INTERNATIONAL DEVELOPMENT ASSOCIATION INTERNATIONAL MONETARY FUND CENTRAL AFRICAN REPUBLIC Joint Bank-Fund Debt Sustainability Analysis – 2018 Update1 Prepared jointly by the staffs of the International Development Association (IDA) and the International Monetary Fund (IMF) Approved by Paloma Anos-Casero (IDA) and Joel Toujas-Bernate (AFR) and Martin Sommer (SPR), IMF Central African Republic (C.A.R.) continues to be assessed at high risk of external debt distress. This rating is unchanged from the previous analysis and consistent with the Staff Report of December 2017 (EBS/17/123). Under the baseline scenario, one debt burden indicator breaches its threshold. And stress tests show that both external and total public debt sustainability is vulnerable to slower GDP, export, and revenue growth. For total public and publicly guaranteed (PPG) debt (external plus domestic), the debt-to-GDP indicator remains below its prudent benchmark. However, the existence of large arrears to suppliers and unpaid public-sector wages in the domestic debt stock justifies the assessment of a heightened overall risk of debt distress. Contingent liabilities could further exacerbate vulnerability concerns. To safeguard debt sustainability, the government’s investment program requires grant financing, with highly concessional debt financing to be considered only in exceptional cases. 1C.A.R.’s average rating in the World Bank’s Country Policy and Institutional Assessment (CPIA) during 2014-2016 is 2.44. This corresponds to weak policy performance under the Debt Sustainability Framework for Low-Income Countries. BACKGROUND 1. C.A.R.’s debt is on a declining path. Debt indicators deteriorated significantly following the 2013 crisis when GDP collapsed, and domestic and external arrears were accumulated. Since then, conditions have improved, supported by economic recovery, stronger revenue mobilization, arrears clearance and limited new borrowing (Text Figure 1). At end-2017, total external public debt stood at 35.5 percent of GDP in 2017, down from 36.4 and 39.8 percent of GDP in 2016 and 2015, respectively. Total public and publicly-guaranteed (PPG) debt (external plus domestic) decreased from 64.2 percent of GDP in 2015 to 51.5 percent in 2017, reflecting a reduction of domestic debt by 6.2 percentage points of GDP and of external debt by 4.8 percentage points of GDP. 2. The authorities’ overall macroeconomic objectives aimed at reducing the debt ratio over the medium term. The government’s strategy centers on resolving pre-HIPC and post-HIPC arrears, clear domestic arrears, strengthening debt management, and relying on grant financing to support their investment program. C.A.R. reached the HIPC completion point in June 2009. Text Figure 1. C.A.R: Total Central Government Debt 2014–20 (in percent of GDP) 50.0% 80.0% 70.0% 40.0% 60.0% 30.0% 50.0% 40.0% 20.0% 30.0% 20.0% 10.0% 10.0% 0.0% 0.0% 2014 2015 2016 2017 External Debt Domestic Debt Total Debt (RHS) Sources: Authorities’ data and staff calculations. 2 RECENT DEVELOPMENTS AND STRUCTURE OF DEBT2 3. C.A.R.’s external public debt is, essentially, owed to multilateral and bilateral creditors. The composition of the external debt stock has remained unchanged over time. In 2017, most external debt was owed to multilateral creditors (13.2 percent of GDP), while debt to bilateral creditors stood at 7.8 percent of GDP and debt to private creditors at 3.1 percent of GDP. The remainder are pre-HIPC arrears (11.4 percent of GDP) owed to Non-Paris Club members (Argentina, Equatorial Guinea, Iraq, Libya, and Taiwan, China). 4. Some external creditors provided debt relief. China canceled five loans amounting to Yuan 198.4 million (2 percent of GDP) and provided flow relief on outstanding debt. Discussions with India to regularize arrears have made good progress. An agreement is being finalized based on the full clearance of arrears in 2018 and a restructuring of the remaining debt is envisaged with repayments set to start in 2024. The authorities have concluded debt restructurings with two private creditors. The small remaining amount (0.2 percent of GDP) will be repaid within 5 years. 