The staff report for the Review of the Staff-Monitored Program and Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility highlights economic developments and performance. Fiscal consolidation efforts were sustained, and public finances improved markedly in the first half of 2005, exceeding the Staff-Monitored Program (SMP) targets. IMF staff welcomes the improvements made in public financial management and urges the government to persist in its efforts. The government encountered some technical difficulties, but also was not able to fully implement other SMP commitments.

Abstract

The staff report for the Review of the Staff-Monitored Program and Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility highlights economic developments and performance. Fiscal consolidation efforts were sustained, and public finances improved markedly in the first half of 2005, exceeding the Staff-Monitored Program (SMP) targets. IMF staff welcomes the improvements made in public financial management and urges the government to persist in its efforts. The government encountered some technical difficulties, but also was not able to fully implement other SMP commitments.

I. Introduction

On behalf of my Cameroonian authorities, I would like to thank the Board, Management and Staff for the continuous involvement and support to Cameroon. In particular, my authorities are appreciative of the productive and cooperative approach developed during policy discussions with Fund staff as reflected by the candid report on the review of the SMP, and welcome the constructive policy recommendations and advice on the design of the three-year program.

Since end-2004, my authorities’ main objective was to reverse the deterioration of the fiscal situation. Consequently, they adopted an SMP with in mind the goal to restore fiscal sustainability, lay the ground for strong growth, and deepen poverty reduction. The demonstration of this commitment is reflected in the strong performance under the SMP with all quantitative benchmarks observed and most structural measures completed, albeit with some delays. Strong actions were taken by the government to enhance governance and transparency: Cameroon is an active participant in the Extractive Industries Transparency Initiative (EITI) since March 2005; the national oil company (SNH) started to publish information on oil sector operations on a quarterly basis on public websites (www.snh.cm and www.spm.gov.cm); an anti-money laundering agency was created (ANIF); a new public procurement code was enacted; the Chambre des Comptes (the audit chamber) was established and the judges are being trained; and the new penal procedure code promulgated; civil servants involved in unauthorized salary transfers were suspended and are being prosecuted. Moreover, on October 17- 18, 2005 the Cameroon bureau of Transparency International has conducted a seminar on “Measuring and improving Governance” attended by cabinet ministers, the civil society and the international partners, and an improvement of transparency in Cameroon has been recognized. On this occasion, the Minister of Finances welcomed the opportunity which was offered to “intensify our reflexions on the ways and means to improving governance in the management of the public affairs”. Notwithstanding the progress made, my authorities are aware of the challenges they continue to face, including the implementation of strong policies and making progress on the needed reforms conducive to private sector development in order to boost growth and reduce poverty.

II. Recent Economic Developments and Performance under the SMP

Cameroon’s economy has suffered over the last two years of poor hydroelectricity supply due to the drought and to managerial and financial difficulties of the newly privatized entity. Therefore, manufacturing output decreased substantially. Although the macroeconomic framework strengthened significantly under the SMP during the first half of 2005, real GDP growth is projected at 3 percent at end-2005 from 3.5 percent in 2004, due to sluggish manufacturing output and weak domestic demand. Inflation remained low and is projected at about 1 percent in 2005. My authorities concur that tight fiscal policies were necessary to restore fiscal balance surplus and contain inflation. In fact, growth and household consumption have suffered in the short run; this has created favorable condition for growth in the medium-term.

Fiscal performance in the first half of 2005 was strong with revenue collection above the program targets, reflecting bold fiscal policies, and improved tax and customs administrations. The authorities maintained tight expenditure management control. Although capital outlays were lower than planned, the implementation of HIPC projects accelerated substantially as of July 2005 because the authorities and the Consultative Committee have streamlined projects implementation procedures. The non-oil primary balance improved from a deficit of 2.3 percent of non-oil GDP in 2004 to a surplus of 0.5 percent of annual non-oil GDP in the first half of 2005, in line with the SMP targets. In this regard, the authorities are determined to sustain the country’s strong economic performance through diversifying the economy and enhancing competitiveness in order to broaden further the export base.

On the monetary front, the regional central bank (BEAC) has continued to implement a tight monetary policy. The government has reduced its liabilities towards the banking system, and broad money grew by about 1½ percent in the12 months to June 2005.

As regards the domestic debt, while an audit was conducted to estimate the stock of the public domestic debt as of end-2004, part of the oil windfall was used to pay selected arrears. To this end, the authorities established a service schedule to pay off arrears to the HIPC account at the regional central bank (BEAC) by end-March 2006.

