement ratio, releasing the equivalent of one-fifth of outstanding statutory advances in additional bank liquidity.
  - The ceiling for statutory advances is set at 20 percent of the previous year’s fiscal revenue.
- Staff assessment and recommendations
  - Staff considered accommodative monetary policy had reached its limits and contributed to the loss of reserves.
  - Monetary financing was not justified based on ex post regional output gap estimations: four countries representing some 85 percent of regional GDP had positive or virtually no output gaps.
  - Monetary stimulation in this context was likely to stoke inflationary and exchange rate pressures, delay fiscal consolidation, hinder development of regional financial markets (SIP 5), limit monetary transmission, and undermine new monetary policy instruments.
  - Staff recommended:
    - Freezing statutory advances at their current level, pending resumption of gradual elimination when circumstances allow.
    - That the BEAC resist indirect monetary financing, such as raising refinancing ceilings of commercial banks or granting additional financing to the regional development bank (BDEAC).
  - Adoption of these recommendations would signal the need for fiscal adjustment to support the exchange rate.
- Monetary indicators and positions
  - The region has a net debtor position with the BEAC (negative sign denotes a debtor position).
  - BEAC’s statutory advances, use of statutory advances, available funding, and governments’ net positions were highlighted as areas of concern.
- Output gap evidence
  - Staff noted that CEMAC’s output gap did not seem to support accommodative monetary policy; only two countries representing some 15 percent of regional GDP had negative output gaps in 2015.
  - Output gaps were estimated using a Hodrick–Prescott decomposition.

*Source: IMF staff report text (CEMAC regional consultation and analysis).*

### 23.      Staff urged the BEAC to pursue the development of its monetary policy instruments. It

### _cr16277 - 23.      Staff urged the BEAC to pursue the development of its monetary policy instruments. It

### Monetary policy instruments and BEAC actions
- Staff urged the BEAC to pursue the development of its monetary policy instruments and noted progress in bolstering interbank transactions and establishing a liquidity forecasting framework.
- Given that the monetary transmission channel remains weak, the BEAC should accelerate reforms (e.g., reserve management), with the help of IMF technical assistance, and strengthen its capacity to conduct monetary policy operations.
- Staff supported the BEAC’s decision—to be implemented soon—to standardize the rates of reserve requirements across banks.
- Staff argued against the introduction of computational changes to reserve requirements that could, in practice, exacerbate excess liquidity (by excluding assets below certain thresholds from reserve requirements).
- Staff supported the decision to stop injecting and withdrawing liquidities simultaneously, as this improves the transparency of monetary policy and of the interbank money market.
- The BEAC had created a Financial Stability Committee (FSC) in 2012; the Committee's first working meeting took place in April 2015.
- The BEAC had developed new monetary policy framework instruments, which should be put in place in late 2016.
- Staff recommended that the BEAC finalize its lender of last resort framework to address specific liquidity needs.
- Staff recommended the BEAC make progress in ensuring full compliance with the reserves pooling requirement by member states and government agencies.
- Authorities noted a new repo contract to be put in place in the second half of 2016 to reduce credit risk in interbank operations and support their development.

### Banking sector performance and vulnerabilities
- Banks appear generally profitable, though the situation varies by country and type of institution; most banks rely on service fees, partially shielding them from the downturn.
- Increasing NPLs have reduced interest revenues for some banks; the majority of NPLs derives from “connected” lending and not from the downturn.
- Bank liquidity indicators:
  - Excess liquidity of banks at the BEAC represented 12 percent of their balance sheet in January 2016 against 15 percent in September 2014.
  - Liquid assets and interbank deposits, excluding statutory reserves, remained stable at 26 percent of total assets during the same period.
  - With the recent decline in reserve requirement, bank liquidity should rise to close to 30 percent.
- Bank solvency and NPLs:
  - At end-2015, capital to risk-weighted assets represented about 13 percent.
  - NPLs increased from 11.9 percent of total loans in September 2014 to 12.6 percent in January 2016.
  - Banks’ adjusted net capital remained unchanged given an increase in equity in the banking sector by nearly 8 percent.
  - NPLs in microfinance institutions (MFIs) increased from 13.3 percent of total loans in December 2014 to 14.0 percent in September 2015; COBAC reports that NPLs could exceed 20 percent in some MFIs.
- Fragile institutions and supervisory concerns:
  - Eight of fifty-two banks have negative equity and do not comply with the solvency norm.
  - Total assets of these banks is less than 5 percent of total bank assets.
  - The inability of national and regional authorities to close them remains an issue.
- Sector concentration and exposure:
  - In Equatorial Guinea, credit to the construction sector represented 57 percent of gross bank loans at end January 2016.
- Staff recommended COBAC run additional stress tests for all member countries given increased macroeconomic risks since the last FSAP.
- Staff encouraged COBAC to:
  - Increase the solvency ratio for systematically important banks.
  - Develop bank supervision on a consolidated basis.
  - Enhance supervisory framework through effective risk-based supervision focusing on liquidity and foreign exchange risks.
  - Consider implementing Basel Pillar II to adjust capital requirements to banks’ risk profiles.
  - Increase risk weights on weak guarantees or collaterals for loan solvency calculations.
  - Agree with BEAC and national authorities on resolving troubled banks in a timely manner.
- Progress in microfinance supervision:
  - COBAC launched e-Sesame, a data collection system.
  - COBAC increased staffing at its microfinance department.
  - COBAC plans to update prudential regulation to raise the minimum capital requirement for MFIs and restrict lending to non-members.
  - Staff noted strengthening governance in MFIs requires a more effective judicial system and more resolute prosecution of fraud.
- Staff advised promoting financial inclusion: facilitate SMEs’ and households’ access to credit; support rapid mobile banking growth with appropriate regulation and enhanced supervision.

