Country Report Central African Republic October 1998 Main report

Economy: IMF finally approves an ESAF deal --

On July 20th the IMF executive board finally approved an enhanced structural adjustment facility (ESAF) for the CAR. It said the first disbursement from the SDR49.4m ($66m) package of concessional funding would be made shortly. Approval of the ESAF could prove to be a turning point in the process of restoring the country's economic and financial credibility. Although the actual loan is relatively small, the reaching of a formal agreement with the Fund is likely to play an important catalytic role, and may help the country in its efforts to secure budget aid from other donors. However, much will depend on the government's ability to adhere to the agreed course of austerity and liberalisation. If complacency creeps in or -- even more damaging -- the programme is derailed by political interference on the part of Mr Patasse, July's accord may turn out to be a false dawn. Major donors such as France and the World Bank remain deeply sceptical about the CAR's conversion to structural adjustment. They feel that the IMF has taken a surprisingly generous attitude towards the country, and will watch closely for signs of slippage in the government's programme. The EIU shares their view that the Fund's assessment of the CAR's economy in recent years is optimistic, as are some of the performance targets linked with the ESAF.

Recent economic performance and ESAF programme targets (%) 1995 1996 1997 1998(a) 1999(a) 2000(a) Real GDP growth 6.0 -1.5 5.1 5.5 5.0 5.2 Consumer price inflation 19.2 4.4 0.6 2.6 2.6 2.6 Overall fiscal balance/GDP -11.2 -4.9 -6.4 -6.2 -5.9 -4.6 Current-account balance/GDP -7.1 -5.8 -4.3 -6.1 -5.4 -5.1 (a) Programme targets. Source: IMF press release.

-- following years of unease over Mr Patasse's commitment to reform --

The CAR is among the last Franc Zone countries to secure an ESAF in the wake of the 50% devaluation of the CFA franc in 1994. Like other zone members, it was accorded a post-devaluation stand-by credit on relatively easy terms, but such funding is much less concessional than ESAF aid, and the facility was designed as short-term emergency support to provide a secure framework while more profound long-term reforms and recovery plans were prepared. However, unlike many other Franc Zone states, the CAR failed to make progress in negotiating the long-term programme that an ESAF required. The principal stumbling block was President Patasse's reluctance to embark on the tough financial controls that the IMF was seeking. Ironically, the CAR was better placed than some other countries to carry out such measures without subjecting the population to undue sacrifice. It had already slimmed down the civil service in the early 1990s, and the productive economy was capable of generating sufficient tax revenue to maintain public services without further substantial cutbacks. But Mr Patasse appeared uninterested. Even after army pay arrears had provoked mutinies and a collapse into near-civil war, he was wary of reform, regarding it as a threat to his patronage base.

-- as the prime minister makes progress on public-sector reform --

The ESAF is the culmination of almost a year of strenuous efforts by the government of Michel Gbezera-Bria to rebuild the revenue collection system, put state finances into order and wrest control of the main parastatals from the presidency (3rd quarter 1998). Earlier this year the Fund outlined four areas for "priority actions" that the government had to fulfil if it was to become eligible for ESAF support. It wanted the 1998 budget revised to ensure compatibility with the targets that would be set under the ESAF. It also wanted the government to carry out a study of coffee taxation. The other two priorities related to the politically sensitive issue of parastatal companies, which have traditionally been central elements in the patronage system underpinning the presidency. The Fund wanted progress towards the privatisation of several parastatals, notably the fuel company, Petroca. As an interim step it wanted these enterprises brought under the control of a privatisation commission headed by a technocrat answerable to the prime minister, rather than President Patasse. By July all four conditions had largely been satisfied, and the government had already begun negotiations with potential bidders for Petroca. Names mentioned include major players such as Addax, Total, Elf and Shell.

-- with an upbeat new budget

In June the finance minister, Anicet Georges Dologuele, introduced a revised budget in anticipation of the ESAF deal. The sharp rise in projected tax income compared with the 1997 budget appears to reflect hoped-for revenue gains from the revival of formal sector business in Bangui and from the drive to increase collection of customs duties and the diamond tax.

Government budgets (CFAfr bn) 1997 1998 % change Total fiscal receipts 29.6 48.4 63.4 Stamp duty & others 1.6 1.4 -12.4 Indirect taxes 19.9 38.1 91.6 Direct taxes 8.1 9.0 11.1 Other income 11.5 11.5 0.0 Total receipts 41.2 59.8 45.4 Capital expenditure 37.5 53.1 41.6 Interest payments 24.1 24.5 1.6 Other current expenditure 41.1 41.5 1.0 Total expenditure 102.7 119.1 16.0 Source: Ministry of Finance and the Budget.

The UN seized on the finance minister's optimism over the economy's performance to apply pressure on Mr Patasse to accept further reform. In April the UN special envoy in Bangui, Oluyemi Adeniji, had bluntly warned that the CAR had to reach an agreement with the IMF. The unstated implication was that any backsliding on the economy might lead to an early end to the Minurca mission, threatening to plunge the CAR back into violence.

© 1998 The Economist lntelligence Unit Ltd. All rights reserved
Whilst every effort has been taken to verify the accuracy of this information, The Economist lntelligence Unit Ltd. cannot accept any responsibility or liability for reliance by any person on this information