Cameroon: Selected Issues and Statistical Appendix
Author: International Monetary Fund
Publication Date:
01 Jan 1999
eISBN:
9781451808018
Language:
English
Keywords:
ISCR; CR; salary; Cameroon; government; investment; firm; potential GDP; Sound fiscal policy; oil revenue; Cameroon's fiscal policy stance; expansionary expenditure policy; Fiscal stance
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This Selected Issues paper and Statistical Appendix highlights that after eight years of decline, economic activity of Cameroon 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, began to recover, with the annual growth rate stabilizing at about 5 percent in the three years to 1997/98. In the policy area, the 1994 devaluation was accompanied by tax and trade reforms.

Abstract

This Selected Issues paper and Statistical Appendix highlights that after eight years of decline, economic activity of Cameroon 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, began to recover, with the annual growth rate stabilizing at about 5 percent in the three years to 1997/98. In the policy area, the 1994 devaluation was accompanied by tax and trade reforms.

III. Fiscal Performance and Sustainability15

38. Because Cameroon’s membership in the CFA zone constrains exchange rate and monetary policy, the budget is the main policy instrument to reduce domestic and external imbalances. It has been shown that sound fiscal policy fosters macroeconomic stability, private investment, and economic growth (Hadjimichael and others, 1995; and Ghura, 1997). This chapter analyzes Cameroon’s fiscal performance and sustainability during 1980-98. Analyzing fiscal performance is essential not only to determine the impact of government operations on economic activity and stability but also to determine whether the way fiscal deficits are financed is sustainable. In Section A the stance of fiscal policy is analyzed to assess its impact on aggregate demand by identifying the relative contributions of revenue and expenditure; the impact of the fiscal deficit on the external current account is also examined briefly. Section B includes an analysis of the sustainability of fiscal policies pursued by the government during the 1990s.

A. Fiscal Performance

39. After registering a comfortable fiscal position until 1985/86 (July-June), Cameroon recorded budget deficits during 1986/87-1993/94, before returning to relative stability after the 1994 devaluation (Figure 7).16 The deterioration in the fiscal position during 1986/87-1993/94 reflected the steep decline in revenue (a loss of 11 percentage points of GDP), despite a reduction of 3 percentage points of GDP in total expenditure. The revenue decline resulted from lower oil and non-oil receipts of 7 and 4 percentage points of GDP, respectively. Developments in total expenditure, however, hid a strong adjustment of primary expenditure17 (which declined by 9 percentage points of GDP between 1986/87 and 1993/94). Owing to the increasing burden of external debt on the budget, interest payments rose by 6 percentage points of GDP over the same period. Fiscal developments after 1994 are characterized by a recovery in government revenue, mainly in non-oil revenue (of 4½ percentage points of GDP), and a stabilization of primary expenditures facilitated by an easing in interest payments that followed Paris Club rescheduling agreements in 1994, 1995, and 1997 (see Chapter V). The primary surplus increased from about 1 percent of GDP in 1992/93-1993/94 to nearly 6 percent in 1996/97-1997/98. The improvement in the financial position permitted Cameroon to clear all nonreschedulable external payments arrears and to begin to normalize relations with external creditors.

Figure 7.
Figure 7.

Cameroon: Fiscal Developments and Real Growth, 1980/81-1997/98 1/

(In percent of GDP, unless otherwise indicated)

Citation: IMF Staff Country Reports 1999, 046; 10.5089/9781451808018.002.A003

1/ Fiscal year begins in July.

40. Favorable developments in government revenue during 1994/95-1997/98 reflect: (a) tax reforms, notably the introduction of the turnover tax (TCA) in the context of the UDEAC/CEMAC) tax and customs reforms launched in 1994, as well as the reform of forestry taxation; (b) improved collection of non-oil revenue following the strengthening of tax administration and the reduction in tax exemptions; and (c) enhanced collection of oil revenue owing to increased transparency in the sector. While primary expenditures were stabilized at 12 percent of GDP, there has been some increase in the share of outlays for priority expenditures: spending on education and health rose from 1.8 percent of GDP in 1995/96 to 2 ½ percent in 1997/98. However, these expenditures remained below levels reached during the 1980s. The financial crisis was associated with a degradation of basic social indicators. The quality of education deteriorated, and the gains achieved in the health sector during the 1970s and the 1980s could not be maintained. Finally, because of the freezing of promotions in 1989, the sharp cut in nominal wages in 1993, and the 1994 devaluation, real wages declined on average by some 50 percent between 1990/91 and 1995/96. The unfreezing of promotion increments was initiated in February 1997, resulting in an increase of some 30 percent in the monthly wage bill of the civil service.

