Highlights

  • The risk for non-payment is mitigated for members of the CEMAC monetary arrangement.
  • Sharp fall in oil prices (2014-2016) and deteriorating security situation drained the region’s liquidity buffers and raised fears for devaluation.
  • Regional consolidation and regulatory efforts should help stabilise the community’s macroeconomic position.
  • The outlook remains fragile due to underperforming non-oil growth, lacking reform compliance and a recent sharp fall in oil prices at a time of inadequate reserves buffers.

CEMAC as part of the CFA franc zone

The CFA franc monetary union includes 14 Sub-Saharan African countries (and the Comoros), divided among the West African Economic and Monetary Union (WAEMU) and the Central African Economic and Monetary Community (CEMAC), on which this piece will focus. CEMAC member states are Cameroon, the Central African Republic (CAR), Chad, Equatorial Guinea, Gabon and the Republic of Congo. The CFA franc (XOF and XAF) was anchored to the French franc until January 1999 after which the euro became the anchor currency. It was devalued in 1948, 1960 and the last 50% devaluation was in 1994, after which today’s peg of 655.95 CFA franc for 1 euro was set. The monetary cooperation with France is based on 4 principles: an unlimited convertibility guarantee from the French Treasury, fixed parities, free transferability within the region and centralisation of foreign exchange reserves at the Bank of Central African States (BEAC) while half of these reserves must be deposited in ‘operation accounts’ at the French Treasury. As a consequence, the risk for non-payment in a current trade transaction caused by transfer issues or foreign exchange shortages is mitigated for members of such a monetary arrangement. Moreover, credible monetary policies have helped keep inflation under control for years.

Oil-dependent union confronted with inadequate liquidity levels

The sharp fall in oil prices between 2014 and 2016 (see graph 2) together with the deteriorating security situation (i.e. conflict in CAR and Lake Chad region) damaged the CEMAC’s macroeconomic stability, consisting of economies highly reliant on oil export receipts (except for CAR). Deep fiscal and external imbalances emerged and most member states resorted to their deposits at the BEAC to finance their balances of payments. As a result, pooled foreign exchange reserves at the BEAC nominally shrank by a staggering 73% since the end of 2013 and merely covered 2.4 months of import by the end of 2017. This is an inadequate buffer for defending a currency peg as the IMF’s alert threshold is actually set at 5 months of import cover. Graph 1 shows the exceptional fall in CEMAC reserves that increased the risk for a liquidity crisis and raised devaluation fears of the CFA franc.

As a response, CEMAC members conjointly rejected the possibility of devaluation at the end of 2016 and expressed their desire to preserve the peg at the current level. Henceforth, in exchange for significant financial assistance, member states agreed to engage in IMF consolidation programmes to give a comprehensive regional response to the crisis. Besides fiscal consolidation efforts, reforms in the BEAC reserves management framework are being pursued to raise compliance to the reserves pooling requirements, given that a great part of foreign exchange assets were held outside the CEMAC before the oil price slump.

Equatorial Guinea, Congo and Gabon were the hardest hit by the oil crisis, as oil exports made up for 97%, 86% and 78% of their total foreign exchange receipts in 2014 respectively. Chad and Congo are considered to be ‘in debt distress’ as they defaulted on external public debts, while Gabon and Equatorial Guinea accumulated significant external payment arrears. Most member states engaged rather quickly in an IMF stabilisation programme, except for Equatorial Guinea (a preparatory programme (SMP) is put in place which could lead to an actual IMF support programme in the near term) and Congo (where programme negotiations are ongoing). Without consolidation and reforms introduced by those two countries, durable regional stabilisation will remain difficult. In fact, Equatorial Guinea and Congo used to contribute the most foreign exchange reserves together with Cameroon, but since 2017 their reserves have been practically depleted (see graph 1). Today, Cameroon is by far the region’s major reserves contributor as its economy is the best diversified and reform implementation has been generally satisfactory.

Outlook for the CEMAC

Although liquidity levels are still far from the required thresholds, devaluation is expected to be avoided because in essence, the credibility of the CFA franc peg results from the possibility of resorting to ‘unlimited advances’ from the French Treasury and the solidarity mechanism of pooled reserves. Moreover, since mid-2017, reserves have somewhat stabilised thanks to fiscal consolidation efforts under the programmes, an upturn in international oil prices and the gradual elimination of statutory advances by the BEAC. The stricter capital and repatriation requirements are essential for better centralising reserves and preventing capital flight, but in the near term implementation might lead to heavier administration for banks and temporary payment delays.

GDP growth is expected to remain confined at 1.3% in 2018, following two recession years (-1.1% in 2016 and -0.2% in 2017), while 2019 growth could reach up to 2.9% again if non-oil growth is reinforced. As a matter of fact, CEMAC oil production is projected to gradually decline over time, making investments in economic diversification away from oil crucial. Furthermore, the very recent sharp decline in international oil prices since October 2018 (see graph 2) could become a real hazard to the region. If this downward trend is persevered, it could jeopardise the CEMAC’s macroeconomic stability altogether as this time the region has no liquidity buffer available. Consequently, the CEMAC’s economic outlook remains fragile although some progress has been made since the depth of the crisis in 2016.

Analyst: Louise Van Cauwenbergh – l.vancauwenbergh@credendo.com