5. C.A.R. has contracted one small new loan in 2017. The African Development Bank provided a highly concessional budget support loan of US$15 million with a grant element of 60.6 percent. 6. Domestic debt consists mainly of payment arrears and loans by the regional central bank (BEAC). At end-2017, domestic debt amounted to CFAF 195.9 billion (17.4 percent of GDP). In line with regional commitments, the government signed an agreement with BEAC to consolidate all loans and advances amounting to CFAF 80.5 billion, with a 4-year grace period, and to be repaid over 14 years. The debt to commercial banks (CFAF 27.2 billion or 2.4 percent of GDP as of December 31, 2017) will be repaid over 8 years. Arrears to private suppliers as of December 31, 2017 (CFAF 9.4 billion as of December 31, 2017) have largely been cleared. Social arrears amount to CFAF 64.9 billion (5.8 percent of GDP). They consist of wage, benefits and pension payments. According to the government clearance strategy, they should be cleared over the next three years. An international audit confirmed that the repayment of arrears at end-March 2018 is broadly in line with the timebound plan and that all safeguards are applied comprehensively. Cross-debts and other debts are estimated at CFAF 4.4 billion. Outstanding T-bills of CFAF 9.5 billion account for the remainder of the domestic debt. 2 The debt (both external and domestic) covers gross central government’s debt. Debt to the IMF is included in external debt. 3 Text Table 1. Central African Republic: Domestic and External Debt Stock 2017 External Debt 2017 Domestic Debt 2017 Type of Creditor Type of Creditor Current Arrears Total (in Total (in of which (in CFA (in CFA (in CFA percent (in CFAF percent in arrears billion) billion) billion) of GDP) billion) of GDP) Domestic Total 119.5 76.4 195.9 17.4 Total1 399.2 35.5 BEAC 80.5 0.0 80.5 7.2 Commercial Banks 27.2 0.0 27.2 2.4 Multilateral 148.4 13.2 Private Suppliers 0.0 9.4 9.4 0.8 World Bank 36.8 3.3 Social Arrears 0.0 64.9 64.9 5.8 IMF 86.4 7.7 T-Bills 9.5 0.0 9.5 0.8 Other 25.1 2.2 Cross Debt and Other 2.3 2.1 4.4 0.4 Bilateral 88.1 7.8 Sources: C.A.R. authorities and IMF Staff calculations. Paris Club 0.0 0.0 Non-Paris Club 88.1 7.8 Saudi Arabia 9.9 0.9 India 23.0 2.0 3.3 China 24.9 2.2 Congo 18.2 1.6 Kuwait 12.1 1.1 Private 34.8 3.1 25.5 Pre-HIPC Arrears 128.0 11.4 128.0 Argentina 19.4 1.7 19.4 Eq. Guinea 3.6 0.3 3.6 Iraq 2.7 0.2 2.7 Libya 7.4 0.7 7.4 Taiwan Province of China 89.1 7.9 89.1 Ofid 5.8 0.5 5.8 Sources: C.A.R. authorities and IMF Staff calculations. 1 Includes pre-HIPC arrears UNDERLYING ASSUMPTIONS 7. Macroeconomic assumptions have been updated moderately compared with the November 2017 DSA. The main changes relate to the primary balance, the non-interest current account balance and GDP growth for the medium term (Text Table 2). • Real GDP growth has been revised upward due to a pick-up in public investment. Growth is expected to reach 4.3 in 2018 and to average 5 percent over 2019–23. Longer-term output 4 gains are expected to average 3.4 percent per year, a conservative assumption given low levels of per-capita GDP. • On the fiscal front, the medium-term primary surplus has been lowered from 1.1 percent of GDP (in the 2017 DSA) to 0.6 percent of GDP, reflecting a downward revision of projected domestic revenues. In the longer term, a primary deficit of about 2 percent of GDP is projected reflecting a gradual decline in external grants. • The non-interest current account deficit is expected to decline gradually in the medium to long term. The average medium-term non-interest current account deficit is projected to improve from 6.8 percent of GDP in the 2017 DSA to 6.0 percent of GDP in the 2018 DSA, driven by more favorable export developments for wood and diamond exports. • Grant-equivalent financing is assumed to decline from an average of 7 percent of GDP in 2018-23 to about 2.7 percent of GDP in the long run (2024–38). Text Table 2. Central