### Regional institutions, governance, and AML/CFT
- Staff urged strengthening CEMAC institutions and closer regional cooperation to support diversification, budget management, and financial sector development.
- CEMAC Commission actions and constraints:
  - The Commission has been displaced from its headquarters since 2013, hindering operational capacity.
  - The Commission launched a new regional surveillance framework; harmonization to reduce non-tariff barriers; and integration of national customs into a common regional policy.
  - Staff encouraged coordination with member states to improve the business climate and ensure free movement of goods and people.
- BDEAC responsibilities and progress:
  - BDEAC should take the lead in coordinating regional infrastructure projects.
  - Following its 2014 capital increase, BDEAC is implementing reforms and expanding investment activities; it is preparing a new regional investment strategy, seeking an independent financial rating, and raising funds for regional projects.
  - BDEAC should increase support for design, financing, and implementation of regional investment projects, including PPPs.
- BEAC safeguards and standards:
  - In early May 2016, the BEAC’s Board of Directors mandated work on improving governance and transitioning to IFRS, meeting two principal requirements of the 2016 IMF Finance Department’s safeguards mission.
  - Staff welcomed progress but noted more efforts needed to strengthen quality of financial reporting and financial sector statistics.
- COBAC operational capacity:
  - COBAC more than doubled the number of its inspectors and deployed a new financial information system.
  - COBAC should accelerate adoption of stricter regulations on connected loans and on the supervision of MFIs.
  - COBAC increased staffing by 34 new executives, enabling closer supervision and more on-site visits.
- AML/CFT:
  - Staff called for a more robust regional legal framework aligned with the 2012 FATF standard.
  - Resources need mobilization for effective AML/CFT risk-based supervision by COBAC and enforcement of AML/CFT requirements.
  - GABAC, the FATF-style regional body for Central Africa, is working with the FATF global network on assessments and technical assistance.
- Statistics and data:
  - Progress on financial soundness indicators is hampered by lack of resources at the BEAC and national statistics offices and coordination challenges.
  - The BEAC could consider implementing a system for preparing and sharing statistics similar to that used at the West African regional bank.
  - Authorities reported the BEAC had almost completed a database of regional economic and financial data, which should be operational later in 2016, while noting difficulties collating national-level data.

### Staff appraisal and policy recommendations
- Macroeconomic outlook and risks:
  - CEMAC’s economic situation has deteriorated markedly and the medium-term outlook entails significant risks due to the oil-price shock.
  - Scaling down public investment and lack of economic diversification could have lasting developmental consequences and affect the most vulnerable.
  - Insufficient policy response to oil-price and security shocks could undermine regional macroeconomic stability.
- Fiscal and monetary policy guidance:
  - Fiscal policy is the most appropriate tool to address structural shocks for commodity exporters with a fixed exchange rate.
  - In the absence of sufficient buffers, the fiscal response to oil revenue loss and increased security spending has been insufficient.
  - The BEAC’s accommodative monetary policy has reached its limits and has delayed fiscal adjustment.
  - Foreign reserves have dropped and are expected to stay below recommended levels in the medium term.
  - Staff recommended freezing statutory advances at their current level, pending a resumption of their gradual elimination when circumstances allow, and adopting a cautious debt policy.
- Regional frameworks and coordination:
  - The new convergence framework constitutes progress but calls for a reinforced monitoring mechanism involving regional and national authorities.
  - Staff supports the Commission's plan to create a fiscal savings mechanism to cope with future revenue shocks.
  - CEMAC authorities should strengthen regional coordination and harmonization, including implementation of the six CEMAC PFM directives.
- Financial stability priorities:
  - An effective microprudential framework is essential to prevent the spread of macrofinancial risks.
  - Liquidity in the banking sector remains ample, especially after the recent reduction of the reserve requirement.
  - Excessive liquidity and shallow interbank and debt markets hamper monetary transmission; the impact on prices and foreign exchange markets needs careful monitoring.
  - Staff welcomed progress on safeguards reforms and the BEAC Board decision to initiate governance reform and transition toward IFRS.

