Cameroon: Staff Report for the 2002 Article IV Consultation, Third Review Under the Poverty Reduction and Growth Facility, and Request for a Waiver of Performance Criterion
Author: International Monetary Fund
Publication Date:
22 Nov 2002
eISBN:
9781451808100
Language:
English
Keywords:
ISCR; CR; PRGF loan; authority; PRGF arrangement; petroleum sector; Cameroon; central government; debt relief; public expenditure; oil revenue; debt service; Fiscal stance
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This paper evaluates Cameroon’s 2002 Article IV Consultation, Third Review Under the Poverty Reduction and Growth Facility (PRGF), and a Request for a Waiver of Performance Criterion. During the first half of the second annual program (October 2001–March 2002), economic activity expanded at a somewhat slower pace than projected, but continued to be strong. Although all the structural benchmarks were observed, the end-March 2002 performance criterion was missed. Good progress continued in implementing policies to strengthen non-oil revenue mobilization, and steps were taken to improve governance.

Abstract

This paper evaluates Cameroon’s 2002 Article IV Consultation, Third Review Under the Poverty Reduction and Growth Facility (PRGF), and a Request for a Waiver of Performance Criterion. During the first half of the second annual program (October 2001–March 2002), economic activity expanded at a somewhat slower pace than projected, but continued to be strong. Although all the structural benchmarks were observed, the end-March 2002 performance criterion was missed. Good progress continued in implementing policies to strengthen non-oil revenue mobilization, and steps were taken to improve governance.

I. Introduction

1. The discussions for the 2002 Article IV consultation and the third review under the Poverty Reduction and Growth Facility (PRGF) arrangement were carried out in Douala and Yaoundé during May 1–15, 2002.1 In a supplementary letter of intent (LOI) to the Managing Director, dated August 28, 2002 (Appendix I), the Cameroonian authorities indicate that economic performance during the first half (October 2001-March 2002) of the second annual program under the PRGF arrangement was broadly on track. In the letter, they outline the objectives and policies for the second half (April-September 2002) of the second annual program and the transition budget for the second half of calendar-year 2002.2 They also take stock of the progress achieved in implementing the enhanced Initiative for Heavily Indebted Poor Countries (HIPC Initiative), including the preparation of the full poverty reduction strategy paper (PRSP) and the HIPC completion point-related structural measures. Finally, the authorities request a waiver for the nonobservance of the end-March 2002 structural performance criterion on the completion of the computerized link between the information system of the treasury and that of the budget department in the Ministry of Economy and Finance for government expenditures, both by the central government and by the local branches of government (hereafter referred to as “treasury/budget information link”).

2. The Executive Board concluded the last Article IV consultation with Cameroon on July 16, 2001, and, on January 30, 2002, it completed the second review under the PRGF arrangement.3 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. Directors stressed the importance of (i) enhancing non-oil revenue mobilization, in particular by limiting tax exemptions and reforming the income tax system, (ii) improving public expenditure management, including notably the full and timely implementation of the agreed action plan to put in place a fully integrated fiscal and accounting system to manage government revenue and expenditure; and (in) tackling weaknesses in governance, especially in the judiciary system.

II. Overview of Key Issues and Major Long-Term Challenges

3. During the last five years, the Cameroonian economy has benefited from improved macroeconomic performance and the progress made in implementing key structural reforms. Real GDP growth averaged 5 percent per annum during 1996/97-2000/01, in sharp contrast to the negative growth rates of the previous decade (Figure 1). While income from the oil sector fluctuated, the expansion of the non-oil sector contributed importantly to the improved overall growth performance. In these years, the annual inflation rate was contained to single-digit levels, averaging 3 percent annually (Figure 1).

Figure 1.
Figure 1.

Cameroon: Developments in Output and Prices, 1990/91-2001/02 1/

Citation: IMF Staff Country Reports 2002, 258; 10.5089/9781451808100.002.A001

Sources: Cameroonian authorities; and staff estimates.1/ Fiscal year begins in July.

4. To promote macroeconomic stability, the fiscal position was substantially strengthened through efforts to improve revenue mobilization, especially non-oil revenues, and prudent expenditure policies (Figure 2 and 7). Steps were taken to promote good governance, transparency, and accountability in both public expenditure management and tax administration. With these policies, the authorities were able to restore macroeconomic stability, normalize relations with external official and commercial creditors, and increase spending in the key social sectors of health and education. To address some of the serious structural problems, the domestic banking system was rehabilitated; the process of implementing important reforms in the transport and forestry sectors was started; and a major public utility company, as well as part of the largest agribusiness company (covering one crop) were privatized.