African Republic: Macroeconomic Projections Dec-17 DSA-18 2017 Aver. 2018-21 Aver. 2023-37 2018 Aver. 2019-23 Aver. 2024-38 (Percent of GDP; unless otherwise indicated) (Percent of GDP; unless otherwise indicated) GDP growth (percent) 4.0 4.0 3.4 4.3 5.0 3.4 GDP deflator (percent) 3.5 3.2 3.4 3.9 3.1 3.3 Non-interest current account balance -8.3 -6.8 -3.0 -8.2 -6.0 -2.8 Primary balance 0.9 1.1 -1.4 1.2 0.6 -1.9 Exports 12.8 12.7 13.2 14.7 13.9 14.0 Revenues 15.0 16.2 13.9 16.6 16.6 13.3 EXTERNAL DEBT SUSTAINABILITY RESULTS 8. The present value (PV) of the external PPG debt-to-exports ratio is expected to narrowly breach the policy threshold over 2018-19. 3 The breach has noticeably shortened compared to the 2017 DSA due mainly to debt relief and or rescheduling provided by some external creditors. All other external PPG debt indicators remain below their respective thresholds under the baseline scenario. The low level of debt service related indicators is essentially explained by the concessionality of the outstanding debt (Figure 1). 9. Alternative scenarios and stress tests underline vulnerabilities. Except for the PV of the debt-to-GDP ratio, which does not show any breach under stress tests, almost all the other external PPG debt indicators record large and protracted breaches under the most extreme shock 3 The high residual in the external debt sustainability framework (Table 1 on p.10) can be explained by project grants (recorded in the capital account) and unrecorded non-debt creating inflows. (continued) 5 scenarios. The PV of debt-to-exports ratio remains above the policy threshold throughout the projection period, under a combination stress-test.4 Furthermore, the PV of debt-to-revenue ratio stays above its threshold from 2019 until 2025 under the same assumptions. These sensitivity analyses underline the vulnerabilities to lower growth and exports—which stand as the most extreme shock scenario. It should be noted that the historical scenario provides a distorted picture of future developments due to the impact of the 2013 crisis. PUBLIC DEBT SUSTAINABILITY RESULTS 10. The total PPG debt (external plus domestic) indicator lies below its respective benchmark under the baseline scenario. The total PPG debt indicator does not show any breach under the baseline scenario. Such results would suggest an attenuated risk of total PPG debt distress. However, the large share of arrears in the domestic debt stock (40 percent) justifies the assessment of heightened overall risk of debt distress. Under the most extreme shock scenario, a falloff in GDP growth, the PV of debt-to-GDP ratio remains above the benchmark from 2024 until the end of the projection period. The sensitivity analysis shows that total debt is vulnerable to lower GDP and revenue growth. In addition, contingent liabilities could further exacerbate sustainability concerns. The main sources of contingent liabilities in C.A.R. pertain to debt held by the three main state-owned enterprises (ENERCA, SODECA, SOCATEL) which operate respectively in the energy, water and telecommunications sectors. Their debt is essentially domestic and held by commercial banks. The government did not guarantee this debt. CONCLUSION 11. The updated DSA confirms that C.A.R. stands at high risk of external debt distress, with overall risk heightened by large domestic arrears, and potential for contingent liabilities to worsen debt dynamics. This rating reflects mainly the past collapse of GDP, tax revenues, and exports as well as the existence of legacy external arrears. The outlook is subject to significant downside risks. An escalation of violence would depress growth and lower revenues and alternative scenarios show that C.A.R.’s debt trajectory is vulnerable to GDP, export and revenue shocks. Contingent liabilities could exacerbate debt vulnerabilities and sustainability concerns. The PV of external debt-to-exports ratio remains for a short time above the policy threshold under the baseline scenario. 