Speech

By Christine Lagarde, Managing Director, International Monetary Fund
Yaoundé, January 8, 2016

As prepared for delivery

Introduction
Mr. Prime Minister,
Ministers of Finance and Economy of CEMAC Member Countries,
President of the CEMAC Commission
Governor of the BEAC,
Representatives of the CEMAC,
Ladies and Gentlemen,

It is a privilege to speak before such a distinguished audience and at such an important moment for CEMAC.

CEMAC is one of the most important regional groupings in Africa. Your countries are virtually the “heart of Africa.” The continent’s fortunes are tightly linked to those of the region.

Over the past few years – and much like the rest of sub-Saharan Africa – the region has seen robust growth and macroeconomic stability. The high tide of oil prices boosted activity and supported a surge in much-needed infrastructure investment. Today that tide has receded, and may stay out for a prolonged period.

At the same time, security related disruptions are taking an additional toll – not only on economic activity and fiscal resources but emotionally as well. Having been in Paris during the November attacks, I know firsthand the sorrow that terrorism can inflict.

Clearly, the prolonged slump in oil prices presents a new reality for CEMAC. So today’s round table on “Low oil prices and the financing of infrastructure” is quite topical. First, it allows us to take stock of progress in infrastructure financing since the March 2014 conference. And second, to identify how to sustain this infrastructure investment in the face of low oil prices and tighter financing. In certain cases, an adjustment in large scale investment plans may be necessary in the short run, to preserve fiscal viability and debt sustainability in the medium term.

Adjustment to this new reality also means tapping new sources of growth within the Community. As the saying goes: “L’union fait la force”. An ambitious reform agenda, focused on diversification and regional integration, is needed more than ever to restore strong growth – and make sure that it is inclusive.

With this in mind, I would like to focus my remarks on three issues:
• First, touch briefly on the outlook for the global economy.
• Second, drill down on the outlook for CEMAC.
• And third, discuss key priorities for stronger, more inclusive growth in CEMAC.
1. The global economy—modest and uneven growth

Let me start with a quick pulse check of the global economy.

The global economy saw a modest and uneven expansion in 2015, estimated at about 3.1 percent. This fragility is expected to persist in 2016, under the weight of three significant transitions.

The first transition is the increased divergence in monetary policy in major advanced economies. Last month, the U.S. Federal Reserve took the first step in raising rates for the first time in nine years. So far, the lift-off went smoothly. It was clearly communicated and priced in by financial markets. The key issue going forward is the pace of normalization. It will certainly be gradual, as the Fed has stressed, and should be based on clear evidence of firmer wage or price pressures.

At the same time, however, vulnerabilities in many emerging economies are rising and their prospects are being reassessed. So “surprises” – including those related to policies in advanced economies – that in normal circumstances would not have a major impact could lead to bouts of financial volatility, especially in emerging and developing economies.

The second transition is unfolding in China—sub-Saharan Africa’s largest trading partner. China is embarking on a historic rebalancing of its growth model, and activity is moderating to more sustainable levels. Nonetheless, this rebalancing is a bumpy process whose effects are being felt worldwide – which reinforces the need for more clarity on policies, especially exchange rate policy. As I underlined several times in the past weeks, this transition will certainly be far from easy, and is also feeding into lower demand for commodities.

The turn in the commodity super cycle is the third transition. It is perhaps the most relevant for your countries.

Oil prices have dropped by close to 70 percent since June 2014 – from a peak of US$120 per barrel to US$32 today. Not surprisingly, this turnaround is making itself felt in this part of Africa: activity is down and fiscal pressures are rising.

Yet the bigger challenge is that – unlike in previous cycles – oil prices this time around are expected to stay low for long. Indeed, futures markets point to only a modest recovery of prices to about US$60 by 2019. Why?

On the supply side, several factors are contributing to the global glut. These include the advent of shale oil, the change in OPEC’s strategic behavior, and a projected increase in Iranian exports.

There are equally important forces on the demand side. The secular decline in oil consumption in the United States and the general weakness in activity, especially in emerging market economies, are exerting downward pressure on oil prices.
2. CEMAC—adjusting to twin shocks and a new global reality

This takes me to my second topic. What do these developments portend for CEMAC and its outlook?

Currently oil represents about 70 percent of CEMAC’s exports and more than a third of its fiscal revenues. So the slump in oil prices poses a big challenge. The good news is that several CEMAC members have used the windfall from oil revenues to remove longstanding impediments in the economy.

For example, Gabon used a large part of windfall to reduce its debt by 50 percent in 2008 and rebuild reserves – from US$10 million in 2001 to US$1.3 billion in 2014. In Chad, the increase in expenditure on education was reflected in a substantial increase in primary school enrolment – from 68 percent in 2000 to near universal enrollment in 2012. And in the Republic of Congo an ambitious National Development Plan was launched to address large social and infrastructure gaps.

These are all important initiatives. Yet the prospect of prolonged low oil prices implies much tighter financing envelopes going forward.

Another shock comes from Boko Haram. Attacks in Cameroon’s extreme north and parts of Chad have disrupted economic activity and necessitated an increase in military spending. These operations crowd out spending in critical areas such as education and health.