*Source: IMF staff report text provided in content unit _cr16277.*

### 52.      Regional and national authorities should promote regional integration by

### _cr16277 - 52.      Regional and national authorities should promote regional integration by

### Strengthening CEMAC institutions
- Regional and national authorities should promote regional integration by strengthening CEMAC institutions.
- Efficient regional institutions could support efforts to diversify growth, enhance public policy coordination, and promote financial sector development.
- Several institutions lack human and financial resources to contribute effectively to the creation of an integrated common market.

### Regional statistics and information gaps
- Shortcomings in regional statistics remain a concern.
- Although regional authorities (the BEAC and the COBAC) have made efforts to improve the quality of key economic information, important gaps remain.
- In the current economic context, timely and quality statistical information is essential for policy implementation.

*Source: _cr16277 - 52.*

### 54.      The discussions with the CEMAC authorities will remain on a 12-month cycle in

### _cr16277 - 54.      The discussions with the CEMAC authorities will remain on a 12-month cycle in

### Governance note
- The discussions with the CEMAC authorities will remain on a 12-month cycle in accordance with Decision No.13654-(06/1), adopted on January 6, 2006.

### Macroeconomic outlook (selected indicators, 2014–21)
- GDP at constant prices (annual percent change): 4.9, 1.6, 1.9, 3.3, 3.8, 4.1, 3.4, 3.7
- Oil GDP (annual percent change): 3.0, -0.4, -1.5, 0.2, 1.6, 2.3, -2.6, -0.9
- Non-oil GDP (annual percent change): 5.0, 2.6, 2.7, 4.1, 4.3, 4.5, 4.5, 4.5
- Consumer prices (period average): 2.7, 2.3, 2.0, 2.7, 2.4, 2.4, 2.4, 2.4
- Consumer prices (end of period): 2.6, 1.6, 2.7, 2.4, 2.4, 2.4, 2.5, 2.3

### Money, credit, and savings
- Net foreign assets (annual change in percent of beginning-of-period broad money): -7.6, -17.7, -8.5, -3.9, ............
- Net domestic assets (annual change in percent of beginning-of-period broad money): 14.9, 15.6, 12.1, 11.2, ............
- Broad money (annual percent change): 9.4, -2.2, 3.6, 7.4, ............
- Gross national savings (percent of GDP): 27.1, 20.2, 21.1, 20.0, 19.9, 19.6, 19.5, 19.2
- Gross domestic investment (percent of GDP): 32.7, 29.7, 28.8, 25.1, 24.6, 23.5, 23.1, 22.3
  - Of which: public investment (percent of GDP): 14.3, 10.7, 9.8, 7.9, 7.2, 6.7, 6.7, 6.7

### Fiscal sector (percent of GDP, 2014–21)
- Total revenue, excluding grants: 25.0, 20.2, 19.0, 18.8, 18.9, 19.2, 19.3, 19.4
- Government expenditure: 29.6, 26.6, 25.9, 23.8, 23.0, 22.1, 22.1, 21.7
- Primary basic fiscal balance (excluding grants, foreign-financed investment, and interest payments): -2.5, -4.4, -2.9, -1.2, -0.2, 0.7, 1.2, 1.5
- Basic fiscal balance (excluding grants and foreign-financed investment): -3.1, -5.2, -4.1, -2.4, -1.5, -0.6, -0.1, 0.2
- Overall fiscal balance, excluding grants: -4.6, -6.4, -6.8, -5.0, -4.1, -2.9, -2.7, -2.3
- Primary fiscal balance, including grants: -3.3, -5.0, -4.7, -3.0, -2.2, -1.0, -0.8, -0.5
- Non-oil overall fiscal balance, excluding grants (percent of non-oil GDP): -25.9, -18.0, -15.9, -13.6, -12.4, -11.1, -10.4, -9.5
- Non-oil primary fiscal balance, including grants (percent of non-oil GDP): -24.0, -16.3, -13.4, -11.2, -10.0, -8.8, -8.1, -7.3
- Total public debt (percent of GDP): 31.2, 39.0, 43.0, 42.9, 43.7, 43.3, 43.3, 43.0
- Memo: Non-oil revenue (CEMAC, percent of GDP): 11.3, 12.6, 12.9, 12.7, 13.0, 13.1, 13.5, 13.8

