Public Information Notice No. 02/96

Public Information Notice: IMF Concludes Discussion on Recent Developments and Regional Policy Issues with the Central African Economic and Monetary Community

September 3, 2002

On June 14, 2002, the Executive Board of the International Monetary Fund (IMF) concluded the discussion on recent developments and regional policy issues with the Central African Economic and Monetary Community (CEMAC).¹

Background

The Bank of Central African States' (BEAC) public finances and external reserves position improved and real GDP growth picked up in 2000-01, thanks to favorable world oil prices. The CPI inflation rate increased to 4 percent in 2001, reflecting mainly domestic demand pressures, in part fed by growth in bank credit to governments. Prospects for 2002 are for continued strong growth in both real GDP and domestic demand. Regional monetary policy of the BEAC will therefore need to address any inflationary pressures by mopping up liquidity. However, monetary control is made difficult by the incomplete integration of financial markets and BEAC's obligation to provide statutory monetary financing to governments. Reforms to the payments system and the elimination of monetary financing of government deficits are underway to improve the effectiveness of the BEAC's instruments and facilitate the financial integration of the region.

The banking system is improving but still does not operate in an integrated fashion across national borders despite the possibility of obtaining a regional banking license. The regional banking supervisory agency, the COBAC, is in the process of further strengthening its role in supervising the financial system and encouraging regional financial integration.

Regional surveillance over fiscal policies could be improved by taking into account the volatility of oil prices. Further fiscal consolidation is needed to provide firm support to the common exchange rate regime. Convergence criteria should be adjusted for movements in oil prices, otherwise they become too lax when prices are high. Countries must also be induced to increase national saving before oil reserves become depleted. Though funds for future generations may help in the process, they need to be designed to embody adequate safeguards to ensure that investments are sound and the resources are well used.

The CEMAC has initiated a number of projects that aim at promoting regional integration, including trade liberalization, the common external tariff rates, the harmonization of taxation, facilitating movements of persons and inputs to production, enhancing multilateral surveillance, and implementing sectoral reforms. While efforts have borne fruit in some areas, in others progress has been slow.

Executive Board Assessment

Executive Directors commended the authorities of the CEMAC countries for their continued efforts to intensify regional economic integration and surveillance and to harmonize macroeconomic policies. They welcomed, in particular, the adoption of new convergence criteria and of a framework for surveillance over macroeconomic policies—while noting the need to build on this progress by strengthening aspects of implementation. Directors considered that the Fund's dialogue with CEMAC was a valuable complement to its bilateral surveillance over the member countries of the region.

Directors noted that developments in world oil markets had permitted CEMAC countries to sustain satisfactory—albeit somewhat uneven—economic growth, and to substantially increase their international reserves. Nonetheless, they considered that domestic demand had been allowed to grow too strongly—reflecting a rapid expansion in credit granted by the regional Central Bank and a procyclical fiscal policy. This had led to a rise in inflation and a deterioration in the external balance. Directors believed that the international reserve position and external competitiveness of the region remained broadly adequate. However, they stressed that the current macroeconomic situation warrants a tightening of financial policies.

Directors underscored that discipline in the public finances must be the foundation of price and exchange rate stability. While recognizing that the current fiscal position is strong, they considered that the management of the public finances could be improved. In particular, they urged that the relevant convergence criteria be adjusted to take into account the importance of oil revenues for most of the economies in the region: at present, a significant increase in the world oil price resulted in a procyclical rise in public expenditure. They suggested, for example, that fiscal goals could be based on a longer-term trend of oil prices, instead of the current price.

In this connection, Directors saw potential merit in the planned establishment of an oil revenue stabilization fund, which could serve as a buffer against oil price fluctuations. For such a fund to be effective, it would be crucial to ensure that regional surveillance over fiscal policy avoids procyclical spending and takes into account developments in the non-oil deficit. In addition, several Directors supported the creation of a long-term savings fund as one of the routes available to benefit future generations—provided it were set up with appropriate safeguards and offered adequate returns.

Turning to monetary policy, Directors welcomed the plan to phase out statutory central bank financing of government deficits, although it was questioned whether 10 years was not too long a time frame for doing so. Directors noted that regional financial markets are not well developed, which inhibits the use of open market operations and other indirect monetary policy instruments. They believed that the sale of government bonds to substitute for central bank financing would help develop domestic money and capital markets and thus further strengthen monetary control. However, they noted that this reform would require a number of legal and institutional changes and would need to be prepared carefully. Directors also supported the increase of commercial bank reserve requirements, provided these are adequately remunerated, as an important step to enhance the effectiveness of monetary policy by reducing excess liquidity. Changes along these lines would allow the regional central bank to pursue its goals more effectively and counter the recent unduly rapid growth of credit.

Regional financial integration also requires a well functioning banking system. Directors noted that, while progress has been made in strengthening bank soundness in recent years, there is scope for further improvements. They commended the authorities for their efforts to put in place an efficient regional payments system. Nonetheless, they stressed the need to go further in making effective the common banking license and developing a well-functioning interbank market—thereby creating a fully-fledged regional monetary zone. Directors also welcomed the authorities' determination to address problems of the arbitrary attachment of bank deposits. They urged further steps to strengthen the financial framework and infrastructure; and they called for additional resources to be provided to the regional supervisory agency (COBAC) to enable it to execute its functions effectively.

Directors noted that much remained to be done to implement fully the goal of a single market in the region. Thus, they welcomed the member countries' decision to further liberalize trade through a simplification of the present structure of the common external tariff and a reduction of average tariff rates. Directors stressed the importance of reducing barriers to trade in order to achieve an outward-looking customs union; and they welcomed a project to take stock of remaining regional barriers with the help of donor countries. Member countries, they emphasized, needed to fully implement the agreements they had reached—demonstrating the commitment to put regional integration goals above sectoral interests. Several Directors also noted that the region's exports of cotton were adversely affected by subsidies in advanced economies.

Directors underscored the importance of technical assistance to CEMAC members—especially in the areas of trade reform and monetary management—to strengthen the regional integration process.

Directors welcomed the amendment of the CEMAC Treaty to create an action group to combat money laundering and the financing of terrorism, and urged speedy passage and implementation of the proposed regional law addressing these activities.