CENTRAL AFRICAN REPUBLIC
Memorandum of Economic and Financial Policies for 2001
I. Introduction
1. Following two years marked by serious political and social turmoil and deteriorating financial conditions, the government launched an economic and financial program in 1998 that was supported by the Fund under the Poverty Reduction and Growth Facility (PRGF) arrangement approved in July 1998. Implementation of this program faced various difficulties, which delayed completion of the midterm review until July 1999. Thereafter, further delays occurred in preparing the request for a second annual arrangement, notably because of the organization of presidential elections and difficulties in finalizing the privatization of the petroleum distribution network.
2. Since the departure of the UN peacekeeping forces (MINURCA) in February 2000, the C.A.R. government has assumed full responsibility for security within its territory, in an unstable regional context. The social peace restored in recent years remains fragile, poverty is widespread, and basic social services have steadily deteriorated. The challenge facing the authorities is to promote security and development in a sustainable manner, with a view to improving conditions for overall stability and economic progress. To this end, the government is determined to reinforce its program, implement targeted measures to reduce poverty, and seek the support required to achieve these policy objectives.
II. Economic Developments in 2000
3. The overall economic situation has remained fragile in 2000 and has been deteriorating further from June onward, following disruptions in the supply of petroleum products. The Planning Ministry estimates that growth has slowed to 2.6 percent in 2000, against 3.4 percent in 1999, notably because of poor conditions for agricultural production (especially cassava). Even though the shortages of petroleum products have disrupted all economic activities, timber exports have risen strongly, partly offsetting the contraction of the primary sector. Inflation has accelerated toward the end of the year following the sharp increase in the prices of petroleum products. The increase in consumer prices in 2000 is estimated at 3 percent on an annual average basis, and 9 percent on an end-of-period basis.
4. The shortages of petroleum products has arisen because of the insufficient buildup of stocks in Bangui at end-1999, the inability to collect large stocks belonging to PETROCA that were kept in Kinshasa, and the suspension of imports via the Ubangui River because of war in the Equator Province of the Democratic Republic of Congo. To overcome this crisis as fast as possible, the authorities secured help from a friendly country, which promised to deliver free of charge 55,000 tons of petroleum products (representing about 80 percent of the Central African Republic's annual consumption). However, only about 2,200 tons were delivered, 700 of which were lost or stolen during transportation. The remaining 1,500 tons were sold through PETROCA for CFAF 742 million, which generated about CFAF 500 million in receipts for the treasury.
5. Regular supplies of petroleum products have been restored since July 2000 through road transport from the Douala seaport. Because of the high cost associated with this mode of transportation (about CFAF 125 per liter by road, against CFAF 60 per liter by river), imports have been limited to the country's current needs and have not permitted the building up of stocks as in the past. The government increased the prices of petroleum products in October 2000 by 33 percent for premium gasoline, 35 percent for kerosene, and 44 percent for diesel fuel. The new price structure takes into account the increased international market prices and higher transportation costs; at the same time, the equalization tax was raised to keep the price of kerosene below costs. In addition, taxes on petroleum products were reduced to limit the increase in prices for consumers.
6. Total government revenue (excluding grants) has remained stable at some 9 percent of GDP in 2000. Attempts to increase revenue have continued to meet with serious difficulties, which have prevented the authorities from reaching the target of 10 percent of GDP set in the budget. Customs revenue collection has been below expectation; and while the performance of the tax directorate has improved, revenue collection at the treasury has remained low.
7. Primary current expenditure (i.e., excluding interest due) has remained below the ceiling set for 2000. Significant efforts have been made to control strictly the government wage bill, notably by cleaning up the civil service roster and limiting recourse to temporary recruitment. Public investment has fallen sharply relative to 1999, reflecting delays in finalizing the transportation sector development project, the late approval of the 2000 finance law, and the problematic supply of petroleum products.
8. The overall budget deficit on a commitment basis (excluding grants) has narrowed to 7½ percent of GDP in 2000, compared with 11 percent of GDP in 1999 and a 2000 budget projection of 10 percent of GDP. The primary balance (using a narrow definition, i.e., excluding foreign-financed investment) has turned into a surplus of 0.4 percent of GDP in 2000, compared with a deficit of 0.4 percent of GDP in 1999 and a budgeted surplus of 1 percent of GDP. The strengthened cash position during the first few months of 2000 allowed the treasury to reduce the float on government outlays that had accumulated in the previous two years, which led to a net reduction of domestic arrears. Subsequently, however, the cash position worsened, and the treasury has been unable to settle all expenditure commitments, including civil service wages. Furthermore, new payments arrears have accumulated on external debt obligations.
