Cameroon: Selected Issues

International Monetary Fund

doi:10.5089/9781451808230.002.A002

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Cameroon: Selected Issues

Author: International Monetary Fund

Publication Date:: 16 Aug 2007

eISBN:: 9781451808230

Language:: English

Keywords:: ISCR; CR; Cameroon; growth acceleration; spending; nonoil GDP; spending path; per-capita GDP; oil GDP; oil production; oil price; Oil production

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This Selected Issues paper on Cameroon identifies impediments to growth acceleration in the country. A two-step approach is followed: first, the characteristics of middle-income countries currently experiencing growth accelerations are examined; and, second, the extent to which Cameroon shares these characteristics is assessed. The focus of the analysis is a set of variables the literature has identified as helping to accelerate growth. This paper also presents a possible fiscal strategy for Cameroon based on the permanent income approach.

Abstract

II. Cameroon—An Application of the Permanent Income Approach¹

A. Introduction

1. Resource rich countries face a unique set of fiscal challenges. These include managing the volatility of commodity revenue and planning for resource depletion, in particular through efforts to strike the right balance between spending and saving for future generations.²

2. Cameroon’s economic history illustrates the pitfalls of implementing a procyclical fiscal policy. As oil production increased rapidly in the late 1970s and early 1980s, Cameroon’s spending expanded to levels that were difficult to scale back once oil revenue started to decline, resulting in mounting public debt. In order to avoid such setbacks, it is important to develop a medium-term fiscal strategy that keeps debt sustainable while allowing for scaled-up spending to meet pressing social needs.

3. This paper presents a possible fiscal strategy for Cameroon based on the permanent income approach. According to this approach, Cameroon could permanently sustain primary public spending of 15.4 percent of nonoil GDP a year from 2007 on as long as efforts to mobilize additional nonoil revenue are borne out.

B. Cameroon’s Past Experience in Managing Oil Resources

4. Cameroon’s oil output is declining. Cameroon’s oil production, which grew rapidly after its start in 1978, peaked at 180,000 barrels per day in 1985. Since then, production has trended downward, reaching 87,000 barrels per day in 2006 (Figure II.1), making Cameroon one of sub-Saharan Africa’s smallest oil producers.³ In 2006 its oil sector accounted for about 10 percent of GDP, 35 percent of fiscal revenue, and 55 percent of exports. Cameroon has 540 million barrels of proven oil reserves and an additional 960 million barrels of probable oil reserves, as well as probable natural gas reserves equivalent to 700 million barrels of oil (Figure II.2). Natural gas production is expected to start in 2008.

5. As oil production grew rapidly in the late 1970s and early 1980s, Cameroon pursued an expansionary fiscal policy that proved unsustainable and eventually contributed to a deep economic crisis (Table II.1 and Figure II.3). From 1976 to 1985, inflation-adjusted government spending rose by an average of 15 percent a year, contributing to strong economic growth. By the second half of the 1980s, however, oil output and international oil prices began to decline, bringing the oil boom to an end. In response, the government made fiscal adjustments (mainly cuts in investment) and pursued limited structural reforms. These steps, however, were insufficient to keep Cameroon from entering a deep recession, which lasted from 1987 until the mid-1990s. In that period per capita income declined more than 40 percent, and Cameroon accumulated a large public debt and payment arrears. By the early 1990s, it was clear that fiscal adjustment and structural reform alone could not restore competitiveness. In the light of similar difficulties in neighboring countries, the CFA franc was devalued by 50 percent in early 1994.

Table II.1.

Cameroon: Key Economic and Financial Indicators

(Percent of GDP, unless otherwise noted)

Sources: Cameroon authorities, IFS, and IMF staff estimates.

^¹Average for 1976–80 reflects data from 1979 onwards.

^²Average for 1981–85 reflects data from 1984 onwards.

^³Average for 1991–96 reflects data from 1992 onwards.

Table II.1.

