I. Recent Macroeconomic Developments

3. The challenging security situation in the Far North, North-West and South-West regions of the country, coupled with the sharp decline in oil production, have somewhat contributed to holding back activity below the projected growth for 2017, affecting the primary and secondary sectors. Nonetheless, real GDP grew by about 3.2 percent last year, thanks to buoyant non-oil activity as the investments in electricity supply are bearing fruits. Growth should accelerate to above 4 percent in 2018 on the back of completed road and energy projects while inflation should remain subdued.

4. The authorities pursued their fiscal consolidation efforts although recent spending overruns occurred following the settlement of ENEO’s arrears, significant security expenditures, and capital outlays related to the organization of CAN. Considerable efforts to collect VAT and increased export receipts allowed non-oil revenues to exceed projections by 0.7 percent of GDP at end-2017 even though this performance softened somewhat in Q1 2018 due to lower growth and trade. Public debt remains sustainable although public debt-to- GDP ratio rose by 4 percentage points due to higher-than-expected disbursements related to externally-financed projects, the conversion of BEAC statutory advances into long-term debt, and the inclusion of the debt of the refinery company (SONARA) due to marketers.

5. Tighter monetary conditions, combined with the deceleration of economic activity, have slowed the growth of credit to private sector. Cash flow difficulties encountered by the private sector translated into banks’ lending more short-term financing to businesses as well as an increase in non-performing loans (NPLs) in early 2018. On the external front, exports of commodities and manufactured products have performed well while imports decreased significantly amid the authorities’ fiscal consolidation efforts. The improved current account position, along with enhanced enforcement of foreign exchange regulations and lower private capital outflows, contributed to the recovery of net foreign assets and the rebuilding of foreign exchange reserves.

II. Program Performance

6. Program implementation has underperformed original expectations, notably on the quantitative front. The spending overruns resulted in the nonobservance of the PC on non-oil primary balance. Two other PCs at end-2017 on disbursements of non-concessional loans and net BEAC financing were also missed amid the structuring of major development projects. The IT on the national oil company SNH direct interventions was missed with a narrow margin. The lower-than-expected bond issuance and non-disbursement of a portion of budgetary support by donors also contributed to the unfavorable program outcomes.

7. That said, no new non-concessional loans were signed between the conclusion of the first review and the date for this second review. In addition, the PCs related to net domestic financing of the government and the accumulation of external payment arrears as well as all but one indicative targets (ITs) were met. To prevent the occurrence of untimely disbursements in the future, the authorities are taking steps to enhance project planning and monitoring.

8. The implementation of the structural measures was strong, with most benchmarks (SBs) met. These include measures aimed at strengthening fiscal policy and transparency; enhancing revenue mobilization; improving public finance and debt management notably through tackling contingent liabilities, containing correspondent accounts and accounts without principal accountant, conducting an external audit of domestic arrears at end-2016, and designing a plan for their gradual clearance. Through their efforts to foster financial stability, the authorities have extended to all credit and microfinance institutions access to creditor databases. The remaining SBs, notably the 2017 budget execution report, the circular on implementing the projects’ maturation guide, and computerization of the register of property collaterals, were either observed with some delay or are being implemented.

III. Policies and Reforms in 2018 and Beyond

9. The Cameroonian authorities remain determined to achieve the program objectives for the rest of 2018 and to the end of the arrangement. They will pursue measures to prevent the reoccurrence of fiscal overruns while protecting social spending, notably in the areas of health, education, social protection, and gender equality. The favorable economic outlook will provide an opportunity for the authorities to advance fiscal and structural reforms to broaden the non-oil revenue base, enhance the efficiency of public investment, strengthen the budgetary process, and control public debt. To accelerate growth, the authorities intend to continue improving energy supply and key transport infrastructures and enhance the economy’s competitiveness.

Pursuing Growth-Friendly Fiscal Consolidation

10. Staff analysis suggests that revenue and capital expenditure multipliers in Cameroon are small and in line with those of comparable countries, as evidenced in the Selected Issues Paper. This suggests that effective growth-friendly fiscal adjustment will require relatively greater focus on revenue mobilization over time. Against this backdrop, Fund continued technical support to the authorities’ revenue mobilization agenda will be particularly important going forward.

11. The objectives of the 2018 budget have been revised in line with the government’s priorities and program goals. It aims at boosting non-oil revenues and limiting investment spending and incorporating non-budgeted expenditures for security and subsidies. On the revenue side, the main course of action will be to broaden the tax base and enhance revenue collection. Efforts in 2018 will be geared toward boosting revenues at the tax administration through improved management of the VAT, enhanced monitoring, audits of large and medium-sized businesses, increased collection of tax arrears, and greater use of electronic means for tax payments. Moreover, the authorities are considering options to improve VAT efficiency. Revenue-enhancing actions are also planned by the customs administration, including the introduction of administrative measures to optimize revenues including, joint DGI-DGD audits, and interfaces with sectoral ministries to fight against the frauds.

