Cameroon
2010: Article IV Consultation: Staff Report; Debt Sustainability Analysis; Staff Report Supplement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Cameroon
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International Monetary Fund
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Publication Date:
04 Aug 2010
eISBN:
9781455205776
Language:
English
Keywords:
ISCR; CR; government; government obligation; authority; real GDP; budget; debt relief; terms of trade; NPL ratio; trade elasticity; growth performance; Arrears; Public investment and public-private partnerships (PPP); light crude
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Cameroon showed incipient signs of recovery from the global financial crisis. Although growth performance remained constrained under the Poverty Reduction Growth Facility (PRGF), tax and customs administrations were strengthened, macroeconomic stability was preserved, and debt relief under the Heavily Indebted Poor Countries (HIPC) and Multilateral Debt Relief Initiatives (MDRI) helped firm up debt sustainability. Executive Directors welcomed the new program aimed to accelerate growth through infrastructure development, development of rural and mining sectors, improvement in human resources, regional integration, and export diversification. They emphasized the need to maintain fiscal and financial stability to preserve economic growth.

Abstract

Cameroon showed incipient signs of recovery from the global financial crisis. Although growth performance remained constrained under the Poverty Reduction Growth Facility (PRGF), tax and customs administrations were strengthened, macroeconomic stability was preserved, and debt relief under the Heavily Indebted Poor Countries (HIPC) and Multilateral Debt Relief Initiatives (MDRI) helped firm up debt sustainability. Executive Directors welcomed the new program aimed to accelerate growth through infrastructure development, development of rural and mining sectors, improvement in human resources, regional integration, and export diversification. They emphasized the need to maintain fiscal and financial stability to preserve economic growth.

I. Background

1. While significant reforms were undertaken under the PRGF arrangement completed in January 2009, Cameroon’s growth performance remained weak and the economy vulnerable to exogenous shocks. Under the PRGF, tax and customs administrations were strengthened, macroeconomic stability was preserved, and debt relief under the HIPC and MDRI Initiatives helped firm up debt sustainability (Figure 1). However, Cameroon’s growth performance remained constrained by weak infrastructure; poor governance and business environment; limited absorption capacity; a shallow financial sector; and obstacles to trade. In per capita terms, real GDP stagnated in 2005-09, and the incidence of poverty remained unchanged, actually worsening in rural areas. The country remains dependent on commodities for export earnings and fiscal revenues and thus is vulnerable to a decline in external demand and world prices.

Figure 1.
Figure 1.

Cameroon: Comparative Indicators and Economic Structure, 1980–2009

Citation: IMF Staff Country Reports 2010, 259; 10.5089/9781455205776.002.A001

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

2. Cameroon’s vulnerability to exogenous shocks was highlighted during the 2009 Article IV consultation. On that occasion, the Executive Board approved a US$144.1 million disbursement under the rapid-access component of the Exogenous Shocks Facility (RAC-ESF) to help the country weather the impact of the global crisis. Directors underscored the critical importance of achieving greater nonoil revenue mobilization; strengthening public expenditure management; improving governance and transparency; making the business environment more attractive; and enhancing the role of the financial sector.

Cameroon: Response to Previous Fund Advice

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3. A new poverty reduction strategy paper (November 2009) recognizes the disappointing growth and poverty reduction record. It identifies five key priority areas to accelerate growth: (i) infrastructure development in energy, telecoms, and transport; (ii) development of rural and mining sectors; (iii) improvement in human resources through health, education, and training; (iv) greater regional integration and export diversification; and (v) financial sector deepening. The JSAN (www.imf.org) for the new PRSP was circulated to Directors in February 2010.

4. The political situation is broadly stable. However, social discontent could reemerge, as in 2008, ahead of the presidential elections in 2011. Parliament amended the constitution in April 2008 to allow the President to stand for a third term.

5. Data provision to the Fund is broadly adequate for surveillance purposes, but there are important gaps in fiscal and financial sector information. Government financial operations on a commitment basis (consistent with accounts on a cash basis) and financial sector soundness indicators are not regularly available. The quality and timeliness of balance of payments statistics need also to improve. The authorities have recognized these deficiencies and have requested TA support to address these matters.

II. Recent Developments and Performance under the Exogenous Shock Facility

6. The global crisis slowed the pace of economic activity in Cameroon. Lower demand and commodity prices affected exports and fiscal revenues, and tighter financing conditions delayed investment projects in energy and mining. Real GDP growth decelerated from 2.9 percent in 2008 to 2 percent in 2009 (Table 1). Food and fuel price pressures eased, leading to a decline in headline inflation to the regional convergence criterion of 3 percent in 2009, down from 5.3 percent in 2008. Inflation continued to decelerate to a twelve-month rate of 2.2 percent in March 2010.

Table 1.

Cameroon: Selected Economic and Financial Indicators, 2008–15

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

Percent of broad money at the beginning of the period.

Estimations are based on the revised DSA (June 2010) using the LIC Debt Sustainability Framework methodology.

Note: … = not available.

7. The impact of the crisis on external accounts was less than anticipated. Exports of oil products plummeted, reflecting a fall in production and world prices, but light crude petroleum imports also contracted sharply. Some nonoil exports have rebounded since mid-2009.1 Remittances fell more than initially projected. As a result, the external current account deficit widened by about 1 percentage point of GDP (less than the 4 percentage points anticipated at the time of the 2009 Article IV consultation), but the overall external balance, excluding the new SDR allocation received in 2009, remained positive (Table 4).