41. This analysis of the budgetary position is complicated by the fact that it does not distinguish changes due to economic activity and those resulting from government policy. As shown in Figure 7, Cameroon’s fiscal performance, not surprisingly, reflects periods of strong economic activity, recession, and recovery. The next section presents a framework for assessing the stance of fiscal policy through the construction of fiscal impulse indicators.

Fiscal impulse analysis

42. The fiscal impulse indicator is a quantitative measure of the size of the initial fiscal stimulus to aggregate demand arising from changes in fiscal policy (Chand, 1984). The advantage of this indicator is that it eliminates cyclical factors in the budget balance, which have a transitory effect (self-correcting), and concentrates on structural changes that have a durable impact (reflecting “discretionary” policy action).18 A positive (negative) sign indicates that fiscal policy has become expansionary (contractionary) relative to the previous year.19 The fiscal impulse indicator is based on the construction of a cyclically neutral fiscal balance (see Attachment I to this chapter). This analysis assumes that revenue increases at the same rate as actual GDP and that expenditure would increase at the same rate as potential output (such factors as automatic stabilizers (unemployment benefits, etc., which are present in industrial countries, are not considered). The argument is that linking expenditure to longer-term trends in output isolates public spending programs from disruptive short-term adjustments; short-term revenue shortfalls caused by weak economic activity would be made up by government borrowing, with repayment expected when the economy recovers. This smoothing activity of the government is based more or less on Barro’s neutrality hypothesis (Barro, 1974) which states that government expenditure has the same impact on the intertemporal allocation of national consumption whether it is financed by taxes or by debt, given that economic agents discount the value of the present government debt by the equivalent future tax liabilities necessary to service the debt. This argument ignores borrowing constraints, as well as fiscal policy sustainability issues (see Section B).20

43. To calculate the fiscal impulse for Cameroon, 1979/80 was chosen as the base year. This was a period of satisfactory performance, in which actual GDP is assumed to have corresponded to potential output. There are indications that Cameroon’s economy achieved broad internal and external equilibrium during the early 1980s. Growth was strong across sectors, inflation was relatively low, and the fiscal position and the external current account balance were in surplus during much of this period. However, given the constraint on exchange rate policy, it became impossible to maintain this equilibrium after 1986, when the terms of trade deteriorated sharply. After the 1994 devaluation, Cameroon’s economy underwent a structural change (a change in relative prices and allocation of factors of production). The choice of a potential GDP measure is difficult and different measures could affect the results. However, given the absence of an accurate measure of capacity for the economy as a whole or a general equilibrium model, the analysis was limited to the estimation of potential output by the GDP trend. The use of an average GDP trend would be misleading in light of the structural changes observed during the period analyzed. Accordingly, potential GDP (cyclically adjusted) was estimated for three periods: 1979/80-1985/86; 1986/87-1993/94; and 19994/95-1997/98 (Figure 8).

Figure 8:
Figure 8:

Cameroon: Fiscal Impulse Analysis

Citation: IMF Staff Country Reports 1999, 046; 10.5089/9781451808018.002.A003

1/ Fiscal year begins in July.

44. In computing the fiscal impulse indicator, interest payments due, oil revenues21 and externally financed investments were excluded from the fiscal balance.22 As shown in Table 6, the domestic fiscal balance was in deficit throughout 1979/80-1993/94, before moving into surplus in 1994/95. In the early 1980s, the government reacted to high government revenues from oil and buoyant economic activity by boosting expenditures.23 When oil revenues dwindled and the economy shifted into recession, it took some time to adjust domestic expenditures to these developments. The main expenditure cuts in the context of “internal adjustment” policies were delayed until the late 1980s and early 1990s and were therefore abrupt and particularly painful.24 Public investment fell sharply from the equivalent of 11 percent of non-oil GDP achieved during 1979/80-1986/87 on average to less than 1 percent of GDP over 1989/90-1992/93.25 This level was insufficient to maintain, let alone expand, the country’s economic and social infrastructure. Given the complementarity between private and public investment, the low level of public investment and the poor quality of government services constrained private investment and growth.

Table 6.

Cameroon: Fiscal Impulse Analysis, 1979/80-1997/98 1/

(In percent of non-oil GDP, unless otherwise indicated; base year 1979/80)

article image

Fiscal year begins in July.

Domestic balance, excluding oil revenue, interest payments and externally-financed investments.

