Abstract
This paper discusses key findings of the Second Review of the Three-Year Arrangement Under the Poverty Reduction and Growth Facility for Cameroon. Economic activity is slowing, reflecting a weak business environment, stronger competition from low-cost producers of manufactured products, and reforms to foster sustainable forestry production. Higher world oil prices are leading to inflation pressures while contributing to an improvement in the fiscal position and external current account balance. Budget execution and implementation of structural measures related to public financial management were also satisfactory.
1. On behalf of my authorities, I would like to thank Executive Directors and Management for their continued support to Cameroon. I would also like to thank staff for the constructive policy dialogue and fruitful exchanges during their recent visit to Yaoundé.
2. My authorities are committed to preserving macroeconomic stability and accelerating the implementation of structural reforms under the current PRGF-supported program. Their sustained efforts in this regard have enabled them to meet all quantitative performance criteria and benchmarks at end-June 2006. They have also made progress on the structural reforms agenda despite the delays encountered in public enterprise reforms. They have since then taken the necessary measures to complete the delayed reforms.
3. Building on the recent achievements that enabled Cameroon to reach the HIPC completion point and qualify for the MDRI, the authorities are convinced that the PRGF-supported program will also help them to improve the country’s prospects for broad-based growth while preserving fiscal sustainability. This should, in turn, enhance their poverty reduction and job creation objectives. Hence, they consider the PRSP as the reference framework for their medium- and long-term development strategy, and the main tool for harmonizing and aligning donors’ actions around their development priorities.
4. My authorities are aware of the important challenges ahead and the need to strengthen structural reforms to enhance growth prospects and boost efficiency in the use of public resources. Accordingly, it is their intention to reinforce public finance management, improve the business climate, promote good governance, and restructure public enterprises. The authorities remain determined to implement these reforms steadfastly and transparently.
5. In view of overall satisfactory program performance and the commitments made for the period ahead, including the ongoing negotiations with the private holders of Cameroon’s debt, I request, on behalf of my Cameroonian authorities, the Board’s support for the completion of the second PRGF review, the completion of the financing assurances review, and the elimination of the performance criterion on the replenishment of the HIPC account from future reviews on the grounds of Cameroon having reached the HIPC completion point. My authorities continue to count on the support of the international community to accompany their efforts going forward.
I. Recent Economic Developments
6. Economic indicators at end-June 2006 show that growth in the non-oil sector had reached 2.9 percent in 2005 due to the downturn in agro-industrial and forestry production. In June 2006, consumer prices recorded a year-on-year increase of 3.9 percent, which primarily reflected the impact of the upward adjustment in oil prices. The money supply was substantially higher at end-June 2006 as a result of the increase in net foreign assets from higher oil revenues.
7. The authorities have continued to pursue fiscal consolidation in 2006. During the first half of the year, non-oil revenue reached expected levels, while rising world oil prices led to higher-than-expected oil revenue. More recent data, albeit preliminary, based on the first nine months of 2006 points to lower-than-projected direct and nontax revenues. The shortfall in the primary balance does not reflect a loosening of fiscal stance, and my authorities are taking the necessary steps to monitor spending closely and strengthen non-oil revenue collection through tighter controls. The rate of capital expenditure execution in the first half of the year was lower than expected, primarily because of the insufficient absorptive capacity and the low level of external financing disbursements. Domestic debt was substantially reduced through the satisfactory implementation of the debt clearance plan and the use of windfall oil revenues.
8. The authorities took steps in 2006 to further improve the collection of non-oil revenue. The General Directorate of Taxes took measures to strengthen audits of the personal income tax (IRPP) receipts in order to improve the poor performance of this tax. Actions for a better management of VAT were also undertaken. A team was assembled to set up the automated system for customs data in Douala, as part of efforts to expand the use of this tool. In addition, the authorities began the work aimed at reinstating CEMAC customs valuation rules for a number of products including cigarettes. In the forestry sector, the authorities selected the Program to Secure Forestry Reserves as the tax point of contact for the sector, and began to consolidate the automated management system of the Ministry of Forests and Wildlife.
