IMF Executive Board Concludes Annual Discussions on CEMAC Countries’ Common Policies
On October 23, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the annual discussions on Common Policies of Member Countries with the Central African Economic and Monetary Community (CEMAC).
The CEMAC’s economic performance in 2012 continued to be strong. Supported by high oil revenues, most CEMAC countries embarked in ambitious public investment plans in the last few years to remove infrastructure bottlenecks. A further increase in public spending in several member countries and buoyant domestic consumption contributed to a 6.5 percent growth in non-oil sectors in 2012, while oil production declined slightly. Overall, region-wide real GDP growth reached 5.5 percent. Anchored by the peg of the CFA Franc to the Euro, inflation remained moderate, at around 3 percent on average for the region, but with some differences across countries. In 2013, economic activity is expected to remain solid, although a decline in oil production, moderation in public investment and the political crisis in Central African Republic will weigh on GDP growth. Inflation should remain subdued with lower food prices.
The further increase in public spending, while supporting growth, also contributed to the deterioration in the regional fiscal position in 2012, which turned into a deficit (excluding grants) of 1.6 percent of GDP. Public debt, however, remained low at about 14 percent of GDP. Following the debt relief and debt restructuring operations of the last few years, public debt has been kept well below the 70 percent of GDP ceiling set by the regional surveillance framework for individual countries. High import demand related to the expansionary fiscal stance and large income outflows contributed to the deterioration of the external current account, which recorded a deficit of 1.4 percent of GDP. However, as capital inflows were stronger, international reserves strengthened further and reached the equivalent of 5.7 months of total imports at end-2012.
The monetary policy stance has been passive during the past few years but became increasingly tight due to the widening in the spreads between the CFA Franc and the Euro. In July 2013, the regional central bank (BEAC) lowered its main policy rate by 50 bps as inflation abated and growth in monetary aggregates slowed. Despite a slowdown in monetary aggregates, excess liquidity in the banking system remains high and its control is a challenge under the current monetary policy framework. The excess liquidity largely reflects the shallowness of the regional financial sector, as progress in financial deepening has been slow. The banking sector appears vulnerable in certain countries and faces significant challenges to support more inclusive private investment-based growth.
Although the macroeconomic performance is expected to remain relatively solid over the medium term, the CEMAC faces important downsize risks. The region remains largely dependent on oil revenues, with oil accounting for 36 percent of regional GDP and 87 percent of total goods exports. A substantial and prolonged drop in oil and commodity prices potentially linked to a slowdown in global growth or key emerging markets is the greatest risk for the CEMAC. Such a decline would significantly impact the fiscal and current account balances and would likely force a sudden decline in public investment. In addition, the region’s heightened security risks could also have a negative impact on growth, even if the political crisis in the Central African Republic is not expected to have large economic spillovers for the sub-region in the short term. Moreover, without increased reform momentum and greater economic integration, CEMAC’s medium-term growth potential would be more limited and the sub-region may not be able to achieve its ambitious development goals.
Executive Board Assessment
Executive Directors welcomed the region’s good macroeconomic performance in 2012 supported by public investment financed with high oil revenues. They noted, however, that while medium-term prospects are favorable, there are significant downside risks from potential oil price shocks. At the same time, substantial challenges remain, including high poverty, income inequality, and underemployment. Directors stressed the need to enhance the fiscal surveillance and monetary frameworks, strengthen the financial sector, and step up efforts to promote economic diversification and integration.
Directors concurred that the current macroeconomic policy mix is broadly appropriate. They considered that the fiscal stance could be more cautious in some countries, particularly where fiscal buffers are insufficient to withstand large adverse external shocks. They agreed that the recent monetary easing was appropriate in light of the benign inflation outlook. Directors noted that the level of external reserves is adequate, but urged national authorities to act in coordination with the regional central bank (BEAC) to improve the compliance by certain member states regarding reserves repatriation.
Directors encouraged the authorities to better adapt the regional fiscal surveillance framework to the structure of its members’ economies dominated by oil. The convergence criteria on the fiscal deficit and on public debt should be reviewed to limit pro-cyclicality and ensure low risks of debt distress, while supporting prudent borrowing. The new criteria could be reinforced with oil stabilization fund rules. Directors also stressed the need to expedite the reform of the monetary policy framework to make it effective. Establishing an analytical framework for monitoring and forecasting liquidity, and developing market-based instruments for liquidity management and an active interbank money market will be important.
Directors urged the authorities to speed up efforts to develop a sound regional financial sector. Strengthening the regulatory and supervisory frameworks, enhancing compliance with prudential requirements, and expediting the resolution of weak banks are critical priorities. Directors considered that an FSAP update would be useful. Over the medium term, establishing a credit registry, strengthening enforcement of property rights, and undertaking judicial system reforms will be essential.
Directors underscored the need to address structural obstacles to inclusive growth, regional integration, and competitiveness. Improving the regional business environment and addressing constraints to private sector development and economic diversification will be key. Efforts to reduce barriers to regional trade and promote labor mobility will also be important.
Directors encouraged the authorities to accelerate the pace of institutional reforms launched by regional institutions. In particular, the governance of the BEAC should be strengthened and the capacities of the regional banking supervisor and the CEMAC Commission should be enhanced. Member states should support the regional agenda by better empowering regional institutions and improving the implementation of common policies. Enhancing the quality of economic and financial information will also be important.
The views expressed by Executive Directors will form part of the Article IV consultation discussions on individual members of the CEMAC that take place until the next Board discussion of CEMAC common policies.
CEMAC: Selected Economic and Financial Indicators, 2009–14
1. For Equatorial Guinea, non-oil GDP includes output from hydrocarbon derivatives.
2. Using as weights the shares of member countries in CEMAC's GDP in purchasing power parity US dollar.
3. Excluding grants and foreign-financed investment and interest payments.
4. Excluding grants and foreign-financed investment.
Source: International Monetary Fund
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