## _spn0920 - Executive Summary

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### Executive Summary: key findings and context
- Global financial crisis: limited direct banking linkages but significant direct and indirect impacts via global recession.
- Oil price shock: by spring 2009, crude oil prices had declined by around US$100 since their peak in 2008.
- Fiscal revenue impact:
  - Overall fiscal revenues from oil for the CEMAC region in 2009 were projected, at the time of this study, to be more than 67 percent lower than they were last July.
- Exports and growth:
  - Combined with the fall in export volumes and prices for timber and other commodities, total export values are now projected to be less than half of what was previously projected.
  - The non-oil growth rate in the region is expected to fall by half, to 2.5 percent.
- Purpose: assess planned policy responses and make recommendations for policy going forward.

### Introduction: scope and objectives
- Scope:
  - Focus on CEMAC countries: Cameroon, Central African Republic, Chad, Republic of Congo, Equatorial Guinea, Gabon (CFA franc issued by BEAC).
  - Monetary policy responses must be regional; fiscal responses have regional implications due to pooled reserves and CFA franc parity to the euro.
  - Emphasis on commodity-export dominance (notably oil) and vulnerability to commodity price collapse.
- Objectives:
  - Assess CEMAC governments’ responses to the global financial crisis and recession with focus on fiscal sustainability, external sustainability, and reserve coverage.
  - Provide general policy advice to CEMAC governments.

### The impact of recent global developments on CEMAC countries — main findings
- Oil and fiscal impacts (WEO comparisons):
  - Fiscal oil revenues (% of GDP): July'08 WEO projections 22.7 25.9; Apr'09 WEO projections 23.0 11.4.
  - Fiscal oil revenues (CFAF billion): July'08 WEO projections 820 710 484; Apr'09 WEO projections 794 832 35.
  - At April’s WEO price forecast, all CEMAC countries except Equatorial Guinea would have fiscal deficits in 2009, with the region seeing a swing of almost 14 percent of non-oil GDP in its overall fiscal balance.
- Exports:
  - Exports (% of GDP): July'08 WEO projections 60.2 61.2; Apr'09 WEO projections 59.7 46.2.
  - Exports (US$ billions): July'08 WEO projections 48.1 55.6; Apr'09 WEO projections 46.2 26.3.
- Country exposure to oil revenues (2008 oil revenues in percent of GDP):
  - Cameroon 7.8; CAR 0.0; Chad 21.6; Congo 44.1; Equatorial Guinea 34.4; Gabon 20.9.
- Overall fiscal balance by country (percent of non-oil GDP, cash basis):
  - CEMAC: 2008 11.3; 2009 -2.2; 2010 6.1; 2011 8.1.
  - Cameroon: 2008 2.1; 2009 -0.8; 2010 -2.1; 2011 -0.6.
  - Central African Republic: 2008 -2.2; 2009 -2.2; 2010 -3.8; 2011 -3.7.
  - Chad: 2008 9.7; 2009 -9.9; 2010 2.0; 2011 5.2.
  - Congo: 2008 -10.7; 2009 -11.2; 2010 45.6; 2011 44.2.
  - Equatorial Guinea: 2008 60.5; 2009 5.3; 2010 16.7; 2011 21.1.
  - Gabon: 2008 21.3; 2009 -0.6; 2010 6.5; 2011 8.3.
  - Note: In the case of Chad, the WEO medium-term framework incorporates a significant fiscal consolidation in 2009.
- Government deposits with BEAC and CEMAC commercial banks (2008, CFAF billion and percent of GDP):
  - CEMAC total: 4344.9 (12.5 percent of GDP).
  - Cameroon 594.1 (5.7 percent of GDP).
  - CAR 8.0 (0.9 percent of GDP).
  - Chad 333.8 (8.9 percent of GDP).
  - Congo 1102.1 (23.0 percent of GDP).
  - Equatorial Guinea 2009.9 (24.2 percent of GDP).
  - Gabon 297.0 (4.6 percent of GDP).
- Balance of payments (CFA francs, 2007–09):
  - Balance on current account: 2007 -140; 2008 1,141; 2009 -1,980.
  - Balance on goods and services: 2007 5,086; 2008 7,178; 2009 1,526.
  - Exports of goods: 2007 15,457; 2008 19,184; 2009 11,955.
  - Exports of services: 2007 1,364; 2008 1,501; 2009 1,206.
  - Imports of goods: 2007 -6,127; 2008 -7,568; 2009 -6,674.
  - Imports of services: 2007 -5,608; 2008 -5,940; 2009 -4,962.
  - Income, net: 2007 -5,410; 2008 -6,157; 2009 -3,699.
  - Current transfers, net: 2007 183; 2008 120; 2009 194.
  - Balance on capital and financial account: 2007 -70; 2008 -1,424; 2009 1,919.
  - Reserve assets: 2007 -796; 2008 -1,795; 2009 620.
- Foreign capital inflows (USD million, 2007–09):
  - CEMAC: 2007 4,280.0; 2008 3,321.6; 2009 3,624.1.
  - Cameroon: 2007 601.4; 2008 161.4; 2009 433.6.
  - Central African Republic: 2007 56.8; 2008 69.2; 2009 75.4.
  - Chad: 2007 67.1; 2008 68.6; 2009 0.0.
  - Congo: 2007 1,178.6; 2008 2,486.5; 2009 764.8.
  - Equatorial Guinea: 2007 1,715.6; 2008 -570.1; 2009 1,303.9.
  - Gabon: 2007 660.4; 2008 1,106.1; 2009 1,046.3.
- Other transmission channels and banking sector vulnerability:
  - Region averaged over 6 percent of GDP in FDI over the last four years and was expected to reach 9 percent in 2009; most FDI has a very heavy import component.
  - De facto limited capital mobility: small net and gross portfolio flows averaging around 1 percent of GDP since 2003.
  - Banking system features: foreign banks (mostly French) account for 60 percent of bank assets (2006 FSAP); banks held significant gross and net foreign exchange positions (over 150 percent of their equity) as of 2006; poor compliance with prudential norms; increase in non-performing loans through March 2008; system is abundantly liquid and could withstand a large and sudden increase in deposit withdrawals.
- Exchange rate effects:
  - Nominal decline of the euro by around 14 percent after mid-2008 caused real depreciation of the CFA franc, cushioning impact of lower oil prices on fiscal revenue (measured in local currency); the real exchange rate of the CFAF is now close to its recent peak.
- Inflation and private sector impacts:
  - Disinflationary pressures in 2009 likely from easing food and fuel price pressures and potential decline in private sector growth.
  - In countries with high pass-through of past oil price increases to pump prices (e.g., CAR and Gabon), the decline should exert important disinflationary pressure; moderate depreciation of the euro may have some inflationary impact.