45. On average, fiscal policy was expansionary during 1979/80-1985/86, with an average impulse of 1.8 percent (Figure 8). The fiscal stance became contractionary during most of the recession period, although there were episodes of expansionary fiscal policy, notably during 1986/87, 1990/91 and 1993/94. Overall, fiscal policy was modestly contractionary after the 1994 devaluation. A decomposition into revenue and expenditure impulses indicates that:

  • During 1980/81-1986/87, fiscal policy was expansionary, with the expenditure impulse dominating the revenue impulse. The contractionary impact of higher revenue in the early 1980s was more than offset by the expansionary impact of government expenditure.

  • During 1987/88-1994/95, the revenue impulse was expansionary for most of the period, while the expenditure impulse was contractionary, except during 1986/87 and 990/91.26 The revenue impulse reflected mainly the collapse of the tax collection system during the period of economic decline. In this period, the government, faced with falling revenue, carried out an “internal adjustment,” which turned out to be pro-cyclical, prolonging the crisis. The reduction in government expenditure was detrimental to economic and social infrastructure. This is an interesting result given the high level of external borrowing during this period, suggesting that fiscal policies had become unsustainable; This issue is addressed in the following section as well as in Chapter V which deals with external debt.

  • Revenue and expenditure impulses were contractionary during 1994/95, and marginally contractionary afterward. During this period, the government stepped up its efforts to collect revenue and increased the primary surplus in order to service external debt obligations, and reestablish orderly relations with creditors.

A sensitivity analysis indicated that the use of different base years did not significantly influence the analysis of fiscal impulse.

Fiscal performance and saving-investment balance

46. The focus of fiscal impulse measures is on the impact on macroeconomic variables, specifically aggregate demand, inflation, and the external current account. Fiscal performance will obviously have a considerable impact on the external current account balance. If government deficits are not compensated by higher private savings, they are reflected in wider current account deficits. Government saving is defined as the difference between revenue and recurrent expenditures.27 Since government revenue transfers to the private sector and official grants were infrequent or insignificant for most of the period, the government’s net financial position corresponds broadly to the overall fiscal deficit.

47. The net financial position of the government was negative during most of the period 1984/85-1997/98, although a substantial improvement has been observed since 1994/95 (Figure 9). During 1984/85-1988/89 and 1996/97-1997/98, the net government financial position was mainly driven by public investment, since government saving was positive (Table 7). Government saving was negative during the rest of the period (1989/90-1997/98). After recording exceptionally high levels during 1984/85-1988/89, public investment was on a declining trend during most of the following period, although there was a slight recovery during 1996/97-1997/98. The financial position of the private sector (which is defined to include public enterprises) has been on a declining trend since 1991/92. It was negative during 1995/96-1997/98, reflecting recoveries in both private consumption and private investment. The external current account was in deficit throughout the period (except in 1991/92).

48. During 1986/87-1994/95, external current account deficits were driven mainly by fiscal deficits of the central government. In this subperiod, the government reduced its saving or dissaved more than it reduced public investment, and the private sector recorded a relatively high level of saving while keeping modest levels of investment. Also, the revenue-to-GDP ratio was on a declining trend, as unpaid taxes were being saved by the private sector.28 However, in face of uncertainties about current and future government policies and other structural constraints, the private sector reduced its level of investment (up to 1995/96). In particular, by reducing outlays in social and economic infrastructure, the government appears to have constrained private sector investment and economic growth.

49. The private sector (including public enterprises) was the main source of current account deficits during 1984/85-1985/86 and 1995/96-1997/98 since the financial position of the government was broadly in equilibrium. The latter subperiod is especially interesting as: (a) the government financial position improved, with a slight recovery in public investment; and (b) the private sector was able to increase consumption and investment, while the overall current account deficit remained at manageable levels. These developments may reflect a gradual, if slow, return of private sector confidence, and should lay the basis for an environment conducive to sustainable growth.

Figure 9.
Figure 9.

Cameroon: Fiscal Performance and the External Current Account, 1984/85-1997/98 1/

(In percent of GDP)

Citation: IMF Staff Country Reports 1999, 046; 10.5089/9781451808018.002.A003

1/ Fiscal year begins in July.
Table 7.

Cameroon: Fiscal Deficits and the Current Account Deficit, 1984/85-1997/98 1/

(In percent of GDP)

article image

Fiscal year begins in July.