Table 2.

Cameroon: Central Government Operations on a Cash Basis, 2008–15

(CFAF billion, unless otherwise indicated)

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

The amount for 2010 represents a provision for the recapitalization of a distressed bank.

Total amount of arrears owed to SONARA at end-2009.

Excludes grants, debt-relief and foreign financed investment and restructuring.

Table 3.

Cameroon: Selected Fiscal Indicators, on a Cash Basis, 2008–15

(Percent of GDP, unless otherwise indicated)

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

The amount for 2010 represents a provision for the recapitalization of a distressed bank.

Total amount of arrears owed to SONARA at end-2009.

Excludes grants, debt-relief and foreign financed investment and restructuring.

Table 4.

Cameroon: Balance of Payments, 2008–15

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

8. The authorities responded to the crisis by protecting priority spending and supporting sectors in distress. Despite lower revenues, original spending allocations to investment, health, and education were broadly maintained. To protect the sectors most affected, the authorities reduced taxes and royalties on timber; settled outstanding VAT credits to the cotton sector; and subsidized inputs and fertilizers for agriculture.

9. Performance on reforms agreed under the RAC-ESF was mixed. The authorities removed tax exemptions for 19 large enterprises; improved the use of a computerized customs system; introduced a GPS-based mechanism to track merchandise in transit and reduce tax evasion; reduced the number of tax forms; stepped up prosecution efforts against officials charged with misappropriation of public funds; and established a new forum for dialogue between government and the private sector to improve business climate. However, other committed measures were not implemented, including the settlement of arrears to the national oil refinery and the elimination of fuel subsidies. The presentation of fiscal data on a commitment basis continued to lag and little progress was made on public enterprise reform.

10. Fiscal accounts for 2009 show a limited overall budget deficit, on a cash basis, despite a shortfall in total revenue (Text Table 2). Revenue including grants amounted to 18.4 percent of GDP, compared with 19.2 percent projected at the time of the RAC-ESF and 20.8 percent of GDP in 2008. The shortfall is primarily explained by the decline in oil prices and crisis-related tax reduction measures affecting nonoil revenues. Total expenditure was broadly maintained (18.4 percent against 18.7 percent of GDP projected) although its composition shifted from capital to current spending. The deficit on a cash basis, after accounting for the clearing of outstanding arrears audited in previous years, was modest (0.2 percent of GDP).2 Reflecting deficit financing, the amortization of external and domestic debt and the absence of an operational market for government securities, usable government deposits at the BEAC dropped to the equivalent of one month’s expenditure at end-2009, compared with 1.6 months targeted under the RAC-ESF.3

Text Table 1

Cameroon: Economic and Social Indicators

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Sources: IMF, African Department and WEO databases; and The World Bank, World Development Indicators database, 2009.
Text Table 2

Cameroon: Key Fiscal Indicators, on a Cash Basis, 2008–10

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Country Report (CR).

11. However, public financial management (PFM) worsened significantly in 2009. Government operations’ accounts on a cash basis give an incomplete picture of the fiscal stance, as they do not include the surge in government payment obligations for fiscal operations that did not reach the cash settlement stage. There were three types of unsettled government obligations in 2009, as shown in Text Table 3 and Box 2:

  • Delayed payment for losses incurred since 2008 by the national oil refinery, SONARA, on account of the fuel pricing policy. These losses reached CFAF 98.3 billion at end-2009 (1 percent of GDP) and were estimated at about CFAF 106 billion in March 2010. The government had committed, under the RAC-ESF, to compensate SONARA but this commitment was not upheld.

  • Unsettled payment orders (UPOs). During 2009, UPOs increased sharply, reaching CFAF173 billion (1.7 percent of GDP). The stock of UPOs accumulated since 2006 reached CFAF 223.4 billion (2.1 percent of GDP) at end-2009.4

  • Expenditure committed and for which services have been provided, but no payment orders issued (validated DENOs). The 2007 new Public Finance Law requires priority clearance of validated DENOs incurred the previous fiscal year. Validated DENOs incurred in 2009 are estimated at CFAF 110 billion, or 1 percent of GDP, to be settled through a 2010 budget appropriation.

Text Table 3

Cameroon: Government Arrears and Other Payment Obligations, 2008–March 2010

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UPOs accumulated by the central government excluding its decentralized services.

Payments of previous years’ UPOs accumulated by the central governments including its decentralized services.

In addition, budget transparency weakened. The National Hydrocarbon Company (SNH), which collects the bulk of government’s oil revenue, was used to fund some government spending operations outside the normal treasury process.

12. Reflecting PFM and supervisory problems and the impact of the crisis, banking system soundness deteriorated (Box 3).

  • The banking system became heavily exposed to a common borrower, the oil refinery (SONARA), which had to turn to bank financing to compensate for the government’s long delays in settling its obligations. This common borrower channel has become a source of systemic risk.5

  • The NPLs ratio increased from 11.5 to 12.9 percent in 2009 (Table 6), reflecting both the weaker economy in 2009 and the more aggressive bank lending behavior in 2008, in which bank credit to the non-government sector had risen by about 15 percent in real terms. Cameroon’s NPL ratio remains higher than the CEMAC average.

