Central African Economic and Monetary Community (CEMAC): Central African Economic and Monetary Community—Common Policies in Support of Member Countries Reform Programs—Staff Report, and Statement by the Executive Director

1. CEMAC stands to benefit from elevated oil prices but is facing heightened uncertainties. CEMAC came out of the acute phase of the COVID-19 crisis in a fragile position, ending 2021 with gross reserves at only 2.7 months of prospective imports and NFA at their lowest level in decades, despite the availability of Fund financing, the SDR allocation, and monetary policy tightening. The oil price shock triggered by the war in Ukraine is expected to be positive for CEMAC, except for the oil-importing Central African Republic. Provided fiscal policies remain prudent, higher oil prices should support the rebuilding of fiscal and external buffers. This more favorable outlook is, however, subject to heightened external uncertainties, notably global inflation pressure and global financial tightening, risks from the possible emergence of new COVID strains and new risks from cryptoassets. Shielding vulnerable populations from soaring energy and food prices adds to the complexity of navigating this uncertain environment, given CEMAC’s already limited policy options on account of its elevated fiscal and debt vulnerabilities.


1. CEMAC stands to benefit from elevated oil prices but is facing heightened uncertainties. CEMAC came out of the acute phase of the COVID-19 crisis in a fragile position, ending 2021 with gross reserves at only 2.7 months of prospective imports and NFA at their lowest level in decades, despite the availability of Fund financing, the SDR allocation, and monetary policy tightening. The oil price shock triggered by the war in Ukraine is expected to be positive for CEMAC, except for the oil-importing Central African Republic. Provided fiscal policies remain prudent, higher oil prices should support the rebuilding of fiscal and external buffers. This more favorable outlook is, however, subject to heightened external uncertainties, notably global inflation pressure and global financial tightening, risks from the possible emergence of new COVID strains and new risks from cryptoassets. Shielding vulnerable populations from soaring energy and food prices adds to the complexity of navigating this uncertain environment, given CEMAC’s already limited policy options on account of its elevated fiscal and debt vulnerabilities.

Background and Recent Developments

A. Background

1. CEMAC stands to benefit from elevated oil prices but is facing heightened uncertainties. CEMAC came out of the acute phase of the COVID-19 crisis in a fragile position, ending 2021 with gross reserves at only 2.7 months of prospective imports and NFA at their lowest level in decades, despite the availability of Fund financing, the SDR allocation, and monetary policy tightening. The oil price shock triggered by the war in Ukraine is expected to be positive for CEMAC, except for the oil-importing Central African Republic. Provided fiscal policies remain prudent, higher oil prices should support the rebuilding of fiscal and external buffers. This more favorable outlook is, however, subject to heightened external uncertainties, notably global inflation pressure and global financial tightening, risks from the possible emergence of new COVID strains and new risks from cryptoassets. Shielding vulnerable populations from soaring energy and food prices adds to the complexity of navigating this uncertain environment, given CEMAC’s already limited policy options on account of its elevated fiscal and debt vulnerabilities.

2. Vaccination rates remain low in the region. The CEMAC average vaccination rates at mid- May 2022 remain low at 10.9 percent of the population, due to continued rollout logistical challenges and high vaccine hesitancy. Most containment measures have now been lifted.

Text Figure 1.
Text Figure 1.

CEMAC: Covid Trend and Vaccination Rates

Citation: IMF Staff Country Reports 2022, 208; 10.5089/9798400211942.002.A001

3. Progress on implementing the recommendations from the August 2021 Heads of State (HOS) summit remains slow. Fund-supported programs are ongoing. Oversight and coordination units have been established in all member countries to follow up on reforms, with quarterly reporting to the Secretariat of CEMAC’s Economic and Financial Reforms Program (PREF-CEMAC). The CEMAC Commission’s annual regional consultations have resumed in 2022 after two consecutive years of interruption owing to COVID-19. The completed consultations with three countries (Chad, C.A.R., and Congo) point to room for improvement in transcribing regional directives, fully operationalizing integrated financial information management systems, switching to program-based budgeting, and implementing comprehensive medium-term debt management strategies, including for domestic arrears clearance. Capacity constraints slow down progress in PFM reforms. The rollout of treasury single accounts (TSA) is now expected for 2022Q3. Progress was made towards finalizing the unified financial market, with an improved schedule for public issuances, and three countries (Equatorial Guinea, Congo, and Gabon) have submitted the list of SOEs that could be listed on the stock exchange (BVMAC). The sanction mechanism for countries breaching the regional convergence framework is yet to be adopted by the HOS Conference.

B. Recent Economic Developments

4. Economic recovery in 2021 was tepid. Real GDP increased by 1.1 percent, 0.8 percentage points lower than initially projected, mostly due to a much larger than expected contraction of the oil sector, reflecting underinvestment (Chad and Congo) and technical production accidents (Equatorial Guinea) that held back oil and gas production. In line with rising global inflationary pressures, inflation is estimated to have increased to 1.9 percent at end of 2021, below the 3 percent convergence criterion, reflecting lagged pass-through of global inflation, price controls, and local market dynamics.

5. Available data point to a declining debt-to-GDP ratio in 2021, supported by improved fiscal positions. The overall fiscal deficit is estimated to have narrowed down to 2 percent of GDP, from 3.1 in 2020. The improved fiscal stance exceeded initial expectations by 0.7 percentage points of GDP, reflecting larger restraint on current expenditure (C.A.R. and Equatorial Guinea), higher oil revenue collection, except in Chad and Gabon, and stronger non-oil revenue collection, except in Congo, C.A.R. and Equatorial Guinea. As a result, public debt decreased to 58.1 percent of GDP, from 60 percent in 2020.