12. The authorities concur with staff’s assessment. Consistent with the conclusions, the authorities remain committed to securing grants to finance investments and contracting highly concessional loans only in exceptional cases. 4 The combination stress test reflects the combined effect of a scale-back in real GDP and export growth, with diminishing inflation and reduced non-debt creating flows (0.5 standard deviation below historic averages). 6 Table 1. Central African Republic: External Debt Sustainability Framework, Baseline Scenario, 2015–38 1/ (Percent of GDP, unless otherwise indicated) Actual Historical 6/ Standard 6/ Projections Average Deviation 2018-2023 2024-2038 2015 2016 2017 2018 2019 2020 2021 2022 2023 Average 2028 2038 Average External debt (nominal) 1/ 39.8 36.4 35.5 32.5 30.3 27.5 25.0 22.7 20.4 19.2 22.0 of which: public and publicly guaranteed (PPG) 39.8 36.4 35.5 32.5 30.3 27.5 25.0 22.7 20.4 19.2 22.0 Change in external debt 2.1 -3.4 -0.9 -3.0 -2.2 -2.8 -2.5 -2.3 -2.3 1.0 0.9 Identified net debt-creating flows 11.6 4.3 4.4 6.3 4.9 4.2 3.4 3.0 3.0 1.1 1.1 Non-interest current account deficit 8.7 8.2 8.4 7.3 2.3 8.2 7.4 6.8 5.7 5.2 5.0 2.8 2.8 2.8 Deficit in balance of goods and services 22.0 19.1 17.5 18.3 16.4 15.2 13.9 13.1 12.6 9.5 8.0 Exports 12.6 14.3 15.3 14.7 14.4 14.1 13.9 13.8 13.4 14.0 14.0 Imports 34.6 33.5 32.8 33.0 30.8 29.3 27.9 26.9 26.1 23.5 22.0 Net current transfers (negative = inflow) -12.5 -10.9 -8.9 -7.9 5.0 -9.9 -8.9 -8.2 -8.1 -7.8 -7.5 -7.2 -5.2 -6.6 of which: official -5.8 -5.2 -3.4 -4.8 -4.1 -3.5 -3.5 -3.4 -3.2 -3.8 -2.6 Other current account flows (negative = net inflow) -0.8 0.0 -0.2 -0.2 -0.1 -0.1 -0.1 -0.1 -0.1 0.6 0.0 Net FDI (negative = inflow) -0.3 -0.4 -0.9 -1.8 1.8 -0.8 -1.1 -1.4 -1.3 -1.2 -1.1 -1.3 -1.2 -1.4 Endogenous debt dynamics 2/ 3.3 -3.5 -3.2 -1.1 -1.3 -1.2 -1.1 -1.0 -0.9 -0.4 -0.5 Contribution from nominal interest rate 0.4 0.3 0.2 0.2 0.2 0.2 0.2 0.2 0.1 0.2 0.2 Contribution from real GDP growth -1.9 -1.6 -1.4 -1.3 -1.5 -1.4 -1.3 -1.2 -1.1 -0.6 -0.7 Contribution from price and exchange rate changes 4.8 -2.2 -1.9 … … … … … … … … Residual (3-4) 3/ -9.6 -7.6 -5.3 -9.3 -7.1 -7.0 -5.9 -5.3 -5.3 -0.1 -0.2 of which: exceptional financing 0.0 -0.2 0.2 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 PV of external debt 4/ ... ... ... 15.6 15.5 14.7 13.5 12.3 11.2 10.0 8.3 11.5 In percent of exports ... ... ... 102.3 105.4 102.4 95.4 88.3 81.5 74.6 59.2 82.1 PV of PPG external debt ... ... ... 15.6 15.5 14.7 13.5 12.3 11.2 10.0 8.3 11.5 In percent of exports ... ... ... 102.3 105.4 102.4 95.4 88.3 81.5 74.6 59.2 82.1 In percent of government revenues ... ... ... 188.2 168.1 155.1 137.6 122.2 108.7 94.4 69.0 95.8 Debt service-to-exports ratio (in percent) 8.3 7.9 2.4 9.2 8.2 6.6 6.5 6.2 8.0 5.5 3.1 PPG debt service-to-exports ratio (in percent) 8.3 7.9 2.4 9.2 8.2 6.6 6.5 6.2 8.0 5.5 3.1 PPG debt service-to-revenue ratio (in percent) 14.7 13.8 4.4 14.7 12.4 9.5 9.0 8.3 10.2 6.4 3.7 Total gross financing need (Billions of U.S. dollars) ... 0.1 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.1 0.2 Non-interest current account deficit that stabilizes debt ratio 6.6 11.6 9.3 11.2 9.6 9.6 8.2 7.4 7.4 1.8 1.9 Key macroeconomic assumptions Real GDP growth (in percent) 4.8 4.5 4.3 -0.8 12.7 4.3 5.0 5.0 5.0 5.0 5.0 4.9 3.5 3.4 3.4 GDP deflator in US dollar terms (change in percent) -11.4 6.0 5.6 3.4 8.3 14.1 4.6 4.4 3.7 3.6 3.3 5.6 3.3 3.3 2.8 Effective interest rate (percent) 5/ 0.9 0.9 0.6 1.8 0.8 0.5 0.5 0.6 0.6 0.7 0.7 0.6 0.9 0.9 0.9 Growth of exports of G&S (US dollar terms, in percent) -10.0 25.6 17.7 3.2 15.9 14.2 7.6 7.6 7.6 7.7 5.5 8.4 6.9 6.9 6.6 Growth of imports of G&S (US dollar terms, in percent) -14.5 7.2 8.0 7.1 25.3 19.8 2.4 4.3 3.7 5.1 5.1 6.7 6.9 6.9 5.2 Grant element of new public sector borrowing (in percent) ... ... ... ... ... ... 37.0 37.4 51.4 51.4 51.4 51.4 46.7 51.4 51.4 51.4 Government revenues (excluding grants, in percent of GDP) 7.1 8.2 8.3 9.2 9.5 9.8 10.1 10.3 10.6 12.0 12.0 11.6 Aid flows (in Billions of US dollars) 7/ 0.1 0.1 0.1 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.3 of which: Grants 0.1 0.1 0.1 0.2 0.2 0.2 0.2 0.2 0.2 0.1 0.1 of which: Concessional loans 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.2 Grant-equivalent financing (in percent of GDP) 8/ ... ... ... ... 