IMF interview on assistance to new government

The newly-elected president of the Central African Republic (CAR), Francois Bozize, is set to be inaugurated on 11 June, ending his two-year transitional rule after seizing power in March 2003. During his rule, and before, the country was beset by severe economic problems: for years, the government was unable to meet its financial obligations and pay the salary of soldiers and civilian servants, which often resulted in violent public demonstrations in the capital, Bangui. These conditions persist. Overcoming them is one of the urgent tasks that Bozize will have to contend with. His government's relationship with the International Monetary Fund (IMF) and other donors could likely be crucial in the quest. The IMF representative for the CAR, Mark Lewis, fielded questions from IRIN about this and other challenges the country faces. The following are responses received from Lewis on Tuesday: QUESTION: Now that the CAR has a democratically elected government, how do you think this will affect the IMF's relationship with the country? ANSWER: As you know, the IMF provided financial support to the CAR during the transition period in the form of emergency post-conflict assistance to help boost the recovery from the conflict. In addition to this financial support, the IMF also provided technical assistance in the areas of tax administration and expenditure management to help rebuild capacity in the public finance area. The conclusion of the electoral process is very promising and a key step for the CAR. We look forward to the formation of a new government in the weeks ahead to continue the dialogue with the CAR and will hope to deepen our engagement with the country. With the transition complete, the new government will be able to focus on the medium and long-term issues facing the CAR. In this context, the IMF stands ready to help the authorities in the form of technical assistance and possible financial support to tackle the pressing needs of the people of Central Africa and to place the economy on the path of recovery. Q: What could the new administration do differently from the last one to increase donor cooperation? A: The new government will need to build on the steps already taken during the transition to establish itself as a credible and serious partner in the effort to reform the economy and fight poverty. We believe that the international community stands ready to help the CAR but this help will depend on the CAR authorities demonstrating a willingness to tackle the countries' problems. Critical areas include fighting corruption, improving the execution of public spending with the aim of boosting social services, strengthening tax collection, and better managing the country's natural resources. The post-transition era in the CAR is an opportune time for the country to make a clear break from the past legacy of mismanagement and corruption. Q: When do you think negotiations with the new government, the IMF and other donors will start and how long do you expect it will take for the donor money the government needs to function to arrive in its coffers? A: Once the new government is in place, the IMF will proceed with discussions on the next steps in our cooperation. We anticipate that an IMF team will travel to Bangui in early July. We would have to assess the progress made during the transition period and agree with the government on the best possible framework for the country and one that the IMF could support. More broadly, as noted, we believe that the international community stands ready to help the CAR and various donors look forward to working with the new authorities. Of course, there is an interest in seeing aid flows pick up as quickly as possible. That said, the pace of how quickly donors reengage with the CAR, and the amount of assistance they would provide, will in part reflect the extent to which the authorities can demonstrate that they are a credible partner, and that aid resources will be effectively used to reduce poverty and improve economic conditions. Q: How can the new government function in the meantime? A: Donors have continued to support projects in 2005 and have provided a great deal of financial support for the elections, although financing of the government's general budget has been very modest. In this setting, the government has to continue its efforts to generate resources through improved tax collection, which remains very low by African and international standards. In addition, the authorities need to strengthen their control over spending and improve the use of public resources, ensuring that they go to where they are most needed. The IMF has been providing technical assistance in these areas. Of course fighting corruption is a necessary component to improving the management of public resources. Indeed, the difficult situation of public finances leaves little room for the government to backtrack in advancing its reform agenda. Q: A 2004 IMF working paper found empirical evidence that the country's political instability is linked to the government's inability to pay salaries of civil servants and military personnel. How could the new government overcome this problem? A: The CAR's problems with generating domestic resources are at the heart of the difficulties the country finds itself in-with limited resources, the government then does not have the resources for salaries and other spending essential for the functioning of the state, which in the past has undermined political stability. This is one reason why the IMF has been devoting a great deal of effort to help the authorities with improving tax collection, and there has been some encouraging progress in this area. Improving the management of the country's natural resources could also lead to better revenue generation. Of course, the CAR has to adjust its spending in line with available resources to ensure that it can meet its obligations, including salary payments. Maintaining the civil service at a size and cost that the government can afford is a key element in remaining current on salaries. Q: Given the diamond and timber resources in CAR, what has blocked previous governments from collecting the revenue they need? A: The CAR is indeed rich in natural resources, including timber and diamonds. Unfortunately, years of instability combined with poor policies, weak governance, and a lack of transparency in the sectors have taken a toll on the ability of the government to exercise adequate controls over the sectors. The CAR is not alone in this problem - many countries with such resources face great difficulties in ensuring adequate controls. In the forestry sector, the CAR authorities have taken a number of steps to monitor timber exports and the payment of taxes due as well as boost the transparency of allocating permits. There have been some gains in tax collections on forestry products, and we continue to discuss with the authorities ways to make further improvements. In the diamond sector, the problems are particularly difficult. Smuggling is widespread and the value of legally exported diamonds is often underreported. While some of these problems are due to the alluvial nature of the diamond deposits in the CAR, we believe that there is room to better control their exports and increase transparency in the sector. The Kimberley process, when adequately applied, can reduce the smuggling of diamond. Strengthening the diamond evaluation and control agency can also improve valuation and reporting practices. Q: According to the 2004 IMF Working Paper, competition over diamonds may be a factor in CAR's political instability. What recommendations would the IMF make to help change the way this economic activity is organized so as to reduce the political instability? A: Reforms in the mining sector require a strong political commitment and we hope to see the new government focus on improving governance and transparency in the sector. We expect that as government administration returns to the entire territory of the country, activities in this sector can be better managed and monitored. The government should aim to provide the appropriate legal and regulatory environment for the private sector to invest in this sector, and should continue working with external partners and donors active in the sector as to how this can be achieved. Greater transparency in the allocation of permits and regulation of enterprises active in the sector is also important. Q: Even if the government were to succeed in increasing its revenue does it have the capacity to absorb the money effectively, in a way that would not lead to increased inflation, corruption and further instability? A: The IMF, both in the CAR and elsewhere, has been emphasizing the importance of strengthening public expenditure management systems to ensure transparency and accountability in the use of public resources, and ultimately, that money goes to the priorities for which it was intended. It is worth noting that a number of countries have indeed been able to absorb considerable increases in domestic and foreign resources in the context of a successful effort to generate sustained economic growth and poverty reduction-we very much hope that some day the CAR will be one of these success stories.