Public Information Notice No. 10/1

Public Information Notice: IMF Executive Board Concludes 2009 Article IV Consultation with the Central African Republic

January 4, 2010

On December 4, 2009, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Central African Republic.¹

Background

The Central African Republic has recorded modest economic growth since the end of the internal conflict in 2003, recovering from decades of decline in living standards. Real Gross Domestic Product (GDP) grew by 2½ percent a year on average during 2004–08. In 2008 and early 2009, a series of domestic and external shocks hit the economy, beginning with unstable power supply, followed by price rises in imported commodities, and later the global recession, which led to slower growth, accelerated inflation, and a higher current account deficit. Recent performance suggests continued slow growth and moderating inflation. Real GDP growth is expected to decrease from 2.2 percent in 2008 to 2.0 percent in 2009 while average inflation is forecast to slow from 9.3 percent in 2008 to 3.7 percent in 2009. The current account balance is expected to improve in 2009 due to improvements in the terms of trade and lower oil import volumes.

Over the last few years the government has implemented an economic reform program with the support of the international community. To restore credibility in public finance and help achieve the objectives of the poverty reduction strategy, a prudent fiscal stance has been maintained—by recording small domestic primary surpluses over 2006–08—and structural reforms have been pursued. The program covers a broad range of areas including public financial management, debt management, and other key areas of economic policy. Thanks to these reform efforts, the Central African Republic reached the completion point under the enhanced Heavily Indebted Poor Countries (HIPC) Initiatives in June 2009.

In the period ahead, the government needs to continue its reform efforts to accelerate growth and mobilize resources required for poverty reduction while maintaining debt sustainability. The main areas of focus should be around the improvement of the business and investment climate, the promotion of private sector activities through facilitating access to credits, an efficient mobilization of government revenues, prudent debt management, and the strengthening of the external sector performance through diversification of export base.

Executive Board Assessment

Executive Directors commended the authorities of the Central African Republic (C.A.R.) for their continued commitment to prudent macroeconomic management and essential structural reforms, against the backdrop of a challenging domestic and external environment. Directors stressed the importance of accelerating economic growth and boosting competitiveness, while keeping debt sustainable, and of mobilizing the resources needed for the country’s large peace building and development needs. Improved security and political stability, particularly in the run-up to the 2010 elections, are critical to encourage private sector development and realize the authorities’ poverty reduction strategy.

Directors underscored the importance of further strengthening fiscal management. They supported the government’s focus on improving revenue administration and widening the tax base, controlling and monitoring expenditure, boosting priority sector spending, and better managing expenditure commitments to ensure that they are aligned with available resources. Continuous implementation of the automatic petroleum pricing formula will also be important.

Directors stressed the importance of increased donor support on concessional terms to help the authorities improve the security situation in the short term and, over the medium term, build the economic management capacity and infrastructure essential to achieve their poverty reduction and the Millennium Development Goals. They encouraged the authorities to work closely with donors to ensure a clear understanding of the country’s financing needs and reform efforts.

Directors welcomed the recent measures to strengthen the financial performance of public utility enterprises. They called for continued adherence to the program targets on government payment of utility bills and cash collections of the utility companies so that these enterprises are provided with adequate resources to maintain key infrastructure.

Directors encouraged the authorities to reduce vulnerabilities in the banking system and to increase the level of financial intermediation. Progressively replacing government cash and check payments with bank transactions and less government recourse to bank financing should help spur private sector access to credit and help diversify the economy. Directors stressed the need to closely monitor developments in the domestic banking sector and to take necessary remedial measures for the undercapitalized bank.

Directors welcomed the authorities’ intention to intensify structural reforms aimed at improving the business climate, removing infrastructure bottlenecks, and enhancing governance, the judiciary, and the delivery of public services.

Directors stressed the importance for the authorities to seek full debt relief from all bilateral and commercial creditors on terms consistent with the HIPC and MDRI Initiatives. They encouraged the authorities to continue enhancing their debt management capacity, and avoid the contracting of nonconcessional debt. Directors noted the authorities’ intention to partially draw on the SDR allocation, which will allow them to replace more expensive commercial bank financing without increasing spending.

Directors expressed concern about the governance issues at a foreign office of the regional central bank, BEAC, and welcomed the bank’s decision to adopt a comprehensive action plan to address them. They encouraged the C.A.R. authorities to continue to support the BEAC to resolve these issues and strengthen its governance in a timely manner.