Cameroon: 2013 Article IV Consultation
Author:
International Monetary Fund. African Dept.
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Publication Date:
09 Sep 2013
eISBN:
9781475554885
Language:
English
Keywords:
ISCR; CR; real GDP; authority; loan; debt; government arrears; growth potential; oil revenue; GDP deflator; reform momentum; Energy subsidies; Arrears; Global; Sub-Saharan Africa; Europe; emerging market economy; IMF debt sustainability analysis; SONARA bankruptcy; gradual adjustment; Oil; gas and mining taxes
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Macroeconomic performance improved in 2012, but it masks persistent vulnerabilities. Growth was again robust, yet insufficient to improve per capita income significantly. The enabling environment for private sector-led growth is slow to materialize, and growth dividends and productivity gains expected from large infrastructure projects are delayed. The recorded lower fiscal deficit is a step in the right direction, but fiscal reserves have been depleted. Untargeted fuel subsidies undermine pro-poor spending, and domestic arrears accumulation and an increase in nonconcessional external financing may compromise desirable fiscal space going forward.

Abstract

Macroeconomic performance improved in 2012, but it masks persistent vulnerabilities. Growth was again robust, yet insufficient to improve per capita income significantly. The enabling environment for private sector-led growth is slow to materialize, and growth dividends and productivity gains expected from large infrastructure projects are delayed. The recorded lower fiscal deficit is a step in the right direction, but fiscal reserves have been depleted. Untargeted fuel subsidies undermine pro-poor spending, and domestic arrears accumulation and an increase in nonconcessional external financing may compromise desirable fiscal space going forward.

Economic Stasis

Macroeconomic performance improved in 2012, but it masks persistent vulnerabilities. Growth was again robust, yet insufficient to improve per capita income significantly. The enabling environment for private sector-led growth is slow to materialize, and growth dividends and productivity gains expected from large infrastructure projects are delayed. The recorded lower fiscal deficit is a step in the right direction, but fiscal reserves have been depleted. Untargeted fuel subsidies undermine pro-poor spending, and domestic arrears accumulation and an increase in nonconcessional external financing may compromise desirable fiscal space going forward.

1. Cameroon has maintained macroeconomic stability, but its robust growth record has fallen short of the authorities’ ambition to reach emerging market economy status by 2035. It also remains vulnerable. Since debt cancellation under the Heavily Indebted Poor Countries initiative in 2006, the risk of debt distress has remained low, and annual inflation has stayed subdued in the context of the CFA franc peg to the euro (the arrangement is classified as conventional peg; Figure 1). However, per capita real GDP and most social indicators have stagnated, despite an abundant and diversified natural resource base (Text Table 1; Figure 2). Private sector development has been constrained by insufficient electricity supply, inadequate public infrastructure, an unpropitious business climate, poor public financial management (PFM), a shallow financial sector, and weak regional economic integration, even within the Central African Economic and Monetary Community (CEMAC). High subsidies, arrears accumulation, and increasingly nonconcessional financing fuel macroeconomic vulnerabilities.

Figure 1.
Figure 1.

Cameroon: Public Debt, 2005–12

(Percent of GDP)

Citation: IMF Staff Country Reports 2013, 279; 10.5089/9781475554885.002.A001

Source: Cameroonian authorities.
Text Table 1.

Cameroon: Economic and Social Indicators

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Sources: IMF, African Department and WEO databases, 2012; and The World Bank, World Development Indicators database, 2013.
Figure 2.
Figure 2.

Cameroon: Nominal GDP, 2012

(Percent of total)

Citation: IMF Staff Country Reports 2013, 279; 10.5089/9781475554885.002.A001

Source: Cameroonian authorities.

2. Policy inertia has continued in a context of multiple elections. A first-time Senate was inaugurated in May 2013, but a date has yet to be set for legislative and municipal elections, which have been postponed since mid-2012. This environment has resulted in policy inertia, notwithstanding major challenges confronting the country, e.g., widespread poverty, youth unemployment, and disparities in wealth distribution. Policy inertia is contributing to vulnerabilities and is a source of potential macroeconomic instability. Past IMF advice has had mixed traction because of the political sensitivities involved in the implementation of some recommendations and the authorities’ inclination for a slower pace of reforms (Box 1).

Cameroon: Response to Past IMF Advice

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3. Economic recovery consolidated in 2012. Growth picked up marginally in 2012, helped by a turnaround in oil production (Tables 1–5 and 8–9). Real GDP is estimated to have grown by 4.4 percent (up from 4.1 percent in 2011; Figure 3). The rise in oil production was partially offset by stagnating electricity supply and a slowdown in the construction and public work sector, in part owing to the transition to new public procurement processes (Text Table 2). Average inflation moderated to 2.4 percent (from 2.9 percent in 2011), notwithstanding a 3.1 percent effective depreciation of the CFA franc, pegged to the euro.

Table 1.

Cameroon: Selected Economic and Financial Indicators, 2011–18

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

Beyond 2012, WEO price in US$ a barrel, minus a discount of US$6 for the uncertainty (prudence factor) and US$3 for the quality of Cameroon’s oil.

Percent of broad money at the beginning of the period.

Projections are taken from the 2013 Debt Sustainability Analysis (DSA), which excludes the stock of debt on which France provided debt relief under the “Contrat de désendettement et de développement” (C2D).

Table 2.

Cameroon: Central Government Operations, 2011–18

(CFAF billions, unless otherwise indicated)

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Sources: Cameroonian authorities and IMF staff estimates and projections.

Figures for 2011 and 2012 exclude customs and VAT taxes due by SONARA that were the objects of cross-cancellations against fuel subsidies due to SONARA (i.e., the revenue is presented on a net basis). From 2013 onward, projections for these taxes are made on a gross basis. Taxes owed by SONARA are projected at CFAF 145 billion in 2013.

Figures for 2011 and 2012 include securitization of fuel subsidies due to SONARA.

The figure for 2012 includes securitization of arrears owed to SONARA. The figure for 2013 includes CFAF 120.3 billion owed to private companies who imported fuel products for the government in 2012. It is assumed that CFAF 56 billion of the CFAF 120.3 billion was paid in 2012.

Table 3.

Cameroon: Central Government Operations, 2011–18

(Percent of GDP, unless otherwise indicated)

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

Figures for 2011 and 2012 exclude customs and VAT taxes due by SONARA that were the objects of cross-cancellations against fuel subsidies due to SONARA (i.e., the revenue is presented on a net basis). From 2013 onward, projections for these taxes are made on a gross basis. Taxes owed by SONARA are projected at CFAF 145 billion in 2013.

Figures for 2011 and 2012 include securitization of fuel subsidies due to SONARA.

The figure for 2012 includes securitization of arrears owed to SONARA. The figure for 2013 includes CFAF 120.3 billion owed to private companies who imported fuel products for the government in 2012. It is assumed that CFAF 56 billion of the CFAF 120.3 billion was paid in 2012.

Table 4.

Cameroon: Balance of Payments, 2011–18

(CFAF billions, unless otherwise indicated)

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Sources: Cameroonian authorities; and Fund staff estimates and projections.
Table 5.

Cameroon: Monetary Survey, 2011–18

(CFAF billions, unless otherwise indicated)

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

Deposits that are readily available for government operations.

Excluding foreign-financed investment.

Text Table 2.

Cameroon: Sectoral Contribution to Real GDP Growth, 2006–12

(Percent)

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Source: Cameroonian authorities.

4. The overall fiscal deficit, on a cash basis, contracted. Revenue exceeded budget projections by 1.2 percentage points of GDP, mainly because of higher-than-budgeted oil revenue, while expenditure was broadly in line with budget appropriations. An overrun of 0.5 percentage point of GDP on subsidies and transfers was offset with lower-than-budgeted capital execution. The recorded budget deficit amounted to 2.0 percent of GDP (3.6 percent in 2011). It was financed by external borrowing (half of which came from emerging creditors) and a further drawdown of government deposits at the regional central bank (BEAC) that fell to the equivalent of 0.2 month of expenditure.

5. However, the stock of government arrears and other payment obligations further increased, mainly on account of rising fuel subsidies. The government did settle all outstanding arrears at end-2011 toward the national refinery (SONARA) in 2012 through cash payments, cancellation of taxes owed, and securitization. However, the continued freeze of retail fuel prices at their 2008 level resulted in new, accrued fuel subsidies, representing 3.4 percent of GDP in 2012. Because of insufficient budget appropriations, these subsidies could be settled only partly. Part of the balance was settled through securitization and tax cancellation, and the rest constituted new arrears. The government also settled a large amount of previous years’ unsettled payment orders, but also accumulated new ones. As a result, the total stock of the government’s arrears and other payment obligations increased from 3.9 percent of GDP at end-2011 to 4.7 percent of GDP at end-2012 (Tables 6 and 7, Figure 4, Appendix I).

Figure 3.
Figure 3.

Cameroon: Selected Economic Indicators, 2008–12

Citation: IMF Staff Country Reports 2013, 279; 10.5089/9781475554885.002.A001

Sources: IMF African Department Database; and IMF staff estimates.
Table 6.

Cameroon: Obligations to SONARA, 2007–12

(CFAF billions, unless otherwise indicated)

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

Fuel subsidies in 2012 do not include CFAF 120.3 because of imports of refined products by private companies.

Stock (n) = Stock (n-1) + Net accumulation of arrears (n).

Table 7.

Cameroon: Government Arrears and Other Payment Obligations, 2009–12

(CFAF billions, unless otherwise indicated)

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

Partial audits conducted in 2009, 2010, and 2012 revealed stocks of CFAF 90 billion, 18 billion and 7 billion in new arrears, respectively. These are included in the end-2009, 2010, and 2012 stocks of audited arrears, respectively; this may create discrepancies in flow figures in certain years.

Table 8.

Cameroon: Central Government Operations, 2011–18 (GFSM2001 Presentation)

(CFAF billions, unless otherwise indicated)

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

Rehabilitation and participation shows General Government’s capital transfers.

Table 9.

Cameroon: Central Government Operations, 2011–18 (GFSM2001 Presentation)

(Percent of GDP, unless otherwise indicated)

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

Rehabilitation and participation shows General Government’s capital transfers.

Figure 4.
Figure 4.

Cameroon: Government Arrears and Payment Obligations, 2009–12

Citation: IMF Staff Country Reports 2013, 279; 10.5089/9781475554885.002.A001

Sources: Cameroonian authorities; and IMF staff estimates.

6. Growth in recent years has had no significant impact on poverty, but it has been relatively inclusive. Overall income poverty has remained virtually unchanged (40.2 percent in 2001 and 39.9 percent in 2007), but its composition has changed—it has decreased by 5.7 percent in urban areas, but increased by 2.9 percent in rural ones. During this period of low per capita growth (0.6 percent per annum), per capita consumption (a proxy for income) has increased by 0.8 percent per annum for all Cameroonians, and by 1 percent for the poorest quartile, thus pointing to somewhat increased inclusiveness. However, inequality remains high: the country-wide Gini coefficient is 0.39. Past policies have had a limited pro-poor focus. A Public Expenditure Review1 by the World Bank indicated that allocations to social sectors had been losing ground to general state functions since 2005. Reforms of the business environment have not caused enterprises to leave the informal sector, which accounts for 90 percent of economic activity, but does not contribute to tax revenue, escapes regulatory requirements, and does not provide social protection to its workers.

7. The public enterprise sector has had a lackluster performance. It comprises about 125 enterprises (21 wholly publicly owned, 46 partially publicly owned, and 58 government administrative agencies in education, health, etc.) The authorities have been carrying out public enterprise reform to reduce the burden on the budget and improve performance, but progress has been slow.

8. Data provision to the IMF is broadly adequate for surveillance, but important gaps remain in fiscal, external, and financial sector information because of lack of capacity. Government financial operations on a commitment basis are not available. The quality and timeliness of balance of payments statistics, particularly the capital and financial accounts, need to be improved. Monetary data availability is untimely, and information on bank lending and deposit rates is lacking. The authorities’ strategy for improving statistics with donor assistance led to the publication of the first quarterly national accounts in 2012.

Balanced Outlook with Moderate Risks

The medium-term outlook for Cameroon is predicated on a continuation of the authorities’ current policies, focusing on the implementation of a number of large public investment projects, pursuing a fiscal path with large financing gaps, and proceeding with ongoing administrative reforms. These policies are expected to deliver somewhat higher real GDP growth, but do not address, as forcefully as needed, still low but growing risks to macroeconomic stability. A possible reform scenario was discussed with the authorities (see below).

