Cameroon: Staff Report for the 2005 Article IV Consultation and Staff-Monitored Program
Author: International Monetary Fund
Publication Date:
19 May 2005
eISBN:
9781451808124
Language:
English
Keywords:
ISCR; CR; authority; government; budget execution report; oil revenue; government arrears; financial situation; government obligation; debt ratio; policy strategy
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Cameroon’s 2005 Article IV Consultation reports that tangible progress has been made in the health and education sectors, and a number of social indicators have improved significantly. The deterioration in fiscal performance and related weaknesses in fiscal management could, in the longer term, threaten macroeconomic stability and debt sustainability. Moreover, sustainable private sector growth requires the authorities to address inadequate infrastructure, poor service delivery from troubled state enterprises, an investment climate overshadowed by poor governance and low levels of financial intermediation.

Abstract

Cameroon’s 2005 Article IV Consultation reports that tangible progress has been made in the health and education sectors, and a number of social indicators have improved significantly. The deterioration in fiscal performance and related weaknesses in fiscal management could, in the longer term, threaten macroeconomic stability and debt sustainability. Moreover, sustainable private sector growth requires the authorities to address inadequate infrastructure, poor service delivery from troubled state enterprises, an investment climate overshadowed by poor governance and low levels of financial intermediation.

I. Introduction

1. Economic policy performance deteriorated against the backdrop of a stable political environment since the last Article IV consultation. Presidential elections were held in early October 2004, and President Biya, in power since 1982, was reelected for a seven-year term. A cabinet restructuring in early December merged the Ministries of Economy and Finance, reversing their separation in 2002/03. The policy recommendations made during the last Article IV discussions in 2002 remain valid, as little progress has been made. In particular, due to the lack of fiscal consolidation, the 2000 PRGF arrangement lapsed a year after the fourth and last review was completed in December 2003. The authorities now plan to build a track record of policy implementation through a staff-monitored program (SMP) for 2005 (see Appendix I for the Letter of Intent and Memorandum of Policies). The SMP reflects the main findings of the Ex-Post Assessment (www.imf.org). Successful policy implementation under the SMP and a successor PRGF arrangement as well as further progress on the HIPC completion point triggers would allow for the possibility of reaching the HIPC completion point in 2006.

2. Growth, inflation and external sector performance through 2004 has been good. However, prospects for sustainable growth and poverty reduction are hampered by weak fiscal performance and public financial management, which in the longer term could threaten macroeconomic stability and debt sustainability, and by impediments to sustained private sector growth, including inadequate infrastructure, poor governance and low levels of intermediation by the financial sector.

II. Recent Economic Developments

3. Overall, macroeconomic performance through 2004 has been robust except for the significant weakening of the fiscal performance, particularly on the revenue side. Overall spending was broadly as planned, but investment fell short of targets while there were overruns on current spending. The overall fiscal balance deteriorated to a deficit of 0.7 percent of GDP and arrears accumulated. The financial situation of public enterprises weakened considerably. Some progress was made in structural reforms in public financial management, transport, forestry, health and education, but there was less apparent progress in improving governance.

4. Real GDP growth remained solid. Nonoil growth was maintained at 4½–5 percent in 2003–04, resulting in per capita income gains of about 1½ percent per year (Figure 1 and Tables 1-2).1 Growth was spread fairly evenly across Cameroon’s relatively diversified nonoil economy. In the primary sector, forestry and agriculture were particularly buoyant, in the secondary sector, electricity generation and distribution picked up, easing an important constraint on manufacturing; in the tertiary sector, transport, communications (mobile telephony) and retail trade performed best. In contrast, crude oil production continued on its long-term downward trend (Box 1). Among the aggregate demand components, exports performed well, while investment remained relatively weak (Table 3). Signs of a slowing in economic activity in the course of 2004 include a drop in credit growth to the private sector from 9 percent in 2003 to 2 percent in 2004 (Figure 2 and Table 4).

Figure 1.
Figure 1.

Cameroon: Output, Prices, Savings and Investments, 1990/91-2008

Citation: IMF Staff Country Reports 2005, 164; 10.5089/9781451808124.002.A001

Sources: Cameroonian authorities; and staff estimates and projections.
Table 1.

Cameroon: Selected Economic and Financial Indicators, 2002-2008

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Sources: Cameroonian authorities; and staff estimates and projections.

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

Excluding foreign-financed investment, restructuring expenditure and separation grants.

Excluding restructuring expenditure.

Excluding external grants and privatization proceeds.

After debt relief.

Table 2.