  • Cameroon also experienced a significant retrenchment in foreign bank loans during the first half of 2009. The retrenchment was part of a longer-term trend of declining international bank exposure to the country relative to GDP.

Table 5

Cameroon: Monetary Survey, December 2008–December 2015

(Billions of CFA francs, unless otherwise noted)

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Sources: BEAC; and IMF staff estimates and projections.

Deposits that are readily available (not earmarked) for government operations.

Excluding foreign-financed investment.

Table 6

Cameroon and CEMAC: Indicators of Banking System Soundness, 2007-09

(In percent, unless otherwise indicated)

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The regulatory capital is sometime lower than the core or Tier 1 capital if there are significant non-values in the bank portfolios.

Gross NPLs/gross loans.

NPLs net of provision/outstanding loans.

The Public Expenditure Chain and Arrears Issue

The normal procedure for expenditure on goods and services in Cameroon has four stages: 1.engagement (commitment) 2. liquidation (validation phase) 3.ordonnancement (payment order), and 4. Paiement (payment).

Weak public expenditure management can lead to the accumulation of domestic and external arrears. Typically, these arise between stages 3 and 4, when payment orders remain unsettled beyond a certain time frame. According a CEMAC directive adopted in June 2008, unsettled payment orders (UPOs), known as Treasury float or “restes à payer” in Cameroon, should be considered as arrears after 90 days.1 This directive is not currently applied in Cameroon and there is no systematic tracking of UPOs’ duration. Therefore, there is no clear distinction between “normal” treasury float and arrears within the total stock of UPOs.

UPOs increased in 2009, in parallel with the clearance of a high level of previous years’ UPOs. This could have resulted from multiple causes, including poor or fragmented cash flow planning and management; over-optimistic revenue forecasts; deficiencies in the treasury information system for tracking revenue and expenditure flows; the impact of extraordinary or unbudgeted expenditures; and nonbudgeted clearance of UPOs from previous years.

Another type of government payment obligation may occur between stages 1 and 3 (DENOs). DENOs which have been validated (between stage 2 and 3) but remain unpaid can be a source of arrears. DENOs cannot be easily traced, especially for expenditures committed by decentralized services of the central government. The concentration of expenditure commitments by line ministries towards the end of the fiscal year is the major source of this type of obligations. DENOs may also originate in exceptional procedures for expenditure or payment. A requirement of the new Public Finance Law implemented for the first time this year is that annual budgets contain an appropriation for DENOs incurred and validated in the previous year.

1 The definition of arrears favored by the IMF is different; an arrear arises if no settlement is made 90 days after the delivery of the goods or services (validation phase).

Risks and Vulnerabilities in Cameroon’s Banking Sector

The bank regulatory framework encourages excessive credit concentration. Current bank regulation caps lending to a single borrower at 45 percent of regulatory capital, a very high limit by international standards (typically 15-20 percent). In addition, upon request by banks, the regional supervisory body (COBAC) grants every year exceptions whereby banks are allowed to lend up to 90 percent of their regulatory capital to “strategic enterprises”. Loans thus tend to be concentrated on a small number of large debtors, mainly public enterprises. At end-2009, the five largest exposures accounted for about 30 percent of bank loan portfolios.

The high exposure to large enterprises could also reflect some caution by banks in lending to smaller enterprises where NPLs are already high. The manufacturing sector, which comprises most of the large enterprises and had a low NPL ratio (6.5 percent in 2009), received 30 percent of total bank loans in 2009. By contrast, the wholesale and retail sector, which encompasses many small and medium enterprises, exhibits the highest NPL ratio (about 34 percent in 2009) and received about 13 percent of total loans.

Another risk factor is connected lending. Breaches to regulatory limits on connected lending are concentrated in banks controlled by local private shareholders. This is one factor contributing to the distress of one commercial bank in 2009.

Cameroon experienced a significant retrenchment in foreign bank loans in recent years. This has resulted from the impact of global liquidity conditions on lending to banks’ local affiliates. Other country risk factors, such as a perception of higher country risk linked to the social unrest in 2008, played a role.

The decline in Cameroon’s exposure to international banks is not just a short term phenomenon. The Bank of International Settlement (BIS) statistics point to a downward trend in international banks’ gross exposure to Cameroon over the last 10 years. The main drivers of this trend include: (i) the lack of bankable projects by international banks standards; (ii) excess domestic bank liquidity; and (iii) a changing landscape where regional banks are gaining market shares over international bank affiliates.

uA01bx03fig01

Change in External Bank Loans to Cameroon, Gabon and Nigeria

(percent of annual GDP, valuation adjusted)

Citation: IMF Staff Country Reports 2010, 259; 10.5089/9781455205776.002.A001

However, reduced international banking integration is all the more challenging for Cameroon as alternative channels of financing (like security issuance) are not yet developed. In an environment where external private financing is becoming intensely competitive, the same reforms that are needed to unfetter Cameroon’s productive potential, such as raising standards of governance and strengthening oversight institutions, are also needed to help attract sustained foreign bank inflows.

13. Banking sector vulnerabilities came to the fore in late 2009. In November, a large local bank experienced a deposit run, following the appointment of a provisional administrator due to protracted violation of prudential regulations. The authorities’ first response included a temporary waiver of the reserve requirement, moral suasion on large public entities to keep deposits at the distressed bank, and emergency liquidity provision by the BEAC. Pressures eased after the Minister of Finance announced the government’s participation in the recapitalization of the bank. An audit of the bank has been completed, and a restructuring plan is under consideration.

