Public Information Notice No. 07/81

Public Information Notice: IMF Executive Board Concludes 2007 Discussion on Common Policies of Member Countries with CEMAC

July 18, 2007

On June 29, 2007, the Executive Board of the International Monetary Fund (IMF) concluded the discussions on Common Policies of Member Countries with the Central African Economic and Monetary Community (CEMAC.¹)

Background

In spite of large oil-related terms of trade increases, the CEMAC region continues to face significant developmental and growth challenges. Oil windfalls boosted regional incomes, but real GDP growth slowed for the second consecutive year to about 1 percent in 2006, from 4.7 percent in 2005, on account of lower oil production, notably in Chad, Gabon and Equatorial Guinea, and a marked slow-down in non-oil output growth in Chad and Equatorial Guinea. Infrastructure bottlenecks, labor market rigidities and weak business environments continue to hamper diversification of non-oil sectors and medium-term growth prospects. Five CEMAC countries still rank in the lowest third of the U.N. Human Development Index, and most countries are not on track to meet the Millennium Development Goals by 2015.

Higher regional inflation—together with a the continued strengthening of the Euro, to which the CFA F is pegged—led to a further real appreciation of the currency. Average inflation exceeded five percent, reflecting the pass-through of higher world oil prices (notably in Cameroon), food price increases (Central African Republic, Chad, Congo and Gabon), but supply constraints in the context of an expansionary non-oil fiscal stance (as in Congo and Equatorial Guinea) also contributed. The higher inflation, together with a further depreciation of the U.S. dollar against the Euro, led to a 3.5 percent appreciation of the real effective exchange rate (REER).

Oil-related inflows contributed to a further strengthening of fiscal and external balances. Higher oil revenues, together with the delivery of Heavily Indebted Poor Countries Initiative (HIPC) debt relief in Cameroon and Congo, helped consolidate overall fiscal balances (excluding grants) to almost 10 percent of GDP; at the same time, public external debt continued to decline. The regional current account surplus almost doubled to reach a high of 6 percent of GDP. Foreign reserves at the Bank of Central African States (BEAC) rose substantially, to cover almost 6 months of imports and over 100 percent of broad money.

Oil-related reserve inflows also helped accelerate regional broad money growth. With no active sterilization policy, oil-related liquidity was only partly absorbed through government deposits at the central bank, while still leading to a 22 percent increase in base money. As governments also kept deposits in commercial banks, broad money grew by almost 19 percent. Commercial banks' excess liquidity increased by 30 percent, to reach 3.6 percent of regional GDP by end-2006. However, credit to the private sector continued to stagnate at around 7 percent of GDP, a level lower than that of other low-income sub-Saharan countries.

Macroeconomic prospects for 2007 are positive, with a projected increase in growth back to about 5 percent due to expected oil production increases and the implementation of public investments in some countries. However there are risks to the overall outlook and inflationary pressures may persist.

At the April 2007 N'djamena summit, CEMAC heads of state approved a package of institutional reforms, which, if promptly implemented, could help revive the regional integration agenda. Reforms aim at strengthening regional institutions by, inter alia, improving governance, representation of member states and transforming the CEMAC Secretariat into a strong Commission. However, beyond the modernization of regional institutions, concrete and visible progress on key integration issues such as freer movement of goods and factors in the region, and deeper financial integration, would boost regional growth while cementing support for common policies and institutions.

Executive Board Assessment

Executive Directors welcomed the broadly favorable macroeconomic conditions prevailing in the CEMAC, which reflect in large part sustained high oil prices. Fiscal and current account balances have improved, external reserves have strengthened, and the external debt has declined.

Directors noted that, notwithstanding these positive developments, growth performance has fallen behind that in the rest of sub-Saharan Africa, trade and financial integration within CEMAC is substantially lacking, dependency on oil revenues has increased, and deep-seated structural impediments to economic diversification remain. These impediments need to be addressed urgently if growth is to be sustained and tangible progress made toward the Millennium Development Goals. Successfully tackling these problems will require adjustments to the regional integration framework, drawing on strong political support from national authorities. Against this background, Directors welcomed the recent reform package that was adopted by the CEMAC Heads of State to strengthen regional institutions and advance the integration process, and urged the authorities to agree quickly on the details of key actions and to draw up firm implementation timetables.

Directors highlighted the challenges that oil-related inflows pose for macroeconomic management, and the need to improve the regional institutional framework to ensure better coordination between monetary and fiscal policies. They expressed concern about the potential inflationary impact of large non-oil fiscal deficits in the context of the limited absorptive capacity in some CEMAC countries. In this regard, Directors called for a broadening of regional surveillance to include a focus on the non-oil primary balance in addition to the traditional convergence criteria.

Directors observed that rapidly rising excess liquidity warrants more active liquidity management by the regional Bank of Central African States. The monetary policy framework would need to be strengthened for this purpose. The BEAC was encouraged to use market-based policy instruments, including central bank or treasury bills, which would allow it to unify and lower bank reserve requirements. Directors also underlined the need for better cash management by member governments, including through the establishment of single treasury accounts at the BEAC. They urged CEMAC members to establish a regional government debt market and phase out automatic central bank financing of the government.

Directors suggested that regional arrangements for pooling foreign exchange reserves need to be revised to allow countries to save part of the inflows in adequately remunerated long-term funds while maintaining adequate monetary reserves for the region. They recognized the importance of centralizing all foreign inflows at the BEAC, but noted that countries might have different savings preferences. Member governments therefore should have more say in setting investment strategies for the Funds for Future Generations, and the remuneration on these funds should reflect actual returns.

Directors concurred that the fixed exchange rate regime has provided stability and transparency, and remains appropriate. They were of the view that the real effective exchange rate is broadly at its equilibrium level, and that sustainability of the peg is currently not a concern given adequate foreign reserves, current account surpluses, and remaining capital controls. They considered that measures to enhance economic diversification and address structural bottlenecks in the non-oil sector will be key to enhance competitiveness in the region.

Directors reiterated that CEMAC's long-term prospects depend critically on private sector development. They emphasized the need for concrete measures to deepen the financial sector, promote a more open trade regime, improve the business environment, and liberalize labor markets in member countries. Furthermore, measures taken at the regional level need the full political support of individual countries. While Directors welcomed the progress in strengthening regional banking supervision, they urged faster progress in implementing the 2006 FSAP recommendations. They welcomed recent proposals to reduce the common external tariff, and they encouraged full implementation of existing internal free trade agreements and further efforts to harmonize trade policies across CEMAC.

Directors were hopeful that the recently approved reforms of CEMAC institutions would help advance regional integration, particularly by improving communication between national and regional bodies. They recommended short transition periods in the BEAC and CEMAC commission to ensure rapid progress. They welcomed the proposed comprehensive Regional Economic Program as an appropriate vehicle to tackle common infrastructure needs, and urged implementation of supporting reforms.

Directors emphasized the need for better and harmonized national statistics, particularly inflation and balance of payments data.

¹ The IMF holds annual regional discussions with the CEMAC region. A staff team visits the region, collects economic and financial information, and discusses with officials the region's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the region's authorities.