## _wp07243

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---

### Overview
- Examines macroeconomic challenges from large oil-related inflows in the Central African Economic and Monetary Community (CEMAC).
- Regional constraints on policy choices:
  - Need to coordinate national fiscal policies to keep the currency stable vis-à-vis the euro.
  - Requirement to repatriate and pool foreign assets at the Central Bank (BEAC), constraining savings choices.
- Institutional change and policy direction:
  - Regional fiscal coordination and reserve management framework became less relevant as oil surpluses rendered fiscal convergence criteria not binding.
  - BEAC reformed government deposit remuneration and introduced a grid of deposit remuneration in 2006.
  - Suggested policy direction: preserve reserve pooling while enabling creation of savings funds remunerated by market-linked returns, subject to maintaining reserve adequacy.

### Anatomy of the Oil Inflows (1995–2006)
- Aggregate and drivers:
  - Total external oil inflows to CEMAC: 25 billion US$ dollars in 2006.
  - Additional oil receipts in 2003-2006 were higher by some 10 percent of regional GDP than inflows in 1999-2002.
  - Drivers: higher world oil prices and significantly increased production in some countries (notably Chad and Equatorial Guinea).
- Country-level dynamics:
  - CAR is not an oil producer; Cameroon experienced a decline in oil production that more than offset price rises.
  - Chad, Congo, Equatorial Guinea, and Gabon substantially increased oil exports; Chad moved from large negative oil balances before 2003 to surpluses thereafter.
- Government oil revenues and fiscal responses:
  - Oil revenues surged to 20 percent of GDP for CEMAC by end-2006, an increase of some 10 percentage points relative to the 1999–2002 average.
  - On average, ratio of government oil revenue to non-oil GDP rose from 14 percent in 1999-2002 to 23 percent in 2003-2006.
  - Non-oil fiscal deficits were stable at about 14 percent of GDP on average.
  - On average, some 40 percent of oil exports accrued to governments in 2003-2006.
  - Production-sharing government shares: about 10 percent in Chad versus 60 percent in Cameroon.
  - Oil inflows relative to non-oil GDP rose on average from 40 percent in 1999-2002 to 61 percent in 2003-2006.
  - Non-oil current account deficits deteriorated from 46 percent of non-oil GDP to 62 percent (on average for the group experiencing deterioration).
- Absorption differences:
  - Chad absorbed about two-thirds of inflows; Equatorial Guinea absorbed about half; Congo did not absorb and improved its non-oil current account; Gabon allowed partial absorption of over half of inflows.

### Current Reserve Management Framework and BEAC Operations
- Monetary cooperation with France:
  - Fixed parity against the euro; full convertibility of CFA francs guaranteed by the French Treasury.
  - All export earnings must be repatriated; a minimum of 65 percent of foreign exchange earnings must be deposited in the operations account with the French Treasury; remainder can be invested elsewhere per BEAC reserve investment rules.
  - BEAC agreed to gradually lower share held with the French Treasury from 65 percent to 60 percent on July 1st 2007, 55 percent on July 1st 2008 and 50 percent on July 1st 2009.
  - As of end-2006, BEAC managed less than 10 percent of its reserves itself.
  - Rate of return on BEAC’s French Treasury Account: 100 basis points more than the ECB policy rate.
- Reserves and prudential limits:
  - BEAC reserves bolstered to about 9 billion U.S. dollars.
  - Reserves are more than 100 percent of base money and far above the 20 percent coverage requirement set out in BEAC statutes.
  - Regulatory floors and limits include:
    - Minimum level of net foreign assets equivalent to at least 20 percent of sight liabilities.
    - Limit credit to governments by the BEAC to 20 percent of tax revenues in the previous year.
    - A decline in reserve coverage to less than 20 percent of sight liabilities for three consecutive months triggers emergency measures; if the operations account as a whole is overdrawn for 30 days, refinancing scope is reduced.
- BEAC deposit remuneration and instruments:
  - Since 2006 BEAC has offered CFA-denominated Funds for Future Generations (FFGs) and Oil Stabilization Funds (OSFs); usage remains low to date.
  - BEAC links FFG/OSF rates to BEAC earnings on its French Treasury operations account (ECB policy rate plus 100 basis points—4.75 percent as of April 2007). Total return also depends on BEAC realized profits.
  - After July 1, 2007, long-term deposits will no longer be included in the pool from which the share of reserves going to the operations account is calculated.
- BEAC profit distribution (summary):
  - BEAC profits net of operating costs are distributed after provisions: 15 percent equally to all members; 15 percent according to each member’s share in currency in circulation; and 70 percent according to each member’s relative contribution to central bank profits.

