Cameroon
Ex Post Assessment of Longer-Term Program Engagement
Author: International Monetary Fund
Publication Date:
10 Jun 2005
eISBN:
9781451808148
Language:
English
Keywords:
ISCR; CR; Cameroon; oil revenue; CFA franc; central bank; banking system; business climate; reform program
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This Ex Post Assessment of Longer-Term Program Engagement for Cameroon highlights that the strengthening non-oil revenue and improving expenditure monitoring and control are critical to strengthening the fiscal position. Structural policies aimed at improving competitiveness and promoting private sector development, including by strengthening the financial sector, have been important to raise Cameroon’s productive potential and generate employment. In both macroeconomic and structural policies, improving governance including through more transparency and accountability has been assigned a high priority.

Abstract

This Ex Post Assessment of Longer-Term Program Engagement for Cameroon highlights that the strengthening non-oil revenue and improving expenditure monitoring and control are critical to strengthening the fiscal position. Structural policies aimed at improving competitiveness and promoting private sector development, including by strengthening the financial sector, have been important to raise Cameroon’s productive potential and generate employment. In both macroeconomic and structural policies, improving governance including through more transparency and accountability has been assigned a high priority.

I. Introduction and Background

1. Following a period of strong economic expansion fueled by the development of the off-shore oil fields starting in 1978, Cameroon entered a deep and prolonged economic recession in the mid-1980s. Between 1986 and 1993, real GDP fell by a third, or by over 50 percent on a per capita basis. Several factors conspired in this precipitous decline: world market prices for its main exports fell sharply, resulting in a 40 percent drop in Cameroon’s terms of trade; oil output began falling in 1986; and the real effective exchange rate appreciated by 40 percent, reflecting primarily the appreciation of the French franc to which Cameroon’s currency was pegged. The overall fiscal balance turned from a small, steady surplus to a deficit averaging 6½ percent of GDP in 1986–93, which was financed by rising foreign borrowing and the accumulation of significant internal and external arrears (Table 1).

Table 1.

Cameroon: Selected Economic and Financial Indicators, 1986/87–20041

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Sources: Cameroonian authorities; and staff estimates and projections.

Fiscal year (July-June) up to 2001/02 and calendar year starting in 2003.

From 1999/00 until 2001/02, the increase in the import volume was related to pipeline imports.

2. The devaluation of the CFA franc in 1994 restored Cameroon’s competitiveness. Earlier internal adjustment, centered on fiscal measures including a 50 percent across-the-board cut in civil servants’ wages, had been insufficient to regain macroeconomic balance.2 Despite an unfavorable development in the terms of trade, the 25 percent real depreciation boosted export growth, particularly in the non-oil sector, and GDP growth averaged 2¾ percent in 1994–97 (Figure 1). Inflation, which spiked up to 30 percent following the devaluation, was rapidly brought back to single-digit levels. But despite some budgetary reforms, especially on the expenditure side, recurrent fiscal slippages forced both stand-by arrangements with the Fund off-track (Table 2). External debt, much of which had been accumulated to finance large development projects during the oil boom years, remained a heavy burden, reaching close to 90 percent of GDP by 1997. External payment arrears persisted, reaching about 17 percent of GDP by 1997.

Figure 1.
Figure 1.

Cameroon: Main Economic Indicators, 1986/87 ~2004

Citation: IMF Staff Country Reports 2005, 189; 10.5089/9781451808148.002.A001

Sources: Cameroonian authorities; and staff estimates.
Table 2.

Cameroon: History of Lending Arrangements Since 1988

(In millions of SDRs)

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Source: International Monetary Fund, Finance Department.

II. Assessment of Performance under Fund-supported Programs 1997–2004

3. In July 1997, Cameroon requested a three-year arrangement under the ESAF, which was later converted to a PRGF arrangement (hereafter PRGF I). The satisfactory performance, and Cameroon’s unsustainable debt burden, allowed Cameroon to reach the decision point under the Enhanced HIPC Initiative in October 2000. Upon completion of PRGF I, Cameroon entered into a second three-year arrangement (PRGF II), which was initially envisaged to cover 2000–2003 and later extended to 2004. All quarterly reviews were concluded and disbursements made under PRGF I; under PRGF II, the first three reviews were concluded as scheduled, but the fourth was completed with a one-year delay in December 2003. No further reviews were concluded and no further disbursements were made before the arrangement expired on December 20, 2004.