14. Broad money expanded moderately, reflecting the slowdown in economic activity and, consequently, in money demand. Money growth declined to 7 percent, from 13 percent in 2008. Growth of bank credit to the non-government sector slowed to 7 percent, from about 20 percent in 2008; net bank credit to the central government expanded by 20 percent; and net foreign assets by some 3.5 percent.

III. Policy Discussions: preserving macroeconomic stability and fostering growth

15. The authorities recognize that the impact of the global crisis and the recent deterioration in PFM have increased vulnerabilities. Against this backdrop, policy discussions focused on: (i) improving PFM conditions; (ii) managing risks to the 2010 budget; (iii) ensuring stability and development of the financial system; (iv) safeguarding debt sustainability; (v) promoting growth; and (vi) the medium-term outlook.

A. Improving PFM Conditions

16. The authorities and staff agreed on the urgent need to correct the weaknesses in expenditure and cash management that occurred in 2009. To mitigate the risks involved, staff advised the following policy actions:

  • Clear all arrears to SONARA to avoid serious implications for the banking system, and undertake a comprehensive audit of all outstanding UPOs;

  • Implement the 2008 CEMAC Directive on the definition of government arrears (90-day rule); avoid accumulating new arrears and limit the level of UPOs by strengthening cash management and stopping budget commitments within the prescribed time limit to prevent spillovers on the following year’s budget; 6

  • Prepare monthly fiscal data on a commitment basis and regular information for the four stages of the expenditure chain to allow for tracking the level of DENOs and UPOs, and a better assessment of the fiscal stance; and

  • Improve the cash management system by (i) preparing a periodic treasury plan; (ii) enforcing the rule requiring the use of a Treasury single account for all government operations; and (iii) avoiding expenditure outside the normal budgetary procedures, including operations by SNH on behalf of the government.

17. The authorities have started to address these challenges. Three steps have already been undertaken. First, a reconciliation of fiscal data between government departments has been conducted to assess the nature and level of UPOs accumulated in recent years. This has led to a downward revision of the initial estimate to CFAF 223.4 billion (2 percent of GDP). Second, about 70 percent of this stock was settled in the first quarter of 2010. Third, the authorities have contacted the BEAC in order to use the SDR allocation to settle the end-2009 stock of payment obligations to SONARA.

18. In addition, measures are being taken to deepen PFM reforms initiated with support from various donors. A medium-term plan for the modernization of PFM was adopted in 2009, together with institutional arrangements for its implementation. In this context, staff underscored the need to address existing shortcomings in the budget execution process, notably by:

  • Establishing effective mechanisms to track expenditure flows through the budget execution process and bring into control the level of UPOs, DENOs, and other payment obligations to prevent the emergency of new arrears in the future;

  • Enforcing the Public Procurement Code to ensure that the procurement process is competitive and that public entities do not rely on single-source contracts;

  • Improving the public investment budget by enhancing programming in line ministries; coordinating work between central (Economy and Finance) and line ministries; and building continuity for investment financing through multi-year commitment appropriations; and,

  • Strengthening the medium-term expenditure framework (MTEF) to facilitate the translation of PRSP priorities into the annual budget preparation process.

The authorities agreed that the current budget preparation and execution processes needs to be strengthened to ensure that budget allocations are consistent with the PRSP objectives, and to enhance transparency, accountability, and efficiency in the use of public resources. They stressed the need for sustained donor technical assistance in the PFM area.

B. Controlling the Risks for the 2010 Budget

19. The 2010 budget, approved in December 2009, critically relies on mobilizing domestic revenues and financing, as well as an improved execution rate for public investment. Projected revenue is based on an optimistic real GDP growth assumption (3.9 percent). Budgeted expenditures (19.2 percent of GDP, compared with 18.4 percent of GDP in 2009) provide for higher wages and salaries, subsidies (including for fuel), and a large increase in capital spending. The budget also includes a provision to clear DENOs accumulated in 2009. The overall budget deficit is projected at about 3 percent of GDP. The budget relies on two main sources of domestic financing: (i) drawings of CFA 205 billion (1.8 percent of GDP) from government deposits at the BEAC; and (ii) issuance of government bonds for CFAF 200 billion (about 2 percent of GDP) on a not-yet-operational regional market for government securities.

20. The 2010 budget framework is problematic, for the following reasons:

  • Domestic revenues are likely overestimated, owing to overstated oil production and nonoil GDP growth projections.

  • The large increase in infrastructure-related spending (to about 6 percent of GDP, from 4 percent of GDP in 2009) is unrealistic in view of Cameroon’s record of low public investment execution (about 50 percent on average over the last three years) and persistent absorption capacity problems.

  • Based on current WEO projections for world oil prices, budgeted fuel subsidies could fall short by about CFAF 60-70 billion (0.5-0.6 percent of GDP).

  • There is no provision for contingent spending linked to the government’s commitment to participate in the recapitalization of a large commercial bank.