### BEAC Government Deposit Remuneration — Selected Rates and Time Series
- Conventional deposits (one-month minimum maturity):
  - Remuneration for countries with outstanding advances from BEAC: 0.5 percent.
  - Remuneration for other countries: 2.8 percent.
- Fiscal Revenue Stabilization Mechanisms (six-month minimum maturity):
  - Interest rate as of June 2007: 3.1 percent, subject to a 30 percent reduction for withdrawals before maturity.
- Fund for Future Generations (minimum maturity of five years):
  - Interest rate as of June 2007: 3.3 percent, subject to retroactive reduction for withdrawals before maturity.
- BEAC reported time series snapshots (selected):
  - Regular Government Deposits: Apr. 06 = 1.4; Jun. 06 = 1.7; Aug. 06 = 2.4; Oct. 06 = 2.6; Dec. 06 = 2.7; Mar. 07 = 2.8.
  - Oil Stabilization Funds: Apr. 06 = 1.7; Jun. 06 = 2.0; Aug. 06 = 2.7; Oct. 06 = 2.9; Dec. 06 = 3.0; Mar. 07 = 3.1.
  - Funds for Future Generations: Apr. 06 = 1.9; Jun. 06 = 2.2; Aug. 06 = 2.9; Oct. 06 = 3.1; Dec. 06 = 3.2; Mar. 07 = 3.3.
  - Memorandum: Interest on the Operations Account: Apr. 06 = 3.5; Jun. 06 = 3.8; Aug. 06 = 4.0; Oct. 06 = 4.3; Dec. 06 = 4.5; Mar. 07 = 4.8.

### Policy Implications: Oil Savings and Reserve Management
- Primary regional priority: ensure reserve adequacy while allowing countries to save oil income beyond levels needed for balance of payments.
- Country-specific optimal saving profiles depend on:
  - Initial oil endowment.
  - Stage in the oil production cycle.
  - Development needs and absorption capacities.
- Regional considerations and recommended reforms:
  - Maintain adequate reserves to support the fixed parity and convertibility arrangements.
  - Reform reserve management to permit a larger role for savings funds (FFGs and OSFs) with market-linked remuneration while preserving pool-based reserve adequacy.
  - Preserve pooling of reserves for monetary stability and transparency of oil receipts.
  - Allow counterpart foreign assets of long-term government deposits to be excluded from the operations account (consistent with the Convention de Compte d'Operations exclusion for deposits over one year).
  - Improve the regional coordination framework to provide guidance for coordinated, sustainable fiscal policies and long-term fiscal savings.

### Assessing Reserve Adequacy — Findings and Indicators
- Indicators and results:
  - Adequacy must be viewed in broader macroeconomic context; reserve indicators are indicative rather than definitive.
  - At end-2006, reserves covered 5.5 months of imports (gross official reserves in months of imports).
  - At end-2006, reserves covered over 5 times short-term debt, 2 times reserve money, and 100 percent of broad money (capital account–based measures).
- Historical and threshold context:
  - Reserve levels at end-2006 far exceed those before the 1994 devaluation and for 1994–2002; also higher than those of other monetary unions referenced in source.
  - IMF Board paper thresholds favor ratio of reserves to short-term debt, or short-term debt plus current account; current CEMAC indicators are above relevant thresholds for the first time in many years.

### Likelihood of Shocks and Implied Reserve Needs
- Volatility and implied coverage (1991–2006 statistics as presented):
  - CEMAC (Average) — Current Account: 9.2; St. Dev.: 5.2; implied zone-wide reserve need (text): about 5 months of imports.
  - Country average — Current Account: 15.1; St. Dev.: 7.1.
  - Cameroon — Current Account: 1.3; St. Dev.: 1.5.
  - Central African Rep. — Current Account: 2.2; St. Dev.: 2.4.
  - Chad — Current Account: 25.1; St. Dev.: 14.6.
  - Congo, Republic of — Current Account: 17.6; St. Dev.: 8.2.
  - Equatorial Guinea — Current Account: 35.4; St. Dev.: 9.8.
  - Gabon — Current Account: 8.8; St. Dev.: 6.1.
- Coverage implications:
  - For the CEMAC, to cover a two standard deviation current account shock: import coverage should amount to about 7 months of imports for the average country; for the zone as a whole, about 5 months of imports would suffice (reflecting pooling benefits).

