Cameroon: Third Review Under the Extended Credit Facility Arrangement and Requests for a Waiver of Nonobservance of a Performance Criterion and Modification of Performance Criteria—Debt Sustainability Analysis

Third Review Under the Extended Credit Facility Arrangement and Requestsfor a Waiver of Nonobservance of a Performance Criterion and Modification of Performance Criteria-Press Release; Staff Report; and Statement by the Executive Director for Cameroon

Abstract

Third Review Under the Extended Credit Facility Arrangement and Requestsfor a Waiver of Nonobservance of a Performance Criterion and Modification of Performance Criteria-Press Release; Staff Report; and Statement by the Executive Director for Cameroon

Public Debt Coverage

1. The coverage of public debt for the purpose of this DSA has been expanded compared to the recent 2017 DSA.1 Specifically, as in the 2017 DSA the debt stock covers the central government, the expenditure float, contingent liabilities linked to some of the external debt of SOEs,2 guarantees and SONARA, including its supplier debt (Text Table 1). In addition, SONARA’s debt is now also included in the debt service schedule as well as its revenue, which was not the case in the 2017 DSA. External debt is mainly defined based on currency but is adjusted for residency where data is available.3

Text Table 1.

Cameroon: Public Debt Coverage Under the Baseline Scenario

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2. Debt of SOEs not yet covered by the DSA remains significant. According to the recently published annex to the 2019 budget law, SOE debt decreased slightly from 13.1 percent of GDP at end-2016 to 13.0 percent of GDP at end-2017. However, about 2.4 percent of GDP are owed to the government and the DSA already includes SONARA’s debt (2.4 percent of GDP). This suggests that the existing stock of SOE debt not included in the debt stock amounts to at most 8.2 percent of GDP. Staff and the authorities have agreed not to include other SOEs in the debt stock at the moment given the need to clarify certain liabilities, but would work towards expanding debt coverage to include all non-financial SOEs. The DSA also does not cover local government debt and extra budgetary funds due to lack of data.

3. The contingent liability stress test accounts for the stock of SOE debt that is not included in the debt stock as well as risks from ongoing PPPs and financial markets. As discussed above, SOE debt is estimated at 8.2 percent of GDP for end-2017 and is reflected in the contingent liability stress test (Text Table 2). The value of PPPs has so far been small at 2.1 percent of GDP but is estimated to have increased to about 5.5 percent of GDP with the signing of the Nachtigal hydroelectric power project (Box1). This has been incorporated in the DSA and raises the contingent liability shock by 2 percent of GDP (corresponding to 35 percent of the total PPP stock). Contingent liabilities from financial markets are set at the minimum value of 5 percent of GDP, which represents the average cost to the government of a financial crisis in a LIC since 1980. Estimates for other elements not covered are currently not available.

Text Table 2.

Cameroon: Coverage of the Contingent Liabilities’ Stress Test

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The default shock of 2% of GDP will be triggered for countries, whose government-guaranteed debt is not fully captured under the country’s public debt definition (1.). If it is already included in the government debt (1.) and risks associated with SoE’s debt not guaranteed by the government is assessed to be negligible, a country team may reduce this to 0%.

Background

A. Debt

4. Public debt has increased in the first three quarters of 2018. After reaching CFAF 7,507 billion at end-2017, preliminary data suggest that public debt has further increased to around CFAF 7,874 billion as of September 2018 (Text Table 3). This was largely due to a rise in external debt to CFAF 5,802 billion, on account of faster-than-expected disbursements of foreign-financed investment related to the Africa Cup of Nations (CAN) and large infrastructure projects. A significant reduction in the expenditure float, due to cancellation and payment of arrears,4 only partially offset that increase. Other elements of the debt stock changed to a lesser extent. Compared to the previous DSA, debt as a share of GDP at end-2017 declined somewhat (36.9 percent against a previous estimate of 38.2 percent) due to a revision in nominal GDP and a correction to SONARA’s supplier debt.