B. Analysis of Fiscal Sustainability

50. Over the past decade, the overall government deficit was financed mainly by recourse to borrowing from abroad and the local market. The total (external and domestic) debt-to-GDP ratio has been in excess of 100 percent since 1990/91, reaching a peak of 174 percent in 1993/94 following the 1994 devaluation; since then, the ratio has been on a declining trend but has remained high, estimated at 113 percent at end-1997/98. The stock of domestic debt (including arrears) is provisionally estimated at some CFAF 1,400 billion, or 26 percent of GDP. The increase in domestic arrears prior to 1994, and their subsequent securitization, has had a detrimental impact on fiscal sustainability.29 The cumulative budgetary deficit during 1989/90-1997/98 is estimated at some CFAF 1,610 billion; the cumulative primary balance was positive (about CFAF 330 billion).30 These deficits were financed by debt-creating sources, mainly external debt, as the government reduced its domestic indebtedness, particularly since 1993/94 (Table 8).31 Foreign borrowing includes project financing through official creditors and international private capital markets, and program support from official creditors and multilateral institutions. Given the lack of a domestic financial market, borrowing in the domestic market includes bank financing and the change in payments arrears.32 Cameroon is a member of the African Financial Community (CFA) zone, and financing through seigniorage is therefore limited and inflation is driven in the long-run by price developments in France.33 34

Table 8.

Cameroon: Financing Sources, 1989/90-1997/98 1/

(In billions of CFA francs, unless otherwise indicated)

article image

Fiscal year begins in July.

51. External debt has become a heavy burden on Cameroon’s budget, and has crowded out needed spending on priority sectors, such as health, education, and the maintenance of infrastructure, that have a lasting impact on economic growth (see Ghura, 1997 and Gerson, 1998). The recourse to borrowing to finance persistent deficits has increased the debt burden and raised doubts about the government’s capacity to service the debt (see Chapter V).35 Such doubts could fuel expectations of future tax increases, which could have an impact on private investment plans, lead to lower-than-desired capital formation, and keep production below potential output.

Conceptual considerations

52. Fiscal policy can be considered sustainable if it leads to a sustainable level of public debt, defined in terms of convergence toward a steady state debt-to-GDP ratio (Zee, 1988 and Home, 1991). One indicator of fiscal sustainability is provided by the comparison of the actual primary balance with a theoretical primary balance that would stabilize the ratio of debt to GDP. Such an analysis determines whether the government can pursue indefinitely a given set of budgetary policies. The identified gap gives the magnitude of the additional effort (e.g., a larger primary surplus) that would be needed to avoid a buildup of debt to unsustainable levels. If this effort is not secured, the country cannot achieve fiscal sustainability and the public debt-to-GDP ratio would follow an explosive path. Blanchard, Chouragui, and Hagemana (1990) and Home (1991) derived some useful indicators of fiscal sustainability for industrial countries. The current analysis of Cameroon’s fiscal policy sustainability builds on Buiter (1997) in the context of a discrete-time framework (Attachment II of this chapter).

Fiscal sustainability during 1989/90-1997/98

53. The use of a “primary gap” in the case of developing countries is more suitable than the “tax gap” in the case of OECD countries. The primary gap is an indicator of the required fiscal adjustment needed to permanently stabilize the debt-to-GDP ratio, and is defined for the purposes of fiscal sustainability analysis as the difference between the sustainable budget balance and the actual budget balance (see Attachment II). Primary gaps were defined accordingly for the current year (short-run gap), and a three-year forward average (medium-term gap), using implied interest rates (4.7 percent on average), nominal GDP growth rates, and ratios of outstanding debt to GDP during the period 1989/90-1997/98. Table 9 and Figure 10 indicate primary gaps during the period to 1992/93 ranging from 6½ to 11¾ percent of GDP, and primary margins from 1993/94 onward, although on a declining trend (some 5 percent of GDP in 1997/98).36 The results do not appear to be altered by an increase in the nominal interest rate.

54. An alternative indicator of fiscal sustainability is based on the growth rate.37 Such an indicator gives the minimum growth rate needed for a given fiscal policy to be sustainable. These growth rates were computed for the period 1989/90-1997/98 using a similar time horizon to define short-run and medium-term fiscal sustainability. It appears that, like the primary balance indicators, sustainable growth rates were above actual nominal growth rates (“growth gap”) during 1989/90-1992/93 before falling below the actual rates thereafter (“growth margin”). This analysis remains valid if potential non-oil GDP growth is used instead of actual GDP growth.