### Optimal Reserves — Insurance Calibration (Jeanne-Rancière)
- Calibration parameters (1991–2006 data, Table 3 / Box 2 values as reported):
  - λ (Size of shock): 0.107 / 0.107
  - γ (Output loss): 0.065 / 0.100
  - σ (Risk aversion): 2.000 / 2.000
  - π (Probability of shock - unconditional): 0.100 / 0.150
  - δ (Term premium): 0.015 / 0.015
  - g (Potential output growth): 0.066 / 0.066
  - r (Risk free rate; return on reserves): 0.050 / 0.050
  - OPTIMAL RESERVES-TO-OUTPUT RATIO ρ: 0.172 / 0.207 (assumes output loss, relative prices constant)
  - OPTIMAL RESERVES-TO-OUTPUT RATIO ρ: 0.097 / 0.153 (Olivier-Ranciere: assumes output loss and relative prices increase during shocks)
- Benchmark result:
  - Actual level of reserves, 14.3 percent of GDP at end-2006, is within the range of what would be considered optimal according to the calibration parameters in Table 3.

### Keeping Reserve Coverage Adequate — Projections and Implications
- Role of oil in reserves:
  - Oil represents 80 percent of the region’s exports; oil-related inflows will form the bulk of reserves.
- Treatment of saving funds:
  - Foreign currency counterparts to FFGs should not count as part of pooled monetary reserves because they serve country-specific and long-term purposes and should have different risk-return profiles.
  - BEAC needs to separate FFG accounts from monetary reserves.
- Illustrative projections and scenarios (Figure 13 / Figure 14 summary):
  - Scenario based on WEO balance of payments projections and alternative assumptions for share of oil revenues saved under FFGs.
  - Saving about a quarter of overall projected oil inflows would be consistent with maintaining through 2012 the reserve coverage prevailing at end-2006.
  - This compares with under 3 percent of oil revenues saved into FFGs at end-2006.
  - Simulations suggest FFG savings would be equivalent to 0 to 3 months of imports under different assumptions; savings fade over time reflecting temporary nature of oil revenues.
  - Figure 14 (FFGs in months of imports, deviation from baseline, 2006-50) scenarios labeled: No FFG savings; 40 percent; 10 percent; 25 percent.
- Conditions for tapping country-owned funds:
  - BEAC and member countries could agree on conditions under which the bank may tap longer-term savings to make up shortfalls in reserve accumulation.
  - The proportion of savings remaining under monetary authority control would depend on specific withdrawal conditions for short-term use from country-owned funds placed under BEAC control.

### Managing Foreign Assets and Investment Portfolio Design
- BEAC responsibilities and design issues:
  - Need to establish a strategic allocation of assets (SAA) for which BEAC assumes management responsibility in close collaboration with CEMAC countries, consistent with governments’ choices and founding principles of the Franc Zone.
  - Consider feasibility of adopting a structure for the investment portfolio akin to an Oil Fund, managed separately from the liquidity portfolio.
  - Consult with governments on a legal structure conducive to clear separation between the liquidity and investment portfolios in terms of governance, operational management, and risks.
  - Agree on implementation of the solidarity principle if BEAC international reserves fall below the desired level.
- Strategic Asset Allocation (Box 3):
  - SAA components: (i) determine portfolio size and return targets if reserves permit national savings; (ii) define investment horizons — few months for liquidity portfolio, several years for investment portfolio; (iii) define a budget for risk and undesirable returns.
  - Implementation requires defining a strategic benchmark tailored to reserve currency composition and asset exposures; distinguish strategic allocation from tactical allocation.

### Conclusions and Issues Going Forward
- Core conclusion: Management of oil booms would benefit from improvements in the regional reserve management framework.
- Key areas to address:
  - Determining appropriate level of government savings in light of monetary-fiscal coordination needs.
  - Distinguishing between monetary reserves and savings.
  - Providing guidance on foreign reserves adequacy targets.
  - Improving BEAC reserve management practices.
  - Providing the right incentives to save oil wealth, including incentives for repatriation of export receipts.
- Status and implications of current foreign assets:
  - Current level of foreign assets in the CEMAC appears sufficient for balance of payment needs, bringing to the forefront how to preserve reserve adequacy while saving oil income.
  - There is some scope for increasing country savings while preserving reserve coverage over the medium-term, conditional on an appropriate asset management strategy.
  - In the absence of such a strategy, incentives underlying saving-spending decisions at the country level would be distorted.
  - An effective strategy is needed to provide incentives for repatriating to the BEAC all foreign exchange revenues and to adopt clear, comprehensive, and transparent investment and risk management.