Figure 2.
Figure 2.

Cameroon: Fiscal Developments, 1990/91-2001/02 1/

(In percent of GDP)

Citation: IMF Staff Country Reports 2002, 258; 10.5089/9781451808100.002.A001

Sources: Cameroonian authorities; and staff estimates.1/ Fiscal year begins in July.2/ Excluding foreign-financed investment. In addition, primary expenditure excludes restructuring expenditure.3/ Defined as government revenue (excluding privatization proceeds) minus expenditure (excluding foreign-financed investment and restructuring expenditure.)
Figure 3.
Figure 3.

Cameroon: Real and Nominal Effective Exchange Rates, January 1993-May 2002

(Index, 1990=100)

Citation: IMF Staff Country Reports 2002, 258; 10.5089/9781451808100.002.A001

Sources: IMF, Information Notice System (INS)
Figure 4.
Figure 4.

Cameroon: Monetary Developments, 1990/91-2001/02 1/

Citation: IMF Staff Country Reports 2002, 258; 10.5089/9781451808100.002.A001

Sources: Cameroonian authorities; and staff estimates.1/ Fiscal year begins in July.2/ Excluding information on two banks (Banque Meridien-BIAO Cameroon and Credit Agricole du Camaroon) that were liquidated in October 1996 and June 1997, respectively.3/ In February 1996, the Bank of Central African States (BEAC) intervention rate was replaced by the auction rate.
Figure 5.
Figure 5.

Cameroon: External Sector Developments, 1990/91-2001/02 1/

Citation: IMF Staff Country Reports 2002, 258; 10.5089/9781451808100.002.A001

Sources: Cameroonian authorities; and staff estimates.1/ Fiscal year begins in July.
Figure 6.
Figure 6.

Cameroon: External Public Debt and Debt Service, 1990/91-2001/02 1/

Citation: IMF Staff Country Reports 2002, 258; 10.5089/9781451808100.002.A001

Sources: Cameroonian authorities; and staff estimates.1/ Fiscal year begins in July.2/ After debt rescheduling.
Figure 7.
Figure 7.

Cameroon: Adjustment Profile, 1994/95-2004/05 1/

(In percent of GDP)

Citation: IMF Staff Country Reports 2002, 258; 10.5089/9781451808100.002.A001

Sources: Cameroonian authorities; and staff estimates and projections.1/ Fiscal year begins in July. Shaded area indicates projections.

5. Looking ahead to the medium and long term, Cameroon will need to achieve much higher growth rates of real GDP on a sustained basis, in order to reduce poverty substantially. This will be a particularly challenging task, because of the steeper than initially projected decline in oil production over the medium and long term. Building on the efforts made so far, more needs to be done to expand the health and education services, invest in basic economic infrastructure, improve governance, and accelerate the structural reforms that are essential for promoting private investment and growth in non-oil output and exports.

6. With the revenue outlook weakened by declining oil output, the authorities will be faced with the difficult challenge of allocating more resources for the development of the social sectors and investment in basic infrastructure, while maintaining an overall fiscal position that is consistent with macroeconomic stability. This challenge will have to be addressed by further broadening the non-oil revenue base and through continued improvements in public resource management, with a focus on appropriate prioritization and restructuring of public expenditures. Other elements of the policy environment will also have to be strengthened. In the area of governance, stronger efforts will be needed to tackle entrenched corruption and implement appropriate reforms of the judicial system. Finally, it will be important to move forward decisively with structural reforms in several key areas. These areas include the privatization program; reforms in the agricultural, forestry, transport, and oil sectors, financial sector reforms, and regional integration and related trade liberalization initiatives.

III. Recent Economic Developments and Program Implementation During the First Half (October 2001-March 2002) of the Second Annual Program

7. During the first half of the second annual program, economic activity expanded at a somewhat slower pace than projected, reflecting recurrent shortages in electricity supply, but remained strong (growing at an annual rate of 4.6 percent). There was notable growth in the services sector because of the ongoing construction of the Chad-Cameroon oil pipeline. The 12-month rate of consumer price inflation increased to 4.8 percent in March 2002, exceeding the program target of 2.9 percent Inflation was mainly driven by a rise in foodstuff prices. This rise reflects long-standing structural problems in the agricultural sector (such as poor transportation infrastructure, low productivity, and inadequate access to land and credit for small farmers) and, more recently, both domestic demand pressure and demand from neighboring countries (e.g, Equatorial Guinea, Chad, Gabon, and Nigeria).