### Policy options and recommendations — medium- and short-term priorities
- Overarching guidance:
  - Medium-term fiscal policy must be guided by considerations of fiscal and external stability.
  - External stability does not appear to be in jeopardy and regional foreign exchange reserves appear more than adequate, but all CEMAC countries are projected to have fiscal deficits that will be unsustainable, calling for medium-term fiscal tightening.
  - Short-term fiscal policy should cushion the impact of the global recession on the domestic economy and protect the most vulnerable.
  - Given sufficient financing regionally, temporary fiscal stimulus may be considered if reconcilable with needed medium-term fiscal adjustment.
- Monetary policy constraints and tools:
  - CFA franc pegged to the euro; little scope for independent monetary policy.
  - De facto limited capital controls leave some room for monetary policy to influence markets through interest rate movements.
  - Rapid development of planned regional bond market would enhance government financing options.
- Financial sector policies:
  - Urgency to strengthen banking supervision given weak global outlook and financial markets.
  - Address weak compliance with prudential norms (capital adequacy, single-exposure limits); monitor foreign bank linkages and foreign exchange exposures.
- Structural reforms:
  - Pursue improvements in non-oil revenue collection (broadening tax base, improving taxation efficiency).
  - Strengthen public financial management systems.
  - Enhance targeting and effectiveness of social safety net programs.
  - Improve judicial and regulatory environment for private business, governance, and regional infrastructure per the Regional Economic Plan.

### Fiscal policy — medium-term sustainability and short-term response
- Medium-term considerations:
  - Fiscal sustainability in oil-producing countries depends on oil price forecasts and sustainable non-oil fiscal deficit.
  - If oil price declines are temporary, sustainable non-oil deficit would not change significantly; if permanent/persistent, sustainable non-oil fiscal deficit is permanently lower and spending must be adjusted.
  - WEO projections indicate some decline is temporary but prices are not projected to return to previous trend in the medium term.
  - Short oil production horizons amplify the impact of price declines on sustainable non-oil deficits.
  - Prior to fall in oil prices, fiscal deficits in oil-exporting CEMAC countries were already above sustainable levels in most cases.
  - Converging toward new sustainable non-oil deficits may require adjusting fiscal stances as early as 2010, or earlier.
- Short-term fiscal policy objectives:
  - Cushion domestic economies, smooth adjustment to new external conditions, protect the most vulnerable, subject to financing constraints and medium-term sustainability.
  - For the region as a whole, no need for fiscal tightening; country-specific factors may differ.
  - Temporary fiscal stimulus could be appropriate for countries with substantial savings and fiscal positions close to sustainable levels.
- Conditions for stimulus feasibility:
  - Adequate financing exists regionally without risking reserve adequacy or exchange rate regime sustainability.
  - Some countries (Chad, Gabon to a lesser extent) would use most/all existing savings in 2009 under current plans, reducing options for 2010+.
  - Authorities must ensure stimulus is warranted, design timely and temporary expansions, and be able to reverse them.
  - Targeting the most vulnerable is desirable but may be difficult to make truly temporary.
- Need for short-term adjustment:
  - Postponing or scrapping long-term projects may be necessary where capital spending is excessive (Equatorial Guinea prior to cuts; Chad).
  - Avoid disrupting large-scale high-return projects; when reducing capital spending, prioritize projects with large import components to limit impact on aggregate demand.
  - Safeguard key social spending.