*Source: IMF staff chapter "1. Comparisons of International Reserves across Regions, 1995–2006" and related sections from the supplied PDF content.*

### 1. Comparisons of International Reserves across Regions, 1995–2006 ..................................14

### 1. Comparisons of International Reserves across Regions, 1995–2006

### Overview
- The chapter examines macroeconomic challenges from large oil-related inflows in the Central African Economic and Monetary Community (CEMAC).
- Key regional constraints on policy choices arise from:
  - The need to coordinate national fiscal policies to keep the currency stable vis-à-vis the euro.
  - A requirement to repatriate and pool foreign assets at the Central Bank (BEAC), constraining savings choices.
- The regional fiscal coordination and reserve management framework has become less relevant as oil surpluses rendered fiscal convergence criteria not binding and provided limited guidance for coordinated fiscal responses or long-term savings mechanisms.
- The BEAC reformed government deposit remuneration and introduced a grid of deposit remuneration in 2006.
- Suggested policy direction: preserve reserve pooling while enabling creation of savings funds remunerated by market-linked returns, subject to maintaining reserve adequacy.

### Anatomy of the Oil Inflows (1995–2006)
- Total external oil inflows to CEMAC: 25 billion US$ dollars in 2006.
- Additional oil receipts in 2003-2006 were higher by some 10 percent of regional GDP than inflows in 1999-2002.
- Country-level dynamics:
  - CAR is not an oil producer; Cameroon experienced a decline in oil production that more than offset price rises.
  - Chad, Congo, Equatorial Guinea, and Gabon substantially increased oil exports.
  - Chad moved from large negative oil balances before 2003 to surpluses thereafter.
  - Congo, Gabon, and Equatorial Guinea saw gradual increases from previously steady net oil exports.
- Drivers of increased inflows: higher world oil prices and significantly increased production in some countries (notably Chad and Equatorial Guinea).
- Government oil revenues:
  - Oil revenues surged to 20 percent of GDP for CEMAC by end-2006.
  - This is an increase of some 10 percentage points relative to the 1999–2002 average.
  - On average, ratio of government oil revenue to non-oil GDP rose from 14 percent in 1999-2002 to 23 percent in 2003-2006.
- Fiscal and absorption responses:
  - Non-oil fiscal deficits were stable at about 14 percent of GDP on average.
  - On average, some 40 percent of oil exports accrued to governments in 2003-2006.
  - In production-sharing arrangements, government share is lower: about 10 percent in Chad versus 60 percent in Cameroon.
  - Oil inflows relative to non-oil GDP rose on average from 40 percent in 1999-2002 to 61 percent in 2003-2006.
  - Non-oil current account deficits deteriorated from 46 percent of non-oil GDP to 62 percent (on average for the group experiencing deterioration).
  - Country differences in absorption: Chad absorbed about two-thirds of inflows; Equatorial Guinea absorbed about half; Congo did not absorb and in fact improved its non-oil current account; Gabon allowed partial absorption of over half of inflows.