9. Economic growth is projected to increase gradually over the medium term under current policies (Figure 5). Staff projects real GDP growth to increase from 4.4 percent in 2012 to 5.5 percent in 2018. These projections are predicated on cautious expectations about the pace of execution of large infrastructure and power supply projects (Figure 6) and the associated private sector response. The hydrocarbon sector is expected to boost growth, because ongoing investments in oil and natural gas production by the National Hydrocarbons Company (SNH) and private companies are coming onstream. Growth is to be also supported by ongoing efforts to boost agricultural productivity and measures to improve the business environment. The authorities are expecting higher medium-term growth—over 6 percent on average.

Figure 5.
Figure 5.

Cameroon: Medium-Term Outlook, 2013–18

Citation: IMF Staff Country Reports 2013, 279; 10.5089/9781475554885.002.A001

Sources: IMF African Department Database; and IMF staff projections.
Figure 6.
Figure 6.

Cameroon: Power Supply, 2010–18

(Megawatts)

Citation: IMF Staff Country Reports 2013, 279; 10.5089/9781475554885.002.A001

Sources: Cameroonian authorities; and IMF staff projections.

10. Inflation is projected to remain below the 3 percent regional convergence criterion. It is dependent on the prices of foodstuffs, which tend to exhibit larger upward adjustments because the shallowness of markets. Inflation is projected to exceed inflation in the main trading partners (e.g., the euro area) slightly. This should not hamper external competitiveness much in the near term, but may have policy implications over time. This projection is also based on a continued freeze in fuel prices.

11. The external current account deficit is projected to stabilize at around 4 percent of GDP in the medium term. The continued rebound in oil exports is projected to be accompanied by higher non-oil exports, whose competitiveness should benefit gradually from the forthcoming alleviation of the infrastructure and energy gaps. The stronger export performance is expected to offset the projected increase in imports. The external current account deficit is expected be financed mainly by new external borrowing, as well as by foreign direct investment.

12. The medium-term fiscal outlook is turning negative. The overall fiscal deficit in terms of GDP is expected to widen in 2014–18 because of declining revenue, owing to softer international oil prices, and higher capital expenditure, associated with large infrastructure projects. Although non-oil revenue to non-oil GDP is projected to rise by about a ½ percentage point, as a result of ongoing improvement efforts in tax and customs administrations, this increase will not be sufficient to offset the decline in oil revenue. The implementation of the large infrastructure projects will require a further increase in capital expenditure, which is projected to reach 7¼ percent of GDP by 2018.

13. Medium-term macroeconomic stability could be threatened by still low but growing risks (Risk Matrix). Cameroon’s outlook could be adversely affected by exogenous risks, of which the most important is a protracted global slump, especially in the euro area. Endogenous risks include (i) rising fuel subsidies; (ii) contingent liabilities arising from distressed banks and public enterprises; (iii) slow progress in raising non-oil revenue; (iv) escalating nonconcessional financing, (v) excessive credit concentration jeopardizing the banking system and the real sector; (vi) delays in the implementation of the public investment program; and (vii) widespread unemployment.

14. The risk of debt distress remains low, despite a steady rise in the debt burden. The joint World Bank-IMF debt sustainability analysis (DSA; companion paper) suggests that all external debt ratios would remain below their respective policy-dependent thresholds, including under standard stress tests, provided the prevalence of nonconcessional debt observed during the last few years is reined in, and borrowed resources are used to finance projects with a sufficient growth payoff.2 However, the debt burden is likely to rise significantly—taking into account borrowing needed to finance projected budget deficits and the recent trend toward nonconcessional borrowing.

Policy Discussion: Unleashing High Growth Potential

The overarching economic challenge is to set Cameroon on a higher, sustainable, and more inclusive growth path within a stable macroeconomic environment. Cameroon’s ambition to become an emerging market economy by 2035 is unlikely to be achieved without an acceleration of growth, which requires addressing risks, increasing the efficiency of public spending, and suppressing bottlenecks to boost private sector response.

A. Containing Risks to the 2013 Budget

15. The authorities’ 2013 budget is set to expand. It is predicated on an annual growth rate of 6 percent and projects a slightly larger deficit than in the previous year’s budget. Revenue is projected to increase by about ½ percentage point of GDP on account of tax and customs administrations reforms. This is to be offset by a larger increase in capital expenditure. The overall budget deficit (2½ percent of GDP) is expected to be fully financed by net external borrowing and a net security issue on the regional market in comparable proportions.

16. The budget is likely to come under stress. Staff projects a deficit twice as large as projected in the budget, resulting in a financing gap of 3¾ percent of GDP because of recurrent stress factors:

  • In the absence of significant policy change, revenue is projected more conservatively by staff to remain broadly stable relative to the 2012 outturn.3

  • As in previous years, the budget incorporates only about half of the expected cost of fuel subsidies, as estimated by the Hydrocarbon Price Stabilization Fund (CSPH).

  • There is no provision in the budget for the payment of outstanding obligations to SONARA and other fuel importers at end-2012 (2 percent of 2013 GDP).

  • Staff thinks that the likely amount of the security issue will be only 40 percent of the amount targeted in the budget.

17. The staff encouraged the authorities to contain the 2013 budget deficit and close the projected financing gap. To reduce the financing need and prevent further accumulation of domestic arrears, staff advised to take the following short-term measures (i) reduce excessive tax exemptions; (ii) reprioritize public expenditure and eliminate non-essential expenditure (e.g., subsidies); (iii) start phasing out fuel subsidies; and (iv) start preparing a contingency plan in case the security issue proves unlikely to be completed. Staff encouraged the authorities to transcribe these changes into a revised budget law to be submitted to parliament as soon as possible.

Authorities’ views

18. The authorities downplayed staff’s concerns about budget risks. They conceded that fuel subsidies were likely to exceed their appropriation again this year. They thought, however, that the shortfall would be addressed by the usual mix of cross-cancellation of mutual debts, securitization, and payment deferrals. They also did not share staff’s concerns about the possibility of lower-than-planned security issue. They noted that the issue was meant to finance infrastructure projects and therefore a lower issue would be compensated by lower capital expenditure.

B. Mitigating Risks to Medium-Term Fiscal Sustainability

19. Under the baseline scenario, further financing gaps could threaten medium-term fiscal sustainability. The medium-term baseline projections assume a small improvement in non-oil revenue mobilization, a continued freeze in retail fuel prices, and execution of the government’s growing investment program. On this basis, the non-oil primary deficit (NOPD) is projected to remain at about 9 percent of non-oil GDP in the medium term, and annual financing gaps of about 2¾ percent of GDP would persist, leading to a significant increase in the public-debt-to-GDP ratio, which would rise from 16 percent at end-2012 to 34 percent at end-2018.

20. Staff made the following recommendations on structural measures to buttress medium-term fiscal sustainability:

  • Strengthen revenue mobilization through improved tax collection capacity and a widening of the tax base, because marginal tax rates are already high. To increase non-oil revenue, reforms need to be accelerated to simplify and modernize complex tax procedures,4 strengthen human resources of tax and customs administrations, improve tax centers’ information technology systems, and widen the list of tax payers, through the creation of additional tax centers and regional surveys.

  • Gradually phase out fuel subsidies and eliminate arrears to SONARA through a combination of cash transfers and securitization. As a first step, streamline the fuel price formula and replace SONARA’s markup in the price structure with direct budget transfers to improve budget transparency, as recommended by FAD technical assistance. These changes may be done without affecting pump prices. A gradual pump price adjustment mechanism, including some smoothing feature to dampen volatility, should then be adopted as soon as possible, to ensure full cost recovery over time. The price of kerosene, mostly used by the most vulnerable segments of the population, would not need to be adjusted initially. These measures would need to be accompanied by appropriate communication and the development of well-targeted programs to limit their impact on the neediest groups.

  • Curb transfers to public enterprises while improving their supervision and fostering greater efficiency. The authorities should complete pending reforms, in particular for telecommunications, postal service, and air transport, to reduce subsidies and to improve the quality of service. Staff recommended strengthening the monitoring of public enterprises’ contingent liabilities through a comprehensive database on public enterprise debt.

  • Adopt a path for the NOPD as a fiscal anchor to preserve fiscal sustainability, taking public investment needs for infrastructure into account. Staff analysis indicates that an NOPD below 6 percent of non-oil GDP would be consistent with maintaining a low risk of debt distress.5

  • Issue regional securities in amounts and at a pace consistent with market absorptive capacity and regional financial sector stability. Such issues will need to be restricted to projects with a high growth payoff.

  • Rebuild the government’s cash deposits to at least the equivalent of one month of public expenditure to be able to respond to spending contingencies.

  • Avoid the reemergence of debt vulnerabilities by (i) contracting new external loans on as concessional terms as possible, including through open competition among potential creditors; (ii) limiting nonconcessional external financing to worthy projects; (iii) enhancing the oversight power and capacity of the national public debt committee; (iv) entrusting the power to contract public debt only to the Minister of Finance; (v) evaluating and monitoring contingent liabilities of public enterprises; and (vi) conducting periodic audits of all outstanding payment obligations.

Authorities’ views

21. The authorities acknowledged the need to rebuild fiscal buffers and ensure fiscal sustainability over the medium term. They reiterated their commitment to improve non-oil revenue mobilization, as reflected in the revisions made to their reform plans for tax and customs administrations, in line with the recommendations of recent FAD technical assistance. The authorities, however, did not see merit in following a tighter NOPD rule given the large public infrastructure gap. They recognized that rising fuel subsidies were unsustainable, and should be reined in through efficiency gains at SONARA and gradual adjustments in pump prices. They agreed that these reforms needed to be well prepared and accompanied by appropriate mitigating measures to build consensus, limit inflationary impact, and preserve social peace. They would not specify a timeline for these reforms though, especially in the run-up to elections.

C. Strengthening Public Financial Management

22. The authorities have embarked upon an ambitious PFM modernization plan.

  • They identified the main reforms needed for the gradual introduction of the six PFM directives adopted by the CEMAC in December 2011 into Cameroon’s legal framework.6 Among the plan’s priorities are the adoption of GFSM2001 standards and the strengthening of external controls and parliamentary oversight.

  • The authorities have initiated program budgeting with the 2013 budget. However, some transitional technical difficulties arose in adapting budget and accounting information systems to programmatic classifications and multiyear spending authorizations.

23. The government’s development strategy critically hinges on the efficiency and effectiveness of the public investment program. This program requires a strengthened PFM framework to avoid misuse of, and improve returns on, investment spending. Some progress was made in recent years in increasing the transparency of procurement, but significant governance concerns remain. To address this issue, a ministry of public procurement was established last year, but it is too early to determine whether it has improved the governance of procurement. In addition, the quality of capital expenditure remains impaired by weak project appraisal and evaluation capacity, and accumulation of payment obligations to private contractors.

24. Staff recommended the following measures to strengthen PFM over the medium term:

  • Address the issue of domestic arrears by (i) clearing all arrears to SONARA to avoid serious implications for the banking system; (ii) completing a comprehensive audit of government payment obligations; (iii) updating a multiyear plan to settle validated arrears; (iv) limiting the level of unsettled payment orders (UPOs) by strengthening forecasting and cash management; and (v) budgeting the full cost of fuel subsidies in future budgets.

  • Improve fiscal reporting and budget transparency by (i) moving toward a single treasury account rule and avoiding spending commitments outside normal budget procedures; (ii) projecting and reporting taxes and subsidies on a gross basis, instead of relying on ad hoc cross-cancellations; (iii) preparing monthly fiscal data on a commitment basis along with improving the financial information management system to track the flow of funds through the four stages of the expenditure chain; and (iv) reconciling differences in reporting oil sector revenue between the budget and the SNH.

  • Build capacity for investment planning, evaluation, and execution, because adequate appraisal and management capacity are a prerequisite for efficient infrastructure investment.

Authorities’ views

25. The authorities noted that improving PFM was a complex reform process that would have to be sustained over several years. They indicated that the technical difficulties encountered when initiating budget programming were being worked out, and emphasized that this important reform was all the more challenging because it required a fundamental change in administrative culture. They were hopeful that this reform would lead to stronger PFM in the years to come.