Cameroon: Key Economic and Financial Indicators

(Percent of GDP, unless otherwise noted)

	1981-85	1986-90	1991-95	1996-2000	2001-06
GDP (annual growth, percent)	9.4	−2.2	−1.8	4.7	3.6
Oil GDP (annual growth, percent) ¹	25.1	−6.4	−12.0	1.4	−3.9
Non-oil GDP (annual growth, percent)	6.1	−0.8	0.4	5.2	4.4
Total fiscal revenue (excl. grants)	21.1	15.2	11.9	13.1	16.9
Oil revenue ²	7.7	5.5	3.4	3.4	5.1
Non-oil revenue (excl. grants)	11.5	9.8	8.5	9.8	11.9
Total fiscal expenditure	20.5	20.9	18.4	15.5	15.6
Current expenditure	10.6	12.6	16.5	13.7	13.5
Capital expenditure	9.8	8.3	1.9	1.8	2.1
Primary expenditure ²	19.4	19.6	13.5	10.6	13.5
Overall balance (excl. grants)	0.7	−5.7	−6.5	−2.4	1.3
Non-oil primary balance (excl. grants)²	−7.8	−9.8	−5.0	−0.8	−1.7
Current account balance²	0.9	−3.3	−3.1	−2.7	−3.4
External debt³	…	…	78.2	60.9	39.1
Memorandum items:
Intl. oil price (US$ per barrel)	30.2	17.6	17.7	19.8	38.9
Oil production (thousands of barrels per day) ²	178.1	163.4	119.5	113.9	93.8
Fiscal expenditure (inflation adjusted annual growth, percent)	20.0	−5.9	−8.4	7.1	1.2
Real effective exchange rate (annual change, percent)	−1.8	3.7	−7.6	0.3	2.1
Per-capita GDP (annual growth, percent)	6.4	−5.0	−4.4	2.5	1.6

Sources: Cameroon authorities, IFS, and IMF staff estimates.

^¹Average for 1976–80 reflects data from 1979 onwards.

^²Average for 1981–85 reflects data from 1984 onwards.

^³Average for 1991–96 reflects data from 1992 onwards.

Table II.1.

Cameroon: Key Economic and Financial Indicators

(Percent of GDP, unless otherwise noted)

	1981-85	1986-90	1991-95	1996-2000	2001-06
GDP (annual growth, percent)	9.4	−2.2	−1.8	4.7	3.6
Oil GDP (annual growth, percent) ¹	25.1	−6.4	−12.0	1.4	−3.9
Non-oil GDP (annual growth, percent)	6.1	−0.8	0.4	5.2	4.4
Total fiscal revenue (excl. grants)	21.1	15.2	11.9	13.1	16.9
Oil revenue ²	7.7	5.5	3.4	3.4	5.1
Non-oil revenue (excl. grants)	11.5	9.8	8.5	9.8	11.9
Total fiscal expenditure	20.5	20.9	18.4	15.5	15.6
Current expenditure	10.6	12.6	16.5	13.7	13.5
Capital expenditure	9.8	8.3	1.9	1.8	2.1
Primary expenditure ²	19.4	19.6	13.5	10.6	13.5
Overall balance (excl. grants)	0.7	−5.7	−6.5	−2.4	1.3
Non-oil primary balance (excl. grants)²	−7.8	−9.8	−5.0	−0.8	−1.7
Current account balance²	0.9	−3.3	−3.1	−2.7	−3.4
External debt³	…	…	78.2	60.9	39.1
Memorandum items:
Intl. oil price (US$ per barrel)	30.2	17.6	17.7	19.8	38.9
Oil production (thousands of barrels per day) ²	178.1	163.4	119.5	113.9	93.8
Fiscal expenditure (inflation adjusted annual growth, percent)	20.0	−5.9	−8.4	7.1	1.2
Real effective exchange rate (annual change, percent)	−1.8	3.7	−7.6	0.3	2.1
Per-capita GDP (annual growth, percent)	6.4	−5.0	−4.4	2.5	1.6

Sources: Cameroon authorities, IFS, and IMF staff estimates.

^¹Average for 1976–80 reflects data from 1979 onwards.

^²Average for 1981–85 reflects data from 1984 onwards.

^³Average for 1991–96 reflects data from 1992 onwards.

6. Much of the poverty that arose during the crisis years has persisted despite improved macroeconomic performance. (Table II.1 and Figure II.3). From 1995 to 2006, GDP growth averaged 4 percent, inflation was generally low, and the fiscal accounts, on average, were close to balance. Thanks to HIPC-related relief, the heavy external debt burden that accumulated in the early 1990s fell to only 5 percent of GDP in 2006. Yet, by the authorities’ estimates, about 40 percent of households continue to live below the poverty line. Further, Cameroon’s score on the UNDP’s human development index—an aggregate measure based on such indicators as life expectancy, adult literacy, primary school enrollment, and per capita income—has yet to rebound to its pre-crisis level.