6. BEAC has continued to tighten monetary policy. On November 25, 2021, BEAC increased the policy rate by 25 basis points to stem the decline in reserves, and by a further 50 basis points (to 4 percent) on March 28, 2022, to anchor inflation expectations. The rate at the marginal financing window was hiked in parallel, leaving the 175-basis points corridor unchanged. BEAC also tightened liquidity. It increased the rate on liquidity absorptions operations, which had been reintroduced in August, by 30 basis points in November, and by another 25 basis points in February (to 0.75 percent), to increase the attractiveness of its liquidity absorption window. It also reduced its weekly liquidity injections from CFAF 250 billion to CFAF 230 billion in December, and gradually to CFAF 160 billion in April. During March–May 2022, BEAC shifted three additional banks structurally dependent on its liquidity injections, away from the main weekly window towards the marginal lending facility window, in line with staff recommendations. Two out of the three long-term liquidity injection operations were discontinued and the maturity of the remaining one was shortened. In September 2021, BEAC unwound the relaxation of the collateral framework for government securities adopted at the onset of the crisis, bringing haircuts on government securities back to their pre-pandemic levels. In May 2022, it increased the haircuts for non-rated countries further. Meanwhile, in January 2022, it started implementing the repatriation and surrender requirements of the FX regulations to the extractive sector.

7. COBAC started curtailing the relaxation measures taken during the pandemic, against a background of bank’s growing exposure to the sovereign. With the temporary relaxation of prudential requirements implemented since mid-2020, the reported NPL ratio peaked at 20.6 percent in 2020Q3, before coming down to 19.4 percent in 2022Q1. COVID-19 crisis-related impaired loans were estimated at CFAF 443 billion in 2021Q3, or about 4.7 percent of total loans. COBAC has initiated the normalization of its supervisory stance, hiking the capital conservation buffer by 50 basis points to 2 percent, and bringing it closer to its pre-COVID level of 2.5 percent. The COVID-related relaxation measures are expected to end by end-June 2022. Banks’ exposure to the sovereign peaked in 2021 at 28.4 percent of total banking sector assets, up from 16 percent at end-2018, reflecting mounting financing needs during the COVID-19 crisis, a bank-based financial system, a rising share of sovereign assets bearing zero-risk weights, and the large and increasing number of banks in breach of individual concentration limits. BEAC is working with CEMAC member countries to broaden the investor base for government securities on the regional securities market.

8. CEMAC member countries used most of the 2021 SDR allocated (CFAF 797 billion) to them. Staff’s advice had been that countries with stronger fiscal positions and better market access save half of their SDR allocation to support reserves build-up, and that SDR use substitute for domestic financing. Staff considers that practice has broadly aligned with this guidance. Chad drew its full SDR allocation upon receipt (CFAF 103 billion), using it to address urgent social needs, including food insecurity. C.A.R. used CFAF 35 billion out its allocation (CFAF 88 billion) in 2021 and drew the remainder in 2022, mostly to offset external budget support shortfalls. Congo is expected to use its fully drawn SDR allocation (CFAF 119 billion) for social and development spending and domestic arrears clearance in 2022. Cameroon used CFAF 50 billion to substitute for delayed IMF support in 2021 and drew another CFAF 70 billion in 2022 for COVID-related measures, planning to save the balance (about 40 percent) of its SDR allocation to rebuild fiscal buffers and external reserves. Gabon plans to use about 15 percent of its allocation in 2022 to repay domestic debt and improve the composition of domestic financing. Equatorial Guinea plans to use its fully drawn allocation (CFAF 120 billion) for domestic arrears clearance (CFAF 106 billion), with the balance mostly expected to support BEAC’s external reserves accumulation.

9. Against the background of budget support shortfalls, and despite a tighter monetary stance, the regional policy assurances for end-December 2021 were missed. Gross external reserves reversed their downward trend during the last quarter of 2021. Notwithstanding this improvement, gross reserves stood at 2.7 months of prospective imports of goods and services at end-December 2021, down from 3.2 months in December 2020. The regional policy assurances on the NFA for end-December 2021 (EUR 2.20 billion) were temporarily missed (EUR 35.1 million), mostly owing to a shortfall in budget support (EUR 71.6 million). Meeting the end-June regional policy assurances (EUR 2.81 billion) will require discipline in repatriating export proceeds and continued fiscal prudence.

Text Figure 2.
Text Figure 2.

CEMAC: Regional Daily Reserves, 2017–22’ 1

(Billions of CFA francs)

Citation: IMF Staff Country Reports 2022, 208; 10.5089/9798400211942.002.A001

1/ Excludes the reserve position with the IMF (about CFAF 36 billion). which is not explicitly reported in the situation comptable.2/ The red squares represent levels consistent with the previously endorsed (December 2018. June 2019. December 2019 and June 2020) NFA regional policy assurances. The orange squares represent the revised NFA regional policy assurances (June 2021). Green square indicates current projections without the FOGADAC Adjustment, while the purple squares refer to the NFA level without IMF credit without FOGADAC Adjustment.Source: SEAC and IMF Staff calculation.