Text Table 3.

Cameroon: Public and Publicly-Guaranteed Debt, 2016-September 2018

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Sources: Cameroonian authorities, and IMF staff calculations.

Excludes budget support.

5. The composition of external debt has remained largely unchanged. External multilateral and bilateral Paris Club (PC) debt represents around one third of total debt. Bilateral non-PC debt is dominated by China, while commercial debt mostly reflects a $750 million Eurobond issued in 2015 which will come due in three installments from 2023 to 2025 (Text Figure 1). Around 40 percent of external debt is on concessional terms and close to 40 percent is denominated in Euros. Average maturity stood at 11 years for external debt (excluding SONARA’s debt), while the average weighted interest rate stood at 2.3 percent. Around 23 percent of external debt has a flexible interest rate. Short-term supplier debt accounts for 87 percent of SONARA’s external debt.

Text Figure 1.
Text Figure 1.

Cameroon: Composition of Public Debt

Citation: IMF Staff Country Reports 2018, 378; 10.5089/9781484392003.002.A002

Sources: Cameroonian authorities; and IMF staff calculations.

6. The composition of domestic debt has shifted with the decline in the expenditure float. BEAC statutory advances account for around 28 percent of domestic debt, while treasury bills represent 17 percent (Text Figure 2). The share of the expenditure float in domestic debt has declined from 29 percent at end-2017 to 17 percent at end-September 2018. Average maturity of domestic debt (excluding the float and SONARA’s debt) stood at 7 years and the average weighted interest rate at 3.2 percent. 70 percent of SONARA’s domestic debt is short-term bank debt.

Text Figure 2.
Text Figure 2.

Cameroon: Composition of Domestic Public Debt

Citation: IMF Staff Country Reports 2018, 378; 10.5089/9781484392003.002.A002

Sources: Cameroonian authorities; and IMF staff calculations.

The Nachtigal Hydroelectric Power Project

The Nachtigal project is a Public Private Partnership project that will address Cameroon’s excess electricity demand, which is expected to grow at an annual rate of 6–7 percent until 2035. Nachtigal is a greenfield 420 MW hydro power project on the Sanaga river. The operator, the Nachtigal Hydro Power Company (NHPC) is owned by the Government of Cameroon, EDF International, and the IFC. The project is estimated to cost about Euro 1.1 billion, and the dam is expected to be fully operational by 2023 and expected to cover about a third of total electricity demand in Cameroon at very low cost.

The government bears significant financial obligations in this project, but the financing arrangement appears generally in line with similar projects in Cameroon and other emerging markets and developing economies. Financial obligations include upfront cost of an equity injection and loan, securing of the funding required to connect the dam to the existing grid and of a loan guarantee to local commercial lenders, issuance of a letter of credit and provision of a payment guarantee to NHPC in case ENEO, the off-taker, defaults on its payment obligations. Financial arrangements are similar to the Kribi powerplant project also supported by the World Bank and IFC and risks allocation appears broadly in line with other hydropower projects in emerging markets. However, the force majeure risk tends to favor the private partner and the internal rate of return awarded to the private partner is high compared to international practice.

Implications for debt sustainability are limited under the baseline, but the size of the project raises the size of the contingent liability shock. The World Bank project on electricity transmission and reform is already disbursing and part of the debt stock and baseline projections. Guarantees will only come into effect at a later stage and will be incorporated in the baseline projections as more information becomes available. To account for the associated risks, staff has included the total value of the Nachtigal project into the stock of PPPs, which increases from 2.0 percent of GDP to 5.5 percent of GDP. While this does not directly raise the debt stock it increases the size of the contingent liability shock in the DSA by 2 percentage points to 15.1 percent of GDP.

