Cameroon
Staff Report for the 2009 Article IV Consultation and Request for disbursement Under the Rapid-Access Component of the Exogenous Shocks Facility

This paper discusses a request from Cameroon for Disbursement Under the Rapid-Access Component of the Exogenous Shocks Facility (RAC-ESF). Despite improvements, the economy of Cameroon remains vulnerable to commodity shocks, especially from oil; and reducing poverty is a challenge. The authorities are eager to set the economy on a higher-growth path that can lower poverty. IMF staff welcomes the accelerated implementation of structural measures to increase the economy’s resilience to shocks. IMF staff supports the authorities’ request for the rapid-access component of the ESF.

Abstract

This paper discusses a request from Cameroon for Disbursement Under the Rapid-Access Component of the Exogenous Shocks Facility (RAC-ESF). Despite improvements, the economy of Cameroon remains vulnerable to commodity shocks, especially from oil; and reducing poverty is a challenge. The authorities are eager to set the economy on a higher-growth path that can lower poverty. IMF staff welcomes the accelerated implementation of structural measures to increase the economy’s resilience to shocks. IMF staff supports the authorities’ request for the rapid-access component of the ESF.

I. Introduction

1. Cameroon’s macroeconomic performance was strengthened under the PRGF arrangement completed in January 2009 (Figure 1 and Box 1). Debt relief in April 2006 under the HIPC Initiative helped firm up the country’s debt sustainability, and create fiscal space for poverty-reducing spending. Public expenditure management is now more transparent and the financial sector stronger.1 Prudent management of oil earnings and revenue has allowed the authorities to accumulate government deposits at the regional central bank (BEAC) and to contribute to the currency union’s pool of foreign exchange reserves, while raising investment and normalizing relations with creditors.

Figure 1.
Figure 1.

Cameroon: Key Achievements Under the PRGF, 2004-08

Citation: IMF Staff Country Reports 2009, 318; 10.5089/9781451808308.002.A001

Sources: Cameroonian authorities; and IMF staff estimates.

Cameroon: Selected Macroeconomic Indicators, 2005–08

(Units indicated)

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

Based on IMF Country Report No. 05/413.

Revised program, in IMF Country Report No. 07/285 for 2006; 08/279 for 2007; and 09/65 for 2008.

Percentage change.

Percent of GDP.

Percent of nonoil GDP. Beginning in 2008, support provided to SONARA through lower taxation was replaced by an explicit subsidy, with an equivalent increase in nonoil revenue. This transparency effect amounts to 0.5 percent of GDP.

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

2. Despite these improvements, the economy remains vulnerable to commodity shocks, especially from oil, and reducing poverty is a challenge (Figure 2). Cameroon still relies heavily on commodities for its foreign exchange earnings and fiscal revenues, making it vulnerable to a decline in demand and prices for these products. Furthermore, the reforms carried out to date have not yet delivered the expected pickup in investment that would set the country on the higher growth path needed to reduce poverty. Reform of public enterprises has been slower than expected under the PRGF arrangement, and limited infrastructure and an unfavorable business environment continue to hamper economic growth. As a result, Cameroon’s per capita real GDP has trailed comparator countries and the population living below the poverty threshold has remained virtually unchanged at 40 percent since 2001. On its current trajectory, Cameroon is unlikely to meet the MDGs.

Figure 2.
Figure 2.

Cameroon: Comparative Indicators, 1980-2008

Citation: IMF Staff Country Reports 2009, 318; 10.5089/9781451808308.002.A001

Sources: Cameroonian authorities; and IMF staff estimates.

Cameroon: Economic and Social Indicators, 2000–07

(Period average, in units indicated)

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Source: World Bank Social Indicators Database; and Cameroonian authorities.

Constant 2000 US dollar.

Annual percent change.

Percent of GDP.

US$ billions.

Percent of children of secondary school age.

Cameroon: Response to Previous Fund Advice

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3. The authorities are eager to set the economy on a higher-growth path that can lower poverty, though they realize that the global crisis will make this task more challenging. Even before the global crisis, the authorities had stressed their resolve to revive economic activity, while preserving macroeconomic stability and debt sustainability. They had accelerated priority expenditure, refocused capital spending on infrastructure and agriculture, and stepped up efforts to mobilize nonoil revenue. They are preparing an economic program in the context of a new poverty reduction strategy (PRS). The global slowdown has made this policy agenda even more urgent.