  • The budgeted drawing on bank deposits exceeds the stock of usable deposits available. Moreover, the delayed launch of the regional bond market has prompted the authorities to limit the issuance of bonds on the shallow domestic financial market.

uA01fig01

Government Investment Budget Planned and Executed, 2005–09

(Percent of GDP)

Citation: IMF Staff Country Reports 2010, 259; 10.5089/9781455205776.002.A001

Source: Cameroonian authorities; and IMF staff estimates and projections.1Total-payment orders for services provided (by government suppliers) under budget allocations.

21. Against this background, staff advised the authorities to revise the 2010 budget, preferably through a supplementary budget. While no decision has yet been taken, the authorities agreed that the following considerations should be taken into account:

  • The allocation for fuel subsidies should prevent any further accumulation of arrears to the oil refinery. A lasting solution to this problem would require reassessing the current fuel price policy including by restoring the mechanism for the automatic adjustment of retail fuel prices; streamlining taxes on petroleum products; and replacing fuel subsidies by a more targeted social safety net. However, the authorities viewed staff advice as difficult to implement in the current social and political context.

  • A provision of CFAF 20 billion (0.2 percent of GDP) for the government’s participation in the recapitalization of the distressed bank was discussed with the authorities. This may underestimate the fiscal costs of the bank restructuring, given the still uncertain participation of private investors.

  • The execution rate for public investment should be realistic, taking into account the country’s record, and concrete actions being taken to improve absorption capacity.

  • Recourse to accumulated deposits should be considered carefully to avoid further weakening an already reduced fiscal buffer for government operations in case of exogenous shocks. The use of BEAC statutory advances, aside from their high cost, could send inconsistent signals at a time when the central bank plans to promote the development of a regional market for government securities as a replacement of this instrument. However, it could constitute a last-resort source of financing.

  • Because of limited absorption capacity of the domestic financial market, staff stressed the need to conduct the planned issuance of bonds by pre-announcing the schedule of sales, and testing the market reaction to a limited initial tranche. The authorities are discussing the issuance with domestic financial institutions.

22. The discussions led to revised projections for 2010, but a financing gap close to 2 percent of GDP still remains (Tables 2 and 3). The authorities have yet to decide on their strategy to close the residual gap. They indicated that they need more time to explore and agree on the best options. Given the past record of execution and the existing infrastructure gaps, staff cautioned on the risks for the investment budget to bear disproportionately the burden of fiscal adjustment, as this would jeopardize the objective of reducing the constraints to growth. Staff advised that sustained efforts for greater revenue mobilization and a gradual phasing out of fuel subsidies could contribute to closing the financing gap in 2010–12.

C. Safeguarding Financial System Stability

23. The authorities recognize that the concentration of bank credit is an important source of vulnerability. Liquidity problems at large common borrowers—typically state-owned enterprises—due to protracted delays in settling government’s obligations could severely affect the health of the banking system. The authorities broadly agreed with staff on the urgency of mitigating risks by:

  • Using the SDR allocation to clear the stock of arrears to the oil refinery to SONARA.

  • Closely monitoring with COBAC the evolution of banking system vulnerabilities, and requiring COBAC to strengthen oversight of systemic risks and aggregate exposures of major borrowers.

  • Facilitating a quick emergence of restructuring plans for financial institutions in difficulty; the fiscal cost of such plans should be kept to a minimum and recognized in the budget.

  • Engaging COBAC in lowering the prudential ratios on risk concentration (Box 2) and eliminating the practice of exempting strategic enterprises, with a view to gradually reduce existing large exposures and facilitate syndication and diversification of bank exposures.

24. Financial intermediation and access to bank credit remains hampered by a poorly functioning judicial system and limited information on creditworthiness of borrowers. The authorities agreed to accelerate the implementation of their action plan to deepen financial intermediation. The plan, which is based on the recommendations of the 2007 Financial Sector Assessment Program (FSAP) update mission, intends 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. Staff advised against creating specialized financial institutions (for agriculture and SME financing) that inherently involve vulnerable and undiversified sectoral loan portfolios.

D. Preserving Fiscal Sustainability

25. The medium-term fiscal anchor in Cameroon should be the nonoil primary deficit, taking into account the nonrenewable nature of oil revenue and the need to scale-up public investment to address the severe infrastructure gaps. Financing the ambitious PRSP agenda may initially translate into higher fiscal deficits and debt. However, growth dividends from resolving the severe infrastructure bottlenecks could be important to maintain a sustainable fiscal position. Staff concurred with the authorities that there is some fiscal space to accommodate much-needed capital spending. A coherent strategy would involve: (i) pursuing efforts to improve nonoil revenue mobilization; (ii) raising the execution rate of the public investment budget and developing public-private partnership in investment projects; (iii) keeping the buffer of usable government deposits at an appropriate level (at least one month of total spending); and (iv) strengthening debt management with a view to maintain a prudent borrowing policy.

26. Mobilizing nonoil revenue continues to pose a challenge. Nonoil revenue performance is still among the weakest in the region.7 Given that tax rates on capital income, labor, and consumption are already high, broadening the tax base through tax administration reforms is a key priority.8 The authorities agreed that priority should be given to:

  • Strengthening the large enterprises division (DGE), and the tax centers offering accounting and tax advice to small and medium size enterprises;

  • Simplifying and easing tax and customs procedures by, in particular, continuing to reduce the number of tax forms;

  • Streamlining exemptions and other incentive-producing tax regimes by establishing eligibility criteria, harmonizing tax benefits, and improving monitoring of recipients;

  • Continuing to combat customs fraud by a more effective tracking system to monitor transit trade;

  • Reducing the time limit for paying VAT refunds, with a view to shore up the private sector’s compliance with the VAT and improve the business climate.