8. To address the long-term challenges facing the economy, the authorities continued to focus their efforts on fiscal consolidation, broadening the revenue base, strengthening expenditure management, improving governance, and implementing structural reforms. Overall, Cameroon’s good record of program implementation continued during the first half of the second annual program.

9. The government continued to maintain a surplus in the primary fiscal balance (excluding HIPC spending), although it was somewhat smaller than programmed. Noninterest current expenditure was slightly above target, as moderate overruns in outlays on transfers and subsidies were not offset by savings derived from holding spending on the wage bill and on other goods and services below the program ceiling. No HIPC spending took place during the period. Based on preliminary data for the second quarter of 2002, the fiscal outcome for the fiscal year ended June 2002 is estimated to have been broadly as programmed, as a result of a better-than-expected non-oil revenue performance, world oil prices that were somewhat more favorable than initially projected, and close adherence to the expenditure program.

10. The government continued to make good progress in implementing policies to strengthen non-oil revenue mobilization and took steps to improve governance. The authorities pursued their efforts to improve domestic tax administration and collection. To strengthen the value-added tax (VAT) collection and reduce tax exemptions, revised decrees were issued to restrict VAT exemptions for computer equipment exclusively to computers and to limit the exemptions granted in support of HIV/AIDS programs to products specifically required to ensure detection and treatment of the HIV/AIDS virus. Moreover, a new General Tax Code (Code Général des Impôts), including a manual of tax procedures, was promulgated. In the governance area, the benchmarks relating to the adoption of the new budget classifications and of an action plan for the establishment of a body to conduct external audits of the state finances were met. However, the reform of the public procurement system slowed, and the implementation of the treasury/budget information link was delayed.

11. On the monetary front, broad money increased by 2.7 percent over the First half of the second annual program. As the increase in net credit to the central government (2 percent) was held below the (adjusted) program target, Cameroon increased its contribution to the net foreign assets position of the BEAC during January-March 2002 All end-December 2001 quantitative benchmarks and all end-March 2002 quantitative performance criteria and benchmarks were observed (Tables 2 and 3).

Table 1.

Cameroon: Fund Position, 2001/02-2004/05 1/

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

Fiscal year begins in July. Starting in January 2003, the fiscal year will match the calendar year.

Table 2.

Cameroon: Quantitative Performance Criteria and Benchmarks During the Second Annual Program Under the Poverty Reduction and Growth Facility, October 1, 2001-September 30, 2002, Situation as of End-December 2001

(In billions of CFA francs, cumulative from October 1, 2001, unless otherwise indicated)

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

Cumulative since end-September 2001.

These targets were structural benchmarks for end-December 2001.

This target has been adjusted (a) upward for a shortfall in program financing, 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 and external debt relief; 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.

The flows have been adjusted on the basis of end-December 2001 actual data.

The targets have been adjusted upward/downward for 50 percent of the windfall/shortfall in oil revenue.

Excluding privatization receipts.

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

Excluding reschedulable external payments arrears. The targets have been adjusted for deviations from projected program financing. Performance criterion, which is 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). 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. Performance criterion, which is monitored on a continuous basis.

This target has been adjusted for the full amount of higher/lower-than-programmed oil revenue.

Benchmarks.

Including the financing gap.

Excluding government-owned provisons amounting to CFAF 10 billion to cover commercial debt operation (London Club).

Including IMF disbursements.

Table 3.

Cameroon: Quantitative Performance Criteria and Benchmarks During the Second Annual Program Under the Poverty Reduction and Growth Facility, October 1, 2001–September 30, 2002, Situation as of End-March 2002

(In billions of CFA francs; cumulative from October 1, 2001, unless otherwise indicated)

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

Cumulative since end-September 2001.

These targets are performance criteria for end-March 2002.

This target have been adjusted (a) upward for a shortfall in program financing, 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 and external debt relief.

The flows have been adjusted on the basis of end-December 2001 actual data.

