Liquidity Re-injection in the CEMAC Region: Balancing Effectiveness, Inflationary Pressures, and Economic Stability Prospects

Abstract

This policy brief examines the impact of liquidity re-injections by the Bank of Central African States (BEAC) since June 2024 (1, 2) and their role in revitalizing the CEMAC region’s economy. While these measures aim to stimulate bank financing, they occur in a context marked by persistent challenges such as low financial inclusion and economic disparities within the region. The analysis highlights the need for stronger coordination between monetary and fiscal policies to maximize the effectiveness of reforms. Such coordination would regulate inflation, support economic growth, and enhance resilience to asymmetric shocks. This policy brief offers concrete recommendations, including improving credit allocation mechanisms, increasing support for SMEs, and fostering closer collaboration between BEAC, national governments, and commercial banks. In conclusion, an integrated and coordinated approach is essential to building a robust, inclusive, and sustainable regional economy.

Introduction

The Central African Economic and Monetary Community (CEMAC) is currently undergoing a period of economic fragility marked by weak growth, persistent inflation, and structural imbalances in credit access. In response to these challenges, the Bank of Central African States (BEAC) decided to resume liquidity injections in June 2024 after more than a year of inactivity. This decision seeks to support the regional economy and restore confidence in the financial sector amid increasing credit demand.

In 2023, inflation in the CEMAC region reached 5.6%, fueled by rising commodity prices and pressures on domestic demand (3). Although BEAC’s liquidity re-injections are intended to improve credit access, particularly for small and medium-sized enterprises (SMEs), the results remain mixed. While large companies have significantly benefited from these measures, SMEs, which are crucial for job creation and economic diversification, continue to face major obstacles such as prohibitive interest rates and strict collateral requirements imposed by commercial banks.

However, the monetary transmission mechanisms in CEMAC face structural limitations. A recent study indicates that the informal sector accounts for a significant share of employment in developing countries, with estimates suggesting up to 70% of total employment in this sector (4). Reports on Cameroon reveal that about 90% of Cameroonian workers are employed in the informal sector, which includes a substantial proportion of SMEs (5, 6). Their low financial inclusion reduces the effectiveness of monetary policy decisions across the economy. This transmission deficit directly affects the ability of liquidity injections to stimulate economic activities and achieve BEAC’s primary objective: containing inflation.

At the same time, inflationary pressures remain a major concern. The projected increase in fuel prices in Cameroon in 2025, resulting from budgetary reforms under IMF guidance, could exacerbate these pressures and jeopardize the goal of reducing inflation to 3% by the end of 2025. This situation calls for a thorough analysis of the impacts of liquidity injections on macroeconomic stability and private sector financing.

This policy brief evaluates the effects of recent liquidity re-injections on macroeconomic stability and private sector financing. It also proposes solutions to strengthen monetary transmission mechanisms and promote inclusive and sustainable growth in the region.

1. Analysis of the Impacts and Challenges of Liquidity Re-injections

1.1 Economic Context in the CEMAC Region

The economic and financial situation in the CEMAC zone presents complex characteristics that require particular attention within the framework of liquidity re-injection policies. Recent data analysis reveals a sharp dichotomy between the stability of certain monetary indicators and the volatility of economic performance.

The current monetary framework in CEMAC reflects a balanced approach. The tender interest rate (TIAO), a benchmark for refinancing commercial banks, is stable at 5% (7), indicating a commitment to maintaining controlled monetary conditions. However, the cost of interbank exchanges, measured by the weighted average interbank rate (TIMP), fluctuates between 6.07% and 6.82% (8). This significant gap compared to the TIAO highlights tensions in interbank financing, which may limit credit access for businesses and households.

Moreover, the minimum lending rate (MLR), set at 2.45% (9), remains unattractive for savers, while banks receive no interest on their deposits with BEAC (deposit rate at 0%) (10). These levels may discourage domestic savings, essential for financing the economy in the long term. While the European Central Bank (ECB) has raised its main rate to 4.50% (11), BEAC maintains a cautious policy to avoid capital flight while ensuring necessary liquidity in the banking system. However, it remains crucial to ensure that this liquidity is effectively directed toward productive sectors, especially small and medium-sized enterprises, to stimulate growth and strengthen economic resilience.

Inflation dynamics are a critical parameter in calibrating monetary policy. After peaking at 5.6% in 2023, BEAC projections anticipate moderation to 4.2% in 2024 (12). However, this disinflationary trajectory remains fragile. Significant risk factors persist, notably the prospect of a fuel price hike in Cameroon in 2025, consistent with IMF-recommended reforms. These potential price pressures constrain the central bank’s maneuvering room in its liquidity re-injection policy.

Financial inclusion shows significant disparities within the region. While Cameroon and Equatorial Guinea report notable progress (respectively 132 and over 200 depositors per 1,000 adults) (13), other countries like the Central African Republic and Chad lag significantly. This heterogeneity in financial services access undermines the effectiveness of monetary policy transmission channels.