Implementation of these actions, together with the projected growth in nonoil activity, is expected to generate an improvement in the nonoil revenue to nonoil GDP ratio.

27. The joint Bank-Fund debt sustainability analysis (DSA) suggests that Cameroon’s risk of debt distress remains low. This assessment is broadly unchanged from the 2009 DSA, though the baseline debt trajectory is less favorable because of recent borrowing developments and the revised fiscal outlook. However, all external debt ratios are projected to stay below the relevant thresholds under the baseline and the stress tests. The public debt burden indicators do not suggest increased concerns for debt sustainability. The authorities shared the low risk assessment. As addressing infrastructure deficiencies is considered a key priority, they see the low debt vulnerability as providing some space for a reasonable increase in debt-financed public investment.

28. Staff reiterated the need for continued prudent external borrowing. This should rely on grants and highly concessional resources (where available) to finance government operations and on improved PFM conditions to avoid domestic arrears. Alternative sources of financing should also be developed to reduce vulnerability. Staff encouraged the authorities to continue to work with BEAC and take action to develop a regional market for government securities.

E. Boosting Competitiveness and Economic Growth

29. Boosting growth is the key pillar of the new PRSP. The authorities intend to tackle the key constraints, including underinvestment in critical infrastructure, unfavorable business climate, poor public financial management, and weak regional trade integration. The new PRSP envisions significant investment in energy, roads, port infrastructure, water supply, and information technology.9 It also plans to improve the business climate and accelerate regional integration.

30. Cameroon’s exchange rate appears to be broadly in line with fundamentals, but competitiveness is hampered by nonprice factors linked to a weak business environment. The real effective exchange rate (REER) appreciated by 1.3 percent in 2009 (annual average) as the appreciation of the nominal effective exchange rate (following the appreciation of the euro against other major currencies during most of the year) was partly offset by the modest negative inflation differential between Cameroon and its trade partners. Based on the Consultative Group on Exchange Rates (CGER) approach, the REER appears broadly in line with fundamentals (Box 4). External sustainability estimates, however, indicate a moderate overvaluation. This could be corrected if the euro current weakness is sustained. Survey data on the business environment show that Cameroon ranks in the bottom quartile for most indicators (Figure 2). The 2009 Enterprise Survey highlights multiple constraints faced by investors. All these indicators show that improving Cameroon’s business environment remains a major challenge.

Figure 2
Figure 2

Cameroon: Effective Exchange Rates (EER) and Competitiveness Index, 2006–10

Citation: IMF Staff Country Reports 2010, 259; 10.5089/9781455205776.002.A001

Sources: Cameroonian authorities; IMF Information Notice System; and World Bank (Entreprise Survey, 2009; and World Economic Forum, 2009; and Doing Business database, 2010).

External Competitiveness and Real Exchange Rate Assessment

Cameroon’s real effective exchange rate (REER) is broadly in line with fundamentals.1 Three quantitative methodologies (similar to the CGER approach) were complemented by survey data analysis to assess Cameroon’s REER and competitiveness.

The macroeconomic balance approach estimates a current account norm (or equilibrium current account) based on economic fundamentals for Cameroon relative to its trading partners. Cameroon’s oil trade surplus is one of the determinants of this norm. Backward and forward refer to the 2009 current account deficit and the 2015 projection, respectively. Based on an estimate of Cameroon’s trade elasticity, a 4 percent 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 norm.

Selected Indicators of the Real Effective Exchange Rate Assessment, as of May 2010

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Backward: actual at end-2009; forward: 2015 WEO projection.

In percent of GDP, excluding grants.

Includes temporary terms of trade movements.

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

The external sustainability approach calculates the current account that stabilizes the net foreign assets (NFA)- to-GDP ratio at the end-2009 level. Based on medium-term nominal growth projections, the REER would need to depreciate by about 8 percent to stabilize NFA-to-GDP. Alternative methodologies seek to take into account the specificity of oil-producing economies, by estimating the return on oil wealth. In Cameroon, the nonoil current account deficit is larger than the expected return on oil wealth. Conclusions in terms of exchange rate misalignment are however blurred by uncertainty over total hydrocarbon (oil and natural gas) reserves.

The equilibrium real exchange rate approach models the medium-run equilibrium value of the REER as a function of fundamental factors which cause temporary but persistent deviations from long-run purchasing power parity. Panel estimation over 182 economies for the period 1973 through 2009 indicates that REER dynamics are primarily driven by variations in terms of trade, productivity, government consumption, and remittances inflows. The country specific model estimation suggests a 1 to 3 percent overvaluation for Cameroon.

Survey data analysis provides qualitative information on structural obstacles to competitiveness. The 2009-10 Global Competitiveness Index ranks Cameroon 111th out of 133 countries. The 2010 Doing Business Report places Cameroon at 171st of 183 countries, with particularly low rankings for Starting a Business (174th), Enforcing Contracts (174th) and Paying Taxes (170th). The 2009 World Bank Enterprise Survey provides a very similar picture. All these indicators underscore that Cameroon’s overall business environment is holding back its competitiveness.

