Cameroon
Fifth Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility, Financing Assurances Review, and Requests for Waiver of Performance Criterion, Modification of Performance Criteria and Extension of Arrangement: Staff Report; Staff Supplement and Statement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Cameroon

This paper discusses key findings of the Fifth Review Under the Poverty Reduction and Growth Facility (PRGF) for Cameroon. Non-oil economic activity accelerated somewhat in 2007, and inflation declined. However, rising food and fuel prices starting in late 2007, amidst discussions of possible changes to the constitution, led to violent social unrest in February 2008. Program implementation was satisfactory in the second half of 2007. Most quantitative targets, notably on the non-oil primary fiscal deficit, for end-December 2007, were also met.

Abstract

This paper discusses key findings of the Fifth Review Under the Poverty Reduction and Growth Facility (PRGF) for Cameroon. Non-oil economic activity accelerated somewhat in 2007, and inflation declined. However, rising food and fuel prices starting in late 2007, amidst discussions of possible changes to the constitution, led to violent social unrest in February 2008. Program implementation was satisfactory in the second half of 2007. Most quantitative targets, notably on the non-oil primary fiscal deficit, for end-December 2007, were also met.

I. Background and Recent Economic Developments

1. Security has improved since the February unrest. The turmoil was caused by dissatisfaction with the rising costs of food and fuel amidst discussions of possible changes to the constitution. In March the authorities adopted fiscal measures—exempting some necessities from custom duties, freezing fuel prices, and increasing civil service salaries—that helped improve security. In April, Parliament adopted constitutional amendments, one of which eliminated the two-term limit for presidents.

2. Economic activity picked up in 2007 and external developments were favorable(Tables 1 and 2):

  • Nonoil real GDP growth picked up as construction, agriculture, and forestry activity recovered.

  • The external current account registered a small surplus, despite an increase in the volume of imports resulting from reduced taxation of basic staple goods.

Table 1.

Cameroon: Selected Economic and Financial Indicators, 2005–10

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Sources: Cameroonian authorities; and IMF staff estimates and projections.

Percent of broad money at the beginning of the period.

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

Excluding restructuring expenditure.

Excluding grants, interest, and foreign-financed capital expenditures.

Assumes cancellation of C2D debt in 2006.

NPVs calculated using the LIC DSA methodology.

Actual payments through 2006, and after all expected debt relief thereafter.

Table 2.

Cameroon: Balance of Payments, 2005–10

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Sources: Cameroonian authorities; and IMF staff estimates and projections.
uA01fig01

Cameroon: Oil and Nonoil GDP Growth, 2002–07

(Percent change)

Citation: IMF Staff Country Reports 2008, 279; 10.5089/9781451808278.002.A001

Sources: Cameroonian authorities; and IMF staff estimates.
uA01fig02

Cameroon: External Developments, 2002–07

(Units indicated)

Citation: IMF Staff Country Reports 2008, 279; 10.5089/9781451808278.002.A001

Sources: Cameroonian authorities; and IMF staff

3. Money growth increased in 2007 but for most of the year inflation decelerated. Continued accumulation of net foreign assets and a slower pace of accumulation of government deposits in the banking system led to a rise in money growth (Table 3). Inflation declined, however, because of the partial pass-through of higher oil prices, lower taxation of staple goods, and the euro appreciation. At year-end, inflation headed up as food prices rose. The REER depreciated slightly despite the rise in the terms of trade.

Table 3.

Cameroon: Monetary Survey, December 2005–December 2008

(Billions of CFA francs, unless otherwise noted)

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Sources: BEAC; and IMF staff estimates and projections.
Table 4.

Cameroon: Central Government Operations, 2005–09

(Billions of CFA francs)

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Sources: Cameroonian authorities; and IMF staff estimates and projections.

Beginning in 2008, support provided to SONARA through lower taxes is replaced by an explicit subsidy, with an equivalent increase in nonoil revenues.

Excludes restructuring, HIPC-and C2D-financed expenditures, in addition to grants, interest, and foreign-financed expenditure.

Table 5.

Cameroon: Selected Fiscal Indicators, 2005–09

(Percent of GDP, unless otherwise indicated)

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Sources: Cameroonian authorities; and IMF staff estimates and projections.

Beginning in 2008, support provided to SONARA through lower taxes is replaced by an explicit subsidy, with an equivalent increase in nonoil revenues.

Percent of nonoil GDP.

Excludes restructuring, HIPC-and C2D-financed expenditures, in addition to grants, interest, and foreign-financed capital expenditures.

uA01fig03

Cameroon: Recent Monetary Trends, 2003–07

(Units indicated)

Citation: IMF Staff Country Reports 2008, 279; 10.5089/9781451808278.002.A001

Sources: BEAC and IMF staff estimates.1 Contribution to growth of broad money.2 Year-on-year percent change.
uA01fig04

Cameroon: Consumer Prices and Real and Nominal Effective Exchange Rates, January 2005–January 2008

Citation: IMF Staff Country Reports 2008, 279; 10.5089/9781451808278.002.A001

Source: IMF Information Notice System.