7. The stock of contracted-but-undisbursed debt (SENDs) declined in the first three quarters of 2018. The stock of SENDs decreased to CFAF 4,092 billion at end-September 2018 (Text Table 3). The ratio of external SENDS to total SENDs declined from 96 percent at end-2017 to 95 percent at end-September 2018. The share of multilateral SENDs in total external SENDs declined to 41 percent with the disbursement of multiple loans to finance infrastructure and development projects. The share of external commercial SENDs in total external SENDs increased to 19 percent on account of new infrastructure and CAN projects. China’s share in undisbursed loans continues to be the largest at 29 percent at end-September.

8. Cameroon’s capacity to monitor and manage public debt for the purposes of the IMF’s debt limit policy is adequate and is improving, but further improvements are needed. Discrepancies in reporting between the ministry of finance and the debt agency can now be reconciled. In addition, the National Public Debt Committee (CNDP) has strengthened its role in the approval process, ensuring that proposals do not move forward to advanced stages without their approval. Tracking of project loan disbursements has improved through close monitoring of calls for funds and strengthened coordination between the Ministries of Finance and Economy, the debt agency and key development partners. This has allowed the authorities to slow down further calls for funds for non-concessional external investment projects until end 2018. However, coordination between project and budget planning remains imperfect and a detailed disbursement plan by project is lacking, resulting in execution above the budget envelope.

9. Measures on SENDs have progressed but the large stock of undisbursed loan commitments remains a key risk to debt sustainability. The authorities have taken important steps to enhance monitoring and management of SENDs, including (i) the adoption of an action plan by the CNDP, (ii) bilateral discussions with creditors and project managers to validate amounts and verify the status of problematic SENDs5, and (iii) official requests for closure of completed projects and cancellation of remaining amounts. However, a large share (13 percent of GDP) of problematic SENDs has been classified for improvement of management and acceleration of disbursements. Formulating a disbursement plan for all remaining SENDs in line with the program’s fiscal objectives will be critical given the recent acceleration of foreign-financed investment spending and the high risk of debt distress.

10. The coverage of external private sector debt has improved. Most recent data have expanded in coverage and suggest that private external debt has increased slightly to US$912 million at end-2017. Direct investment by enterprises accounts for the largest share at 78 percent, with main creditors being exporters and other private sources and official institutions. However, the change in debt coverage makes intertemporal analysis difficult.

B. Macroeconomic Forecast

11. The macroeconomic framework reflects recent economic developments and the policies underpinning the ECF-supported program. The baseline scenario is predicated on full implementation of fiscal and external consolidation, as well as structural reforms envisaged under the program, and on gradual completion of ongoing infrastructure projects, which should lead to higher FDI and exports. Key macroeconomic projections have changed only slightly since the 2017 DSA (Box 2, Text Table 4). Real GDP growth was revised up for historical data but remains largely unchanged over the projection horizon. Inflation has been revised up due to higher historical data and recent changes in the term-of-trade. The primary balance has also remained unchanged as corrective measures are on track for 2018, while revenue-to-GDP ratios declined on account of higher nominal GDP.6 Exports of goods and services as a share of GDP are largely unchanged in the medium-term but are lower in the long term, as downward revisions in volume of oil exports outweigh the increase in oil prices.

Text Table 4.

Cameroon: Key Macroeconomic Assumptions, 2016–38

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Sources: Cameroonian authorities; IMF staff calculations.

The year of the DSA refers to the latest year with actual data. For example, the updated DSA 2017 refers to this version.

12. Financing assumptions have been updated based on most recent data. The financing gap during 2018–20 is assumed to be fully covered by IMF financing and budget support from donors. For 2018, additional budget support from the AfDB (CFAF 98 billion) has been included, while budget support from the World Bank was shifted from 2018 to 2019 (CFAF 55 billion). Financing terms for new external debt have been updated based on average financing terms of SENDs. The mix of new external disbursements in the medium-term is projected based on the composition of SENDs, which implies a shift towards multilateral creditors. In the longer term a gradual shift towards commercial borrowing causes the grant element to gradually decline. Domestic financing (excluding the BEAC loan) is projected to shift gradually towards more medium- to long-term borrowing. The discount rate remains at 5 percent, as approved by the IMF and World Bank Executive Boards in October 2013.

