Press Release No. 08/142

Press Release: IMF Executive Board Completes Second Review Under the PRGF Arrangement with the Central African Republic, Increases Financial Assistance to Mitigate Food and Fuels Price Impact, and Approves US$14 Million Disbursement

June 18, 2008

The Executive Board of the International Monetary Fund (IMF) today completed the second review of the Central African Republic's economic performance under the Poverty Reduction and Growth Facility (PRGF) arrangement and augmented access under the PRGF to help the country address the impact of rising food and oil prices. The Executive Board agreed to augment the SDR 36.2 million (about US$58.4 million) under the PRGF arrangement with SDR 8.355 million (about US$13.5 million) to be disbursed in the context of the second and third reviews. The completion of this review enables the disbursement of SDR 8.67 million (about US$14 million), including SDR 5.57 million (about US$9 million) from the augmentation.

In completing the review, the Executive Board granted waivers for the nonobservance of four quantitative performance criteria pertaining to the ceilings respectively on wages, government domestic arrears, the changes in net claims of the commercial banking system, and external payments arrears, and the nonobservance of structural performance criteria on petroleum product pricing formula and on the reduction in the stock of tax arrears.

The three-year PRGF arrangement was approved on December 22, 2006 (see Press Release No 06/299).

Following the Executive Board's discussion of the Central African Republic's IMF-supported economic program, Mr. Murilo Portugal, Deputy Managing Director and Acting Chair, stated:

"During the past several years, the Central African authorities have made important progress in consolidating peace and security and in strengthening economic policies. This progress is being reflected in an economic recovery that is gathering strength, in particular in agriculture, which is crucial for poverty alleviation.

"The authorities are demonstrating a firm resolve to implement their PRGF arrangement, under difficult financial conditions and a challenging external environment. Fiscal consolidation will continue in 2008. This will entail enhancing public financial management, better targeting spending, improving treasury and debt management, and addressing the quasi-fiscal deficits of state-owned companies. Although there have been some slippages in program implementation in 2007, these have been transitory, minor, or were corrected. In this context, the Executive Board supported the authorities' request for waivers of nonobservance of program performance criteria. Directors also supported the authorities' request for an augmentation of access to the Fund's financial resources to cushion the impact of higher oil prices on the balance of payments, and urged the donor community to also provide additional financial assistance to the Central African Republic (C.A.R.).

"The recent adoption of a petroleum product pricing formula is a crucial step to insulate the budget from the impact of fluctuations in international oil prices and strengthen government revenue collection. Fuel excise increases are being implemented gradually to adjust to higher prices, and measures have been taken to help mitigate the impact of higher prices on the poorest households.

"The level of tax collections in the C.A.R. remains among the lowest in sub-Saharan Africa. In the near term, the government plans to raise domestic revenues by reorganizing customs administration and strengthening tax audits and collection enforcement. In the medium term, the emphasis will be placed on a comprehensive tax policy reform to raise the revenue-to-GDP ratio. Higher domestic and concessional external resources are needed to accelerate progress toward the Millennium Development Goals.

"The government plans to borrow from the regional financial markets to help resolve the domestic debt overhang. This would replace costly short-term financing from domestic banks; reduce the C.A.R.'s debt to the regional central bank so as to free resources for short-term liquidity management; and facilitate the payment of domestic arrears, most of which are salaries. The authorities intend to reinforce their debt and treasury management capacity before implementing this new borrowing strategy. The authorities are encouraged to increase their efforts to reach the HIPC completion point, which would provide further significant debt relief and support their fiscal consolidation efforts," Mr. Portugal said.

The PRGF is the IMF's concessional facility for low-income countries. It is intended that PRGF-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners and articulated in a Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that PRGF-supported programs are consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5 ½-year grace period on principal payments.