Cameroon: Millenium Development Goals

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Source: http://www.developmentgoals.org/.Goal 1 targets: Halve, between 1990 and 2015, the proportion of people whose income is less than one dollar a day. Halve, between 1990 and 2015, the proportion of people who suffer from hunger.Goal 2 target: Ensure that, by 2015, children everywhere, boys and girls alike, will be able to complete a full course of primary schooling.Goal 3 target: Eliminate gender disparity in primary and secondary education preferably by 2005 and to all levels of education no later than 2015.Goal 4 target: Reduce by two-thirds, between 1990 and 2015, the under-five mortality rate.Goal 5 target: Reduce by three-quarters, between 1990 and 2015, the maternal mortality ratio.Goal 6 targets: Have halted by 2015, and begun to reverse, the spread of HIV/AIDS. Have halted by 2015, and begun to reverse, the incidence of malaria and other major diseases.Goal 7 targets: Integrate the principles of sustainable development into country policies and programs and reverse the loss of environmental resources. Halve, by 2015, the proportion of people without sustainable access to safe drinking water. By 2020, to have achieved a significant improvement in the lives of at least 100 million slum dwellers.Goal 8 targets: Develop further an open, rule-based, predictable, non-discriminatory trading and financial system. Address the Special Needs of the Least Developed Countries. Address the Special Needs of landlocked countries and small island developing states. Deal comprehensively with debt sustainable in the long-term. In cooperation with pharmaceutical companies, provide access to affordable, essential drugs in developing countries. In cooperation with the private sector, make available the benefits of new technologies, especially information and communications.
Table 3.

Cameroon: Savings-Investment Balances, 2002-2008

(In percent of GDP at market prices)

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Sources: Cameroonian authorities; and staff estimates and projections.

Gross disposable national income minus total consumption.

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

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

Figure 2.
Figure 2.

Cameroon: Monetary Developments and Prospects, 1990/91-2008 1/

Citation: IMF Staff Country Reports 2005, 164; 10.5089/9781451808124.002.A001

Sources: Cameroonian authorities; and staff estimates and projections1/ Fiscal year begins in July. Starting in January 2003, the fiscal year corresponds to the calendar year. Shaded area indicates projections2/ Excluding information on two banks (Banque Meridien-BIAO Cameroun and Credit Agricole du Cameroun) that were liquidated in October 1996 and June 1997, respectively.3/ In percent of broad money at the beginning of the period.4/ In February 1996, the Bank of Central African States (BEAC) intervention rate was replaced by the auction rate, and the reverse auction rate was established (seven-day deposits).5/ French money market rate until end-1999.
Table 4.

Cameroon: Monetary Survey, December 2002-December 2008

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Sources: Cameroonian authorities; and staff estimates and projections.

In percent.

In billions of CFA francs, using the definition of the Central Bank of African States, which includes deposits of public enterprises and autonomous agencies.

Cameroon’s Oil Sector

Cameroon is a small oil producer, but the oil sector contributes significantly to economic activity. Oil output amounted to 90,000 barrels/day in 2004 (2/5 and one third of the production in Congo and Equatorial Guinea, respectively). The share of the oil sector in Cameroon’s total value added amounts to 10 percent, and oil is estimated to account for 40 percent of exports in 2004.

Output is to decline over the medium to long run, but the pace is uncertain. Oil output fell by half over the last two decades, and the pace of decline accelerated to an average of 5 percent over the last 5 years. However, thanks to recent discoveries, output is expected to rise by 5 percent in 2006-07 and to remain stable in 2008-10.

Cameroonian crudes are heavy and the differential below the WEO benchmark recently widened. Existing world refining capacity has recently preferred light crude oil, contributing to a significant rise in light-heavy spreads. In Cameroon, the differential against the WEO benchmark rose to US$5 per barrel in the last quarter of 2004, against a previous average of US$2 per barrel.

Despite the steady decline in oil output, oil revenue fluctuated with developments in oil prices and exchange rates. Oil revenue accounted for one quarter of government revenue in 2004.

The national oil company SNH (Société Nationale des Hydrocarbures) is under the aegis of the Secretary General at the Presidency and represents the authorities in their financial relations with the foreign oil companies. SNH receives about 70 percent of total output while operating costs are equally split with the oil companies. SNH is responsible for transferring oil revenue (after deducting costs) to the Treasury.

Further progress is needed to enhance transparency and accountability. The SNH provides quarterly data to Fund staff on oil production, exports, prices, revenues, and costs, but little is published. Financial audits, conducted by local accounting firms, are carried out with long delays (the respective audits for 2000–03 are only now being finalized). SNH makes significant expenditures on behalf of the government.

Given the volatility of oil prices, the SMP has a built-in contingency mechanism, whereby oil revenue exceeding program targets will be used to reduce domestic debt while net domestic borrowing will be adjusted upward by half of any revenue shortfall.

uA01fig01

Oil revenue

(In percent of GDP)

Citation: IMF Staff Country Reports 2005, 164; 10.5089/9781451808124.002.A001

uA01fig02

Oil output

(In thousands of barrel per day)

Citation: IMF Staff Country Reports 2005, 164; 10.5089/9781451808124.002.A001

Sources Cameroonian authorities; and staff estimates.