8.9 8.2 7.2 6.5 6.3 6.2 3.4 2.3 2.7 Grant-equivalent financing (in percent of external financing) 8/ ... ... ... ... 78.5 88.1 96.6 96.5 96.7 96.8 71.7 65.3 74.9 Memorandum items: Nominal GDP (Billions of US dollars) 1.6 1.8 1.9 2.3 2.5 2.8 3.0 3.3 3.6 4.6 9.0 Nominal dollar GDP growth -7.1 10.8 10.2 19.1 9.9 9.6 8.9 8.8 8.5 10.8 6.9 6.9 6.4 PV of PPG external debt (in Billions of US dollars) 0.3 0.4 0.4 0.4 0.4 0.4 0.4 0.4 1.0 (PVt-PVt-1)/GDPt-1 (in percent) 2.1 0.7 0.0 -0.1 -0.1 -0.4 0.4 1.0 1.4 0.7 Gross workers' remittances (Billions of US dollars) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 PV of PPG external debt (in percent of GDP + remittances) ... ... 15.8 15.6 14.8 13.6 12.4 11.3 10.1 8.3 11.5 PV of PPG external debt (in percent of exports + remittances) ... ... 108.6 111.8 108.5 100.8 93.1 85.8 78.4 60.0 82.9 Debt service of PPG external debt (in percent of exports + remittances) ... ... 2.5 9.8 8.6 7.0 6.8 6.6 8.5 5.6 3.2 Sources: Country authorities; and staff estimates and projections. 0 1/ Includes both public and private sector external debt. 2/ Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms. 3/ Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes. 4/ Assumes that PV of private sector debt is equivalent to its face value. 5/ Current-year interest payments divided by previous period debt stock. 6/ Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability. 7/ Defined as grants, concessional loans, and debt relief. 8/ Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt). 7 Table 2. Central African Republic: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2018 –38 (Percent) Projections 2018 2019 2020 2021 2022 2023 2028 2038 PV of debt-to GDP ratio Baseline 15 15 13 12 11 10 8 11 A. Alternative Scenarios A1. Key variables at their historical averages in 2018-2038 1/ 15 15 15 15 15 16 24 52 A2. New public sector loans on less favorable terms in 2018-2038 2 15 15 14 13 12 11 12 18 B. Bound Tests B1. Real GDP growth at historical average minus one standard deviation in 2019-2020 15 18 20 18 17 15 12 17 B2. Export value growth at historical average minus one standard deviation in 2019-2020 3/ 15 16 17 16 15 13 11 13 B3. US dollar GDP deflator at historical average minus one standard deviation in 2019-2020 15 16 16 15 14 12 10 14 B4. Net non-debt creating flows at historical average minus one standard deviation in 2019-2020 4/ 15 18 20 19 18 16 14 14 B5. Combination of B1-B4 using one-half standard deviation shocks 15 21 29 27 25 23 20 19 B6. One-time 30 percent nominal depreciation relative to the baseline in 2019 5/ 15 21 19 17 16 14 12 16 PV of debt-to-exports ratio Baseline 105 102 95 88 82 75 59 82 A. Alternative Scenarios A1. Key variables at their historical averages in 2018-2038 1/ 105 107 106 108 112 116 173 371 A2. New public sector loans on less favorable terms in 2018-2038 2 105 105 99 92 86 80 82 128 B. Bound Tests B1. Real GDP growth at historical average minus one standard deviation in 2019-2020 105 103 96 89 82 75 59 82 B2. Export value growth at historical average minus one standard deviation in 2019-2020 3/ 105 139 185 173 162 151 123 137 B3. US dollar GDP deflator at historical average minus one standard deviation in 2019-2020 105 103 96 89 82 75 59 82 B4. Net non-debt creating flows at historical average minus one standard deviation in 2019-2020 4/ 105 128 144 136 127 120 99 97 B5. Combination of B1-B4 using one-half standard deviation shocks 105 142 187 176 165 156 129 124 B6. One-time 30 percent nominal depreciation relative to the baseline in 2019 5/ 105 103 96 89 82 75 59 82 PV of debt-to-revenue ratio Baseline 168 155 138 122 109 94 69 96 A. Alternative Scenarios A1. Key variables at their historical averages in 2018-2038 1/ 168 162 154 150 149 146 202 432 A2. New public sector loans on less favorable terms in 2018-2038 2 168 159 142 128 115 