4. Social tensions that arose last year have abated and the political situation is stable. Dissatisfaction with rising costs for food and fuel amid discussions of changes to the constitution had caused unrest in early 2008. Fiscal measures adopted by the authorities in March 2008—customs duty exemptions for some necessities, a fuel price freeze amid high oil prices, and salary increases for civil servants—helped to reduce social tensions and price pressures. The impact of the global crisis carries a risk of severe social implications, however. In April 2008, Parliament amended the constitution to eliminate the two-term limit for presidents.

II. Recent Economic Developments and Outlook—Weathering the Global Crisis

A. Economic Developments in 2008

5. In 2008, the global downturn had little effect on Cameroon’s economic activity (Table 1). Despite a contraction in oil output, real GDP grew by about 3½ percent driven by the continued pickup in nonoil economic activity, including agriculture. Slower external demand has, however, lowered timber and cotton exports. In addition, increased imports resulting from high food prices kept the current account in deficit (Table 2), despite high oil prices for most of the year. Nonetheless, the overall external position remained in surplus, allowing a further contribution to the regional pool of foreign exchange reserves.

Table 1.

Cameroon: Selected Economic and Financial Indicators, 2007–12

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

Percent of broad money at the beginning of the period.

In months of next year's imports of goods and services.

Estimations and calculations are based on the revised DSA (June 2009) using the LIC Debt Sustainability Framework methodology.

Table 2.

Cameroon: Balance of Payments, 2007–14

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Cameroon: External Developments, 2004-08

(Units indicated)

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Sources: Cameroonian authorities; and IMF staff estimates.

Cameroon: Consumer Prices and Real and Nominal Effective Exchange Rates, January 2006–December 2008

(Index, 2000=100)

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Source: IMF Information Notice System.Sources: Cameroonian authorities; and IMF staff estimates and projections.

6. Fuel and food continued to dominate price developments. Despite the fuel price freeze and lower taxation of some staple goods, inflation increased in 2008. Headline inflation reached 5.3 percent (year-on-year) in December 2008 (compared to 3.4 percent a year earlier), but core inflation remained stable at about 4½ percent. Combined with a recent strengthening of the euro, these developments contributed to an appreciation of the real effective exchange rate (REER).3 While the REER is broadly in line with fundamentals, nonprice factors continue to hamper Cameroon’s external competitiveness (Box 2 and Figure 3).

Figure 3.
Figure 3.

Cameroon: Competitiveness-Survey Data Analysis, 2008–09

Citation: IMF Staff Country Reports 2009, 318; 10.5089/9781451808308.002.A001

Source: The World Bank, Doing Business 2008 and 2009.
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Cameroon: Quantitative Assessment of the REER

Citation: IMF Staff Country Reports 2009, 318; 10.5089/9781451808308.002.A001

Source: Cameroonian authorities; and IMF staff estimates.
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Cameroon: Export Performance, 1995–2007

Citation: IMF Staff Country Reports 2009, 318; 10.5089/9781451808308.002.A001

Source: UN Comtrade database; and IMF staff estimates.1 Data series available only for Cameroon, Central Africa Republic, and Gabon.

7. Fiscal performance was mixed, however. Although the overall fiscal balance remained in surplus (2 percent of GDP, including grants), allowing some further buildup of government deposits at the regional central bank (BEAC), spending pressures narrowed the surplus. Capital spending increased substantially relative to 2007, as the authorities began to tackle bottlenecks to investment and better coordinate with donors. Current spending expanded with higher explicit subsidies replacing the lower taxes granted to SONARA (the national oil refinery).4 Oil revenues remained strong with high oil prices for most of the year. Nonoil revenues were, however, broadly unchanged, despite the authorities’ continued efforts to improve revenue administration.

Cameroon: Key Fiscal Indicators, 2006–08

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

Excluding grants.

Includes the transparency effect from the new fuel price formula. Beginning in 2008, support provided to SONARA through lower taxes is replaced by an explicit subsidy, with an equivalent increase in nonoil revenue. This transparency effect amounts to 0.5 percent of GDP.

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

8. Weaknesses in public expenditure management have resurfaced. Overspending on goods and services in 2008 was partly the result of large settlements of unpaid bills (treasury float) related to the previous budgetary period.5 There was also a re-emergence of domestic arrears. In particular, subsidies to SONARA to offset losses incurred as a result of the freeze in fuel prices were not fully paid, resulting in arrears towards this company of about 1 percent of GDP.

External Competitiveness and Real Exchange Rate Assessment

Staff’s analysis suggests that Cameroon’s real effective exchange rate (REER) is in line with its equilibrium level. Survey data indicate, however, that the country’s competitiveness continues to suffer from several nonprice factors, principally related to a poor business environment.

