Journal Issue


International Monetary Fund
Published Date:
January 1999
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I. Recent Economic and Financial Developments1

A. Background

1. Stabilization and growth. Cameroon’s economic and financial situation deteriorated sharply in the mid-1980s, when large external shocks, coupled with poor economic and financial management and an overvalued exchange rate, led to a 50 percent drop in real per capita income. After eight years of decline, economic activity began to pick up following the January 1994 devaluation of the CFA franc, the accompanying upturn in world economic activity, and favorable international commodity prices. Real GDP, which had fallen by an annual average of 4 percent since the mid-1980s, has begun to recover, with the annual growth rate stabilizing at about 5 percent in the three years to 1997/98.2 As the effects of the devaluation tapered off, inflationary pressures eased, with average annual inflation falling to below 3 percent in 1997/98. Mirroring strong economic activity, total investment is estimated to have increased by 3 percentage points of GDP from 15½ percent in 1993/94 to 18½ percent in 1997/98.

2. Adjustment performance. In the policy area, the 1994 devaluation was accompanied by tax and trade reforms, as well as efforts to strengthen public finances. However, budgetary developments in the two years following the devaluation fell short of targets—particularly with regard to non-oil revenue—and primary expenditures (including wages) remained compressed, contributing to a weakening of domestic demand. The implementation of structural reforms, particularly privatization and bank restructuring, was also slower than envisaged. The continued weakness in the fiscal area, the lack of adequate progress in the structural reforms, and the accumulation of external and domestic arrears led to disappointing performance under the 1994 and 1995 IMF-supported adjustment programs. In an effort to remedy these slippages, the Cameroonian authorities asked the Fund to monitor the execution of their adjustment program for 1996/97. Overall, despite slippages in the first half of the year, Cameroon made good progress in improving the fiscal situation, settling external arrears and implementing structural reforms (see Chapter II). On this basis, the IMF Executive Board approved a three-year Enhanced Structural Adjustment Facility (ESAF) arrangement on August 20, 1997, in an amount of SDR 162.12 million (120 percent of quota).

B. Economic and Financial Developments in 1997/98 and Early 1998/99

3. Economic activity remained buoyant in 1997/98, with the impact of the international crisis only beginning to be felt fully in early 1998/99. Private sector activity, in general, benefited from the continued growth of exports to the CEMAC3 countries following the trade reforms and an easing of credit conditions after the restructuring of the banking sector. Forestry activity was particularly robust, with a 9.6 percent increase in output of sawn woods in 1997/98. Also noteworthy was the strong growth in output of cotton (8.1 percent). While domestic demand picked-up, increasing to 6.9 percent in 1997/98, this has largely been driven by strong investment activity. Private sector consumption remained weak, continuing to reflect the earlier sharp compression of real incomes. Inflationary pressures have therefore remained largely contained, despite occasional increases in local prices as a result of shortages in neighboring countries (annual average inflation was 2.9 percent in 1997/98). The impact of the Asian crisis and weaker international oil and commodity prices began to have adverse effects on the Cameroon economy in early 1998/99, resulting in a sharp deterioration in the terms of trade and lower, growth outlook. However, given the relative diversity of the economy, performance in the first half of 1998/99 indicates that the situation should remain manageable, although some modifications of the government’s fiscal and financial policies have been necessary.

Fiscal developments

4. Fiscal performance in 1997/98 was encouraging, with a primary surplus (excluding interest and restructuring expenditure) of 5.9 percent of GDP and an overall deficit of 1.7 percent. Indications are that the strong budgetary performance continued into the first half of 1998/99, despite the impact of the Asian crisis, although some weakening of the budgetary position is expected in the second half of the year. Fiscal performance in 1997/98 largely reflected higher-than-expected oil revenue—stemming from the transfer of windfall profits (from 1996/97)—and the payment of arrears by a major oil company following the settlement of a tax dispute. These factors more than offset the adverse effects of falling international petroleum prices. Fiscal performance has also benefited from strong revenue mobilization efforts, which have sought to redress the low ratio of non-oil revenues to GDP by widening the tax base and reducing exemptions (see Chapter III on fiscal sustainability). Non-oil revenues increased 1¼ percent of non-oil GDP in 1997/98, which more than offset the impact of the lowering of nonforestry export tax rates from 13.5 percent to 10 percent on July 1, 1997.4 Nonforestry taxes were lowered further to 5 percent on July 1, 1998 as part of a reform of direct and indirect taxes, that aims at reducing anti-trade bias in the tax system by lowering trade taxes and increasing the weight of domestic taxes. An important aspect of this reform was the successful replacement of the turnover tax by a value-added tax (VAT) in January 1999, accompanied by the elimination of differential taxes under the old sales tax.

5. Noninterest expenditures were contained within target in 1997/98, increasing by 1 percent to 10.3 percent of GDP, owing to higher investment expenditures and increased outlays on health and education, as well as the effects of the unfreezing of salary promotions which started in February 1997. While the ratio of non-oil revenue to GDP is still low, revenue mobilization efforts have been encouraging, and the government is focusing greater attention on improving the low efficiency of public expenditures and civil service reform (see Chapter IV). As part of its poverty strategy declaration of December 1998, the government is also preparing plans to enhance targeting of education and health expenditures and improve its database on social sector indicators. The government prepared an action plan to improve public expenditure management in late 1998 with the aim of increasing transparency and strengthening budget execution.

