Central Africa Should Rejigger Rescue Formula (Financial Times)

As an August IMF blog recounts, four of the six countries in the Francophone Central Africa Economic and Monetary Community (CEMAC)—Cameroon, Gabon, Chad and the Central Africa Republic—are now in oil price collapse and debt crisis programs with negotiations also begun with the Republic of Congo and Equatorial Guinea. They share a common central bank and the CFA Franc currency tied to the euro and managed through the French Treasury, which requires backing with half of foreign reserves. The Fund notes that despite a summit in Yaoundé last year that pledged commodity diversification and fiscal, financial sector and business climate changes, policy maker delay and the spreading Boko Haram conflict left the region in “dire shape” to be addressed chiefly through traditional austerity and transparency nostrums. French President Macron, at the recent G-20 summit, for his part recommended a new strategy that could involve shedding the 50-year old currency peg, but his message lacked specifics and was garbled by reference to “civilizational” differences like deep-rooted corruption and large families that can frustrate growth and modernization plans. Instead of relying on historic outside bilateral and multilateral relationships to overcome its repeated predicament, Central Africa should focus on its own stalled efforts, such as in banking integration and stock exchange launch, to achieve development breakthroughs and narrow the income and sophistication gap with the neighboring West Africa UEMOA zone led by Cote d’ Ivoire and Senegal, which has started to link with the English-speaking ECOWAS group.

Oil is 60 percent of CEMAC’s exports and earnings halved from 2014-16 as the current account deficit neared 10 percent of output. Public debt rose 20 percent, approaching 50 percent of GDP, and international reserves dipped $10 billion to cover only two months’ imports, below the danger threshold exacerbated by the fixed exchange rate. The Fund arrangements feature standard formulas to correct imbalances and also limit further commercial borrowing from Cameroon and Gabon, which have issued Eurobonds and are components in JP Morgan’s NEXGEM index. Cameroon is to prioritize infrastructure projects from domestic and donor resources, and boost non-oil revenue through land taxes and ending exemptions. High bad loan levels and insolvent banks will be resolved and private sector “administrative obstacles” slashed, with 3.5 percent of GDP safeguarded for education and health spending. Gabon will improve public finance management and show progress across the World Bank’s “Doing Business” indicators, especially on company startup, construction permits, property registration and contract enforcement. After getting the first installment of its $650 million facility, GDP growth stabilized in mid-year at 1 percent with oil price recovery and mining, timber and construction contributions, with exports up almost 40 percent on an annual basis.  Both Cameroon and Gabon are led by longstanding rulers, and their governments must follow extractive industry transparency initiative (EITI) reporting and also clear and disclose outstanding contract arrears. Chad, which must restructure external commercial debt, and the Central Africa Republic, gripped by civil war, face similar program criteria with larger relative allowances for anti-poverty outlays.

As of April the central bank BEAC’s gross reserves were $4.5 billion, as it worked to maintain the integrity of the decades old CFA Franc structure, deal with the 15 percent commercial bank non-performing loan ratio, and tighten monetary policy through a 50 basis point interest rate hike and reduced access to overdraft facilities. Excess liquidity has evaporated from the system, which now requires emergency lines and recapitalization, according to a June IMF regional policy report. Stricter statutory ceilings on government borrowing will apply, and banks in turn will face collateral limitations for refinancing under the latest Fund pacts. Interbank foreign exchange and capital markets will also deepen, and supervision is due to strengthen next year with enforcement of prudential rules including connected lending, risk concentration, asset provisioning and board conduct alongside basic capital sufficiency. Several smaller banks have been closed and seized, most recently in Gabon, and with the deposit insurance regime to be finalized in 2018 other “orderly” insolvencies are likely following the terms agreed between the BEAC regulators.

These promises have fallen short in past efforts, and even if honored member countries could plot their own future direction apart from conventional recipes. They could explore a phased devaluation or peg to a wider currency basket, to include the dollar and major emerging market units given trade and investment links.  “Single passport” cross-border banking approaches should be revisited in full operational and regulatory senses and the dormant Central African securities market, with a few government and state company bond listings, can be cast as an active private sector debt and equity platform, or merged with the bigger nearby West African bourse so this frontier region charts a proprietary path that is no longer desperate.

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