In this exclusive interview with AnnualMeetings Daily, Mr Lucas Abaga Nchama, Governor, Central Bank for Central African States (BEAC), Mr. Abaga Nchama explains the essence of his mission to return the Bank to credibility. He believes that the reforms currently in place and a more transparent agenda which he has instituted will revolutionalise the BEAC and sharpen its competitive edge globally.
The BEAC celebrated its 40th anniversary in November 2012. What memories do you have of those celebrations?
The BEAC was founded on November 22, 1972, as the successor to the Central Bank of Equatorial Africa and Cameroon (BCEAEC) by five member states: Cameroon, Central African Republic, Chad, Republic of the Congo, and Gabon. On January 1, 1985, it welcomed a sixth member, Equatorial Guinea, and since then has been part of the Central African Economic and Monetary Community (CEMAC).
By virtue of the convention establishing the Central African Monetary Union that links these six states, they have agreed to pool their external assets in a common international reserves fund managed by the BEAC to ensure the external convertibility of their currency. The BEAC issues the monetary union’s currency—the CFAF (African Financial Community Franc)—and ensures its stability. The currency has a fixed parity with the euro, through the guarantee provided by the French Treasury, pursuant to a monetary cooperation arrangement between the six BEAC member countries and France.
Two years ago, the BEAC organized its anniversary as an opportunity to celebrate 40 years of stability focusing on the general theme, “The BEAC: Cornerstone of Integration within the CEMAC,” along with the signature phrase “Facing the Future Together.” The commemoration was an exceedingly colorful and emotional experience. The flagship event in the festivities was an international symposium on the theme : “International Integration in Africa: Experiences and Outlook,” it gave us the chance to look back and examine the challenges that lie ahead, with the support of distinguished academics and professional people.
I would like to take this opportunity to express my appreciation for the support we received from the IMF. Managing Director, Madame Christine Lagarde, congratulated the BEAC on its steadfast commitment to monetary stability over the past four decades and applauded the ground-breaking efforts of the Bank’s founders and pioneers at achieving monetary and financial integration.
Forty years on, where does the BEAC stand in regard to the four major challenges it faces—namely, monetary integration, monetary stability, financial stability, and regional integration?
Being a monetary union, the central bank as one of the pillars of integration. From the monetary point of view, I believe that we can be proud of our achievements. We have a sound single currency within a monetary zone characterized by moderate inflation and a sound macroeconomic outlook. The financial stability in our subregion has been restored since the last crisis in the 1990s. Our banking sector is sound and is broadly in compliance with international prudential standards. Thanks to the creation of the Central African Banking Commission in 1992, the adoption of unified banking regulations and a prudential framework, we are today among the pioneers of banking union across Africa. Regional integration within the financial system is a reality exemplified by the integrated payments system in operation within our subregion. We hope to further strengthen this system by linking the financial markets of Douala and Libreville as envisaged by CEMAC Finance Minister. However, economic integration is a work in progress on a vast scale which each community institution must seek to strengthen within its own sphere of competence. The implementation of the Regional Economic Program is expected to represent a major qualitative leap forward in this respect.
This coming January 17 will mark the fifth anniversary of your appointment as Governor of the BEAC. Given the challenging situation you encountered upon taking office, which part of your work do you regard as having been the most successful?
Unquestionably, our greatest accomplishment would be the renewed credibility of the institution. Thanks to the bold measures in the Action Plan which we negotiated with the IMF in November 2009, the Roadmap set by the Conference of CEMAC Heads of State in January 2010, as well as the measures contained in the BEAC Reform and Modernization Plan through 2014—a full-fledged business plan which the BEAC Management had our Board adopt in June 2011.
BEAC governance now reflects the management standards of major international institutions. Accordingly, we have a reliable and efficient accounting system in line with global best practice; we have a powerful and independent Audit Committee, a General Directorate of General Control (DGCG) with the broadest powers, as well as an internal control framework based on a risk-oriented approach. In addition, we work with external auditors selected from among internationally reputable firms. Given the caliber of the BEAC’s current governance, we are better able to safeguard the financial resources entrusted to us, to reassure the international institutions supporting the development efforts being pursued by our governments, and to offer greater assurances to international investors regarding the financial viability of our subregion.
What reforms will you now be focusing your efforts on?
As I mentioned just now, the first part of my term was devoted to efforts to restore the BEAC’s credibility in the eyes of its partners as well as establish institutional governance based on best international practices among central banks. Once this indispensable foundation is in place, I expect, during the latter part of my term, to focus on our primary responsibilities; namely, modernizing our monetary policy instruments in order to enhance their efficiency and thereby enable the BEAC to serve as lender of last resort for the financial system as effectively as possible.
