August 1, 2017
Six countries in central Africa have been hit hard by the collapse in commodity prices. Oil prices dropped, economic growth stalled, public debt rose, and foreign exchange reserves declined. A delayed response from policymakers, and a regional conflict have worsened the situation further for people in the region.
The countries of the Central African Economic and Monetary Community are Gabon, Cameroon, Chad, the Central African Republic, the Republic of Congo, and Equatorial Guinea. They share a common currency—the CFA franc—that is pegged to the euro, and have a common central bank that holds the region’s pool of foreign exchange reserves.
In response to their current acute economic difficulties, the countries have devised a strategy to turn their economies around. Success depends on countries’ implementation of well-coordinated policies within and across their borders.
The countries have also approached the IMF for support. In recent weeks, the IMF has approved new Fund-supported programs for Gabon, Cameroon, and Chad, and an increase in funding for the Central African Republic. Discussions are ongoing with the Republic of Congo and Equatorial Guinea.
Oil price collapse
Oil accounts for about 60 percent of the regions’ exports. Hence, the collapse in oil prices in 2014 was a huge economic blow that cut government revenues from oil exports in half between 2014 and 2016. The region’s current account deficit consequently widened substantially from 3.9 percent of GDP in 2014 to 9.3 percent in 2016.
Despite some cuts in public spending to compensate for the decline in government revenues, public debt rose from 29 percent of GDP in 2014 to 47 percent of GDP in 2016.
Economic difficulties have been compounded by security threats from Boko Haram in the Lake Chad region and civil conflict in the Central African Republic.
Countries were initially slow to respond to these shocks, and, by the end of 2016, foreign exchange reserves had dropped by US$10 billion, reaching the equivalent of about two months of imports; much lower than needed, especially for a region with a fixed exchange rate.
Recognizing the gravity and urgency of the situation, at a Summit in Yaoundé last December, country leaders decided to take the necessary measures to address their current economic difficulties, and lay the foundations for a gradual economic recovery. A cornerstone of the economic strategy is preservation of the current exchange rate peg. An important decision by the leaders was that all countries would take the necessary actions to fix the collective problem. This decision was critical because only by working together would the region’s economy as a whole begin to recover.
While each country will develop its own policies, their overall strategy emphasizes four areas to reform:
- Raise non-oil revenues through fiscal reforms, better prioritize expenditures to help stabilize public debt levels, and strengthen the transparency and efficiency of public spending.
- Protect social spending and introduce new social protection programs to ease the impact of the economic crisis on the poor.
- Strengthen the financial sector to promote stability and inclusion.
- Improve the business environment and promote economic diversification away from the overreliance on oil.
The IMF is providing support through financing, policy advice, and technical assistance.
Financing . In conjunction with other development partners, the financing we are providing will allow for a more gradual correction of imbalances than would otherwise be the case. This will also allow more time for countries to implement much-needed economic reforms that will help them become more resilient to future shocks and crises.
While our policy advice and technical assistance work covers a broad front, three areas are critical for the success of the reforms:
- Policy coordination among countries and with regional institutions. All countries need consistent implementation of their reform programs to prevent free rider problems. At the same time the regional central bank needs to remain committed to supporting country programs and raise interest rates as needed to help rebuild external reserves and support the exchange rate peg. The financial sector also needs strengthening, including by enhancing the bank supervision framework and its implementation.
- Growth-friendly and inclusive fiscal reforms. Countries can mitigate the effects of spending cuts with measures that improve the efficiency of public spending and help protect the poor. People are more likely to support reforms if governments can show that fiscal adjustment is distributed fairly and the vulnerable are protected.
- Combating corruption and increasing transparency in the use of public resources. Corruption can be a significant drain on scarce public resources and be a drag on economic growth. The six countries can demonstrate that current reforms can overcome past weaknesses with concrete steps. For example, among other policies, we encourage countries to join the Extractive Industries Transparency Initiative which supports the disclosure of information related to commodity revenues.
Ultimately, how well countries implement these reforms and how adroitly they use policies to respond to future shocks will determine the success of their strategy. The IMF stands ready to support the countries’ work to improve economic prospects for their people.