### External sector and reserves
- Exports of goods and nonfactor services (percent of GDP): 50.8, 41.5, 36.3, 37.0, 36.6, 36.3, 34.9, 34.2
- Imports of goods and nonfactor services (percent of GDP): 43.0, 42.3, 36.9, 34.8, 33.6, 32.7, 31.4, 30.4
- Balance on goods and nonfactor services (percent of GDP): 7.9, -0.8, -0.6, 2.2, 3.0, 3.7, 3.6, 3.8
- Current account, including grants (percent of GDP): -3.3, -9.4, -7.7, -5.2, -4.7, -4.0, -3.6, -3.1
- External public debt (percent of GDP): 18.5, 23.4, 25.6, 25.8, 26.5, 26.2, 26.0, 25.6
- Gross official reserves (end of period, Millions of U.S. dollars): 15,309; 10,139; 7,866; 7,634; 7,872; 8,346; 9,006; 9,596
- Months of imports of goods and services (less intra regional imports): 6.1, 4.6, 3.4, 3.3, 3.2, 3.3, 3.5, 3.9
- Percent of broad money (reserves): 64.3, 52.0, 38.5, 34.5, ............

### Memorandum and commodity indicators
- Nominal GDP (billions of CFA francs): 46,702; 43,369; 43,423; 47,019; 49,982; 53,512; 56,745; 60,266
- CFA francs per U.S. dollar, average: 494, 591, ..................
- Oil production (thousands of barrels per day): 914, 951, 930, 920, 932, 952, 923, 914
- Oil prices (US dollars per barrel): 96, 51, 44, 51, 53, 55, 57, 59

### Regional accounts and country breakdowns (high-level takeaways)
- CEMAC real GDP (2014–21, annual percent change): 4.9, 1.6, 1.9, 3.3, 3.8, 4.1, 3.4, 3.7
- Country real GDP (2014–21, annual percent change) highlights:
  - Cameroon: 5.9, 5.9, 4.9, 4.6, 4.9, 4.7, 4.7, 4.6
  - Central African Republic: 1.0, 4.8, 5.2, 5.5, 5.8, 5.8, 5.8, 5.8
  - Chad: 6.9, 1.8, -0.4, 1.6, 5.1, 8.2, 3.4, 3.5
  - Congo, Republic of: 6.8, 2.3, 1.7, 5.0, 3.1, 2.0, 1.7, 2.9
  - Equatorial Guinea: -0.3, -12.4, -6.0, -3.4, -2.8, -2.3, -1.8, -0.7
  - Gabon: 4.3, 4.0, 3.2, 4.5, 4.7, 4.9, 5.0, 4.9

### Fiscal balances by country (overall fiscal balance, excluding grants, percent of GDP, 2014–21)
- Cameroon: -5.1, -5.0, -8.1, -6.6, -6.3, -5.3, -5.8, -5.6
- Central African Republic: -7.8, -7.8, -9.0, -7.2, -6.6, -6.3, -5.8, -5.1
- Chad: -6.2, -8.4, -8.8, -4.9, -5.0, -3.5, -3.1, -3.0
- Congo, Republic of: -8.4, -18.3, -7.2, -1.3, 1.3, 2.4, 1.9, 1.6
- Equatorial Guinea: -6.7, -4.8, -6.5, -10.3, -8.1, -5.5, -2.5, 0.5
- Gabon: 2.7, -1.2, -2.3, -2.6, -2.3, -2.0, -1.5, -0.8
- CEMAC aggregate: -4.6, -6.4, -6.8, -5.0, -4.1, -2.9, -2.7, -2.3