A. Objectives and Instruments of the Economic Programs

4. The overall program objectives were to return the economy to a sustainable growth path, restore internal and external viability, and reduce poverty. With the instruments of macroeconomic policy constrained by the exchange rate peg, a key role fell to fiscal policy. Strengthening non-oil revenue—against the background of the anticipated drop in oil output and corresponding government revenue—and improving expenditure monitoring and control were critical to strengthening the fiscal position and generating sufficient resources to meet social and infrastructural needs over the medium term. In addition, structural policies aimed at improving competitiveness and promoting private sector development—including by strengthening the financial sector—were important to raise Cameroon’s productive potential and generate employment. In both macroeconomic and structural policies, improving governance—including through more transparency and accountability—was assigned high priority.

B. Economic Performance 1997–2000

5. During PRGF I, economic performance was strong and significant reforms were initiated. Economic growth rose to an average of 4½ percent per year. At the same time, inflation was contained at low levels (Table 4).

Table 3.

Cameroon: Selected Fiscal Indicators, 1997/98–2004 1/

(In percent of annualized GDP, unless otherwise specified)

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Sources: Cameroonian authorities; and staff estimates and projections.

As of 2003, the fiscal year begins in January 2003.

Excluding external grants and privatization proceeds

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

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

Table 4.

Cameroon: Performance Under PRGF Arrangements, 1997/98–2004

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Sources: Cameroonian authorities; and staff estimates.

Based on the audits carried out by debt agency operations (last completed in December 2003 covering debt up to end-June 2003), but excluding most public enterprise debt. In FY 1999/00 about CFAF 450 billions (7.7 percent of GDP) of unvalidated claims were rejected, which explains the large drop in the stock of domestic debt between FY 1999/00 and FY 2000/01.

6. The fiscal position strengthened significantly (Table 3 and Figure 1). Channeling all oil revenue through the budget represented an important step toward better fiscal management (as well as better governance—see below). Moreover, non-oil revenue rose from an average of 10 percent of GDP in 1994–97 to 13¼ percent by the end of PRGF I in 2000. Combined with successful control of current expenditure, this contributed to a sharp improvement in both the overall and the primary fiscal balance; the latter reaching a surplus of over 7 percent of GDP by 2000. Together with the debt relief obtained from Paris Club creditors, this allowed for the clearance of all external payment arrears to official creditors.3 In addition, a repayment plan was formulated for domestic arrears, providing for their repayment over six years. A number of structural fiscal reforms contributed to the strengthening of the underlying fiscal position, including through extensive technical assistance to improve tax policy and administration and, to a lesser extent, public expenditure monitoring and control (Box 1).

7. Structural reforms contributed to an improvement in competitiveness (Box 2). Notably, the electricity utility and several public enterprises were successfully privatized, and the banking sector was restructured and liberalized within a strengthened supervisory framework.

IMF Technical Assistance

Since 1997, Cameroon has received extensive technical assistance from the Fund and other multilateral and bilateral sources. Fund technical assistance concentrated on strengthening the revenue and expenditure management procedures to increase the non-oil revenue effort and improve the monitoring of budget execution. Technical assistance was primarily provided by short-term missions, supplemented by an in-depth report and supported by resident advisors.

IMF Technical Assistance Provided to Cameroon, 1997–2004

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During 1997–2000, technical assistance in tax policy and administration focused on the introduction of a value added tax (VAT). Introduced in 1999, the VAT is functioning well, but suffers from a relatively narrow base. A key priority, emphasized by recent follow-up technical assistance, is to reduce the wide range of exemptions. In 2001–03, assistance concentrated on measures to broaden the tax base and enhance revenue collection by introducing a global income tax (GIT), restructuring the tax department, including by establishing a Large Taxpayers Unit (LTU), modernizing the customs department, and improving audit and collection enforcement, especially at the level of small and medium-sized businesses. The GIT and the LTU reforms were introduced in 2004, and a number of customs administration measures were also implemented, including the full computerization of the single window for external trade formalities.

Since 1998, Cameroon has embarked on a far-reaching reform program of its public expenditure management framework. Initially, Fund technical assistance focused on improving internal audit procedures and implementing the action plan for the full integration of various information systems at the Ministry of Finance. Subsequently, attention was given to the improvement of Treasury operations in order to improve the accuracy and transparency of fiscal data. A new budget classification and a new chart of accounts were adopted, which has facilitated economic analysis. However, a reliable monitoring and recording system has not yet been fully implemented; the government continues to maintain numerous bank accounts, rather than a single consolidated Treasury account; and the new Integrated Financial Management System remains underutilized.