D. Promoting Sound Financial Intermediation

26. Conditions in the banking sector have somewhat improved, but the situation varies across banks (Appendix II). Capital adequacy has improved somewhat across the banking system, but remains weak in problem banks. Aggregate numbers hide a wide disparity in prudential ratios.7 Prudential indicators are improving, albeit slowly, at a larger troubled bank and a long-overdue restructuring plan for a medium-size regional bank is coming closer to implementation. However, three other small banks still show negative equity. The rest of the banking system is sound, but vulnerable to a concentration on a few sectors and corporations. In addition, persistent government arrears to SONARA translate into a substantial credit risk for the banking sector. In parallel, the authorities are in the process of creating a new specialized bank to assist small and medium-size enterprises.

27. The staff urged the authorities to take swift action to resolve financial problems at the troubled banks. In one case, this involves a recapitalization from public funds and the creation of a separate entity that would take on impaired assets. Going forward, staff recommended that the government recover as much as possible of the bad assets and seek private investors for taking over the recapitalized bank. The other three non-systemic banks require prompt resolution or liquidation to protect depositors. The government should avoid increasing public deposits at troubled banks. The staff agreed with the regional bank regulator (COBAC) that it will be of paramount importance to provide close supervision (i) to the newly created public bank to avoid possible contingent liabilities, as has been the case in the past; and (ii) to large microfinance institutions, whose activities are expanding.

28. Further institutional reforms are necessary to improve the legal framework of credit. The launching in June 2013 of three databases on payment incidents, and financial statements from non-financial enterprises and microfinance institutions will help assess the creditworthiness of potential creditors and encourage lending. Nonetheless, further reforms are needed, including (i) improving procedures for recording and enforcing guarantees; (ii) improving the operations of land and commercial registries; and (iii) strengthening creditor rights enforcement by enhancing the effectiveness of the courts.

29. Staff encouraged the authorities to engage other CEMAC member states in strengthening the regional bank crisis prevention and resolution framework. Staff stressed the need for a new regional regulation on crisis resolution, whose preparation could benefit from IMF technical assistance. This regulation should (i) allow the authorities to intervene early in bank resolution; (ii) define clearly the responsibilities of regional and national bodies and the scope of judicial review; and (iii) prevent shareholders of insolvent banks from participating in restructurings. The recruitment underway at COBAC needs to be completed to allow COBAC to monitor the increasing number of financial institutions and to boost the frequency and intensity of its inspections.

Authorities’ views

30. The authorities recognized that the concentration of bank credit was a source of vulnerability. Liquidity problems at large common borrowers—typically SONARA and other state-owned enterprises—partly because of delays in the government settling its obligations, could jeopardize the health of the banking system. In their view, a solution to this issue resides in better PFM.

31. The authorities committed to limiting the risks linked to the new bank. They opined that the bank aimed at helping fill a void in financing worthwhile small and medium-size enterprises. The bank would rely on long-term resources, including its paid-in capital of US$20 million, to grant guarantees to bank credit, purchase equity participation, and provide direct loans.

E. Fostering Higher Growth

32. Estimates do not point to a substantial real effective exchange rate (REER) overvaluation (Appendix III). The REER depreciated by 3.7 percent in 2010–12, in line with the depreciation of the euro. This depreciation did not, however, offset the cumulative appreciation of the REER in 1994–2009 (24 percent). Model-based estimates suggest a possible overvaluation of Cameroon’s REER between 5½ percent and 16 percent at end-2012. This estimate is consistent with the finding of the last Article IV consultation with the CEMAC, which suggests an overvaluation of about 11 percent.

33. The evolution of non-price indicators of external competitiveness has been mixed. Cameroon’s ranking under the Global Competitiveness Index improved, but its ranking under the World Bank’s “Doing Business” indicators deteriorated, with the most ground lost in access to credit, investor protection, property registration, and tax payment procedures. Not surprisingly, foreign direct investment has remained relatively low in non-oil sectors.

34. The staff warned the authorities about the potential pitfalls of a new law aimed at providing tax incentives to new investments. Provisions for tax incentives under this law are general and discretionary, thereby creating a presumption that tax packages will be negotiated on a case-by-case basis. Such practices could result in significant losses of tax revenue and undermine ongoing efforts to improve governance, while providing only limited results in terms of increased investment.

35. The staff encouraged the authorities to help foster greater regional economic integration, especially among CEMAC member countries. In particular, harmonizing the rules of products’ country of origin, and removing non-tariff barriers and administrative hurdles to travel among CEMAC countries could contribute to developing intraregional trade.8

Authorities’ views

36. The authorities felt confident that Cameroon’s competitiveness would greatly benefit from the completion of large public investment projects. They stressed that financing for most of these projects has already been mobilized or was under negotiation with external creditors. The planned security issue in 2013 and beyond was also intended to finance these and future infrastructure projects, which would then contribute to higher growth.

37. The authorities concurred with the need to strengthen Cameroon’s external competitiveness and remove obstacles to trade. They took note of the reservations expressed by staff about the new investment incentive law, and welcomed comments on the law.9 However, they noted that the private sector was keen on enacting the law to spur investment. The authorities expressed their strong determination to meet the mid-August 2013 deadline for Cameroon to be declared conforming by the Board of the Extractive Industries Transparency Initiative (EITI). Although they saw greater regional integration as a desirable objective, the authorities noted the generally difficult process of coming to agreements with other CEMAC partners.

F. Reform Scenario

38. A moderate reform scenario was discussed with the authorities, building on the policy advice reported above (Text Table 3, and Tables 10–12).10 The scenario’s main tenets are (i) an acceleration of private sector-led growth through faster improvements in the business environment and alleviation of infrastructure and energy bottlenecks; (ii) the creation of fiscal space through a gradual fuel subsidy reform11 and a redirection of unproductive resources (e.g., subsidies to public enterprises) toward investment; (iii) acceleration of PFM reforms, and improved tax and customs administrations and project appraisal and execution; and (iv) improved financial sector intermediation and access to credit. The scenario assumes gradual adjustment of gasoline and diesel pump prices to international oil prices (as illustrated in Scenario A, Appendix I), the intensification of public enterprise reform to improve efficiency, and the acceleration of tax reforms to modernize complex procedures and reduce the burden on small and medium-size enterprises.

Text Table 3.

Cameroon: Selected Macroeconomic Indicators, 2013-18

(Units as indicated)

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Sources: Cameroonian authorities; and IMF staff projections.

Percentage change.

Percent of GDP.

Percent of non-oil GDP.

Table 10.

Cameroon: Reform Scenario—Selected Economic and Financial Indicators, 2011–18

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

Beyond 2012, WEO price in US$ a barrel, minus a discount of US$6 for the uncertainty (prudence factor) and US$3 for the quality of Cameroon’s oil.

Percent of broad money at the beginning of the period.

Projections are taken from the 2013 Debt Sustainability Analysis (DSA), which excludes the stock of debt on which France provided debt relief under the “Contrat de désendettement et de développement” (C2D).

Table 11.

Cameroon: Reform Scenario—Central Government Operations, 2011–18

(CFAF billions, unless otherwise indicated)

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

Figures for 2011 and 2012 exclude customs and VAT taxes due by SONARA were the objects of cross-cancellations against fuel subsidies due to SONARA (i.e., the revenue is presented on a net basis). From 2013 onward, projections for these taxes are made on a gross basis. Taxes owed by SONARA are projected at CFAF 145 billion in 2013.

Figures for 2011 and 2012 include securitization of fuel subsidies due to SONARA.

The figure for 2012 includes securitization of arrears owed to SONARA. The figure for 2013 includes CFAF 120.3 billion owed to private companies who imported fuel products for the government in 2012. It is assumed that CFAF 56 billion of the CFAF 120.3 billion was paid in 2012.

Table 12.

Cameroon: Reform Scenario—Central Government Operations, 2011–18

(Percent of GDP, unless otherwise indicated)

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

Figures for 2011 and 2012 exclude customs and VAT taxes due by SONARA that were the objects of cross-cancellations against fuel subsidies due to SONARA (i.e., the revenue is presented on a net basis). From 2013 onward, projections for these taxes are made on a gross basis. Taxes owed by SONARA are projected at CFAF 145 billion in 2013.

Figures for 2011 and 2012 include securitization of fuel subsidies due to SONARA.

The figure for 2012 includes securitization of arrears owed to SONARA. The figure for 2013 includes CFAF 120.3 billion owed to private companies who imported fuel products for the government in 2012. It is assumed that CFAF 56 billion of the CFAF 120.3 billion was paid in 2012.

39. Relative to the baseline, this scenario would lead to an increase in sustainable growth by close to 1 percentage point at the end of the projection period. The resulting budget savings and improvement in the business environment would help redirect spending toward investment and generate higher growth over the medium term, notably, because of the private sector’s response to the coming onstream of infrastructure projects in a more conducive environment. This better outcome is consistent with macroeconomic stability and debt sustainability. Inflation would be somewhat higher, reflecting the gradual upward adjustment of domestic fuel prices. Fiscal balances would be preserved: non-oil revenue could be expected to increase by about ½ percentage point during the projection period, supported by accelerated implementation of tax administration reforms aimed at widening the tax base and streamlining tax payments. These reforms would also be expected to produce improvements in the business climate. The tighter fiscal path and structural reforms to boost competitiveness will help underpin external sustainability. Finally, financial sector intermediation would be spurred by a rapid and orderly resolution of distressed banks and more effective bank supervision.

Authorities’ views

40. The authorities endorsed the higher growth objective and indicated that, in their view, their current policy mix would yield those results. In particular, they thought that the large infrastructure projects’ contribution to growth would materialize earlier than envisaged by staff.

Staff Appraisal

41. Moving toward emerging market economy status by 2035 will require a substantial increase in trend growth. The authorities’ higher growth strategy rightly focuses on addressing Cameroon’s substantial infrastructure gap, but its success will hinge on the efficiency of public investment and the strength of the private sector’s response. Staff therefore urges the authorities to intensify their efforts to address weaknesses in project selection and execution, and to allocate appropriate resources for infrastructure maintenance. Single-source procurement for large projects will need to be curtailed or given special scrutiny.

42. Greater improvements in the business environment will be essential to boost the private sector’s response. The payment of taxes and the granting of permits should therefore be made less burdensome, and ongoing anti-corruption efforts should be strengthened. The authorities should also strive to foster financial intermediation and facilitate cross-border trade. Cameroon may want to take the lead in reviving stalled regional integration talks within CEMAC, which would support diversification and productivity growth in Cameroon’s non-oil sector. A recent law aimed at fostering private investment, through the provision of overly generous tax incentives, may well fall short of its objectives, while potentially undermining revenue collection.

43. Substantial risks to the 2013 budget need to be addressed without delay to avoid a further accumulation of domestic arrears that undermine fiscal sustainability. The fiscal outcome stabilized in 2012, but masked growing vulnerabilities. Fuel subsidies remained high, as international prices and domestic demand remained buoyant. The underbudgeting of fuel subsidies in the 2013 budget continues to threaten orderly budget execution and fiscal stability, as do overly ambitious plans for a regional securities issue. Contingent liabilities, arising from distressed banks and public enterprises, pose an additional risk.

44. Increasing fiscal space over the medium term will require a combination of improved revenue collection, expenditure reallocations, and judicious financing choices. To limit revenue volatility, non-oil revenue will need to grow, aided by the large taxpayer unit and a broadening of the tax base. Resource availability for the scaling up of public investment will also require eliminating fuel subsidies through a gradual relaxation of price controls and curbing subsidies and transfers to public enterprises.

45. PFM needs strengthening to become the backbone of effective and efficient public spending. The authorities are encouraged to validate arrears and adopt a plan for settling them. The shift toward program budgeting is a promising step for strengthening PFM, but initial information technology issues need to be addressed. The authorities’ modernization plan for PFM is welcome, and should go hand in hand with the adoption of CEMAC PFM directives.

46. Cameroon’s risk of debt distress remains low, but debt indicators have deteriorated since last year. The deterioration resulted from the impact of domestic arrears on domestic debt, and the ramping up of external borrowing at nonconcessional terms. Going forward, the baseline scenario projects a doubling of the debt-to-GDP ratio within the next five years. This warrants close scrutiny and changes in external debt policy. In particular, external financing choices will need to reflect a judicious strategy predicated on medium-term debt sustainability.

