IMF Survey: Central African Republic's Reforms Enter Crucial Phase

IMF News, January 21, 2010

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IMF Survey: Central African Republic's Reforms Enter Crucial Phase

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• Authors: Werner Keller IMF African Department January
• Published: January 21, 2010

Economic health check

• The Central African Republic is one of Africa’s least known and most overlooked countries.
• It is the only nonoil-producing country of the Central African Economic and Monetary Community (CEMAC), landlocked between troubled Sudan, Chad, and the Democratic Republic of Congo.
• The population of less than 5 million—among the world’s poorest—occupies an area one and a quarter times that of France that is endowed with rich natural resources and fertile land.
• Political instability since independence, deficient infrastructure, and underdeveloped human capital are negatively affecting economic performance.
• The country has achieved modest economic growth since open conflict ended in 2004, and income per capita has started to recover after years of decline.

External shocks and macro performance

• A series of domestic and external shocks in 2008 and early 2009 included unstable power supply, surging prices for imports, and low demand and prices for export goods as a result of the global recession.
• Despite these shocks, the government has made good progress with its fiscal program of mobilizing domestic revenues, controlling spending, and clearing arrears.
• The Central African Republic received full debt relief from the IMF and World Bank in June 2009 by reaching the final, completion-point stage of the Heavily Indebted Poor Countries Initiative.
• The country is well on the way to concluding its current Poverty Reduction and Growth Facility program in June 2010—the first time it would successfully conclude a three-year program with the IMF, after two successful Emergency Post-Conflict Assistance programs.
• A modest recovery from last year’s shocks is under way, supported by prudent macroeconomic management policies and structural reforms.

Encouraging results: peace, stability, and public finance

• Establishing peace and security
  • The “inclusive political dialogue” concluded in December 2008 led to some participation in government by the political opposition.
  • The domestic peace process is implemented as part of the disarmament, demobilization, and reintegration program and should open the way for general elections in 2010.
  • Some external financing from the United Nations and CEMAC has been secured; more financial and logistical help from other donors might be required.
  • The government intends to follow up with comprehensive reform of the security sectors, for which financing still has to be identified.
• Maintaining economic stability
  • Real GDP growth is projected to increase from 2 percent in 2009 to 3½ percent in 2010.
  • Inflation is expected to slow to 2¼ percent after peaking at close to 15 percent at end-2008.
  • World demand for the country’s principal exports—wood products and diamonds—declined significantly and may take time to pick up.
  • The current account balance is expected to improve in 2010 as aid flows rise.
  • The tax-to-GDP ratio—still one of the lowest in the world—continues to head upward; insufficient resources, particularly grants, make it hard to implement a poverty reduction strategy.
• Improving public financial management
  • Fiscal performance was broadly kept on track under the current IMF loan program despite recent shocks.
  • The government increased domestic revenue mobilization efforts, controlled spending, and cleared more domestic arrears than initially planned.
  • Fiscal policies allowed for a moderate fiscal stimulus by maintaining spending in the face of lower-than-expected revenues while maintaining prudent fiscal policies given limited resource availability.
  • Fiscal structural reforms have progressed and provide a better basis for further results.

Better access to credit — constraints and policy actions

• Financial intermediation is among the lowest in the world; lack of adequate financial institutions is a major constraint for private sector development.
• Bank lending activities are constrained by legal and regulatory weaknesses and the short-term structure of deposits.
• Bank credit is mainly channeled to short-term operations and is seldom offered to small and medium-size enterprises; bank loan portfolios are of poor quality.
• Large public deficit financing operations have crowded out private sector borrowing.
• Local banks’ contributions to growth could be boosted by action to:
  • Improve the legal and court systems to guarantee property ownership and speed up resolution of business conflicts and enforcement of collateral
  • Strengthen bank capital and provisioning for bad loans and continue reducing government demand for bank credit
  • Foster payment of taxes and government outlays through the banking system
  • Pay back loans to the government, as envisaged under the government’s IMF-supported program
  • Adopt a national strategy for microfinance development and establish licensing of certified public accountants

Donor relations, infrastructure, and investment climate

• Bilateral and multilateral donors excluding the IMF provide only about 4½ percent of GDP—substantially less than for other post-conflict and low-income countries.
• More efforts by the government are needed to improve communication and cooperation to foster relations of mutual confidence and support.
• Donors are increasingly interested in contributing more actively to political and economic consolidation, particularly to the strengthening of public management capacity; major multi-year programs of coordinated technical assistance are being explored.
• Local unrest, decaying infrastructure, deficient economic integration, a weak legal system, and governance problems hamper social development and private investment and could be serious long-term obstacles to growth.
• To address these constraints and unlock economic potential, the government must rely on external partners and pursue consistent and transparent sectoral policies over the long term.
• Increasing public investment, strengthening project and policy implementation capacity, and investing in human capital need further attention.

New IMF-backed loan program and fiscal specifics

• The authorities are committed to sustaining reform momentum; the IMF stands ready to provide more economic policy advice and technical assistance.
• The authorities have expressed interest in a successor arrangement to the current loan program.
• The 2010 fiscal program is designed to support domestic demand and consolidate recovery gains.
  • Domestic revenue is expected to rise to 10.6 percent of GDP, implying an additional collection effort of about 0.3 percentage points of GDP.
  • Expenditure is projected to increase moderately, mainly as a result of spending on the peace process and capital expenditure.
  • This will increase the primary domestic deficit to 1.2 percent of GDP, up from 0.4 percent in 2009.
• Structural fiscal reforms remain targeted to supporting the macrofiscal framework through:
  • Better public financial management
  • Reduced customs exemptions
  • Streamlined procedures to refund value-added tax
  • Strengthened tax audits
• Over the medium term, policy reform should focus on measures to accelerate economic growth and strengthen competitiveness while keeping debt sustainable:
  • Targeted alleviation of infrastructure bottlenecks and security concerns
  • More private investment and easier private sector access to credit
  • Greater efforts to mobilize domestic revenues, prudent debt management, and increased donor support on concessional terms to meet social development and security needs

IMF Survey: Central African Republic's Reforms Enter Crucial Phase — By Werner Keller, IMF African Department, January 21, 2010

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References

• https://www.imf.org/en/News/country-focus
• PRESS CENTER
• IMF Country Focus
• Press release
• Central African Republic and IMF
• Africa’s recovery signs
• Africa’s new growth engines
• Africa regional outlook
• (CEMAC)
• Heavily Indebted Poor Countries Initiative
• Emergency Post-Conflict Assistance
• https://www.imf.org/en/home