Monetary and financial sector developments

6. Monetary developments in 1997/98 and early 1998/99 were dominated by a rapid recovery of private sector credit, reflecting an easing of credit conditions after the recent restructuring of the banking system, the growth in private sector economic activity, and higher domestically financed investment (including the financing of local participation in the privatization program). However, as deposit growth was slower than the increase in private sector credit, some banks have been forced to draw on resources at the regional central bank (BEAC) and to reduce their net foreign assets. The rapid growth of private sector credit (by 30 percent in the 12 months to end-June 1998), may also have reflected the improvement in credit conditions following the restructuring of the banking system. Interest rates to banks’ primary customers fell by about one-third, from 14-16 percent at end-June 1997 to about 9 percent in late 1998.

7. The initial results of the bank restructuring have generally been encouraging. In the past decade, Cameroon’s banking system had experienced two episodes of serious liquidity and solvency difficulties, and is now in its fourth year of the bank restructuring that begun in 1994/95. Because of the recurrent difficulties in the domestic financial sector, the depth of financial intermediation had been seriously affected, with the broad money-to-GDP ratio falling from 22 percent in 1987/88 to 14 percent at the end of 1997/98. For all practical purposes, the restructuring of the banking system is now complete, with the rehabilitation of two banks, split (scission and liquidation) of two banks, and liquidation of two others. The last remaining bank (BICEC) in which the government has a majority share holding is to be privatized in 1999. The success of the recent banking reform effort has been reflected in a reduction in the cost of credit and a gradual, albeit slow, recovery of confidence in the domestic banking sector, with deposits increasing by 3 ½ percent in 1997/98, compared with the sharp decline experienced before the restructuring effort. Financial sector reform is now concentrating on reinforcing bank supervision and prudential requirements, and the strengthening of the cooperative and insurance sectors.

External sector developments

8. Cameroon’s external competitiveness improved in 1997/98 with the implementation of structural reforms; the depreciation of the CFA franc (along with the French franc) vis-à-vis the U.S. dollar also helped to offset some of the erosion of competitiveness after the devaluation of the CFA franc in January 1994. Particularly noteworthy was the reduction in some port fees as well as lower freight charges following the liberalization of maritime shipping. Non-oil export volumes increased by about 7 percent in 1997/98, led by coffee, cotton and forestry products, while import volumes rose by about 8 percent reflecting higher economic activity and the recovery of investment expenditures. The terms of trade deteriorated by about 4 percent with the onset of the impact of the international crisis and lower oil and international commodity prices. The current account deficit (including grants) widened to 2 ½ percent of GDP in 1997/98 from 1½ percent of GDP in 1996/97. The main impact of the international crisis, however, was felt in the first half of 1998/99 as international prices of nearly all Cameroon’s main export products fell steeply (and exports of logs to the Asian market were sharply reduced). Progress continues to be made in external debt negotiations (see Chapter V). Following the October 1997 Paris Club rescheduling agreement, the authorities concluded bilateral agreements with most creditors, and the agreement entered into force in December 1998. Negotiations are now focusing on London Club and other commercial creditors.

Structural reforms

9. Progress continues to be made in the implementation of structural reforms, particularly in the privatization area and the transport and petroleum sectors. Deregulation and infrastructure improvement has been a major focus of the policy reforms under the ESAF-supported program, with the aim of improving competitiveness, lowering costs, and increasing supply. Reforms are well advanced in the agro-industrial sector, with the privatization of the rubber company (HEVECAM) in late 1996 and, more recently, the sugar company (CAMSUCO). The privatization of the palm oil company (SOCAPALM) is also near completion. Structural reforms are now focusing on the public utilities sector and infrastructure improvement. Given the low efficiency of the public utilities (see Chapter II), rehabilitation will require substantial investment, which the government regards as being best met by the private sector. The privatization process is under way for the main utilities (telecommunications, electricity, and water), and bids have already been launched for a private cellular telephone service. In the transport sector, the privatization of the national railway network is near completion, and a number of actions are being taken to improve the management of the Port of Douala and the financing and management of the road network. These measures are also expected to have important social benefits by increasing access of farmers to local and regional markets. In the petroleum sector, particularly noteworthy has been the elimination of the national oil refinery’s (SONARA) monopoly on the supply of refined petroleum products through the liberalization of competing imports, which is to be followed by the liberalization of distributor margins in 1998/99.

Prepared by Graeme Justice.

Fiscal year July 1-June 30.

Central African Economic and Monetary Community (comprising Cameroon, the Central African Republic, Chad, Congo, Equatorial Guinea, and Gabon).

In February 1998 the 15-25 percent discount on the taxable value of logs was also abolished and the actual updated f.o.b. values are now used as the tax base for both export duty and stumpage fee.

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