- Key projections and figures — Real non-oil GDP growth (Table 8, percent):
  - CEMAC - Apr'09 WEO projections 5.0 2.4 3.7
  - CEMAC - July'08 WEO projections 6.2 6.1 6.1
  - Cameroon - Apr'09 WEO projections 4.1 3.2 3.3
  - Cameroon - July'08 WEO projections 4.6 4.8 5.2
  - Central African Republic - Apr'09 WEO projections 3.5 4.5 5.0
  - Central African Republic - July'08 WEO projections 4.9 5.0 5.0
  - Chad - Apr'09 WEO projections 3.2 4.0 3.5
  - Chad - July'08 WEO projections 2.0 5.0 4.5
  - Congo - Apr'09 WEO projections 5.4 3.5 6.0
  - Congo - July'08 WEO projections 6.9 7.3 7.5
  - Equatorial Guinea - Apr'09 WEO projections 17.6 -0.5 4.6
  - Equatorial Guinea - July'08 WEO projections 31.3 16.1 12.7
  - Gabon - Apr'09 WEO projections 3.0 -0.5 2.8
  - Gabon - July'08 WEO projections 4.4 5.0 5.3

- Key projections and figures — Central government non-oil primary balance on payment orders basis (Table 9, percent of non-oil GDP):
  - CEMAC - Apr'09 WEO projections -20.9 -16.2 ...
  - CEMAC - July'08 WEO projections -15.5 -16.7 ...
  - Cameroon - Apr'09 WEO projections -6.8 -4.1 -1.4
  - Cameroon - July'08 WEO projections -4.3 -4.5 -3.1
  - Central African Republic - Apr'09 WEO projections 0.6 0.3 1.0
  - Central African Republic - July'08 WEO projections 1.3 1.3 1.0
  - Chad - Apr'09 WEO projections -27.4 -17.9 b/n 1 and -3
  - Chad - July'08 WEO projections -22.0 -39.6 ...
  - Congo - Apr'09 WEO projections -46.6 -42.3 b/n 0 and -2
  - Congo - July'08 WEO projections -43.2 -39.3 -10.0
  - Equatorial Guinea - Apr'09 WEO projections -75.6 -60.9 -18.5
  - Equatorial Guinea - July'08 WEO projections -58.7 -52.1 -25.0
  - Gabon - Apr'09 WEO projections -15.3 -13.4 -3.6
  - Gabon - July'08 WEO projections -11.2 -9.5 -5.6

### Monetary policy
- Policy environment:
  - CFA franc pegged to the euro; some room for independent monetary policy due to de facto limited capital mobility.
  - CEMAC policy rate (interest rate on 7-day negative auctions) has been considerably below ECB deposit rate for more than two years; spread has declined amid interest rate cuts by both central banks.
- Monetary effectiveness and constraints:
  - BEAC’s acceptance of most bids for deposits since May 2007 led to exponential increase in negative auctions and greatly reduced excess reserves.
  - BEAC’s greater control on liquidity via the policy rate has improved capacity to influence credit; a decrease in the policy rate could encourage marginal lending.
  - Credit growth hampered by high cost of intermediation and lack of competition.
  - Historical behavior: prior to May 2007 banks preferred holding excess reserves (net nominal return of zero) over increasing lending—even when excess reserves reached 35 percent of total deposits.
  - Credit growth accelerated significantly in 2008 despite BEAC’s liquidity withdrawal; forecasts indicate significant slowdown in credit growth in 2009.
- Bank credit growth (Table 10, 12-month growth rate of bank credit to private sector, percent):
  - CEMAC Dec-07 10.9 Dec-08 28.0 Dec-09 7.9
  - Cameroon Dec-07 7.0 Dec-08 20.8 Dec-09 8.1
  - Central African Republic Dec-07 4.7 Dec-08 8.6 Dec-09 6.7
  - Chad Dec-07 -10.9 Dec-08 46.1 Dec-09 7.3
  - Congo Dec-07 7.6 Dec-08 87.7 Dec-09 15.6
  - Equatorial Guinea Dec-07 41.9 Dec-08 109.2 Dec-09 8.1
  - Gabon Dec-07 17.8 Dec-08 1.1 Dec-09 5.5
- Other instruments:
  - Accelerating plans for a regional debt market could cushion crisis impact by improving national governments’ financing ability and allocation of savings across the region.