55. These results indicate that fiscal policies pursued before 1993/94 were clearly unsustainable. There appears to have been some tentative progress toward sustainability in fiscal policies pursued after 1993/94, with considerable surpluses generated in the context of buoyant economic activity following the 1994 devaluation and the upturn in international commodity markets. Although the devaluation (through its impact on growth) helped to improve fiscal sustainability after 1994, the massive cut in public sector salaries in 1993, and the decision not to increase nominal wages after the devaluation, also had a major impact on the underlying fiscal balance. In addition, the compression of investment and social spending resulted in a sharp reduction in expenditures. Another important factor has been debt relief following the Paris Club reschedulings on external debt service.

Table 9.

Cameroon: Analysis of Fiscal Sustainability, 1989/90-1997/98 1/

(In percent of GDP, except otherwise indicated)

article image

Fiscal year begins in July.

b* is the sustainable primary balance, (b*-b) and (b*-b3) the primary gap indicators, g* the sustainable nominal growth, and (g*-g) the growth gap.(See Appendix II). The growth rate calculations do not take into account capacity underutilization which gives a lower “potential” growth profile than the earlier fiscal impulse analysis.

Figure 10.
Figure 10.

Cameroon: Primary and Growth Gaps, 1989/90-1997/98 1/

(In percent of GDP)

Citation: IMF Staff Country Reports 1999, 046; 10.5089/9781451808018.002.A003

56. However, despite these improvements, the average debt-to-GDP ratio rose from 103 percent during 1989/90-1992/93 to 134 percent during 1993/94-1997/98.38 In addition, there was an unsustainable compression of expenditure. This increase indicates the limitations of analyses based on the primary balance concept: (a) analyzing fiscal sustainability in terms of convergence to a steady state equilibrium does not necessarily mean that the debt-to-GDP ratio would be stabilized to an optimal or desirable level; (b) fiscal performance, interest rates, and economic growth are not necessarily independent; and (c) private sector behavior may have an impact on government solvency (e.g., the onset of speculative runs in case of perceived future monetization of deficits). In addition, the analysis is limited in that the indicator of fiscal sustainability is based on previous-year debt-to-GDP ratios. For this reason, once growth picked up after the 1994 devaluation, the measure indicated an improvement in “sustainability” irrespective of the very high debt-to-GDP ratio. This could be misleading as the debt-to-GDP ratio is still unsustainable in absolute terms, requiring action to reduce it to more supportable levels. In this respect, it would be useful to examine fiscal sustainability from the point of view of a desirable total debt-to-GDP ratio (and some light is thrown on this question in Chapter V).39

C. Conclusions

57. Sound fiscal policy is an important determinant of sustainable growth. This chapter has analyzed Cameroon’s fiscal performance over the 1980s and the 1990s. The fiscal impulse measure suggests that Cameroon’s fiscal policy stance was on average procyclical during 1979/80-1993/94, with developments in the fiscal position dominated by expansionary expenditure policies during 1979/80-1985/86, and by contractionary expenditure policies (internal adjustment) for most of 1986/87-1993/94. During boom years, the authorities increased government spending, particularly on investment, to levels that could not be sustained by domestic revenue. Government spending remained high until 1986/87, the first year of the recession, pointing to its rigidity and to the inability to adjust its level in the short run (given the limits on raising revenue). Later on, the government reacted to unanticipated shocks (revenue shortfalls) by abruptly cutting expenditures. The budget situation was aggravated by the increasing external debt burden. After the 1994 devaluation, the authorities appear to have adopted a modestly restrictive fiscal policy.

58. Fiscal policy had a negative impact on the external current account and on private investment, particularly during 1986/87-1994/95. While the government was reducing its saving or dissaving, the private sector maintained a relatively high level of saving, which could be viewed as a hedge for future consumption. At the same time, however, private investment was kept at a low level, reflecting uncertainties about government policies and other structural constraints. In particular, by reducing outlays in social and economic infrastructure, the government appears to have constrained private sector investment and economic growth. Following the relative strengthening in the government position since 1995/96, accompanied by a slight recovery in public and private investment, the external current account deficit has remained at a manageable level. This environment seems to reflect a return of private sector confidence and is conducive to sustainable growth.

59. Given the statutory limits on bank financing in the context of the CFA zone, the government resorted to external borrowing or to the accumulation of arrears to finance its deficits. Indicators of fiscal sustainability were used to assess whether domestic the fiscal policy followed by Cameroon over the last nine years could be pursued without increasing indefinitely the debt-to-GDP ratio. These indicators suggest that fiscal policy implemented before 1993/94 was not sustainable. There appears to have been a tentative shift toward fiscal sustainability after the 1994 devaluation, with the resumption of growth and improvement in economic and fiscal policies (notably the strengthening of tax administration). These results, however, ignore the compression of primary expenditures and the impact of the high debt-to-GDP ratio, which is taken up in Chapter V. In particular, fiscal sustainability, would depend crucially on enhanced revenue performance and on further donor assistance and debt relief in the context of the Paris and London Clubs.

