- The positive terms-of-trade shock amidst the fallout from Russia’s war in Ukraine has broadly benefited CEMAC, reinforcing its external position and gradual post-pandemic recovery.
- Rising global inflation has passed through to domestic prices, putting pressure on real incomes and threatening food security and tight global financial conditions create headwinds to growth.
- A prudent management of the oil windfall and faster progress on deep structural and governance reforms are pivotal for laying the foundations for a more diversified, inclusive, and sustainable growth.
Washington, DC : On December 20, 2022, the IMF Executive Board concluded the annual discussions with the Central African Economic and Monetary Community (CEMAC) on Common Policies of Member Countries and Common Policies in Support of Member Countries Reform Programs. [1]
CEMAC is broadly benefiting from the positive terms of trade shock amidst the fallout from Russia’s war in Ukraine. Post-pandemic economic recovery is gradually taking hold, with real GDP growth expected to reach 3.4 percent in 2022, mostly supported by high oil prices and the lifting of COVID-19 containment measures. External reserves have started to build up (though still short of the desired level), with gross reserves expected to reach 3.5 months of prospective imports at end-2022, thanks to higher oil export revenues and tighter monetary policies. The regional policy assurance on net foreign assets (NFA) for end-June 2022 (EUR 2.81 billion) was met with a good margin (EUR 378 million). Global inflation pressures have passed through to domestic prices, with regional inflation expected to reach 4.6 percent by end-2022, putting pressure on real incomes and threatening food security.
Regional authorities tightened monetary policy and normalized prudential regulation in 2022, while continuing to advance the reform agenda. The Central Bank (BEAC) increased its policy rate three times in less than a year to respond to inflationary pressures and support reserves levels. In addition, it reinforced its liquidity management framework, steadily scaling back weekly liquidity injections at its monetary operations window, discontinuing all three long-term liquidity injection operations upon their maturation, and gradually returning to the pre-COVID liquidity management framework. The Banking Commission (COBAC) normalized prudential regulation, ending the temporary COVID-related prudential forbearance as planned in July 2022 and increasing the capital conservation buffer by 50 basis points to 2.5 percent. The CEMAC Commission completed its regional surveillance consultations for all six member countries in July 2022, after the post-COVID resumption in April 2022.
The outlook for 2023 is broadly positive, driven by high oil prices, the lifting of COVID-19 containment measures, and assumed continued prudent management of the oil windfall in the context of Fund-supported programs and policy advice. Inflation is projected to slow to 3.3 percent in 2023 and to revert to below the 3 percent convergence criterion from 2024 on, as monetary policy is expected to remain appropriately tight to anchor inflation expectations firmly and to support the external position. However, this outlook is also subject to headwinds and heightened uncertainties stemming from elevated debt vulnerabilities, risks of persistently high inflationary pressures, the prospect of continued tightening of global financial conditions, and regional security issues. Particularly, the near-term recalibration of fiscal stances, motivated by the desire to cushion the social impact of external shocks, will tend to slow the positive trends in public debt reduction and reserve accumulation.
In the medium term, growth is expected to rise gradually to above 3.5 percent, mostly owing to a stronger rebound in the non-oil sector, as the reforms to improve governance, transparency, and business climate are projected to bear fruit progressively. Current high oil prices, if sustained, will help rebuild fiscal and external buffers, as well as curb debt levels significantly by 2024, provided fiscal policies remain prudent. Public debt is expected to decline to close to 40 percent of GDP by 2026, down from about 53 percent of GDP in 2022. After improving in 2022, the current account balance is expected to fall to -1.2 percent of GDP in 2023, and to about -3 percent of GDP over the medium term. Gross reserves are projected to reach about 4½ months of prospective imports by 2026, slightly below staff’s adequate metrics for a resource-rich monetary union (5 months), assuming a more active management of liquidity and greater foreign exchanges repatriations, including from governments, state-owned enterprises, and the extractive sector.
Executive Board Assessment [2]
Executive Directors welcomed the strengthening of CEMAC’s external position and gradual post-COVID recovery amid the positive terms-of-trade shock linked to Russia’s war in Ukraine. Given headwinds and heightened uncertainties from elevated debt vulnerabilities, persistently high inflationary pressures, tight global financial conditions, and regional security issues, Directors urged CEMAC authorities to manage the oil windfalls prudently, to rebuild buffers and sustain a recovery that protects the most vulnerable, including through reforming energy and food subsidies while implementing targeted social safety nets.
Directors welcomed BEAC’s monetary policy tightening to date and encouraged BEAC to tighten further should it observe evidence of rising inflation, deviations from the targeted reserve path, or fiscal slippages. Directors also encouraged BEAC to work to absorb excess liquidity more effectively and implement the FX regulation transparently and consistently.
Directors encouraged the regional and country authorities in CEMAC to cooperatively resolve the inconsistency between C.A.R.’s cryptoasset law and the CEMAC Treaty. Directors also urged regional supervisors to step up coordination to ensure greater capacity in regulating digital assets, with a view to preserving the single currency, mitigating risks, and protecting consumers, while creating space for legitimate innovation.
Directors welcomed the normalization of prudential regulation and urged COBAC to move to conduct thorough asset quality reviews in the banking sector following the normalization, to better monitor and tackle NPLs, and appropriately address undercapitalized banks. They also advised COBAC to pursue a prudent approach on dividend distribution and to ensure banks account for sovereign risks adequately.
Noting mixed progress in ongoing Fund-supported programs and likely delays in completing a number of upcoming reviews, Directors underscored the importance of accelerating progress on deep structural and governance reforms, which, if coupled with prudent management of the oil windfall, should lay the foundations for a more diversified, inclusive, and sustainable growth.
Directors considered that BEAC met the policy assurance on the NFA for June 2022 provided in the July 2022 follow-up letter, which reflected inter alia greater FX repatriation and tighter monetary policy. They endorsed the updated policy assurance on NFA accumulation for end-December 2022 and end-June 2023 outlined in the December 2022 Follow-up Letter from the BEAC governor. Directors emphasized that implementation of this assurance is critical for the success of Fund-supported programs with CEMAC member countries.
[1] Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of these bilateral Article IV consultations, staff hold separate annual discussions with the regional institutions responsible for common policies in four currency unions-the Euro Area, the Eastern Caribbean Currency Union, the Central African Economic and Monetary Union, and the West African Economic and Monetary Union. For each of the currency unions, staff teams visit the regional institutions responsible for common policies in the currency union, collects economic and financial information, and discusses with officials the currency union’s economic developments and policies. On return to headquarters, staff prepares a report, which forms the basis of discussion by the Executive Board. Both staff’s discussions with the regional institutions and the Board discussion of the annual staff report will be considered an integral part of the Article IV consultation with each member.
[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’ authorities. An explanation of any qualifiers used in summing up can be found here: https://www.IMF.org/external/np/sec/misc/qualifiers.htm .