47. Effective financial intermediation is necessary to buttress the authorities’ growth vision. Risks to financial sector stability have abated, but need to be addressed conclusively. The number of distressed banks has been reduced from five to four, and none appears to pose a systemic risk. Nonetheless, their situations need to be resolved decisively without overly compromising public resources. Decisive action on this front will also contribute to allaying persistent governance concerns. The authorities and the regional bank regulator will need to focus on the concentration of bank credit to SONARA, and the launch of a new public bank for small and medium-size enterprises, to avoid the emergence of contingent liabilities. Other reforms will have to include more frequent supervision, tighter lending standards, and seamless cooperation between national and supranational regulatory bodies.

48. Staff recommends that the next Article IV consultation take place on the 12-month consultation cycle.

Table 13.

Cameroon: Millennium Development Goals, 1990–2011

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Source: World Development Indicators.

Cameroon: Risk Assessment Matrix

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Appendix I. Cameroon: Fuel Subsidies

A. Introduction

1. Fuel subsidy reform has been a long-standing policy issue for advanced and developing countries.1 Although the importance of the policy issue is acknowledged by governments, progress in implementing reform has been hesitant. The difficulty lies mainly in removing a visible and tangible benefit that is accessible to all purchasers of fuel without affecting social stability.

2. The sustained increase in the international price of crude oil and its distillates since 2008 has revived discussions and analysis about fuel subsidy reform, with particular emphasis on the lessons from reform implementation. The IMF Country Reports for the previous two Article IV consultations with Cameroon already included sections devoted to the management of fuel subsidies. In the past year, the IMF has expressed its views of principle on this issue in a chapter in the Spring 2013 Regional Economic Outlook for Sub-Saharan Africa, and the 2013 paper titled “Energy Subsidy Reform: Lessons and Implications.”

3. The purpose of this note is to bring these lessons to bear on Cameroon’s situation, by: (i) updating and expanding existing knowledge of fuel marketing arrangements in Cameroon; (ii) analyzing the subsidy systems’ fiscal and macroeconomic implications in light of new developments; and (iii) generating ideas to achieve full cost recovery for the marketing of fuel and to spur momentum for reform of the pricing mechanism.

B. Overview of the Current System

4. The structure of Cameroon’s petroleum distillates production, storage, and distribution revolves around two independent entities: the National Refinery (SONARA), and the Cameroon Petroleum Depot Company (SCDP). SONARA, which is more than 80 percent state-owned, is the country's sole refinery, based in Limbé, and refines imported light crude oil from Nigeria, Equatorial Guinea, and Angola. SCDP is a 51 percent state-owned firm, tasked with securing the supply of petroleum products to Cameroon’s end-users. SCDP handles petroleum product storage and distribution throughout the country, to and from its 12 depots,2 which together can store 268,000 cubic meters of liquid fuels. SCDP purchases most of SONARA’s output, which is shipped by the main domestic shipping company (Camship) to its main depot in Douala.3 SCDP also procures additional refined products abroad to meet domestic demand. Distributers and retailers,4 which together own the remaining 49 percent in SCDP, market the petroleum products secured by SCDP. Distribution is done by trucks, except for the North, Extreme North, and Adamoua regions, which are serviced by the main railways operator (Camrail).5

5. Retail prices of the three main petroleum products (gasoline, kerosene, diesel) have been fixed since 2008 (Figure I.1). The sector is regulated by the Caisse de Stabilisation des Prix des Hydrocarbures (CSPH), a public company with regulatory powers that was set up in 1974. Its mission is to protect the consumers from fluctuations in the international price of hydrocarbons. In doing so, it sets domestic retail prices and subsidizes transport to remote regions. It underwrites the losses of the operators in the sector, which are in turn taken over by the state.

6. The markups of operators in the sector are derived from a formula setting a notional retail price that would reflect a full pass-through of costs to the end-consumer. The petroleum product pricing formula comprises four components: (i) the international price for refined fuel products; (ii) taxes; (iii) markups for domestic refining, transport, storage, distribution, and retail; and (iv) in the event that actual retail prices are less than the sum of the first three components, a posttax subsidy (Table I.1).6

Figure I.1.
Figure I.1.

Cameroon: Retail Price of Basket of Petroleum Products, 2009–13

Citation: IMF Staff Country Reports 2013, 279; 10.5089/9781475554885.002.A001

Sources: Cameroonian authorities; and IMF staff estimates.

7. The design of the pricing formula raises several issues. Among them are (i) the existence of the SONARA markup, above and beyond the international price for refined products, that already includes a profit margin for cost-effective refineries; (ii) the “cost plus” principle for calculating the SONARA markup, which does not provide incentives for efficiency gains; and (iii) the relatively large share of ad valorem taxes (including the SONARA markup), which exacerbates the volatility of the national pump price and thus of the subsidies.

Table I.1..

Cameroon: Price Structure for Fuel Products, 2010-20131

(CFAF per liter)

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Sources: Cameroonian authorities; and IMF staff estimates.

For a detailed description and disaggregation of the price formula, see Appendix II in the 2012 Article IV Consultation staff report (IMF Country Report No 12/237).

A positive sign implies a net subsidy from the state; a negative sign implies a profit for the fuel refinery.

8. The inconsistent implementation of the pricing formula has compounded its design issues. The state has delayed paying compensation to SONARA because of the magnitude of the subsidy, compounded by the “cost plus” design of the formula.

C. Fiscal and Macroeconomic Implications of the Current System

9. The fiscal implications of the current price controls are significant. Pre-tax subsidies (i.e., the difference between post-tax subsidy and the overall tax take) turned positive in 2011. The existence of pre-tax subsidies means that the state has become a net contributor to, rather than a net beneficiary of, the fuel distribution sector. In effect, unlike in most countries, fuel distribution is a net fiscal drain on public resources. Post-tax subsidies are significantly higher and have increased from 0.2 percent of GDP in 2009 to 3.4 percent of GDP in 2012, as oil prices nearly doubled over that period. They are expected to near 3.1 percent in 2013, mostly on account of the consumer subsidy (86 percent of the total; Figures I.2 and I.3).

Figure I.2.
Figure I.2.

Cameroon: Fuel Subsidies, 2009–13

Citation: IMF Staff Country Reports 2013, 279; 10.5089/9781475554885.002.A001

Sources: Cameroonian authorities; and IMF staff estimates.
Figure I.3.
Figure I.3.

Cameroon: Consumer and Producer Subsidies, 2009–13

(Percent of GDP)

Citation: IMF Staff Country Reports 2013, 279; 10.5089/9781475554885.002.A001

Sources: Cameroonian authorities; and IMF staff estimates.

10. Cameroon’s level of post-tax subsidy is high when compared to other countries in the region (Figure I.4). It is a result of the relatively high level of energy intensity in its economic activity, and relatively weak cost recovery because of a freeze on the pump price. Cameroon does not differ much from a number of comparator countries in having resisted retail price adjustments. Its pump price is on a par with that of countries that border Nigeria, where the pump price is significantly lower. However, it is lower than in other countries in the subregion. Countries that have made pump price adjustments, such as Burkina Faso, Guinea-Bissau, and Senegal, have been better able to contain the level of the subsidy. In addition, more than in any other country in the region, except Guinea Bissau, the increase in Cameroon’s post-tax fuel subsidies has been exacerbated by the relative importance of procyclical ad valorem taxes (including the SONARA markup), which, unlike the excise tax, increase with the price of oil. At end January 2011, ad valorem taxes accounted for 21.9 percent of the notional pump price in Cameroon, versus 16.1 percent in Senegal.7

Figure I.4.
Figure I.4.

Selected African Countries: Post-Tax Fuel Subsidies, 2012

(Percent of GDP)

Citation: IMF Staff Country Reports 2013, 279; 10.5089/9781475554885.002.A001

Source: IMF, May 2013 Regional Economic Outlook: Sub-Saharan Africa.

11. Cameroon’s fuel price structure points to hidden inefficiencies in its marketing arrangements. Although Cameroon’s reference cost-insurance-freight (CIF) import price is among the more competitive ones, “other costs” to market gasoline are high for a country that is not landlocked (Table I.2.). In general, Cameroon’s CIF price compares unfavorably with that of other countries in the region—in terms of cost recovery and containment of notional pump price volatility.

Table I.2.

Selected Countries: Price Structure of Gasoline, January 2011

(CFAF a liter)

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Sources: Country Authorities; and IMF staff estimates.

Includes SONARA markup.

A negative number reflects a positive tax intake rather than a subsidy.

12. Fuel subsidies can depress long-term economic growth and reinforce inequality.8 Fuel subsidies may crowd out other productive government spending on infrastructure, education, and health, and make it unattractive for the private sector to invest in energy. Beyond the direct effects, the policy of subsidizing fuel consumption has additional pernicious and profound effects on economic development. Firms do not adjust their production processes to reflect the true cost of energy, thus exacerbating the potential impact of a fuel price shock. Furthermore, in Cameroon, SONARA’s financial difficulties affect the banking system, which may need to curtail credit to the economy, thus directly undermining growth. Other negative externalities, such as environmental degradation and climate change, are also significant. Figure I.5 shows the energy efficiency of economic activity in various countries. Sub-Saharan African countries, which all have retail price controls on fuel except South Africa, are intensive users of energy. Finally, fuel subsidies are also impeding the government in carrying out its redistributive function: analyses have repeatedly shown that energy subsidies benefit mostly the richer segments of the population.

Figure I.5.
Figure I.5.

Selected Countries: Energy Efficiency of Production, 2010

Citation: IMF Staff Country Reports 2013, 279; 10.5089/9781475554885.002.A001

Source: World Bank World Development Indicators.

13. High retail fuel price differentials with neighboring countries pose governance difficulties for the region, as well as increased corruption and crime (Table I.3). Small-scale contraband can soon give way to organized networks of smugglers, causing the state to subsidize the consumption of foreigners on a large scale, while jeopardizing law and order in their own country and in neighboring countries. This is particularly well illustrated in Benin, where it is estimated that over 90 percent of gasoline is smuggled from Nigeria and sold illegally. For Cameroon, the most significant risk stems from its proximity to Nigeria, with which it shares its longest border, and where retail prices are less than half the price in Cameroon and where supply is abundant.

Table I.3.

Selected Countries: Super Gasoline Prices, December 2012

(CFAF per liter)

Sources: University of Texas (map); and IMF staff estimates (table).

D. Reform Options for Cameroon

14. Attempts at reform in Cameroon and elsewhere point to the need for a comprehensive reform strategy. The introduction of fuel pricing reforms involves large trade-offs between different social and macroeconomic objectives. Recent work has highlighted key elements of a successful reform strategy based on international experience.9

  • Undertake comprehensive research to assess the costs and benefits of the subsidy system to the various stakeholders, and the macroeconomic impact of possible reforms.

  • Consult widely with society stakeholders; in Cameroon’s case, consultations should include engagement with SONARA to assess its ability to achieve scale savings and commercial sustainability in the international marketplace—and discuss the withdrawal of industry protections.

  • Communicate clearly: reinitiate a wide program to broaden the policy debate on fuel pricing—by mobilizing thought leaders (industry experts, journalists, policy advocates, etc.,) and using far-reaching media (radio, TV, print press).

  • Decide early on important parameters of the reform initiative, such as the pace of price adjustment; experience has shown that gradual reforms tend to be more successful as long as the reform commitment is seen as irreversible.

  • Roll out accompanying mitigating measures to provide offsets to stakeholders who are adversely affected by the reforms, with particular emphasis on vulnerable households.

  • Focus equally on efficiency improvements and price-setting reforms.

  • Map out the important steps and various aspects of the reforms: institutional arrangements, legal requirements, etc.

15. Reforms with an immediate impact should focus on efficiency gains rather than pump prices. Preparatory work on reforms to allow for removal of the pre-tax subsidy, for prevention of smuggling from neighboring countries, and for synchronization of energy policy within the region, should be pursued nonetheless without delay. Near-term reform options to the pricing formula and market structure to generate immediate efficiency gains need to focus on the following:

  • Simplify and make the price formula more transparent because it is too complex (e.g., fewer components, simpler markups).

  • Remove the SONARA markup from the pump price structure (without adjusting retail prices downward) and finance legitimate SONARA losses through direct budget transfers to ensure budget transparency, as recommended in FAD technical assistance advice.

  • Determine a level of compensation for SONARA, if any, by specifying compensation based on volume of throughput rather than its value; the level of compensation should decrease over time, consistent with progressive efficiency gains and increasing scale.

  • Clear government arrears to SONARA with a mix of debt reduction, cash, and securitized debt—to alleviate the risk posed by SONARA to the banking system.