101 96 149 B. Bound Tests B1. Real GDP growth at historical average minus one standard deviation in 2019-2020 168 189 203 180 160 139 102 141 B2. Export value growth at historical average minus one standard deviation in 2019-2020 3/ 168 170 176 158 142 125 95 105 B3. US dollar GDP deflator at historical average minus one standard deviation in 2019-2020 168 172 167 148 131 114 83 116 B4. Net non-debt creating flows at historical average minus one standard deviation in 2019-2020 4/ 168 194 208 188 169 151 115 113 B5. Combination of B1-B4 using one-half standard deviation shocks 168 226 300 271 245 219 168 161 B6. One-time 30 percent nominal depreciation relative to the baseline in 2019 5/ 168 219 194 172 153 133 97 134 8 CENTRAL AFRICAN REPUBLIC Table 2. Central African Republic: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2018–38 (concluded) (Percent) Debt service-to-exports ratio Baseline 9 8 7 6 6 8 6 3 A. Alternative Scenarios A1. Key variables at their historical averages in 2018-2038 1/ 9 9 8 8 8 11 9 16 A2. New public sector loans on less favorable terms in 2018-2038 2 9 8 7 7 6 8 4 6 B. Bound Tests B1. Real GDP growth at historical average minus one standard deviation in 2019-2020 9 8 7 6 6 8 6 3 B2. Export value growth at historical average minus one standard deviation in 2019-2020 3/ 9 10 10 10 10 13 10 6 B3. US dollar GDP deflator at historical average minus one standard deviation in 2019-2020 9 8 7 6 6 8 6 3 B4. Net non-debt creating flows at historical average minus one standard deviation in 2019-2020 4/ 9 8 7 7 7 9 7 5 B5. Combination of B1-B4 using one-half standard deviation shocks 9 9 9 9 9 11 9 6 B6. One-time 30 percent nominal depreciation relative to the baseline in 2019 5/ 9 8 7 6 6 8 6 3 Debt service-to-revenue ratio Baseline 15 12 10 9 8 10 6 4 A. Alternative Scenarios A1. Key variables at their historical averages in 2018-2038 1/ 15 13 11 11 11 14 11 18 A2. New public sector loans on less favorable terms in 2018-2038 2 15 12 10 9 9 11 5 7 B. Bound Tests B1. Real GDP growth at historical average minus one standard deviation in 2019-2020 15 15 14 13 12 15 9 5 B2. Export value growth at historical average minus one standard deviation in 2019-2020 3/ 15 12 10 10 9 11 7 5 B3. US dollar GDP deflator at historical average minus one standard deviation in 2019-2020 15 14 11 11 10 12 8 4 B4. Net non-debt creating flows at historical average minus one standard deviation in 2019-2020 4/ 15 12 10 10 9 11 9 6 B5. Combination of B1-B4 using one-half standard deviation shocks 15 15 14 14 13 16 12 8 B6. One-time 30 percent nominal depreciation relative to the baseline in 2019 5/ 15 17 13 13 12 14 9 5 Memorandum item: Grant element assumed on residual financing (i.e., financing required above baseline) 6/ 50 50 50 50 50 50 50 50 Sources: Country authorities; and staff estimates and projections. 1/ Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows. 2/ Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline. 3/ Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels). 4/ Includes official and private transfers and FDI. 5/ Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent. 6/ Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2. INTERNATIONAL MONETARY FUND 9 Table 3. Central African Republic: Public Sector Debt Sustainability Framework, Baseline Scenario, 2015–38 1/ (Percent of GDP, unless otherwise indicated) Actual Estimate Projections 5/ Standard 5/ 2018-23 2024-38 Average 2015 2016 2017 Deviation 2018 2019 2020 2021 2022 2023 Average 2028 2038 Average Public sector debt 1/ 64.2 56.0 52.9 47.0 41.9 38.6 35.7 33.0 30.6 30.1 28.7 of which: foreign-currency denominated 39.8 36.4 35.5 32.5 30.3 27.5 25.0 22.7 20.4 19.2 22.0 Change in public sector debt -5.0 -8.1 -3.1 -6.0 -5.1 -3.2 -2.9 -2.7 -2.4 1.1 0.4 Identified debt-creating flows -2.8 -6.9 -7.7 -6.7 -4.7 -3.6 -3.3 -3.1 -2.9 -0.5 0.6 Primary deficit 0.1 -2.1 0.8 0.1 2.5 -1.2 -1.0 -0.5 -0.5 -0.6 -0.7 -0.7 1.2 2.2 1.9 Revenue and grants 14.3 14.1 13.7 16.6 17.0 16.7 16.3 16.5 16.6 14.0 13.0 of which: grants 7.2 6.0 5.4 7.4 7.6 6.9 6.3 6.1 