### Financial sector policies
- Supervisory priorities:
  - Heightened risk of rising non-performing loans requires preemptive supervision and swift action.
- Strengthening COBAC:
  - Empower and resource the Central African Banking Commission (COBAC) to fulfill supervisory role.
  - Current gaps: mission-resource mismatch, staffing below minimum targets proposed by 2006 FSAP mission.
  - Limited institutional independence has contributed to poor enforcement of prudential norms.
  - Recommendations: increase COBAC’s power and resources; strengthen enforcement of capital adequacy requirements; consider raising capital requirements and aligning prudential norms with international standards.
- Bank balance sheet monitoring:
  - Identify and monitor nonperforming loans; ensure adequate provisioning.
  - Avoid excessive risk concentration, including off-balance sheet risks.
  - Monitor asset-liability mismatches and anticipate spillovers from parent companies abroad.
  - Be prepared to resolve problem banks swiftly once vulnerabilities identified.
- Trade finance:
  - Follow developments in trade financing availability and costs; be alert to declines in trade credits such as pre-paid letters of credit.
- Inter-institutional coordination:
  - Improve exchange of information and coordination between BEAC authorities and home supervisors of foreign-owned banks to minimize contagion risk and clarify lender-of-last-resort responsibilities.

### Structural reforms
- Rationale: global developments heighten importance of improving business environment to attract risk-averse investors.
- Priority reforms:
  - Strengthen judicial and regulatory environment for private business.
  - Improve governance.
  - Improve regional infrastructure consistent with the Regional Economic Plan.

### Appendix 1 — Implications of existing spending plans for CEMAC reserves
- Context and approach:
  - Most IMF teams did not call for government expenditure reductions in 2009 because accumulated fiscal savings (except CAR) can finance deficits and avoid pro-cyclical spending cuts.
  - Teams projected fiscal/trade balances and balance of payments for 2009–11 under two oil-price scenarios (April WEO and prior WEO).
- Appendix Table 1. CEMAC: Pooled Foreign Assets
  - Apr'09 WEO Prices (2009-52 USD/barrel; 2010-62.5; 2011-67.5)
    - In billion of US$ 15.7 13.2 16.0 19.3
    - In months of next year's imports of goods and services 7.6 6.3 7.2 8.5
  - Feb'09 WEO Prices (2009-44 USD/barrel; 2010-52; 2011-57.5)
    - In billion of US$ 15.7 12.5 13.8 16.3
    - In months of next year's imports of goods and services 7.8 6.1 6.5 7.6
- Key inference:
  - Using either WEO price set, reserves decline but stay above the minimum of 5 months’ import coverage in 2009 before rising again from 2010.
  - Fund staff concluded that 5 months of import coverage is a reasonable minimum for CEMAC given dependence on a few volatile export commodities.
  - Downside scenario: with oil prices falling to $35 in 2009 and $45 in 2010, reserve coverage falls over 30 percent in 2009, to just above the minimum, and continues to fall thereafter.

*Source: IMF staff — Executive Summary, _spn0920 - Executive Summary.*

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

### _spn0920 - Executive Summary ......................................................................................................

### Executive Summary: key findings and context
- The global financial crisis has had little direct impact on the CEMAC region because banks in the region have limited connections to the global market; however, the resulting global recession is having significant direct and indirect impacts on the region.
- The most important impact stems from the decline in world oil prices: by spring 2009, crude oil prices had declined by around US$100 since their peak in 2008.
- Overall fiscal revenues from oil for the CEMAC region in 2009 were projected, at the time of this study, to be more than 67 percent lower than they were last July.
- Combined with the fall in export volumes and prices for timber and other commodities, total export values are now projected to be less than half of what was previously projected.
- The non-oil growth rate in the region is expected to fall by half, to 2.5 percent.
- This note assesses planned policy responses to these developments, and makes recommendations for policies going forward.

### Introduction: scope and objectives
- Scope:
  - Focuses on CEMAC countries (Cameroon, Central African Republic, Chad, Republic of Congo, Equatorial Guinea, Gabon) sharing a common monetary and exchange rate framework (CFA franc issued by BEAC).
  - Emphasizes that monetary policy responses must be regional while fiscal responses have regional implications due to pooled reserves and a common currency parity to the euro.
  - Highlights the dominance of commodity exports (notably oil) in CEMAC economies and vulnerability to commodity price collapse.
- Objectives:
  - Assess the response of CEMAC governments to the global financial crisis and recession, focusing on fiscal sustainability and the region’s external sustainability and reserve coverage.
  - Provide general policy advice to CEMAC governments as they refine responses to global developments.