Methodology. Five approaches were used to assess Cameroon’s real effective exchange rate (REER) and competitiveness: the three CGER methodologies complemented by a Cameroon-specific multivariate reduced-form model (see Table) and survey data analysis.

1. The macroeconomic balance approach estimates a current account norm (or equilibrium current account) based on economic fundamentals for Cameroon relative to its trading partners. The analysis shows that a 4 percent (backward) to 3 percent (forward) real depreciation would be required to close the gap between the underlying current account, which strips the actual current account of all temporary factors, and the current account norm.

2. The external sustainability approach calculates the current account that stabilizes the net foreign assets (NFA)-to-GDP ratio at the end-2008 level. Based on medium-term growth and inflation projections and estimated trade elasticities, the analysis suggests that the REER would need to depreciate by 6 percent (backward) to 8 percent (forward) to stabilize NFA.

3. Two reduced-form Fundamental Equilibrium Exchange Rate assessments were conducted: the CGER panel-based and the country-specific multivariate vector error correction model. These methodologies assume that the equilibrium REER is related to a set of fundamental factors: terms of trade, productivity, investment, government consumption, NFA, and trade openness. They produce a range of results from 0.2 percent undervaluation (CGER panel-based) to 7 percent overvaluation (country-specific model).

4. Survey data analysis, which is a complement to the above quantitative assessments, provides information on structural obstacles to competitiveness. For the last two years the Global Competitiveness Index (GCI) and the World Bank Doing Business reports have ranked Cameroon in the bottom quartile. The country’s share in world nonoil products markets has been declining for the past decade (see text figure). These observations suggest an erosion in Cameroon’s competitiveness.

Selected Indicators of the Real Effective Exchange Rate Assessment

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Backward: actual at end-2008; forward: medium-term, WEO.

Percent GDP, excluding grants.

Includes CAMAIRco air plane import (-0.4 %), temporary exchange rate, and terms of trade movements (0.7%).

”+”=overvaluation;, “-”=undervaluation

Difference Log of index (2000=100); G=100*(Ln(E/100)-Ln(F/100)).

9. Money growth slowed in 2008. The continued accumulation of government deposits and slower expansion in net foreign assets kept money growth contained (Table 3). Meanwhile, credit to the private sector picked up, expanding by about 20 percent (year-on-year) as a number of investment projects were initiated. This reduced the amount of excess liquidity in the banking system. Despite the rapid credit expansion, observance of regional prudential norms has improved. In addition, an agreement was reached with a strategic partner to take over one of the two intervened banks, with discussions ongoing for the other one. At this stage, the regional supervisory agency (COBAC) sees no widespread evidence of distress in the banking sector. Pockets of vulnerability exist, however, compliance with capital requirements and credit exposure limits remaining weak in some instances.

Table 3.

Cameroon: Monetary Survey, December 2005–December 2012

(CFA F billions, unless otherwise noted)

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Cameroon: Recent Monetary Trends, Q1 2005-Q1 2009

(Units indicated)

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

Earmarked for specific projects financed by France.

Cameroon: Banking System Indicators

(Units indicated)

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Sources: Banking Commission of Central Africa (COBAC) and IMF staff calculations.

Single large exposure is limited to 45 percent.

The sum of single large exposure above 15 percent cannot be more than 8 times the permanent resources.

Net capital and other permanent resources over fixed assets must be equal or above 100 percent.

Short term assets (up to one month remaining maturity) over short-term liabilities (up to one month remaining maturity) must be equal or above minimum 100 percent.

Excess liquidity: Banks' total reserves minus reserve requirements over deposits.

Financing of long-term assets (more than five years) over long-term liabilities (more than five years) must be at least 50 percent.

Minimum capital for Cameroon: CFAF 1 billion.

Credit to shareholders, administrators, and managers must be below 15 percent.

B. The Impact of the Crisis in 2009

10. The global crisis is expected to take a considerably greater toll in 2009 (Figure 4). Although Cameroon’s banking sector is not directly exposed to the global financial turmoil, Cameroon’s economic activity is expected to be adversely affected through the following channels:

Figure 4.
Figure 4.

Cameroon: Impact of Exogenous Shocks, 2007–091

Citation: IMF Staff Country Reports 2009, 318; 10.5089/9781451808308.002.A001

Source: Cameroonian authorities; and IMF staff estimates and projections.1 CEMAC averages exclude Cameroon.
  • World prices for Cameroon’s main export commodities (e.g., oil) have declined, leading to a sharp deterioration in the terms of trade (about 20 percent).

