IMF Executive Board 2018 annual discussions on CEMAC countries’ common policies
On December 17, 2018, the International Monetary Fund Executive Board concluded the annual discussions with the Central African Economic and Monetary Community (CEMAC) on Common Policies of Member Countries and Common Policies in Support of Member Countries Reform Programs.
CEMAC’s economic situation remains challenging. Economic growth in the region, which declined substantially after the oil price slump of 2014, remains sluggish and has not yet picked up as expected. Non-oil growth is projected to decline in 2018 to 1.0 percent (from 2.6 percent in 2017). A larger-than-expected rebound in oil GDP (+7.3 percent) would nevertheless contribute to an increase in overall growth, from 1.0 percent in 2017 to 2.2 percent in 2018. While increasing, inflation would remain low, at about 2 percent at end-year. The situation of the banking sector remains difficult, owing to large government arrears. Non-performing loans continued to rise to 17 percent at the end of September 2018, while several banks continue to fail to meet certain prudential ratios.
The Bank of Central African States’ (BEAC) net foreign assets were lower than expected at end-September and are expected to remain so until the end of the year, despite rising oil prices and the efforts of BEAC and the Central African Banking Commission (COBAC) to strengthen the enforcement of foreign exchange regulations. This largely owes to delays in the adoption of IMF-supported programs and of the disbursement of the related external budget support with Congo and Equatorial Guinea. At the same time, the budgetary efforts of countries with IMF-supported programs are broadly in line with expectations. For the region as a whole, the non-oil deficit at the end of 2018 should be in line with expectations, while the overall balance would exceed expectations on account of higher oil revenues.
The medium-term outlook continues to see a gradual improvement in the economic and financial situation. Reforms to improve the business environment and governance and strengthen the financial sector, along with a lower drag from fiscal adjustment and the repayment of government arrears would contribute to the gradual recovery of non-oil growth, to 4½ percent by 2021. The overall fiscal balance (excluding grants) would be close to balance from 2019 onward, reflecting a further reduction in the non-oil primary fiscal deficit. Public debt would decline significantly, from almost 50 percent of GDP at end-2018 to less than 44 percent of GDP by end-2020.
A further decline in the current account deficit to around 1½ percent of GDP in 2018-20 (compared to 4 percent of GDP in 2017) would contribute to a gradual accumulation of reserves, with reserve coverage reaching almost 4 months of imports by 2020. This outlook is predicated on the full implementation of policy commitments by CEMAC member states and regional institutions and is subject to substantial downside risks, including: further delays in the approval of financial arrangements with the Republic of Congo and Equatorial Guinea; lower oil prices; and tighter global financial conditions.
Selected Issues paper
A regional approach to enhancing governance and reducing the potential for corruption
Good governance, including the control of systemic corruption, is vital for macroeconomic stability as well as sustainable and inclusive economic growth. IMF research shows that weak governance and systemic corruption is associated with lower growth and investment and higher inequality. Investing in good governance and reducing corruption is a largely budgetary-neutral reform to empower the private sector and expand opportunities for all. It is a step of critical importance in the CEMAC, part of the overall objective to address the root cause of the crisis it has faced following the decline in commodity prices in 2014: a largely undiversified economy over-dependent on oil, and still untapped internal regional market.
The CEMAC region was severely affected by a sharp decline in commodity prices after 2014, notably the reduction in oil prices. Facing a continue and rapid decline in regional reserves, the authorities decided at end-2016 to embark on a coordinated and sizeable fiscal adjustment effort by member countries, supported by the IMF and other partners and backed by adequate policies at the regional level in the monetary and financial sectors. The short-term objective is to restore external and domestic stability. In the medium term, addressing the root cause of the crisis would require reducing excessive dependency on oil and lay the foundation for a broader economic base. To unlock this potential, it will be key to address the constraints that affect governance, in particular in the management of public resources, and which feed into a strong perception of corruption.
