IMF Policy Paper: Cameroon: Staff Report For The 2018 Article IV Consultation, Second Review Under The Extended Credit Facility Arrangement, Requests For Waivers Of Nonobservance Of Performance Criteria And Modification Of Performance Criteria—Debt Sustainability Analysis

2018 Article IV Consultation, Second Review Under the Extended Credit Facility Arrangement Requests for Waivers of Nonobservance of Performance Criteria and Modification of Performance Criteria-Press Release; Staff Report; and Statement by the Executive Director for Cameroon

Abstract

2018 Article IV Consultation, Second Review Under the Extended Credit Facility Arrangement Requests for Waivers of Nonobservance of Performance Criteria and Modification of Performance Criteria-Press Release; Staff Report; and Statement by the Executive Director for Cameroon

Background

1. Public debt increased to 38.2 percent of GDP in 2017, a full 5 percent higher than what was reported at the time of the 1st ECF Review (Text Table 1, Text Figure 1). The increase can be explained by two factors: (i) a broadening of the definition of public debt to include all SONARA debt due to third parties (1.8 percent); and (ii) a larger-than-expected fiscal deficit at end-2017, financed by higher external disbursement and higher expenditure float. As a result, total public and publicly guaranteed debt (external plus domestic) increased from a revised 33.3 percent of GDP in 2016 to 38.2 percent in 2017.1

Text Table 1.

Cameroon: Public and Publicly Guaranteed Debt, 2016-17

(percent of GDP)

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Sources: Cameroonian authorities; and IMF staff calculations.
Text Figure 1.
Text Figure 1.

Cameroon: Public Debt

Citation: IMF Staff Country Reports 2018, 235; 10.5089/9781484370179.002.A004

Sources: Cameroonian authorities; and IMF staff calculations.

2. The stock of contracted-but-undisbursed debt also increased. A 2017 study by the National Debt Committee (CNDP) found that the large stock of undisbursed loans reflects a number of factors, including (i) normal project execution lags; (ii) delays in large infrastructure projects; (iii) non-performing projects with very low or nil disbursements, owing to lack of maturation or lack of available counterpart funds. This stock reached CFAF 4.5 trillion or 23 percent of GDP, up from 20 percent of GDP at end-2016. China’s share in undisbursed loans is still the largest, but dropped from 36 percent at end-2016 to 28 percent at end-2017, as new borrowing agreements were signed mostly with multilateral creditors, which now account for over 40 percent of undisbursed debt. Commercial loans account for 15.6 percent of the undisbursed amount.

3. The share of external concessional and semi-concessional debt has increased, in line with the objectives of the ECF-supported program. Multilateral and Paris Club (PC) debt represented almost half of total debt. Bilateral non-PC debt is dominated by China, while commercial debt mostly reflects a $750 million Eurobond issued in 2015 (Text Table 2).

Text Table 2.

Cameroon: Composition of External Debt by Creditor, 2016-17

(percent of GDP)

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Sources: Cameroonian authorities; and IMF staff calculations.

4. Domestic2 bank debt remains low at 8 percent of GDP in 2017. The composition of bank debt remained tilted towards the long term, with T-bills only accounting for 20 percent of domestic debt.

5. The coverage of public debt for the purposes of this DSA has expanded compared to the 2016 DSA. Specifically, the entire debt to the private sector of the oil refinery SONARA, estimated at 3 percent of GDP, is included. As in the previous DSA, other liabilities linked to other SOEs are small and limited to their external debt (0.1 percent of GDP).

6. However, the debt of State-Owned Enterprises (SOEs) not yet covered by the DSA remains significant. According to a recent report by the authorities, SOE debt stood at 12.5 percent of GDP at end-2016 (see Box 1). For most of SOEs, data for 2017 is not available and further work is needed to clarify the nature of certain liabilities. Staff has agreed with authorities not to include SOEs ex-SONARA in the debt definition, but to work towards expanding it in the future to include all non-financial SOEs. Given that SONARA’s debt (4 percent of GDP) is already included in the DSA analysis, and the significant cross-debts between SOEs and the state and across SOEs, the existing stock of SOE debt not included in this DSA (about 8.5 percent of GDP) could give rise to much lower contingent liabilities.

Public Debt and State-Owned Enterprises

Improved monitoring. The authorities took a decisive step in improving monitoring of SOEs by publishing, at the end of 2017, a “livre vert” listing all companies where the state or public entity is a shareholder, and all Public Establishments with an Industrial or Commercial Character (EPIC), which are legally distinct from SOEs but imply the same modalities of operation and state control. It is expected that the livre vert will be updated and published yearly.

Text Table. A census of public enterprises

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Coverage. This analysis employs data from SOEs with a state participation above 50 percent and the EPICs for which reliable financial data are available. Financial companies (such as public banks) are excluded.

SOE gross debt is sizeable. Total SOE debt reached 12.5 percent of GDP in 2016, up from 11.7 percent in 2014. Over two thirds of outstanding SOE debt is financial (banks, securitized debt and other loans) and suppliers’ debt.

