The central African regional CEMAC bloc is unlikely to fully deliver on its fiscal consolidation and debt sustainability agenda, as its respective national governments prioritise political patronage and regime survival over fiscal and monetary prudence. Failure to successfully implement IMF-mandated reforms is likely to trigger a devaluation of the CEMAC currency, which would in turn sharply increase non-payment risks across key sectors.
On 20 May, the Congolese senate voted to approve the restructuring of USD 2.5 billion of loans from China’s Import-Export Bank, which includes eight credit agreements between Congo Republic and China. The restructuring is a key condition for the unlocking of a three-year lending programme with the International Monetary Fund (IMF). In June, the Fund’s Executive Board is due to approve, or not, a three-year Extended Credit Facility (ECF). EXX Africa made further observations on Congo’s risk outlook in a recent briefing in May (See REPUBLIC OF CONGO: IMF BAILOUT OFFERS ONLY SHORT-TERM RELIEF AS POLITICAL CHALLENGES REMAIN).
If approved, Congo Republic will become the fifth country in the central African regional bloc, the Communauté économique et monétaire de l’Afrique centrale (CEMAC), to join the IMF programme, leaving out only Equatorial Guinea. A slump in global oil prices between 2014 and 2016 saw the foreign reserves at the Bank of Central African States (BEAC) drop by 68 percent from USD15.5 billion in 2014 to USD 4.8 billion in December 2016. Reserves dropped further to USD 4.5 billion in April 2017, which amounted to less than two months of import cover. The slump also led to a combined loss of almost one percent of GDP in the CEMAC region. This fiscal and monetary crisis led to the holding of an extraordinary meeting in Cameroon, where all constituent countries agreed to undertake painful reform.
The successful completion of an IMF programme by all CEMAC countries will be critical to ensure economic recovery, as well as to stave off a devaluation of its currency by France. On the back of dwindling foreign reserves at BEAC, the French Treasury in June 2017 called for a 50 percent devaluation of the CEMAC currency, which has a fixed parity with the euro. The last time France devalued the currency by 50 percent without warning was in 1994 following a dramatic collapse in global oil prices.
The role of the IMF in CEMAC
Negotiations between the Congolese government and the IMF have been ongoing since January 2017. The main sticking point in the negotiations has been the runaway public debts of Congo owed to China and other investors, especially oil exporters. As a precondition set by the IMF, Congo should secure debt restructuring from both China and the oil exporters. Following its May vote, the Congolese parliament has finally ratified the agreement with Export-Import Bank of China that will see 33 percent of Congo’s entire debt paid in the first three years, while the remaining 67 percent paid over 15 years.
Moreover, the IMF is also demanding enhanced transparency in the oil sector, calling for state oil firm Société nationale des pétroles du Congo (SNPC) to submit to parliament a report of all pre-export financing contracts. This has to be done before the meeting of the IMF’s Executive Board later in June. Although the debt restructuring agreement with China has the potential of facilitating the approval of the ECF, there is risk of a further delay to the process in the event the government fails to declare all pre-export finance contracts and demonstrate new resolve to renegotiate these contracts.
At present, CEMAC constituents Central African Republic (CAR) and Chad have secured a three-year ECF with the IMF amounting to USD 132 million and USD 312 million respectively, while Cameroon and Gabon secured USD 666 million and USD 642 million dollars, respectively. The amount approved is a reflection of the size of the economy of each country, with CAR having the weakest economy, while Cameroon holds the largest economy in the CEMAC region. This means that the amount to be approved for Congo Republic will be between USD 500 and 600 million.
However, for most of these countries, the amount of the IMF loan is not of great importance. What is more important for some of the CEMAC countries is the fact that securing an IMF programme would legitimise contract renegotiations with commercial investors and facilitate the release of financial support from other partners in the name of debt relief or restructuring.
Social strife undermines economic diversification
Protracted social strife in Cameroon, CAR, and Chad, as well as intermittent political violence in Gabon and Congo Republic is compounding the challenges to promote economic diversification in these countries. On 6 February 2019, a peace agreement was signed in CAR between the government and 14 armed groups, raising hope for a revitalisation of country’s sluggish economy. However, armed attacks along the Bangui–Garoua Boulai corridor has led to the disruption of key exports, including gold, cotton, timber, and coffee. In Chad, the ongoing insurgency by Boko Haram together with the loss of oil revenue have left the country with three consecutive years of recession, with poverty expected to hit almost 40 percent by the end of the year. Its foreign reserves are critically depleted, amounting to just under one month’s worth of import cover, according to the latest available figures in 2018. EXX Africa is due to publish analysis briefings on Chad and CAR in the coming two weeks.
