Statement by Damian Ondo Mane, Executive Director for Cameroon

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.

1. Introduction

Cameroon’s continued satisfactory implementation of Fund-supported programs over the last five years is a testimony of strong program ownership of economic reforms. Indeed, economic performance during the first half of the second annual program was broadly in line with the program targets, thanks to the continued implementation of sound macroeconomic policies and key structural reforms. Economic growth was strong, albeit slower than projected, inflation was low, the fiscal stance improved and the external position was strengthened. All the December 2001 and March 2002 performance criteria and structural benchmarks were met, except the structural performance criterion on the completion of a computerized link between the treasury and the budget department in the Ministry of Finance and Budget. This was mainly due to unforeseen technical difficulties at the local branches of government and to staffing problems. The link has now been put in place and the authorities are requesting a waiver for nonobservance of this performance criterion.

The authorities have also continued to strengthen non-oil revenue mobilization and to improve governance notably by addressing the long standing issues of saisie-attribution and implementing anti-corruption units in the line Ministries. Furthermore, my Cameroonian authorities have stepped-up their efforts to finalize the full PRSP, accelerate the disbursement of the interim assistance and speed-up the implementation of the reforms needed to reach the completion point under the Enhanced HIPC Initiative.

In assessing Cameroon’s economic performance, it should be noted that the authorities have built a strong and sustained track record over the last five years, that has helped foster economic growth, improve governance, restore macroeconomic stability, normalize relations with external creditors and reduce domestic arrears. Cameroon’s economy is at a critical juncture. The key challenge facing the authorities is to consolidate economic performance and diversify economic growth. Although medium-term economic prospects remain favorable, the economy is still vulnerable to a number of shocks, including the expected decline in oil production. In this context, my authorities are aware that to reduce poverty substantially, they need to ensure more rapid economic growth on a sustainable basis. To this end, they intend to maintain macroeconomic stability, intensify their efforts to further improve governance, accelerate the implementation of the structural measures, including HIPC completion point triggers.

II. Program Implementation and Recent Economic Developments

During the first half of the second annual arrangement, Cameroon’s economic performance was satisfactory and broadly in line with the program targets. Fuelled by stronger growth in the services sector and the impact of the ongoing construction of the Chad-Cameroon pipeline, real GDP remained strong, albeit slower than projected; reflecting recurrent shortages in electricity supply. Despite a sharp rise in foodstuff prices, inflation was contained at 4.8 percent against a program target of 2.9 percent, reflecting long-standing structural problems in the agriculture sector and increased domestic and regional demand of locally produced agricultural products from neighboring countries.

In the fiscal area, the program’s objectives were broadly met, as the authorities continued to maintain a primary fiscal balance (excluding HIPC spending) although smaller than programmed and to have an overall fiscal surplus, on a commitment basis (excluding HIPC Initiative-related spending and grants). The authorities pursued their efforts to strengthen non-oil revenue mobilization, and improve expenditure management. They have also promulgated a new general tax code.

As regards governance, a number of measures were taken, notably in the judicial area. The authorities completed the investigation of cases of saisie- attributions and adopted an action plan to improve transparency and accountability in the public sector, as a follow up of a Country Financial Accountability Assessment (CFAA) that was conducted with the assistance of the World Bank. They also launched a technical audit of the judiciary system as scheduled, but the consultants encountered some technical difficulties in delivering the work on time. The authorities are now working with them to finalize an action plan to be submitted to the World Bank before end-December 2002. Moreover, the authorities adopted a new budget classification and stepped up efforts to accelerate the implementation of the new procurement system.

In the structural area, while all the structural benchmarks were observed, the pace of other structural reforms to be taken before the completion point under the World Bank SAC III was slower than expected, despite the strong commitment of the authorities. Accordingly, recognizing the difficult circumstances facing the authorities in the privatization of major utilities such as the water company (SNEC) or the telecommunications company (CAMTEL) in the context of a global slowdown and the financial difficulties facing potential buyers in the international utility sectors, the World Bank awarded an extension of the SAC III to the authorities. Indeed, while the privatization of CDC proceeded as scheduled, with the selection of an interim adjudicator for the tea crop component, the first round of negotiations failed with the sole bidder of the water company (SNEC) because of its insufficient financial offer. As regards the privatization of CAMTEL, a new strategy is being finalized, following the inconclusive negotiations with the second bidder who could not-like the first one- raise enough funds to acquire the company.