Cross-debts with the central government are significant. Anecdotal evidence suggests liabilities across SOEs are significant. A substantial portion of gross SOE debt, exceeding 2 percent of GDP, is owed to the state. At the same time SOE claims on the state declined to 0.3 percent of GDP at end-2016, (1.5 percent in 2014).

Text Table: SOEs and EPIC debt, 2014-16

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The public oil refinery SONARA is a concern. Total SONARA debt reached 5 percent of GDP in 2014, before gradually declining to 4 percent of GDP at end-2017, as lower oil prices triggered higher-than-expected profits. However, the increase in international oil prices has already started to strain SONARA’s finances again in 2018. At end-2017, reported state debt vis-à-vis the refinery stood at 0.5 percent of GDP; the refinery’s debt to the state, mainly in the form of tax and customs arrears, stood at 1.2 percent of GDP.

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7. Cameroon’s capacity to monitor and manage public debt for the purposes of IMF’s debt limit policy is adequate and is improving, but further improvements are needed. Discrepancies in reporting persist between the ministry of finance and the debt agency. While progress has been made in making the approval of National Public Debt Committee (CNDP) a requirement for all externally financed projects, some proposals still move forward to relatively advanced stages without preliminary authorization by the CNDP. The tracking of project loan disbursements remains inadequate, often leading to significant ex-post revisions in external debt data. Rapid and concrete actions to reduce the SENDs, particularly those related to loans signed over four years ago and that have very low or zero disbursement rates, is needed to provide a clearer picture of the existing commitments’ overhang and space for new borrowing. On the other hand, progress has been made in the monitoring of SOE debt and other contingent liabilities (see Box 1).

Assumptions

8. The macroeconomic framework reflects recent economic developments and the policies underpinning the ECF-supported program. The baseline scenario is predicated on full implementation of program consolidation and reforms, as well as completion of ongoing infrastructure projects, which should lead to higher FDI and exports. Compared to the 2016 DSA, growth is projected to be lower in 2017 and 2018 following a slower-than-expected recovery and declining oil production; economic activity is expected to gradually pick up and growth to average 4.4 percent in 2018-22. Higher-than expected spending weakened fiscal consolidation in 2017; corrective measures should ensure more tightening in 2018, but revenues are projected to be on average 1 percent of GDP lower than in the 2016 DSA over the long term due to more conservative assumptions about organic revenue growth. Non-oil exports are projected to remain dynamic and support the current account even as oil exports decline (Text Table 3).

Text Table 3.

Cameroon: Key Macroeconomic Assumptions, 2016-38

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2015 DSA referred to 2014-15 and 2016 DSA referred to 2015-16.

2015 DSA referred to 2016-20 and 2016 DSA referred to 2017-21.

2015 DSA referred to 2021-35 and 2016 DSA referred to 2022-36

9. The financing assumptions have been adjusted to reflect a higher concessionality than in the 2016 DSA. The financing gap during 2018-20 is assumed to be fully covered by IMF financing and budget support from donors. In line with 2017 disbursements and the government’s intention to shift the composition of new project borrowing towards concessional loans, the projected new debt will be skewed towards multilaterals creditors and the grant element of new borrowing is assumed to remain relatively high through the projection horizon.

External Debt Sustainability

10. Cameroon is classified in the category of weak policy performers based on the World Bank Country Policy and Institutional Assessment (CPIA). With a three-year average CPIA score of 3.2 on a scale of 1 (low) to 6 (high), Cameroon falls within the range of 1 to 3.25 for weak policy performers. However, Cameroon fares better than the average of CEMAC countries (2.9) and its score is comparable to the SSA average. The policy-dependent thresholds applicable to this category are the following: (i) a present value (PV) of debt-to-exports ratio of 100 percent; (ii) a PV of the debt-to-revenue ratio of 200 percent; (iii) a PV of the debt service-to-exports ratio of 30 percent; (iv) a debt service-to-exports ratio of 15 percent; and (v) a debt service-to-revenue ratio of 18 percent.

11. The PV of external PPG debt-to-exports breaches its threshold for a prolonged period of time under the baseline scenario. The PV of debt-to exports ratio—which is the most critical ratio for Cameroon—reached 103 percent in 2017, breaching its policy dependent threshold, and would remain above it until 2035. Its average deviation to the threshold is about 16 percent throughout the period. The path has further deteriorated compared to that projected in the 2016 DSA, reflecting recent export trends and more conservative projections over the medium term, in spite of the fact that the baseline trajectory rests on the assumption of continued access to highly concessional financing and limited use of non-concessional loans.3

12. Other debt stock indicators remain well below their thresholds. The PV of external debt stood at 19.8 percent of GDP and 132 percent of government revenues (excluding grants) at end-2017. After peaking in 2019, ratios are expected to decline steadily during the projected period. The PV of debt-to-GDP ratios has declined by about 15 percent compared to the 2016 DSA reflecting the rebasing of the GDP that occurred in July 2017. These ratios remain well below their thresholds throughout the horizon under the baseline.