9. Despite mixed results, the authorities continued to implement structural reforms and measures designed to strengthen governance and transparency. In addition, they have taken steps to further develop the financial system. The Cameroonian authorities should be credited for the numerous actions undertaken.
10. On structural reforms, implementation is broadly proceeding as planned. The important measures already taken in 2006 include: (i) the strengthening of government finance. The preparation of data to improve tracking of budget execution continued. Accordingly, data recapitulating the expenditure chain continued to be produced regularly, including expenditure for poverty reduction; (ii) the selection of a provisional successful bidder for the privatization of Cameroon Airlines (CAMAIR), with the assistance of the IFC. Negotiations with the provisional bidder began in mid-November 2006 and the authorities intend to complete the process as soon as possible; (iii) the announcement in June 2006 of the sale of the national telecommunications company (CAMTEL) at the end of the prequalification process. The privatization timetable was delayed to allow the consultant responsible for preparing the bid documents the necessary time to incorporate the recommendations made by the government and the World Bank on the initial documents; (iv) further steps taken in connection with the call for bids for the lease management contract for the water company (SNEC). Assets were inventoried and the legal documents for the transaction were prepared in coordination with the World Bank; (v) the effective recruitment of the management team for the national postal service (CAMPOST), initially planned for February 2006, but completed in October 2006.
11. More recently, the 2007 budget has been approved by Parliament in line with the program; the new customs management system in the Littoral region that accounts for the bulk of imports is expected to be operational by end-2006 as planned; the census of civil servants has been completed; and the payroll records are being cleaned up based on the information collected in the census.
12. On governance and transparency, progress was also made, notably on: (i) the publication in newspapers and on the government’s website of the budget execution reports at end-March and end-June, the summary quarterly operating accounts of the national oil company (SNH), the annual financial aggregates for the main public enterprises, numerous administrative sanctions against public officials who had committed acts of corruption, as well as judicial decisions and information on pending court cases; (ii) the implementation of the EITI principles for which a consortium was recruited to prepare the reconciliation report for oil revenue data covering 2001-04. Publication of the first EITI report is on track and expected by end-2006 as envisaged; (iii) the fight against corruption. In April 2006, the authorities enacted a law defining the modalities for the disclosure of assets by senior government officials, consistent with the Cameroonian Constitution; (iv) the reform of the judicial system, including the adoption and publication on the government’s website of the criminal code.
13. The authorities have also taken steps to strengthen the financial system. Cameroon’s state-owned housing bank, Crédit Foncier, continued to implement the recommendations of the Central African Banking Commission (COBAC)’s inspection mission. In particular, three audits were conducted: one on the organization and the staff, the second on the accounting and financial system, and the third on information technology. A number of measures have already been implemented internally, most notably the formulation of management and performance indicators, which have been widely disseminated throughout the agencies and directorates. In the microfinance sector, the steps taken by the authorities to improve supervision include the intensification of control missions to ascertain the closure of the 205 microfinance institutions that were not given a license, and the initiation of the process of evaluating the capital base and viability of the 508 microfinance institutions that had been granted a license.
II. Economic Policies and Structural Reforms Going Forward
14. For the period ahead, the authorities have set ambitious medium-term objectives, consistent with the PRGF macroeconomic framework. They will continue to place particular emphasis on enhancing fiscal management, reforming the judicial system, combating corruption, and improving the quality of public investment. Aware of the importance of structural reforms for improving growth prospects in Cameroon, the authorities intend to accelerate the implementation of these reforms, especially in the public enterprise sector.
15. In 2007, economic growth in the non-oil sector should reach 4 percent, thanks mainly to a recovery in forestry sector activities and increased public investment. The continued rise in international oil prices will help strengthen Cameroon’s external position. The inflationary
16. pressures of 2006, which were caused mainly by the rising prices of petroleum products, could persist in 2007. Nevertheless, macroeconomic objectives of the program are based on very conservative oil price and revenue assumptions.