### Balance of payments highlights (CFAF billions and percent of GDP)
- Balance on current account (CFAF billions): -1,551; -4,089; -3,356; -2,440; -2,353; -2,119; -2,036; -1,858
- Total exports (CFAF billions): 23,745; 18,011; 15,747; 17,406; 18,307; 19,432; 19,807; 20,590
  - Oil exports (CFAF billions): 17,113; 11,364; 9,030; 10,163; 10,601; 11,227; 11,059; 11,193
  - Non-oil exports (CFAF billions): 4,471; 4,554; 4,632; 5,008; 5,349; 5,721; 6,133; 6,615
- Total imports (CFAF billions): 20,059; 18,365; 16,019; 16,383; 16,792; 17,477; 17,790; 18,313
- Income, net (CFAF billions): -5,854; -4,075; -3,511; -3,900; -4,050; -4,264; -4,264; -4,356
  - Income credits: 184; 234; 235; 219; 218; 223; 228; 232
  - Income debits: -6,043; -4,313; -3,746; -4,120; -4,269; -4,491; -4,497; -4,593
  - Investment income, debit: -1,929; -1,525; -1,058; -1,155; -1,368; -1,753; -1,883; -2,079
  - Interest paid on public debt: -92; -126; -256; -240; -281; -292; -298; -306
- Balance on capital and financial accounts (CFAF billions): 3,735; 3,763; 3,356; 2,440; 2,353; 2,119; 2,036; 1,857
  - Direct investment, net: 3,812; 1,765; 2,059; 1,951; 2,002; 1,994; 1,989; 2,058
  - Reserve assets (accumulation -): 1,440; 3,056; 1,328; 134; -138; -273; -377; -338

### Monetary and financial sector indicators
- Monetary survey (CFAF billions, selected aggregates):
  - Net foreign assets (2013–17, CFAF billions): 8,788.1; 7,974.7; 5,888.5; 4,914.9; 4,453.3
  - Broad money (CFAF billions): 10,760.9; 11,775.6; 11,521.5; 11,942.0; 12,821.5
  - Net credit to private sector (CFAF billions): 5,634.7; 6,939.6; 6,850.7; 7,177.9; 7,623.7
  - Broad money (annual percent change): 6.7, 9.4, -2.2, 3.6, 7.4
  - Velocity (GDP/broad money): 4.2, 4.0, 3.8, 3.6, 3.7

### Financial soundness and banking sector
- Capital adequacy (CEMAC aggregate, percent): Capital/Risk-weighted assets 13.4 (2014), 13.5 (2015)
- Asset quality (CEMAC aggregate, percent): Doubtful loans/Total loans 8.8 (2014), 10.0 (2015)
- Profitability (CEMAC aggregate): Return on Assets (ROA) 1.2 (2014), 1.2 (2015); Return on Equity (ROE) 11.1 (2014), 10.3 (2015)
- Liquidity (CEMAC aggregate): Liquid assets/Total assets 29.4 (2014), 25.4 (2015); Liquid assets/Short-term liabilities 156.3 (2014), 151.1 (2015)
- Bank ratings (COBAC, December 2015): CEMAC (52 banks) distribution across rating categories: 1 (strong)=1; 2 (good)=14; 3 (not fully satisfactory)=23; 4 (fragile)=8; 5 (critical)=6; Not Rated=0

### Convergence and prudential compliance
- Compliance with convergence criteria (2013–16): Number of countries violating basic fiscal balance criterion across years: 4, 5, 5, 4
- Consumer price inflation (percent): CEMAC aggregate (period average) 2.7 (2014), 2.3 (2015), 2.0 (2016), 2.7 (2017)
- Level of public debt (percent of GDP) by country (2014–16 examples): Cameroon 18.7, 28.0, 31.2; Congo, Republic of 38.2, 47.5, 70.6

*Source: Authorities' data; and IMF staff estimates and projections.*

### Annex I. CEMAC: Risk Assessment Matrix

### Annex I. CEMAC: Risk Assessment Matrix

### Sharper-than-expected global growth slowdown
- Source/Likelihood:
  - Significant China slowdown, triggered by corporate distress that propagates through shadow banks, precipitating deleveraging, uncertainty and capital outflows. Weak domestic demand further depresses commodity prices, roils global financial markets, and reduces global growth.
  - Likelihood: low in the short term, medium thereafter.
  - Significant slowdown in other large emerging markets (EMs) / frontier economies. Turning of the credit cycle and fallout from excess household and corporate leverage (including in foreign exchange), as investors withdraw from EM corporate debt, generating disorderly deleveraging, with potential spillbacks to advanced economies (AEs).
  - Likelihood: medium in the short term.
- Expected Impact:
  - Lower growth in China will continue to depress commodity prices, including oil, and will have a negative impact on CEMAC exports. Lower hydrocarbon revenues will undermine fiscal sustainability in most CEMAC countries.
  - Slower growth in China could hamper external financing for large infrastructure projects and cloud CEMAC’s long-term growth prospects.
  - Lower foreign investment in CEMAC, in particular in the oil sector, especially from EMs.
- Proposed Policies to Mitigate Risks:
  - Adopt more vigorous fiscal consolidation to reduce the “twin” deficits and ensure external sustainability.
  - Develop the regional debt market to help cover CEMAC members’ financing needs.
  - Implement an ambitious structural reform agenda to promote economic diversification, including measures to attract more private capital.
  - Diversify export markets to other EMs to compensate for China’s economic slowdown.
  - Improve external competitiveness through structural reforms to improve the regional business climate.

