Request for a Three-Year Arrangement Under the Extended Credit Facility
Request for a Three-Year Arrangement Under the Extended Credit Facility
We thank staff for the constructive policy discussions held with the Cameroonian authorities in Yaoundé and Washington on an economic program that could be supported by a three-year arrangement under the Extended Credit Facility (ECF). We also welcome Management’s close engagement with the authorities.
The Cameroonian economy has been severely hit in recent years by falling oil prices and increasing security threats in the Lake Chad basin. These shocks contributed to a substantial deterioration in the fiscal stance by reducing petroleum revenues and increasing expenditure related to security and humanitarian operations associated with refugees from neighboring countries and internally-displaced persons. Against this backdrop, Cameroon’s external position also weakened, as demonstrated by the sharp drop in the country’s reserve coverage.
To address the challenges facing the country and the region and restore fiscal and external stability, the Cameroonian authorities decided to take urgent actions in coordination with their CEMAC counterparts. In support of their policy and reform agenda, the Cameroonian authorities request a three-year ECF-supported program aimed at strengthening fiscal and external buffers, expanding non-oil revenues, improving the efficiency of public investment, boosting the financial sector’s resilience and accelerating economic diversification. The implementation of their ECF-supported program will also contribute to improving reserve coverage.
II. Recent Economic Developments
Cameroon has maintained a solid economic growth in recent years thanks to greater economic diversification and the increase in oil production from new oilfields which offset the decline in prices. But in 2016, growth slowed down as oil production declined and non-oil output remained broadly unchanged. Inflation stood at 0.9 percent far below the CEMAC convergence criterion of 3 percent. The fiscal deficit widened to 6.5 percent of GDP due notably to significantly lower petroleum revenues and increased budget allocations related to the authorities’ Emergency Plan, the fight against Boko Haram, assistance to refugees and displaced populations, and partial arrears clearance.
Public debt increased significantly, reaching about 34 percent of GDP in 2016. The rapid increase in public debt resulted largely from the issuance of the first international debt in Eurobonds in 2015, major infrastructure investments, the financing of the three-year emergency plan to accelerate growth (PLANUT), and the inclusion of domestic and external payment arrears.
The current account deficit narrowed to 3.6 percent of GDP in 2016 from 4.1 percent in 2015, as the decline in exports was less than the import compression stemming from slower economic activity and import substitution in the construction sector. However, the weak export revenue caused external reserves to fall to the equivalent of 3.7 months of imports.
III. Policies and Reforms Under the ECF-Program
The Cameroonian authorities are fully committed to the objectives of the ECF-supported program consistent with the regional approach outlined by the CEMAC summit held in Yaoundé in December 2016.
The implementation of the program will also help achieve the objectives of Cameroon’s Growth and Employment Strategy Paper (GESP) to reduce poverty and unemployment while accelerating economic growth. The program rests on three main pillars, namely, (i) sustained fiscal adjustment to build up fiscal and external buffers; (ii) structural reforms to mobilize non-oil revenue, improve public financial management and the efficiency of public investment; and, (iii) structural reforms to accelerate private-sector led economic diversification and boost the resilience of the financial sector.
The authorities are committed to sustaining their fiscal consolidation efforts. In 2017, they will focus their revenue mobilization efforts on further mobilizing non-oil revenue notably by increasing the excise tax on petroleum products, and enhancing efforts to broaden the tax base.
On the expenditure side, the authorities intend to strengthen both the structure and efficiency of current spending. At the same time, they are committed to protecting vulnerable segments of the population by increasing health and education spending and social protection. Care will be also taken to prioritize capital expenditure, while deferring lower-priority projects. Moreover, the authorities will implement the recommendations resulting from the Public Investment Management Assessment (PIMA). Improved public investment management will be served by the set of criteria developed to help align budgetary resources allocated to investment projects to existing implementation capacities.
Over the period 2018 and 2019, fiscal consolidation will be based on measures aimed at increasing revenue mobilization and enhancing the quality of expenditures. Planned tax policy measures actions to improve the efficiency of tax and customs administration will help boost non-oil revenues going forward. The gradual consolidation of expenditures will enable a reduction in fiscal outlays from 20.1 percent of GDP in 2017 to 19.6 percent in 2019, while preserving priority social expenditure.
The authorities are determined to pursue the ongoing fiscal reforms with a view to strengthening the credibility and transparency of the budget. This will ensure the effectiveness of public expenditures. In addition, the authorities will make greater use of Public-Private Partnerships (PPPs) in areas where the private sector could operate at lower costs. Contingent liabilities associated with PPPs will be analyzed and reported in the annual budget laws together with the analysis of risks stemming from public enterprises.
The authorities’ debt policy aims at keeping public debt on a sustainable path. In this regard, the borrowing plan for 2017 and subsequent years will focus on priority projects with high growth potential. Steps will be taken to set non-concessional debt ceilings in line with the capacity to prepare and execute projects. The authorities have taken necessary actions to strengthen the authority of the National Public Debt Committee (CNDP) and improve the capacity of the Caisse Autonome d’Amortissement (CAA) with a view to better monitoring external debt of public enterprises and avoiding arrears accumulation.
The authorities are mindful that policies to be implemented in the context of Cameroon’s ECF-supported program will help maintain the stability of the regional monetary arrangement by contributing to stabilizing and restoring regional reserves. To address the causes of the fall in these reserves, the BEAC is implementing a tighter regional monetary policy to support its members’ fiscal consolidation efforts and limit their direct and indirect monetary financing.
The Cameroonian authorities have agreed to comply with the commitments made at the regional level to freeze the ceiling on BEAC statutory advances at the level established based on the 2014 budget revenues. In march 2017, the central bank increased its key lending rate to 2.95 percent. The framework and instruments of its monetary policy will be modernized to improving its transmission mechanism. With Fund’s TA, the BEAC will also introduce an emergency liquidity support instrument to assist solvent banks facing liquidity problems.
Stability of the Financial Sector
Despite its overall resilience, the financial sector of Cameroon is showing signs of vulnerabilities due notably to the concentration of banking portfolios and the burden of overdue claims. To enable the sector to be more resilient and increase its contribution to the financing of the economy, the authorities will implement a program aimed at the clearance of overdue claims and the rapid resolution of banks in difficulty. The program will also facilitate the establishment of a legal and regulatory framework enabling the financial sector to select, monitor and actively manage its risks based on best practices.
In addition, the authorities are cognizant of the need to further increase public access to financial services. They will focus their efforts on strengthening the stability of microfinance institutions and will facilitate the development of mobile banking as part of the implementation of the national strategy for inclusive finance.
Competitiveness and Development of the Private Sector
The Cameroonian authorities are committed to implementing the needed reforms to increase the competitiveness of their economy, support the development of the private sector and foster economic diversification. In this regard, they will implement, in coordination with CEMAC institutions, the required reforms to improve the business environment, address the lack of infrastructures in energy and transport while encouraging the private sector’ access to financial services. This effort will help boost the competitiveness and attractiveness of Cameroonian economy. Moreover, the authorities have support for enhanced coordination of tax policies and harmonization of customs procedures at the regional level.
The Cameroonian authorities are determined to steadfastly implement the ECF-supported program to address the daunting challenges facing their economy and the region. The authorities are mindful that restoring macroeconomic and external stability requires sustaining fiscal consolidation efforts and advancing structural reforms. In this regard, the ECF-supported program will anchor their policies and reforms and help lay the ground for inclusive and sustainable growth while strengthening CEMAC’s macroeconomic and external stability.
In this light, we would appreciate Directors’ support to the authorities’ request for an ECF-supported program.