Cameroon: Staff Report for the 2001 Article IV Consultation, First Review of the First Annual Program Under the Poverty Reduction and Growth Facility, and Request for a Waiver and Modification of Performance Criterion

Cameroon’s good record of performance in the macroeconomic and structural areas under the previous three-year Poverty Reduction and Growth Facility (PRGF) arrangement remained broadly satisfactory during the first six months of the first annual program. Progress in structural reforms has continued, notably in the financial, transport, forestry, and petroleum sectors. For the medium term, Executive Directors emphasized the importance of continuing to strengthen the efficiency and transparency of public revenue and expenditure management, and welcomed the authorities’ intention to launch a technical audit of the judicial system.

Abstract

Cameroon’s good record of performance in the macroeconomic and structural areas under the previous three-year Poverty Reduction and Growth Facility (PRGF) arrangement remained broadly satisfactory during the first six months of the first annual program. Progress in structural reforms has continued, notably in the financial, transport, forestry, and petroleum sectors. For the medium term, Executive Directors emphasized the importance of continuing to strengthen the efficiency and transparency of public revenue and expenditure management, and welcomed the authorities’ intention to launch a technical audit of the judicial system.

I. Introduction

1. The discussions for the 2001 Article IV consultation and the first review under the first year arrangement under the new Poverty Reduction and Growth Facility (PRGF) were carried out in Yaoundé and Douala during May 2-16, 2001.1 In a supplementary letter of intent to the Managing Director, dated June 28, 2001 (Appendix I), the Cameroonian authorities indicate that performance during the first half of the first annual program under the PRGF arrangement was broadly on track. In the letter, they outline the targets and policies for the second half of the first annual program and the draft budget for fiscal year 2001/02 (beginning July 1), and provide a status report on the preparation of the full Poverty Reduction Strategy Paper (PRSP). The authorities also request a waiver for the nonobservance of the end-March 2001 performance criterion on net bank credit to the central government, as well as a modification of this performance criterion to exclude privatization receipts from its definition during the remainder of the first year of the PRGF arrangement.

2. The Executive Board concluded the last Article IV consultation with Cameroon on June 7, 2000; and on December 21, 2000, it approved Cameroon’s request for a new three-year PRGF arrangement (October 1, 2000-September 30, 2003) in an amount equivalent to SDR111.42 million (60 percent of quota).2 Cameroon has accepted the obligations of Article VIII and maintains an exchange system free of restrictions on the making of payments and transfers for current international transactions. Noting Cameroon’s satisfactory performance during the previous three-year PRGF arrangement, Directors stressed the importance of strengthening policy implementation capacity and budgetary performance, particularly in revenue collection at customs and expenditure management and control (including the timely provision of data on treasury balances). They also underscored the need to take concrete actions to enhance transparency and governance and to complete the privatization program.

II. Recent Economic Developments and Program Implementation During the First Half (October 2000-March 2001) of the First Annual Program

3. Overall, Cameroon’s good record of performance under the previous three-year PRGF arrangement (July 1997-June 2000) continued during the first six months (October 2000-March 2001) of the first annual program under the new PRGF arrangement. The pace of economic activity was fairly steady during the first six months, in line with the projected real GDP growth of 5.4 percent for 2000/01. The work on the Chad-Cameroon pipeline is proceeding; other private residential and business construction gained momentum; and investment in the wood processing sector expanded. The 12-month national consumer price inflation accelerated somewhat but remained low at 2.2 percent in March 2001, driven by higher foodstuff prices following a drought in the northern provinces. The primary fiscal surplus was close to the program target, despite a shortfall in oil revenue and some expenditure slippages in the wage bill and other goods and services. Non-oil revenue was consistent with the program target. As Cameroon’s contribution to the strengthening of the net foreign assets position of the regional central bank (BEAC) increased, broad money rose by 13 percent, reflecting mainly a recovery in deposits (see paragraphs 2 and 4 of Appendix I). There was a moderate expansion of credit to the private sector and a net repayment to the banking system by the central government.

4. The government made good progress in implementing institutional reforms and policies to strengthen revenue mobilization. In particular, the authorities pursued their efforts to reform the customs administration, improve the domestic tax administration and collection, broaden the tax base,3 and strengthen the value-added tax (VAT). Use of the taxpayer identification number (TIN) at customs was generalized, a special unit was created at headquarters to monitor and control exemptions, and the security system of the computer network was made operational. In domestic taxation, the taxpayer master file was expanded further by assigning a TIN to all economic agents. However, progress in other areas of structural reform lagged, notably in public expenditure management and the privatization of the national water company (SNEC), the fixed telecommunications company (CAMTEL), the electricity company (SONEL), and the agro-industrial company (CDC). Although the successful bidders for the first three public utility companies had been selected by early 2001, their privatization could not be completed because further negotiations were needed to resolve the remaining issues that related, inter alia, to financial disclosure, tariffication, tax arrears and cross debts between the government and the companies.