  • Reassess/renegotiate cost and margin items in the price structure to increase efficiency in the sector, based on international benchmarking and objective cost considerations specific to Cameroon. For example, the cost of transport by truck can be benchmarked internationally, whereas trucker’s margins should reflect the actual cost of fuel. Storage fees should reflect economies of scale and Cameroon’s amortization rules.

  • Liberalize the market for refined fuel imports into Cameroon by introducing competitive tenders for SCDP’s procurement of refined products. Remove barriers to imports of refined fuels, if any, and review applicable import tariffs for refined fuels to limit market protection.

16. Over the medium term, the magnitude and volatility of subsidies underpin the case for price adjustments. The following reform options would increase the pass-through of the true costs of fuel to the end-consumers, and dampen retail price volatility:

  • Reinitiate pump price adjustments on a regular basis, aiming at narrowing the gap between current prices and notional pump prices. Although inflation will increase initially, international experience points to temporary effects.10

  • Adopt a price-smoothing component to complement the existing price adjustment mechanism. Smoothing could take the form of a moving average of the notional prices for a given number of past review periods; bands defining a maximum percentage adjustment during any given period; or a combination thereof (e.g., a moving average within bands).

  • Prepare policies explicitly designed to mitigate losses of end-consumers. Such policies are crucial to entrenching the fuel pricing reform. They should include policies that over time increase social transfers to the poor (e.g., school lunches, improved primary education, appropriate social safety nets), taking into account the need to develop the capacity of line ministries to design and implement well-targeted programs. The government should also envisage launching policies that can be calibrated to provide a direct, tangible offset with the additional cost of fuel—such as a cash transfers, or new electricity distribution (access to, and quality of, electricity) in the most populous areas.

  • Consider increasing taxes, levies, and fees that discourage fuel consumption: road usage fees (e.g., tolls), vehicle licensing fees in proportion to the size of the engine or the weight of the vehicle, yearly registration fees, etc.

17. In addition, the government would gain from considering broader structural reform options:

  • Seek out additional structural efficiency gains: review the logistics of fuel marketing (inland and coastal depots capacity and costs, port capacity, processing efficiency, fees), rail transport (rail network, rolling stock, fees), road transport (rolling stock and fees), technical standards (fuel octane, safety rules, etc.)—seek recommendations for efficiency improvements in distribution and storage, and security of supply (e.g., storage capacity in number of days of consumption).

  • Define an exit strategy from subsidizing SONARA. The strategy should include (i) an invitation to SONARA’s private financial sponsors to consider plans to expand its production capacity and make it competitive in the world market; and (ii) a divestiture by the state from its direct and indirect stakes in SONARA to help remove the perceived implicit state guarantee on its debt.

  • Approach neighboring states to harmonize tax policy and price setting methods—discuss with them the creation of an intergovernmental task force to track international commodity price developments, harmonize taxes on fuel, and set domestic prices. Such an international coordination mechanism would be useful to help stop cross-border contraband and achieve genuine independence in determining prices from any one national political authority.

E. Price Adjustment Scenarios for Cameroon

18. To illustrate fuel subsidy reform options and cost implications, three price scenarios were estimated (Text Table I.4). The scenarios are (i) a baseline scenario, corresponding to the authorities’ current policy, under which fuel prices remain frozen; (ii) a moderate scenario corresponding to the IMF staff report’s reform scenario, under which gasoline and diesel prices are adjusted in 2014 and 2015, but do not reach full cost-recovery levels over the medium term; and (iii) an “aggressive” scenario, under which gasoline and diesel prices reach cost-recovery levels by end-2015 and end-2016, respectively—at which point the corresponding subsidies would be fully eliminated. Under all three scenarios, kerosene and liquefied propane gas (LPG) bottle prices remain fixed at their current levels—those are most consumed by the neediest segments of the population—while gasoline and diesel prices are gradually adjusted from January 1, 2014, onward.

19. Fuel subsidies under the two reform scenarios are estimated based on existing price structures. They are estimated according to a partial equilibrium analysis based on (i) the latest World Economic Outlook (WEO) Brent futures contract prices; (ii) unchanged price structure components (such as the refinery margin); (iii) pump prices, which follow each scenario’s assumed price increases; and iv) the assumption that fuel products’ consumption reacts to domestic price increases according to respective price demand elasticities.11

Text Table I.4.

Cameroon: Fuel Subsidy Reform Scenarios, 2014-171

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Sources: Cameroonian authorities; and IMF staff estimates.

The “Baseline Scenario” is equivalent to the staff report’s baseline scenario, while “Scenario A” is equivalent to the staff report’s reform scenario.

A negative sign implies that domestic prices have already reached their cost-recovery levels, such that they start falling in parallel with international prices.

20. The reform scenarios illustrate different approaches to price adjustment. It is assumed that price increases are initially larger for gasoline, which is consumed mostly by private vehicles typically belonging to people in higher-income groups. Price increases for diesel are initially smaller, and as noted, there is no price increase for kerosene. Compensatory measures, such as targeted transfers to the most vulnerable segments of the population, could be funded from the associated budgetary savings. Although the reform scenarios show an average annual fuel price increase for illustrative purposes, monthly price adjustments could be envisaged using price smoothing rules to avoid sharp increases in domestic prices, while generating the same average budget savings.

21. The choice of a reform scenario depends on the trade-off between desired budgetary savings and lesser impact on households. For example, while the fuel subsidy cost is at 2.6 percent of GDP in 2017 under the baseline (no reform) scenario, it sharply declines to 0.4 percent of GDP under the aggressive scenario (Scenario B), with only subsidies on kerosene and LPG remaining in place. The pace of price increases depends on the reform’s medium-term objectives. In general, it is best to avoid sharp increases in pump prices to allow households and enterprises time to adjust.

22. The impact on inflation of either reform scenario would be limited. Preliminary calculations indicate that if gasoline and diesel prices are increased on a monthly basis by an equal number of CFA francs, the impact on inflation of the more moderate “Scenario A” would be around 1.4 percentage points in 2014, and an additional 0.6 percentage point in 2015. In the more aggressive “Scenario B,” the impact on inflation would be 2 percentage points and 0.8 percentage point in 2014 and 2015, respectively. While these inflationary impacts may nudge the overall inflation rate beyond the regional convergence criterion of 3 percent, they do not pose, by themselves, a significant risk to macroeconomic stability.

References

  • Dahl, Carol A. (2012), “Measuring Global Gasoline and Diesel Price and Income Elasticities,” Energy Policy, 41, pages 2–13.

  • International Monetary Fund, 2012, “Cameroon: Selected Issues,”IMF Country Report No. 12/237 Washington, D.C..

  • International Monetary Fund, 2013, “Energy Subsidy Reform: Lessons and Implications,” http://www.imf.org/external/np/pp/eng/2013/012813.pdf, Washington, D.C..

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  • International Monetary Fund, 2013, “Regional Economic Outlook for Sub-Saharan Africa,” Washington, D.C..

Appendix II. Cameroon: Financial Sector Review

A. Profile of the Financial Sector

The Cameroonian financial system is dominated by foreign-owned commercial banks. The banking system has grown, but remains small relative to GDP. By regional standards, the microfinance sector is relatively large; microfinance institutions improve access to finance by lower-income households and small and medium-size enterprises, but rapid growth has brought governance and stability issues. The bond and stock markets remain a marginal source of funding, even for the government.

The Banking Sector

1. The Cameroonian financial system is dominated by foreign-owned commercial banks.1 Banks accounts for about 70 percent of total assets of the financial system. Of the 13 banks operating in Cameroon, 10 are foreign-owned and accounted for 76 percent of total deposits at end-2012 (Text Table II.1). French banks dominate with about 40 percent of total bank assets (Figure II.1). The banking system is heterogeneous, segmented, and significantly concentrated. Despite overall excess reserves, there is virtually no interbank market. In the absence of collateralized instruments, banks generally refrain from lending to other banks in order to avoid counterparty risk.

Text Table II.1.

Cameroon: Banking System Structure, 2012

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Sources: COBAC; and IMF staff calculations.
Figure II.1.
Figure II.1.

Cameroon: Credit Market Share and Volume of Interbank Market

Citation: IMF Staff Country Reports 2013, 279; 10.5089/9781475554885.002.A001

Sources: BEAC; COBAC; and IMF staff calculations.

2. The banking sector is geared toward large enterprises. It can be broadly characterized as a lopsided business model, where 80 percent of bank credit goes to large enterprises and the remaining 20 percent is allocated mostly to small and medium-size enterprises. Retail credit is growing, but still marginal. Banks offers loans exclusively to retail clients who work in the formal sector, domicile their wages with the bank, and whose employer is already a customer.2

3. Mobile banking has started but is still embryonic (Box II.1). Money transfers through mobile phones are limited. The cost of services is relatively competitive compared to some countries in West Africa, but still significantly higher than in East Africa.

Microfinance Institutions

4. The microfinance sector is large by regional standards. More than 450 microfinance institutions (MFIs) were registered at end-2012. Cameroonian MFIs constitute about two-thirds of all MFIs in CEMAC. The sector includes three types of MFIs: (i) quasi banks; (ii) saving clubs; and (iii) microfinance nongovernmental organizations (NGOs). MFIs in the first category are the most common ones; they are deposit takers and operate in bank-like fashion. MFIs are significantly smaller than commercial banks; together their assets amount to about 15 percent of total banking sector assets. MFIs are significant for providing access to financial services to the lower-income segments of the population. Loans by MFIs amount to about 15 percent of total bank loan volume, but reach about 50 percent of all financial services customers.

Cameroon: Mobile Banking

Mobile banking in Cameroon is still nascent. Given the large size of the country, the dispersion of the population, and the low penetration of formal banking services, Cameroon would appear to be a good candidate for widespread mobile banking—defined as banking transactions carried out through mobile devices. This industry, however, has not taken off yet in Cameroon. While the number of mobile phone subscriptions is rising, it lags the numbers found in comparable African countries, such as Senegal or Kenya.

Mobile Phone Subscriptions

(Per 100 inhabitants)

Citation: IMF Staff Country Reports 2013, 279; 10.5089/9781475554885.002.A001

Source: World Development Indicators.

Mobile banking costs are more competitive than in West Africa, but significantly more expensive than in East Africa. The small number of customers explains, in part, the overpricing compared to East Africa. At the low end of the spectrum, for transfer amounts below US$5, Cameroonian customers pay almost four times more than in Kenya; for transfer amounts between US$5 and US$50, they still pay 1.5 times more; at the upper end, for transfers above US$100, the cost in Cameroon rises steeply above the comparable cost in Kenya. Competition within countries also differs from region to region. While the fee structure of Orange Kenya matches that of its competitor M-Pesa Kenya, Orange Cameroon follows the Ivoirian business model, rather than that of the other local operator, MTN Cameroon.

Mobile Banking Transaction Fees

(US dollars per transaction amount)

Citation: IMF Staff Country Reports 2013, 279; 10.5089/9781475554885.002.A001

Source: IMF staff calculations.

5. The microfinance sector is insufficiently supervised. The large number of MFIs raises governance and profitability concerns, because the regional supervisor (COBAC) is not appropriately staffed to monitor such a large number of institutions effectively. The situation of individual MFIs varies greatly, in size and access to refinancing. A few of the larger MFIs are able to get refinancing from commercial banks, but for most MFIs access to refinancing remains a major issue. The COBAC has initiated electronic reporting from MFIs since 2010 and developed accounting norms to be implemented by them. The National Directorate of the regional central bank (BEAC) is also preparing to launch an on-line database of financial statements of MFIs in June 2013 that will help improve transparency in the sector.

Stock Market

6. The stock market remains a marginal source of private sector financing. It is based in the business capital, Douala, and has been operating for ten years. It only has three companies listed and its capitalization of CFAF 115 billion (0.9 percent of GDP) is too small to provide a significant source of financing for the private sector. The bond market essentially deals with government securities. Most government debt, however, is still issued to banks through auctions organized by the BEAC, mostly in the form of Treasury bills (T-Bills). There is no significant secondary market for this type of government debt. Over the last couple of years, T-Bill yields have progressively declined, although maturity has lengthened (Figure II.2). There are ongoing discussions to merge the Douala stock exchange with that of Libreville, Gabon.

Figure II.2.
Figure II.2.

Cameroon: 26-week T-Bill Yield, 2011-2013

(Percent)

Citation: IMF Staff Country Reports 2013, 279; 10.5089/9781475554885.002.A001

Source: BEAC.