Structural Reform Program

The 1997–2000 economic programs incorporated far-reaching structural reforms with the objective of strengthening the economy’s productive potential. Reforms fell into two broad areas: First, reinforcing the functioning of the market economy by privatizing state-owned enterprises, liberalizing markets, and where appropriate, establishing supportive regulatory frameworks; and second, improving the environment for private sector development through sectoral reforms in the energy, forestry, transport and financial sectors, and strengthening public administration through reforms of the civil service and the judicial system. These reforms continued in 2000–2003, when they were complemented by policies aimed at accelerating poverty reduction through the elaboration of a poverty reduction strategy and improvements in social services.

Key reforms included:

In the area of privatization of state-owned enterprises, market liberalization, and establishment of regulatory frameworks, several companies were successfully privatized (electricity supplier SONEL, rubber company HEVECAM, palm oil company SOCAPALM, railway company CAMRAIL, commercial bank BICEC), regulatory agencies for the telecommunications and electricity sectors were established, and the mobile telephone system was liberalized and competition was introduced. However, privatization of other companies was not attempted or failed (air carrier CAMAIR, water supplier SNEC, telephone company CAMTEL, petroleum storage facility SCDP).

In the energy sector, the petroleum product market was liberalized, and the national oil company SNH underwent a series of audits, adopted an accounting system conforming to international standards, and strongly improved revenue transfers to the government budget (see Box 8).

In the forestry sector, reforms were undertaken aiming mainly at the introduction of market elements into the allocation of cutting rights and the establishment of a framework for better monitoring of operators and enforcement of regulations.

In the transport sector, progress was made with the restructuring of the Port of Douala and discriminatory regulation of marine transportation was eliminated.

In the financial sector, the banking system was largely rehabilitated and liberalized, while banking regulation and supervision were strengthened in a regional framework. The majority of the key recommendations of the FSAP conducted in 2000 were implemented, including restructuring of the insurance sector and the regulation of the microfinance sector. Work is ongoing in modernizing the payment system.

In the area of strengthening public administration, the number of civil servants was successfully reduced by several thousand, and a civil service data management system was effectively implemented in key ministries. In order to strengthen governance and the rule of law, a strategy and an associated action plan to improve governance and reduce corruption were adopted, but only few concrete measures to improve governance seem to have been taken to date, and there is little indication of strengthened governance (see Box 6). Also, while an independent study of the judicial system was done and an action plan elaborated, to date the reform measures taken are not yet operational (establishment of the audit office and the constitutional council).

Finally, in the area of accelerating poverty reduction, a poverty reduction strategy was adopted in mid-2003 (and approved by the World Bank and the Fund), containing inter alia strategies for improving education and health services provision. A first annual progress report was prepared in mid-2004.

8. Some progress was made in strengthening governance. The government adopted a strategy and an associated action plan to improve governance and reduce corruption. Significant steps were taken by the national oil company (SNH) to become more transparent and accountable, including by adopting a new accounting system in line with international standards and conducting regular financial audits. Regulatory agencies for telecommunications and electricity were established, and reforms of public procurement procedures were initiated.

9. There was progress in tackling poverty and social issues (Box 3 and Table 5). Sustained economic growth contributed to a reduction in poverty: between 1996 and 2001, the proportion of the population below the poverty line dropped from 53 percent to 40 percent. Some social indicators, including school enrollment and literacy, also improved during this period. However, health indicators worsened (infant and maternal mortality) and inequality remained high.4 On most measures, Cameroon scores better than average in sub-Saharan Africa. But the pace of progress falls well short of what would be needed to achieve the Millennium Development Goals.

Table 5.

Cameroon: Selected Social and Demographic Indicators

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Sources: World Bank, World Development Indicators, 2004, www.developmnentgoals.org

Data as of 2000.

Data as of 2001.

Data as of 1995.

C. Economic performance in 2000–2004

10. Economic growth remained robust, averaging 4½ percent per annum under PRGF II. But while this was strong by sub-Saharan African standards, it fell somewhat short of program objectives and well short of Cameroon’s potential and ambition identified in the PRSP. Domestic investment remained below expectations and the diversification of both production and exports was less than expected. While price competitiveness was maintained in the wake of the 1994 devaluation, there has been little export diversification and the business climate, as perceived by international investors, has remained difficult (Box 4).

11. Fiscal consolidation under PRGF I was followed by significant fiscal slippages in the second half of PRGF II. Initially, targeted increases in non-oil revenue were realized and the overall fiscal targets, including the adjusted primary balance, remained on track. But fiscal tensions were already emerging, reflected at first in a shift in expenditure composition as public investment (including social spending from HIPC resources—Box 5)5 was kept well below budgeted levels, offset by overruns in current expenditure. By 2002–03, non-oil revenue collection began falling, budgetary expenditure monitoring weakened, scheduled domestic debt repayments fell into arrears, and unpaid bills by the government to utilities and suppliers started to accumulate (see below).