9. In the area of structural reforms, the government has achieved significant progress in privatizing petroleum distribution, made notable efforts in bank restructuring, implemented adjustment measures in the cotton sector, and approved the new civil service statute. In particular, the assets of the parastatal PETROCA (which is being liquidated) were transferred to private investors in November, and an agreement was reached to adjust petroleum prices with changes in costs (see para. 15). The National Assembly approved the new civil service statute in November 1999, and the government issued the implementing decree in July 2000 (with effect from January 1, 2000). The implementation of the new statute will allow for more flexible management of staff, and the enforcement of strict rules for promotions. The total number of public employees has remained subject to a ceiling of 19,500; a census of civil servants and controls carried out in 2000 established that the number of public employees has been kept below that ceiling (i.e., about 19,000 at the end of September 2000, including temporary employees).
III. Economic and Financial Program for 2001
10. The main objective of the program is to lay out the conditions that promote rapid and sustainable growth, and to achieve a significant reduction of poverty. To that end, the government intends to meet as soon as possible the conditions for preparing a preliminary document for debt relief under the Initiative for Heavily Indebted Poor Countries (HIPC Initiative).
11. The program for 2001 projects real growth of about 5 percent, stemming mainly from rising activity in the forestry, construction, and industry sectors in an environment of improved investors' confidence. Inflation is expected to remain moderate, at an annual rate of about 2½ percent on average, consistent with the exchange rate peg. Despite a projected surge in imports, the external current account deficit is projected to remain broadly unchanged at about 4½ percent of GDP. The government deficit (excluding grants) is set to widen to 8½ percent of GDP in 2001 from 7½ percent of GDP in 2000, while the primary budget surplus (narrow definition) would increase to CFAF 7½ billion, or 1 percent of GDP.
A. Fiscal Policy
12. The draft 2001 finance law was approved by the government and submitted to the National Assembly on November 15, 2000. The draft law provides for substantial increases in government revenue, which would cover core outlays while allowing for a primary surplus to settle part of the external debt service due. Nevertheless, the full payment of government obligations vis-à-vis external creditors and the domestic banking system, and the clearance of payments arrears, would require large financial support from donors.
13. Overall revenue is projected at nearly 10 percent of GDP in 2001, compared with 9 percent of GDP in 2000. The increase in the revenue ratio reflects not only measures to strengthen collecting agencies—notably by implementing the new organizational structure at the customs directorate, in line with technical assistance recommendations, and by increasing the number of taxpayers subject to return-based taxation at the tax directorate—but also the introduction of the value-added tax (VAT), effective January 1, 2001. The 2001 finance law reinforces the elimination of exceptions to the general rule by banning all tax and customs exemptions that are inconsistent with the regulations of the Central African Economic and Monetary Community (CEMAC). At both the tax and customs directorates, preparations are well under way to introduce the VAT, with Fund technical assistance. At the treasury, measures have been implemented to improve the tracking of overdue tax payments.
14. The elimination of tax and customs exemptions applies, in particular, to the mining code, which had its exemptions reestablished in February 2000. Henceforth, exemptions allowed for mining sector imports will be limited to those provided for under CEMAC regulations, that is, duty-free imports for specific equipment used in mining and oil exploration. In addition, the finance law provides for the streamlining and reduction of export duties. It eliminates all levies imposed by the tax directorate on diamonds and agricultural products, as well as export duties on agricultural products collected by the customs directorate. Apart from the 2 percent minimum tax collected at the customs point, there remain only export duties on diamond and wood. Moreover, the government will submit a draft law to the National Assembly by end-December 2000 to ban special dispensations for diamond exports, and to mandate the use of official valuation and certification for all diamond exports.
15. In view of the recent reduction in petroleum-based taxes, the government has decided to defer the implementation of the customs tariff and the VAT on petroleum products. Normal taxes and duties will apply to petroleum products once river imports resume regularly. Taxes on petroleum products will not be reduced. From January 2001 onward, the retail prices of petroleum products will be adjusted in a transparent manner as often and as much as needed to take into account changes in costs and taxes. The government has also reinforced the monitoring of taxes on petroleum products and set mechanisms to collect tax payments every ten days based on actual amounts due (taking into account government consumption and legal exemptions). The settlement of mutual debts among PETROCA, the government, and the road fund will be made when PETROCA is actually liquidated, by June 2001 at the latest.