13. Financing assumptions regarding SONARA reflect recent loan agreements as well as current and planned measures to enhance its viability. While staff is not assuming any new issuance of domestic or external medium- to long-term debt, it does assume that short-term debt is rolled over albeit at a declining rate. In particular, 2013 supplier debt is projected to be transformed into medium-to long-term debt in line with the government’s buyback plan (MEFP ¶31). The remaining supplier debt is projected to decline gradually over the medium term to about 0.2 percent of GDP with the implementation of measures to reduce costs and increase price flexibility (Box 3). These measures should allow SONARA to increase its viability and thus rely more on its own liquidity to finance inputs. The interest rate on external short-term supplier debt is set in line with a recently signed loan to finance oil imports. Government revenue and expenditure are consolidated between the central government and SONARA, with the latter projected to restore profitability over the medium-term.

14. Newly added realism tools flag risks around the forecast (Figure 3 and 4). Although the consolidation envisaged from 2018 to 2020 remains moderate at 1 percentage point for the primary deficit, the planned 3-year fiscal adjustment (3.5 percent) falls in the top quintile of historical data on LIC adjustment programs and demonstrates a shift from historical performance. Nonetheless, the consolidation remains credible as the 2018 budget has been adjusted to a more realistic expenditure envelope and budget execution at end-September was largely in line with program objectives. Furthermore, the authorities have committed to ensure end-December program fiscal targets are met. The preliminary 2019 budget framework is also in line with program objectives. Enhanced fiscal discipline and public financial management reforms to ensure a sustainable adjustment have resulted in an elimination of treasury advances and a reduction of unallocated spending, while monitoring of foreign-financed investment has improved. Enhanced spending efficiency and the floor on social spending are aimed at safeguarding and advancing social achievements. The realism tool also flags the growth path, due to the projected consolidation and historical performance. However, staff’s empirical analysis indicates low multipliers (Annex II of the staff report for the 2018 Article IV consultation and 2nd ECF review) and growth is expected to remain strong due to natural gas production, construction for the CAN, coming on stream of key energy and transport infrastructure and increasing private investment. An increase in expenditure efficiency is also expected to cushion the impact of consolidation on growth. Government investment is projected to decline in line with the consolidation, which explains the shift compared to historical data.

Figure 1.
Figure 1.

Cameroon: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2018–2028 1/

Citation: IMF Staff Country Reports 2018, 378; 10.5089/9781484392003.002.A002

Sources: Cameroonian authorities; and IMF staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2028. Stress tests with one-off breaches are also presented (if any), while these one-off breaches are deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.2/ The magnitude of shocks used for the commodity price shock stress test are based on the commodity prices outlook prepared by the IMF research department.
Figure 2.
Figure 2.

Cameroon: Indicators of Public Debt Under Alternative Scenarios, 2018–2028

Citation: IMF Staff Country Reports 2018, 378; 10.5089/9781484392003.002.A002

Sources: Cameroonian authorities; and IMF staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2028. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.
Figure 3.
Figure 3.

Cameroon: Drivers of Debt Dynamics – Baseline Scenario

Citation: IMF Staff Country Reports 2018, 378; 10.5089/9781484392003.002.A002

Sources: Cameroonian authorities; and IMF staff estimates and projections.1/ Difference between anticipated and actual contributions on debt ratios.2/ Distribution across LICs for which LIC DSAs were produced.3/ Given the relatively low private external debt for average low-income countries, a ppt change in PPG external debt should be largely explained by the drivers of the external debt dynamics equation.
Figure 4.
Figure 4.