### Current Reserve Management Framework and BEAC Operations
- Monetary cooperation agreements with France:
  - Fixed parity against the euro; full convertibility of CFA francs guaranteed by the French Treasury.
  - All export earnings must be repatriated; a minimum of 65 percent of foreign exchange earnings must be deposited in the operations account with the French Treasury; remainder can be invested elsewhere per BEAC reserve investment rules.
  - BEAC agreed to gradually lower share held with the French Treasury from 65 percent to 60 percent on July 1st 2007, 55 percent on July 1st 2008 and 50 percent on July 1st 2009.
  - As of end-2006, BEAC managed less than 10 percent of its reserves itself.
  - Rate of return on BEAC’s French Treasury Account: 100 basis points more than the ECB policy rate.
- Reserves and prudential limits:
  - BEAC reserves bolstered to about 9 billion U.S. dollars.
  - Reserves are more than 100 percent of base money and far above the 20 percent coverage requirement set out in BEAC statutes.
  - Regulatory floors and limits include:
    - Minimum level of net foreign assets equivalent to at least 20 percent of sight liabilities.
    - Limit credit to governments by the BEAC to 20 percent of tax revenues in the previous year.
    - A decline in reserve coverage to less than 20 percent of sight liabilities for three consecutive months triggers emergency measures; if the operations account as a whole is overdrawn for 30 days, refinancing scope is reduced.
- BEAC deposit remuneration and new instruments:
  - Since 2006 BEAC has offered CFA-denominated Funds for Future Generations (FFGs) and Oil Stabilization Funds (OSFs); usage remains low to date.
  - Interest rate linkage: BEAC links FFG/OSF rates to BEAC earnings on its French Treasury operations account (ECB policy rate plus 100 basis points—4.75 percent as of April 2007). Total return also depends on BEAC realized profits.
  - After July 1, 2007, long-term deposits will no longer be included in the pool from which the share of reserves going to the operations account is calculated.
- BEAC profit distribution (summary):
  - BEAC profits net of operating costs are distributed after provisions: 15 percent equally to all members; 15 percent according to each member’s share in currency in circulation; and 70 percent according to each member’s relative contribution to central bank profits.

### BEAC Government Deposit Remuneration (selected rates from Box 1 and BEAC data)
- Conventional deposits (one-month minimum maturity):
  - Remuneration for countries with outstanding advances from BEAC: 0.5 percent.
  - Remuneration for other countries: 2.8 percent.
- Fiscal Revenue Stabilization Mechanisms (six-month minimum maturity):
  - Interest rate as of June 2007: 3.1 percent, subject to a 30 percent reduction for withdrawals before maturity.
- Fund for Future Generations (minimum maturity of five years):
  - Interest rate as of June 2007: 3.3 percent, subject to retroactive reduction for withdrawals before maturity.
- Time series snapshots (BEAC reported):
  - Regular Government Deposits: Apr. 06 = 1.4; Jun. 06 = 1.7; Aug. 06 = 2.4; Oct. 06 = 2.6; Dec. 06 = 2.7; Mar. 07 = 2.8.
  - Oil Stabilization Funds: Apr. 06 = 1.7; Jun. 06 = 2.0; Aug. 06 = 2.7; Oct. 06 = 2.9; Dec. 06 = 3.0; Mar. 07 = 3.1.
  - Funds for Future Generations: Apr. 06 = 1.9; Jun. 06 = 2.2; Aug. 06 = 2.9; Oct. 06 = 3.1; Dec. 06 = 3.2; Mar. 07 = 3.3.
  - Memorandum: Interest on the Operations Account: Apr. 06 = 3.5; Jun. 06 = 3.8; Aug. 06 = 4.0; Oct. 06 = 4.3; Dec. 06 = 4.5; Mar. 07 = 4.8.
- BEAC auction and yield indicators charted against the ECB policy rate for Jan-05 to Jan-07 (BEAC data).

### Policy Implications: Oil Savings and Reserve Management
- Primary regional priority: ensure reserve adequacy while allowing countries to save oil income beyond levels needed for balance of payments.
- Optimal saving profiles are country-specific and depend on:
  - Initial oil endowment.
  - Stage in the oil production cycle.
  - Development needs and absorption capacities.
- Regional-level considerations emphasize:
  - Maintaining adequate reserves to support the fixed parity and convertibility arrangements.
  - Reforming reserve management to permit a larger role for savings funds (FFGs and OSFs) with market-linked remuneration while preserving pool-based reserve adequacy.
- Operational constraints and recommended changes:
  - Preserve pooling of reserves for monetary stability and transparency of oil receipts.
  - Allow counterpart foreign assets of long-term government deposits to be excluded from the operations account (consistent with the Convention de Compte d'Operations exclusion for deposits over one year).
  - Improve the regional coordination framework to provide guidance for coordinated, sustainable fiscal policies and long-term fiscal savings.

### Concluding observations and forward-looking challenges
- Management of additional oil inflows will require careful investment and use of oil-related savings.
- The regional framework should be adapted to balance national savings choices with collective requirements for reserve adequacy and monetary stability.
- The BEAC’s reforms (deposit remuneration grid, provision of FFGs and OSFs, and planned reduction in share of reserves held with the French Treasury) are steps toward addressing these challenges, but usage and operational rules need further refinement.