16. The government will step up its efforts to improve expenditure control and implement agreed spending priorities effectively. A provision in the draft 2001 finance law restates that the Finance Minister solely is authorized to commit expenditure. Primary expenditure (excluding foreign-financed investment) is set to remain broadly unchanged, compared with 2000, at 8.8 percent of GDP. The government wage bill is to increase by 2.2 per-cent in 2001 relative to 2000, taking into account new staff recruitment within the established ceiling (19,500) and some wage drift. Expenditure on other goods and services will increase by some 15 percent, mainly for priority areas (education, health, and social affairs), demobilization efforts, centrally paid bills (water, telephone, electricity, mission allowances and transportation costs). No new budget subsidy is planned for the cotton company (SOCOCA), which should reach financial balance in 2001.
17. Budget allocations for the health and education sectors have been raised from 1.6 percent of GDP in 2000 to 1.8 percent of GDP in 2001, and from 1.3 percent of GDP to 1.5 percent of GDP, respectively. To reinforce the monitoring of priority social expenditure, the government, in collaboration with staff from the European Union, intends to set quarterly spending targets in the areas of primary education, basic health care, water management and sewerage, and access to drinking water. In addition, the authorities have appointed a committee to monitor the poverty reduction program that will be responsible for developing targeted approaches that would benefit the poorest segments of the population.
18. Investment expenditure is to increase from 8 percent of GDP in 2000 to 10 percent of GDP in 2001 (including the cost of technical assistance). This projection is based on expected disbursements, taking into account the existing project portfolio. The public investment program continues to focus on health, primary education, and basic infrastructure, notably in the transport sector, and also includes an important component for the restructuring of the armed forces.
19. External debt service in 2001 is estimated at CFAF 17 billion (after debt relief), or 2.3 percent of GDP, while domestic debt service is projected at CFAF 3 billion (including repayments to the banking system). The government intends to settle external arrears and regularize relations with external creditors as fast as possible (see para. 32). The stock of external arrears at end-2000 is expected to reach CFAF 25½ billion, including about CFAF 12 billion vis-à-vis the African Development Bank, CFAF 6 billion vis-à-vis the OPEC Fund, and CFAF 4 billion vis-à-vis the Development Bank of Central African States. The stock of domestic arrears includes CFAF 10 billion in late payments to suppliers (in addition to the float on government expenditure) and CFAF 21 billion in overdue government wages. The 2001 program provides for CFAF 6 billion in domestic arrears repayments, which would allow two months in wage arrears to be settled and the float to be reduced slightly.
B. Monetary and Credit Policies
20. Monetary policies are conducted by the Bank of Central African States (BEAC) in a regional context. Central bank policies contribute to the defense of the fixed peg and the strengthening of the external position. Assuming a return of confidence related to the restored health of the C.A.R. banking system, and taking into account the pursuit of prudent fiscal policies, the net domestic assets of the central bank (excluding the counterpart to the use of Fund resources) are projected to increase by about CFAF 5 billion in 2001.
21. The net claims of the banking system on the government are projected to decline by CFAF 1.7 billion in 2001, excluding the counterpart to the use of Fund resources. This takes into account amortization scheduled on consolidated loans and drawings on counterpart funds (especially in the context of arrangements with the European Union). The government's arrears vis-à-vis the BEAC were consolidated in July 2000, with a schedule of repayments drawn up through 2010. Over time, the authorities plan to reduce outstanding statutory advances from the BEAC.
22. The C.A.R. bank restructuring has made much progress. The three commercial banks have been recapitalized, and each of them is to abide at end-2000 by the main prudential regulations set by the regional supervisory agency (COBAC), including the ratios for minimum capital, liquidity, and solvency. The monetary authorities—in close collaboration with the COBAC—will see to it that all prudential requirements are met from January 2001 onward.
C. Poverty Reduction and Structural Reforms
23. The medium-term program focuses on poverty reduction policies and structural reforms designed to improve economic efficiency and increase growth potential. In these areas, the authorities intend to rely extensively on technical and financial assistance from bilateral and multilateral donors, notably the World Bank, which will assess progress in program implementation.
24. The preliminary statement on poverty reduction strategies and medium-term economic policies describes the timetable to be followed in convening a national conference aimed at defining this strategy, in the context of a participatory process that would bring together the civil society, nongovernmental organizations, bilateral donors, and international organizations. Studies will be conducted ahead of this conference to adopt a series of relevant indicators, sort out priorities, and estimate the costs of proposed poverty reduction programs. At present, it is expected that the full PRSP will be available in the second half of 2001.
25. The government plans to speed up the implementation of structural reforms with technical and financial assistance from the World Bank. Ongoing operations to privatize or restructure companies relate to the cotton sector, energy (petroleum products and electricity), water, and telecommunications. Decisions will be taken soon on the strategies (liquidation or privatization) that will be adopted as regards the second batch of public enterprises. An agency responsible for regulating the water, electricity, and telecommunications sectors, as well as the prices of petroleum products, will be set up by September 2001 with assistance from World Bank staff. In addition, the government expects to finalize a new labor code and a revised mining code in 2001.