Poverty Profile

Despite the high rates of economic growth prevailing until the mid-1980s, Cameroon experienced a high degree of poverty in rural areas, marked inequality in the distribution of incomes, and significant regional disparities. The deep recession from 1986 to 1993 led to a sharp increase in poverty, especially in urban areas, and the fiscal crisis during this period contributed to a serious deterioration of Cameroon’s education and health sectors, the civil service, and infrastructure.

Two comprehensive household surveys conducted in 1996 and 2001 show a marked decrease in poverty over this period.

Income poverty The share of the population living below the poverty line (defined broadly as $1 per day) declined from over 50 percent to about 40 percent. The decline was particularly sharp in urban areas, where the share roughly halved. At the same time, the depth of poverty was reduced from 19 percent in 1996 to 14 percent in 2001. Growth rather than income redistribution accounted for the much of this reduction with the Gini coefficient remaining unchanged.

Poverty Profile Indicators

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Source: Cameroonian authorities (ECAM I and ECAM II Household Surveys).

Poverty depth is a measure of the difference between the average income of the poor and the poverty line.

Social Indicators Some education indicators improved, with net school enrollment up from 76 percent in 1996 to 79 percent in 2001. The literacy rate also increased from 61 percent in 1992 to 68 percent in 2001. However, there are indications that the delivery of some social services may have deteriorated, reflected in the rising school dropout rates and some key health indicators. For example, the infant mortality rate increased from 85 to 95 per 1000 live births from 1990 to 2002, and the malnutrition rate rose from 32 percent to 44 percent from 1991 to 1998. Life expectancy at birth declined from 55 to 48 from 1992 to 2002, and between 2000 and 2004, Cameroon slipped from 132nd to 141st out of 177 countries ranked by the UNDP’s Human Development Index.

Gender Poverty has significant gender dimensions in Cameroon. Gender differences in labor force participation and earnings, in time allocation, in land ownership and use rights, and in schooling and literacy are critical impediments to poverty reduction in Cameroon. Women play a central role in economic production, notably agriculture, but face discrimination—often reinforced by custom, culture and law—in access to and control of basic assets. A key challenge is to enable women to achieve much higher levels of labor productivity to promote growth, while reducing overall labor effort.

Competitiveness and the Business Environment

The 1994 devaluation of the CFAF of 50 percent in foreign currency terms was followed by a temporary surge in inflation. Nevertheless, it resulted in a depreciation of the real exchange rate by about 25 percent by 1996, a level that has been broadly maintained since (Figure 1).

Figure 1:
Figure 1:

Cameroon: Real and Nominal Effective Exchange Rate

(Index, 1990=100)

Citation: IMF Staff Country Reports 2005, 189; 10.5089/9781451808148.002.A001

Exports, particularly non-oil exports, responded positively to the improvement in price competitiveness, and by 2002 export volumes were 50 percent above their 1993 level. However, despite some diversification, oil, timber, aluminum, and a few agricultural products continue to account for about 70 percent of Cameroon’s exports (Figure 2).

Figure 2.
Figure 2.

Cameroon: Main Exports Products

(In percent of total of goods)

Citation: IMF Staff Country Reports 2005, 189; 10.5089/9781451808148.002.A001

Both PRGF arrangements also supported reforms addressing structural constraints on exports, including phasing out domestic price controls, restructuring the financial system, judicial reform, trade and tax reforms to promote regional integration, and measures to improve transportation and infrastructure. Despite success in a number of areas, notably in financial sector reform, numerous constraints continue to limit private sector development, and investment –both from domestic and foreign sources – remains low.

International investors rank Cameroon’s business climate as difficult. The 2001 Trade Policy Review by the WTO cited difficulties in enforcing contracts and protecting property rights as key constraints for investment. The 2004 African Growth Competitiveness Index prepared by the World Economic Forum ranked Cameroon 18th among the 25 African countries it covered. Finally a recent World Bank report, Doing Business 2005, notes that although Cameroon compares favorably with many other sub-Saharan countries across key dimensions of the business environment (cost of obtaining a business registration; steps and time required to establish a new business), contract enforcement remains weak.