*Source: IMF staff chapter "1. Comparisons of International Reserves across Regions, 1995–2006" from the supplied PDF content.*

### 18.      While the existing reserve policy and management framework has many positive

### _wp07243 - 18.      While the existing reserve policy and management framework has many positive

### Challenges in the existing reserve policy and management framework
- Determining the level of government savings needed for coordinating monetary and fiscal policy:
  - BEAC’s regional monetary program calibrates bank refinancing taking into account each country’s public finances and economic forecasts.
  - Fiscal convergence criterion requiring a zero-basic balance has lost much of its significance in the context of fiscal surpluses.
  - The limit on Central Bank credit to the government (“avances statutaires”) of 20 percent of fiscal revenue in the previous year has similarly lost significance.
- Distinguishing between monetary reserves and fiscal savings:
  - BEAC manages the FFGs and OSFs jointly with its pool of foreign exchange.
  - Alternative: split foreign assets into a liquidity portfolio (balance of payment purposes) and an investment portfolio (longer-term savings), with BEAC oversight and country consultation on investment strategies.
  - Change is more pressing given exclusion of long-term deposits from the pool on which the share of reserves going to the operations account is calculated, effective July 1, 2007.
- Providing guidance on the foreign reserves target:
  - BEAC forecasts foreign exchange cover in light of members’ balance of payments but has not established a framework to assess a desirable target for foreign exchange reserves.
  - BEAC should define criteria for assessing necessary and desirable reserves, including weight to: credibility of the exchange rate regime, short term debt considerations, potential liberalization of limits on banks’ open positions, and safeguarding against adverse oil price and other terms of trade shocks.
- Improving BEAC’s reserve management practices:
  - BEAC has traditionally kept a higher-than-required percentage of reserves in the operations account.
  - Lowering of the share of foreign exchange reserves to be held with the French Treasury from 65 percent in early 2007 to 50 percent in 2009 allows BEAC to manage a larger share of reserves directly or through external managers.
  - BEAC can make deposits above that limit but at a rate 100 basis points below the remuneration offered on the Operations Account.
  - Increases in assets managed by BEAC should aim at keeping operational and financial risks low.
- Providing the right incentives to save oil wealth:
  - Growing fiscal surpluses prompted review of financial arrangements between BEAC and CEMAC governments to make deposits at BEAC more attractive.
  - Existing remuneration rule safeguarded BEAC profitability, but member countries viewed remuneration as too low: yields on 5-year government bonds in the euro area were 4 percent as of April 2007 compared to FFG’s rates of 3.3 percent at the BEAC.
  - Reports of evasion of repatriation requirement for export proceeds suggest weak incentives to channel all export receipts through BEAC.

### Managing reserves: principles and required actions
- Reserve management aligned with an oil savings framework requires:
  - A clear distinction between monetary reserves and other saving funds.
  - A mechanism to keep reserve coverage adequate.
  - Sound asset management strategies.
- Monetary reserves: invest with a view to safety and liquidity.
- Other funds (e.g., FFGs): invest in longer-term instruments to earn higher returns and provide incentives to save.
- Implementing the framework requires action on three fronts:
  - Assessing reserve adequacy.
  - Keeping reserve coverage adequate.
  - Managing foreign assets.

### Assessing reserve adequacy — findings and indicators
- Adequacy of reserves must be viewed in broader macroeconomic policy context; reserve indicators are indicative rather than definitive.
- Traditional measures considered:
  - Gross official reserves in months of imports (current account–based):
    - At end-2006, reserves covered 5.5 months of imports.
  - Capital account–based measures:
    - At end-2006, reserves covered over 5 times short-term debt, 2 times reserve money, and 100 percent of broad money.
- Literature notes many fundamentals beyond reserves can amplify shock impacts: risky short-term financing, maturity/currency/interest-rate mismatches, high leverage, institutional safeguards, availability of credit lines, value of foreign guarantees.

### Comparisons and historical context
- Reserve levels today for CEMAC far exceed those before the 1994 devaluation and for 1994–2002; they are also higher than those of other monetary unions (see Table 1 and Figure 11 in source).
- Past experience provides limited guidance for future adequate reserve levels due to structural changes affecting balance of payments flows and diverse vulnerabilities.