  • Slower world demand has had adverse effects on timber, rubber, cotton, and to a lesser extent, aluminum, which was also affected by input constraints.

  • Given the tight international liquidity conditions, financing for some large investment projects has been delayed, particularly in the energy, aluminum, and mining sectors, reducing the inflow of foreign capital.

  • Remittances (although they amount only to about 0.8 percent of GDP) are expected to decline.

11. As a result, economic activity, the external position, and the fiscal accounts are being severely affected. Economic growth is projected to slow by 1 percentage point, to 2.4 percent in 2009, with risks on the downside. The estimated net impact of the shocks on balance of payments flows is about 7.6 percent of GDP. Offsetting developments in other items bring the deterioration in the balance of payments to about 6 percentage points of GDP in 2008-09. This would imply a sharp decline in the country’s notional foreign exchange reserves at the BEAC from 6.2 months of imports in 2008 to about 4.5 months of imports by end-2009 in the absence of additional financing. Similarly, the overall fiscal surplus of 2 percent of GDP (including grants) observed in 2008 is expected to turn into a deficit in 2009 of close to 1 percent of GDP.

Estimated Net Impact of Exogenous Shocks on Cameroon's Balance of Payments

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C. Medium-Term Outlook

12. Cameroon’s medium-term economic outlook has also been revised downward. The deterioration in Cameroon’s terms of trade is expected to be partially reversed in 2010 and the country’s export outlook should gradually improve as the global economy recovers. Nevertheless, delays in implementing important infrastructure projects will continue to weigh adversely on the country’s medium-term economic prospects. Against this background,

  • Nonoil real GDP growth is expected to be lower than previously projected by about 1½ percentage points per year.

  • Fiscal oil revenues have been revised slightly upwards with recent investment temporarily raising oil production in 2011 and 2012.

  • Nonoil revenues have been revised downward, because of the weaker growth projections.

  • The overall fiscal balance will turn into a modest deficit of less than one percent of GDP and the nonoil primary deficit will widen broadly by the same magnitude.

  • The current account deficit, widening by about 2 percentage points of GDP because of the global crisis, will persist over the medium term.

  • On the positive side, price pressures on food and fuel seen last year have subsided.

Cameroon: Selected Macroeconomic Indicators, 2008–14

(Units indicated)

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

Based on IMF Country Report No. 09/65.

Percentage change.

Percent of GDP.

Percent of nonoil GDP.

Using WEO oil prices minus US$ 10 per barrel.

III. Policy Discussions—Responding to The Crisis and Reducing Vulnerabilities

13. A key challenge confronting the Cameroonian authorities is to address the impact of the global crisis within a framework that maintains fiscal and external sustainability while leaving room to boost growth. The authorities recognize that the impact of the global crisis underscores the continued vulnerability of Cameroon’s economy to external shocks, especially fluctuations in demand and prices for its key commodities. They have taken immediate actions to shelter the economy in the short run and are committed to reforms that would increase resilience to external shocks over time. Against this backdrop, the Article IV consultation discussions centered on three key areas:

  • Using the available fiscal space;

  • Reducing the obstacles to growth; and

  • Ensuring the stability of the financial sector.

A. Using Fiscal Space

14. The authorities and staff agreed that in the short run fiscal policy should help cushion the economy from the impact of the global crisis, despite the tighter financing conditions. The private sector has expressed concerns about the potential social costs of the current crisis and is calling for immediate action in favor of sectors in distress (Box 3). In this context, the authorities agreed to avoid to the extent possible a fiscal contraction in a year of significant decline in growth. In this regard, they are preparing a supplementary budget which would allow for some targeted support, a minor increase in domestic investment, and a larger allocation for the clearance of arrears. The level of the 2009 budgeted spending would be maintained (with the exception of fuel subsidies). The implied fiscal stance would remain broadly unchanged in 2009 compared to 2008.6

  • In the absence of social safety nets, targeted measures will be taken to protect sectors facing particular difficulties. In the forestry sector, cascading has been reduced by eliminating some taxes and the annual timber royalty could be reduced to reflect lower timber prices. In the agriculture sector, given the tight financial situation of many small producers, the authorities are moving to provide targeted subsidies to purchase seeds and fertilizers for the next harvest.

  • Lower international oil prices offer an opportunity to eliminate fuel subsidies in 2009 and resume timely retail fuel price adjustments. In this regard, options for rolling out targeted mechanisms to protect the poor are under consideration.