5. All quantitative benchmarks for end-December 2000, except for the cash settlement of domestic arrears (which was missed by a small margin), and all quantitative performance criteria and benchmarks for end-March 2001, with the exception of the performance criterion on net bank credit to the central government and the benchmark on the reduction of domestic arrears, were met (Tables 2 and 3). The ceiling on net bank credit to the central government was missed by 0.8 percent of GDP, because of unexpected delays in the completion of the privatization of CAMTEL (see paragraph 4 above). The quantitative benchmark on domestic arrears was missed, owing to a slower-than-envisaged pace in the securitization of domestic arrears.

Table 1.

Cameroon: Fund Position, 2000/01-2003/04 1/

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Sources: International Monetary Fund, Treasurer’s Department; and staff projections.

Fiscal year begins in July.

Table 2.

Cameroon: Quantitative Performance Criteria and Benchmarks During the First Annual Program Under the Poverty Reduction and Growth Facility October 1, 2000-September 30, 2001

(In billions of CFA francs; cumulative from July 1, 2000, unless otherwise indicated)

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Sources: Cameroonian authorities; Bank of Central African States (BEAC); and staff estimates.

Cumulative since end-June 2000.

These targets constitute performance criteria for end-March 2001.

This target will be adjusted (a) upward for a shortfall in program financing, privatization proceeds, and external debt relief up to an amount equivalent to 50 percent of the shortfall (for a total cumulative shortfall of CFAF 35 billion); (b) downward by the full amount of any excess of the programmed levels in program financing, external debt relief, and privatization proceeds; and (c) downward by the full amount of any shortfall in the reduction of domestic arrears, on a net basis in comparison with the program, See technical memorandum of understandings (TMU) in Annex II.

This target will be adjusted for the full amount of higher/lower-than-programmed oil revenue. See TMU.

The flows have been constructed on the basis of estimated end-June 2000 data.

Defined as government revenue (excluding privatization proceeds) minus noninterest expenditure (excluding foreign-financed investment and restructuring expenditure).

The targets will be adjusted upward/downward for 50 percent of the windfall/shortfall in oil revenue. For a windfall/shortfall beyond a thershold of CFAF 35 billion, the authorities will consult with Fund staff 10 formulate policies to adjust performance criteria. See TMU.

Excluding reschedulable external arrears. The targets will be adjusted for deviations from projected program financing. To be monitored on a continuous basis.

In millions of U.S. dollars. Nonconcessional debt (including leases) is defined as debt with a grant element of less than 35 percent using discount rates based on the commercial interest reference rates (CIRRs). Exception will be made during 2000/01 for the contracting of a nonconcessional IBRD loan in an amount of US$65 million contracted by government of Cameroon in the context of the Chad-Cameroon pipeline construction, Debt is defined as set forth in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (Decision No. 12274-(00/85), adopted on August 24, 2000.

Excluding normal, import-related credit. To be monitored on a continuous basis.

These benchmarks do not constitute performance criteria.

Excluding privatization proceeds.

Including the financing gap.

Including IMF disbursements.

Table 3.

Cameroon: Quantitative Performance Criteria and Benchmarks During the First Annual Program Under the Poverty Reduction and Growth Facility, October 1, 2000-September 30, 2001

(In billions of CFA francs; cumulative from July 1, 2000, unless otherwise indicated)

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Sources: Cameroonian authorities; Bank of Central African States (BEAC); and staff estimates.

Cumulative since end-June 2000.

These targets constitute performance criteria for end-March 2001.

This target will be adjusted (a) upward for a shortfall in program financing, privatization proceeds, and external debt relief up to an amount equivalent to 50 percent of the shortfall (for a total cumulative shortfall of CFAF 35 billion); (b) downward by the full amount of any excess of the programmed levels in program financing, external debt relief, and privatization proceeds; and (c) downward by the full amount of any shortfall in the reduction of domestic arrears, on a net basis, in comparison with the program. See technical memorandum of understandings (TMU) in Annex II.

This target will be adjusted for the full amount of higher/lower-than-programmed oil revenue. See TMU.