6.0 2.0 1.0 Primary (noninterest) expenditure 14.4 12.0 14.5 15.4 16.1 16.2 15.8 15.9 15.9 15.2 15.2 Automatic debt dynamics -1.9 -4.7 -7.5 -5.4 -3.7 -3.1 -2.8 -2.5 -2.3 -1.7 -1.6 Contribution from interest rate/growth differential -6.5 -5.9 -3.8 -3.8 -3.4 -2.9 -2.6 -2.4 -2.2 -1.7 -1.6 of which: contribution from average real interest rate -3.3 -3.1 -1.5 -1.6 -1.1 -0.9 -0.8 -0.7 -0.6 -0.7 -0.7 of which: contribution from real GDP growth -3.2 -2.8 -2.3 -2.2 -2.3 -2.0 -1.8 -1.7 -1.6 -1.0 -0.9 Contribution from real exchange rate depreciation 4.5 1.1 -3.7 -1.7 -0.3 -0.2 -0.2 -0.1 -0.1 ... ... Other identified debt-creating flows -1.0 -0.1 -1.0 -0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Privatization receipts (negative) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Recognition of implicit or contingent liabilities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Debt relief (HIPC and other) -1.0 -0.1 -1.0 -0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other (specify, e.g. bank recapitalization) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Residual, including asset changes -2.2 -1.2 4.6 0.8 -0.4 0.4 0.4 0.4 0.5 1.6 -0.1 Other Sustainability Indicators PV of public sector debt ... ... 33.1 29.9 26.3 24.6 23.0 21.6 20.2 19.2 18.2 of which: foreign-currency denominated ... ... 15.6 15.5 14.7 13.5 12.3 11.2 10.0 8.3 11.5 of which: external ... ... 15.6 15.5 14.7 13.5 12.3 11.2 10.0 8.3 11.5 PV of contingent liabilities (not included in public sector debt) ... ... ... ... ... ... ... ... ... ... ... Gross financing need 2/ 1.3 -0.8 2.1 1.1 1.0 1.2 1.1 0.9 1.0 2.4 2.8 PV of public sector debt-to-revenue and grants ratio (in percent) … … 241.4 180.0 154.1 147.7 141.1 131.1 122.0 136.8 139.7 PV of public sector debt-to-revenue ratio (in percent) … … 397.9 325.6 277.0 251.7 228.8 208.4 190.6 159.6 151.3 of which: external 3/ … … 188.2 168.1 155.1 137.6 122.2 108.7 94.4 69.0 95.8 Debt service-to-revenue and grants ratio (in percent) 4/ 8.9 9.4 3.8 9.1 7.7 6.3 6.2 5.9 7.1 5.7 3.4 Debt service-to-revenue ratio (in percent) 4/ 18.0 16.3 6.2 16.5 13.9 10.8 10.1 9.4 11.1 6.6 3.7 Primary deficit that stabilizes the debt-to-GDP ratio 5.1 6.0 3.9 4.8 4.1 2.7 2.4 2.1 1.8 0.1 1.8 Key macroeconomic and fiscal assumptions Real GDP growth (in percent) 4.8 4.5 4.3 -0.8 12.7 4.3 5.0 5.0 5.0 5.0 5.0 4.9 3.5 3.4 3.4 Average nominal interest rate on forex debt (in percent) 0.9 0.9 0.6 1.8 0.8 0.5 0.5 0.6 0.6 0.7 0.7 0.6 0.9 0.9 0.9 Average real interest rate on domestic debt (in percent) -5.0 -5.0 -2.6 -0.2 6.1 -2.8 -2.0 -1.6 -1.5 -1.4 -1.5 -1.8 -3.0 ... -2.6 Real exchange rate depreciation (in percent, + indicates depreciation) 13.3 3.2 -10.9 2.5 7.5 -5.1 ... ... ... ... ... ... ... ... ... Inflation rate (GDP deflator, in percent) 6.2 6.3 3.5 5.1 2.9 3.9 3.4 3.2 3.0 2.9 2.9 3.2 3.3 3.3 3.3 Growth of real primary spending (deflated by GDP deflator, in percent) 24.3 -12.4 25.5 3.7 11.8 11.1 9.3 5.8 2.5 5.6 5.1 6.6 3.5 3.4 3.2 Grant element of new external borrowing (in percent) ... ... ... … … 37.0 37.4 51.4 51.4 51.4 51.4 46.7 51.4 51.4 ... Sources: Country authorities; and staff estimates and projections. 1/ [Indicate coverage of public sector, e.g., general government or nonfinancial public sector. Also whether net or gross debt is used.] 2/ Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period. 3/ Revenues excluding grants. 4/ Debt service is defined as the sum of interest and amortization of medium and long-term debt. 5/ Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability. Table 4. Central African Republic: Sensitivity Analysis for Key Indicators of Public Debt, 2018 –38 Projections 2018 2019 2020 2021 2022 2023 2028 2038 PV of Debt-to-GDP Ratio Baseline 30 26 25 23 22 20 19 18 A. Alternative scenarios A1. Real GDP growth and primary balance are at historical averages 30 28 28 28 28 29 29 19 A2. Primary balance is unchanged from 2018 30 26 24 22 20 19 12 -2 A3. Permanently lower GDP growth 1/ 30 27 26 26 25 25 34 70 B. Bound tests B1. Real GDP growth is at historical average minus one standard deviations in 2019-2020 30 33 40 39 39 39 50 65 B2. Primary balance is at historical average minus one standard deviations in 2019-2020 30 28 28 26 24 23 22 20 B3. Combination of B1-B2 using one half standard deviation shocks 30 31 34 33 32 32 37 46 B4. One-time 30 percent real depreciation in 2019 30 32 30 28 26 24 20 17 B5. 