On structural reforms, the authorities have continued to enhance the transparency of fiscal operations and to strengthen public financial management. The bulk of government’s accounts in commercial banks were closed and balances were transferred to the Treasury account at the BEAC, and significant efforts were made to commit all spending before making cash payments. The budget execution data (TABORD) was improved and provided in a timely way. In addition, starting August 2005, the budget execution report is published on a monthly basis.

My authorities have continued firmly the implementation of the restructuring and privatization of public enterprises with the support of the World Bank. Efforts focused on alleviating the burden these entities impose on the government’s budget, and to improve the quality of the services they provide. As regards the national airline (CAMAIR), the authorities recruited the International Financial Corporation (IFC) as a government advisor, and the workforce was reduced in order to control its wage bill. Adjusting the prices of petroleum product within the first 8 months of 2005 helped to limit the losses of the state-owned refinery (SONARA). While my authorities remain committed to implementing fully their restructuring and privatization agenda, delays that occurred were due notably to technical difficulties including delays in the hiring and/or work of international consultants.

The authorities have prepared an update of the PRSP’s macroeconomic framework and a second annual progress report covering January 2004-March 2005. Substantial progress has been achieved, in particular, on the triggers pertaining to the social sectors, especially education and health (including HIV/AIDS).

III. Economic Policies for 2005/06 and the Medium Term

Building on lessons learned from the 2004 EPA and on the momentum gained while satisfactorily implementing the SMP, the medium-term economic program prepared by my authorities is in line with Cameroon’s PRSP. This program aims at consolidating fiscal performance achieved under the SMP by preserving debt sustainability and strengthening structural reforms in order to build a basis for enhanced growth and rapid poverty reduction, including boosting the development of the private sector, increasing investment in human capital and in infrastructures whilst safeguarding long-term fiscal sustainability and making progress in governance.

During 2005-08, maintaining the real GDP growth in the non-oil economy to at least 4.4 percent per year in average is key for stabilizing the economic conditions and reducing poverty. In this vein, a multi-year budget framework that is consistent with these mediumterm growth objectives is a necessary tool. With the aim of translating comprehensively the policy objectives into program targets, sectoral Medium-Term Expenditure Frameworks (MTEF) are under preparation with the support of the World Bank.

Fiscal policy

Cameroon is an oil producer and my authorities take seriously the projected decline over the medium-term of oil production. Their fiscal strategy seeks to ensure the availability of resources to cover core expenditure independent of the level of oil revenue and external financial support.

The 2006 budget that will be tabled to the Parliament by end-October 2005 is in line with the program. Non-oil revenue is projected to reach 13 percent of annual non-oil GDP. Measures to enhance tax collection include the strengthening of the tax and customs administration. Despite the prospect of additional resources from debt relief after the completion point, the authorities have agreed to broaden the tax base including containing exemptions and aligning tariff with the CEMAC external tariff, and increasing the taxation of the informal sector. As regards staffs proposal to bring down from 30 to 20 percent the abatement in the calculation of the personal income tax (IRPP) introduced in 2004, my authorities would like to emphasize that the introduction of a new cap will be considered later, in order to take into account the results of the ongoing assessment of the personal income tax reform.

Expenditure will be directed toward growth enhancement and poverty reduction objectives. This goal will be achieved through increasing public investment while controlling outlays on goods and services including the wage bill and subsidies. At the same time, my authorities will vigorously enhance the efficiency and the quality of public spending, and the absorptive and management capacity. Particular attention will be given to the selection, planning and sequencing of capital investment projects drawn from existing MTEF. Furthermore, the momentum gained in HIPC spending since July 2005 will be maintained. The authorities are keen to enhance investors’ confidence, and they are committed to implement the repayment plan of domestic debt that was established early October 2005.

Structural Policy

My authorities are determined to promote fiscal governance and transparency that is crucial to sustain private sector development and growth. From January 2006, all cash advances by the oil company (SNH) will be discontinued, and the monthly fiscal reporting will be strengthened further, including the publication of the budget execution report. The experience gained since the establishment of the Large Taxpayers Unit will be consolidated in order to enhance revenue mobilization. The integrated financial management system (SIGEFI) will be gradually implanted in other government entities. Concerning the civil service reform, the integrated payroll and human resource management system (SIGIPES) will be extended to eleven line ministries by end-2006.

My authorities remain resolved to enhance governance and tackle corruption. In this regard, the national governance program (PNG) is being streamlined. The Chambre des Comptes (the audit chamber) will start its activities as soon as the training of judges is completed. To make progress in the implementation of the EITI, a multi-stakeholder Committee was established and an action plan aimed at strengthening the implementation of the EITI principles was adopted with the assistance of the World Bank.