5. Tangible progress has been made in the health and education sectors and a number of social indicators have improved significantly (school enrollment, immunization rates, child mortality; see Appendix I, Attachment I, paragraph 7 and Annex I). However, income levels remain far below those enjoyed in the pre-crisis years before the devaluation of the CFA franc in 1994 and Cameroon continues to rank just above the first quintile (place 141 out of 177 countries) of UNDP’s Human Development Index.

6. Average inflation fell to ½ percent in 2003–04. Inflation declined mainly because import prices declined due to the appreciation of the CFA franc against the U.S. dollar.2 Also, favorable climatic conditions increased agricultural output and lowered food prices. Cameroon continued to benefit from the stability anchored in the prudent monetary policy of the regional central bank (BEAC).3 Cameroon’s banking sector has remained sound overall, with most commercial banks complying with the prudential ratios set by the regional supervisor (COBAC);4 banks hold significant liquidity above prudential requirements. Effective progress at the judiciary level was made in 2003–04 to limit cases of abusive attachment of bank balances (saisie-attributions).

7. The external current account deficit improved to about 2 percent of GDP in 2004, due mostly to strong exports of primary goods (Figure 3 and Table 5). The terms of trade remained broadly unchanged. Despite the nominal appreciation of the CFAF against the U.S. dollar by 25 percent in 2003–04, the real effective exchange rate appreciated by only 3.3 percent with little effect on competitiveness because about two thirds of Cameroon’s trade is with the Euro area and inflation remained low.5 Cameroon benefited from higher-than-anticipated debt relief, reflecting mainly significant additional bilateral relief and exchange rate movements. Intermittent arrears were incurred to external creditors reflecting tight financing constraints as well as insufficient coordination between the Treasury and the debt agency (CAA).

Figure 3.
Figure 3.

Cameroon: External Sector Developments and Prospects, 1990/91-2008 1/

Citation: IMF Staff Country Reports 2005, 164; 10.5089/9781451808124.002.A001

Sources: Cameroonian authorities; and staff estimates and projections.1/ Fiscal year begins in July. Starting in January 2003, the fiscal year corresponds to the calendar year. Shaded area indicates projections.
Table 5.

Cameroon: Balance of Payments, 2002-2008 1/

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Sources: Cameroonian authorities; and staff estimates and projections.

Including the financing of the Chad-Cameroon oil pipeline in 2001-03.

From Paris Club and other non-Paris Club creditors.

Including the London Club operation, estimated at CFAF 580 billion in 2002.

From 2005 onward, the financing gap could be covered through debt relief.

8. The underlying fiscal performance weakened significantly, particularly on the revenue side. Non-oil revenue fell by 1 percent of non-oil GDP in 2004 instead of increasing as planned to offset the long-term decline in oil revenue (Figure 4, Tables 6–7). This decline was due largely to a weak performance of VAT and excises, and larger-than-expected revenue losses from the January 2004 personal income tax reform. This reflected a weakening of tax administration, lower tax compliance in an election year, and, according to the authorities, a shift in activity from the formal to the informal sector following completion of the Chad-Cameroon pipeline in 2003. Oil revenue continued its secular decline reflecting a downward trend in output, increasing discounts on Cameroon’s heavy petroleum, and the dampening effect of the CFA franc appreciation against the U.S. dollar on the impact of the rise in international oil prices (Box 1 and Table 8). Overall spending was broadly as planned, but the decline in public investment did not correspond well to the priorities specified in the Poverty Reduction Strategy Paper (PRSP). Domestically-financed investment declined by 0.4 percent of GDP in each 2003 and 2004, while noninterest current expenditure (excluding HIPC spending) rose by 0.7 percent of GDP in 2004. The latter reflected mostly a weakening of expenditure control which resulted in off-budget spending and an increase in the float (accumulation of expenditure committed during past fiscal years but not yet paid). The level of social spending (health and education) probably increased slightly (the data for the functional breakdown of expenditure is incomplete), and the use of HIPC relief picked up slowly.

Figure 4.
Figure 4.

Cameroon: Fiscal Developments and Prospects, 2002-2006

(In percent of GDP)

Citation: IMF Staff Country Reports 2005, 164; 10.5089/9781451808124.002.A001

Sources: Cameroonian authorities; and staff estimates and projections.1/ Excluding restructuring expenditures.
Table 6.

Cameroon: Central Government Operations, 2002–08

(In billions of CFA francs, unless otherwise indicated)

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Sources: Cameroonian authorities; and staff estimates and projections.

VAT revenue is on a net basis.

Including payments in 2003 of arrears of CFAF 15.8 billions to CAMAIR that are excluded from the debt reduction plan.

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