ATTACHMENT I: Fiscal Impulse Indicators

60. From a base period in which macroeconomic imbalances are small, a cyclically neutral balance is computed for each year (CNBt). Revenue (expenditure) is obtained by applying the base year revenue (expenditure)-to-GDP ratio (to (go) to that year’s actual GDPt (potential output). The cyclical effect of the budget (CEBt), or the fiscal stance, is the difference between the actual budget balance (Bt) and the cyclically neutral balance (CNBt). The fiscal impulse (FIt) is the change in the cyclical effect of the budget. For each period these relations are summarized as follows:

Bt=Gt−Tt(3)
CNBt=go⁢Ypt−to⁢Yt(4)
CEBt=Bt−CNBt=(Gt−go⁢Ytp)−(Tt−to⁢Yt)(5)
FIt=Δ⁢CEBt=(Δ⁢Gt−go⁢Δ⁢Ytp)−(Δ⁢Tt−to⁢Δ⁢Yt)⁢.(6)

where Δ denotes the first-difference operator.40 Following Chand (1984) and Howáth, Thacker, and Ha (1998), the fiscal impulse indicator can be decomposed into a revenue impulse (TIt) and an expenditure impulse (GIt). Relation (4) may be rearranged to derive (5) below. The impact of government revenues is neutral if revenues and actual GDP grow proportionally (unitary revenue elasticity); their impact is expansionary (contractionary) if they •grow less (more) than proportionally. Similarly, the impact of government expenditures is neutral if expenditures and potential output GDP grow proportionally, (unitary spending elasticity); their impact is expansionary (contractionary) if they grow more (less) than proportionally:

FIt=(to⁢Δ⁢Yt−Δ⁢Tt)︸+(Δ⁢Gt−go⁢Δ⁢Ytp)︸(7)=TIt+GIt

ATTACHMENT II: Measuring Fiscal Sustainability

61. From the usual financing identity, the change in nominal debt is given by the following equation:

Δ⁢D=(I−B)−E(8)

which relates the change in government debt (ΔD) with interest payments (I), the primary balance (B, assumed to be in deficit), and other financing elements (E). The first component of the right-hand side of equation (8) is the overall budget deficit. Dividing equation (8) by GDP (Y) and defining I = rD-1 where r is the nominal interest rate, and Y=(1+g)Y-1 where g is the nominal GDP growth rate, relation (8) gives the following dynamic equation (with E expected to cancel out in the long run):

Δ⁢d=(r−g)*d−1/(1+g)−b(9)

where d is the debt-to-GDP ratio and b the ratio of primary balance to GDP. In case g is higher than r, the system is stable and converges to a finite debt-to-GDP ratio for any given level of the primary balance (even primary deficits). The debt-to-GDP ratio would converge to -b(1+g)/(g-r), a positive value. In case of primary surpluses, the debt-to-GDP ratio would decline steadily at the rate (g-r)/(1+g). When the interest rate is higher than the growth rate, primary surpluses (b<0) would be needed to stabilize the debt-to-GDP ratio at the outstanding level (d-1).

62. Under the solvency condition, the intertemporal budget constraint is given by41

dt=−Σj=0∞αibt−j(10)

where a = (1+r)/(1+g)

63. Equation (10) relates the current debt-to-GDP debt ratio to discounted primary surpluses. Discounted primary balances should be large enough to exceed the outstanding stock of debt. In other words, for the government to be solvent, the present value of government spending programs should be equal to its net wealth.42 From relation (9), ít can be shown that, for any given period t, b* is the surplus that would be required to stabilize the debt-to-GDP ratio at its current level:

b*=d−1(r−g)/(1+g).(11)

64. The difference between the sustainable primary balance b* and the actual primary balance b is an indicator of required fiscal adjustment that would be needed permanently to stabilize the debt-to-GDP ratio, defined as the primary gap.

ν=b*−b−d−1*(r−g)/(1+g)−b(12)

65. The size of the gap depends on the outstanding debt, the nominal GDP growth, the nominal interest rate, and the actual primary balance. A positive value for ν indicates the fiscal effort that the government would need to stabilize its previous-years’ debt and to honor its debt obligations. A negative value would indicate that the government has amassed a “budgetary margin” in its effort to achieve solvency. The higher the level of interest rate, the larger is the primary gap. It can also be shown that the primary gap is a decreasing function of the growth rate. Finally, the amplitude of the impact depends on the debt-to-GDP ratio.

