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CEMAC Staff Report Summary: Common Policies and Reform Programs

Core Content

This document presents the CEMAC Staff Report on common policies and reform programs, released in June 2019. It outlines the regional economic context, implementation of policy assurances, recent economic developments, and medium-term outlook and risks. The report also includes policy recommendations and data tables and figures to support analysis.

Key Issues

• Regional Strategy Progress: The regional strategy has helped stabilize the economic position through fiscal consolidation, tighter monetary policy, and external financial assistance. However, the region remains dependent on oil revenues, with limited economic diversification and under-performing non-oil revenues.
• Fiscal and External Position: The public debt-to-GDP ratio has declined for the first time in recent years, reaching 50% of GDP by end-2018. The external current account deficit has decreased due to higher oil exports and moderate import growth.
• Inflation and Monetary Policy: Inflation increased in 2018 due to price adjustments and supply shocks, but has since stabilized. The monetary policy remains focused on external stability.
• Challenges in the Financial Sector: The quality of bank portfolios has deteriorated, with a 4 percentage point increase in overdue loans. Only 20 out of 51 banks comply with concentration risk limits, and resolution of problem banks is slow.
• Liquidity and Excess Liquidity: Excess liquidity in the banking system has increased significantly, with BEAC's liquidity injections not keeping pace. The weighted average liquidity auction rate has increased, and marginal lending facility usage has also risen.
• Regional Cooperation: A tripartite consultative forum was established to coordinate policy responses, and policy assurances from BEAC's December 2018 letter were implemented as planned.

Main Policy Recommendations

• Sterilization of Excess Liquidity: BEAC should sterilize increasing excess liquidity in the banking system to mitigate risks to external stability and inflation.
• Strict Implementation of FX Regulations: The revised foreign exchange regulations should be well communicated to banks and the business community to avoid negative impacts on economic activity.
• Bank Portfolio Monitoring: COBAC should define a more assertive strategy to monitor non-performing loans (NPLs) and streamline the process for dealing with problem banks.
• Regional Surveillance and Integration: The regional institution should strengthen the multilateral surveillance framework and support economic diversification and regional integration.

Recent Economic Developments

• Growth and Inflation: Regional growth increased to 2.5% in 2018, with oil sector growth playing a key role. Inflation remained close to 3% and has since stabilized.
• Fiscal Performance: Fiscal consolidation efforts have brought the regional fiscal position close to balance. Congo and Equatorial Guinea have implemented strong fiscal adjustment policies, recording surpluses.
• Public Debt and Reserves: The public debt-to-GDP ratio has declined, and net foreign assets (NFA) have increased, with a surplus of €170 million in 2018. Reserves-to-imports coverage reached 2.7 months at end-2018.
• Credit and Liquidity: Credit growth remained moderate (4%), while excess liquidity continued to increase, largely due to net foreign assets. BEAC's liquidity injections have decreased, but not sufficiently to match the liquidity build-up.

Medium-Term Outlook and Risks

• Outlook for 2019: The outlook assumes full implementation of country programs, including fiscal adjustments and repayment of domestic arrears. It also anticipates new IMF-supported programs for Congo and Equatorial Guinea.
• Growth Projections: Overall growth is projected to increase to 3.4% in 2019, but may decline slightly in subsequent years due to a return to declining oil production.
• Non-oil Growth: Non-oil growth is expected to increase by 1 percentage point, reaching 2.7% in 2019, despite security challenges.
• Inflation Control: Inflation is expected to remain below convergence criteria, supported by appropriate monetary policy.
• Public Debt: The public debt-to-GDP ratio is projected to decline to 49% in 2019 and below 40% by 2023.
• Risks:
  • Downside Risks:
    • Weaker program implementation could delay external budget support.
    • Prolonged decline in oil prices would increase fiscal and external pressures.
    • Security deterioration could reduce economic activity and increase capital outflows.
  • Upside Risks:
    • Strict implementation of FX regulations could boost NFA accumulation.
    • Higher oil prices could lead to larger NFA accumulation, contributing to reduced net debt.

Key Data Highlights

• NFA Accumulation: Exceeded the end-2018 objective by €170 million.
• Oil Price Impact: Oil prices were only 3% above original projections over the period.
• Alternative Scenario: A scenario with higher oil prices could lead to an additional €500 million in NFA accumulation in 2019 and cumulative €1.2 billion by end-2020.
• Reserves-to-Imports Coverage: Reached 3.3 months at end-2019, still below the desired level for an oil-dependent region.

Conclusion

The report highlights continued progress in fiscal and monetary policy implementation, but also persistent challenges in economic diversification, financial sector stability, and external dependency. It emphasizes the need for continued vigilance, structural reforms, and coordinated regional efforts to ensure sustainable growth and financial stability. The CEMAC authorities and regional institutions are urged to maintain their commitment to the strategy and take corrective actions if needed.