Outlook and Risks

10. The macroeconomic outlook is favorable but predicated on continued fiscal prudence and expectation of a limited inflation pass-through. The outlook is supported by much higher oil prices than initially projected, and policies underpinning the recently approved Fund-supported arrangements.1 Real GDP growth is projected to reach 4.2 percent in 2022, driven by a strong recovery in the non-oil sector, on account of improved non-oil terms of trade (manganese, wood, gas), relaxation of COVID-19 containment measures, as well as by buoyant oil sector amid the surge in oil prices along with its positive spillover to the services sector. Inflation is projected to rise to 3.3 percent on average in 2022, slightly above the 3 percent convergence criterion, and to reach 3.5 percent by end-2022. Inflation over the medium term will depend on the magnitude and persistence of the commodity price shock, and delays in passing global inflation through to domestic prices (due to price controls, implicit subsidies, or tax reliefs granted to suppliers).

11. Fiscal positions are expected to improve. Barring slippages in adhering to program fiscal targets, the region’s overall fiscal balance is projected to improve by 3.1 percentage points of GDP in 2022, aided by the larger-than expected oil windfalls (particularly in Congo, Chad and Gabon).

12. CEMAC’s external position is expected to strengthen. The current account balance is projected to improve by 3 percentage points of GDP in 2022, up from -2.3 percent in 2021, reflecting the expected net positive impact of improved non-oil terms of trade and the oil price shock for CEMAC oil producers (Box 1). As a result, gross external reserves are projected to rise to 3.5 months of imports by end-2022.

13. The outlook is clouded by heightened uncertainties, with risks heavily tilted to the downside, underscoring the importance for the authorities to start preparing contingency plans.

  • An escalation of sanctions and other disruptions related to Russia’s invasion of Ukraine is one of the main downside risks. Global demand uncertainties, should they translate into larger oil price volatility, would cloud growth prospects. High (food) inflation could pass through to domestic prices, affecting the poor and the urban middle class and weighing on growth and possibly triggering social unrest. High fertilizers inflation could affect agriculture production and worsen food insecurity in coming years. Food and fertilizer subsidies would contain inflationary pressures but would weigh on budgets and ultimately on reserves. Tightening global financial conditions, including owing to a de-anchoring of inflationary expectations in advanced economies, would raise vulnerabilities to rollover risks, notably if they spill over into the regional market.

  • Oil subsidies represent a fiscal risk and may erode the positive impact of higher revenues if the higher subsidy bill is not offset by a reprioritization of spending. Higher oil prices may also reduce the urgency to make progress towards debt restructuring under the Common Framework (Chad).

  • Slow progress on structural reforms and failures to adhere to targets under Fund-supported programs2 may delay IMF financing and generate external financing shortfalls (Text Table 1). More broadly, strong policy implementation is needed to avoid the repeated shortfalls in catalytic donor support that have occurred over 2020–21, which is critical for strengthening external stability, diversifying the region’s financing mix, and ensuring a more equitable burden sharing, against the background of heightened Fund’s exposure to the region (Text Figure 3).

  • Low vaccination rates and, more generally, weak health infrastructure in the CEMAC also leave growth prospects vulnerable to new waves or variants of COVID-19.

  • A persistence or worsening of security challenges, weak governance and AML/CFT regimes, high perceptions of corruption, and possible post-electoral political instability may weigh on growth prospects.

  • The CEMAC region is vulnerable to climate-related shocks. In addition to energy preferences shifting away from hydrocarbons, climate change is likely to exacerbate the region’s vulnerabilities due to high poverty rates, food insecurity, political instability, and conflicts.

  • On the upside, even more elevated oil prices could allow CEMAC to rebuild buffers without compromising the recovery, and resolute advances in its governance and structural reforms could also boost growth potential.

Text Figure 3.
Text Figure 3.

CEMAC: IMF Credit Outstanding as of April 2022

Citation: IMF Staff Country Reports 2022, 208; 10.5089/9798400211942.002.A001

Text Table 1.

CEMAC: External Financing Sources

(EUR millions)

article image
Sources: World Bank, African Development Bank, European Union, France, other national authorities; and IMF estimates

After projected/targeted change in gross reserves.

Refers to the projections of the IMF CR 22/013 (December 2021 SR)

Possible Spillover Channels of the War in Ukraine on CEMAC

The main channel through which the war in Ukraine is expected to affect CEMAC is a marked increase in international commodity prices, in particular oil and food prices, given Ukraine and Russia’s 30-percent share of global wheat exports, and Russia and Belarus’ share of global fertilizer exports (20 percent). Overall, under the baseline, the impact is expected to be positive for the five oil producers in CEMAC, while C.A.R is expected to be adversely affected.

  • Higher oil prices can support CEMAC’s fiscal revenue and external balances and help rebuild reserves faster. Most CEMAC member countries, however, subsidize retail fuel prices, and subsidies may amount to more than 2 percent of GDP in some countries at current oil prices.

  • Higher wheat prices are expected to fuel food inflation and weigh both on the fiscal balance (if government spending on implicit or explicit food subsidies increases) and the current account balance (through a higher import bill). In addition, the combination of higher prices and underdeveloped social assistance systems is expected to affect the poor and the urban middle class adversely. This, in turn, could trigger social unrest.

  • Supply disruption of key industrial metals from Russia and Ukraine —both countries are major global suppliers of metals— causes disruptions in global supply chains and increases global metal prices, contributing to higher imported inflation in CEMAC through further global inflation.

Under a more adverse scenario, CEMAC would also be affected by spillovers from the war on global growth and inflation, and monetary policy responses in advanced countries, which would in turn impact global financial conditions, and possibly exchange rates for major currencies.

  • A deteriorating global demand could have significant negative spillovers for CEMAC through lower trade and lower financing from partners.

  • The tightening of global financial conditions could adversely affect external financing costs, and lead to a reassessment of risk, especially term premiums and sovereign risks. In such a scenario, the cost of Eurobond issuance could rise.