III. Medium-Term Program and Policies for the Remainder of 2002

The growth prospects in the medium-term are less favorable than at the inception of the PRGF arrangement, reflecting a number of shocks, including among others, the international economic slowdown and the steeper than initially expected decline in oil output. Consequently, real GDP growth has been revised downward to 4.4 percent in the fiscal year 2001/02 (ended June 30) from 4.6 percent projected, equivalent to 1 percentage point lower than what was forecast at the inception of the PRGF-supported program. This highlights the need to further diversify the economy. To achieve a broad-based private sector-led growth, the authorities intend to implement a policy-mix consistent with their economic objectives.

Fiscal Policy

The authorities have 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, consistent with Cameroon’s commitment under the CEMAC. They are committed to continuing to adhere to a cautious fiscal stance during the second half of the second annual program. Oil revenue is expected to decline more than expected to only 2.6 percent of GDP, reflecting the depletion of the major known oil fields. Thus, stronger fiscal adjustment will be necessary in the medium-term. To achieve their fiscal objectives, the authorities will base their efforts on further strengthening their capacity to mobilize non-oil revenue while containing public expenditure and accelerating governance reforms.

On the revenue side, the authorities will continue to strengthen their capacity to mobilize non-oil revenue through a strict implementation of measures to enhance customs and tax administration and broadening the tax base. In the tax area, the authorities will take a number of measures, including inter alia, measures to improve the administration of the value-added tax (VAT) and forestry taxation, the adoption of an action plan for the implementation of a comprehensive reform of the income tax system for individual tax payers, the launching of the preparatory work to extend the income tax system to nonindividual taxpayers and to introduce a property tax, based on the land survey that is being put in place. The authorities are also committed to restricting VAT exemptions and to enhancing VAT refunds. In this regard, they have effectively started the implementation of an action plan to reduce VAT exemptions over a five-year period and accelerate the VAT credit reimbursement as agreed with the Fund, and intend to pursue the work on the evaluation of the revenue loss stemming from the existing exemptions.

In the customs area, the authorities will pursue the strengthening of customs administration through, notably, the computerization of the single processing window for external trade, taking actions to improve the physical and documentary controls for the release of goods and to enhance the control system for exemptions and special status traffic (transit and bonded warehouses) and temporary admissions and, taking steps to strengthen the valuation office within the customs and improve the collaboration with the Société Générate de Surveillance (SGS). Finally the authorities will strengthen the collaboration between the customs and tax administrations through extending the use of the taxpayer identification number for all taxpayers and importers and exporters and strengthening the joint tax-customs unit to render it operational.

On the expenditure side, the authorities intend to contain public expenditure in non-priority sectors, while improving spending, as well as the implementation of HIPC-related projects in line with the poverty reduction objectives of the PRSP. In this context, the authorities will strictly adhere to the expenditure ceilings for the wage bill and transfers and subsidies. Nonetheless, non-interest expenditure is targeted to increase to about 7.9 percent of GDP, mainly driven by HIPC-related projects and a larger wage bill stemming from selective recruitment in the health and education sectors, the gradual implementation of new statutes for the various professional categories in the civil service and the integration of the wage bill of the Ministry of telecommunications into the State’s budget. As regards HIPC expenditures, the six-month transition budget will give high priority to the implementation of the already approved HIPC-related projects and the authorities have put in place new procedures to avoid further delays in the disbursement of HIPC resources. They also intend to accelerate the preparation of high quality programs, so as to address the urgent development issues in the education and health sectors, and promoting rural and urban development.

In order to improve transparency and fiscal credibility, my Cameroonian authorities are taking steps to improve the external and internal control systems through, inter alia, implementing the action plan to establish an external audit body “Cour des Comptes”, enhancing budgetary procedures, reducing the supplementary period for closing the accounts, taking action to further enhance the quality and timeliness of the quarterly reports on the financial and physical execution of the budget of key ministries. They are also taking action to further enhance the coordination between the debt agency Caisse Autonome d’Amortissement (CAA) and the relevant departments in the Ministry of Finance and Budget, and launch an audit on the operations of the CAA and strengthen its management structure.

Monetary Policy and Financial Sector Reforms

Monetary policy, which is conducted at the regional level by the BEAC will remain consistent with the objectives of preserving the exchange rate arrangements under the currency union and maintaining adequate level of reserves. Broad money is expected to increase gradually. As a result of improvements in the fiscal stance, net credit to the central government will decrease, but at a lower pace, reflecting the rephased disbursements of the HIPC-related funds held at the special account at the BEAC. In the financial sector, my Cameroonian authorities will continue to implement measures in line with the Financial Sector Assessment Program (FSAP) recommendations, in order to strengthen the financial system and support the implementation of regional policies. To this end, they will continue to implement the restructuring plan for the state-owned Savings Bank, support the implementation of the recently adopted regional regulatory framework for microfinance, ensure the effective implementation of the reform of the payments system and pursue the reform of the social security system.