The flows have been constructed on the basis of estimated end-June 2000 data.

Defined as government revenue (excluding privatization proceeds) minus noninterest expenditure (excluding foreign-financed investment and restructuring expenditure).

The targets will be adjusted upward/downward for 50 percent of the windfall/shortfall in oil revenue. For a windfall/shortfall beyond a threshold of CFAF 35 billion, the authorities will consult with Fund staff to formulate polities to adjust performance criteria. See TMU.

Excluding reschedulable external arrears. The targets will be adjusted for deviations from projected program financing. To be monitored on a continuous basis.

In millions of U.S. dollars. Nonconcessional debt (including leases) is defined as debt with a grant element of less than 35 percent, using discount rates based on the commercial interest reference rates (CIRRs). Exception will be made during 2000/01 for the contracting of a nonconcessional IBRD loan in an amount of US$65 million contracted by the government of Cameroon in the context of the Chad-Cameroon pipeline construction. Debt is defined as set forth in point No. 9 of the Guidelines on Performance Criteria, with Respect to Foreign Debt (Decision No. 12274-(00/85), adopted on August 24, 2000.

Excluding normal, import-related credit. To be monitored on a continuous basis.

These benchmarks do not constitute performance criteria.

Excluding privatization proceeds.

Including the financing gap.

Including IMF disbursements.

6. All the structural benchmarks and performance criteria for the period October 2000-March 2001(Table 4), as well as the other governance-related measures, were observed, except for the development of a computer interface for the government payroll file (a structural benchmark). The nonobservance of the latter was due to unexpected technical difficulties encountered in making the recently computerized updated payroll file compatible with the various systems used within the Ministry of Finance and the personnel administration files used in the Ministry of Civil Service.

Table 4.

Cameroon: Structural Performance Criteria and Benchmarks for the First Annual Program Under the Poverty Reduction and Growth Facility October 1, 2000–September 30, 2001

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III. Report on the Discussions

7. Discussions for the 2001 Article IV consultation and the first review of the first annual program under the PRGF arrangement focused on (a) macroeconomic prospects and policies for the remainder of the first annual program and fiscal year 2001/02 (July 2001-June 2002), in light of the implementation of the program supported by the PRGF arrangement since its inception (as discussed above); (b) a reassessment of the broad-based governance and structural reform agenda, with a view to establishing priorities for creating an environment conducive to private sector investment; and (c) the preparation of the full PRSP, and use of HIPC resources. The World Bank staff took the lead in discussing issues relating to social policies and poverty reduction programs and the petroleum, forestry, transport, and agro-industrial sectors (Box 1).

8. The authorities reiterated their commitment, at the highest level, to economic reforms and the timely and full implementation of the PRGF–supported program. They also stated that while substantial progress had been achieved during the past few years, much more remained to be done to ensure higher and sustainable economic growth and thereby help to reduce poverty significantly. They indicated that while the enhanced HIPC Initiative assistance would help rebuild basic infrastructure and address the urgent challenges in education and health, such assistance could in no way be a substitute for private capital and investment to lay the foundation for sustained and high growth in the medium to long term. They reassured the staff that the recent government reshuffle4 did not mean a departure from the economic policy strategy that had been implemented in recent years. Continuing a satisfactory implementation of the new PRGF-supported program, finalizing a fully participatory and good-quality PRSP, and reaching the completion point under the enhanced HIPC Initiative remained top national priorities.

Structural Conditionality

Coverage of structural conditionality in the current arrangement under the PRGF

As indicated in Table 4 of the staff report and Table 2 of the attached supplementary letter of intent (Appendix I), conditionality in the current program focuses on the following areas:

  • public expenditure management-including public procurement system, treasury balances and budget execution reports for key ministries, and the setting up of a fully integrated system to manage central government revenue and expenditure from commitment to payment—chaîne de la dépenses;

  • civil service reform-physical and legal census of civil servants and the setting up of an interface for the government salary file, to provide a more accurate basis for assessing appropriate staffing and salary levels;

  • oil sector reform-formulation of a reform strategy for the sector;

  • customs and tax administrations-including, inter alia, the security system for the computer network;

  • financial sector reform-rehabilitation plan for the Postal Savings Bank and microfinance; and

  • governance-audits of the national oil company (SNH), functioning of the modified procurement system and management, and use of enhanced HIPC Initiative resources.

In addition, there were two prior actions for the completion of the first review in the privatization area and the follow-up on the implementation of the HIPC Initiative (see para. 28 of Appendix I).