  • A depreciation of the euro against the dollar would be positive for the region as it would increase oil revenue in CFAF, while the inflationary impact would be limited given CEMAC’s large import share from the EU, provided inflation remains under control in the Eurozone.


CEMAC Trade with Ukraine and Russia

Citation: IMF Staff Country Reports 2022, 208; 10.5089/9798400211942.002.A001

Taking Advantage of High Oil Prices to Rebuild Buffers

14. Discussions focused on taking advantage of high oil prices to rebuild dearly needed buffers while navigating a very uncertain environment. Higher oil prices are a positive terms of trade shock for CEMAC on balance, offering opportunities to rebuild fiscal and external buffers. Given the volatility in oil and commodity markets, mounting global inflationary pressures, and tightening global financial conditions, CEMAC policies should be focused on strengthening fiscal balance sheets, ensuring the recovery of the banking system, and rebuilding reserves. In the meantime, structural reforms should be accelerated, including to improve governance and transparency, and diversify the economies away from fossil fuel.

A. Managing the Oil Windfall Prudently to Strengthen External Stability

15. The oil windfall offers CEMAC a unique opportunity to rebuild fiscal and external buffers. Higher oil revenues combined with prudent fiscal policies under Fund-supported programs are expected to help strengthen fiscal positions and support a reserves buildup. Staff stressed that national authorities should fend off the temptation of pro-cyclical spending, in light of the costly experience of the latest oil cycle, and gear fiscal policies towards supporting the monetary policy stance. Prudence is all the more needed in light of large shortfalls in external budget supports in recent years. Additional oil revenues could also be used to reduce debt servicing costs, by paying off expensive debts or pre-paying the stock of past statutory advances without changing previously determined expenditure envelopes. Staff stressed that CEMAC countries should respect borrowing limits under their Fund-supported programs; for low-income member countries, this includes refraining from relying on non-concessional external financing (including drawing on already contracted loans). The expected decrease in overall financing needs should lead to a reduction in domestic borrowing, which would in turn reduce fiscal dominance, enhance monetary policy space, and allow the banking system to better comply with regulatory requirements and rely less on BEAC’s refinancing. Rebuilding the SDR position with the Fund to bring holdings back to 50 percent of the allocation in countries that are not liquidity-constrained would also help sterilize excess liquidity, while limiting the risk of tighter financial conditions on governments balance sheets which stems from higher interest rates on SDR drawings.

16. Measures to shield the most vulnerable segments of the population from global energy and food price pressures should be carefully designed to ensure proper targeting and avoid consuming the oil windfalls in a prolonged surge in subsidies. Staff recommended that social safety nets be strengthened, including through targeted cash transfers, using part of the fiscal space created by higher oil prices or savings from streamlining fuel subsidies. Staff advocated reforming fuel subsidies, including crafting communication plans, with a view to increasing the pass-through of higher international oil prices to domestic retail prices. Any remaining subsidy should be well targeted, ideally limited to fuel consumed by the poorest segments of the population, like kerosene rather than petroleum, and combined with targeted social safety nets to protect the most vulnerable. If these are not available, it is advisable to implement the necessary social assistance through existing infrastructure such as those for school food programs. Subsidies should be explicit and on budget, and timebound where possible. Food subsidies should be limited to essential food items. They should be accommodated within the established budget envelopes —which may include flexibility embedded in member countries’ programs —to minimize fiscal slippages, or be financed by donors on concessional terms for low-income countries. Price controls should be discouraged given the risk of generating shortages that will push inflation into the informal economy, where it is hard to measure and could distort BEAC’s ability to take adequate policy decisions. Trade restrictions should be avoided.

17. Structural fiscal reforms should be accelerated to allow meeting the region’s development needs while preserving debt and macroeconomic stability.

  • Non-oil revenue collection needs to be intensified and tax policy reforms accelerated. Tax policy coordination across CEMAC countries is key to designing national tax systems, mobilizing additional revenues, and minimizing regional spillovers. Timely adoption of new regional tax directives (VAT, corporate income, and personal income taxes) and their subsequent implementation in domestic laws will be important to help mobilize more non-oil revenues.

  • Public investment efficiency should be improved, including through conducting PIMA exercises in countries where they have not taken place yet (CAR., Congo, and Equatorial Guinea), and accelerating the implementation of recommendations provided in the context of past PIMA reviews (Cameroon, Gabon, Chad).

  • Treasury single accounts (TSA) should be swiftly operationalized. Cameroon and Gabon have made progress on the implementation of the TSA. CAR expressed interest in signing a convention with BEAC, while the three other CEMAC countries are still in the initial phase of the reform. Progress should accelerate to provide all ministries of finance with better oversight of government cash flows and improve budget control and monitoring.

  • To enhance transparency, the coverage and dissemination of government finance and public sector debt statistics should be improved by accelerating the implementation of CEMAC’s directive related to fiscal tables (Tableau des Operations Financieres de l’Etat—TOFE).3

B. Maintaining a Prudent Monetary Policy

18. Staff and BEAC concurred that monetary policy should continue to focus on preserving the credibility of the peg and containing inflationary pressures, given exceptional global uncertainties. Staff welcomed the monetary policy committee (MPC)’s decision to hike rates in March, which, coupled with the tightening of liquidity since the Fall, attests to BEAC’s commitment to safeguard the domestic and external stability of the currency. While the tightening of the monetary and liquidity stance has been effective, Staff advised BEAC to stand ready to further contain liquidity growth, e.g., should external reserves fail to grow in line with the NFA targets, and second-round effects of global energy and food prices threaten to pass through to other prices. Supportive fiscal policies anchored in Fund-supported programs will be instrumental in ensuring that BEAC can use its policy space and avoiding a costly scenario of uncoordinated monetary and fiscal policies.