B. Banking Sector Performance—An International Comparison

This section assesses the performance of the Cameroonian financial sector by benchmarking its depth, breadth, and inclusiveness against peer countries in the region, in Africa, and within the same income group.

The banking sector is highly concentrated and shallower than the expected benchmark. Profitability meets the expected structural benchmark and the sector outperforms its peers in terms of liquidity. The picture is mixed in terms of inclusiveness, where Cameroon underperforms in terms of access to banking services. Retail and small and medium-size enterprise banking is limited. Small-scale saving and borrowing needs are met by microfinance institutions and the informal sector.

Methodology

7. Benchmarking provides an assessment of Cameroon’s banking sector performance with respect to depth, breadth, access, and efficiency. For each country and each key financial sector indicator, the World Bank’s Finstat database provides a structural benchmark based on the country’s economic and structural characteristics.3 Given the structural characteristic of the country under review, regressions compute an expected median level that the country could achieve. The difference between the observed value and the benchmark then needs to be interpreted. A negative difference suggests scope for policy action, while a positive difference could reflect over-performance compared to the peer group and the impact of successful reforms. The analysis was carried out using data from 2000 onward, where available.

8. Data availability permitting, Cameroon’s financial sector indicators are also compared to those from peer countries. These are defined as other CEMAC countries, Ghana, Kenya, and Senegal. Comparisons are also made with the average for Sub-Saharan Africa (SSA), excluding South Africa, and the average of the lower-middle-income countries group (LMC). Ghana is an interesting example of a change in regulation (the “Borrowers and Lenders Act,” 2008) leading to a breakthrough in access to finance. Kenya is an example of an SSA economy with a rapidly developing financial sector. Senegal provides an example from a similar institutional setting (the West African Economic Monetary Union, WAEMU). The SSA average (excluding South Africa) reflects the development of the rest of the subcontinent, while the LMC group average provides a comparison with countries at a similar level of development.

Depth

9. The banking system has grown in recent years but remains shallow. Private sector credit has expanded rapidly since the mid-2000s, although rising from a low base of 8 percent of GDP to 15 percent in 2012. Nevertheless the benchmarking shows that the sector remains relatively shallow (Figure II.3). Cameroon underperforms the benchmarks for private sector credit and deposits to GDP. It reaches the expected 25th percentile rather than the median. Country comparisons confirm that although the banking sector is larger than in neighboring CEMAC countries, it remains much shallower than for the average of SSA countries, even when excluding South Africa. The ratio of broad money to GDP gained 10 percentage points in the past decade, but remains much lower than in Ghana or Senegal.

Figure II.3.
Figure II.3.

Cameroon: Selected Indicators on Financial Sector Depth

Citation: IMF Staff Country Reports 2013, 279; 10.5089/9781475554885.002.A001

Breadth and Efficiency

10. The banking sector is heavily concentrated. Competition in the banking system, proxied by the asset concentration of the three largest banks, appears relatively low. Figure II.4 shows that the three largest banks own more than 70 percent of total assets of all commercial banks, a ratio that has remained stable, notwithstanding new entries from regional or international groups. Small and medium-size banks have not significantly increased their market share over the past five years. Although such a concentration level is not uncommon in SSA, it is much lower among LMCs. Non-interest income represents about 35 percent of total income, a ratio that is below the SSA average, but 6 percentage points above that in Ghana and Senegal, and in line with the structural benchmark.

Figure II.4.
Figure II.4.

Cameroon: Selected Indicators on Financial Sector Breadth and Efficiency

Citation: IMF Staff Country Reports 2013, 279; 10.5089/9781475554885.002.A001

11. Profitability is in line with that of the region. Both return on assets (ROA) and return on equity (ROE) show comfortable rates of return over the past decade, despite a fall in net income at the system-wide level since 2009, reflecting difficulties experienced in the four problems banks (Figure II.5).

Figure II.5.
Figure II.5.

Cameroon: Selected Profitability Indicators

Citation: IMF Staff Country Reports 2013, 279; 10.5089/9781475554885.002.A001

12. Banks are highly liquid. With the exception of a small dip during the 2009 global financial crisis, bank liquidity has steadily increased and is above the Senegal, SSA, and LMC averages. Given limited sources of funding to domestic deposits, credit-to-deposit ratios underperform the expected median—this has implications for the limited financing of the economy.

Inclusiveness

13. The sector presents a mixed picture of inclusiveness. The banking sector has grown in terms of number of banks and number of branches. The number of branches has almost doubled in the past 10 years, albeit from a low base (Figure II.6). Nonetheless access to formal banking services remains low; access to financial services is similar to other CEMAC countries but lower than in comparable countries outside the region. The indicator of banks per inhabitant underperforms the estimated statistical benchmark. Only 15 percent of the adult population has a bank account and barely 3 percent received their wages directly through their bank account. This explains the limited amount of retail banking because banks focus their lending on customers that have monthly paycheck deposits.

Figure II.6.
Figure II.6.

Cameroon: Selected Indicators on Financial Sector Inclusiveness

Citation: IMF Staff Country Reports 2013, 279; 10.5089/9781475554885.002.A001

14. MFIs help reach the unbanked population. Saving and lending behaviors of households and small and medium-size enterprises reflect the importance of informal and microfinance institutions. More than half of the adult population that has saved money in the past year has done so through an MFI or a savings club. Similarly, the vast majority of loans are obtained through family and friends followed by private lenders. Less than 3 percent of the population has received a loan from a bank in the past 12 months, underscoring the marginal dimension of retail banking.

C. Financial Stability and Risks

15. Overall conditions in the banking sector have improved, but the situation varies substantially across banks. The system-wide capital adequacy ratio (CAR) remains below the minimum regulatory requirement of 8 percent in March 2013. It hides important variations and reflects weak capital positions only in some problem banks (Table II.2 and Figure II.7). The overall improvement at the system level reflects mostly a positive evolution at a large domestic bank in the first quarter of 2013; the ongoing supervisory procedure led to understandings between the COBAC and this bank on the adequate amount of required provisions and on assets to be recognized as quasi equities. As a result, and with the caveat of preliminary data requiring verification, the bank appears to be on the way of recovery. Four smaller domestic and regional banks show negative equity at end March 2013 and progress with restructuring plans has been slow. For one of them, a long-overdue restructuring plan is coming closer to implementation.

Table II.2.

Cameroon: Aggregate Banking System Financial Soundness Indicators, 2009–13

article image
Source: IMF staff calculations based on bank data provided by COBAC (end-2012 preliminary).

Tangible net worth (net) = Book net worth less: intangible fixed assets and shareholdings in other credit institutions.

Tangible assets = Book assets less: intangible fixed assets.

Figure II.7.
Figure II.7.

Cameroon: Selected Financial Stability Indicators

Citation: IMF Staff Country Reports 2013, 279; 10.5089/9781475554885.002.A001

16. The system is liquid and shows limited interest and exchange rate risks. As lending activities are typically limited to the short term (up to 12 months) and non-interest income is high, banks can be considered as not vulnerable to interest rate shocks. They face virtually no exchange rate risk because assets and liabilities are in CFA francs, and most banks possess large cash reserves.

17. Asset quality remains weak, credit risk remains high, and banks are vulnerable to a high concentration of lending to a few economic sectors and corporations. Even though they improved slightly compared to 2011, system-wide non-performing loans (NPLs) remain relatively high at 11.7 percent of gross loans. All banks are vulnerable to a default by a large borrower because their lending is concentrated on a few sectors and corporations. In a severe downturn situation, risks could become systemic. In addition, persistent government arrears to SONARA translate into a substantial credit risk for the banking sector.

D. Recommendations

Stability Issues

18. It is important to take swift action to resolve financial problems at the troubled banks while limiting the fiscal costs.

  • The authorities need to accelerate the finalization of the resolution of one regional bank as the process is nearing its end. In addition to the recapitalization of the bank on public funds and the creation of a separate “bad bank” structure that would take on all impaired assets, the government should try to recover as much as possible of impaired assets to minimize the burden on public finances.

  • A bank has been put under temporary administration and its restructuring or resolution should be implemented as swiftly as possible.

  • The intention of a parent group regarding the onward sale or absorption of a bank needs either to be confirmed shortly or its license should be revoked.

  • The timetable for recapitalization of a bank has been agreed by the COBAC, but the plan must be implemented swiftly.

19. Boosting COBAC’s resources is of paramount importance. A lack of adequate resources has been hampering COBAC’s activities for many years.4 This constraint limits the frequency of on-site inspections and hinders early detection of problems. It severely restricts the capacity to supervise the growing microfinance sector. A specific recruitment process has started and needs to be completed as swiftly as possible.

Access Issues and Structural Constraints

20. Financial intermediation and access to credit remain hampered by a number of structural constraints. These include a poorly functioning judicial system, absence of adequate collateral, and limited credit information. To help alleviate these constraints, the authorities are planning to launch three databases on (i) payment incidents; (ii) balance sheet data of small and medium-size enterprises; and (iii) microfinance institutions.

21. Institutional reforms need to be pursued to improve the legal framework of credit through: (i) improving procedures for recording and enforcing guarantees; (ii) modernizing the operations of land and commercial registries; (iii) strengthening creditor rights enforcement by enhancing governance of the courts; and (iv) upgrading standards of disclosure of information by borrowers and lenders.

22. The supervision of MFIs needs to be strengthened. Given the rising importance of the sector and its significance for vulnerable households, it is important to adequately supervise MFIs. Good practice is available regarding adequate supervision of MFIs, and COBAC should be encouraged to follow it. However COBAC resources constraints need to be taken into account and supervisory activity to be opportunely focused on large establishments that could present a risk for depositors. In addition prevention should be emphasized, and the process of granting operating licenses should be reinforced. Better coordination between the supervisor and the national authorities could help boost transparency and inform users.

References

  • Beck, T., E. Al-Hussainy, A. Demirgüç-Kunt, and Z. Bilal, 2011, “Financial Access Data base,” World Bank.

  • Čihák, M., A. Demirgüç-Kunt, E. Feyen, and R. Levine, 2012, “Benchmarking Financial Development Around the World,” World Bank Policy Research Working Paper 6175, World Bank, Washington, D.C..

    • Search Google Scholar
    • Export Citation

  • Demirgüç-Kunt, A., and L. Klapper, 2012, “Measuring Financial Inclusion: The Global Findex,” World Bank Policy Research Working Paper 6025. World Bank, Washington, D.C..

    • Search Google Scholar
    • Export Citation

  • International Monetary Fund, 2006, Country Report 06/321, “CEMAC—Financial Sector Assessment Program.”

  • International Monetary Fund, 2009, Country Report 09/51, Cameroon—Financial System Stability Assessment.

  • International Monetary Fund, 2012, Country Report 13/9, “Benin Article IV Consultation, Fourth Review Under the Extended Credit Facility Arrangement—Financial Sector Review.”

    • Search Google Scholar
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  • International Monetary Fund, 2012, Country Report 12/337, “Senegal Article IV Consultation, Fourth Review Under the Policy Support Instrument, and Request for Modification of Assessment Criterion—Financial Depth and Macro-Stability.”

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  • World Bank, 2012, “FinStats—User Guide and Benchmarking Methodology, Washington, DC.”

Appendix III. Cameroon: External Competitiveness

The present exchange rate assessment follows the three approaches of the Consultative Group on Exchange Rate Issues (CGER).1 It is broadly consistent with the findings of the 2012 Central African Economic and Monetary Community’s (CEMAC) external assessment,2 because it finds that Cameroon’s real effective exchange rate (REER) may be slightly overvalued. Despite some improvements in recent years, structural competitiveness remains low. The analysis of non-price indicators highlights the need for Cameroon to improve its business climate and to lower the cost of doing business, which implies better access to financing and improved infrastructure.

A. Exchange Rate Developments

1. Cameroon’s real effective exchange rate (REER) has been slowly depreciating since 2010 (Figure III.1). This recent trend has not offset, however, the long period of appreciation, which culminated in 2009, when the REER appreciated by almost 24 percent compared to its 1994 level. Since 2010, the REER has depreciated by 3.7 percent, reflecting the depreciation of the euro, to which the country’s currency is pegged. The nominal effective exchange rate (NEER) has closely followed this trend.

Figure III.1.
Figure III.1.