12 On the spending front, expenditures will be curtailed while preserving social spending. In this regard, measures include mainly the continued cleaning of the payroll database to reduce “ghost” civil servants; additional cuts in goods and service expenditures in line with the Prime Minister’s circular; the prioritization of domestically-financed capital spending; greater monitoring of budget execution; and reinforced programming and monitoring of disbursements. All these measures are expected to achieve budget savings equivalent to at least 2.3 percent of GDP. The government undertakes to prevent any increase in domestic arrears and clear the domestic arrears that have been validated through an audit. As of end- May 2018, the government has already cleared the equivalent of 1.3 percent of GDP in domestic arrears.

13. Over the medium term, the authorities plan to undertake bold actions to boost further non-oil revenue mobilization, with the collection of property taxes through the electricity bill; an action plan to gradually reduce tax expenditures, notably discretionary exemptions; and external financing arrangements for investment incorporating relevant taxes. They are already undertaking urgent measures to better control the budget execution and enhance fiscal discipline, as laid out in their MEFP.

14. The Cameroonian authorities also intend to pursue their public financial management (PFM) reforms—with technical assistance from the Fund and other partners—with a view to enhancing the quality of, and data on, expenditure; focusing on the transposition into national laws of CEMAC directives for which draft decrees are either ready or will be finalized by year-end; pursuing and expanding the cash flow management reforms; strengthening the government financial reporting system; improving the effectiveness and quality of capital spending; and strengthening the management of SOEs. At the same time, the DGD and DGI will further enhance revenue collection, strengthen the taxpayer database and IT systems, and fight fraud and tax evasion.

Preserving Debt Sustainability

15. The authorities will pursue prudent debt strategy and management, including closely monitoring contingent liabilities, with a view to preventing a downgrading to “debt distress” of the country’s DSA rating and preserve debt sustainability. Their borrowing plan has been revised, in consultation with the country’s partners, to integrate medium-term development priorities and give preference to projects with the least expensive financing. The authorities will continue to favor concessional borrowing over non-concessional financing provided that the former is available.

16. Actions are envisaged on different fronts to reduce the stock of public debt. First, the authorities are committed to reducing the balance of contracted but undisbursed debt (SEND) through a joint plan by the ministries of finance and planning. Furthermore, the authorities will expand to public enterprises and public establishments the collection of cross debts. They are also determined to improve the financial situation of SOEs, notably the cash flow and financial viability of SONARA and the electricity transmission company SONATREL through the implementation of best practices in management. The soundness of the latter company is key to promoting inclusive growth.

Tackling Macro-Financial Vulnerabilities

17. As Chapter 4 of the Selected Issues makes evident, sovereign risks dominate the banking sector in Cameroon. Therefore, fiscal consolidation and addressing contingent liabilities should help reduce risks to banks. The authorities are also committed to finalizing a cost and feasibility assessment of resolution options for distressed banks, in coordination with regional authorities and with the support of development partners. Moreover, an action plan to address NPLs is being prepared that will include building capacities in the area of business law to ensure an adequate treatment of disputes. Judicial specialists, including at least 30 judges, will be trained in resolution of banking disputes in the main activity centers. The authorities will lean on strengthened prudential standards to preserve financial sector stability, in coordination with the regional supervisor COBAC.

18. The Cameroonian authorities take note of staffs recommendation to identify actions to tackle weaknesses in the AML/CFT framework, and look forward to Fund technical assistance in this area. They also continue to attach high priority to fighting tax evasion and illicit financial flows.

Fostering Competitiveness and Private Sector Development

19. The development of the private sector and increased economic diversification remain at the center of the authorities’ transformation agenda. Efforts will be aimed at closing the infrastructure gaps, promoting greater competitiveness and improving access of the private sector to financial services. The authorities envisage measures to reduce the costs and delays related to foreign trade and the congestion of the Port of Douala, which hamper competitiveness. They share the view that improving the business climate will require simplifying tax collection procedures and reducing delays in the payment of government invoices.

20. The authorities are already taking measures to improve credit access for SMEs and the public, notably through the ongoing update of the financial inclusion strategy. Finally, they are consulting with development partners, notably the World Bank and the African Development Bank to revise the business model for the SME bank while encouraging commercial banks to lend more to SMEs.

IV. Conclusion

21. Our Cameroonian authorities are confident that the policies and reforms laid out in their MEFP will enable the country to meet the objectives of their ECF-supported program. They stand ready to take any additional measures deemed necessary to this end. In light of the above, the authorities would appreciate Directors’ support for the completion of the second review under the ECF-supported program. They also request waivers of nonobservance of performance criteria (PCs) and modification of PCs.