The negative effects of COVID-19 on the economies of the member countries of the Central African Economic and Monetary Community, known by its French acronym, CEMAC, could lead to the devaluation of the franc cfa (FCFA) according to a report by the Bank of Central African States, popularly known by its French acronym, BEAC.
The countries in the group are Cameroon, DR Congo, Gabon, Chad, Central African Republic and Equatorial Guinea.
The devaluation would affect mostly the rate at which the FCFA is exchanged to the euro which currently stands at 655.42 FCFA to the euro.
The report noted that the coronavirus pandemic hit the region at a time when it had yet to recover from the shock of the 2014 drastic drop in oil prices – oil is the principal export earner of the CEMAC zone countries.
The 2014 oil price drop forced countries of the sub-region to adjust their budgets in 2016 with the help of the International Monetary Fund for fear of devaluation.
The new pressure on the economies of the CEMAC zone occasioned by both and drastic drop in oil prices (to less than 20 dollars per barrel) and the COVID-19 pandemic is, according to an economist at Cameroon’s Ministry of the Economy, Plan and Regional Development who opted for anonymity because he is not authorized to speak on behalf of the ministry, “like shooting at an ambulance”.
The BEAC report noted that the “level of exchange reserves of the zone has moved from 3.2 months of imports of goods and services as at December 2019 to …. three months of imports of goods and services, whereas the required level for countries that export raw materials like those of the zone is five months”.
It noted that if the coronavirus rapidly spread to add to the effects of the collapse of oil prices, there would be a recession in the economies of the CEMAC zone possibly by -4.9 per cent if oil revenue dropped to -15 per cent as against a growth rate of two per cent in 2019.
It also projected that there would be a degradation in the budgetary deficits oscillating between 6.6 per cent and 8.6 per cent as against 0.2 per cent and 1.5 per cent in the previous year.
“If the CEMAC countries don’t efficaciously fight against the COVID-19 pandemic in order to limit its economic and financial consequences, the macroeconomic situation would become untenable leading to a strong curtailment in foreign exchange reserves to two months of imports of goods and services or even a shorter period,” the report pointed out.
The report added that “Such an evolution would result in a real menace to the external stability of the currency.”
It stressed that “should there be an absence of budgetary adjustments and consequent mobilisation of external finances, BEAC would be faced with the same risks to the parity of its currency as at the end of 2016,” – a situation which almost led to the devaluation of the FCFA.
This analysis by BEAC falls in line with that of Fitch Ratings, which estimates that the drop in oil prices is putting excessive pressure on the parity between the FCFA and the euro.
Meanwhile, during the third extraordinary session of the Steering Committee of the Programme of Economic and Financial Reforms of CEMAC (PREF-CEMAC) in Brazzaville, Congo, on March 28, CEMAC ministers in-charge of the economy, finance and integration agreed on “…the urgency for rapid, solid and concrete action” against the effects of the pandemic.
But none of the countries has taken the “rapid, solid and concrete” economic action against the effects of the pandemic instead they are concentrating on the sanitary fight against the disease.
“Irrespective of the gravity of the macroeconomic situation resulting from the pessimistic scenario envisaged, it is important to underline the fact that the scope of adjustment by the central bank by way of support to the economy by the massive injection of liquidity is limited due to the still unsatisfactory level of reserves which stand at 3.27 months of imports of goods and services as at 2019 ending,” the report stated.
It noted that since April, the bank had put at the disposal of the banking system a total of 250 billion FCFA (500 million dollars) every week.
However, the level of subscription (national banks making use of the money) for now is very low but if this were to change positively, the bank could increase the amount made available each week to 500 billion FCFA (one billion dollars), the report stated.
According to the report, the Central Bank cannot go further in the weekly replenishment of the coffers of local banks because “massive and uncontrolled injection of liquidity by Central Banks is generally followed by a degradation in the external stability of the currency”.
It added that the Monetary Policy Commission of the bank had .called on BEAC to “continue to strictly apply the exchange regulations in order to avoid speculative and unjustified capital flight”.
It would appear for now that devaluation is not yet on the table and according to Fitch Ratings, as at February ending, the CEMAC reserves stood at 8.5 billion dollars representing three months of imports.
Experts at BEAC are, however, optimistic that if things stabilise at current levels, COVID-19’s effect on the economies of the sub-region may not be very devastating.