A. Fiscal Policy and External Debt Management
17. The fiscal outlook for the second half of 2006 is positive. Rising prices will cause projected oil revenues to exceed the programmed level while non-oil revenues will remain at programmed levels. Primary expenditure (excluding externally-financed spending) will remain within the planned envelope for the program. However, to address urgent priorities, the authorities envisage additional spending of 0.1 percent of GDP to support the development of infrastructure in Bakassi and the improvement of university facilities. Thus, the primary balance in 2006 is expected to increase by 1.3 percentage points of GDP over program projections.
18. The new customs management system, which should be operational by end-2006, will contribute to boosting non-oil revenues. In 2007, those revenues will increase to 12.3 percent of GDP, while oil revenues should record a marked upturn following the expected increases in production and prices. The 2007 budget law, which was approved recently by Parliament, contains a number of tax measures that aim to stimulate investment and reduce the impact of recent price increases on consumer purchasing power. These measures include a reduction, for a period not exceeding three years, of the income tax of individuals and legal entities reinvesting in Cameroon. Already in October 2006, the authorities took measures to reduce custom duties on a number of essential products, consumed primarily by the most vulnerable groups of the population, and to exempt them from VAT. As these measures are expected to lead to a loss of fiscal revenues, the authorities will closely monitor non-oil revenues and stand ready to take remedial actions if and when required. Indeed, if non-oil revenues through end-March 2007 fall short of the target specified under the program, the authorities, in consultation with the IMF, will take additional measures starting in the second quarter of 2007 to ensure that non-oil revenues remain at the level envisaged for 2007. The authorities will also consider expenditure measures, if needed, to safeguard the fiscal stance.
19. Spending policy will remain prudent while encouraging priority expenditures. To accelerate poverty reduction under the PRSP, the government budget contains provisions for increasing non-interest expenditure by 1.5 percentage points of GDP over 2006 levels, about half of which is for investment expenditures. The sectoral ministries will endeavor to improve project quality by systematizing the preparation of preliminary execution reports and by using their Medium-Term Expenditure Frameworks (MTEFs) to prepare their budgets. A circular is currently being adopted on how to prepare a budget that is harmonized with the PRSP. Current expenditure (excluding interest) should increase, due in part to additional poverty reduction spending financed by budgetary assistance from France under the Contrat de Désendettement et de Développement (C2D), and through financial assistance expected from multilateral creditors under the MDRI. Poverty reduction expenditure will increase from 6.7 percent of GDP in 2006 to 7.5 percent in 2007.
20. The authorities plan to pursue a prudent policy of gradually increasing salaries in a stable macroeconomic framework sustained over the medium term to enhance the efficiency of the civil service, combat corruption, and improve the economic welfare of civil servants. It is worth noting that public sector salaries have still not been increased to the levels prevailing before the 1994 devaluation of the CFA franc. The authorities also intend to continue implementing measures to further control the wage bill and staffing levels. Already, initiatives are being undertaken to reduce fraudulent wage payments and make the civil service more efficient, including the completion of the public payroll census and the regularization of civil servants who for years have been denied the financial benefits of promotions.
21. With the expected upsurge in international oil prices, Cameroon should continue to earn windfall oil revenues. The authorities also intend to continue applying these revenues exclusively to one-off purposes. This includes payments on domestic debt and arrears of which the financing of repurchase of debt held by external commercial creditors who did not take part in the commercial debt repurchase initiative (London Club), and the financing of investment projects in the sectors defined in the PRSP, after consultation with IMF staff.
22. The authorities will pursue a prudent debt policy and ensure that their debt management safeguards sustain ability. They undertake to seek mainly grants and concessional loans for externally-financed investment.
