Press Release No. 98/32

Press Release: IMF Approves Three-Year Arrangement Under the ESAF for Central African Republic

July 21, 1998

The International Monetary Fund (IMF) approved a three year loan under the Enhanced Structural Adjustment Facility (ESAF)¹ equivalent to SDR 49.4 million (about US$66 million), to support the Central African Republic’s economic program for 1998-2000. The first annual loan of SDR 16.5 million (about US$22 million) is available in two equal semiannual installments, the first of which will be made available shortly.

Background

Since the second half of 1997, after two years marked by episodes of military mutinies and social unrest, the Central African Republic has regained a measure of stability, partly because of international peacekeeping efforts. Nevertheless, throughout 1997 and in the early months of 1998, the fiscal situation remained precarious, and the government continued to accumulate domestic and external payment arrears.

During the mutinies, the destruction of some manufacturing industries in the capital city of Bangui idled an estimated 3,000 workers, bringing the unemployment rate at end-1997 to 10 percent of the active population in the formal sector. This, along with a gradual decline in per capita income--estimated at US$310 in 1996, which is among the lowest in the world--and the deterioration in social services over the past years, has contributed to a significant rise in poverty.

The authorities introduced additional emergency adjustment measures during the first half of 1998, and as a result, the fiscal situation has begun to improve while the stock of arrears broadly stabilized, even though treasury cash management remained tight.

Medium-Term Strategy and the 1998-2000 Program

The authorities’ medium-term program seeks to maintain an average annual real GDP growth of about 5 percent, stabilize inflation at about 2½ percent per annum, and contain the external current account deficit at 5 percent of GDP by 2000. The program aims at improving the fiscal position through tighter tax policy implementation and greater transparency in all government financial operations, strengthening institutional capacity and macroeconomic management, and resuming the structural reform process.

Early and sustained fiscal consolidation is an essential component of this strategy, with a reduction of the overall fiscal deficit (on a commitment basis) by some 2 percentage points of GDP during 1998-2000 to 4.6 percent of GDP. To this end, emphasis is being placed on early and strong improvements in revenue collection, mainly through the reinforcement of tax and customs administration. On the expenditure side, both the wage bill and nonpriority outlays are to be contained to ensure that adequate resources are available for social spending and critical infrastructure investment.

Consistent with the medium-term strategy, the 1998 program projects a real GDP growth of 5.5 percent, an inflation rate of 2.6 percent (on an average annual basis) and an external account deficit of 6.1 percent of GDP, assuming a continuous strong growth in agriculture and a recovery of manufacturing output. The revised budget for 1998 emphasizes increased efforts to collect government revenue and extremely tight control over the government’s current expenditure, including a reduction in military and security personnel, and the containment of nonpriority expenditure in goods and services.

Structural Reforms

The authorities attach high priority to making rapid progress in privatizing nonfinancial public enterprises, reforming the banking and financial sectors, and revamping the legal and regulatory framework, in addition to resuming civil service reform.

The focus early in the program period is on privatizing the three major public sector enterprises--the petroleum distribution, telecommunications, and electricity companies. Reforms in the banking and financial sectors will be concentrated on the privatization of the two main commercial banks, the Union bancaire de l’Afrique Centrale (UBAC) and the Banque internationale pour le Centrafrique (BICA). As for the legal and regulatory framework, the authorities have established an auditor’s office, and they intend to launch a reform of the judicial system and to adopt new and more liberal labor and mining codes.

Addressing Social Needs

To combat poverty and reduce unemployment, the government has embarked on a strategy based on achieving sustained and high economic growth, coupled with the implementation of social policies that target the most vulnerable groups of the population. The social strategy aims at increasing the share of spending on the social sectors, with a view to raising school enrollment and literacy rates, and increasing the supply and quality of health care. The 1998 supplementary budget included provisions for the social costs of privatizing and restructuring public enterprises and began to redirect priority public spending toward education and health in particular.

The Challenge Ahead

The authorities have established a strong and credible program for 1998-2000, which addresses the major challenges facing the country. The successful implementation of theprogram, however, depends on a critical improvement in fiscal performance to increase public savings, as well as timely and adequate external technical and financial assistance, and also hinges upon strengthening further administrative capacity and economic management.

Central African Republic joined the IMF on July 10, 1963. Its quota² is about 41.2 million (about US$55 million) and its outstanding use of IMF financing currently totals SDR 7 million (about US$10 million).