### Lower Commodity prices
- Source/Likelihood:
  - Persistently lower energy prices, triggered by supply factors reversing only gradually.
  - Likelihood: high in the medium term.
- Expected Impact:
  - Lower oil and other commodity prices will lower CEMAC exports. This could threaten the adequacy of the reserve coverage.
  - Lower hydrocarbon revenues will erode fiscal sustainability further in most CEMAC countries.
- Proposed Policies to Mitigate Risks:
  - Eliminate oil subsidy schemes following the example of Gabon.
  - Widen the non-oil tax base.
  - Where applicable, reform national oil companies to increase efficiency.
  - Spur competition in the non-oil import sector.

### Delays in the implementation of regional and national reforms
- Source/Likelihood:
  - Weak implementation capacity and bureaucratic delays both at the regional and national levels hamper the pace of reforms. In a low oil-price environment, CEMAC may find it even more challenging to support regional integration.
  - Likelihood: high in the short term.
- Expected Impact:
  - Delays in reforms to address institutional governance and operational weaknesses could adversely affect policy responsiveness.
  - The absence of significant progress in public finance and financial sector reforms could constrain private investment and undermine efforts to diversify the regional economy.
  - The lack of progress in improving CEMAC reserve pooling could undermine regional reserve coverage, and erode CEMAC’s external sustainability.
- Proposed Policies to Mitigate Risks:
  - Implement reforms in key regional institutions. For the BEAC, the priority should be the finalization of its modernization plan and the implementation of FIN’s safeguards recommendations.
  - The CEMAC Commission should push for the implementation of the new regional surveillance framework and the finalization of the transposition of CEMAC’s public finance directives by member states.
  - Coordinate national and regional efforts to improve the business environment.
  - Improve the BEAC’s reserve management system by adopting the 2015 FSAP recommendations.

### Worsening of the Lake Chad security crisis
- Source/Likelihood:
  - Security threats would resume and threaten larger settlements.
  - Likelihood: medium in the short-term.
- Expected Impact:
  - Displacement of populations and interference with economic activities could affect investment and trade in affected countries.
  - Additional fiscal security costs (military spending, refugee management) could depress fiscal balances in affected countries.
- Proposed Policies to Mitigate Risks:
  - Create sufficient fiscal buffers by prioritizing large infrastructure projects, widening the non-oil tax base, eliminating oil subsidy schemes, and where applicable, reforming national oil companies.

*Annex I. CEMAC: Risk Assessment Matrix — IMF staff compilation as presented in the source document.*

### Annex IV. CEMAC: 2015 FSAP Recommendations

### Annex IV. CEMAC: 2015 FSAP Recommendations

### Key Recommendations (By responsible decision-making body)
- Note: Impact legend — S: Stability; D: Development. Timeframe legend — Less than a year; 1–2 years; Over 2 years.

- Conference of Heads of State and/or the Ministerial Committee (MC)
  - MC to validate the methodology to assess the optimal level/structure of international reserves.
  - Streamline the procedure for the approval of CEMAC regulations on the financial sector.
  - Formalize cooperation procedures among all the authorities to be involved in a financial crisis.
  - Identify actions to return chairmanship of the BEAC board to the governor.
  - Complete the streamlining of the two competing stock markets.
  - Strengthen the institutional autonomy and accountability of the BEAC and the COBAC.
  - Review the rules and practices for appointing senior staff of the regional financial agencies.

- Regional Financial Agencies: BEAC and COBAC
  - Increase the BEAC’s transparency by adopting an appropriate accounting framework.
  - Adopt a regional approach to credit reporting systems, keeping duplications to a minimum.
  - Accelerate implementation of the monetary policy reform.
  - Initiate an asset quality review, at least of the systemic and the most vulnerable banks.
  - Put in place an appropriate lender of last resort framework.
  - Strengthen and formalize the role of the BEAC’s national branches in financial sector reforms.
  - Strengthen the FOGADAC’s pay box function.
  - Continuously strengthen the SG-COBAC’s staffing.
  - Strengthen the prudential framework of lending to connected parties.
  - Review the tools available to the supervisor for implementing risk-based supervision.
  - Establish a mechanism for monitoring financial inclusion.
  - Implement coordinated actions to promote the use of electronic money.