### The impact of recent global developments on CEMAC countries — main findings
- Oil and fiscal impacts:
  - WEO forecasts comparison (CEMAC fiscal oil revenues):
    - Fiscal oil revenues (% of GDP): July'08 WEO projections 22.7 25.9; Apr'09 WEO projections 23.0 11.4.
    - Fiscal oil revenues (CFAF billion): July'08 WEO projections 820 710 484; Apr'09 WEO projections 794 832 35.
  - At April’s WEO price forecast, all CEMAC countries except Equatorial Guinea would have fiscal deficits in 2009, with the region seeing a swing of almost 14 percent of non-oil GDP in its overall fiscal balance.
- Exports:
  - Table summary (CEMAC exports):
    - Exports (% of GDP): July'08 WEO projections 60.2 61.2; Apr'09 WEO projections 59.7 46.2.
    - Exports (US$ billions): July'08 WEO projections 48.1 55.6; Apr'09 WEO projections 46.2 26.3.
- Country exposure to oil revenues (2008 oil revenues in percent of GDP):
  - Cameroon 7.8; CAR 0.0; Chad 21.6; Congo 44.1; Equatorial Guinea 34.4; Gabon 20.9.
- Overall fiscal balance by country (in percent of non-oil GDP):
  - CEMAC: 2008 11.3; 2009 -2.2; 2010 6.1; 2011 8.1.
  - Cameroon: 2008 2.1; 2009 -0.8; 2010 -2.1; 2011 -0.6.
  - Central African Republic: 2008 -2.2; 2009 -2.2; 2010 -3.8; 2011 -3.7.
  - Chad: 2008 9.7; 2009 -9.9; 2010 2.0; 2011 5.2.
  - Congo: 2008 -10.7; 2009 -11.2; 2010 45.6; 2011 44.2.
  - Equatorial Guinea: 2008 60.5; 2009 5.3; 2010 16.7; 2011 21.1.
  - Gabon: 2008 21.3; 2009 -0.6; 2010 6.5; 2011 8.3.
  - Note: Overall balance on cash basis. In the case of Chad, the WEO medium-term framework incorporates a significant fiscal consolidation in 2009.
- Government deposits with BEAC and CEMAC commercial banks (2008, CFAF billion and percent of GDP):
  - CEMAC total: 4344.9 (12.5 percent of GDP).
  - Cameroon 594.1 (5.7 percent of GDP).
  - CAR 8.0 (0.9 percent of GDP).
  - Chad 333.8 (8.9 percent of GDP).
  - Congo 1102.1 (23.0 percent of GDP).
  - Equatorial Guinea 2009.9 (24.2 percent of GDP).
  - Gabon 297.0 (4.6 percent of GDP).
- Balance of payments (CFA francs, 2007–09):
  - Balance on current account: 2007 -140; 2008 1,141; 2009 -1,980.
  - Balance on goods and services: 2007 5,086; 2008 7,178; 2009 1,526.
  - Exports of goods: 2007 15,457; 2008 19,184; 2009 11,955.
  - Exports of services: 2007 1,364; 2008 1,501; 2009 1,206.
  - Imports of goods: 2007 -6,127; 2008 -7,568; 2009 -6,674.
  - Imports of services: 2007 -5,608; 2008 -5,940; 2009 -4,962.
  - Income, net: 2007 -5,410; 2008 -6,157; 2009 -3,699.
  - Current transfers, net: 2007 183; 2008 120; 2009 194.
  - Balance on capital and financial account: 2007 -70; 2008 -1,424; 2009 1,919.
  - Reserve assets: 2007 -796; 2008 -1,795; 2009 620.
- Foreign capital inflows (USD million, 2007–09):
  - CEMAC: 2007 4,280.0; 2008 3,321.6; 2009 3,624.1.
  - Cameroon: 2007 601.4; 2008 161.4; 2009 433.6.
  - Central African Republic: 2007 56.8; 2008 69.2; 2009 75.4.
  - Chad: 2007 67.1; 2008 68.6; 2009 0.0.
  - Congo: 2007 1,178.6; 2008 2,486.5; 2009 764.8.
  - Equatorial Guinea: 2007 1,715.6; 2008 -570.1; 2009 1,303.9.
  - Gabon: 2007 660.4; 2008 1,106.1; 2009 1,046.3.
- Other transmission channels and banking sector vulnerability:
  - Region averaged over 6 percent of GDP in FDI over the last four years and was expected to reach 9 percent in 2009; most FDI has a very heavy import component.
  - De facto limited capital mobility: small net and gross portfolio flows averaging around 1 percent of GDP since 2003.
  - Banking system: foreign banks (mostly French) account for 60 percent of bank assets (2006 FSAP); banks held significant gross and net foreign exchange positions (over 150 percent of their equity) as of 2006; poor compliance with prudential norms; increase in non-performing loans through March 2008; system is abundantly liquid and could withstand a large and sudden increase in deposit withdrawals.
- Exchange rate effects:
  - The nominal decline of the euro by around 14 percent after mid-2008 helped cause a real depreciation of the CFA franc, cushioning the impact of lower oil prices on fiscal revenue (measured in local currency); the real exchange rate of the CFAF is now close to its recent peak.
- Impacts on inflation and private sector:
  - Disinflationary pressures in 2009 likely from easing food and fuel price pressures and potential decline in private sector growth.
  - In countries with high pass-through of past oil price increases to pump prices (e.g., CAR and Gabon), the decline should exert important disinflationary pressure; moderate depreciation of the euro may have some inflationary impact.