B. Structural Reforms
23. Beginning in 2007, the authorities plan to implement new reforms aimed at strengthening trade liberalization and boosting the volume of foreign trade, particularly with a view to consolidating sub-regional integration, in which Cameroon plays a lead role. Most of the issues in CEMAC trade that were raised in the recent regional surveillance report, notably discrepancies between the common external tariff, nationally applied tariffs, import surcharges, and export taxes, have already been addressed by the Cameroonian side. Nevertheless, the expected revenue losses from lower tariffs need to be addressed, and we call on the Fund to assist the authorities in this endeavor.
24. As regards fuel pricing, the authorities plan to adopt a system for the full pass-through of petroleum prices over the medium term. To this end, they will request technical assistance from the IMF to assess how this measure will affect poverty and possible related measures. In addition, the authorities intend to pursue the implementation of measures to bolster the financial situation of the national refinery, SONARA.
25. The authorities are committed to continuing the ongoing civil service reforms to establish a solid basis for determining staffing levels and the payroll, as well as to secure related data and increase the efficiency of the civil service. They have recently completed the census of civil servants and are cleaning up the payroll records based on the data compiled in the census.
C. Transparency, Good Governance, and the Business Climate
26. It is my authorities’ strong commitment to continue to make inroads in promoting transparency in government budget execution. To this end, they will continue to regularly publish the following information on their website: (i) the quarterly report on the execution of the government budget; (ii) the main annual financial data of the 20 public enterprises selected by the government for monitoring; and (iii) the main results of SNH’s oil operations, particularly production, selling prices, and oil revenue transferred to the Treasury. In addition to this information and as part of the implementation of the EITI principles, the government will publish the conciliator’s reports on its website. Publication of the first EITI report on oil revenues for the period 2000-04 is on track and expected by end-December as planned, while the second report, for the 2005 financial year, will be published by end-February 2007 at the latest. As for the quarterly investment-budget execution report, it will be published within two months after the end of the reporting period.
27. We take note that, according to the World Bank’s studies as well as Transparency International, Cameroon’s rankings in doing business, governance and quality of institutions need to be improved. My authorities remain determined to strengthen governance and combat corruption in order to improve the business climate and the effective use of public resources. Already, the actions engaged in this area are starting to bear fruit. Furthermore, my Cameroonian authorities are committed to make operational the National Anti-Corruption Commission (CONAC) created in March 2006, and to take the measures necessary to enable the commission envisaged under the high public official asset disclosure framework to begin its work. Also, the authorities, in partnership with the private sector, are preparing a strategic plan for improving the business climate. This plan will give priority to addressing the main problems identified in the World Bank’s 2006 “Doing Business” study, in particular, corruption, the lack of infrastructure, and the burdensome tax regime.
28. On the issue of competitiveness, my authorities are convinced that the weakening external competitiveness of the economy owes to a large extent to non-price factors, which in their view would be best addressed by the structural measures they are taking in the domains of trade liberalization in the context of sub-regional integration, restructuring of public enterprises, governance and business climate.
Conclusion
29. My authorities have once again demonstrated their commitment to policies and reforms defined in the PRGF-supporter program. There have been commendable achievements since the HIPC completion point. In particular, the actions engaged by my authorities to fight corruption will take time to yield the expected results. Nevertheless, the initial actions have started to bear fruit, and my authorities will pursue and strengthen them steadfastly. Their ownership of the needed measures in this area and others remain intact.
30. In view of the satisfactory fiscal performance in the first nine month of 2006, the broadly smooth implementation of the structural reform agenda, the overall satisfactory
31. program performance as reconfirmed in the most recent staff update, and the renewed commitments made by the Cameroonian authorities on policy and reform implementation for the period ahead, I will appreciate the Board’s support for the completion of the second review under the PRGF for Cameroon. In addition, in light of the appropriate debt policies pursued by my authorities, including prudent borrowing policies and their good-faith efforts to reach agreements with the private holders of the country’s debt, I also request the Board’s support for the completion of the financing assurances review.