4. Fiscal performance in 2007 was generally satisfactory. Capital spending was much higher than in 2006 as the authorities began to tackle bottlenecks to investment and donors raised disbursements. Nonoil revenues, however, stagnated in relation to nonoil GDP due to a shortfall in nontax revenues. Restraint on current spending and higher than expected oil revenues contributed to the fiscal surplus. Nonetheless, the stock of treasury float1 rose by about 0.3 percent of GDP in 2007, raising questions about public expenditure management.

Cameroon: Key Fiscal Indicators, 2005–07

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Sources: Cameroonian authorities, and IMF staff estimates and calculations.

Excluding grants.

Excludes interests, grants, foreign project loans, HIPC and C2D financed expenditure.

5. Program implementation for July–December 2007 was satisfactory (MEFP, Tables 12):

  • Most quantitative program targets for December 2007 were met. Nevertheless, the performance criterion related to domestic debt and the benchmark on nonoil revenues were missed by small margins.

  • The planned structural reforms were completed, and Parliament approved the 2008 budget law. A new formula was adopted for automatic adjustment of fuel prices (performance criterion). The structural benchmark on streamlining taxpayer identification and safeguarding the single taxpayer file was met.

6. Reform of public enterprises is proceeding slowly. The management contract for SNEC was signed in December 2007, and the authorities have selected a privatization advisor for CAMAIR. Technical evaluation of bids on privatizing CAMTEL was completed, and the authorities are assessing next steps (MEFP, ¶6, 36).

II. Policy Discussions

7. Implications of the recent unrest for policy choices and the macroeconomic outlook dominated the discussions. The gross cost of the measures the government adopted is an estimated 1.6 percent of nonoil GDP for 2008 (Box 1). Staff noted that the fuel price freeze and adhoc tariff reductions were second best policy choices that could be accommodated as long as they remained temporary. Two policy challenges have gained urgency since the recent unrest: safeguarding medium-term fiscal sustainability, and accelerating growth and private sector development. The authorities will implement a two-pronged approach to meeting these challenges. First, the tax exemption and fuel price freeze are to be temporary and will be reassessed in the context of the 2009 budget preparation, while simultaneously, measures will be taken to contain budgetary costs. Second, structural reforms and capital outlays will be accelerated to spur agriculture production and pro-poor growth.

Fiscal Impact of March 2008 Measures (Percent of nonoil GDP)

  • 0.7 percent: increase in civil service wages by 15 percent and adjustment of the housing allowance from 10 to 20 percent of basic salary.

  • 0.3 percent: exemption of basic commodities (rice, wheat, palm and cooking oil, fish) from import taxes, and reduction in the external tariff on imported cement from 30 to 10 percent.

  • 0.6 percent: fuel price freeze.

A. Safeguarding Fiscal Sustainability

8. The medium-term fiscal strategy aims to create space for priority outlays while preserving fiscal sustainability. Using conservative oil price assumptions2 it targets (i) a gradual increase in nonoil revenues; (ii) expanded poverty-related spending; and (iii) paying down domestic arrears to improve the business environment. The authorities are committed to a path of fiscal sustainability and to building space for priority spending, particularly on agriculture and infrastructure. Staff sees room for higher outlays than in the baseline scenario (Box 2).

Fiscal Policy Considerations on Additional Spending

  • Higher public spending will contribute to higher growth and improved social conditions. Staff analysis shows room for additional spending of about 1 percent of GDP under a scenario in which current spending is financed by nonoil revenues and capital projects by oil revenues and debt.

  • Higher spending would require closer attention to:

  • Institutional capacity. Cameroon needs to continue (i) strengthening public expenditure tracking and training personnel accordingly; and (ii) improving capacity to prepare, evaluate, and execute projects. Capital projects would need to be carefully selected to maximize their growth impact. Furthermore, the authorities would need to strengthen debt management, including by finalizing their preliminary debt strategy, in order to contain future risks (MEFP, ¶27).

  • Absorptive capacity. The inflationary impact of the proposed increase in spending would be modest because economic growth is below potential. Inflationary pressures arising from capital projects would be minimized if outlays were geared toward expanding productive capacity with high import content.

  • The DSA results indicate that the revised macroeconomic forecast, including higher spending, is consistent with fiscal sustainability (Supplement).

9. The fiscal stance in 2008 will be eased by about 1 percent of nonoil GDP relative to the baseline scenario. To contain the costs of the March fiscal measures, the authorities plan to cut spending on goods and services by 0.7 percent of nonoil GDP. Staff cautioned against deep cuts that might endanger government services. The authorities noted, however, that the bulk of the cuts originate from lower prices that have been renegotiated with suppliers, and assured staff that the savings can be achieved without jeopardizing services.