In November 2013 the BEAC adopted historic measures which enjoined us to refinance public securities issued by auction or syndication, to improve their attractiveness on markets and to facilitate financing of public investment. In addition, with input from our main partners, academia, and local banks, we at the BEAC embarked upon wide-ranging discussions in an effort to further stimulate the mobilization of saving to be used for appropriate purposes. The BEAC is accordingly working on the development of innovative instruments that will enable it to play a more efficient role in financing the economy, without prejudice to its legal mandate, which is to safeguard monetary and financial stability. Aside from the 2011 creation of the Guarantee Fund for Bank Deposits in Central Africa (which we are administering), in 2012 we created the Financial Stability Committee for Central Africa to act within a macroprudential framework, in conjunction with all stakeholders entrusted with a particular aspect of financial regulation in member countries. In addition, we are endeavoring to strengthen financial stability through new and stricter regulations on bank crisis resolution and on intervention mechanisms applicable to credit institutions within the CEMAC. We believe that these instruments and mechanisms will enable us to help create a financial environment that is both stable and conducive to developing investment in Central Africa.
What is the status of banking supervision in BEAC countries?
The CEMAC banking system is sound overall. However, we are in the process of strengthening banking supervision by doubling the auditing staff at the General Secretariat of the Banking Commission and upgrading the regulatory framework. We have raised the minimum capital of credit institutions to strengthen their equity capital, enhance their intervention capacity, and improve their resiliency to shocks. Discussions are in progress with a view to adopting the same approach toward a certain category of microfinance entities.
What is the outlook for economic and social development within BEAC member countries?
In 2013, GDP growth had slumped to around 1.5 percent compared to 5.2 percent in 2012, reflecting the downturn in public investment. In 2014, however, the increase in economic activity is expected to recover to 6.1 percent. Over the last 10 years, we have witnessed an average increase in economic activity of about 5 percent and an average inflation rate of around 3 percent. While we have succeeded in controlling prices, much work remains to be done if we are to achieve our short-term and medium-term emergence objectives. However, we have many reasons for expecting our performance to pick up significantly over the next 10 years. For example, a number of key investments are being executed within all countries in the sub-region, with the unfortunate exception of Central African Republic. All of these countries are investing massively in energy, transport, and telecommunications infrastructure, not to mention education and health. In addition, efforts are being made to improve the business environment and promote the diversification of sources of growth. In our opinion, these will be true catalysts for private investment.
According to BEAC regulations, the CFA Franc has four pillars, with the first being the fixed parity between the FCFA and the Euro. What is the justification for this policy?
Parity with the Euro means that the BEAC guarantees the rate of conversion between the CFAF and the Euro. This is vitally important as it imposes strict monetary discipline which we must follow if we are to honour such a commitment. Accordingly, we are required to conduct our monetary policy in such a way as to ensure that inflation rates are kept in line with Euro area rates at all time. Furthermore, parity gives investors predictability regarding rates of return on their investments in our sub-region, and in particular, it enables them to safeguard the value of their capital in the medium term. It follows that parity with the Euro is a key factor in ensuring our attractiveness to foreign investors.
Has the Euro area crisis been affecting BEAC countries over the years? In what way?
In the beginning, the Euro area was in crisis which was primarily financial in nature. It had very limited impact on our financial system, which was not yet closely integrated into the global financial system, which in turn made it possible to hold contagion effects in check. Furthermore, our prudential framework is quite strict, particularly with regard to the use of certain financial instruments; and this approach, notwithstanding the numerous relationships between our banks and their correspondents in Europe, made it possible to preserve the balance sheet performance of our banks. That said, it has to be acknowledged that the global economic crisis has since had an impact on economic performance in our sub-region, particularly as a result of declining demand for our export products, the decrease in ODA, and the downturn in FDI.
Who benefits from unrestricted transfers among Franc area countries?
Both sides benefit, of course! Unrestricted transferability of capital allows us to attract international investors with guarantees enabling them to repatriate earnings from their investments or their invested capital when they withdraw. If you are to attract foreign investors, you have to be able to offer them considerable freedom of movement. Unrestricted transferability enhances our trade with the rest of the euro area, but also with the rest of the world.
Can you give examples of countries which have developed by practising totally unrestricted transfers with one another, when one country is more developed than the others?
Don’t forget that most countries in the world have abolished exchange controls. Even those countries that had exchange controls in the past kept incentives for international investors or had a particularly dynamic foreign exchange market. I do not think that given their relatively small size, African countries in the Franc zone would have been in any position to develop into self-contained powers detached from international trade.
What is the origin of Operators Account, that is the pooling of official reserves? What was the purpose behind it?
The pooling of official reserves reflects the intention of African governments in the CFA Franc zone to work in partnership with one another. This system allows countries with sizable official reserves, where necessary, to pay for exports of those countries whose external position is in deficit. In other words, if countries in deficit had a national currency, they would find it difficult to finance their imports and would regularly undergo speculative attacks and cascading devaluations. This monetary instability would fuel inflation and thwart growth policy efforts.
Some African economists are critical of this principle. How do you respond to them?
Recent monetary crises have shown that countries that have withstood those crises most effectively are the ones that enjoy not only a sound macroeconomic framework, but also a stable currency or a comfortable balance of Payments (BOP). I am not saying that a fixed exchange rate regime is panacea to all the problems; however, our experience has taught us that the discipline which our monetary regime has imposed on all our countries has enabled us to turn the franc zone into an area characterized by stability and growth.