19. BEAC has continued appropriately to strengthen its liquidity management framework. Liquidity provision is being normalized to be driven by the autonomous factors of banking liquidity (AFBL). Pressures on liquidity demand are also being contained, with BEAC moving three additional liquidity-stressed banks out of the monetary policy operations and into the marginal liquidity window, in line with Staff’s advice. Staff noted that the number of banks with liquidity needs that are high but below the 10 percent of liabilities dependency threshold, had been gradually increasing since 2019. Staff recommended proactively engaging with such banks, ideally with COBAC’s support, to resolve liquidity needs before they become structurally dependent on BEAC’s support. Staff reiterated that only banks compliant with their prudential obligations should be granted access to the standard weekly liquidity window. Liquidity-stressed banks should gradually reduce their dependence on BEAC’s support, including through submitting credible refinancing plans, to contain the risks that could stem from a durable increase of BEAC’s balance sheet. BEAC emphasized that the success of such a strategy requires member countries’ support, under Fund-supported programs. BEAC and Staff also discussed required reserves, which BEAC does not currently use actively for liquidity management but could consider using should liquidity surge amid high oil prices.

20. BEAC concurred with Staff on the need to carefully contain risks to its balance sheets. The stock of past statutory advances and the stock of bonds bought in the context of BEAC’s COVID- related bond purchase program, which starts maturing in 2022Q2, should be repaid as scheduled. Higher oil prices make timely repayments feasible. BEAC’s credit line to the regional development bank (BDEAC), opened to support COVID-related investments, should be retired as credits are amortized, as should any undrawn amounts. Staff also stressed that contingent liabilities, such as BEAC’s sizeable exposure to BDEAC’s capital, should be reduced to safeguard BEAC’s balance sheet. There has been progress in clearing domestic arrears through securitization exercises in member countries (Text Table 2). These exercises help restore government solvency, support private sector growth, and improve companies’ and banks’ balance sheets. They should however be carefully designed to avoid any unintended consequences, notably an excessive buildup of government securities on BEAC’s balance sheet through refinancing, which could impede the central bank’s monetary policy implementation. Staff notably recommended that securitized government arrears, if used as collateral for refinancing operations, carry larger haircuts to reflect the lower credit quality of the underlying assets as well as to ensure such securities do not ultimately thwart BEAC’s liquidity management objectives.

Text Table 2.

CEMAC: Past Domestic Arrears Securitization Experiences

(Billions of CFAF)

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21. The FX regulation, including its adaptation to the extractive sector, remains an important element of the authorities’ toolkit.4 It is critical to ensure that high oil prices lead to greater FX repatriations by the public sector and to larger government deposits, in line with program projections. The implementation of the FX regulation to the extractive industry is ongoing, with foreign currency accounts being authorized, in line with the agreement between the extractive sector and BEAC. Discussions continue regarding the repatriation of the funds set aside for the rehabilitation of oil sites.5 BEAC has continued to demand full implementation of the regulation by banks and is imposing sanctions to banks failing to comply with surrender requirements.

22. Safeguards Assessment. The 2022 safeguards assessment update of BEAC was concluded in April 2022. BEAC has maintained strong governance arrangements following legal reforms in 2017. BEAC also completed its multi-year initiative in 2019 to transition to International Financial Reporting Standards, strengthening its financial reporting practices. The external audit arrangements continue to be robust. BEAC should continue to strengthen its risk management and resilience framework.

C. Thwarting Risks from Cryptoassets

23. On April 22, C.A.R. issued a law providing “cryptocurrencies”, and bitcoin in particular, legal tender status, making it the second country after El Salvador to do so, but the first case applied in a monetary union. The law allows tax payments to be made in cryptocurrency and provides for convertibility of bitcoin into CFAF through the creation of a trust fund. Non-compliance with the law is subject to imprisonment (10 to 20 years) and/or fine (CFAF 0.1 million to 1 million).

24. The adoption of bitcoin raises major legal issues for CEMAC and could create significant macroeconomic and financial stability risks (Annex 1). C.A.R.’s law appears to be inconsistent with the CEMAC Treaty, which provides the BEAC with the exclusive right to issue banknotes and coins serving as legal tender in the member states of the monetary union. Staff cautioned against giving legal tender status to cryptoassets and stressed that C.A.R.’s adoption of bitcoin as legal tender poses significant risks for macro-financial stability, consumer protection, and policymaking more broadly. It would be appropriate to remove the legal tender status of bitcoin, and a collective political solution would help address the inconsistencies between the C.A.R. law and the laws of the monetary union.

25. The law also raises serious financial integrity concerns. Unless effective anti-money laundering and combating the financing of terrorism (AML/CFT) measures are put in place, cryptoassets present financial integrity risks: they could be used to easily conceal and launder proceeds of corruption among other crimes, commit crimes such as terrorist financing, through undetected and unreported transactions, due notably to their pseudo-anonymous and decentralized nature. The establishment and effective implementation of a framework in line with the international standards on AML/CFT is a prerequisite to mitigate these risks.