  • The decline in oil revenue is expected to turn the overall fiscal balance in 2009 into a deficit. While the country’s low debt level would allow it to borrow without jeopardizing fiscal sustainability, access to concessional financing could be limited in the near future in light of the global downturn. In addition, the domestic debt market is not yet operational. Hence, the deficit would have to be financed by drawing on the government deposits at the BEAC.

  • Given the downside risks, the authorities agreed in principle on the need to consider contingent measures, in case revenues are much lower than expected. In this regard, they agreed that such measures should be rapid to implement, yield quick results, imply limited economic distortions, and minimize adverse effects on the poor. These actions would aim at safeguarding government deposits and would probably imply cuts in nonpriority spending.

Views from the Private Sector

Staff had a number of meetings with the private sector, including representatives of the aluminum, banking, cement, cotton, electricity, forestry, and oil industries.

Private sector representatives have expressed concerns about the severe impact of the global crisis. Lower external demand and prices are affecting a number of key sectors in Cameroon, some of which were already in difficulty. The cotton sector, for instance, had been suffering from a steep increase in the cost of inputs, especially fertilizers, and production was in sharp decline. Spillover effects were expected to be significant, especially in the transport sector with about half of its activities related to the seriously affected timber industry.

Social costs were seen as high. The forestry sector (10,000 jobs) has laid off about 20 percent of its employees and put another 15 percent on forced leave. The cotton sector (370,000 jobs) is under threat. If the crisis were to be protracted and no action taken to help sectors in distress, especially timber, it was feared that the financial crisis could degenerate into a social crisis.

There were calls for immediate action. The private sector called for immediate measures to alleviate the impact in the sectors most affected, through subsidies or tax deferrals. It was suggested that the government help laid-off workers find other jobs to reduce hardship. Private sector representatives also underscored the need for structural reforms to make the economy more resilient to shocks and improve competitiveness. They stressed the importance of improving transparency and governance, access to financing, and public infrastructure (especially roads, ports and energy).

15. The medium-term fiscal strategy should continue to reflect the nonrenewable nature of oil revenues and the need to address obstacles to growth, while preserving debt sustainability. Cameroon should limit fiscal deficits while oil revenues are significant so that future generations are not faced with a renewed debt burden. Oil revenues and available prudent borrowing should be effectively used to finance growth-enhancing investments. This strategy is ensured by maintaining a moderately positive nonoil current balance and by avoiding sizable overall deficits for as long as oil revenues remain substantial. Finally, fluctuations in the nonoil primary balance should be contained to avoid destabilizing effects on the economy. The macroeconomic framework discussed with the authorities is in line with these principles.

16. Within this framework, the authorities recognize that existing fiscal buffers are limited and adjustment efforts needed over the medium term. In view of limited financing prospects at terms consistent with safeguarding sustainability, a balanced overall fiscal position would need to be gradually restored over the medium term, while continued support is provided to the economy. The policy discussions focused on a three-pronged strategy: (i) increase nonoil revenues, (ii) rationalize public spending to protect priority programs, and (iii) develop alternative sources of domestic financing.

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Nonoil Fiscal Revenue

(In percent of nonoil GDP)

Citation: IMF Staff Country Reports 2009, 318; 10.5089/9781451808308.002.A001

Sources: Authorities data and staff calculations.
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Number of Hours to Prepare, File and Pay Taxes, 2008

(Number of hours per year)

Citation: IMF Staff Country Reports 2009, 318; 10.5089/9781451808308.002.A001

Source: World Bank.

17. The recent significant decline in oil revenues makes it more urgent to continue efforts to mobilize additional nonoil revenues in order to protect priority spending. In view of the expected decline in oil production beyond 2012 and further envisaged import tariff reductions–and given that tax rates on capital income, labor, and consumption are already high–broadening the tax base through administrative measures is a key priority.

  • article image
    The authorities agreed that the priority should be to reduce the cost of compliance by simplifying tax procedures. In particular, the number of tax forms will be reduced. In addition, the opening of tax centers offering accounting and tax advice to small- and medium-sized enterprises is expected to facilitate compliance.

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    Implementation of exemptions will be tightened. A more effective tracking system will be put in place to monitor transit trade and trading risk-profiles will be further developed to improve customs administration.

18. The quality of public spending would need to be improved. With tighter budgetary constraints, efforts to achieve greater efficiency should continue. In this regard, capital expenditure (and maintenance of existing infrastructure) would need to be stepped up to reduce the severe infrastructural bottlenecks, and provide a renewed and stronger impetus to growth. Related administrative capacity needs also to be further strengthened.