13. Debt service payment increase substantially in 2023-25, and liquidity ratios need to be monitored carefully. The external debt service to export ratio remains comfortably below the threshold over the program horizon, but rises to 15.4 percent, slightly above its threshold, in 2023-25 due to the repayment (in three yearly instalments) of the US$750 million 2015 Eurobond. It then quickly declines after the last installment of the Eurobond is repaid in 2025. Despite an increase in 2023-25, The PV of external debt service to revenue remains below its threshold through the projection horizon.

14. Standard stress tests underline the broad scope of risks to the debt outlook. The ratios of PV of debt-to-exports exports breaches threshold under all eight standardized stress tests, while debt-service-to-exports breaches under four of eight tests. The most severe of these shocks are those that diminish export growth for a short interval (figure 1). Under the combined scenario, the PV of debt-to-GDP ratio briefly and marginally breaches its threshold, and the PV of debt to revenue ratio approaches it (without breaching it) in 2020, before declining. The debt-service-to-revenue ratio marginally breaches its threshold in 2019-25 under the scenario of 30 percent nominal depreciation.

Figure 1.
Figure 1.

Cameroon: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2018-38 /1

Citation: IMF Staff Country Reports 2018, 235; 10.5089/9781484370179.002.A004

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio on or before 2028. In figure b. it corresponds to a Combination shock; in c. to a Exports shock; in d. to a Combination shock; in e. to a Exports shock and in figure f. to a One-time depreciation shock

Public Sector Debt Sustainability

15. Public debt is projected to lie on a downward trajectory in the medium to long term. Public debt is projected to peak at 38.7 percent of GDP in 2018 and gradually decline to below 30 percent of GDP by 2030. The incidence of public external debt would increase temporarily as the government relies on external financing to support key infrastructure and pro-poor projects. In the baseline scenario, the PV of total public sector debt as a share of GDP is expected to reach 33 percent in 2018, close to the DSF benchmark level of 38 percent of GDP associated with heightened public debt vulnerabilities for weak policy performers, but is then expected to decline steadily over time to 15 percent of GDP in the long term. Enhanced revenue mobilization would also help reduce the PV of total public debt as a share of revenue from 216 percent in 2017 to 169 percent in 2023 and 91 percent in the long term.

16. The threshold for the PV of debt to GDP ratio would be breached under the real depreciation and contingent liabilities scenario. A 30-percent real depreciation would push the PV of public debt to 40 percent of GDP (the policy threshold) next year, before declining steadily. The same results are obtained under a 10 percent contingent liabilities shock (however, this shock is larger than the total stock of SOE debt not included in the DSA plus the realization of existing contingent liabilities on existing PPPs).

Conclusion

17. The assessed risk of debt distress remains high. The present value (PV) of debt-to exports ratio and debt-service-to-exports ratio breach the policy dependent thresholds over several years. This results in the categorization of risk of debt distress as “high”. Steadfast implementation of ambitious fiscal and structural reforms supported by the IMF program is crucial to mitigate risks. The weaknesses presented in all debt burden indicators which are expressed as a proportion to exports points to the need for deep structural reforms to improve competitiveness and achieve economic diversification, while fiscal consolidation and a prudent borrowing policy, skewed towards concessional loans, remain crucial to keep public debt dynamics on a sustainable path and rebuild buffers ahead of upcoming high debt repayments.

18. Authorities’ view. The authorities noted that large infrastructure needs, including for the upcoming African Cup of Nations (CAN) are an exceptional factor driving the recent increase in debt. As several large projects come to fruition in the coming months, the upward pressure on debt would start easing. They were also confident that steady improvements in non-oil exports and higher growth in the medium term would ensure external sustainability over the projection horizon. Going forward, the authorities also plan to continue prioritizing concessional loans and contract new debt only to fund critical projects with proven strong growth or social potential. The authorities also maintain that only a fraction of SONARA’s debt to the private sector (that came under distress following the refinery’s losses due to the fixed pump prices) should be included in the definition of public debt.

Figure 2.
Figure 2.

Cameroon: Indicators of Public Debt Under Alternative Scenarios, 2018-38 /1

Citation: IMF Staff Country Reports 2018, 235; 10.5089/9781484370179.002.A004

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio on or before 2028.2/ Revenues are defined inclusive of grants.
Table 1.

Cameroon: External Debt Sustainability Framework, Baseline Scenario, 2015-38

(percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

Includes both public and private sector external debt.

Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Assumes that PV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Table 2.

Cameroon: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2018-38

(percent)

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Sources: Country authorities; and staff estimates and projections.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly a an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

Table 3.

Cameroon: Public Sector Debt Sustainability Framework Baseline Scenario, 2015-38

(percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

Coverage includes the central government and certain SOEs. Gross debt is used.

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Table 4.

Cameroon: Sensitivity Analysis for Key Indicators of Public Debt, 2018-38

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Sources: Country authorities; and staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period.

Revenues are defined inclusive of grants.