### Policy options and recommendations — medium- and short-term priorities
- Overarching guidance:
  - Medium-term fiscal policy must be guided by considerations of fiscal and external stability.
  - While external stability does not appear to be in jeopardy and regional foreign exchange reserves appear more than adequate, all CEMAC countries are projected to have fiscal deficits that will be unsustainable, calling for medium-term fiscal tightening.
  - Short-term fiscal policy should be geared toward cushioning the impact of the global recession on the domestic economy and protecting the most vulnerable.
  - Since sufficient financing appears to be available, governments may wish to engage in temporary fiscal stimulus if they can reconcile that with needed medium-term fiscal adjustment.
- Monetary policy constraints and tools:
  - With the CFA franc pegged to the euro, there is little scope for independent monetary policy.
  - De facto limited capital controls leave some room for monetary policy to influence markets through interest rate movements.
  - Rapid development of the planned regional bond market would enhance government financing options.
- Financial sector policies:
  - Weak global outlook and financial markets increase urgency to strengthen banking supervision.
  - Focus on addressing weak compliance with prudential norms (capital adequacy, single-exposure limits) and monitoring foreign bank linkages and foreign exchange exposures.
- Structural reforms:
  - Structural reform needs are noted as part of broader policy options; specific measures are discussed in the main note.

### Conclusion
- The main policy challenge for CEMAC is to adjust to the decline in external revenue (primarily from oil) in a way that is least disruptive to domestic economies.
- Regional coordination is essential given pooled reserves and common currency arrangements; the impact will vary across countries and policy responses should take country-specific exposures and savings into account.
- Barring a dramatic further decline in oil prices, reserve coverage in the CEMAC region is estimated to remain more than adequate under existing expenditure plans (see Appendix for estimates under a range of oil price assumptions).

*Source: IMF staff — Executive Summary, _spn0920 - Executive Summary.*

### 14.      CEMAC finance ministers have met on a number of occasions, to seek to

### 14.      CEMAC finance ministers have met on a number of occasions, to seek to coordinate their responses to the global financial crisis and economic recession

### Overview and key macroeconomic impact
- Global financial crisis and recession have led to:
  - Substantial declines in export prices and volumes.
  - Sharp declines in government revenues—oil and non-oil.
  - Increased likelihood of rising non-performing loans and adverse financial-sector impacts.
  - Declining employment.
- The accumulation of international reserves in recent years provides financing capacity to respond to shocks, including the potential for short-term fiscal stimulus for the region as a whole.

### A. Fiscal policy — medium-term sustainability and short-term response
- Medium-term considerations:
  - Fiscal sustainability in oil-producing countries depends on oil price forecasts and the sustainable non-oil fiscal deficit.
  - If oil price declines are temporary, sustainable non-oil deficit would not change significantly; if permanent/persistent, the sustainable non-oil fiscal deficit is permanently lower and spending must be adjusted.
  - WEO projections indicate some decline is temporary but prices are not projected to return to previous trend in the medium term; the gap between previous and new trend is large.
  - Short oil production horizons amplify the impact of price declines on sustainable non-oil deficits.
  - Prior to the fall in oil prices, fiscal deficits in oil-exporting CEMAC countries were already above sustainable levels in most cases (Table 9).
  - Converging toward new sustainable non-oil deficits may require adjusting fiscal stances as early as 2010, or earlier; authorities should begin adjusting medium-term spending frameworks sooner rather than later.
- Effect on the Central African Republic (non-oil producer):
  - CAR’s sustainable long run fiscal position is not affected by decline in oil prices, though other commodity price declines (timber, diamonds) could affect it.
  - Ongoing revenue mobilization under PRGF should help compensate for permanent decreases in non-oil resource-based revenue.
- External sustainability:
  - Depends on fiscal sustainability and maintenance of a cushion against external shocks—CEMAC’s pool of external reserves.
  - Reserves appear adequate to cover existing fiscal plans whether financed by drawing down savings at BEAC, borrowing from BEAC, or borrowing on the regional bond market being developed.
  - Substantial reserves could support some additional short-term fiscal stimulus, subject to analysis below.
- Short-term fiscal policy objectives:
  - Cushion domestic economies from crisis, smooth adjustment to new external conditions, protect the most vulnerable, subject to financing constraints and medium-term sustainability.
  - For the region as a whole, no need for fiscal tightening; country-specific factors may differ.
  - Temporary fiscal stimulus could be appropriate for countries with substantial savings and fiscal positions close to sustainable levels.
- Conditions for stimulus feasibility:
  - Adequate financing exists regionally without risking reserve adequacy or exchange rate regime sustainability.
  - Some countries (Chad, Gabon to a lesser extent) would use most/all existing savings in 2009 under current plans, reducing options for 2010+.
  - Authorities must evaluate economic conditions to ensure stimulus warranted, design timely and temporary expansions, and be able to reverse them.
  - Targeting the most vulnerable is desirable but may be difficult to make truly temporary.
- Need for short-term adjustment:
  - Postponing or scrapping long-term projects may be necessary where capital spending is excessive (Equatorial Guinea prior to cuts; Chad).
  - Avoid disrupting large-scale high-return projects; when reducing capital spending, prioritize projects with large import components to limit impact on aggregate demand.
  - Safeguard key social spending.
- Structural fiscal reforms to pursue regardless of cyclical stance:
  - Improve non-oil revenue collection (e.g., broadening tax base, improving taxation efficiency).
  - Strengthen public financial management systems.
  - Enhance targeting and effectiveness of social safety net programs.

