Central Africa’s CFA Franc Deception

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As leaders representing the two CFA Franc zones declared after long negotiations with Paris that they will no longer keep half of foreign exchange reserves with the French Treasury under the euro peg, the IMF described the Central African economic and monetary union (CEMAC) at a “crossroad” still reeling from oil export price reversal five years ago. All member countries, Cameroon, Gabon, Congo, Chad, Central Africa Republic, and Equatorial Guinea are already in or about to enter formal adjustment programs, with regional growth due to repeat 2018’s 2.5%, as the non-oil segment languishes. Inflation is the same figure, and fiscal deficits beyond agreed EU-modeled convergence criteria keep public debt over 45% of output. With stricter currency rules and modest private capital inflows the balance of payments gap is only half a percent, but the current account one could hit 3% in 2020 on lower petroleum earnings. The common central bank BEAC has tightened monetary policy but excess liquidity and an almost 20% bad loan ratio afflict banks, and ailing smaller units should be swiftly closed. Staff and expertise shortages at the system supervisor are obstacles as Basel III prudential standards will soon apply. The November CEMAC high-level summit acknowledged that foreign reserves were insufficient covering three months of imports, and that budget discipline was tilted toward government investment cuts harming medium-term growth rather than tax revenue collection. Economic diversification is slow toward agriculture and transport industries in particular, with dominant Cameroon also in the grips of a breakaway struggle with armed Anglophone groups. Repatriation of bank overseas assets should compensate for reduced donor aid, but credit extension is zero as institutions park money at BEAC or in Treasury bonds available through the nascent securities market. A 1% possible growth pickup toward mid-decade will hinge on business climate reforms, where the zone ranks behind neighbors according to the World Bank’s flagship reference.

Tax exemptions should be eliminated as collection improves, and the region needs to pay off contractual arrears above 5% of GDP, possibly in securities form, to stimulate the private sector and financial markets. The benchmark 3.5% borrowing rate stayed at the November meeting, as the IMF urged authorities to increase “absorption” operations to drain liquidity. Repos are a main short-term instrument, but pilot certificates of deposit may soon be issued. BEAC refinancing will no longer be approved beyond 10% of bank assets, and under new procedures foreign exchange can only be retained for trade purposes and not surpass 30% of repatriated client funds. Oil and mining companies have not yet adopted the regulations and are in stiff opposition, as central bank officials fan out for “consultations” that may result in big revisions. A first credit bureau will launch in 2020 accessible to microfinance providers, and in fixed income secondary trading development is a priority to create a yield curve. Treasury market-makers have been designated to sell at least one-third of inventory, and on the equity side the separate Cameroon and regional markets were merged and state enterprise IPOs are set for the coming months. The BDEAC development bank may also eventually float shares if it can be placed on a sound footing after years of minor changes, as the currency regime tempts similar fate.