The main changes to the fiscal program relative to the baseline scenario, necessitated by measures taken to address the population’s grievances and the need to contain the costs, are that:

  • Nonoil revenue will be lower because of the reduction of customs tariffs on essential staples and cement. Meanwhile, efforts to improve tax and customs administration will continue (MEFP ¶14).

  • The current expenditure-to-GDP ratio will be higher by about 0.6 percentage point of GDP; higher spending on salaries and fuel subsidies will be partially offset by lower spending on goods and services.

  • Fuel subsidies will be higher by 1.1 percentage point of GDP, because fuel prices are frozen for the rest of 2008 (0.6 percentage point of GDP) and a more transparent price formula is being introduced (0.5 percentage point of GDP).3 If oil prices increase beyond expectations, the authorities will adjust domestic prices, taking into account the social situation (MEFP, ¶23).

10. Fiscal policy will be somewhat more relaxed over the medium term than in the baseline scenario. By 2012, the nonoil primary fiscal balance (program definition) will be about 0.7 percent of nonoil GDP higher than programmed, which is consistent with fiscal sustainability.

uA01fig05

Fiscal Indicators, 2007‐12

(Percent of nonoil GDP)

Citation: IMF Staff Country Reports 2008, 279; 10.5089/9781451808278.002.A001

  • Nonoil revenue. The shortfall between projected and programmed nonoil revenues will be gradually reduced. The authorities agreed to adopt measures in the 2009 budget that would start nonoil revenues heading upward (MEFP, ¶14–15).

  • Priority spending. The authorities plan to increase capital outlays on infrastructure and agriculture but also lower noninterest current spending. They are preparing programs to boost food production and rural infrastructure. Efforts to contain the wage bill and reduce transfers to public enterprises will continue (MEFP, ¶19, 36). They will also resume the pass–through of changes in world oil prices to consumers and reduce subsidies in favor of SONARA. Freed budgetary resources should be used to improve the social safety net. The authorities noted that putting in place a benefit system that targets the poor directly would take time and require technical assistance.

  • Civil service reform. The authorities will continue working to secure the payroll and personnel systems. They will also undertake a diagnostic before designing a civil service reform strategy (MEFP, ¶19).

11. The authorities agreed that public expenditure management needs further work. To strengthen medium-term expenditure planning, budget execution, and tracking, they are moving to prepare the fiscal operations table on a payment order basis. Meanwhile, they have agreed to set a ceiling on the stock of treasury floats (MEFP, ¶20). The new organic law, adopted in December 2007, aims at strengthening budget execution, accounting framework, and control rules. Staff urged the authorities to execute the new law cautiously, while simultaneously reinforcing implementation capacity.

Cameroon: Selected Macroeconomic Indicators, 2007–09

(Units indicated)

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Sources: Cameroonian authorities; and IMF staff estimates and projections.

Based on Country Report No. 07/285.

Percentage change.

Percent of GDP.

Percent of nonoil GDP.

Excluding foreign–financed and debt–relief–financed investment and restructuring spending.

12. The revised macroeconomic framework reflects government priorities since the February unrest. The main effects of the unrest and policy measures are as follows (Tables 15):

  • Despite the turmoil’s adverse impact on growth, nonoil oil GDP will grow by 4½ percent. The authorities are of the view that the 2007 growth momentum will continue, driven primarily by agriculture, services, and higher public investment.

  • The reduction in import taxes and expected rise in imports should contain inflationary pressures.

  • The external current account deficit will be smaller because oil exports are higher. Import volume will increase, however, because import taxes are lower.

B. Accelerating Growth and Private Sector Development

13. To revive growth, the authorities recognize that the business environment needs to improve. They will continue to target areas identified in business surveys as core to attracting investment—developing the financial sector, opening trade, and improving transparency and governance.

Financial sector

14. Building on the new medium-term action plan, financial intermediation will be strengthened(MEFP, ¶29-31). The plan proposes measures to create new financial products for small and medium enterprises, improve data collection, strengthen the supervision of microfinance, diversify financing instruments, and create specialized financial institutions. In addition, with a view to developing the securities market, the authorities will limit recourse to new statutory advances and issue publicly-traded government securities. They are also assessing the future financial activities of CAMPOST based on its new business plan (MEFP, ¶33). With regard to specialized financial institutions, the staff noted that past public intervention in the financial sector had proved costly and ineffective. It urged the authorities instead to consider reforms to improve the operating environment (e.g., information flows, accounting standards, and the legal system). The authorities argued that dealing with the structural impediments to financial intermediation would take time, and a well-defined strategy could give the government a role in the interim.