- Key reported projections and figures (preserve exactly as in source):
  - Table 8. CEMAC: Real Non-oil GDP Growth, 2008-10 (percent)
    - CEMAC - Apr'09 WEO projections 5.0 2.4 3.7
    - CEMAC - July'08 WEO projections 6.2 6.1 6.1
    - Cameroon - Apr'09 WEO projections 4.1 3.2 3.3
    - Cameroon - July'08 WEO projections 4.6 4.8 5.2
    - Central African Republic - Apr'09 WEO projections 3.5 4.5 5.0
    - Central African Republic - July'08 WEO projections 4.9 5.0 5.0
    - Chad - Apr'09 WEO projections 3.2 4.0 3.5
    - Chad - July'08 WEO projections 2.0 5.0 4.5
    - Congo - Apr'09 WEO projections 5.4 3.5 6.0
    - Congo - July'08 WEO projections 6.9 7.3 7.5
    - Equatorial Guinea - Apr'09 WEO projections 17.6 -0.5 4.6
    - Equatorial Guinea - July'08 WEO projections 31.3 16.1 12.7
    - Gabon - Apr'09 WEO projections 3.0 -0.5 2.8
    - Gabon - July'08 WEO projections 4.4 5.0 5.3
  - Table 9. CEMAC: Central Government Non-Oil Primary Balance on Payment Orders Basis, 2008-09 (percent of non-oil GDP)
    - CEMAC - Apr'09 WEO projections -20.9 -16.2 ...
    - CEMAC - July'08 WEO projections -15.5 -16.7 ...
    - Cameroon - Apr'09 WEO projections -6.8 -4.1 -1.4
    - Cameroon - July'08 WEO projections -4.3 -4.5 -3.1
    - Central African Republic - Apr'09 WEO projections 0.6 0.3 1.0
    - Central African Republic - July'08 WEO projections 1.3 1.3 1.0
    - Chad - Apr'09 WEO projections -27.4 -17.9 b/n 1 and -3
    - Chad - July'08 WEO projections -22.0 -39.6 ...
    - Congo - Apr'09 WEO projections -46.6 -42.3 b/n 0 and -2
    - Congo - July'08 WEO projections -43.2 -39.3 -10.0
    - Equatorial Guinea - Apr'09 WEO projections -75.6 -60.9 -18.5
    - Equatorial Guinea - July'08 WEO projections -58.7 -52.1 -25.0
    - Gabon - Apr'09 WEO projections -15.3 -13.4 -3.6
    - Gabon - July'08 WEO projections -11.2 -9.5 -5.6

### B. Monetary policy
- Policy environment:
  - CFA franc pegged to the euro; some room for independent monetary policy due to de facto limited capital mobility.
  - CEMAC policy rate (interest rate on 7-day negative auctions) has been considerably below ECB deposit rate for more than two years; spread has declined amid interest rate cuts by both central banks (Figure 4).
- Monetary policy effectiveness and constraints:
  - BEAC’s acceptance of most bids for deposits since May 2007 led to exponential increase in negative auctions and greatly reduced excess reserves in the banking system (Figure 5).
  - BEAC’s greater control on liquidity via the policy rate has improved capacity to influence credit; a decrease in the policy rate could encourage marginal lending.
  - Credit growth remains hampered by high cost of intermediation and lack of competition among banks in many CEMAC countries.
  - Historical behavior: prior to May 2007 banks preferred holding excess reserves (net nominal return of zero) over increasing lending—even when excess reserves reached 35 percent of total deposits.
  - Credit growth accelerated significantly in 2008 despite BEAC’s liquidity withdrawal; forecasts indicate significant slowdown in credit growth in 2009.
- Table 10. CEMAC: 12-Month Growth Rate of Bank Credit to Private Sector, 2007-09 (percent)
  - CEMAC Dec-07 10.9 Dec-08 28.0 Dec-09 7.9
  - Cameroon Dec-07 7.0 Dec-08 20.8 Dec-09 8.1
  - Central African Republic Dec-07 4.7 Dec-08 8.6 Dec-09 6.7
  - Chad Dec-07 -10.9 Dec-08 46.1 Dec-09 7.3
  - Congo Dec-07 7.6 Dec-08 87.7 Dec-09 15.6
  - Equatorial Guinea Dec-07 41.9 Dec-08 109.2 Dec-09 8.1
  - Gabon Dec-07 17.8 Dec-08 1.1 Dec-09 5.5
- Other monetary instruments and actions:
  - Accelerating plans for a regional debt market could cushion crisis impact by improving national governments’ financing ability and allocation of savings across the region.