1 The recent Euro depreciation, if sustained, would contribute to improving the price competitiveness of Cameroon.

Competitiveness Index and Doing Business Indicators

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Sources: Cameroonian authorities; IMF Information Notice System; and World Bank (Entreprise Survey, 2009; and World Economic Forum, 2009; and Doing Business database, 2010).

31. Staff welcomed the authorities’ initiatives to strengthen the dialogue between the government and the private sector, in particular the Cameroon Business Forum.10 It emphasized the need, however, to support these efforts with PFM reforms that would reduce, and eventually eliminate, government arrears, and to sustain public enterprise reforms.11 Efforts under way to improve governance, ensure the transparency of the government budget, and hold managers of public resources accountable, could reduce the uncertainty that surrounds the regulatory and judicial framework.

32. Progress in trade liberalization remains key. The currently high customs duties are a disincentive to private investment and productivity growth. Staff emphasized the need to (i) pursue negotiations with the other CEMAC member states with a view to reduce the level and range of the common external tariff (CET), in particular regarding imported machinery and equipment; (ii) accelerate efforts supporting regional integration by harmonizing the rules of origin and streamlining CET exemptions; and (iii) conclude a regional economic partnership agreement with the European Union. The authorities broadly agreed with staff recommendations. However, they noted difficulties in coming to an agreement with their regional partners on trade issues.

F. Medium-Term Outlook

33. Staff concurred with the authorities that Cameroon’s economic outlook is likely to improve, although less than anticipated in the new PRSP. The positive outlook is driven by the expected recovery of the global economy, the projected increase in public capital spending, and ongoing initiatives to improve the business climate.12

  • Oil production is expected to contribute to real growth during 2012-14, with SNH projections pointing to an average annual increase in oil production of about 20 percent during that period, followed by a resumption of the declining trend. The projected increase reflects ongoing oil investments, after successful exploration efforts over the last three years.

  • Nonoil sector growth is expected to gradually respond to structural reforms and alleviation of infrastructure gaps.13

Overall, staff’s projections envision a gradual but sizeable increase in overall growth (from 2.6 percent in 2010 to close to 5 percent in 2014, followed by a decline in 2015 under the effect of projected lower oil production (Text Table 4). The external current account deficit would widen in 2011, but would thereafter narrow gradually to reach close to 1 percent of GDP in 2014. Efforts to tackle infrastructure bottlenecks should result in a relatively high nonoil primary deficit (around 5 percent of GDP) but a steady flow of oil revenue will gradually lower the overall budget deficit and eliminate the financing gap by 2013.14 Inflation is expected to remain below the regional convergence criteria of 3 percent, barring new exogenous shocks.

Text Table 4

Cameroon: Selected Macroeconomic Indicators, 2009–15

(Units indicated)

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

Percentage change.

Percent of GDP.

Percent of nonoil GDP.

34. The medium-term macroeconomic framework is subject to significant downside risks. These include: (i) the uncertain pace and strength of global recovery; (ii) the fiscal framework hinges on the coverage of financing gaps that may not materialize; (iii) a vulnerable banking sector that may generate contingent fiscal liabilities; and (iv) delays in the implementation of reforms in a pre-election environment.

IV. Staff Appraisal

35. After a slowdown in activity as a result of the global crisis, there are signs that Cameroon’s economy has started to recover. Growth is expected to increase, helped by a pick-up in external demand, public investment in basic infrastructure, and ongoing initiatives to improve the business environment. However, there are risks to the projected favorable outlook stemming from (i) uncertainty on the strength and duration of the global recovery; (ii) lack of financing to cover the projected fiscal gap; and (iii) possible delays in the implementation of reforms ahead of the upcoming elections.

36. Strengthening PFM is critical to maintain fiscal and financial sector stability. Weaknesses in budget management that came to the fore in 2009 need to be decisively corrected. The authorities are encouraged to strengthen expenditure and treasury management, audit outstanding arrears comprehensively, and set in place processes to limit the accumulation of unsettled payment obligations. This is key to reducing adverse spillover effects on other sectors, and to enhancing policy credibility.

37. The authorities need to be vigilant against banking sector risks. While domestic banks have been relatively insulated from the global financial crisis, the excessive concentration of bank exposure to a few large enterprises, especially the national oil refinery, continues to pose systemic risks. These risks have been exacerbated by protracted delays in settling government obligations, and by inadequate supervisory standards. In collaboration with the regional supervisor, the authorities need to take resolute steps to: (i) monitor banking sector vulnerabilities through regular analysis of banking sector soundness indicators; (ii) promote a sound and rapid restructuring plan for a sizeable bank in difficulty; and (iii) foster the adoption of best practices on prudential ratios on risk concentration, eliminate existing exceptions in favor of some enterprises, and implement gradually but consistently these changes.

38. The 2010 budget needs to be revised. The authorities have discussed with staff some adjustments to the budget. To ensure transparency, a supplementary budget should be prepared and presented to the National Assembly. This will give the authorities an opportunity to realign non-priority spending and adopt other corrective measures that could help reduce the remaining financing gap. It will also help prevent any undue compression of priority public investment and the incurrence of new domestic arrears.

39. Increasing Cameroon’s growth will require concrete actions to address the existing bottlenecks. Staff recognizes the need to address severe infrastructure gaps, thereby helping to promote private investment. Achieving these objectives will require raising the execution rate for public investment, improving absorption capacity, and reducing regulatory uncertainty. Cameroon’s REER appears to be broadly in line with fundamentals, but competitiveness remains hampered by nonprice factors related to the weak business environment. Staff encouraged the authorities to take concrete actions to implement ongoing initiatives to improve the business climate.