- National authorities
  - Ensure that governance of the state-owned banks is consistent with best practices.
  - Streamline mortgage foreclosure procedures within the framework of the OHADA.
  - Secure land rights and strengthen the registration systems.
  - Give preference to official support mechanisms open to all credit institutions.
  - Adopt an AML/CFT prosecution policy (including for predicate offenses).
  - Improve the training/specialization of magistrates and the governance of judicial bodies.
  - Put the national FIUs in Congo and Equatorial Guinea into operation.

### Macrofinancial context and sector structure
- Financial sector size and composition
  - In January 2016, CEMAC banking assets represented CFAF 13 trillion (about US$22.5 billion; 29.9 percent of CEMAC’s GDP), compared to 15.7 percent in 2004.
  - About 85 percent of total assets belong to foreign banks.
  - The regional capital market is small (only four companies are listed) and fragmented, with two stock exchanges in Douala, Cameroun, and Libreville, Gabon.
  - Microfinance institutions (MFIs) are significant players in Cameroon and Congo; in some cases, MFIs have become systemic (Congo).
  - Mobile banking is growing, but it is still a nascent industry.

- Financial sector performance and constraints
  - The financial sector does not support CEMAC’s development needs adequately despite large pockets of excess liquidity.
  - Banks rely on deposits and derive revenue about equally from fees and interest rate margins.
  - Financial information is limited, hampering interbank and debt market development.

### Macrofinancial linkages and channels of risk
- Public sector exposure
  - The banking sector’s exposure to the public sector is the main transmission channel of macrofinancial risks.
  - The oil sector generated 59 percent of regional fiscal revenues in the last decade.
  - Public sector bank deposits decreased from 22 percent of total deposits in September 2014 to 19 percent in January 2016.
  - Increases in government payment delays and scaling down of public investment programs could increase banks’ non-performing loans (NPLs), particularly in the construction sector.

- Direct oil sector link
  - At end-January 2016, the share of loans to extractive industries was 2.4 percent, and their NPLs represented 1.4 percent.
  - International oil companies keep their oil revenues abroad and are externally financed; assets of state-owned oil companies are included in the public sector assessment.

- Interbank markets and liquidity
  - Linkages through interbank markets are limited, which should hinder transmission of shocks.
  - Factors limiting interbank development include asymmetry of information (e.g., the corporate accounts registry—centrale des bilans—not fully operational), reluctance to provide liquidity to competitors, excess systemic liquidity, and direct government borrowing from banks crowding out the government bond market.
  - BEAC actions to improve its monetary policy framework may support interbank market development but will take time to have full effects.
  - The BEAC has stopped injecting and borrowing liquidity at the same time, and started working on a lender of last resort framework.

- MFIs and banks linkages
  - Many banks have created MFIs to access households and SMEs; MFIs deposit excess liquidity at these banks because MFIs generally cannot have an account at the BEAC (except for one MFI).
  - MFIs’ vulnerability and ongoing liquidations due to governance problems have affected thousands of low-income savers and pose liquidity/credit risks to banks with large MFI deposits.

### Financial sector health, vulnerabilities, and stress-test findings
- Non-performing loans and profitability
  - NPLs increased from 11.9 percent of total loans in September 2014 to 12.6 percent in January 2016.
  - NPLs were above 19.0 percent at end–January 2016 in the largest CEMAC oil exporting countries.
  - NPLs in microfinance institutions increased from 13.3 percent of total loans in December 2014 to 14.0 percent in September 2015; COBAC estimates this level could exceed 20 percent in some important institutions.
  - Construction is the most vulnerable sector for banks.

- Bank income and capital adequacy
  - Equatorial Guinea saw a decline of 16 percent in its yearly net banking income between 2014 and 2015, largely due to a sharp decline in interest rate revenues.
  - Cameroon and Congo saw their yearly net banking income increase by 9 percent and 13 percent, respectively.
  - Average solvency ratios reach 13.0 percent; eight of fifty-two banks in CEMAC were not complying with the 8.0 percent norm at end–January 2016.
  - In most countries the solvency ratio is well below 10 percent.