66. The composition of government spending out of public borrowing thus becomes critical. Efficient use of resources in productive government investments (for example, human resource development and economic infrastructure) may help stabilize and even reduce the debt burden, while a financing of government consumption out of external borrowing could have adverse consequences on the debt burden and lead to an explosive debt path.

67. It is also clear that equations (9) and (12) are equivalent (measuring the change in debt-to-GDP ratio), which indicates that the primary gap increases at the same rate as the debt-to-GDP ratio. Delaying the adjustment would thus imply a steeper adjustment in the future.

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15

Prepared by Joseph Ntamatungiro.

16

Only financial operations of the central government are considered. Caution is required as regards expenditure data: (a) government consumption of public utilities is largely recorded on a net basis, net of taxes; (b) expenditures are by and large recorded on a cash basis, except for interest payments; (c) the coverage of externally-financed outlays is incomplete; and (d) there are major weaknesses in expenditure management and control. An action plan to improve government expenditure was adopted in December 1998.

17

Primary expenditures exclude interest payments, restructuring expenditure, and foreign financed capital outlays.

18

A limitation of this analysis is that it assumes that all noncyclical changes are induced by government policies. In the case of developing countries, there may be noncyclical shocks that are beyond government control, such as terms of trade deterioration, interest payments on external debt, and the availability of foreign borrowing and grants.

19

See Chand (1993) for an analytical derivation of the fiscal indicator in the context of a partial income-determination model. Such an analysis has, however, a few limitations: (a) government expenditure and taxes may not have an immediate impact on aggregate demand if agents are not liquidity constrained or if their consumption decisions are determined by long-term considerations (e.g., permanent income); and (b) the analysis does not consider the indirect impact of government policy on aggregate demand through interest rates, inflation, the exchange rate, or private sector expectations.

20

It is difficult to determine, ex ante, whether a slump in economic activity is a cyclical downturn or a long recession. The determination of the path of potential output is a judgmental decision. An overestimation of the cyclical component could lead to unduly high deficits, while an underestimation of cyclical factors would lead to unnecessary deflationary policies.

21

It could be argued that oil revenue should be included given that other variables such as export duties or income tax receipts are also, to some extent, exogenous.

22

Interest payments on external debt are assumed to have no direct impact on domestic demand; similarly, since interest payments on domestic debt are paid to creditors to prevent the value of government papers eroding, they have no significant effect on domestic demand. The inclusion of interest payments in the fiscal impulse analysis would therefore be misleading, especially given their strong increase over the period analyzed, from an average of ½ of 1 percent of GDP in 1979/80-1985/86 to 6 percent of GDP on average during 1994/95-1997/98. Moreover, revenues from the oil sector were excluded from government revenue since they are determined exogenously, with the government having little control over them. Also, since the oil sector is not fully integrated in the economy, non-oil GDP was used for computing the fiscal impulse instead of total GDP. Foreign-financed investments were excluded, given their high import content. In a few cases, interest rates barely cover inflation. For example, the interest paid on zero coupon government bonds issued to nonbank creditors is fixed at 3 percent.

23

Oil revenue increased from the equivalent of about 2 percent of total GDP in 1979/80-1980/81 to over 9 percent of GDP in 1984/85-1985/86 before declining to about 6 percent of GDP in 1986/87-1987/88 and 2 percent in 1993/94.

24

Notable were the following wage measures: (a) the freeze of promotions in July 1989; and (b) cuts in nominal wages and salaries in January and November 1993 which had a negative impact on the morale of the civil service (see Chapter IV).

25

The low level of public investments reflects not only the lack of resources, but also Cameroon’s difficulties in mobilizing available external financing, owing to weak macroeconomic policies, the lack of sectoral strategies, and low management capacity. A census of external donor financing showed that undisbursed external financing had remained stable at over US$1 billion since 1990.

26

Expenditure was particularly expansionary during 1986/87, owing to an exceptional high level of public investments.

27

The external current account balance is based on national saving, before adjustment for net income (mainly interest payments on external debt) and net unrequited transfers.

28

The Ricardian equivalence theory appears to have applied somewhat during this period.

29

Caution is required with the data on domestic debt pending the completion of an extensive audit of domestic payments arrears. A settlement plan is in place (cash payments for small creditors, and compensation or securitization for banks, public enterprises, and the social security fund) for domestic arrears accumulated before June 30, 1993. A census of arrears incurred between July 1, 1993 and June 30, 1997 is under way. No new domestic arrears appear to have been generated after June 30, 1997, as the delay in paying government bills is reported to have been reduced to 55 days.