C. The Permanent Income Approach

7. The permanent income approach is often used to develop a fiscal framework for countries with nonrenewable resources. Under this approach, fiscal revenue from both oil and nonoil resources is taken as given, and the utility of government spending is seen as akin to the utility of a private agent spending on consumption. Accordingly, the government chooses the spending path that maximizes the utility of the representative infinitely lived individual, up to the amount that can be accommodated within the government’s budget constraint.⁴ Based on this premise, the permanent income approach recommends that governments fully smooth primary fiscal spending over time, setting it equal to permanent income (i.e., the constant level of fiscal revenue that can be generated from both oil and nonoil revenue sources), minus interest payments on inherited public debt.⁵,⁶ The permanent income approach has several attractive features: First, by tying spending to the utility of the representative infinitely lived household, it ensures that wealth is shared among generations. Second, by integrating the government’s budget constraint, it ensures that spending is sustainable. Third, by smoothing expenditure, it helps minimize the likelihood of boom-bust cycles.

8. It is important to note, however, that this approach has been criticized as overly restrictive when applied to countries with important investment needs. The premise of the approach—that government spending is purely consumptive—fails to consider domestic investment, reflecting the finding that much investment spending in sub-Saharan Africa in the past has been of low quality and thus had little investment character.⁷ However, in countries with very limited physical and human capital, the returns of investing in infrastructure, education, or health services—in the form of enhanced productivity and growth—could in principle exceed the returns of investing in financial assets. For developing countries, it may thus be optimal to let spending temporarily exceed the sustainable threshold (Takizawa, Gardner, and Ueda 2004). The omission of investment spending from the permanent income approach is an important caveat when interpreting the results presented in this paper.

D. Application to Cameroon and Results

9. A common variant of the permanent income approach is applied to Cameroon. In this variant, the utility of the representative individual depends on the ratio of primary spending to nonoil GDP, with the optimal policy being to keep that ratio constant at the sustainable level (permanent income minus interest payments on inherited debt adjusted for nonoil GDP growth).⁸ Box II.1 outlines the main assumptions underpinning the application.

Box II.1.

Applying the Permanent Income Approach to Cameroon: Main Assumptions

1) Cameroon exploits all its proven oil reserves, half of its probable oil reserves, half of its proven gas reserves, and a quarter of its probable gas reserves.

2) The price of Cameroonian crude remains at a discount of 6 percent, or US$ 3.5 per barrel, relative to World Economic Outlook projections, as observed in 2004–06.

3) Fiscal oil revenue remains at about 65 percent of oil GDP, as observed in 2004–06.

4) Fiscal nonoil revenue rises by 0.1 percentage point per year on average during 2007–21—from 13.5 percent of nonoil GDP to 15 percent—and is constant thereafter.

5) Real nonoil GDP grows by 3.8 percent per year, as observed in 2004–06.

6) The real interest rate is 4.2 percent, exceeding the 3.2 percent real interest rate average observed for U.S. government bonds in the past two decades.⁹

10. The application suggests that Cameroon could sustain a moderate fiscal expansion. Under the baseline scenario, which assumes a gradual increase in nonoil revenue (see Box II.1), Cameroon could permanently sustain primary spending of 15.4 percent of nonoil GDP each year from 2007 on. This would represent a moderate fiscal expansion relative to 2006, when primary spending (excluding foreign-financed investment) was 15.1 percent of nonoil GDP.¹⁰ Given the assumed gradual increase in nonoil revenue through 2021, the nonoil primary deficit would decline steadily—from 1.8 percent of nonoil GDP in 2007 to 0.4 percent in 2021—and remain constant thereafter. The appendix provides further details on the size of revenue components as well as the evolution of spending components and the fiscal balance.

11. This result, however, should be interpreted with caution, especially given its sensitivity to changes in certain parameters (Table II.2 and Figure II.4). Specifically, the level of sustainable spending is

Highly sensitive to changes in nonoil revenue. If nonoil revenue stayed at its 2006 level of 13.5 percent of nonoil GDP, primary spending would need to be 1.5 percent of nonoil GDP lower than in the baseline for it to be sustainable. In such a scenario, the government would need to reduce spending to 14 percent of nonoil GDP from 2007 on, implying a fiscal contraction of 1.1 percent of nonoil GDP relative to 2006 spending.
Moderately sensitive to changes in oil prices and oil production volumes. For example, a US$10 variation in the per-barrel price would change the level of sustainable primary spending by only 0.1 percent of nonoil GDP. Higher or lower production, within reasonable limits, would change the spending estimates by less than 0.4 percent of nonoil GDP. The lesser sensitivity of the level of sustainable spending with respect to changes in oil prices and oil production volumes is because Cameroon’s oil sector, and thus the oil sector’s share of total revenue, is relatively small.
Moderately sensitive to changes in real interest rates. For example, in response to an interest rate variation of 0.25 percentage point, the level of primary spending that could be sustained would change by 0.2 percentage point of nonoil GDP. Again, the moderate sensitivity of the results to changes in interest rates reflects the small size of Cameroon’s oil sector—and hence the correspondingly small size of financial assets that can be built by saving some of the oil revenue.¹¹

Table II.2.