Cameroon: Realism Tools

Citation: IMF Staff Country Reports 2018, 378; 10.5089/9781484392003.002.A002

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

Medium- and Long-Term Macroeconomic Assumptions

Medium Term, 2018–2023

Real GDP growth is projected to average 4.7 percent of GDP supported by increasingly strong growth in the non-oil sector offsetting a rapid decline in oil production. Annual inflation is projected to remain around 1.5 percent in 2018 in the medium-term, below the CEMAC convergence criteria of 3 percent.

The medium-term fiscal framework is anchored on continued improvements in non-oil revenue mobilization and a stabilization of public investment allowing a gradual reduction of the deficit towards the CEMAC convergence criterion. The revenue-to-GDP ratio (excluding grants) is projected to rise from 14.6 percent in 2016–17 to 15.2 percent in the medium term on the back of base-broadening measures including gradual removal of tax and customs exemptions and enhanced coordination among administrations.

The current account deficit is projected to remain broadly stable in the medium term as strong non-oil exports growth offsets the decline in oil exports and import growth stabilizes. The current account deficit is expected to be financed through the IMF-supported program, international donors, and other private capital inflows.

Long Term, 2024–2038

Real GDP growth is projected to average 5.5 percent in the long term, as public investment slows and the private sector gains competitiveness and increases investment.

The revenue-to-GDP ratio (excluding grants) is projected to rise slightly to 15.7 percent. This assumes a decline in oil revenue with the gradual depletion of oil reserves, while non-oil revenue improves on continued efficiency gains in revenue collection.

Exports are projected to decline to around 12 percent of GDP in the long-term, reflecting falling oil production. However, the current account is assumed to gradually improve as non-oil exports remain dynamic and imports increase at a lower rate.

Restoring SONARA’s Financial Viability

SONARA’s financial situation is worrisome and poses significant fiscal risk. In particular, SONARA’s refining capacity is too small to ensure financial viability and costs have increased above fixed domestic retail fuel prices since late 2017. This has contributed to non-oil revenue slippages and rapidly increasing fuel subsidies, which are estimated to exceed the budgeted amount for 2018. SONARA also accounts for the largest share of SOE debt and is the major contributor to risks originating from SOEs (Country Report No. 18/235). Its debt (excluding debt to the government) has continued to increase in 2018 and its short-term supplier debt is the main reason for breaches of the external debt service thresholds under the baseline.

The authorities are implementing measures to enhance SONARA’s financial viability (MEFP ¶31). Short-term measures aim at reducing costs by revising the price structure of petroleum products and gas, allowing open bids for LPG purchases and buying back SONARA securities regarding the 2013 crude oil suppliers debt. The recently-completed expansion of production capacity is also expected to reduce costs. For the medium-term, the authorities agreed to start planning a gradual move towards cost-recovery and more flexible fuel prices, while protecting the poor through targeted social transfers. They would start a communication campaign in 2019 to raise public awareness.

C. Country Classification and Determination of Stress Test Scenarios

15. With the publication of the October 2018 WEO, Cameroon is assessed at medium debt carrying capacity. Under the previous methodology that used the CPIA score Cameroon was classified at low debt carrying capacity. Based on the April 2018 WEO, Cameroon received its first classification as medium performer under the new calculation of the CI index. This is largely due to newly added variables (real GDP growth, remittances, reserves and world growth) that outweigh the CPIA score. The recent October 2018 WEO (Text Table 5) has provided a second medium performer rating, which moves Cameroon to medium debt carrying capacity. This change in classification implies an increase in thresholds for the present value of external debt relative to exports and GDP to 180 percent and 40 percent, respectively (Text Table 6). The benchmark for the present value of total public debt will also rise to 55 percent of GDP. The ratios for debt service will remain unchanged.

Text Table 5.

Cameroon: Calculation of the CI Index

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Text Table 6.

Change in Thresholds for Cameroon

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16. Stress tests follow standardized settings, with the addition of a market financing shock. The standardized stress tests apply the default settings, while the contingent liability stress test is based on the quantification of contingent liabilities discussed above. The market financing shock is the only tailored stress test that applies to Cameroon due to an outstanding Eurobond. For this shock the standard scenario design is applied.7 The commodity price shock is not applicable to Cameroon because commodity exports are below the 50 percent threshold.