30

The primary balance used here only excludes interest payments (in the normal definition, restructuring expenditure and foreign-financed investment are also excluded).

31

Although an efficient use of external resources may be instrumental to economic growth, resort to external borrowing to finance fiscal deficits may increase the country’s vulnerability to external factors, particularly to interest and exchange rate risks. The debt service (and drawings) on external debt increased substantially following the devaluation in January 1994. For external debt issues, see Chapter V.

32

The change in arrears followed a more volatile path than other financing sources. The accumulation of external payments arrears had a negative impact on the mobilization of external assistance, while domestic payments arrears had a deleterious effect on private investment and undermined seriously the financial performance of the local banking system.

33

In particular, the stock of central bank financing (statutory advance) in period t should not exceed 20 percent of tax revenues collected in period t-1.

34

In CFA countries, the accumulation of external arrears reflects domestic budgetary problems rather than a shortage of foreign exchange, given their access (within limits of the arrangements) to foreign exchange through the French Treasury.

35

Such difficulties are epitomized by the accumulation of domestic and external arrears, which have a negative impact on domestic activity and on government credibility abroad.

36

Generally, the short-run primary gap was higher than the medium-term primary gap. However, differences between the short-run and medium-term gap indicators are not large (about 1 percent on average), except in 1993/94 when the difference increased to about 4 percent of GDP, owing to the structural change that followed the 1994 devaluation.

37

From Attachment II, equation (10), it can be shown that a growth rate greater than or equal to g* would also lead to a sustainable debt-to-GDP ratio, for any given fiscal performance:

g*=(d−1r−b)/(d−1+b)(2)

The numerator is the overall fiscal deficit, while the denominator is the current debt-to-GDP ratio, with the change in debt equal to the primary surplus. Positive (negative) values of g*-g would indicate “growth gaps (margins).

38

Progress toward sustainability indicates that the achieved primary surpluses resulted in an increase in the net government equity despite the increase in the debt-to-GDP ratio that followed the devaluation.

39

Further analysis could look at alternative scenarios, such as (a) How many years of primary surpluses of 5 percent of GDP would it take for Cameroon to reach a sustainable debt ratio? and (b) If a ratio of 30 percent were to be reached by a terminal date, say 2004/5, how large would the annual primary surplus have to be?

40

An alternative indicator of the fiscal impulse is the “Dutch budget impulse where the base year corresponds to the preceding year:

FIt = (ΔGt - θ* Gt-1 - (ΔTt - θ Tt)

FI/Yt-1 = (ΔGt/Gt-1 - θ*)gt-1 - (ΔTt/Tt-1 - θ)tt-1)

where θ* and θ are the growth rates of potential and actual GDP, respectively.

41

Under the stability condition (r<g), lim d0ai - 0 when j → ∞ (Zee, 1998). If the interest rate were higher than the growth rate, changes in fiscal policies would be necessary, requiring persistent spending cuts or tax increases; otherwise, the government would borrow to service the ever-growing debt (continuing on an exploding debt path).

42

Solvency assumes that this condition is met ex ante. The government will always meet this constraint ex post, either through fiscal adjustment, debt repudiation, the accumulation of arrears, or monetization of deficits.

Same Series

Other IMF Content

Other Publishers

Cover IMF Staff Country Reports
Cameroon: Selected Issues
Author: International Monetary Fund
Volume/Issue:
Volume 1999: Issue 046
Publisher:
International Monetary Fund
ISBN:
9781451808018
ISSN:
1934-7685
Pages:
126
DOI:
https://doi.org/10.5089/9781451808018.002
  • View in gallery

    Cameroon: Fiscal Developments and Real Growth, 1980/81-1997/98 1/

    (In percent of GDP, unless otherwise indicated)

  • View in gallery

    Cameroon: Fiscal Impulse Analysis

  • View in gallery

    Cameroon: Fiscal Performance and the External Current Account, 1984/85-1997/98 1/

    (In percent of GDP)

  • View in gallery

    Cameroon: Primary and Growth Gaps, 1989/90-1997/98 1/

    (In percent of GDP)

Cameroon: Fiscal Developments and Real Growth, 1980/81-1997/98 1/

(In percent of GDP, unless otherwise indicated)

Cameroon: Fiscal Impulse Analysis

Cameroon: Fiscal Performance and the External Current Account, 1984/85-1997/98 1/

(In percent of GDP)

Cameroon: Primary and Growth Gaps, 1989/90-1997/98 1/

(In percent of GDP)