26. Staff welcomed COBAC’s May 6 decision6 prohibiting the use of cryptocurrencies, and bitcoin in particular, by entities under its remit. The decision prohibits entities under its remit (credit, microfinance, and payment institutions, including mobile money operators, and foreign exchange offices) from holding and using cryptoassets, converting them into CFAF or legal foreign currencies, denominating balance sheets or off-balance sheet items in cryptoassets, as well as keeping their books in cryptoassets. Finally, the measures require financial sector’s entities to report identified cryptoassets-backed operations monthly to the regulators, and to upgrade their IT systems accordingly. Staff stressed the need for enhanced coordination between BEAC, the banking commission (COBAC), and the capital markets regulator (COSUMAF) in exploring regulatory options to manage the development of cryptoassets and effectively tackle the supervisory challenges that they pose.

D. Strengthening Financial Sector Policies

27. Staff advised COBAC to exit the prudential relaxation measures adopted to support the banking system during COVID by end-June 2022, as planned. Aggregate solvency in the banking system is solid but is marked by a large heterogeneity across countries and between private and public banks, and by sizable capital shortfalls, provisioning needs, and numerous prudential breaches. The stock of COVID loans was estimated by COBAC to be CFAF 433 billion (4.7 percent of total loans) as of September 2021, down from a peak of 14 percent in March 2021. These loans are concentrated in a few well-capitalized banks, and only a small portion is deemed nonperforming. As economies reopen, COBAC should avoid extending temporary measures beyond June-2022, to prevent veiling financial sector weaknesses and blunting incentives to address problem banks. It should also step-up supervision to monitor the impact of exiting COVID measures. Banks’ asset classification and provisioning should reflect credit risks and expected losses on a timely basis. Dividend distributions should be limited, especially for banks that are close to the capital adequacy regulatory minimum, until asset quality and profitability uncertainties have abated, and more robust determinations of capital adequacy can be made using on-site inspections and stress tests.

28. COBAC should ensure that banks account for sovereign risk adequately. Banks’ sovereign exposure almost doubled during the last five years, to reach 25.6 percent in 2022Q1, reflecting large public financing needs during COVID. As post-COVID fiscal consolidation takes hold, COBAC should enforce concentration limits and non-zero risk weights on sovereign exposure. This would ensure that only banks with sufficient resources build up additional risks and would help avoid crowding out the private sector. The resumption of multilateral surveillance is welcome and should allow COBAC to update risk weights. COBAC should end zero-risk weight exceptions on government bonds, or at least define their conditions very conservatively (e.g., restricting them to banks complying with concentration limits and conditioning them on properly structured and audited escrow accounts). BEAC and COBAC should also make sure that primary dealers, mainly banks, gradually sell government securities to their clients as specified in their contracts, with a view to supporting the development of the secondary market.

29. Staff urged COBAC to monitor banks’ asset quality actively, strengthen its early intervention and sanction powers, and firmly tackle weak banks. COBAC should require undercapitalized banks to submit credible medium-term recapitalization plans and establish a strategy for NPLs reduction. It should also avoid delaying the treatment of banks that were insolvent prior to the pandemic and/or those assessed as nonviable looking forward. As many banks have several breaches of solvency, liquidity ratios, and concentration limits, and since several banks do not submit timely and satisfactory refinancing, recapitalization, and recovery plans, henceforth delaying the processes, Staff recommended that COBAC escalate its actions by using gradually all the available arsenal, including early intervention, sanctions, and resolution powers when needed. Such actions would enforce the regulatory framework, ensure timely compliance, and improve the soundness of the banking system while limiting the fiscal cost of delayed decisions. COBAC should be involved in the rollout of domestic arrears repayment plans, to assess and monitor their impact on banks’ balance sheets and business viability. The coordination between BEAC and COBAC should be reinforced so that access of banks with structural liquidity needs to monetary policy operations is informed by COBAC supervisory judgment and review of recapitalization and funding plans.

30. COBAC is developing the regulatory framework. After the delays caused by the pandemic, COBAC has resumed its work agenda on implementing risk-based prudential and AML/CFT supervision, modernizing the regulatory framework in line with the Basel framework implementation plan. Progress was made on implementing the liquidity coverage ratio (LCR). Staff advised COBAC to prioritize the revision of solvency requirements and steadily improve banks governance, risk management frameworks, AML/CFT compliance, and cybersecurity. Staff reiterated the importance of strengthening COBAC’s resources and upgrading its supervisory capacity (including IT solutions), given the large number of banks and microfinance companies under its supervision, as well as the emergence of new topics and activities.

31. Staff advised against the segmentation of the government issuance market. Despite the development of a government bond market (with BEAC as the single central depository), government issuances on the stock exchange (BVMAC) have continued, with government bonds issued through BVMAC standing at about 16 percent of those issued through BEAC as of 2022Q1 (Text Figure 4). This is creating a dual market, as government bonds are heterogeneous across platforms, and hampers the development of the secondary market. Staff advised that government securities should be issued through BEAC, while BVMAC should focus on capital markets. The issuance of public securities through BVMAC, if any, should be accompanied by a strict enforcement, for acquiring banks, of the non-zero weight exception for member countries that either do not meet the regional convergence criteria or for which the issued securities are not backed with a proven-funded escrow account at BEAC.

Text Figure 4.
Text Figure 4.

CEMAC: Stock of Government Securities Monthly – CFAF Billion

Citation: IMF Staff Country Reports 2022, 208; 10.5089/9798400211942.002.A001

E. Moving Forward with the Regional Surveillance Framework

32. Staff welcomed the resumption of regional surveillance by the CEMAC Commission, after two years of pandemic-related interruption. Staff reiterated that adherence to regional convergence criteria is essential for the credibility of the regional surveillance framework. A rapid adoption by the HOS Conference of the new sanction mechanism for breaches of regional surveillance rules would strengthen the enforceability of the regional surveillance framework.7 The Commission should conduct the first internal analysis of the early warning system as planned in 2022 and urge member countries to submit updated triennial convergence plans. Staff supported the Commission’s call to accelerate the transcription of regional PFM directives into national legislations, operationalize integrated financial information management systems, switch into program-based budgeting, and implement comprehensive domestic arrears clearance strategies and medium-term debt management strategies built on integrated information systems.

