ECONOMIC HEALTH CHECK
Central African Republic's Reforms Enter Crucial Phase
By Werner Keller
IMF African Department
January 21, 2010
- Central African Republic received full IMF, World Bank debt relief in June 2009
- Peace process, fair elections in 2010 should lead to greater donor involvement
- New IMF-backed program should help speed reform, support economic growth
Against the odds, the Central African Republic is making remarkable progress toward peace, economic development, and structural reform.
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.
It also struggles to escape the legacy of years of civil strife and to overcome debilitating structural weaknesses. 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. Still, the country has been able to achieve modest economic growth since open conflict ended in 2004, and income per capita has started to recover after years of decline (see chart).
A series of domestic and external shocks in 2008 and early 2009—unstable power supply, surging prices for imports, and then low demand and prices for export goods as a result of the global recession—represented new potential obstacles to maintaining growth, controlling inflation, and supporting the current account.
Despite these shocks the government has made good progress with its fiscal program of mobilizing domestic revenues, controlling spending, and clearing arrears, the IMF said in its regular review of the country’s economy. 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 also well on the way to concluding its current Poverty Reduction and Growth Facility program in June 2010. This would be the first time in the Central African Republic’s history that it has successfully concluded a three-year program with the IMF, after two successful Emergency Post-Conflict Assistance programs.
A modest recovery from last year’s shocks is already under way, helped by the continued implementation of prudent macroeconomic management policies and necessary structural reforms. The government intends to further strengthen the credibility of public financial management, step up donor relations, and improve public infrastructure and the private sector investment climate.
The government is achieving encouraging results from implementation of its most urgent priorities.
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, but more financial and logistical help from other donors might be required to ensure a smooth outcome. The government intends to follow up with comprehensive reform of the security sectors, for which financing still has to be identified.
Maintaining economic stability. The Central African Republic is slowly recovering from the global economic crisis. Real GDP growth is projected to increase from 2 percent in 2009 to 3½ percent in 2010, and 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, but 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. However, insufficient resources, particularly grants, make it hard to implement a poverty reduction strategy.
Improving public financial management. Despite recent shocks, fiscal performance was broadly kept on track under the current IMF loan program. The government increased domestic revenue mobilization efforts and controlled spending, and it cleared more domestic arrears than initially planned. In the context of the global crisis, fiscal policies allowed for a moderate fiscal stimulus by maintaining spending in the face of lower-than-expected revenues, all while maintaining prudent fiscal policies given limited resource availability. Fiscal structural reforms have progressed and provide a better basis for further results in the future.
Better access to credit
The lack of adequate financial institutions in the Central African Republic is a major constraint for private sector development. Financial intermediation is among the lowest in the world. 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; and
■ Adopt a national strategy for microfinance development and establish licensing of certified public accountants.
Fostering donor relations. 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 currently being explored.
Building infrastructure and improving the investment climate. 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 them and unlock the country’s economic potential, the government must rely on external partners and pursue consistent and transparent sectoral policies over the long term. A credible and encouraging beginning has been made in consolidating security and building better performing institutions. At the same time, increasing public investment, strengthening project and policy implementation capacity, and investing in human capital need further attention.
New loan program
In the face of these difficulties, the authorities are committed to sustaining reform momentum. In the difficult but decisive period ahead, the IMF stands ready to provide more economic policy advice and technical assistance to help the economic reform program. 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 reform measures in the fiscal area remain targeted to supporting the macrofiscal framework through better public financial management, reduced customs exemptions, streamlined procedures to refund value-added tax, and 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 (see box) are vital to sustain growth prospects. Meeting the social development and security needs will require greater efforts to mobilize domestic revenues, prudent debt management, and increased donor support on concessional terms.