26. Because of market disturbances and the need to preserve the market share of the national sugar company (SOGESCA), the government decided to maintain controls over sugar imports, with prior authorization and the up-front payment of taxes and duties. A detailed study to evaluate the economic and financial impact of this system will be completed with the assistance of World Bank staff by September 2001.
D. Governance and Judiciary System
27. The authorities place a high priority on reinforcing the rule of law, strengthening the revenue-collecting agencies, and combating corruption. Already, the transfer of the disciplinary board to the Ministry of the Civil Service in July 2000 has helped improve the efficacy of existing regulations applying to government employees guilty of fraud. The Ministry of Commerce and Industry will continue its awareness campaign to ensure that private operators adapt their practices to the business law treaty (OHADA Treaty). Also, in collaboration with the Ministry of Justice, existing laws will be reviewed and revised as needed to achieve consistency with OHADA regulations. The Ministry of Finance is preparing a settlement law (loi de règlement) for 1999, which includes the settlement of treasury accounts for previous years, and plans to finalize detailed functional accounts (comptes de gestion). On this basis, the Auditing Court will be in a position to review execution of the 1999 budget.
E. Statistical Apparatus and Debt Management
28. The statistical data available are very limited and do not allow a fully reliable assessment of the country's economic situation. To address this problem on a lasting basis, the Planning Ministry has prepared a work program based on the diagnosis made by the Fund technical assistance mission of October 1999. The program includes measures to improve the coverage, reliability, consistency, and timeliness in publication of macroeconomic data. In view of the limited available resources, the government intends to seek assistance from the donor community to implement this program. The government will soon finalize a draft statistical law for parliamentary approval and intends to set up a National Statistical Board by March 2001. Already, efforts are under way to improve computation of the consumer price index, based on updated surveys and according to a methodology harmonized with other countries of the subregion.
29. The debt directorate at the Ministry of Finance is improving its monitoring of public debt, including through upgraded computer hardware and software. A comprehensive database is under development, in close collaboration with Fund and Bank staffs, in the format needed to prepare HIPC Initiative documents. In view of its financial situation, the government intends to mobilize financing, including debt relief, exclusively through grants or loans on highly concessional terms. As regards bilateral creditors, the authorities will abide strictly by the provision on the comparability of treatment with the conditions granted by Paris Club creditors.
F. Program Financing
30. Based on program projections, the aggregate financing need is estimated at CFAF 108½ billion in 2001 (15 percent of GDP). This estimate takes into account the primary budget surplus (narrow definition) of CFAF 7½ billion, externally financed investment of CFAF 58½ bil-lion, current external debt service of CFAF 23½ billion (before debt relief), and the clearance of CFAF 25½ billion in external arrears, as well as net payments on the domestic debt (including wage and pension arrears) for CFAF 7½ bil-lion. In addition to project loans and grants, secured financing includes debt relief for CFAF 6 billion (excluding possible additional assistance under the HIPC Initiative), which leaves a financing gap of CFAF 42½ billion.
31. The full implementation of the program should enable budgetary support totaling some CFAF 32½ billion to be mobilized, including the use of Fund resources, the third tranche of the World Bank Fiscal Consolidation Credit, and assistance from France and the European Union. Thus, there remains a residual gap on the order of CFAF 10 billion.
32. Efforts will continue to seek additional financing to cover the residual gap. In particular, the government will request an extension of the consolidation period under the rescheduling agreement with Paris Club creditors and seek new budgetary support from bilateral and multilateral donors. The government plans to settle outstanding external arrears, including vis-à-vis the Development Bank of Central African States, the African Development Bank, and the OPEC Fund. Discussions have already been initiated with these institutions, which have been informed of the authorities' firm commitment to settle all current obligations due in a timely manner, and to implement a schedule for the repayment of arrears over 2001-02.
G. Prior Actions and Program Monitoring
33. All prior program actions mentioned in the attached Table 1 have been implemented during the last two months. Criteria and benchmarks for 2001 are shown in Table 2. The targets for net bank credit to the government (excluding the counterpart of Fund resources) and outstanding external arrears will be subject to an adjustment mechanism, as described in footnote 5, Table 2. The precise definition of performance criteria and benchmarks is provided in the following technical memorandum (Annex II). Two reviews under the PRGF arrangement are scheduled by June 2001 (based on criteria and benchmarks for end-March) and by December 2001 (based on criteria and benchmarks for the end of September), respectively. The first review will focus on fiscal developments and progress in privatizations.