Economic growth in the region reveals divergent and concerning trajectories. Cameroon maintains moderate but declining growth (from 5.7% in 2014 to around 3.3% in 2023) (14), while Equatorial Guinea is experiencing a prolonged recession (-9.1% in 2015 to -5.7% in 2023). This situation is exacerbated by relatively low credit to the private sector (around 14-15% of GDP in the most dynamic economies), reflecting insufficient financial intermediation (15).

A particularly worrying aspect concerns the relationship between commercial banks and SMEs. Data suggests that despite the central bank’s accommodative policy, the interest rates applied to SMEs remain high, as evidenced by the significant interest rate spread. Secondary banks, prioritizing security, channel their investments toward Treasury bonds rather than private sector financing, thereby limiting the potential impact of liquidity injections on the real economy.

The recent evolution of the money supply in the CEMAC region illustrates persistent challenges related to the effectiveness of monetary policies. While the money supply (M2) increased by 8.1% by the end of June 2024 (16)—mainly driven by a rise in credit to the economy (+12.4%) and net claims on states (+10.9%) (17)—its impact on economic growth remains limited. In particular, countries like Chad and the Central African Republic continue to experience low, and at times negative growth rates despite these monetary injections. This situation reflects structural constraints that hinder the transformation of liquidity into economic dynamism. Deep structural reforms—such as combating corruption, improving the business climate, and fostering economic diversification—are essential to complement monetary policy and maximize its effect on growth.

1.2 The Impact of Liquidity Re-injections on Private Sector Development

Liquidity re-injections by a central bank, such as those implemented by the Bank of Central African States (BEAC), play a crucial role in developing the private sector. By increasing the availability of funds within the financial system, these interventions directly influence key aspects such as credit access, overall economic conditions, and the competitive dynamics of businesses. However, these impacts vary depending on the economic context and accompanying policies.

Improved Access to credit

One of the primary effects of liquidity re-injections is the enhancement of commercial banks’ ability to lend to businesses. By making funds more abundant, these measures generally lead to reduced interest rates, thus making borrowing more affordable for private companies, especially small and medium-sized enterprises (SMEs). This fosters investment and business growth, as highlighted by a World Bank report (18), which underscores the importance of access to financing for private sector development. However, the effectiveness of these measures depends on the willingness of financial institutions to channel these resources to the most vulnerable enterprises. In times of uncertainty, banks may prioritize large corporations perceived as less risky, limiting the positive effects for SMEs (19).

Reduction of Financing Costs

Liquidity re-injections, by lowering interest rates, reduce borrowing costs for businesses. This enhances their capacity to invest in long-term projects, modern equipment, and improve productivity. Nonetheless, this positive dynamic may be hindered by structural factors such as insufficient collateral offered by businesses or low financial literacy. SMEs, which account for a significant share of the private sector in Central African countries, are particularly sensitive to these barriers.

Indirect Effects Through Inflation

However, liquidity re-injections can also have negative side effects. By stimulating overall demand, they may exert inflationary pressure, thereby increasing input costs for businesses. These cost increases, combined with heightened competition, can reduce profit margins, particularly for firms operating in the informal sector. High inflation can harm the competitiveness of small businesses, which often have limited flexibility to adjust prices or absorb rising costs (20).

Boosting Economic Activity

In the short term, liquidity re-injections stimulate the economy by increasing consumption and facilitating investments. This stimulation directly benefits private sector businesses, particularly in sectors with elastic demand. An IMF analysis (2014) (21) indicates that expansionary monetary policies can support economic growth, especially in contexts where the economy suffers from contraction. However, the absence of structural reforms, such as improving the business environment or reducing barriers to credit access, can limit the sustainability of these effects.

Exacerbation of Inequalities Among Businesses

Another effect of liquidity re-injections is the potential widening of gaps between formal and informal businesses. Informal enterprises, which represent a substantial part of the economic fabric in many Central African countries, often have limited access to formal financing. Thus, while formal businesses benefit directly from liquidity re-injections, those in the informal sector risk remaining marginalized, reinforcing their financial exclusion (22).

1.3 Limitations of Monetary Transmission Mechanisms in the CEMAC Region

Monetary transmission mechanisms in the Central African Economic and Monetary Community region exhibit several structural and functional limitations, reducing their effectiveness. These constraints hinder the impact of monetary policies on local economies and present specific challenges to stability and economic development within the region. Below is an analysis of the main limitations identified.

Heterogeneity of Economic Structures

Differences Among Countries

CEMAC comprises economies with diverse economic and financial structures, leading to asymmetric effects of monetary policy decisions across countries. For example, an expansionary monetary policy aimed at stimulating growth may yield varying results depending on local contexts. This heterogeneity complicates the implementation of uniform monetary policy and reduces its overall effectiveness in the region (23) (24).

