Washington, DC — On July 13, 2012, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Cameroon on a lapse of time basis.[1]

Background

The economic rebound observed in 2010 strengthened in 2011, with growth reaching 4.2 percent (compared with 2.9 percent in 2010), despite a decline in oil output. This decline reflected aging equipment and postponement of some investments following the 2008-09 global financial crisis. Average inflation edged up to 2.9 percent in 2011 (from 1.3 percent the year before) mostly reflecting a rise in food prices.

External balances in 2011 benefited from positive developments in commodity prices, but the current account deficit (including grants) widened from 3.0 percent to 4.1 percent of gross domestic product (GDP), following a 16 percent increase in the volume of imports.

The government's fiscal situation remained difficult in 2011. Non-oil revenue performance was characterized by lower-than-budgeted value-added tax (VAT) receipts, mostly caused by parastatals not being able to meet their VAT obligations. The shortfall in non-oil revenue was offset by an oil revenue windfall generated by the surge in international oil prices.

On the expenditure side, budget execution was affected by the need to settle outstanding payment orders from previous years, pressure from fuel subsidies, and overruns on other current transfers. Consequently, the non-oil primary deficit, on a cash basis, deteriorated from 5.7 percent to 8.5 percent of non-oil GDP, and the overall fiscal deficit, on a cash basis, reached 3.4 percent of GDP versus 2.3 percent the year before.

Conditions in the banking system remained worrisome. This reflected financial distress in four (and possibly five) of the country's 13 commercial banks, excessive concentration in bank credit, inadequate resources for the regional supervisory agency, and weaknesses in the current framework for dealing with distressed banks. Financial sector soundness indicators deteriorated in 2011 and nonperforming loans increased by about 17 percent. At the same time, the number of banks in violation of the main prudential ratios continued to increase.

Over the longer term, Cameroon has maintained macroeconomic stability, and debt relief under the Heavily Indebted Poor Countries (HIPC) and Multilateral Debt Relief (MDRI) Initiatives considerably reduced the debt burden. However, there has been almost no growth in per capita income during the last five years, despite a relatively diversified productive base.

Economic growth is now expected to increase moderately under current policies which would imply positive per capita growth of over 2 percent in 2012. Staff projects real GDP to increase gradually from 4.2 percent in 2011 to 5½ percent in 2016. Non-oil growth is to be supported by ongoing efforts to boost agricultural productivity and competitiveness; major public investment projects; and measures to improve the business environment. The oil sector is expected to boost real GDP growth in 2012-17, reflecting the coming on-stream of ongoing investments, following successful exploration efforts. Inflation is expected to remain below the regional convergence criterion of 3 percent.

Executive Board Assessment

In concluding the 2012 Article IV consultation with Cameroon, Executive Directors endorsed staff's appraisal, as follows:

Economic growth continues at a moderate pace, and measured inflation remains within the regional convergence limit of 3 percent. There are, however, risks to the outlook arising from a potential downturn in the global economy, particularly in Europe; increasing financial sector vulnerabilities and the impact of the increase in fuel subsidies and the stock of domestic arrears on fiscal sustainability.

There is a need to address the substantial challenges facing the 2012 budget if a further deterioration of the fiscal situation is to be avoided. These result from underbudgeting fuel subsidies, further arrears accumulation in 2011, and contingent liabilities of public enterprises and distressed banks. Safeguarding fiscal sustainability over the medium-term will require corrective measures including improving non-oil revenue mobilization; containing expenditure on fuel subsidies and avoiding accumulation of domestic arrears; and rebuilding fiscal buffers.

There is continuing concern regarding public financial management performance. The ongoing audit of arrears should be finalized and a plan adopted for the settling of audited arrears. Public expenditure management should also be reinforced by strengthening control of the expenditure chain and better tracking of the flow of funds.

There are risks to financial sector stability arising from the increasing number of distressed banks and the delays in restructuring them, the concentration of bank credit to the national oil refinery, and the spillover from arrears accumulation. Lasting financial stability can only be achieved through an effective regional framework and better cooperation between national and regional bodies. As the largest economy in the CEMAC region, Cameroon should take a proactive stance in pressing toward the necessary regional reforms in the financial sector.

A key policy priority for Cameroon is achieving higher and more inclusive growth through addressing the significant infrastructure gaps and improving the business climate. Accelerating Cameroon's recent moderate economic growth performance will require the full implementation of a major program of public investment. Competitiveness in Cameroon remains challenged by structural factors. Improving the business climate will require that the authorities tackle governance issues, deepen dialogue with private sector interests, take measures to increase the level of financial intermediation, and improve access to credit.

Cameroon's risk of debt distress remains low. Nonetheless, reducing domestic arrears and maintaining a prudent borrowing policy are essential to preserving debt sustainability. Total public debt indicators have deteriorated since 2011 owing to the impact of domestic arrears on domestic debt and the need to cover fiscal financing gaps through increased securitization. There are further signs of vulnerabilities emerging from increasing quasi-fiscal liabilities of state-owned enterprises and distressed banks, and external borrowing at nonconcessional terms. Reform of the fuel subsidy mechanism, improved commitment control, and external borrowing at concessional terms to the extent possible would help to maintain overall debt sustainability.

[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for consideration by the Executive Board. The Executive Board takes decisions under its lapse of time procedure when the Board agrees that a proposal can be considered without convening formal discussions.