Statement by Mr. Mohamed-Lemine Raghani, Executive Director for Cameroon and Mr. Regis O. N’Sonde, Senior Advisor to the Executive Director December 17, 2018

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


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

I. Introduction

1. On behalf of our Cameroonian authorities, we thank Management and Staff for the continued dialogue with them and for the support to their reform efforts. They remain committed to the CEMAC’s crisis exit strategy that was adopted in December 2016 and reaffirmed last October. The authorities are fully aware of the importance of maintaining coordinated efforts among CEMAC members and regional institutions to ensure the success of this strategy.

2. Amid a challenging domestic and external environment, Cameroon continues to register good performance under its Fund-supported program, and medium-term prospects remain favorable. Nonetheless, the authorities are mindful of the risks facing the outlook, and they intend to remain steadfast in achieving the objectives of the program.

3. Based on a good track record of policy and reform implementation, and their determination to stay the course in enhancing macroeconomic stability, strengthening external buffers, and promoting stronger and more inclusive growth, our Cameroonian authorities request Fund’s continued support to their policy and reform agenda and the completion of the Third Review under the Extended Credit Facility (ECF).

II. Recent Economic Developments and Program Implementation

4. Our authorities’ resoluteness in pursuing fiscal consolidation has helped maintain the program on track, despite challenging socio-political circumstances, notably tensions in the two anglophone regions of the country and Boko Haram’s continued threats in the North. The overall fiscal deficit stood in line with the program target of 1.2 percent of GDP at end-September 2018. Lower collection of taxes from the state oil refinery SONARA was the leading cause of the revenue shortfall of 0.3% of GDP which was however offset by lower-than-expected spending. Significant efforts have been made in limiting arrears although the cash deficit was nevertheless somewhat higher due to unanticipated arrears and float clearance.

5. The authorities have also doubled their efforts in improving public financial management (PFM). Measures have been taken to boost governance and transparency at customs administration while enhancing cooperation and coordination with the tax administration to strengthen compliance and tackle tax evasion. In addition, the authorities have strengthened budget control through the implementation of the budget circular adopted in June, which set boundaries regarding treasury advances, unbudgeted spending, and better control of execution related to foreign-financed investments.

6. Developments in the external sector have been more challenging in the first half of 2018, with the widening of the current account owing to the security situation in the two anglophone regions which contributed to the lower-than-anticipated agricultural exports. As private capital outflows also increased, the balance of payments deteriorated and the country’s net foreign assets decline somewhat but Cameroon continues to account for much of the region’s pooled reserves.

7. Regarding the financial sector, liquidity conditions have improved, contributing to a recovery of credit to the private sector.

8. In this context, the authorities have continued to implement satisfactorily their economic and financial program supported by the ECF. All performance criteria (PCs) at end-June were met except the ceiling on net central bank financing of government which was missed with a small margin. All indicative targets (ITs) at end-June were also observed except the floor on non-oil revenue which was not met on the back of SONARA missing to pay its taxes and customs duties. Quantitative performance at end-September was also robust, with all but one ITs met. Performance on the structural front also showed good progress in reform implementation, with 12 out of 18 benchmarks observed between June and September 2018. Areas of strong structural achievements include fiscal reforms, revenue mobilization and PFM. The authorities recognize the need to step up reforms to enhance debt management and financial sector stability where non-performing loans (NPLs) remains high and two banks remain in difficult situation. The authorities are undertaking measures to address weaknesses in these areas going forward.

III. Policies and Reforms Going Forward

9. The authorities will pursue their program objectives amid and despite a challenging domestic context and a difficult external environment marked by tightening financial conditions and trade tensions. They broadly agree with staff’s assessment of the risks facing the favorable outlook although they see greater upside risks notably stemming from the potential impact next year of large infrastructure projects in the hydro-power and transportation sectors. It is worth noting that the recently announced postponement to of the African Nations Soccer Cup (CAN) in Cameroon initially scheduled for mid-2019 should help smooth out capital spending and alleviate immediate pressures on the budget.

10. As the central piece of their medium-term agenda, the Cameroonian authorities remain committed to fiscal consolidation by pursuing further adjustments towards reducing the overall fiscal deficit to 2.4 percent of GDP this year and 2 percent of GDP in 2019 and beyond. The goal is to ensure that Cameroon meets the CEMAC convergence on the fiscal deficit by 2021 and maintain public debt on a sustainable path. Ensuring financial sector stability and promoting competitiveness are also at the forefront of Cameroon’s agenda, with the view to reinvigorate activity and promote private sector development. The authorities’ policy and reform program over the medium terms is laid out in their Memorandum of Economic and Financial Policies (MEFP).

Preserving Fiscal and Debt Sustainability

11. Efforts are currently underway at the tax and customs administrations—DGI and DGD respectively—to bolster non-oil revenue collection, fight fraud and tax evasion, and enhance the reliability of the taxpayer database. Several actions will be made to achieve these goals, including strengthening audits and controls by these administrations, further efforts in collection of tax arrears and additional taxes from public entities, and enhanced control of shipment regimes at duties.

12. The authorities are also focusing their action on rationalizing expenditures notably by further strengthening budget execution control and advancing their public finance reform agenda, including improving the quality of spending and treasury management. On this front, measures include substantial savings on goods and services as well as wages, while safeguarding social spending. Furthermore, the authorities are closely monitoring disbursements related to externally-financed projects to keep them within the budget framework as to not exceed non-concessional disbursement targets. The expected resources from revenue and expenditure measures would provide room to close gaps caused by overruns in direct interventions and by subsidies to SONARA.