Cameroon: Effective Exchange Rates and Terms of Trade, 1994–2012

(1994=100)

Citation: IMF Staff Country Reports 2013, 279; 10.5089/9781475554885.002.A001

Sources: IMF’s Information Notification System; and IMF staff estimates.

2. As preliminary assessments, ad hoc assumptions could be made on the long-run behavior of the REER, and results would be derived from the comparison between the assumed long-run REER and the current REER. One assumption would be to consider that long-run equilibrium was reached within the two years of the currency’s devaluation. In this case, comparing the long-run equilibrium level (LREER) with the actual LREER indicates that the REER was overvalued by about 6.7 percent at end-2012. Another assumption would be to consider the sample mean during 1994–2012 was at its long-run equilibrium. This method suggests that the LREER was undervalued by 2.3 percent at end-2012. Conclusions therefore differ, but both preliminary assessments are heavily dependent on the strong assumption that the LREER was constant. As noted in the previous exchange rate assessment, this is unlikely to be the case, because one important determinant of Cameroon’s LREER, the country’s terms of trade, has been on a declining trend since 1994.

B. Model-Based Assessments

3. The REER is assessed using the three approaches that are adopted by the CGER, namely, the macroeconomic balance (MB), the equilibrium real exchange rate (ERER), and the external sustainability (ES) approaches. The IMF assessment toolkit, which contains annual data for 184 countries for 1973–2012 is used, along with projections that reflect the macroeconomic framework discussed during the 2013 Article IV Consultation. Those standard CGER procedures are also complemented by two methods, an adjusted macroeconomic balance approach and an adjusted external sustainability approach that explicitly consider Cameroon’s oil wealth and the projected exhaustion of its oil resources.

4. The MB approach calculates the difference between the current account balance projected over the medium term at prevailing exchange rates (the underlying current account balance) and an estimated equilibrium current account (also called the current account norm), which is a function of economic fundamentals. This approach consists of three steps. First, an equilibrium relationship between current accounts and a set of macroeconomic fundamentals is estimated. Second, based on the projection of economic fundamentals over the medium term, the current account norm for each country is obtained using the previously derived coefficients. Third, the difference between the current account norm and the underlying current account reflects the exchange rate adjustment necessary to close the gap between the two current account balances. The extent to which the real exchange rate will need to adjust will mostly depend on the country-specific elasticity of the current account with respect to the real exchange rate.

5. Results from the MB approach suggest that the REER was slightly overvalued at end-2012 (Figure III.2). The estimated current account norm points to a deficit of 2.4 percent, while the underlying current account deficit is about 4.6 percent. The real exchange rate would then need to eliminate this difference. Given an elasticity of the current account to the real exchange rate of -0.4, estimated from similar countries’ export and import elasticities,3 the MB approach suggests that the REER would need to depreciate by about 5.5 percent, with the lower bound o 1.75 and upper bound of 9.25, to close the external current account gap. This result is however highly dependent on the elasticity of the current account to the real exchange rate. The more elastic the current account is, or the more open a country is, the less the magnitude of the exchange rate adjustment needs to be.4

Figure III.2.
Figure III.2.

Cameroon: Required Change in the REER to Bring it to Equilibrium Level

Citation: IMF Staff Country Reports 2013, 279; 10.5089/9781475554885.002.A001

Source: IMF staff calculations.

6. The ERER approach suggests the REER was undervalued, but within the margin of error.5 The ERER approach calculates the difference between the actual real exchange rate and an estimated equilibrium real exchange rate, which is directly derived from the projection of medium-term fundamentals, such as net foreign assets, productivity differential between tradable and nontradable sectors, and the terms of trade. As in the MB approach, this approach consists of three steps. First, an equilibrium relationship between equilibrium real exchange rates and a set of macroeconomic fundamentals is estimated. Second, using the coefficients that were found in the first step, the equilibrium real exchange rate is obtained as a function of medium-term projections of economic fundamentals. Third, the difference between the equilibrium real exchange rate and the actual real exchange rate reflects the needed REER adjustment.

7. Assuming the same elasticity of -0.4 as the MB approach, the ES approach suggests that the REER was slightly overvalued at end 2012. The ES approach calculates the difference between the actual current account and the current account that would stabilize the net foreign assets (NFA) position of a country at some benchmark level. As in the previous methods, the ES approach consists of three steps. First, the level of current account that would stabilize the NFA position of a country at given benchmark values is determined. Second, the NFA stabilizing current account is compared to the actual current account that is projected to prevail over the medium term. Third, the difference between the NFA-stabilizing current and the medium-term current account reflects the exchange rate adjustment that is required to close the gap, assuming a certain elasticity of the current account to the real exchange rate.

8. To complement the above analysis, the MB and ES approaches were specifically tailored to oil-producing countries.6 These adjusted procedures notably imply considering Cameroon’s oil wealth and the projected exhaustion of oil resources in estimating the current account norm. Results show that both MB and ES-adjusted approaches point to an overvaluation of Cameroon’s REER at end-2012 of about 15.8 percent for the MB approach and 12.8 percent for the ES approach.

9. The above results indicate that Cameroon’s REER may be slightly overvalued, confirming last year’s exchange rate assessment. The above results are however very dependent not only on the macroeconomic assumptions on which the baseline scenario is predicated, but also on the hypotheses each approach uses, such as the level of elasticity of the current account to the real exchange rate.

C. Alternative Indicators of External Competitiveness

10. The REERs discussed above measure the relative domestic and foreign price levels expressed in a common currency. The economic literature on developing countries considers, however, that the “internal” real exchange rate (IRER), defined as the relative price of nontradable to tradable goods, is a more appropriate measure of competitiveness because it is the key relative price influencing resource allocation, the production and consumption of tradables and nontradables, and thus, ultimately, external balance. Although the theoretical concept of the IRER is straightforward, its empirical measurement raises the problem of finding operational counterparts for the required price indices of tradable and nontradable goods. As a result, the literature uses a variety of proxies. We depart from a two-good framework by dividing the economy into three categories of goods: exports, imports, and domestically produced and consumed goods. We consider that aggregating imports and exports into one composite tradable good blurs the effects of changes in the terms of trade and constitutes a price index that does not adequately translate the incentive effects of a change in IRER either on the supply side or on the demand side of the economy.

11. The three-good framework produces two IRERs, corresponding to the relative prices of exportables and importables in terms of domestically produced and consumed goods:

IRERx = Pd / Px

IRERm = Pd / Pm

Where Pd is the price of the domestic goods, and Px and Pm are the domestic prices of exportables and importables, respectively, measured in domestic currency terms. IRERx could be considered an indicator of the internal price competitiveness of exports relative to domestic goods. A decline in IRERx would indicate a gain in competitiveness for the export sector. IRERm is similarly an indicator of the internal price competitiveness of domestic goods relative to importables (or imported goods). A rise in IRERm indicates a loss in competitiveness for importables.

12. Figure III.3. compares the evolution of the four categories of relative prices in 1994–2012. They include the (external) REER used above in the model-based assessment, the relative price of domestic goods to imports (IRERm), the relative price of domestic goods to exports (IRERx), and the relative price of nontradables to tradables published by the Cameroonian National Institute of Statistics (IRERTn).7 The following observations can be drawn:

Figure III.3.
Figure III.3.

Cameroon: Internal and External Real Exchange Rates, 1994–2012

(1994=100)

Citation: IMF Staff Country Reports 2013, 279; 10.5089/9781475554885.002.A001

Sources: Cameroon authorities; IMF staff estimates.

  • IRERm and IRERx continue to be more volatile than the external REER. Because some of these volatilities are not embodied in the external REER, the latter is likely to be an incomplete measure of competitiveness in the case of developing countries. In 2012, both IRERm and IRERx took the opposite direction they had taken in 2011, implying a brief gain in competitiveness in the importables and a slight loss of competitiveness in the export sector for that year.

  • The 2012 brief movements were not, however, strong enough to compensate for the long-run trends of IRERx and IRERm. Since its peak in 1998, IRERx continues its declining trend,8 suggesting a broad gain in competitiveness in the export sector, even though it went through two short periods of upward movements or loss of competitiveness, in 2000–04 and 2008–09. These two periods corresponded to important changes then happening in the global trade environment, including an increased traded share of processed agricultural foods and a strong trade growth in manufactured goods. The 2012 decline in IRERm was not insignificant,9 but more broadly, IRERm continues to be on an upward trend since 1994,10 indicating a sustained loss of competitiveness in the importables.

  • As in previous years, the estimated IRERn for 2012 follows relatively closely the external REER, hence not capturing the volatilities shown in IRERm and IRERx. Considering this perspective, the Cameroonian National Institute of Statistics discontinued the publication of the tradables and nontradables price series in 2012.

D. Assessment of Structural Competitiveness11

13. Competitiveness, defined by the World Economic Forum as the set of institutions, policies, and factors that determine the level of productivity of a country, can also be measured with non-price indicators in addition to using price indicators. This section presents available survey data that compare Cameroon on the structural determinants of external competitiveness.

14. According to the 2013 Global Competitiveness Index (GCI), Cameroon ranks 112th of 142 surveyed countries, with a score of 3.7 of 7, hence gaining four places since the 2012 report and doing slightly better than Sub-Saharan Africa (SSA) (Table III.1). Cameroon obtained higher scores than the SSA average on basic requirements (macroeconomic environment, health, primary education), on all efficiency enhancers except for technology readiness and financial sector development, and on both factors of innovation and sophistication.

Table III.1.

Cameroon and SSA: Global Competitiveness Index 2012–13

article image
Source: World Economic Forum, The Global Competitiveness Report, 2013.

15. However, Cameroon’s business climate, as measured by the 2013 World Bank Doing Business indicators has deteriorated since last year. The country lost five places in 2013, reaching the rank of 161 of 185, compared to 156 of 183 in the 2012 report (Table III.2). Cameroon moved up in the subtopics of trading across borders, enforcing contracts, and resolving insolvency, but lost places on the rest. This was especially true concerning getting credit and protecting investors, where the country lost four places in both subtopics, compared to last year. Cameroon’s 2013 rank is still below that of SSA, which obtained an average rank of 139. In comparison to the CEMAC and West African Economic and Monetary Union (WAEMU) regions, Cameroon does relatively better than the CEMAC, but less well than the WAEMU, which respectively rank 174 and 152.

Table III.2.

Cameroon: Doing Business Indicators, 2012–13

article image
Source: World Bank, Doing Business Indicators, 2013.

16. According to the 2013 World Economic Forum’s report on global competitiveness, firms identify the same five major constraints as in to the 2012 report. Those constraints are corruption, access to financing, inadequate infrastructure, government bureaucracy, and tax regulations (Figure III.4). Compared to last year, corruption now tops the list, as opposed to access to financing, which was the major source of concern in last year’s survey. However, according to the Heritage Foundation, Cameroon performed better in 2013 on the index of economic freedom (Table III.3), gaining two places in its ranking compared to last year. The economic freedom index attributed this better rank to improvements in fighting corruption and a more flexible labor market. On balance, it seems that despite the authorities’ efforts to fight corruption and improve the business environment, firms still perceive corruption as a major impediment.

Figure III.4.
Figure III.4.

Cameroon: The Most Problematic Factors for Doing Business

(Percent of Responses)

Citation: IMF Staff Country Reports 2013, 279; 10.5089/9781475554885.002.A001

Source: World Economic Forum, 2012-13.
Table III.3.

Cameroon: Index of Economic Freedom, 2011–13

article image
Source: Heritage Foundation.
1

“Cameroon—Fiscal Policy for Growth and Development,” World Bank, Washington, DC (2010).

2

See forthcoming IMF Working Paper: “Fiscal Sustainability, Public Investment, and Growth in Natural Resource-Rich, Low-Income Countries: The Case of Cameroon,” Washington, DC (2013).

3

Tables 2 and 3 report revenue for 2011–12 on a net basis (i.e., after cancellation of mutual claims between the government and SONARA), but they show revenue projected from 2013 onward on a gross basis (i.e., without cancellation), consistent with IMF recommendations. In 2012, the cross-cancellation amounted to about 1 percentage point of GDP.

4

The 2013 World Bank Doing Business Indicators ranked Cameroon among the worst 10 performers of 185 countries in terms of the processes related to “paying taxes.”

5

The NOPD is an indicator of fiscal sustainability when applying the Permanent Income Hypothesis (PIH) fiscal rule, which stipulates that earnings from oil are saved during the years of high production, and drawn down as oil production falters in the outer years, to smooth public spending. For further discussion of the NOPD as a fiscal anchor, see Appendix III on public investment and fiscal sustainability in the 2012 Article IV Consultation staff report (IMF Country Report No.12/237).