### Thresholds for reserve cover (currency and capital account crises literature)
- IMF Board paper defines thresholds by minimizing missed crises and false alarms; indicator of choice: ratio of reserves to short-term debt, or short-term debt plus current account.
- Figures indicate current CEMAC reserve cover indicators (with respect to short-term debt and short-term debt plus the current account balance) are above relevant thresholds for the first time in many years.

### Likelihood of shocks and implied reserve needs
- External shocks (especially current account/terms of trade shocks) are major threat to macro stability.
- Table 2: standard deviation of the current account as share of GDP (1991–2006) and reserve coverage needed for a two-standard deviation shock:
  - CEMAC (Average) — Current Account: 9.2; St. Dev.: 5.2; Implied reserve need: (blank in source table cells but text states) for the zone as a whole about 5 months of imports.
  - Country average — Current Account: 15.1; St. Dev.: 7.1.
  - Cameroon — Current Account: 1.3; St. Dev.: 1.5.
  - Central African Rep. — Current Account: 2.2; St. Dev.: 2.4.
  - Chad — Current Account: 25.1; St. Dev.: 14.6.
  - Congo, Republic of — Current Account: 17.6; St. Dev.: 8.2.
  - Equatorial Guinea — Current Account: 35.4; St. Dev.: 9.8.
  - Gabon — Current Account: 8.8; St. Dev.: 6.1.
- For the CEMAC, to cover a two standard deviation current account shock:
  - Import coverage should amount to about 7 months of imports for the average country.
  - For the zone as a whole, about 5 months coverage would suffice (reflecting pooling benefits and lower aggregate shock propensity).

### Optimal level of reserves: insurance approach (Jeanne-Rancière calibration)
- Reserves as insurance: optimal level depends on vulnerability to crisis, magnitude of likely crisis, and opportunity cost of holding reserves.
- Calibration assumptions (1991–2006 data):
  - Size of shock estimated to replicate largest yearly increase in the current account for CEMAC during period.
  - Cumulative output loss assumed to range between 6.5 percent and 10 percent in the year of the shock and the year following.
  - Probability of a shock set between 10 and 15 percent.
- Benchmark calibration result:
  - Actual level of reserves, 14.3 percent of GDP at end-2006, is within the range of what would be considered optimal according to the parameters in Table 3.
- Box 2 and Table 3 parameter values (as reported):
  - λ (Size of shock): 0.107 / 0.107
  - γ (Output loss): 0.065 / 0.100
  - σ (Risk aversion): 2.000 / 2.000
  - π (Probability of shock - unconditional): 0.100 / 0.150
  - δ (Term premium): 0.015 / 0.015
  - g (Potential output growth): 0.066 / 0.066
  - r (Risk free rate; return on reserves): 0.050 / 0.050
  - OPTIMAL RESERVES-TO-OUTPUT RATIO ρ: 0.172 / 0.207 (assumes output loss, relative prices constant)
  - OPTIMAL RESERVES-TO-OUTPUT RATIO ρ: 0.097 / 0.153 (Olivier-Ranciere: assumes output loss and relative prices increase during shocks)

### Keeping reserve coverage adequate — projections and implications
- Oil represents 80 percent of the region’s exports; oil-related inflows will form the bulk of reserves.
- Foreign currency counterparts to saving funds (FFGs) should not count as part of pooled monetary reserves because they serve country-specific and long-term purposes and should have different risk-return profiles.
- BEAC needs to separate FFG accounts from monetary reserves.
- Size of country-owned savings that can be accommodated while maintaining adequate monetary reserves depends on:
  - Baseline profile of reserves accumulation.
  - Projected size of oil reserves.
  - Projected stream of oil inflows.
  - Continuous BEAC monitoring and incorporation of medium-term balance of payments forecasts, including projected oil inflows, into monetary programming.
- Illustrative projections (Figure 13):
  - Scenario based on WEO balance of payments projections and alternative assumptions for share of oil revenues saved under FFGs.
  - Saving about a quarter of overall projected oil inflows would be consistent with maintaining through 2012 the reserve coverage prevailing at end-2006.
  - This compares with under 3 percent of oil revenues saved into FFGs at end-2006.
  - Simulations suggest FFG savings would be equivalent to 0 to 3 months of imports under different assumptions; savings fade over time reflecting temporary nature of oil revenues.
  - There appears to be scope for increasing country-owned savings for the region as a whole consistent with preserving reserve coverage over the medium term.
- Conditions for tapping country-owned funds:
  - BEAC and member countries could agree on conditions under which the bank may tap longer-term savings to make up shortfalls in reserve accumulation.
  - The proportion of savings remaining under monetary authority control would depend on specific conditions for withdrawal for short-term use from country-owned funds placed under BEAC control.
  - Setting such withdrawal conditions is an important consideration affecting levels of country savings other than contributions to the common reserve pool.