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    To be effective, new capital projects need to be carefully selected to maximize their impact on growth and integrated into a medium-term strategy. In this context, the authorities intend to continue (i) reinforcing public expenditure tracking and training of personnel; and (ii) building capacity to prepare, evaluate, and execute projects.

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    The large fluctuations in the treasury float make it difficult to assess the fiscal stance in any given period. In this regard, the authorities have committed to settle the arrears to SONARA in 2009 and produce comprehensive budgetary execution data on a payment orders basis by the end of the year.

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    The gradual implementation of the new public finance system law will require careful monitoring. Among the changes it introduces are a budget structured by program, stronger budget execution, more stringent accounting and control rules, and improved transparency. The introduction of such changes has been a challenge, even in advanced countries.

19. Alternative sources of financing should also be developed. A broader financing base could help protect priority spending while preserving fiscal sustainability and containing pressures on the region’s pool of foreign exchange reserves. Staff recognized that the country’s low debt level would allow it to borrow prudently without jeopardizing fiscal sustainability, and encouraged the authorities to continue to work with relevant regional agencies and take action to speed up the development of the domestic bond market.

20. In this regard, the DSA analysis indicates that the risk of debt distress remains low, but the authorities are taking steps to strengthen their debt management capacity.7 Cameroon’s debt management was assessed by the World Bank as among the weakest in post-completion point HIPC countries. The authorities have indicated that improving this area is a priority. Following joint Bank-Fund technical assistance, they are working on implementing a new debt management strategy in line with CEMAC regional guidelines. This will require the definition of an institutional framework with clear responsibilities, effective coordination of all relevant entities (Budget, Treasury, CAA, and BEAC), and the elaboration of an annual borrowing plan and calendar for the issuance of bonds suited for the country’s financial situation.

B. Raising Growth: Addressing the Bottlenecks

21. The authorities recognize that an unfavorable investment climate is holding back the country’s economic expansion. Inadequate infrastructure and an unfavorable business environment hamper output and export diversification and faster economic growth (Box 4). The authorities have initiated a dialogue with the private sector and donors to identify concrete measures and recognized that continued efforts to improve governance would reduce regulatory uncertainty.

22. Further progress in reforming public enterprises would also help improve the business environment. Progress in restructuring public enterprises and service delivery has been slow (Box 5). The authorities recognize that the global financial crisis could hamper access to financing and cause further delays for their privatization agenda. Against this, the opportunity should be taken to clarify the reform strategies, in particular for air transport and telecommunications, allowing a prompt finalization of the restructuring once international financial conditions improve.

23. Progress in trade liberalization would stimulate economic growth. The authorities signed an interim economic partnership agreement with the European Union (EU) in January 2009, pending a broader regional agreement with the other CEMAC members. Intra-CEMAC regional trade remains very limited, however. CEMAC import tariffs are among the highest in sub-Saharan Africa.8 Against this backdrop, the authorities agreed to continue to urge CEMAC partners to further liberalize trade by (i) reducing the maximum common external tariff (CET) from 30 to 20 percent, and (ii) harmonizing rules of origin and streamlining CET exemptions, and (iii) working toward a regional trade agreement with the EU.

C. Assuring the Stability of the Financial System

24. Although the banking sector is generally sound, there are pockets of vulnerability. Observance of regional prudential norms has generally improved, but the compliance of some Cameroonian banks with capital requirements and credit exposure limits remains weak, making them vulnerable to an economic slowdown. In this regard, the authorities agreed that they would continue to work with the relevant regional agencies to monitor closely developments in the banking sector, and in particular ensure timely assessment of asset quality and adequate provisioning for nonperforming loans, and enforce corrective action where needed.

Infrastructure Bottlenecks to Growth and Challenges Ahead

Several factors have held back Cameroon’s growth. Cameroon’s productivity played a key role in boosting growth after the devaluation of the CFA franc in 1994. The impulse from the devaluation was accompanied by a number of structural reforms in the telecommunications, port, railroad, and banking sectors. Since then, productivity gains have slowed down and growth has been far slower than in other lower-middle-income countries. A shallower financial market, a lower investment rate, a generally unattractive business environment, and inadequate infrastructure have been mentioned as the main reasons. Improvements in these areas will be crucial to achieve faster growth.