6

The CEMAC directives focus on the budget law and the medium-term fiscal framework: government accounting; payroll management; implementation of GFSM2001; metadata related to the budget system; value-added tax law; and transparency and governance code.

7

Four banks presented negative equity at end-March 2013. Their combined assets represented about 8 percent of the assets of the banking system.

8

A planned reduction in the common external tariff is awaiting an economic impact study.

9

Comments were sent by FAD shortly after the mission. The thrust of FAD’s comments was to suggest limiting the application of the law both in terms of the sectors it covers, and the tax incentives it provides.

10

No significant reform is likely before parliamentary elections due in 2013; it is thus assumed that reforms will start in 2014.

11

The moderate reform scenario contemplates a price increase for gasoline of 20 percent and 10 percent over 2014 and 2015, respectively; and a price increase for diesel of 15 percent and 5 percent over 2014 and 2015, respectively.

1

This appendix was prepared by Jean van Houtte and Samah Mazraani.

2

Bafoussam (1), Banabo (1), Garoua (1), Ngaoundéré (1), Yaoundé (3), and Douala (5).

3

A small portion of SONARA’s production is stocked by SONARA in Limbé for local distribution.

4

TotalFina Elf, ExxonMobil, Shell, Tradex, Oliybia, and ChevronTexaco, among others.

5

Cameroon exports the bulk of its domestic heavy crude oil production, while SONARA exported only about 37 percent of its refined products in 2009.

6

The “post-tax subsidy” is defined as the difference between the international price adjusted for transport and distribution margins and taxes on the one hand, and the price paid by consumers on the other hand.

7

By comparison, in the European Union, the bulk of the tax levy on fuel price at the outset of the fuel increase in 2008 fell on excise taxes (on average 37 percent of the retail price for 95RON super gasoline in May 2008), and less on the value-added tax (20 percent).

8

For a review of the negative consequences of energy subsidies, see http://www.imf.org/external/np/pp/eng/2013/01 2813.pdf: “Energy Subsidy Reform: Lessons and Implications” and the May 2013 Regional Economic Outlook for Sub-Saharan Africa chapter “Increasing Fiscal Space and Prospects for Economic Growth: The Role of Energy Subsidy Reforms.”

9

See “Energy Subsidy Reform: Lessons and Implications.”

10

The direct and indirect effects on inflation of the increase of all retail fuel prices in Burkina Faso by about 8 percent in late March 2012 lasted for about three months, and contributed to less than 1 percentage point of inflation by the end of the year. This finding is consistent with the low inflation rates in European countries with full international price pass-through to end-consumers.

11

Dahl (2012) estimates a range of values for price elasticities for diesel and gasoline between -0.11 and -0.38 based on a review of 124 countries. An elasticity of -0.2 for diesel and gasoline is assumed for this estimation.

1

This appendix was prepared by Boriana Yontcheva with assistance from Du Prince Tchakoté and Patrick Zoungarani.

2

The strategy is aimed at limiting credit risk in the absence of adequate information on retail borrowers.

3

The structural benchmarks are calculated based on FinStats from the World Bank. Using a large dataset of countries, each financial indicator was regressed on a set of structural characteristics, such as GDP per capita and its square; population size and density; the age dependency ratio; and country-specific factors. For more methodological information, see Čihák and others (2012).

4

The lack of adequate resources was highlighted in the 2006 Financial Sector Assessment Program report.

1

This appendix was prepared by Arina Viseth, with inputs from Aleksandra Zdzienicka, Fabien Nsengiyumva, and Kwame Tweneboah Kodua.

2

The external stability assessment of the CEMAC region (IMF Country Report No. 12/244, 2012) found that the REER was overvalued, but was within the margin of error, indicating that the REER was broadly consistent with equilibrium under current policies, and reserves remained adequate.

3

The current account elasticity is calculated as (export elasticity) x (export-to-GDP ratio)-(import elasticity – 1) x (import-to-GDP ratio).

4

REER assessments for Sub-Saharan African countries use elasticities of the current account to the REER ranging from -0.3 to -0.6.

5

The panel regression model to estimate the LREER for Cameroon was, however, incomplete owing to data unavailability.

6

See Bems, Rudolfs, and Irineu de Carvalho Filho, 2009, “Exchange Rate Assessments: Methodologies for Oil-Exporting Countries,” IMF Working Paper No.09/281, Washington, DC.

7

The 2012 relative price of nontradables to tradables was estimated based on past values. The proxy used for the price of domestic goods is derived from national accounts data as explained in Hinkle, L., and F. Nsengiyumva, 1999, “Internal Real Exchange Rates: Concepts and Measurement” in Hinkle, L. and Peter J. Montiel, Exchange Rate Misalignment: Concepts and Measurement for Developing Countries (Washington, DC; World Bank).

8

The cumulative depreciation of IRERx from 1998 to 2012 was 46 percent.

9

A 7 percent decline in 2012 compared to 2011, which almost matches its most important decline in 2008 of 8 percent.

10

The cumulative appreciation of IRERm from 1994 to 2012 was 56 percent.

11

Assessment based on the Global Enabling Trade report of 2012 is not presented, because the 2013 report is not yet available.

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Cover IMF Staff Country Reports
Cameroon: 2013 Article IV Consultation
Author:
International Monetary Fund. African Dept.
Volume/Issue:
Volume 2013: Issue 279
Publisher:
International Monetary Fund
ISBN:
9781475554885
ISSN:
1934-7685
Pages:
109
DOI:
https://doi.org/10.5089/9781475554885.002
  • <sup><xref rid="RA01fig01" ref-type="fig">Figure 1</xref>.</sup>
    View in gallery
    Figure 1.

    Cameroon: Public Debt, 2005–12

    (Percent of GDP)

  • <sup><xref rid="RA01fig02" ref-type="fig">Figure 2</xref>.</sup>
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    Figure 2.

    Cameroon: Nominal GDP, 2012

    (Percent of total)

  • <sup><xref rid="RA01fig03" ref-type="fig">Figure 3</xref>.</sup>
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    Figure 3.

    Cameroon: Selected Economic Indicators, 2008–12

  • <sup><xref rid="RA01fig04" ref-type="fig">Figure 4</xref>.</sup>
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    Figure 4.

    Cameroon: Government Arrears and Payment Obligations, 2009–12

  • <sup><xref rid="RA01fig05" ref-type="fig">Figure 5</xref>.</sup>
    View in gallery
    Figure 5.

    Cameroon: Medium-Term Outlook, 2013–18

  • <sup><xref rid="RA01fig06" ref-type="fig">Figure 6</xref>.</sup>
    View in gallery
    Figure 6.

    Cameroon: Power Supply, 2010–18

    (Megawatts)

  • <sup><xref rid="RA01app1fig01" ref-type="fig">Figure I.1</xref>.</sup>
    View in gallery
    Figure I.1.

    Cameroon: Retail Price of Basket of Petroleum Products, 2009–13

  • <sup><xref rid="RA01app1fig02" ref-type="fig">Figure I.2</xref>.</sup>
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    Figure I.2.

    Cameroon: Fuel Subsidies, 2009–13

  • <sup><xref rid="RA01app1fig03" ref-type="fig">Figure I.3</xref>.</sup>
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    Figure I.3.

    Cameroon: Consumer and Producer Subsidies, 2009–13

    (Percent of GDP)

  • <sup><xref rid="RA01app1fig04" ref-type="fig">Figure I.4</xref>.</sup>
    View in gallery
    Figure I.4.

    Selected African Countries: Post-Tax Fuel Subsidies, 2012

    (Percent of GDP)

  • <sup><xref rid="RA01app1fig05" ref-type="fig">Figure I.5</xref>.</sup>
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    Figure I.5.

    Selected Countries: Energy Efficiency of Production, 2010

  • <sup><xref rid="Rapp02A01fig01" ref-type="fig">Figure II.1</xref>.</sup>
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    Figure II.1.

    Cameroon: Credit Market Share and Volume of Interbank Market

  • View in gallery

    Mobile Phone Subscriptions

    (Per 100 inhabitants)

  • View in gallery

    Mobile Banking Transaction Fees

    (US dollars per transaction amount)

  • <sup><xref rid="Rapp02A01fig02" ref-type="fig">Figure II.2</xref>.</sup>
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    Figure II.2.

    Cameroon: 26-week T-Bill Yield, 2011-2013

    (Percent)

  • <sup><xref rid="Rapp02A01fig03" ref-type="fig">Figure II.3</xref>.</sup>
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    Figure II.3.

    Cameroon: Selected Indicators on Financial Sector Depth

  • <sup><xref rid="Rapp02A01fig04" ref-type="fig">Figure II.4</xref>.</sup>
    View in gallery
    Figure II.4.

    Cameroon: Selected Indicators on Financial Sector Breadth and Efficiency

  • <sup><xref rid="Rapp02A01fig05" ref-type="fig">Figure II.5</xref>.</sup>
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    Figure II.5.

    Cameroon: Selected Profitability Indicators

  • <sup><xref rid="Rapp02A01fig06" ref-type="fig">Figure II.6</xref>.</sup>
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    Figure II.6.

    Cameroon: Selected Indicators on Financial Sector Inclusiveness

  • <sup><xref rid="Rapp02A01fig07" ref-type="fig">Figure II.7</xref>.</sup>
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    Figure II.7.

    Cameroon: Selected Financial Stability Indicators

  • <sup><xref rid="Rapp03A01fig01" ref-type="fig">Figure III.1</xref>.</sup>
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    Figure III.1.

    Cameroon: Effective Exchange Rates and Terms of Trade, 1994–2012

    (1994=100)

  • <sup><xref rid="Rapp03A01fig02" ref-type="fig">Figure III.2</xref>.</sup>
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    Figure III.2.

    Cameroon: Required Change in the REER to Bring it to Equilibrium Level

  • <sup><xref rid="Rapp03A01fig03" ref-type="fig">Figure III.3</xref>.</sup>
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    Figure III.3.

    Cameroon: Internal and External Real Exchange Rates, 1994–2012

    (1994=100)

  • <sup><xref rid="Rapp03A01fig04" ref-type="fig">Figure III.4</xref>.</sup>
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    Figure III.4.

    Cameroon: The Most Problematic Factors for Doing Business

    (Percent of Responses)

Figure 1.

Cameroon: Public Debt, 2005–12

(Percent of GDP)
Figure 2.

Cameroon: Nominal GDP, 2012

(Percent of total)
Figure 3.

Cameroon: Selected Economic Indicators, 2008–12
Figure 4.

Cameroon: Government Arrears and Payment Obligations, 2009–12
Figure 5.

Cameroon: Medium-Term Outlook, 2013–18
Figure 6.

Cameroon: Power Supply, 2010–18

(Megawatts)
Figure I.1.

Cameroon: Retail Price of Basket of Petroleum Products, 2009–13
Figure I.2.

Cameroon: Fuel Subsidies, 2009–13
Figure I.3.

Cameroon: Consumer and Producer Subsidies, 2009–13

(Percent of GDP)
Figure I.4.

Selected African Countries: Post-Tax Fuel Subsidies, 2012

(Percent of GDP)
Figure I.5.

Selected Countries: Energy Efficiency of Production, 2010
Figure II.1.

Cameroon: Credit Market Share and Volume of Interbank Market

Mobile Phone Subscriptions

(Per 100 inhabitants)

Mobile Banking Transaction Fees

(US dollars per transaction amount)
Figure II.2.

Cameroon: 26-week T-Bill Yield, 2011-2013

(Percent)
Figure II.3.

Cameroon: Selected Indicators on Financial Sector Depth
Figure II.4.

Cameroon: Selected Indicators on Financial Sector Breadth and Efficiency
Figure II.5.

Cameroon: Selected Profitability Indicators
Figure II.6.

Cameroon: Selected Indicators on Financial Sector Inclusiveness
Figure II.7.

Cameroon: Selected Financial Stability Indicators
Figure III.1.

Cameroon: Effective Exchange Rates and Terms of Trade, 1994–2012

(1994=100)
Figure III.2.

Cameroon: Required Change in the REER to Bring it to Equilibrium Level
Figure III.3.

Cameroon: Internal and External Real Exchange Rates, 1994–2012

(1994=100)
Figure III.4.

Cameroon: The Most Problematic Factors for Doing Business

(Percent of Responses)