The targets have been adjusted upward/downward for 50 percent of the windfall/shortfall in oil revenue

Excluding privatization receipts.

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

Excluding reschedulable external payments arrears. The targets have been adjusted for deviations from projected program financing. 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). 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. Monitored on a continuous basis, from the date of completion of the second review.

This target has been adjusted for the full amount of higher/lower-than-programmed oil revenue.

Benchmarks.

Including the financing gap.

Excluding government-owned provisons amounting to CFAF 21.5 billion to cover commecial debt operation (London Club).

Including IMF disbursements.

12. While all structural benchmarks for the period October 2001-March 2002 were observed (Table 4), the implementation pace of other structural reforms, including notably the measures to be taken before the HIPC completion point and covered under the World Bank’s SAC III, remained very slow. In addition to the above-mentioned benchmarks in the fiscal area, the benchmark relating to the completion of the investigation of 48 identified cases of saisie-attribution4 was also met. However, the end-March 2002 structural performance criterion on the completion of the treasury/budget information link was not observed as scheduled. The nonobservance of this criterion was due to unforeseen technical difficulties at the level of the local branches of government and to problems associated with staff reassignments during the transition from the manual system to a computerized system of tracking government expenditure. There was also a need to strengthen coordination among departments within the Ministry of Economy and Finance and other government agencies. However, as a result of intensified efforts, the treasury/budget information link— a critical measure for enhancing public expenditure management—was put in place in late July 2002.

Table 4.

Cameroon: Structural Performance Criterion and Benchmarks for the First Half of the Second Annual Program Under the Poverty Reduction and Growth Facility, October 1, 2001–March 31, 2002

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IV. Report On the Discussions

13. The discussions for the 2002 Article IV consultation and the third review under the PRGF arrangement focused on (i) the medium-term macroeconomic prospects, especially in light of the steeper decline in oil output than initially expected; (ii) the near-term macroeconomic prospects and policies for the remainder of the year, including the interim six-month budget (July-December 2002);5 (iii) the plans for accelerating the structural reforms that are essential for promoting private investment and efficient use of resources, including those to be implemented prior to the HIPC completion point, (iv) foreign borrowing and other external sector policies; and (v) the preparation of the full PRSP, the associated social and poverty reduction policies, and HIPC-related projects. The World Bank staff has taken the lead in discussing issues relating to social policies, privatization, and reforms in the forestry, port, and petroleum sectors (Box 1).

A. Medium-Term Macroeconomic Prospects and the Balance of Payments Outlook

14. The latest downward revisions to the medium-term projections for oil output6 imply an adverse impact on real GDP growth, oil exports, and government oil revenue. The growth rate of real GDP over the period 2002/05-2006/07 is projected to be 1 percentage point lower than what was forecast at the inception of the PRGF-supported program (Table 5).7

Table 5.

Cameroon: Medium- to Long-Term Economic and Financial Indicators, 2000/01–2006/07 1/

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Sources: Table.7.

Fiscal year begins in July. Starting in January 2003, the fiscal year will match the calendar year.

15. The authorities agreed with the staff that the current surge in activity in the services sectors, stemming from the ongoing construction of the Chad-Cameroon pipeline, would be only temporary, and that one could not rely only on the forestry sector alone to achieve a significant increase in the real GDP growth rate. They also acknowledged that an accelerated implementation of structural reforms was needed to achieve a sufficiently broad-based expansion of the non-oil sectors that could offset the impact of the decline in oil output. They recognized that the adverse income effects of the latter could be compounded by a fall in world oil prices. Buttressed by continued efforts to improve governance and develop the education and health services and basic economic infrastructure, it will be important to promote sustained increases in private investment, particularly in agriculture and agribusiness, where there is considerable potential for generating growth and reducing poverty.