Debt Sustainability

D. External Debt Sustainability

17. Cameroon remains at high risk of external debt distress (Table 1 and Figure 1). Public external debt is projected to peak in 2019 at 31.3 percent of GDP and to decline gradually thereafter. The present value of external debt-to-GDP and the present value of public-debt to-exports remain well below their thresholds as they have been raised significantly under the new LIC DSF methodology (see Table 6). While the former is projected to gradually decline after 2019 on the back of solid GDP growth, the latter increases until 2028 as the present value of debt grows faster than exports. The debt service-to-revenue ratio breaches the threshold for the first two years by a magnitude of up to 1.9 percentage points, driven by the inclusion of short-term supplier debt of SONARA, and then declines below the threshold. The debt service-to exports ratio breaches its threshold under the baseline for two main reasons. First, it is significantly above the threshold from 2018 to 2022 (on average around 3.4 percentage points) due to the inclusion of short-term debt from SONARA maturing. Second, it continues to breach the threshold from 2023 to 2025 (on average about 2 percentage points) due to the maturation of the Eurobond. The two debt service ratios are highly sensitive to the assumptions regarding SONARA’s roll-over of short-term supplier debt.

Table 1.

Cameroon: External Debt Sustainability Framework, Baseline Scenario, 2015–2038

(Percent of GDP, unless otherwise indicated)

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

Includes both public and private sector external debt.

Derived as [r – g – p(1 +g)]/(1 + g+p+gp) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and p = 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.

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

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).

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

Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.

18. Under stress tests the thresholds are breached for three of the indicators, with the export and the depreciation shock resulting in the largest increase. The present value of debt-to-GDP remains well below its threshold under all stress tests. It reaches its highest value under the exports shock in 2020 (i.e., 29.0 percent or 11.0 percentage points below its threshold). The present value of debt-to-exports breaches the threshold for the contingent liability and the exports shocks. The latter, which is the most severe scenario, raises the ratio up to 262.0 percent in 2024, due to high variability of historical export growth. The debt service-to-exports ratio also reaches its highest values under the exports shock to a maximum of 27.6 percent. For the debt service-to-revenue ratio the most extreme shock is a one-time 30 percent nominal depreciation, which raises the ratio to as high as 25.0 percent in 2019. Historical scenarios point towards exploding present values of debt-to-GDP and debt-to-exports, which reflect the large historical current account deficit. This differs from projections under the baseline, which assume a gradual improvement in the current account driven by dynamic non-oil exports as the economy diversifies.

E. Public Debt Sustainability

19. Public sector debt is projected to gradually decline and remain well below the benchmark (Table 2 and Figure 2). Public debt is projected to decline gradually after peaking in 2018 at 36.9 percent of GDP. Higher realized real GDP growth in 2017 and the cancelation of arrears in the first half of 2018 explain the lower level compared to the 2017 DSA. The present value of debt-to-GDP also declines gradually and remains well below the benchmark, which is now significantly higher under the new DSA and the reclassification to medium debt carrying capacity (see Table 6). The 2018 total debt service-to-revenue ratio is large at 50.8 percent, reflecting the short-term supplier debt of SONARA coming due, but declines gradually thereafter. Again, these dynamics are highly sensitive to assumptions on the rollover of the supplier debt. While the public debt stock indicator does not breach its benchmark, Cameroon remains at high overall risk of public debt distress due to the breach by the two external debt service indicators under the baseline.

Table 2.

Cameroon: Public Sector Debt Sustainability Framework, Baseline Scenario, 2015–2038

(Percent of GDP, unless otherwise indicated)

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

Coverage of debt: The central government, central bank, government-guaranteed debt, non-guaranteed SOE debt. Definition of external debt is Currency-based.

