Public Information Notice No. 98/2

Press Information Notice: IMF Concludes Article IV Consultation with Cameroon

January 21, 1998

The IMF Executive Board on January 7, 1998 concluded the 1997 Article IV consultation¹ with Cameroon.

Background

After an eight-year period of economic decline, activity picked up in 1994/95 (July-June), reflecting the effects of the 1994 devaluation of the CFA franc. Real GDP, which had declined by an average of 4 percent during these years, rose by 3.3 percent in 1994/95 and by 5 percent in 1995/96. As the effects of the devaluation tapered off, inflation fell from 33.8 percent in 1993/94 (end of period) to 4.4 percent in 1995/96. Economic activity remained buoyant in 1996/97. Real GDP growth is estimated to have stabilized at 5 percent, a pace that appears to have continued in the early months of 1997/98. This growth was propelled by a substantial improvement in the tradable goods sectors. Inflation, which rose to 9.9 percent in the year to June 1997 (reflecting a temporary shortage of foodstuffs associated with unrest in neighboring countries), fell to 2.8 percent in November 1997. Mirroring the strong economic activity, total investment increased in relation to GDP by about 1 percentage point to 16 1/2 percent; public and private savings both rose by 2 percentage points to about 15 1/2 of GDP.

In the policy area, progress was made in strengthening government finances. However, budgetary improvements fell short of program targets under the 12-month Stand-by arrangement approved by the IMF Executive Board on September 27, 1995, particularly with regard to non-oil revenue, and noninterest expenditure, including wages, remained compressed. Also, the implementation of structural reforms was slower than envisaged. In an effort to remedy these slippages, the Cameroonian authorities asked the Fund staff to monitor the execution of their adjustment program for 1996/97, so as to pave the way for an ESAF-supported program. While performance under the staff-monitored program in the first half of the fiscal year was mixed, the authorities took remedial actions to bring it back on track in the second half of the year, including in particular, the transfer to the budget of all the windfall revenue of the national oil company (SNH) accrued in the first half of the year. On this basis, the Executive Board approved Cameroon's request for a three-year arrangement under the ESAF.

Significant progress was made in strengthening the public finances. The primary budget surplus is estimated to have increased by about of one percentage point to 5.8 percent of GDP in 1996/97, owing largely to higher-than-projected oil prices and the transfer of windfall oil revenue to the Treasury. However, non-oil revenue was below target, reflecting continued weaknesses in revenue-raising capacity. The improved overall budgetary outcome in 1996/97 enabled the authorities to make large external debt service payments and substantially reduce external payments arrears on nonreschedulable debt, totaling some US$450 million (5 percent of GDP).

Progress was made in 1996/97 in implementing structural reforms in the civil service, the public enterprise sector, the financial sector, and in reducing domestic payments arrears. Noteworthy are the completion of the long-eluded rehabilitation of the domestic banking system and the transparent privatization of the national rubber company.

Monetary developments in 1996/97 were characterized by a strengthening in money demand and an improvement in net foreign assets of the banking system, reflecting the gradual return of confidence in the banking system that followed its successful rehabilitation. Net foreign assets increased by CFAF 114 billion in the 12-month period ending June 1997, and total deposits in domestic banks rose by 7 percent during the same period, reversing a decline of 21 percent in the previous year; broad money increased by about 14 percent.

In the external sector, the 1994 devaluation of the French franc vis-à-vis the U.S. dollar helped to maintain the gains in competitiveness achieved since the devaluation of the CFA franc. As a result, total non-oil exports are estimated to have grown by almost 12 percent in volume terms in 1996/97, led by logs, coffee, cotton, natural rubber, and manufactured goods. In addition, oil exports are estimated to have increased by about 10 percent in volume; in value (SDR) terms oil exports increased by 36 percent benefitting in part from favorable international prices. In line with the strong growth of total demand, import volume increased by 19 percent. Reflecting the gains in the value of exports, the external current account deficit narrowed by about 1 percentage point of GDP, to 1.2 percent in 1996/97. Finally, there was an inflow of non-oil private capital into Cameroon, estimated at about 1 percent of GDP, marking a significant turnaround from developments in the early 1990s.

Executive Board Assessment

Executive Directors noted the continued buoyancy in economic activity--reflected in positive real per capita growth--the low inflation rate, and the progress made in strengthening public finances and in implementing key structural reforms under the staff-monitored program for 1996/97. They also noted the efforts made to normalize relations with Cameroon's external creditors. Furthermore, Directors were encouraged by the good economic performance during the first quarter of 1997/98 under the program supported by the Enhanced Structural Adjustment Facility, but observed that this performance had to be seen only as a beginning of the adjustment process after a period of a poor track record and against the background of the recent favorable oil price developments. Against this background, Directors stressed the importance of strengthened policy implementation to demonstrate a firm and lasting commitment to macroeconomic stabilization and structural reform.

While noting some improvement in the conduct of fiscal policy, Directors emphasized the need to address the significant weaknesses remaining in both revenue-generating capacity and expenditure management. In this regard, they noted the worrisome backtracking on the forestry tax reform included in the program, and urged the authorities to reinstate as soon as possible these reform measures so as to reach the programmed revenue target. This measure, together with bold actions to improve tax administration and combat fraud, and to prepare adequately for the planned introduction of the value-added tax, would be crucial to broadening the tax base and achieving the revenue target.

On the expenditure side, Directors stressed the need to enhance efficiency, effectiveness, and accountability in government budgetary operations, and ensure adherence to spending priorities in favor of social services and infrastructure. They welcomed the authorities' request for Fund technical assistance on public expenditure management. They also noted that the unfreezing of civil service promotions and merit increases in February 1997 was a first step toward improving staff morale. Noting that civil service reform should be a priority, Directors called on the authorities to decompress the salary structure and rationalize civil service employment to keep the overall wage bill within a reasonable limit.

In the financial sector, Directors noted the completion of the long elusive rehabilitation of the banking system. Moreover, they encouraged the authorities to improve the functioning and soundness of the banking system through the removal of any remaining government involvement in all banking decisions following the rehabilitation and privatization of the banks; the active use of indirect monetary instruments; and the strengthening of bank supervision. Several Directors also encouraged the authorities to strengthen the independence of the regional banking commission and ensure that prudential regulations are observed.

Directors stressed the importance of accelerating structural reforms aimed at further reducing the public sector's share in the economy by pressing ahead with privatization and liberalization of the energy and transport sectors, so as to consolidate the gains in external competitiveness and allow Cameroon to achieve its growth potential. In this regard, they underlined the need to enhance transparency in the energy sector and to rehabilitate economic infrastructure.

Directors welcomed the rescheduling agreement reached with the Paris Club in October 1997. They called on the authorities to clear all remaining external payments arrears on nonreschedulable debt, as scheduled, and to remain current on all debt-service payments falling due. Directors urged the authorities to make rapid progress toward concluding bilateral agreements with Paris Club creditors and to reach agreements on similar terms with non-Paris Club official and commercial creditors.

Directors stressed the need to improve further the quality and timeliness of the availability of Cameroon's core data.