13. For 2019, the authorities are fully committed to pursuing a fiscal policy stance in line with program objectives. This policy is well reflected in the 2019 budget which is consistent with the program objectives—a prior action for this Board meeting. The 2019 budget envisages tax efforts measures from non-oil revenues of at least 0.3 percent of GDP and a further tightening in spending of about 0.5 percent of GDP. To extend the tax base and improve revenue collection, the authorities will implement several policy measures including raising taxes and fees on alcohol, public contracts, tobacco, vehicles, and sodas. In addition, the government plans to expand property tax coverage to the land tax and inheritance. Furthermore, measures aimed at removing VAT exemptions on insurance contracts, the social portion of electricity and water bills, and processed wood will be executed.

14. The authorities intend to contain expenditures further while safeguarding social spending. In this regard, measures aimed at identifying and eliminating from the payroll system cases of ghost civil servants will continue in 2019 along with further cuts in expenditures on goods and services. Improvements in spending efficiency will be sought through restrictions on non-priority spending, including travel allowances and running expenses of commissions. Tighter control of budget execution through prioritization and rationalization of capital spending will also proceed, with the view to align disbursements with budgetary envelopes.

15. Over the medium term, policy actions will be consistent with the priorities set in the country’s Growth and Employment Strategy. The authorities plan to undertake strong measures to reduce poverty and inequalities. To this end, the authorities’ social protection strategy will be implemented starting in 2019, notably through expanding significantly the social safety net program. Additional resources will also be allocated to the health and education sectors. The 2019–20 floor on social spending will be raised gradually up to 4 percent of GDP by 2020. To boost non-oil revenue mobilization further, the government intends to continue limiting tax expenditures. On public financial management, the authorities will pursue their PFM reform strategy. Envisaged measures are geared toward enhancing transparency and credibility in the budget process while further improving the quality of spending. These measures include: timely reconciliation and regularization of spending; limiting extra-budgetary expenses; transposition into national laws of the four remaining CEMAC directives; full implementation of a single treasury account; improving the effectiveness and quality of capital spending; and strengthening SOEs’ management with the view to alleviate pressures on the budget and contingent liabilities.

16. Attentive of the need to preserve debt sustainability, our authorities are committed to prudent debt management, including the strong role of the public debt committee (CNDP)— chaired by the Minister of Finance—to ensure that debt contracting follows regular procedures and remains within debt limits set under the program. In pursuing prudent debt management, the authorities will: (i) give priority to concessional financing for infrastructure projects and social spending; (ii) prepare a disbursement plan with development partners that is consistent with budgetary frameworks, (iii) approve a performance improvement plan for SOEs building on their audits; and (iv) implement a plan to enhance SONARA’s financial viability. The authorities also intend to implement their time-bound action plan on the reduction of non-performing signed-but- undisbursed loans (SENDs).

Ensuring Financial Sector Stability

17. Cameroon’s financial sector is broadly sound and resilient to the type of terms-of-trade shock that has impacted the region, thanks to a more diversified economy. The authorities reiterate their commitment to take all necessary measures to safeguard the region’s external and financial stability, including providing support to the efforts of the regional central bank BEAC and banking commission COBAC’ in strengthening compliance with foreign exchange regulations. They are also pushing ahead the resolution plan for the two private ailing banks as well as a timebound implementation of their strategy to address non-performing loans (NPLs). They continue to make strides towards enhancing the judicial system notably its capacity to address banking and credit repayments disputes. Financial sector reforms will continue to be supported by technical assistance from developments partners, notably the Fund and World Bank.

Stepping up Structural Policies

18. The authorities will continue to strengthen fiscal governance and improve the business climate, recognizing that much remains to be done to fight corruption, enhance transparency, and reform the fuel pricing mechanism with the view to streamline the hydrocarbons price structure.

19. The authorities broadly agree with staff’s assessments and recommendations laid out in Annex II of the staff report on improving governance especially as it relates to SOEs, strengthening market regulations, promoting the rule of law, and enhancing the AML/CFT framework. Their structural reform agenda takes in most of those recommendations. On governance, the authorities are implementing measures to enhance transparency at customs and develop trade facilitation platforms which will help lower trade costs. They are committed to continue complying with EITI principles by implementing all recommendations set forth in the 2017 EITI assessment. Regarding fuel subsidies, the authorities share the view on a gradual transition to cost-recovery and more flexible fuel prices while protecting the poor through well targeted social transfers. They stand ready to consider all viable options in this regard.

20. Regarding financial services, the authorities will pursue greater financial inclusion given its implications for growth as well as poverty reduction. They will continue to promote access to finance for SMEs and the public, notably through the updated financial inclusion strategy. They are reviewing the economic model of the SME Bank, and will draw from the findings of the assessment of SMEs’ financing needs and consult with the Fund to make an informed decision on a new model by end-March 2019.

IV. Conclusion

21. Our Cameroonian authorities remain steadfast in implementing their policy and reform agenda under the ECF-supported program and their agenda consistent with CEMAC strategy of exit from crisis. Quantitative and structural performance under the current review is broadly satisfactory, and the authorities request a waiver of nonobservance of a PC that was missed with a small margin as well as modification of PCs. We would appreciate the Board’s approval of these requests and its completion of the Third Review under the ECF for Cameroon.

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-Press Release; Staff Report; and Statement by the Executive Director for Cameroon
Author: International Monetary Fund. African Dept.