Rekindling the Reform Momentum for Stronger and Inclusive Growth

33. The reform momentum needs to accelerate to achieve stronger and inclusive growth. The needed global transition to a low-carbon world economy, high oil price volatility, and increasing food price pressures underscore the need to reduce the region’s dependence on fossil fuel and unlock its non-oil growth potential, including in agriculture. Particularly:

  • National and regional authorities should accelerate the implementation of the revised 2021–25 five axes-based reforms matrix8, building on the recently established national oversight units.

  • The PREF-CEMAC steering committee (PREF-COPIL)’s growth and resilience strategy rests on regional infrastructure investments and import-substitution to enhance food security. To ensure highly effective infrastructure spending, Staff recommended strengthening PFM practices, including by upgrading public investment management and better monitoring PPP-related fiscal risks. Staff cautioned that restrictive foreign exchange practices should be avoided at all costs in the context of developing domestic agricultural production to support food security. It also urged the authorities to seek concessional resources to limit the cost of possible fertilizer subsidies, to ensure that oil windfalls are used in priority to rebuild fiscal and external buffers.

  • Staff welcomed the COPIL’s call on national governments and SOEs to repatriate FX held abroad, to strengthen external stability and foster private sector development

34. The CEMAC Commission should work closely with member countries to ease supply-side inflation pressure, by designing and implementing structural policies to facilitate intra-regional trade, and improve competition, including at the retail level. Key steps include harmonizing taxation within the region, removing key bottlenecks, leveling off the playing field between public and private firms, aligning the treatment of firms in the formal and informal sectors, reducing red tape, and improving governance, transparency in the oil sector, and broadening financial inclusion.

Monitoring of Regional Policy Assurances

35. The regional authorities moved forward with the policy commitments from the December 2021 follow-up to the Letter of support to member countries’ recovery and reform programs. BEAC maintained an appropriate monetary and liquidity stance (see para. 6, 18), hiking the interest rate to contain nascent inflationary pressures and normalizing the provision of liquidity. The FX regulation was adapted to the oil industry and implementation started in January 2022, with discussions ongoing to finalize the framework for the repatriation of rehabilitation funds. COBAC initiated the normalization of its supervisory stance, increasing the capital conservation buffer by 50 basis points to 2 percent and bringing it closer to its pre-COVID level of 2.5 percent. Despite these efforts, the regional policy assurances on NFA set for end-December 2021 were missed by a EUR 35 million margin. The deviation took place against the background of external budget support shortfalls (EUR 71.6 million), a larger than expected current account deficit due to lower than expected oil exports, and significant volatility in net inflows into reserves. Daily data confirm that the assurances were met on January 3, 2022, implying that the deviation was only temporary. After a decline in January and February 2022, the NFA resumed their upward trend.

36. The NFA position was increased to [FCFA 1,558] billion following a methodological revision. The deposit insurance fund (FOGADAC)’s deposits at BEAC (CFAF 138 billion), which are in CFAF, were originally classified as external liabilities of BEAC. Following an audit of the monetary survey methodology, BEAC has reclassified FOGADAC deposits as domestic liabilities, an approach endorsed by Staff. The move triggered a one-off increase in the NFA and commensurate decline in the NDA While this adjustment is not taken into account when assessing performance on the NFA assurance for end-December 2021, the assurances for end-June and end-December 2022 reflect the methodological change.

37. The attached follow-up letter describes proposed revisions to end- June and December 2022 NFA targets, and regional institutions’ policy intentions in support of national programs. Consistent with staff projections, the end-June 2022 and end-December 2022 proposed NFA targets covered by the updated policy assurance were set to EUR 2.81 billion and EUR 3.73 billion (Text Table 3), respectively, using the revised monetary survey methodology. The targets are in line with staff advice and consistent with program projections at the time of the review.

Text Table 3.

CEMAC: Regional Policy Assurance on NFAs, 2021–22

(Billions of euros)

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* December 2021 targets were endorsed in December 2020.

Staff Appraisal

38. Rising oil prices and projected prudent policies are expected to support a strengthening of CEMAC’s external position amid elevated risks. Two years of COVID-19 crisis brought gross reserves down to only 2.7 months of prospective imports, and NFA reached their lowest level in decades, despite the availability of Fund financing, the SDR allocations, and monetary policy tightening. The outlook for 2022 is positive, driven by high oil prices and expectations of fiscal prudence in the context of Fund-supported programs. However, this outlook faces heightened uncertainties associated with the fallout from the war in Ukraine, a possible decline in oil prices, fiscal risks created by the cost of subsidies, the irruption cryptoasset risks, domestic security issues, and the continued risks from COVID-19.

39. The BEAC’s monetary and liquidity stance was appropriately tightened. BEAC tightened monetary policy twice to stem the decline in reserves and contain nascent inflationary risks, and normalized its liquidity supply framework, returning gradually to the pre-crisis focus on the autonomous factors of banking liquidity. Normal liquidity operations are being restricted to liquid and solvent banks, with banks with structural liquidity needs being shifted to the marginal lending facility. To avert deviations from the revised NFA targets including due to rising euro area interest rates (or should inflationary expectations de-anchor), BEAC and the CEMAC member states should stand ready to identify and adopt additional measures, including further monetary and liquidity policy tightening, if needed, and tighter fiscal stances. BEAC and COBAC should address liquidity-stressed banks, including by proactively treating banks that show emerging structural liquidity needs. Progress on the TSA infrastructure are welcome, and the operationalization of TSAs should support the effectiveness of liquidity management operations.