16. Oil exports and government oil revenue are projected to drop cumulatively by3.1 and 2.3 percentage points of GDP, respectively, over 2002/03-2006/07. In light of this, the staff observed that, given the magnitude of the projected oil revenue losses over the medium term, the fiscal consolidation process should be continued with a focus on improving expenditure management, strengthening tax and customs administration, and accelerating governance reforms. Based on such a fiscal adjustment strategy and the accelerated implementation of the efficiency-enhancing structural reforms discussed below, the medium- term macroeconomic framework and balance of payments projections were updated for the period 2002/03-2006/07 (Table 5 and Figure 7). Under this baseline (policy-driven) scenario, the volume of non-oil exports is projected to grow at an average annual rate of 4.9 percent (Table 14 and Figure 5). However, after accounting for the decline in oil output, total export volume would grow at an annual average rate of some 1 percent. Import volume is projected to rise at an average annual rate of 3.6 percent over the same period, reflecting the construction of the Chad-Cameroon pipeline, some increase in private consumption, and the spending of HIPC-related resources. As a result, the trade surplus is projected to decline from 1.9 percent of GDP in 2001/02 to 0.3 percent of GDP in 2004/05. The current account deficit (including grants) is projected to widen slightly in 2002/03 and thereafter to start narrowing at a slow pace. Provided the policies needed to attract national and foreign private investment are in place—and taking into account the increase in private capital inflows related to the construction of the Chad-Cameroon pipeline—the capital account balance is projected to turn into a surplus in 2004/05. As a result, the overall balance of payments deficit would narrow from 4.6 percent of GDP in 2002/03 to 3.2 percent of GDP in 2004/05, and the financing gaps for the period 2002/03-2004/05 would be covered by the substantial debt relief obtained under the enhanced HIPC Initiative on both official and commercial debt.

B. Prospects and Policies Under the Second Annual Program and for the Year 2002

Macroeconomic prospects

17. Estimates suggest a modest slowdown in economic activity in 2002. The construction of the Chad-Cameroon pipeline is providing a boost to transportation, trade, and other services, while growth remains strong in the textile, light manufacturing, and construction sectors. However, taking into account the moderating impact of the constrained electricity supply situation on the growth of industrial output, real GDP growth in fiscal-year 2001/02 (ended June 30) is now estimated at 4.4 percent, compared with the program projection of 4.6 percent (Table 7 and Figure 1); in calendar-year 2002, real GDP growth is expected to be close to the initial projection of 4.7 percent (Box 2) On an average annual basis, national consumer prices are projected to rise by 4.0 percent during the program period (October 2001-September 2002), compared with the program targets of 2.9 percent for end-September and 3.5 percent for end-December 2002. The authorities expressed the view that the supply of foodstuffs would not improve significantly in the short run, although they noted that the planned efforts to improve transport and the overall business climate and accelerate the privatization of agribusiness could help alleviate the pressures on food toward the end of the year. The staff stressed the need for sustained implementation of these actions.

Table 6.

Cameroon: Savings-Investment Balances, 1997/98–2004/05 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. Starting in January 2003, the fiscal year will match the calendar year.

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: Selected Economic and Financial Indicators, 1999/00–2004/05 1

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Sources: Cameroonian authorities, and staff estimates and projections.

Fiscal year begins in July. Starting in January 2003, the fiscal year will match the calendar year.

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

Including restructuring expenditure. KPC-related expenditure envisaged for 2000/01 was postponed to 2001/02. HFC-related expenditure envisaged for 2001 /02 has been postponed to 2002/03 and 2003/04.

Excluding restructuring expenditure.

Excluding foreign-financed investment and privatization proceeds.

Fiscal policy stance8

18. The government has introduced a six-month transition budget for the period July-December 2002, following the approval by the National Assembly of a new annual budget cycle beginning January 1, 2003. The budget aims at generating a primary surplus of 1.4 percent of GDP and limiting the overall fiscal deficit, on a commitment basis and excluding grants, to 0.6 percent of GDP (Table 8). To achieve these targets, the authorities will continue their efforts to strengthen tax and customs administration, and, as detailed in paragraph 8 of the LOI, noninterest current expenditure will be limited to 5.9 percent of GDP. Public investment is budgeted at 1.9 percent of GDP (including HIPC-related spending of 0.4 percent of GDP) The authorities indicated that the government had decided to give priority to the implementation of the approved HIPC-financed projects and the ongoing projects that are being financed from the national budget. The staff noted that achieving the spending target for HIPC-related projects would help to address the concerns that representatives of both the civil society and the donor community had expressed about past delays in implementing HIPC-financed projects.

Table 8.

Cameroon: Central Government Operations, 1998/99–2004/05 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 Starting in January 2003. the fiscal year will match the calendar year.

Including restructuring expenditure. MPC-rclated expenditure envisaged for 2000/01 was postponed to 2001/02 HIPC-related expenditure envisaged for 2001/02 has been postponed lo 2002/C3 and 2003/04

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

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