To reduce impediments to growth and improve the business climate, the authorities will improve the regulatory framework in key sectors including energy, transport, and forestry. In the forestry sector, the plan is to enhance and maintain coherent data on forestry exploitation and on related fiscal revenue. In the electricity sector, studies show that the generation capacity needs to be increased by 2008 in order to meet the growing demand. The authorities will develop with the support of the World Bank a least-cost investment plan consistent with international standards by March 2006. Efforts to reduce delays in clearance time and cost in the port of Douala include the enhancement of the one-stop window (GUCE) for international trade operations.

Monetary sector

Monetary policy conducted at the regional level by the BEAC will remain prudent and consistent with the objective of maintaining the parity of the CFAF with the Euro. The monetary and credit policies have helped to keep inflation low, and the policies will be maintained. Consistent with these objectives, broad money is projected to grow by about 4½ percent at end-2005.

Restructuring and Privatization

Limiting the losses of public enterprises and improving the services they provide will continue to be the objectives of my authorities. They are committed to paying, on a timely basis, public enterprises and utilities bills thus helping to preserve the financial position of these entities. The restructuring and privatization program will be intensified with the support of the World Bank. For the national airline company (CAMAIR), the invitation for bid will be launched by end-January 2006, and the sale is expected by end-May 2006. The sectoral strategy on telecommunications will be completed by end-October 2005 and CAMTEL will be offered for sale by end-June 2006. To ensure the viability of the water distribution company (SNEC), water tariffs will gradually be increased by end-January 2006 with the aim to reach cost-recovery levels, and the invitation for bids will be launched by end-July 2006. In the context of high international oil prices, the adjustment mechanism of petroleum products prices will be implemented monthly. Since SONARA will continue to incur losses, the government has agreed to provide a budgetary transfer that will cover the subsidies to the consumer. Various studies are underway to determine the prerequisites for the privatization of CDC and SODECOTON.

Financial Sector

The authorities remain committed to the deepening of financial intermediation in Cameroon In this regard, they will complete the microfinance licensing by end-October 2005 and will ensure ongoing supervision of microfinance institutions in cooperation with COBAC. In collaboration with BEAC, they will improve accounting practices and enhance the enforcement of property rights. The restructuring of CAMPOST will be pursued with a view to insuring its long-term sustainability and establishing a viable subsidiary for its financial activities. The authorities will firmly continue the restructuring of state-owned housing credit company (Credit Foncier) under the plan agreed with the COBAC, including renewed efforts to recover non-performing loans. They request an update of the FSAP in the regional context while continuing to build on the recommendations of the 2000 FSAP for Cameroon.

IV. External Debt Issue

The staff report indicates that, based on key assumptions consistent with the proposed PRGF-supported program, Cameroon external debt situation would improve significantly after the full delivery of HIPC and bilateral debt relief beyond the HIPC completion point. My authorities are cognizant that the program financing depend on debt relief, and they will work with Paris Club and non-Paris Club creditors in order to obtain a substantial reduction of debt servicing.

V.PSRP Process, Harmonization, and Alignment with Donors

My authorities acknowledge the need to accelerate the implementation of the PRSP while further enhancing transparency in the management of HIPC resources. To this end, they will implement the recommendations of the 2004 audit. Notably, the financial and physical monitoring of HIPC projects will be strengthened by establishing a special control unit under the Consultative Committee. To facilitate and enhance the implementation of the poverty reduction strategy, the authorities will accelerate the preparation and adoption of sectoral strategies and associated MTEFs in all priority sectors. Efforts towards improving access and service in the social sectors in order to meet the MDGs by increasing spending volume and efficiency will be pursued. The authorities’ goal is also to enhance donor harmonization and alignment in line with the 2005 Paris Declaration on aid effectiveness. They intend to work with donors on an action plan aimed at improving donor alignment with PRSP priorities, and harmonization of operational policies and procedures.

VI. Conclusion

My authorities reiterate their strong commitment to the implementation of sound policies based on an enhanced ownership to accelerate poverty reduction and make progress towards MDGs. They would also like to reaffirm their determination to pursue steadfastly the economic reform program as described in their PRSP. They remain confident that their efforts will enable them to fulfill the remaining completion point triggers of the HIPC Initiative. My authorities are confident that they can continue to rely on the strong support of the international community, including the Fund, to support their efforts. In this regard, I would like to ask Directors for their support for my authorities’ request for a new PRGF arrangement.