Public Information Notice No. 98/57

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

August 11, 1998

On July 20, 1998, the Executive Board concluded the Article IV consultation with the Central African Republic.¹ On the same day, it also approved the authorities' request for financial support under the Enhanced Structural Adjustment Facility (see Press Release No. 98/32).

Background

In the aftermath of the January 1994 devaluation of the CFA franc, the Central African Republic adopted a comprehensive adjustment strategy supported by the IMF under a Stand-By Arrangement, which aimed at promoting a resumption of economic activity and a progressive return to financial viability. Following a period of unsatisfactory performance in both the fiscal and structural areas, the authorities undertook in late 1994 and during most of 1995 to implement a number of corrective measures in the fiscal area, and initiated a series of actions designed to revive the structural reform process and strengthen economic management. However, the authorities' efforts were interrupted during 1996 and in the first half of 1997 by three mutinies that disrupted the functioning of public administration, stifled economic activity in the capital city of Bangui, and aggravated unemployment and poverty.

With the return to peace, in April 1997, the new government endeavored to address the severe domestic financial issues and began to develop a medium-term economic strategy. Economic activity recovered in 1997, despite the damage caused by the mutinies. Real GDP increased by an estimated 5.1 percent, as a result of a strong recovery in the forestry sector, sustained growth in agriculture, and a pick-up in activity in the tertiary sector. Consumer price inflation declined to zero in the year ending December 1997.

Despite a number of corrective measures implemented during the last quarter of 1997, the fiscal situation failed to improve significantly in 1997. Revenue performance remained poor, reflecting the lingering effects of the political and security situation, long-standing weaknesses in tax and customs administration, and excessively generous exemptions granted to various domestic and foreign companies. As a result, the government accumulated sizable domestic and external payments arrears, bringing the total stock of arrears to about one-third of GDP at end-1997. Broad money fell by 7 ½ percent in 1997, compared with a 5 percent increase the previous year. Because of the central bank’s rules that limit advances to the government to 20 percent of revenue in the previous year, the authorities could not resort to domestic bank financing in 1997; outstanding credit to the private sector remained broadly unchanged throughout the year.

Prospects for 1998 and beyond

The authorities' economic program for the next three years aims at restoring financial discipline, strengthening macroeconomic management and institutional capacity, and revitalizing the process of structural reforms, with the objective of promoting sustainable growth of output and employment and reducing poverty. Program projections for 1998-2000 include an annual average growth of real GDP of 5 percent and stable inflation at about 2½ percent per annum. The government intends to implement fiscal policies designed to increase domestic resources mobilization and create an enabling environment for the private sector, with a view to raising gross domestic savings from 6.7 percent of GDP in 1997 to 9.4 percent of GDP in 2000. Gross investment is programmed to increase by 4 percentage points of GDP over 1998-2000, mostly on account of public sector investment in basic infrastructures.

Reflecting a broad range of discretionary measures taken in the original 1998 budget and in the context of a revised budget introduced in early June, a primary fiscal surplus (excluding foreign-financed expenditure) of 1.4 percent of GDP is projected for 1998, compared with a deficit of 0.6 percent of GDP in 1997. A strengthened budget position will enable the government to fund core recurrent expenditure (including wage and salaries) and increase allocations for education, health and infrastructures, including road construction. In the structural area, the program provides, inter alia, for a full privatization of oil distribution, the partial sale of government equity in the telecommunications company, and the launching of tenders for the privatization of the electricity company.

Executive Board Assessment

Executive Directors welcomed the authorities’ resolve to improve economic and financial management, which they viewed as a key element of the concerted efforts to restore peace and stability following the severe political and social unrest in 1996–97. Directors also noted the encouraging resumption of economic growth and the good domestic price performance in 1997. However, they cautioned that the economic situation remained very fragile, and called for a strong determination to improve budgetary revenues and make decisive progress in the area of structural reforms so as to alleviate poverty and consolidate the fragile social peace. They also stressed the importance of achieving a national reconciliation that would facilitate the implementation of financial and economic policies to further these objectives.

While government revenue had recovered from the severely depressed level recorded in 1996, Directors felt that this level remained insufficient to cover core government expenditure, thus giving rise to a sizable buildup of domestic and external payments arrears. Directors welcomed the initiatives taken in the context of the 1998 revised budget, but stressed that much remains to be done. They urged the authorities to step up their efforts to eliminate exemptions, broaden the tax base, and strengthen tax and customs administration. An overhaul of the tax system should be a key reform priority for the next two years. Directors encouraged the authorities to continue to adhere strictly to their tight current expenditure stance, as well as rigorous spending procedures at all government levels. They also stressed the need to improve the quality and composition of expenditure, in particular to ensure adequate allocations for priority social sectors, and to improve the transparency of all government operations and budgetary management. Directors noted that steps taken to date in this area need to be sustained.

As regards structural reforms, Directors commended the authorities for their broad-based, yet focused and properly sequenced, approach to the privatization or restructuring of public enterprises and financial institutions. The steps already taken—to offer for sale government equity in the petroleum distribution and telecommunications sectors, initiate the farming out of the electricity company, and liquidate, privatize, or restructure state-owned banks—demonstrated the authorities’ determination to improve the allocation of resources and promote private sector development. Directors noted, in particular, the importance of stepping up efforts at reestablishing a sound domestic banking system. They stressed that strict adherence to the agreed timetable and timely completion of the planned divestitures would be critical to the success of the authorities’ economic program, both in 1998 and over the medium term.

Directors observed that the Central African Republic’s financing requirements were large, especially under the 1998 program, mainly reflecting the need to regularize external debt payments arrears. Clearly, the balance of payments and budget positions would remain difficult over the medium term in view of the country’s limited export base, weak economic structures, and continued heavy debt-service obligations. Directors emphasized the importance of sustained implementation of strong macroeconomic policies and structural reforms to improve the prospects for timely and adequate mobilization of the required amounts of donor support and debt relief on highly concessional terms. In this regard, the regularization of the arrears was seen as another essential ingredient to permit the resumption of aid flows.

Directors noted that further strengthening of institutional and administrative capacity and improvement of the quality and timeliness of economic and financial statistics remainedimportant priorities. They considered that the provision of adequate and timely technical assistance from the IMF and other donors would be essential.