Meanwhile, Cameroon is struggling to contain the worsening security situations in the Far North from Boko Haram attacks and the North West and South West by the Anglophone separatist movement. EXX Africa has published monthly briefings on these security situations in Cameroon and their impact on the country’s economic outlook. The buoyant economic statistics for Cameroon underestimate the impact of the conflicts in the real economy (See CAMEROON: BUOYANT ECONOMY DESPITE SECURITY THREATS). Due to the rising attacks in these areas, businesses have come to a halt. Following the kidnapping of Tunisian workers in 2018, the Tunisian firm SOROUBAT-CM, abandoned the 60 km Kumba- Ekondo Titi road rehabilitation project, an important route for agricultural exports.
The North and South West regions of Cameroon, where the Anglophone separatist movement launched an armed struggle in October 2016, is a key provider for agricultural produce aimed at the export market. The fighting is disrupting the agro-business sector, with banana exports dropping, while palm oil factories, in particular the PAMOL plantations in Ndian Division, have almost ceased operations in the Anglophone regions. The Cameroon Development Corporation (CDC), which is an important debtor to local banks, is also in crisis with its plantations and mills not in operation due to the insecurity. This is likely to impact negatively the bottom line of local banks.
In times of economic hardship, CEMAC governments are more likely to pile pressures on foreign investors to extract more money. This is done mainly through arbitrary demands for backdated tax, demands for new investment, reduction of equity participations, and other unilateral demands to sponsor local projects or some government programmes.
In 2018, the government of Gabon seized the assets of the national power and water supplier, SEEG, a 51 percent subsidiary of French utility firm Veolia, before annulling its contract. This was partly due to Veolia’s refusal to bring down its equity share. Veolia took the matter to the International Centre for the Settlement of Investment Disputes (ICSID), an offshoot of the World Bank for international conciliation. The government’s action against Veolia, a French company was meant to send a strong message to other investors and concession holders to support its agenda or face serious consequences on contract stability.
Similarly, Congolese oil companies Total E&P, Eni, Perenco, Congorep, and Wing Wah E&P have received a letter in April 2019 from the authorities requesting a joint contribution towards the payment of EUR 1.7 million directly to the Organization of the Petroleum Exporting Countries (OPEC) to cover Congo’s 2018-2019 statutory contributions. Furthermore, the Congolese authorities have threatened to cancel Eni’s offtake agreement of 171,000 barrels per month, stating that the company’s contract with the government to finance infrastructural project in exchange for oil export has come to an end. Perenco and Congorep were also asked to end the practice of deducting the maritime tax from the profit of their oil sales, which was a well-established practice in the past. The Congolese government’s claim of having no knowledge about the practice was to justify future sanctions including claims for backdated tax payments.
In Cameroon, businesses are also facing a number of challenges including increasingly high operating cost, the ongoing security crisis in vast swathes of the country, and difficulty in accessing foreign currencies to pay for imports, according to the employers’ union (GICAM). The government has imposed price controls on essential commodities, such as frozen fish and rice, which together require over half a billion dollars annually for importation. Moreover, the IMF is concerned with the ailing health of some the country’s local banks as some struggling companies like PAMOL and CDC, are fast losing revenue and are struggling to honour some of their financial obligations.
In Equatorial Guinea, in September 2018, the government threatened oil companies with a licence extension refusal if they failed to invest collectively at least USD 2 billion in new oil wells. As part of its strategy, the government has launched an audit exercise to determine firms that are not complying with the National Content Regulation of 2014. The first company to fall foul of the audit has been US-based oil services company Subsea 7. The government has now ordered all energy firms in the country to cancel their contracts with the company. In its banking sector, local sources in the ministry of finance have claimed that the government has requested new loans from local banks, which is against the advice of IMF not to accumulate new arrears with local banks in a bid to protect the banking sector.
Finally, in Chad, the government with the assistance of IMF is working to improve the ailing health of the country’s two largest public banks in a bid to mitigate the risk of banking collapse. The only bright spot so far for the CEMAC banking sector is in CAR, where the government has managed to pay back commercial arrears, thereby decreasing the share of the sector’s non-performing loans. EXX Africa will continue to monitor these developments in the CEMAC region in coming months on the political, security, and economic front.