Trade

15. Trade liberalization can expand growth opportunities. The medium-term revenue loss associated with the recently initialed EPA will likely be modest because liberalization will be phased in gradually and apply first to low-taxed goods. To minimize the risk of trade diversion, staff encouraged the authorities to pursue multilateral trade liberalization and deepen regional integration by harmonizing rules of origin and streamlining CET exemptions (MEFP, ¶28).

Business environment

16. To attract investment and revive growth, the business environment should be enhanced. The authorities recognize that progress has been slow; they agreed to work with the private sector to prepare a private-sector development strategy (MEFP,¶34).

Transparency and governance

17. Continued efforts to improve governance would reduce regulatory uncertainty (MEFP,¶35). The authorities recently stepped up their anticorruption efforts by arresting two ex-ministers on corruption charges. They will continue publishing corruption-related court decisions and prepare an anticorruption strategy based on a program developed with donors.

Cameroon: Doing Business Indicators, 20071

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Source: Doing Business Database, 2008 (World Bank)

Indicates ranking out of 178 countries (lower number = higher ranking).

Percent of value.

Lower‐middle‐income countries.

III. Financing Assurances and Program Issues

18. Given Cameroon’s arrears to private external creditors, the mission discussed the issue of financing assurances. Staff reiterated the importance of reaching agreement with all commercial creditors, in line with Cameroon’s commitments to the Paris Club. The authorities expect to finalize negotiations with the three remaining commercial creditors (holding claims of about US$91 million) in 2008.

19. The main risks to the program have to do with fiscal sustainability and growth. Further unrest would test the authorities’ willingness to withstand pressures to spend too much. Slower progress in mobilizing nonoil revenue and uncertainties about reductions in spending on goods and services could also undermine medium-term fiscal objectives. Insufficient improvement in the business environment and poor capital budget execution could jeopardize growth and poverty reduction.

20. The program is monitored twice a year.4 Considering the impact of measures adopted to address popular concerns, the authorities have requested modification of performance criteria and benchmarks for June (MEFP, Table 1). They have also included an indicative target on the stock of treasury floats to reinforce budget management. Since the current arrangement expires in October, they have requested an extension until January 2009 to allow time for completion of the sixth and final review.

IV. Staff Appraisal

21. The government faces the challenge of balancing fiscal sustainability through prudent fiscal policy, addressing the harmful social consequences of rising food and fuel prices, and promoting growth through structural reforms and public investment. Staff believes that the course charted by the authorities, including measures adopted in March in response to the social unrest, is consistent with these goals. Nonetheless, staff sees several areas where policies need to be refined to maintain this balance among these goals.

22. Staff is encouraged by the authorities’ commitment to fiscal sustainability. The increase in the nonoil primary fiscal deficit under the revised scenario is consistent with a sustainable fiscal path. Nonetheless, while welcoming the authorities’ commitment to contain the budgetary impact of the March measures, staff cautions that cuts in spending on goods and services should not jeopardize public services. Also, the authorities will need to be vigilant with regard to institutional capacity constraints to higher spending. In this regard, the government needs to continue strengthening public expenditure management and improve its capacity to prepare and execute projects.

23. Cameroon needs to strengthen policies to protect the poor from rising food and fuel prices. It will be important for fuel prices to reflect world market conditions so that consumption can adjust accordingly. Targeted support for the vulnerable groups (e.g., cash or in-kind transfers) is preferable to generalized subsidies as the latter tend to benefit the rich more than the poor. Ad hoc tariff reductions on food items could hurt incentives for local production, and thus should be limited in time.

24. Staff urges the authorities to intensify efforts to accelerate growth. There is scope for expanding fiscal space for increasing priority spending, including on agriculture and infrastructure, through mobilization of additional nonoil revenues and reduction of support to public enterprises. In addition, concrete measures will need to be implemented to improve financial intermediation, trade, and the business environment.

25. Debt policies should continue to be prudent. While the risk of debt distress remains low, the authorities should continue to borrow on concessional terms and make effective use of borrowed resources. Cameroon is making good faith efforts to reach understandings with commercial creditors, and developments in this area are not interfering with the country’s adjustment efforts.

26. Staff recommends that the Board (i) complete the fifth review under the PRGF arrangement; (ii) grant a waiver for the nonobservance of the performance criterion related to domestic debt given that the target was missed only by a small margin, (iii) modify the June performance criteria to account for the fiscal impact of policies adopted to address the social consequences of rising food prices; (iv) extend the PRGF arrangement through January 2009; and (v) complete the financing assurances review.

Table 6.

Cameroon: Indicators of Capacity to Repay the Fund, 2007–171

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Sources: IMF staff estimates and projections.

Including remaining disbursements under the current PRGF arrangement.

Total debt service includes IMF repurchases and repayments.