40. The updated LIC-DSA shows that Cameroon’s risk of debt distress is low. The authorities need, however, to continue to implement a prudent borrowing policy that relies on grants and highly concessional loans for financing their development program. They also need to continue to work with regional institutions to develop rapidly a regional market for government securities, a key step in reducing the current vulnerability to external financing shocks.

41. Close monitoring of financial sector developments is warranted. Given the current vulnerable situation, staff recommends that the authorities closely monitor financial sector developments to detect changes in risk factors at an early stage.

42. Staff recommends that the next Article IV consultation take place within 12 months.

Table 7.

Cameroon: Millennium Development Goals, 1990-2008

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Source: World Development Indicators, The World Bank.
1

Wood exports, however, continue to suffer from a weak economic recovery in Europe.

2

Arrears cleared in 2009 were part of the stock of arrears audited in 2005 and 2007. Out of the total stock of arrears recognized by past audits, about CFAF 120 billion remained outstanding at end-2008. The government’s plan is to have all this stock cleared by end-2014, as agreed under the PRGF program—thus fiscal accounts tables include scheduled flows of arrears to be cleared annually (about CFAF 20 billion).

3

Usable government deposits are those readily available (not earmarked) for government operations.

4

UPOs are not recognized as arrears in Cameroon, regardless of the date of issue of the payment orders, and are only recorded in the table of central government operations at the time of their payment. Cash spending in each year reflects in part payment of previous years’ UPOs.

5

Long delays in government payments to SONARA strained its liquidity and magnified its bank borrowing needs. By end-2009, SONARA had become the largest borrower for nine out of the twelve banks operating in Cameroon. For several banks, exposure to SONARA reached more than 90 percent of regulatory capital.

6

The Fiscal Regime Law requires that commitments be stopped at end-November in each fiscal year.

7

The ratio of nonoil revenue to nonoil GDP was 12.5 percent over 2007-09, compared with about 16.5 percent average for nonoil low-income SSA countries.

8

The current VAT and most excises are already set at the maximum allowed by the CEMAC directives. The prevailing VAT rate is 19.25 percent. The standard rate for excises is 25 percent. The Corporate income tax rate is 38.5 percent. Personal income tax rates range from 10 to 35 percent. The oil and forestry sectors are subject to additional taxes through special regimes applicable for these activities.

9

Large projects have been identified in the new PRSP for key sectors of the economy and most of them are expected to be funded through public–private partnerships. These include energy (Kribi natural gas power station, Lom Pangar hydropower dam); transport (rehabilitation and upgrading of existing road network, deep sea port in Kribi, construction of new railway facilities); and water distribution (rehabilitation and extension of existing infrastructure).

10

The Cameroon Business Forum was created in early 2009 with IFC assistance and held its first session in February 2010. It has pushed for concrete measures to improve the business climate, notably by simplifying procedures and creating a one-stop window to start a business.

11

The airline company has a new management since February 2010. A bidding process for the telecommunication company was launched in 2009 but was unsuccessful. A new privatization strategy, through a public-private partnership, is being prepared. Restructuring options for the postal services company (CAMPOST) are being explored with a key development partner.

12

The baseline scenario assumes a gradual moderate increase in private investment from 12.4 percent of GDP in 2009 to 13.5 percent in 2015.

13

Recent staff assessment of the growth-accounting framework points to the need to boost productivity through structural reforms and investment in infrastructure, and improving human capital (IMF Country Report No. 07/285, August 2007).

14

The medium-term framework assumes that the level of UPOs will be stabilized to less than 5 percent of total non-interest expenditure by end-2010, consistent with a normal amount of float from treasury operations, and maintained at this level throughout 2015. Liquidated DENOs to be paid each year are factored in each spending item and not shown separately in the 2011-15 projections.

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Cover IMF Staff Country Reports
Cameroon: 2010: Article IV Consultation: Staff Report; Debt Sustainability Analysis; Staff Report Supplement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Cameroon
Author:
International Monetary Fund
Volume/Issue:
Volume 2010: Issue 259
Publisher:
International Monetary Fund
ISBN:
9781455205776
ISSN:
1934-7685
Pages:
59
DOI:
https://doi.org/10.5089/9781455205776.002
  • Figure 1.
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    Figure 1.

    Cameroon: Comparative Indicators and Economic Structure, 1980–2009

  • View in gallery
  • View in gallery

    Change in External Bank Loans to Cameroon, Gabon and Nigeria

    (percent of annual GDP, valuation adjusted)

  • View in gallery

    Government Investment Budget Planned and Executed, 2005–09

    (Percent of GDP)

  • Figure 2
    View in gallery
    Figure 2

    Cameroon: Effective Exchange Rates (EER) and Competitiveness Index, 2006–10

Figure 1.

Cameroon: Comparative Indicators and Economic Structure, 1980–2009

Change in External Bank Loans to Cameroon, Gabon and Nigeria

(percent of annual GDP, valuation adjusted)

Government Investment Budget Planned and Executed, 2005–09

(Percent of GDP)
Figure 2

Cameroon: Effective Exchange Rates (EER) and Competitiveness Index, 2006–10