Structural Policies

In the structural area, the main objective of the authorities is to accelerate the implementation of the efficiency-enhancing measures necessary to stimulate private sector investment, enhance the competitiveness of the economy and diversify the sources of growth.

To this end, the authorities intend to improve governance by taking a comprehensive set of measures aimed at correcting the nonfunctioning features of the procedure of saisie-attribution, strengthening the judiciary system and fostering the implementation and dissemination of the provisions of the OHADA Treaty. In particular, on saisie-attributions, following the investigation of the 48 cases, the authorities will take all the necessary corrective actions and sanctions, including legislative, regulatory and other provisions specifying the nature of the executory titles and, ratify the agreement between the BEAC and Cameroon to mitigate the impact of saisie-attribution on the assets of the banking system. On the action plan for improving governance and combating corruption, the authorities have already put in place the public procurement commissions with the assistance of the World Bank and anti-corruption units within the line ministries.

The authorities are determined to accelerate the implementation of the World Bank SAC Ill-supported reforms, whose satisfactory implementation is a completion point trigger. As regards the privatization program, the authorities will continue to address the remaining issues, so as to privatize the telecommunications (CAMTEL), water (SNEC) and agro-industrial (CDC and SODECOTON) companies. While the privatization of SNEC is expected to be completed soon with the sole bidder, CAMTEL’s privatization is more complex given the current financial difficulties facing companies in the international telecommunications sector. Following two unsuccessful attempts to privatize CAMTEL and, in light of the current crisis in the telecommunications sector, the World Bank has rightly advised the authorities to redefine the privatization strategy and postpone the privatization of CAMTEL to September 2003. The experience with the privatization of utility sectors in Cameroon, especially the telecommunications, water and electricity sectors shows that despite the strong commitment of the authorities, the pace and outcome of privatization can adversely be affected by the international crisis in these sectors. In this context, the number of potential buyers is limited and bidders seem to use the deadline set by the program or the HIPC Initiative, as a leverage in their negotiations with the authorities.

The authorities will also pursue the reforms in the transport, forestry and agro-industrial sectors which are critical for improving competitiveness and enhancing job creation. In the transport sector, the authorities will launch the privatization of the national airline company (CAMAIR) and take a number of actions to improve the competitiveness of the port of Douala. In the forestry sector, the authorities will proceed with the restructuring of the National Forestry Development Office (ONADEF) and intend to apply legal sanctions for serious violations of forestry rules and management plans, and publish the cases that have been dealt with. In the petroleum sector, the authorities will accelerate the privatization of the petroleum storage facility company (SCDP), redefine the role of the key stakeholders in the hydrocarbon sector, prepare an action plan for private sector involvement in the sector, and improve transparency and the financial sustainability of the national oil company (SNH). Furthermore, the authorities have indicated that they stand ready to adjust upward the petroleum prices, if needed, so as to prevent the reemergence of subsidies.

Poverty Alleviation and HIPC

The main objective of the authorities is to ensure that improved economic performance translates into tangible results in terms of job creation, poverty alleviation and an improvement in the economic welfare of the average citizen. To this end, my Cameroonian authorities reiterate their commitment to accelerate the implementation of measures relating to the completion point as specified in box 7 of the HIPC Initiative decision point documents. They have also stepped-up their efforts to complete the final PRSP and will have a last series of consultations soon with the staffs to finalize the PRSP. They have already increased budgetary outlays in the key sectors of health, education and rural infrastructure, in line with the PRSP objectives and recently approved a first series of programs and projects to be financed through the savings resulting from debt relief under the enhanced HIPC Initiative. In order to improve the effectiveness of these outlays, the authorities took steps to improve the functioning of the national consultative committee through the adoption of a provisional set of internal rules, a procedure manual, and more transparent and predictable operating guidelines. The authorities also improved coordination between the Ministry of Finance, the consultative committee and the permanent secretariat of the HIPC, in order to ensure a better preparation, implementation and monitoring of HIPC-related projects.

IV. Conclusion

Cameroon has achieved a significant improvement in macroeconomic performance over the past five years. These positive developments have reflected strong efforts to strengthen the fiscal position and accelerate progress in the structural area. However, the situation remains fragile, as evidenced by the long-term decline in oil production that would adversely affect the fiscal performance and the external situation. In this context, my Cameroonian authorities are determined to strengthen their adjustment efforts. They will do their utmost to achieve their economic objectives and reduce poverty. They are hopeful they can continue to rely on an adequate, additional, predictable and timely international financial and technical assistance. In view of the strong track record of my Cameroonian authorities and their commitment to the adjustment program, I would like to request the Board’s support for the completion of this review and a waiver for nonobservance of a performance criterion.