Use and Tracking of HIPC Resources

Debt service savings arising from the HIPC Initiative are to be used in priority areas, including health, education, infrastructure, rural development, combating HIV/AIDS, and governance. With this objective, the authorities established a special account at the regional central bank, which is to be credited by monthly payments from the Treasury (in the case of bilateral debt relief) or from the World Bank on a quarterly basis.1 Although final spending authority rests with the government, the identification of high-quality expenditures—and their monitoring—is done in close coordination with civil society and the donor community, guided by the priorities established in the PRSP.

However, transfers from the Treasury have been subject to delays, and overdue transfers stood at 0.8 percent of GDP in mid-2004. Moreover, spending from the special account has been very slow, and to date less than 10 percent of the available resources have been used.

1 Establishing such special accounts and providing the budget with corresponding grants is a practice followed in several countries, including Guyana, Honduras, Mauritania, Tanzania, and Uganda, and consistent with the recommendations of Tracking of Poverty-Reducing Public Spending in Heavily Indebted Poor Countries (www.imf.org).

12. Progress on the structural reform agenda slowed during PRGF II. There were some significant advances, including in restructuring Cameroon’s principal port of Douala and in putting in place a regulatory framework for the sustainable exploitation of Cameroon’s forests.6 But in other areas, notably the planned privatization of state-owned enterprises, progress fell short of expectations. In particular, the privatization of several public utilities was not completed. More recently, the performance of several large publicly-owned enterprises, including the national airline CAMAIR, has deteriorated further, weighing heavily on public finances.

13. Despite the courageous steps taken since 1997, problems with poor governance and corruption persist. A large share of the measures envisaged in the ambitious governance program that was formulated by the government in their PRSP remains in delay, including key reforms of the judiciary. The lack of progress is confirmed by independent measures of governance perception (Box 6). The World Bank governance indicators (GRICS) compiled in 2002 show that Cameroon ranked below the average for sub-Saharan Africa in five of six dimensions, performing particularly poorly on those related to the rule of law and the control of corruption. The more recent World Bank Country Policy and Institutional Assessment index (CPIA), however, notes some improvement, moving Cameroon from the fifth (bottom) quintile in 2002 to the fourth in 2003 in the area of public sector management and institutions, and from the fourth to the third quintile overall.7 Nevertheless, the global trend toward more transparency in the public sector has raised the bar. For example, several African oil producers have significantly increased the transparency of their resource revenue management in recent years (Table 6).

Table 6.

Current Practice in Governance and Transparency of the Oil Sector Operations

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Source: IMF staff analysis.

14. Economic policies were not fully coherent with regional integration initiatives. The PRSP sets out an ambitious strategy to exploit the economic potential of accelerating regional economic integration within the CEMAC. But progress to date has been limited. Regional commitments, for example to implement the common external tariff and to eliminate remaining nontariff barriers to intra-CEMAC trade, have not yet been reflected in domestic policy formulation, although it must be noted that Cameroon is generally ahead of most of its CEMAC partners in implementing common policies and regulations.

D. Performance against program targets

15. The overall mixed performance was reflected in the compliance with program targets, performance criteria, and benchmarks. During PRGF I, all quantitative and structural performance criteria were met, as were, with very few exceptions, all program benchmarks (Tables 7 and 8). In contrast, the PRGF II program experienced repeated slippages, particularly in the fiscal area. The quantitative performance criterion for end-September 2002 on net bank credit to the central government was missed; major problems in reconciling fiscal data emerged in late 2002; non-oil revenue performance weakened in the first quarter of 2003, as VAT receipts fell; and several of the tax measures envisaged in the 2003 budget were not implemented.8 Ultimately, the fourth review was completed in December 2003 with a one-year delay and the PRGF arrangement was extended by a year. Since then, fiscal performance has been weak. Quantitative performance criteria on the primary fiscal surplus and net bank credit to government were missed by considerable margins; two structural performance criteria in the area of public expenditure management were not observed; and eight out of ten quantitative benchmarks, largely in the fiscal area, were missed. As a result, no further reviews were completed.

Table 7.

Cameroon: Quantitative Performance Criteria and Benchmarks Under PRGF Arrangements 1/

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Source: Fund staff.

M = met, NM = not met, NMW = not met and waiver was granted, and - = the particular item was not a quantitative target during that test date.

Changed to “Ceiling on the accumulation of external payments arrears of the central government” in the original program.

Changed to “Floor on reduction of domestic debts” in Country report No. 03/401.

Data not available, but based on the larger fiscal picture, Fund staff believes it is unlikely that the benchmark was met.

Table 8.

Cameroon: Structural Conditionality Under the PRGF Arrangements, 1997/98 - 2004

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Source: Fund staff.

A considerable delay is defined as a delay of six months or more.