10 percent of GDP increase in other debt-creating flows in 2019 30 31 29 27 26 24 23 20 PV of Debt-to-Revenue Ratio 2/ Baseline 180 154 148 141 131 122 137 140 A. Alternative scenarios A1. Real GDP growth and primary balance are at historical averages 180 162 162 162 158 155 191 128 A2. Primary balance is unchanged from 2018 180 153 145 136 124 113 88 -12 A3. Permanently lower GDP growth 1/ 180 157 154 152 147 144 232 507 B. Bound tests B1. Real GDP growth is at historical average minus one standard deviations in 2019-2020 180 176 199 204 204 204 334 486 B2. Primary balance is at historical average minus one standard deviations in 2019-2020 180 164 167 159 148 138 155 151 B3. Combination of B1-B2 using one half standard deviation shocks 180 171 181 182 177 174 257 347 B4. One-time 30 percent real depreciation in 2019 180 188 179 170 157 145 146 131 B5. 10 percent of GDP increase in other debt-creating flows in 2019 180 183 176 168 156 146 164 157 Debt Service-to-Revenue Ratio 2/ Baseline 9 8 6 6 6 7 6 3 A. Alternative scenarios A1. Real GDP growth and primary balance are at historical averages 9 8 7 7 7 9 8 4 A2. Primary balance is unchanged from 2018 9 8 6 6 6 7 5 -1 A3. Permanently lower GDP growth 1/ 9 8 7 7 6 8 8 13 B. Bound tests B1. Real GDP growth is at historical average minus one standard deviations in 2019-2020 9 9 8 8 8 10 10 16 B2. Primary balance is at historical average minus one standard deviations in 2019-2020 9 8 7 7 6 7 6 4 B3. Combination of B1-B2 using one half standard deviation shocks 9 8 7 8 7 9 8 11 B4. One-time 30 percent real depreciation in 2019 9 9 9 9 8 10 8 6 B5. 10 percent of GDP increase in other debt-creating flows in 2019 9 8 7 7 6 7 6 5 Sources: Country authorities; and staff estimates and projections. 1/ Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period. 2/ Revenues are defined inclusive of grants. 11 Figure 1. Central African Republic: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2018–38 1/ a. Debt Accumulation b.PV of debt-to GDP ratio 10 60 60 8 50 50 6 40 40 4 30 30 2 20 20 0 10 2018 2023 2028 2033 2038 -2 0 10 Rate of Debt Accumulation 0 Grant-equivalent f inancing (% of GDP) 2018 2023 2028 2033 2038 Grant element of new borrowing (% right scale) c.PV of debt-to-exports ratio d.PV of debt-to-revenue ratio 500 400 450 350 400 300 350 250 300 200 250 200 150 150 100 100 50 50 0 0 2018 2023 2028 2033 2038 2018 2023 2028 2033 2038 e.Debt service-to-exports ratio f.Debt service-to-revenue ratio 18 25 16 20 14 12 15 10 8 10 6 4 5 2 0 0 2018 2023 2028 2033 2038 2018 2023 2028 2033 2038 Scenario de Base Historical scenario Most extreme shock 1/ Threshold Sources: Country authorities; and staff estimates and projections. 1/ The most extreme stress test is the test that yields the highest ratio on or before 2028. In figure b. it corresponds to a Combination shock; in c. to a Combination shock; in d. to a Combination shock; in e. to a Exports shock and in figure f. to a Combination shock 12 Figure 2. Central African Republic: Indicators of Public Debt Under Alternative Scenarios, 2018–38 Most extreme shock Growth Baseline Fix Primary Balance Most extreme shock 1/ Historical scenario Public debt benchmark 70 60 PV of Debt-to-GDP Ratio 50 40 30 20 10 0 -10 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 600 PV of Debt-to-Revenue Ratio 2/ 500 400 300 200 100 0 -100 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 18 16 Debt Service-to-Revenue Ratio 14 12 10 8 6 4 2 0 -2 -4 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 Sources: Country authorities; and staff estimates and projections. 1/ The most extreme stress test is the test that yields the highest ratio on or before 2028. 2/ Revenues are defined inclusive of grants. 13