Cameroon: Sensitivity Analysis at a Glance Baseline vs. Alternative Scenarios

Source: IMF staff estimates.

Appendix II.1

This appendix provides details on the size of revenue components as well as the evolution of spending components and the fiscal balance.

1. Sustainable fiscal spending is calculated according to

\begin{matrix} (1) & g = \bar{τ} + \frac{r - γ}{1 + r} \sum_{j = 0}^{E_{1}} {(\frac{1 + γ}{1 + r})}^{j} {(τ_{t} - \bar{τ})}_{t + j} + \frac{r - γ}{1 + r} \sum_{j = 0}^{E_{2}} {(\frac{1 + γ}{1 + r})}^{j} z_{t + j} - \frac{r - γ}{1 + γ} b_{t - 1}, \end{matrix}

where g is primary government spending over nonoil GDP, $\bar{τ}$ long-run nonoil revenue over nonoil GDP (assumed at 15 percent under the baseline), τ_t nonoil revenue over nonoil GDP, z_t oil revenue over nonoil GDP, b_t debt over nonoil GDP, r the real interest rate, γ the real growth rate of nonoil GDP, E₁ the last period before nonoil revenue reaches its long-run level, and E₂ the last period before oil revenue stops. Equation (1) is a generalization of the formula in Barnett and Ossowski (2003).

2. Accordingly, the level of primary fiscal spending that is sustainable flows from the following four sources (totaling 15.4 percent of nonoil GDP under the baseline):

a) the long-run level of nonoil revenue (under the baseline, 15 percent of nonoil GDP every year);

b) the interest payments on the present value of the shortfall of nonoil revenue relative to its long-run level (under the baseline, the interest rate adjusted for nonoil GDP growth is 0.4 percent per year, the present value of the shortfall of nonoil revenue relative to its long-run level is 10 percent of 2007 nonoil GDP, resulting in interest payments of 0.04 percent of nonoil GDP every year);

c) the interest receipts on the present value of oil revenue (under the baseline, the interest rate adjusted for nonoil GDP growth is 0.4 percent per year, the present value of oil revenue is 1.4 times 2007 nonoil GDP, resulting in interest receipts of 0.6 percent of nonoil GDP every year);

d) the interest payments on inherited public debt (under the baseline, the interest rate adjusted for nonoil GDP growth and for the fact that the debt level to be serviced is that of the preceding year 2006 is 0.4 percent, and the level of inherited debt is 17 percent of 2006 nonoil GDP, resulting in interest payments of 0.07 percent of nonoil GDP every year).

3. Primary spending at the sustainable level of 15.4 percent of nonoil GDP generates a nonoil primary deficit and, initially, an overall fiscal surplus, given substantial initial oil revenue. The overall surplus first allows the government to reduce net debt and later build positive net financial assets. The corresponding reduction in interest payments by the government and the eventual receipt of interest payments help offset the decline in oil revenue, as does the increase in nonoil revenue. Eventually, the nonoil primary fiscal deficit improves to 0.4 percent of GDP and the overall fiscal surplus falls to zero (given spending of 15.4 percent of nonoil GDP, nonoil revenue of 15 percent of nonoil GDP, oil revenue of zero, and interest receipts of 0.4 percent of nonoil GDP).

References

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Baunsgaard, T., 2003, “Fiscal Policy in Nigeria: Any Role for Rules?” IMF Working Paper 03/155 (Washington: International Monetary Fund).
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Davoodi, H., 2002, “Assessing Vulnerability, Fiscal Sustainability, and Fiscal Stance in a Natural Resource-Rich Country,” in Republic of Kazakhstan: Selected Issues and Statistical Appendix (Washington: International Monetary Fund), pp. 7–31.
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Prepared by Hans Weisfeld.

The literature describing and analyzing the “natural resource curse” initiated by Sachs and Warner (1995) has grown steadily. See, for example, Manzano and Rigobon (2001), Hausmann and Rigibon (2002), Leite and Weidmann (2002), and Sala-i-Martin and Subramanian (2003). For a recent survey, see Rossner (2006).