40. COBAC’s swift reaction to the introduction of crypto currencies, and bitcoin in particular, as a legal tender in C.A.R. was a welcome stopgap to the financial sector risks created by cryptoassets. C.A.R.’s law appears to be inconsistent with the CEMAC Treaty, which grants currency issuance power to BEAC. Because it could create significant risks for macroeconomic and financial stability, financial integrity, consumer protection, and policymaking more broadly in CEMAC, Staff cautions against giving legal tender status to cryptoassets. COBAC’s May 6, 2022, decision prohibits the holding and use of cryptoassets by entities under its remit, thereby contributing to the mitigation of systemic and financial integrity risks that could arise from banks balance sheets being exposed to bitcoin’s volatility and weak AML/CFT regimes. Going forward, BEAC, COBAC, and COSUMAF should strengthen their coordination to tackle the supervisory challenges posed by cryptoassets.

41. In light of the positive macroeconomic outlook for 2022, COBAC should normalize the regulatory framework and step up its enforcement. The prudential relaxation measures taken during the pandemic are no longer justified given the expected economic rebound driven by high oil prices, and should be retired by end-June 2022, as planned. The expected resumption of dividend distributions should be conditioned on banks not breaching prudential regulations. COBAC should also ensure that banks account for sovereign risk adequately, by limiting the recourse to zero-risk weights, notably in the context of domestic arrears settlement plans. There is also a need to monitor actively banks’ asset quality, decisively reduce NPLs and tackle weak banks. To carry out its heavy workload, COBAC’s longstanding under-staffing issues need to be addressed.

42. Achieving stronger and inclusive growth requires a rekindled momentum on reforms implementation, building on priorities set out by the HOS summit. Governance, transparency, and structural reforms need to be rekindled to unleash the region’s non-oil growth potential, bolster domestic revenue mobilization and build up adequate external reserves. Improvements in PFM are needed to maximize growth dividends from envisaged infrastructure projects aimed to unlock intra-regional trade. Restrictive foreign exchange practices should be avoided at all costs in the context of developing domestic agricultural production to support food security. Concessional resources will be critical to shoulder the cost of subsidies for the agriculture sector’s development strategy, to ensure that the oil windfalls support fiscal and external buffers buildup.

43. Overall, staff: (i) notes that BEAC missed the policy assurance on the NFA provided in the November 2021 follow-up letter, largely due to lower external financing in 2021, and the deviation was temporary; (ii) supports the updated policy assurance on NFA accumulation (to bring NFA to €2.81 billion and €3.73 billion at end-June 2022 and end-December 2022, respectively). BEAC could not meet the policy assurance on the NFA provided in the December 2021 follow-up letter, despite appropriately tightening the monetary and liquidity stance. The deviation was temporary and took place against the background of external budget support shortfalls (EUR 71.6 million) and significant volatility in net inflows into reserves. Since January 2022, reserves have been building up. Staff supports the proposed updated policy assurances on the NFA targets set at EUR 2.81 billion and EUR 3.73 billion for end-June 2022 and end-December 2022, respectively, which rest on a continued prudent monetary and liquidity stance. Member states also intend to maintain macroeconomic stability, including through appropriate fiscal policy measures, and to implement ambitious structural, transparency, and governance measures to unlock the growth potential of the region, in the context of program engagement with the Fund. Nevertheless, external reserves build-up will hinge on timely disbursements of external financing in member countries. Meeting the proposed policy assurance on NFAs is critical to allow the continuation of (or approval of new) financial support as part of the Fund-supported programs with CEMAC members.

Figure 1.
Figure 1.

CEMAC: Selected Economic Indicators, 2001–22

Citation: IMF Staff Country Reports 2022, 208; 10.5089/9798400211942.002.A001

Sources: CEMAC authorities; and IMF staff estimates.
Figure 2.
Figure 2.

CEMAC: Selected Economic Indicators, 2006–25

Citation: IMF Staff Country Reports 2022, 208; 10.5089/9798400211942.002.A001

Sources: GAS Live, CEMAC authorities; and IMF staff estimates.
Figure 3.
Figure 3.

CEMAC: Recent Monetary Developments

Citation: IMF Staff Country Reports 2022, 208; 10.5089/9798400211942.002.A001

Table 1.

CEMAC: Selected Economic and Financial Indicators, 2016–26

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Sources: Authorities’ data; and IMF staff estimates and projections.

Estimated after rebasing the national real GDP series to 2005.

Using as weights the shares of member countries in CEMAC’s GDP in purchasing power parity in US dollars.

Excluding grants and foreign-financed investment and interest payments.

Refers to the projection published in the IMF Country Report No 22/013

Table 2.

CEMAC: National Accounts, 2016–26

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Sources; Authorities’ data; and IMF staff estimates and projections.

Refers to the projection published in the IMF Country Report No 22/013

Table 3a.

CEMAC: Balance of Payments, 2016–26

(Billions of CFA francs)

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Sources: BEAC; and IMF staff estimates and projections.

FDI data have been revised, including to better reflect the flows linked to the construction of the Moho-Nord platform in Congo.

Does not reflect reserve accumulation by BEAC’s central services,

Refers to the projection published in the IMF Country Report No 22/013