- Capacity to absorb further shocks
  - Banking sector’s excess equity and long-term debt with respect to total long-term assets were CFAF 285 billion (about USD494 million) in January 2016.
  - Eight banks had negative equity, representing about 4.6 percent of the banking sector’s total assets.
  - Excessive exposure to connected parties and longstanding governance issues are critical weaknesses.

- Country-level stress-test outcomes
  - Equatorial Guinean banks: average solvency ratio would decline from 22 percent to 15 percent under stress, with the construction sector being the main transmission channel.
  - Gabon: average solvency ratio would decline from 15 percent to 8 percent under stress, with the public sector as the direct channel due to banks’ high exposure to the government.

- Liquidity and collateral
  - Banks’ excess liquidity at the BEAC represented 12.3 percent of their total assets in January 2016.
  - Refinancing at the BEAC represented 1.7 percent of the aggregated sector-wide balance sheet at end–January 2016.
  - Banks had CFAF 123 billion (about USD213 million; 0.9 percent of total assets) of unused eligible collateral.

### Institutional capacity, supervision, and policy recommendations
- Supervision and regulatory priorities
  - Bank supervision remains the main protection against negative spillovers; the COBAC supervision framework addresses credit risk relatively well but needs stronger focus on loans to connected parties.
  - COBAC should focus on the level of compliance of banks regarding the quality of reporting of their financial statements.
  - Supervision of the largest MFIs remains a major challenge; reinforcing the legal framework, increasing minimum capital, and strengthening supervisory regulation are top priorities.

- Macroprudential framework and data
  - The regional macroprudential framework is nascent and hampered by weak data.
  - The Financial Stability Committee (created in 2012) should urgently develop a robust set of early warning indicators covering macroeconomic indicators, financial institutions, households, government budgets, and financial markets (e.g., foreign exchange, interest rate).

- BEAC operational measures
  - The BEAC has little room to mitigate current shocks because foreign reserves have significantly declined and monetary financing has reached its limits.
  - The BEAC should reduce excess liquidity and increase its stable resources backing foreign reserves through its own funds or CEMAC governments’ long-term deposit.
  - The BEAC should urgently finalize its lender of last resort framework to address specific liquidity needs.

*Prepared by the Financial Stability Assessment Program team.*

### 18.      CEMAC’s weak legal framework undermines the actual value of financial collaterals and

### 18.      CEMAC’s weak legal framework undermines the actual value of financial collaterals and other guarantees

### Main finding
- CEMAC’s weak legal framework and challenges in its judicial system reduce the actual value of financial collaterals and other guarantees.
- This weakness is not expected to be solved in the near term because of the challenges in CEMAC’s judicial system.

### Implications for banks and financial stability
- Banks should avoid overly relying on collateralized credit to hedge against credit risk.
- Relying on collateral in the current legal environment could overstate the effective credit protection and undermine bank resilience.
- The weakened collateral enforceability can translate into higher non-performing loans (NPLs) and impair bank balance sheets, especially given:
  - the decline in public sector bank deposits discussed elsewhere in the report,
  - governments’ difficulties in meeting payment obligations,
  - trimmed infrastructure programs that can reduce credit quality.

### Supervisory and regulatory recommendations
- The COBAC should take the weak enforceability of collaterals into greater account when computing solvency ratios of banks.
  - Example measure: increasing the provision rate for NPLs.

### Relevant contextual points from the broader CEMAC report (selected)
- The regional authorities note multiple shocks affecting CEMAC: a sharp drop in oil prices, security challenges (e.g., Boko Haram), and weather-related shocks (drought in Chad).
- Macroeconomic indicators cited by the authorities:
  - Average GDP growth fell to 1.6 percent in 2015 and is expected to increase to 1.9 percent in 2016.
  - Inflation is estimated at 2.3 percent in 2015 and projected to fall to 2 percent in 2016.
  - The overall fiscal balance (excluding grants) is expected to increase slightly to 6.8 percent of GDP in 2016 from 6.4 percent in 2015.
  - The current account balance rose to 9.4 percent of GDP in 2015 and is projected to be reduced to 5.2 percent in 2016.
  - International reserves are expected to be around 3 months of imports.
- Policy priorities highlighted by authorities include fiscal adjustment, rebuilding buffers, improving monetary policy transmission, and enhancing financial sector soundness.

*Source: CENTRAL AFRICAN ECONOMIC AND MONETARY COMMUNITY (CEMAC) — STAFF REPORT ON COMMON POLICIES OF MEMBER COUNTRIES—INFORMATIONAL ANNEX (June 28, 2016).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16277.pdf_