Variable Transmission Delays

The time required for monetary decisions to influence the real economy varies considerably among countries. In nations like Congo or the Central African Republic, monetary transmission mechanisms are particularly weak, prolonging the time needed to observe significant impacts following changes in interest rates or money supply. These delays limit policymakers’ ability to respond effectively to urgent economic needs (25) (26).

Weakness of Monetary Transmission Channels

Ineffectiveness of the credit Channel

The credit channel, one of the main vectors of monetary transmission, functions poorly in the region. Despite favorable monetary conditions, banks often hesitate to grant loans due to a lack of reliable guarantees or a high perceived risk, especially for SMEs. This situation limits businesses’ access to financing, hindering their expansion and contribution to economic growth (27) (28).

Low Impact on Economic Activity

The effects of monetary shocks on economic activity, while observable, remain weak in several CEMAC countries. For instance, in Cameroon, changes in the money supply or key interest rates produce results below expectations. This low sensitivity reflects structural deficiencies in transmission mechanisms, which require reforms to improve their responsiveness and effectiveness (29) (30).

The limitations of monetary transmission mechanisms in CEMAC stem from a combination of factors: heterogeneity of national economies, variable transmission delays, and inefficiencies in credit channels. These challenges impede the effectiveness of monetary policies in their roles of stabilization and economic support. To overcome these obstacles, it is essential to introduce structural reforms aimed at strengthening financial institutions, harmonizing economic practices, and improving the infrastructure necessary for effective monetary transmission, particularly to benefit SMEs, which play a key role in regional growth.

2. Policy Recommendations

Strengthen Targeted Financial Support for SMEs:

• BEAC should introduce specific refinancing lines for SMEs under preferential terms to encourage commercial banks to extend more credit to this segment. For example, differentiated interest rates for loans allocated to SMEs or partial guarantees offered by BEAC to mitigate banking risks.
• BEAC can improve transmission channels by modernizing institutional frameworks and fostering better integration of financial systems. This may include digitizing payments, creating financial intermediation platforms for SMEs, and improving access to financing for informal enterprises.
• CEMAC could envisage creating a regional guarantee fund financed by BEAC, governments, and international partners to share the risks associated with loans granted to SMEs.
• BEAC should adopt a sector-specific and gradual approach to liquidity injections, prioritizing sectors with low price elasticity and high potential for inclusive growth (agriculture, light industry, etc.). A targeted approach can minimize inflationary pressures while ensuring that funds benefit strategic sectors.
• Governments, Regional Organizations, and Development Partners could implement training programs in financial management for entrepreneurs and promote microfinance associations for businesses operating in the informal sector. Weak financial management among SMEs hinders their access to banking services and credit. Tailored training can improve their credibility with financial institutions.

Harmonize Monetary and Budgetary Policies

• Strengthen Coordination between BEAC and Governments: Enhanced collaboration is needed to align monetary and fiscal policies, ensuring they jointly support economic stability and growth. For example, governments could implement pro-growth fiscal policies, such as stimulus plans or tax credits, to complement BEAC’s restrictive monetary measures aimed at controlling inflation. This coordination is crucial for reducing the inefficiencies caused by policy misalignment and for fostering a favorable environment for SMEs, which are highly sensitive to the transmission channels of monetary policy, particularly the credit channel (31) (32) (33).
• Mitigate Adverse Effects and Improve Crisis Response: Effective coordination minimizes the negative impacts of independently applied policies, such as the suppression of economic activity from rising interest rates. Active fiscal measures can counteract these effects by stimulating aggregate demand and supporting SMEs. In monetary unions with diverse economies, such coordination is indispensable to address asymmetric shocks, stabilizing the broader economy while meeting specific regional needs (34) (35) (36) (37).

Conclusion

The resumption of liquidity injections by BEAC in June 2024 marks a decisive step in stimulating the economy of the CEMAC region. However, the actual impact of these measures will depend on their integration into a coordinated strategy that effectively combines monetary and fiscal policies. Coordination between these two economic levers is essential to maximize the benefits of reforms and address persistent structural challenges, such as low financial inclusion and limited access to financing for SMEs.

A harmonized approach would regulate inflation while supporting economic growth and ensuring the effective transmission of policies to productive sectors, particularly SMEs. Simultaneously, it would mitigate the adverse effects of isolated policies, such as the restrictive impact of rising interest rates on private investment. Lastly, this integrated approach would enhance resilience to economic shocks, a critical need in a monetary union where disparities between member states remain significant.

To meet the complex challenges of the current period—where economic recovery must be balanced with inflation control—a concerted effort among BEAC, national governments, and commercial banks is indispensable. This partnership should translate into ambitious structural reforms, financing mechanisms better suited to SMEs’ needs, and strategic allocation of resources to sectors that drive inclusive growth.

Thus, the success of liquidity re-injections does not lie solely in their implementation but in their integration into a coherent and shared economic vision. Coordinated monetary and fiscal policies are a central pillar for building a more resilient, equitable, and sustainably developing regional economy.