### Managing foreign assets
- (Section heading present in source; detailed content beyond the heading not included in the supplied excerpt.)

*Source: IMF staff analysis as presented in the supplied content.*

### 33.      The accumulation of foreign assets beyond the level considered sufficient for

### 33.      The accumulation of foreign assets beyond the level considered sufficient for 

### Investment portfolio design and BEAC responsibilities
- Current arrangements on the operations account with France allow the BEAC to tap into longer term savings of member countries and countries' foreign assets held abroad to make up for reserves shortfall.
- Issues the BEAC must address when designing and managing an investment portfolio for longer-term savings:
  - The need to establish a strategic allocation of assets (SAA) for which BEAC assumes management responsibility in close collaboration with CEMAC countries, in line with governments’ choices and consistent with the founding principles of the Franc Zone (Box 3).
  - The need to consider the feasibility of adopting a structure for the investment portfolio that would be akin to an Oil Fund, managed separately from the liquidity portfolio.
  - The need to consult with governments on a legal structure conducive to a clear separation between the liquidity and investment portfolios in terms of governance, operational management, and risks.
  - The need to reach an agreement on the implementation of the solidarity principle in the event BEAC international reserves fall below the desired level.

### Figure 14 — Saving inflows: FFGs in months of imports (deviation from baseline, 2006-50)
- Vertical scale values shown: -3.5, -3.0, -2.5, -2.0, -1.5, -1.0, -0.5, 0.0, 0.5
- Horizontal years shown: 2006, 2010, 2014, 2018, 2022, 2026, 2030, 2034, 2038, 2042, 2046, 2050
- Scenario labels appearing on the figure: No FFG savings; 40 percent; 10 percent; 25 percent
- Source: IMF staff calculations.

### Box 3 — The Concept of Strategic Asset Allocation
- The strategic allocation of assets (SAA) aims to achieve investment objectives for a given investment horizon and risk taking.
- Strategy components:
  - (i) determining the size of the portfolio(s) and setting targets for returns, if the level of reserves is sufficiently high to create national savings;
  - (ii) defining the investment horizon(s); a few months for the liquidity portfolio, several years for the investment portfolio;
  - (iii) defining a budget for risk and what constitutes an undesirable return.
- Implementation requires defining a strategic benchmark, with an optimal risk/return ratio.
- The benchmark is different for each institution and is based on a specific reserve currency composition and exposure to different categories of financial assets.
- Some institutions distinguish the strategic allocation (optimum long-term portfolio) from tactical allocation that exploits trade-offs between different assets to optimize the risk/return ratio.

### Conclusions and issues going forward (paragraphs 34–35)
- Core argument: Management of the oil booms for the CEMAC countries would benefit from improvements in the existing regional reserve management framework.
- The CEMAC’s ambitious institutional reform agenda should allow the issues discussed to be addressed.
- Key areas to be addressed:
  - Determining the appropriate level of government savings in light of the need to coordinate monetary and fiscal policy;
  - Distinguishing between monetary reserves and savings;
  - Providing guidance on the adequacy of the foreign reserves target;
  - Improving BEAC reserve management practices; and,
  - Providing the right incentives to save oil wealth.
- Status and implications of current foreign assets (paragraph 35):
  - The current level of foreign assets in the CEMAC, which seems sufficient for balance of payment needs, brings to the forefront issues of how to preserve reserve adequacy and how to save oil income.
  - Oil-based savings should be compatible with keeping reserves adequate; there is some scope for increasing country savings while preserving reserve coverage over the medium-term.
  - An appropriate asset management strategy is both required and desirable so that country-owned funds can potentially receive large amounts of resources.
  - In the absence of such a strategy, the incentives underlying the saving-spending decision at the country level would be distorted.
  - There must also be an effective strategy to provide incentives for repatriating to the BEAC all foreign exchange revenues; such a strategy could allow BEAC to continue coordinating these funds but would seek to adopt clear, comprehensive, and transparent investment and risk management.

*Source: IMF staff calculations and text from the referenced IMF working paper section.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2007/_wp07243.pdf_