Scope of Governance Issues in CEMAC
The choice of these themes reflects key features of the CEMAC economic structure. Exports by the extractive sectors represent a dominant part of the regional economic basis and constitute the main source of foreign exchange. Consequently, good management in this sector, where the state is present directly (through its state-owned enterprises) and indirectly (through related tax- collection), is key to ensure good governance at large. Second, the role of the public sector is still a dominant source of aggregate demand, and strong governance in managing public funds directly impacts governance in the CEMAC. Lastly, CEMAC banks play a crucial role in avoiding safe havens for the proceeds of corruption, thereby directly contributing to allocating financial resources to productive ends.
These themes are also directly related to CEMAC’s own regional governance.
First, the CEMAC regulatory framework for public financial management (PFM) provides strong standards for transparency and accountability in the management of public resources. Weaknesses in this area can create the potential for resources not being collected and used according to the intended purposes. Work in this area is mainly led by the CEMAC Commission.
Second, a strong AML/CFT regime is a crucial tool in addressing corruption. Because the proceeds of corruption are often concealed to avoid detection or confiscation, an effective AML/CFT framework can contribute to both prosecuting and deterring corruption. The diversion of resources away from economically and socially productive uses can also negatively undermine the stability of a country’s financial system or its broader economy. Work in this area is mainly led by the COBAC.
Finally, the oil sector is central to the CEMAC, also given the strong presence of the state, through its SOEs, into profit sharing agreements signed with private entities. Such agreements, in turn, should be consistent with the regulatory framework set at the regional level in the area of foreign exchange. As such, the good management of these resources is essential to ensuring external stability to the monetary arrangement. Work in this area is a shared responsibility of member countries, primarily, the CEMAC Commission (in ensuring proper implementation of adequate tax codes and tracking funds which are to be covered by state’s budget), and the BEAC (in fully understanding the link between export commodity prices and volumes and accumulation of foreign exchange).
Conclusion: Enhancing Growth Through Better Governance
The analysis included in this note has underscored that there is great potential to enhance governance in the CEMAC and make this an engine for sustained and inclusive growth. There are two common themes to the set of recommendations included here.
First, there needs to be a “transparency shock” in the regular production and sharing of basic documentation related to public resource management. This step is an absolute priority, well inscribed in CEMAC’s own institutional set-up, in particular the key directive on transparency and governance.
Second, and relatedly, there needs to be a continuous focus to turn the CEMAC regional framework, which is overall well designed, into consistent procedures and work practices within public institutions.
There are specific lines of actions. First, there need to be an ongoing effort to translate the CEMAC directives related to PFM into work practices that are fully consistent with the premises and vision of the very directives. This translates into giving absolute priority to ensuring more transparency, full disclosures, ongoing reconciliation, and internal and external audit of transactions of the public sector. Second, efforts to enhance the AML/CFT framework, reflecting the CEMAC’s directive in this area, need to deepen. Finally, the full system of check and balances already provided for by the CEMAC legislation institutional design needs to be forcefully implemented in the extractive sector. This covers, critically, the full disclosure and regular reconciliation of contracts and transactions in the oil sector. It also covers the rigorous implementation of a stronger networks of CEMAC customs, with better governance and more capacity (in particular, in complex sectors such as oil).
The CEMAC regional institutions will have to play a central role to lead progress in these areas, and support member countries’ own efforts. Because such actions result in giving a coherent framework to actions conducted at the country level, the synergic dimension can spur a virtuous circle, key to earn the benefit of an economic and monetary union. The success of the regional strategy that CEMAC member countries and regional institutions are implementing to exit the severe crisis they are facing depends critically on creating the conditions for laying the ground for a diversified economy, within a well-functioning regional market and an environment that provides opportunities for all and where public resources are geared to most productive use. The single most important element in this effort is good governance of public resources and reducing the perception of wide-spread corruption. The CEMAC regional institutions can play an important role in achieving this, in support of member countries’ own effort