### C. Financial sector policies
- Need for proactive monitoring and readiness to act:
  - Heightened risk of rising non-performing loans requires preemptive supervision and swift action.
- Strengthening regional supervision (COBAC):
  - The Central African Banking Commission (COBAC) must be empowered and resourced to fulfill supervisory role.
  - Current gaps: mission-resource mismatch, staffing below minimum targets proposed by 2006 FSAP mission.
  - Limited institutional independence has contributed to poor enforcement of prudential norms.
  - Recommendations: increase COBAC’s power and resources; strengthen enforcement of capital adequacy requirements; consider raising capital requirements and aligning prudential norms with international standards.
- Bank balance sheet monitoring priorities:
  - Identify and monitor nonperforming loans; ensure adequate provisioning.
  - Avoid excessive risk concentration, including off-balance sheet risks.
  - Monitor asset-liability mismatches and anticipate spillovers from parent companies abroad.
  - Be prepared to resolve problem banks swiftly once vulnerabilities identified.
- Trade finance:
  - Follow developments in trade financing availability and costs; be alert to declines in trade credits such as pre-paid letters of credit.
- Inter-institutional coordination:
  - Improve exchange of information and coordination between BEAC authorities and home supervisors of foreign-owned banks to minimize contagion risk and clarify lender-of-last-resort responsibilities.

### D. Structural reforms
- Importance heightened by global developments:
  - Investors likely to be more risk-averse post-crisis; CEMAC must improve business environment to attract investment.
- Priority reforms:
  - Strengthen judicial and regulatory environment for private business.
  - Improve governance.
  - Improve regional infrastructure consistent with the Regional Economic Plan.

### IV. Conclusion
- The CEMAC region has been seriously affected by the global financial crisis and recession: lower export prices/volumes, falling government revenues, likely rising non-performing loans, and declining employment.
- Regional international reserve accumulation provides a source of financing to respond to shocks.
- Tension exists between:
  - Short-term rationale for fiscal stimulus, and
  - Medium-term need for fiscal sustainability (all five oil exporters ran non-oil primary deficits above sustainable levels prior to shocks).
- With oil prices and forecasts substantially lower, sustainable non-oil deficits are reduced while actual non-oil deficits have increased—requiring careful policymaking by CEMAC authorities.

### Appendix 1 — Implications of existing spending plans for CEMAC reserves
- Context and approach:
  - Despite revenue declines, most IMF teams have not called for government expenditure reductions in 2009, as accumulated fiscal savings (except CAR) can finance deficits and avoid pro-cyclical spending cuts.
  - Teams assessed whether aggregate spending plans would rapidly reduce region’s international reserves by projecting fiscal/trade balances and balance of payments for 2009–11 under two oil-price scenarios (April WEO and prior WEO).
- Appendix Table 1. CEMAC: Pooled Foreign Assets
  - Apr'09 WEO Prices (2009-52 USD/barrel; 2010-62.5; 2011-67.5)
    - In billion of US$ 15.7 13.2 16.0 19.3
    - In months of next year's imports of goods and services 7.6 6.3 7.2 8.5
  - Feb'09 WEO Prices (2009-44 USD/barrel; 2010-52; 2011-57.5)
    - In billion of US$ 15.7 12.5 13.8 16.3
    - In months of next year's imports of goods and services 7.8 6.1 6.5 7.6
- Key inference:
  - Using either WEO price set, reserves decline but stay above the minimum of 5 months’ import coverage in 2009 before rising again from 2010.
  - Fund staff concluded that 5 months of import coverage is a reasonable minimum for CEMAC given dependence on a few volatile export commodities.
  - Downside scenario: with oil prices falling to $35 in 2009 and $45 in 2010, reserve coverage falls over 30 percent in 2009, to just above the minimum, and continues to fall thereafter.

*IMF staff analysis as presented in source content.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/spn/2009/_spn0920.pdf_