Cameroon’s oil output in 2006 was just 4 percent of oil output in Nigeria, Africa’s largest oil producer.

The notion of a representative infinitely lived individual is used to simplify the analysis. It imposes the assumptions that all individuals have identical preferences, and that they value their children’s consumption as much as their own (future) consumption.

This result mirrors Friedman’s finding that a household with uneven consumption maximizes its utility by setting consumption equal to its permanent income (Friedman 1957).

The permanent income approach is most often applied in ways that ignore uncertainty and the costs of adjusting fiscal spending levels. Engel and Valdès (2000) show how uncertainty changes results. Leigh and Olters (2006) show how adjustment costs change results.

See, for example, Sala-i-Martin and Subramanian (2003), who find that poor quality spending explains part of Nigeria’s weak economic performance in the past 30 years.

Applications of this variant are numerous and include Davoodi (2002) for Kazakhstan, Baunsgaard (2003) for Nigeria, Danninger et al. (2005) for Azerbaijan, Bailen and Karamenko (2004) for Iran, Velculescu and Rizavi (2005) for Trinidad and Tobago, Segura (2006) for São Tomé and Príncipe, Leigh and Olters (2006) for Gabon, and Olters (forthcoming) for all sub-Saharan African oil producers.

The difference is intended to reflect two factors: the surcharge Cameroon would have to pay on its debt given its lower sovereign rating as well as the margin Cameroon could hope to earn if it invested part of its savings in international stocks instead of prime debt titles.

The permanent income approach determines the level of sustainable spending that can be financed from domestic sources (oil and nonoil revenue). To ensure comparability between the results of the permanent income approach and 2006 spending figures, foreign-financed investment was excluded from the 2006 data.

If Cameroon were to set spending to the sustainable level, it would build up a positive net financial asset position by saving some of the oil revenue, see the appendix.

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Cameroon: Selected Issues

Author: International Monetary Fund

Volume/Issue:: Volume 2007: Issue 287

Publisher:: International Monetary Fund

ISBN:: 9781451808230

ISSN:: 1934-7685

Pages:: 43

DOI:: https://doi.org/10.5089/9781451808230.002

Keywords
II. Cameroon—An Application of the Permanent Income Approach1
References

View raw image

Cameroon: Oil Production, 1984-2020

(Thousands of barrels per day)

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Oil Reserves in Sub-Saharan Africa at end-2006

(Billions of barrels)

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Cameroon: The Crisis of the Late 1980s and Early 1990s and its Aftermath

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Cameroon: Sustainable Nonoil Primary Balance, 2004–54

(Percent of nonoil GDP)

Sustainable Primary Fiscal Spending (Percent of nonoil GDP)
Baseline Scenario	15.4
Interest rate 0.25 % higher	15.7
Interest rate 0.25 % lower	15.2
Nonoil revenue constant at 2006 value	14.0
Oil prices US$ 10 per barrel higher	15.5
Oil prices US$ 10 per barrel lower	15.3
Nonoil GDP growth 0.25 % point higher	15.2
Nonoil GDP growth 0.25 % point lower	15.7

Sustainable Primary Fiscal Spending (Percent of nonoil GDP)
Baseline Scenario	15.4
Interest rate 0.25 % higher	15.7
Interest rate 0.25 % lower	15.2
Nonoil revenue constant at 2006 value	14.0
Oil prices US$ 10 per barrel higher	15.5
Oil prices US$ 10 per barrel lower	15.3
Nonoil GDP growth 0.25 % point higher	15.2
Nonoil GDP growth 0.25 % point lower	15.7

Sustainable Primary Fiscal Spending (Percent of nonoil GDP)
Baseline Scenario	15.4
Interest rate 0.25 % higher	15.7
Interest rate 0.25 % lower	15.2
Nonoil revenue constant at 2006 value	14.0
Oil prices US$ 10 per barrel higher	15.5
Oil prices US$ 10 per barrel lower	15.3
Nonoil GDP growth 0.25 % point higher	15.2
Nonoil GDP growth 0.25 % point lower	15.7

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Abstract

II. Cameroon—An Application of the Permanent Income Approach1

A. Introduction

B. Cameroon’s Past Experience in Managing Oil Resources

C. The Permanent Income Approach

D. Application to Cameroon and Results

Appendix II.1

References

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II. Cameroon—An Application of the Permanent Income Approach¹