CEMAC: A Stronger Community for Stronger and More Inclusive Growth
IMF News, January 8, 2016
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Bibliographic details
- Authors: Christine Lagarde
- Published: January 8, 2016
Introduction and context
- Speech by Christine Lagarde, Managing Director, International Monetary Fund, Yaoundé, January 8, 2016 (As prepared for delivery).
- Purpose: assess implications of prolonged low oil prices and security shocks for CEMAC; take stock of infrastructure financing since March 2014; identify policies to sustain infrastructure investment while preserving fiscal viability and debt sustainability.
Global economy — modest and uneven growth
- Global expansion in 2015 estimated at about 3.1 percent.
- Three significant transitions shaping 2016 prospects:
- Divergence in monetary policy in major advanced economies; U.S. Federal Reserve raised rates for the first time in nine years with gradual normalization dependent on firmer wage or price pressures.
- China’s historic rebalancing and moderating activity, feeding into lower demand for commodities and requiring clarity on policies, especially exchange rate policy.
- Turn in the commodity super cycle, most relevant to CEMAC:
- Oil prices have dropped by close to 70 percent since June 2014 — from a peak of US$120 per barrel to US$32 today.
- Futures markets point to only a modest recovery of prices to about US$60 by 2019.
- Supply factors: advent of shale oil, change in OPEC’s strategic behavior, projected increase in Iranian exports.
- Demand factors: secular decline in oil consumption in the United States and general weakness in activity, especially in emerging market economies.
CEMAC outlook — adjusting to twin shocks and a new global reality
- Oil dependence and past windfalls:
- Oil represents about 70 percent of CEMAC’s exports and more than a third of its fiscal revenues.
- Examples of past windfall use:
- Gabon reduced its debt by 50 percent in 2008 and rebuilt reserves — from US$10 million in 2001 to US$1.3 billion in 2014.
- Chad increased expenditure on education; primary school enrolment rose from 68 percent in 2000 to near universal enrollment in 2012.
- Republic of Congo launched an ambitious National Development Plan to address social and infrastructure gaps.
- Security shock: Boko Haram attacks in Cameroon’s extreme north and parts of Chad have disrupted activity and increased military spending, crowding out education and health.
- Macroeconomic outcomes and projections:
- Growth in CEMAC estimated to have slowed to about 2 percent in 2015, with wide variation across members (Equatorial Guinea contracted severely; Cameroon posted robust growth projected to carry over to 2016).
- Combined fiscal deficit for CEMAC estimated to have widened to 6.5 percent of regional GDP in 2015, with only a modest improvement projected for this year.
- Activity in CEMAC projected to rebound to about 3.5 percent this year, conditional on sound policies that safeguard macroeconomic stability and remove growth drags.
Priorities for stronger, more inclusive growth — “Spend better, collect more, and make the region work for you”
- Overarching strategy:
- With oil prices expected to remain low for long and oil reserves depleting, prioritize smart fiscal policies and structural reforms to strengthen the business climate and regional integration.
- Open up to neighbors and tap their markets to regain momentum.
- First priority — Spend better:
- Selectivity in infrastructure development; scale back some plans where necessary to preserve fiscal viability and debt sustainability.
- Prioritize projects based on economic merit and cost efficiency.
- Use concessional sources of financing where possible as the window for sustainable non-concessional external support narrows because of the buildup in commercial debt.
- Second priority — Collect more (domestic resource mobilization):
- Non-oil revenue in CEMAC improved last year to about 13 percent of regional GDP; scope to reach the regional indicative level of 17 percent.
- Reduce widespread use of discretionary tax and customs exemptions that undermine revenues and weaken governance.
- Improve inter-governmental cooperation and coordination on tax policies; many Directives in the tax area published by the Commission have not been incorporated into national legislation and implemented.
- Address international tax issues that affect the extractive revenue base, including indirect, offshore transfers of interest on assets located in developing economies to avoid base erosion and profit shifting.
- IMF technical assistance and training examples:
- Technical assistance in Chad and the Republic of Congo focused on enhancing customs revenue administration to expand the non-oil revenue base.
- IMF stands ready to assist on various aspects of domestic revenue mobilization going forward.
- Third priority — Make the region work for you (business climate and regional integration):
- Intra-CEMAC formal trade is less than 5 percent — significant scope to increase internal commerce.
- Leverage new infrastructure (e.g., deep-sea port and hydroelectric dams in Cameroon) to expand regional boundaries and access big consumer markets in Nigeria and East Africa for private sector development and diversification.
- Business climate indicators and bottlenecks:
- Facilitating tax payments and intra-CEMAC trade would significantly improve the business climate.
- On average, it takes 572 hours per year in CEMAC versus 304 in other African countries to pay business taxes.
- Waiting time for clearing goods: 40 days for exports and 50 days for imports.
- Reforms in these areas would yield the highest benefits.
- Governance and institutional reforms:
- Streamline decision-making in the existing governance framework to make it more effective.
- Consider fiscal rules that set regionally consistent frameworks for scaling up investments.
- IMF stands ready to provide technical assistance in these areas.
- Cameroon’s role: as the largest, most diversified, and least affected economy in CEMAC, Cameroon is well placed to sustain and reinforce integration momentum.
Conclusion and IMF role
- Low oil prices for long necessitate policy adjustment to preserve macroeconomic stability and create new sources of growth.
- The IMF can assist through policy advice, capacity building, and financial support if needed.
- Closing thought: “If you dream of moving mountains tomorrow, you must start by lifting small stones today.” Emphasizes strength in diversity and success in unity through deeper integration.
Source: By Christine Lagarde, Managing Director, International Monetary Fund, Yaoundé, January 8, 2016 (As prepared for delivery).