Inadequate transport services and unreliable electricity supply are particularly problematic. Improving roads and access to market remains a major objective. Only about 8 percent of Cameroon’s road network is paved, far below the lower-middle-income-country average. Much of this network, including the paved areas, is of questionable quality and insufficient capacity. The rainy season severely compounds transportation problems. Surveys have highlighted that unreliable electricity supply was also a major deterrent for private investors. Electricity consumption in Cameroon is far lower than in other lower-middle-income countries. Supply is insufficient and distribution is uneven, with frequent blackouts affecting also important parts of the public administration.

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Cameroon, Other CEMAC, and SSA: Selected Comparative Indicators, 2008

Citation: IMF Staff Country Reports 2009, 318; 10.5089/9781451808308.002.A001

Note: SSA stands for Sub-saharan African countries.

Cameroon: Bottlenecks to Growth, 2007

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Source: World Bank Development Indicators Database; and Cameroonian authorities.

Data for 2000–06.

Mobile cellular and fixed-line subscribers per employee, 2008.

Public Enterprise Reform

The authorities have been carrying out public enterprise restructuring programs to improve their performance and the quality of services they provide, as well as reduce the burden on the budget. Progress, however, has been slow, contributing to the infrastructure bottlenecks that hamper faster economic growth.

CAMAIR (the national airline company) ceased operations in May 2008 and is being liquidated. The authorities have stepped up their efforts to launch a successor company, CAMAIRCo. The preparatory work for issuing the bids for the selection of a strategic partner is ongoing, but the prospects are problematic in the current financial environment.

Bids for the privatization of CAMTEL (the telephone company) were issued in March 2007, but the government judged the offers unsatisfactory. It is now considering a management contract as a more appropriate framework, in light of the investment it has made to set up a fiber optic backbone and the significant market power it would convey to a private operator.

Efforts to reduce the costs of SONARA (the oil refinery) continue. The financing package for the expansion of its production capacity is being finalized and would allow greater economies of scale. The next step is to improve efficiency to allow the refinery to process more of the heavier Cameroonian crudes.

The 2008 financial accounts for CAMPOST (the postal bank) have been produced. A business plan has been prepared by the management company on how best to provide financial services to rural areas and move ahead with the restructuring. The authorities are examining the options.

25. The authorities recognize that bank credit remains hampered by a poorly functional judicial system, absence of adequate collateral, and limited credit information. Given the global financial crisis, credit conditions could become even tighter if impediments to access are not tackled and asset quality deteriorates. The authorities agreed, therefore, to accelerate the implementation of their action plan to deepen financial intermediation, based on the recommendations of the 2007 FSAP mission. The plan aims to (i) improve credit information by supporting the BEAC in finalizing implementation of the central credit registry; (ii) introduce financial instruments appropriate to small and medium enterprises such as factoring, leasing, and venture capital; and (iii) improve contract enforcement by setting up a court dedicated to commercial matters and facilitating out-of-court settlements.

IV. ESF Request

26. Cameroon is facing difficulties caused primarily by sudden and exogenous shocks with a severe impact on the economy. Declining commodity prices, lower external demand, and tighter external financing are adversely affecting key economic activities. Growth projections have been revised downwards and the overall external balance is expected to turn into a deficit. A financing requirement of CFAF 111 billion (1.1 percent of GDP), which mirrors the fiscal gap, would emerge if the deterioration in the country’s notional foreign exchange reserves were to be limited to a level corresponding to about 5 months of imports.

27. The authorities have expressed concern about the size of the shocks and the pace of deterioration of their fiscal buffers. The authorities consider it prudent to maintain government deposits at about their current level (equivalent to about 2.6 percent of GDP or 1¾ months of public spending), given (i) the uncertain duration of the global crisis, (ii) the volatility of oil revenues, (iii) the risk of contingent liabilities materializing, considering the pockets of vulnerability in the banking system, (iv) the absence of an operational market for government securities, and (v) their commitment to regularizing their payment arrears. Under current conditions and without additional financing, the authorities’ proposed fiscal strategy would imply, however, a decline in usable government deposits from 2.6 percent of GDP at end-2008 to about 1½ percent of GDP at end-2009 (equivalent to about a month of spending).9

28. Against this background, the authorities have requested Fund financing under the rapid-access component of the ESF in the amount of SDR 92.85 million (50 percent of quota). In light of the unfinished structural agenda, the authorities intend to move rapidly to a new PRGF arrangement and have approached other multilateral development partners for additional financing. Meanwhile, rapid Fund assistance would provide some temporary additional financial support to help the economy adjust to the exogenous shocks, and to ensure that priority outlays (investment, health, education) are protected in 2009.