The underlying PV of external debt-to-GDP ratio under the public DSA differs from the external DSA with the size of differences depending on exchange rates projections.

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

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 and other debt creating/reducing flows.

Defined as a primary deficit minus a change in the public debt-to-GDP ratio ((-): a primary surplus), which would stabilizes the debt ratio only in the year in question.

Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.

20. Under the stress scenarios, public sector debt remains well below the benchmark. The most extreme shock for all three indicators of public debt is that of combined contingent liabilities. However, even in this case the present value of debt-to-GDP remains substantially below the benchmark, peaking at 44 percent of GDP. The present value of debt-to-revenue jumps to 230 percent in 2019, while the debt service-to-revenue ratio peaks in 2020 at 60 percent. The historical scenario projects an explosive path for the present value of debt-to-revenue, which is mainly driven by large historical primary deficits compared to projections. As discussed above, baseline projections in this DSA are based on implementation of ECF program measures that aim to ensure a sustainable adjustment through enhanced fiscal discipline and public financial management reforms.

F. Market Module

21. The market financing tool signals that risk related to market financing pressures are low (Figure 5). Cameroon remains below the benchmark for gross-financing needs as well as the benchmark on the EMBI spread. The latter has decreased recently to around 540 bps from a high of 650 bps in August. As neither threshold is breached, this signals low market financing risks.

Figure 5.
Figure 5.

Cameroon: Market-Financing Risk Indicators

Citation: IMF Staff Country Reports 2018, 378; 10.5089/9781484392003.002.A002

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

G. Risk Rating and Vulnerabilities

22. Cameroon remains at high overall risk of public debt distress, but for the time being debt still appears sustainable. Thresholds are breached for the two external debt service indicators, highlighting the fragile liquidity situation. Yet, staff currently assesses debt as sustainable due to a range of factors. In particular, while the debt-service-to-revenue breaches the threshold at the beginning of the forecast period it does so only for the first two years. The breach of the debt service-to-exports ratio is more sustained but declines gradually over the projection horizon. The higher magnitude of the breach compared to the 2017 DSA is largely driven by the inclusion of maturing short-term supplier debt of SONARA and is highly sensible to rollover assumptions. In addition, debt stock indicators remain comfortably below their thresholds. Remaining risks however could stem from accelerations in disbursements due to the large stock of SENDs, the need to finalize construction for the CAN and additional security spending pressures and export losses owing to the Anglophone crisis.

23. Significant efforts are warranted to ensure debt remains on a downward trajectory and sustainability is preserved. Steadfast implementation of fiscal and structural reforms supported by the IMF program is crucial to mitigate risks. The weaknesses presented in the debt service indicator which is 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 essential to keep public debt dynamics on a sustainable path and rebuild buffers ahead of upcoming high debt repayments. The high debt service due to SONARA’s supplier debt also highlights the importance of restoring its financial viability. Finally, a granular analysis and sound management of the SENDs, including a dialogue with lenders, will be critical.

24. Authorities’ views. The authorities agreed with the need for prudent debt management but viewed the debt sustainability outlook more positively. They noted that the breaches in the debt service indicators were due to the SONARA’s supplier debt which, in their view, should not be part of public debt. However, they agreed with the need to prioritize concessional borrowing, limit non-concessional borrowing to critical projects (MEFP ¶26), and carefully manage disbursements of SENDs to stay within the budget envelope (MEFP ¶29). They also pointed out that the reduction of problematic SENDs requires close collaboration with project managers and creditors to ensure a sustainable solution. The authorities agreed to continue to improve data provision on SOEs, in particular on cross-debts (MEFP ¶30) and indicated that the CNDP would continue to systematically review all loan and PPP project proposals (MEFP ¶23).

Table 3.

Cameroon: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2018–2028

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Sources: Country authorities; and staff estimates and projections.

A bold value indicates a breach of the threshold.

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

Includes official and private transfers and FDI.