The toll on activity of these two shocks has been significant. Growth in CEMAC is estimated to have slowed to about 2 percent in 2015, though outcomes vary widely across members. For instance, Equatorial Guinea experienced a severe contraction, while Cameroon posted robust growth that is projected to carry over to 2016.

At the same time, the sustained implementation of large infrastructure programs has brought fiscal pressures to the fore. The combined fiscal deficit for CEMAC is estimated to have widened to 6.5 percent of regional GDP in 2015, with only a modest improvement projected for this year.

Looking forward, activity in CEMAC is projected to rebound to about 3.5 percent this year. But this outlook is predicated on sound policies that safeguard macroeconomic stability and remove the drag on growth. How can this be achieved?

I am reminded of a Chadian proverb: “If you always walk down the same path, you’ll go where you’ve already been.”

Confronted with this new reality, CEMAC needs to chart a new path for its prosperity.
3. Toward strong and inclusive growth—spend better, collect more, make the region work for you

This takes me to my third topic for today—the policies needed to secure strong and inclusive growth in CEMAC.

With oil prices projected to remain low for long and oil reserves depleting, macroeconomic stability will hinge on smart fiscal policies and determined structural reforms to strengthen the business climate and regional integration. It will require the region to open up to its neighbors and tap into their markets to regain momentum.

I see three priorities: spend better, collect more, and make the region work for you. Let me take each in turn.

First priority—spend better. The right set of complementary infrastructure projects is clearly a pre-requisite for sustainable and inclusive growth.

Yet in an environment of rising fiscal pressures, careful consideration needs to be given to priorities. That may mean scaling back some plans. Selectivity in infrastructure development – based on economic merit and cost efficiency – can help guide this effort.

Equally important is a more judicious approach to external financing. For several members, the window of sustainable external financial support on non-concessional terms is narrowing because of the buildup in commercial debt. Concessional sources of financing should be tapped to ensure that medium-term debt sustainability is preserved.

Turning to the second priority—collect more. Alleviating fiscal pressures also requires better mobilization of domestic resources. As the Central African Republic proverb goes: “A big river is enlarged by its tributaries.” That means determined action on the non-oil revenue base.

The good news is that non-oil revenue in CEMAC improved last year to about 13 percent of regional GDP. Yet there is scope to reach the regional indicative level of 17 percent.

How? By reducing the widespread use of discretionary tax and customs exemptions within the region. These exemptions undermine overall state revenues and weaken governance.

CEMAC members would also benefit from better inter-governmental cooperation and coordination on tax policies. A number of Directives in the tax area have been published by the Commission in the last few years, yet very few have been actually incorporated into national legislation and implemented. So more could be done to improve credibility and commitment.

Domestic resource mobilization should also focus on important international tax issues that affect the extractive revenue tax base. This includes areas such as indirect, offshore transfers of interest on assets located in developing economies. This can be particularly relevant for resource-rich nations, like some CEMAC members, to help avoid base erosion and profit shifting.

More broadly, raising revenues to fund the investments that will be needed to meet the new Sustainable Development Goals, for all IMF members, is at the top of our agenda. We are already engaged with several CEMAC members through technical assistance and training on this issue.

For example, our technical assistance in Chad and the Republic of Congo is focused on enhancing customs revenue administration as a way to expand the non-oil revenue base. And we stand ready to assist on various aspects of domestic revenue mobilization going forward.

How about the third priority—make the region work for you? Of all formal trade conducted by CEMAC countries, less than 5 percent involves intra-CEMAC commerce. There is scope to do more. There are obvious synergies to be reaped from working together.

By leveraging new infrastructure projects, such as the deep-sea port and hydroelectric dams in Cameroon, the boundaries of the Community could expand well beyond its national limits. The big consumer markets in Nigeria and East Africa could be tapped, providing a significant impetus for private sector development and economic diversification.

This requires action on two fronts: the business climate and regional integration.

Let’s start with the business climate. Global experience consistently points to the importance of a vibrant private sector to boost growth and diversification. Competitiveness indicators suggest that CEMAC members have a lot to gain from catching up with their peers.

Our own analysis indicates that 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, and the waiting time for clearing goods is of 40 days for exports and 50 days for imports. Reforms in these areas would yield the highest benefits.

Improvements in the business climate are best achieved if supported by increased regional integration. The existing governance framework needs to become more effective by streamlining the decision-making process. The Community could also benefit from fiscal rules that set regionally consistent frameworks for scaling up investments. The IMF stands ready to help with technical assistance in this area.

Clearly, deeper regional integration will require a collective effort by all members. As the largest, most diversified, and least affected economy in CEMAC, Cameroon is well placed to sustain, and reinforce, the momentum of integration.

Conclusion

Let me conclude. CEMAC members are confronting a new reality. Low oil prices for long necessitate policy adjustment to preserve macroeconomic stability and create new sources of growth. Once again, the IMF can help through policy advice, capacity building and financial support if needed.

So I would like to leave you with one thought, drawing on a proverb from Equatorial Guinea: “If you dream of moving mountains tomorrow, you must start by lifting small stones today.”

There is strength in your diversity and success in your unity. By coming together today, you can harness the dividends from integration and deliver on the region’s promise of greater prosperity for its people tomorrow.

Thank you.