29. Cameroon has adequate capacity to repay the Fund (Table 6). Access of 50 percent of quota (about 0.6 percent of GDP) will not jeopardize debt sustainability. The country has a low stock of external debt, and the debt sustainability analysis places Cameroon at a low risk of debt distress. Following the HIPC Initiative assistance and MDRI debt relief, Cameroon’s stock of public debt fell to about 10 percent of GDP and external debt to about 6 percent of GDP at end-2008, while the NPV of external debt stood at 10.2 percent of exports.

V. Risks

30. The economic outlook is nevertheless subject to significant downside risks. The main risks relate to a further worsening or longer duration of the global downturn and delays in implementing the proposed policies.

  • A sharper or more protracted growth decline in the global economy could lower demand and prices for commodities, including oil, and remittances.10

  • Tighter financial conditions could dry up further net private capital inflows and postpone large infrastructure projects with adverse effects on the country’s prospects for growth and poverty reduction.

  • Lack of improvements in mobilizing nonoil revenue and reducing nonpriority spending could put greater pressure on the government’s deposits at the regional central bank.

  • Delays in improving the investment climate could hamper the expected pickup in nonoil exports and net capital inflows, putting pressure on the regional pool of foreign exchange reserves.

VI. Staff Appraisal

31. The global economic crisis is affecting Cameroon severely. After last year’s social tensions arising from high food and fuel prices, the global crisis this year is providing yet another set of challenges. Lower oil prices are reducing exports and fiscal revenues. Considerably weaker external demand is adversely affecting key exports. Tighter external financing conditions have delayed important investment projects. As a result, growth projections have been revised downward, and the overall fiscal and external balances are projected to turn into deficit. Without appropriate social safety nets in place, the social costs of the downturn could be severe.

32. Recent economic achievements provide Cameroon with a relatively solid foundation for weathering the impact of the global crisis. Prudent management of oil windfalls under the recently completed PRGF-supported program has allowed the authorities to accumulate government deposits at the BEAC and contribute to the regional pool of foreign exchange reserves. These savings now provide welcome fiscal and external buffers that can be prudently used to alleviate the impact of the crisis.

33. Economic growth has, however, been too slow to reduce poverty. While the exchange rate is broadly in line with fundamentals, nonprice factors continue to adversely affect Cameroon’s competitiveness. Limited infrastructure and an unfavorable business environment hamper faster economic development. On the current trajectory, Cameroon is highly unlikely to meet the MDGs. Against this backdrop, staff commends the authorities’ commitment to continue to preserve macroeconomic stability and tackle structural impediments to growth, although the global crisis will make this task more challenging.

34. The authorities have already taken steps to deal with the shocks. Staff agrees that the implementation of the 2009 budgetary priority spending plans should be maintained to avoid a public sector contraction in a year of declining economic growth. Targeted measures are being put in place to help particular sectors in difficulty and alleviate social distress.

35. Staff welcomes the accelerated implementation of structural measures to increase the economy’s resilience to shocks. The authorities have committed to enhance their efforts to achieve greater nonoil revenue mobilization, strengthen public expenditure management and transparency, and develop alternative sources of financing. Decisive actions are also needed to improve governance, make the business environment more attractive, and enhance the still limited role of the financial sector in the development of the economy. Staff welcomes the authorities’ efforts and commitment to address these challenges through a medium-term economic program in the context of a new PRS under preparation.

36. Staff supports the authorities’ request for the rapid-access component of the ESF. The authorities have demonstrated a readiness to collaborate with the Fund in finding solutions to the deteriorating balance of payments situation. Their policy commitments appropriately address the impact of the shocks and contribute to making the economy more resilient. Rapid Fund support would contribute to contain the decline in the country’s notional foreign exchange reserves and in usable government deposits to a level that is prudent to maintain in light of the uncertainties facing the economy. Cameroon has adequate capacity to repay the Fund and, with a low risk of debt distress, access of 50 percent of quota will not jeopardize debt sustainability.

37. Nonetheless, the authorities should continue to remain vigilant against the possibility of downside risks. While not directly affected, the financial sector in particular could be negatively affected by a protracted economic slowdown and act as a further drag on growth if credit conditions become tighter. Developments in this sector should be closely monitored in cooperation with regional supervisors and corrective actions taken if needed.

38. It is proposed that the next Article IV consultation with Cameroon take place on the standard 12-month cycle.

Table 4.

Cameroon: Central Government Operations; 2007–12

(CFA F billions)

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