Structural conditionality in the above areas covered by the PRGF-supported program are critical for (a) the consolidation of macroeconomic stability, improved budgetary performance, and government fiscal policy credibility: and (b) the creation of an environment conducive to increased private investment, enhanced growth prospects, and significant poverty reduction.

Status of structural conditionality in the previous arrangement under the PRGF

All the measures set in the previous arrangement have been met (Box 1 of EBS/00/255 (12/6/00) and Table 3 of EBS/00/90 (5/23/00)).

Structural areas covered by World Bank lending and conditionality

At present, IDA structural conditionalities pertain only to the third structural adjustment credit (SAC III), which has four floating tranches (sector specific):

  • Privatization tranche 1. This tranche was released in June 2000 following the issuance of invitations to negotiate to the successful bidders for the first group of companies to be privatized BICEC (commercial bank), CAMSUCO (sugar company), SOCAPALM (oil palm company), SOCAR (insurance company), SNEC (water company), and a second mobile telephone license. All transactions have been concluded, except those for SOCAR and SNEC.

  • Privatization tranche 2. This tranche will be released following the issuance of invitations to negotiate to the successful bidders for the remaining companies to be privatized CNR (national reinsurance company), SONEL (electricity company), CAMTEL (telecommunications company), and CDC (agro-industrial company). All invitations have been issued, except that for CDC.

  • Forestry tranche. This tranche is expected to be released in September-October 2001 once conditionalities have been satisfied, which are related to, inter alia, the revision of the statutes of the National Forestry Development Office (ONADEF) and resource taxation, environmentally sustainable development, and economically efficient use of the asset.

  • Transport tranche. In line with the commitment under SAC III, this tranche would be released in March/June 2002, following the completion of several conditionalities (i.e., institutional and regulatory reforms, privatization of all commercial, industrial, and selected port services, and reduction in port clearance delays).

Other structural conditions

European Union: grant assistance conditionality covers some tax administration reforms and internal and external audits of existing public expenditure controls.

Other relevant structural conditions not included in the current program: None.

A. Macroeconomic Prospects Under the First Annual Program and Financial Policies for 2001/02

Macroeconomic prospects

9. Real GDP growth is estimated to remain close to the initial projections under the program. It is estimated at 5.3 percent in 2000/01 (fiscal year ending June 30); although it is projected to improve somewhat in fiscal year 2001/02, it is likely to fall short of the initially programmed target (5.7 percent), owing mainly to lower-than-anticipated oil production (see Table below). The lower-than-programmed oil prices5 would result in a deterioration of Cameroon’s terms of trade, with a potential negative impact on government oil revenue and national income (Tables 5 and 7). During the second half of the first annual program, the 12-month national consumer price inflation rate is expected to ease down to somewhat less than the program projection of 2 percent, benefiting from an improved supply of foodstuff.

Table 5.

Cameroon: Selected Economic and Financial Indicators, 1998/99-2003/04 1

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Sources: Cameroonian authorities; and staff estimates and projections.

Fiscal year begins in July.

In percent of broad money at the beginning of the period.

Including restructuring expenditure. HIPC Initiative-related expenditure envisaged for 2000/01 has been postponed to 2001/02.

Excluding restructuring expenditure.

Table 6.

Cameroon: Savings-Investment Balances, 1996/97-2003/04 1/

(In percent of GDP at market prices, unless otherwise indicated)

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Sources: Cameroonian authorities; and staff estimates and projections.

Fiscal year begins in July.

Gross disposable national income minus total consumption.

GDP at market prices minus total consumption, or gross national savings minus factor services (net) minus unrequited transfers (net).

Central government total revenue (including grants) minus current expenditure (excluding interest payments to the IMF).

Government national savings minus government factor services (net) minus government unrequited transfers (net).

Central government current expenditure minus domestic subsidies and transfers minus domestic and foreign interest payments.

Table 7.

Cameroon: Central Government Operations, 1998/99-2003/04 1/

(In billions of CFA francs, unless otherwise indicated)

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Sources: Cameroonian authorities; and staff estimates and projections.

Fiscal year begins in July.

Following the audit carried out in 2000. CFAF 20 billion remain to be fully validated. If confirmed, this amount will be settled in annual cash payments of CFAF 5 billion over the period 2001/02-2004/05.

For 2001/02, possible debt relief only includes the London Club operation, estimated at CFAF 580 billion.

Excluding foreign-financed investment, restructuring expenditure, and privatization proceeds.

Cameroon: Selected Economic and Financial Indicators, 1999/2000-2003/04

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