III. ECONOMIC TRENDS AND OUTLOOK Cameroon's economy is the biggest in Africa's Franc Zone. Before 1985, it was one of the most successful economies, not just in Africa, but in the entire developing world. Although dominated by parastatal enterprises and hobbled by wage and price rigidities, it was export-oriented and fiscally conservative. During the 1970s and early 1980s, per capita income grew at an average rate of nearly six percent a year in real terms, and officially peaked at FCFA 410,000 (then about US $1,080) in FY 1985/86. During the mid-1980s, however, Cameroon's terms of trade deteriorated precipitously, for two reasons. First, world prices for Cameroon's main exports, oil, coffee and cocoa, all fell sharply and simultaneously. Second, the U.S. dollar, in which most of Cameroon's exports are denominated, appreciated substantially relative to the French Franc and currencies linked to it. The simultaneous effect of falling world prices and the appreciation of the dollar on Cameroon's economy was a dramatic 50 percent drop in the country's export earnings. Cameroon's economic crisis had begun, and the major structural weaknesses of the political-economy were exposed. The Government of the Republic of Cameroon (GRC) was slow to respond to the crisis. It gambled rather on the expectation that commodity prices would recover. While waiting, it paid its bills from an opaque off-budget account (containing oil revenues) controlled exclusively by the Presidency of the Republic. In 1991, the account was empty. By FY-1987/88, however, the extent of the crisis had become clear, and in May 1989, the GRC formally adopted its first Structural Adjustment Program (SAP). Between 1989 and 1994, the GRC received substantial external financing from the IMF, the World Bank, the African Development Bank, the Paris Club, the European Communities, and the Government of France. However, the GRC's first two IMF stand-by programs expired in 1990 and 1992 without fulfilling their objectives, due to GRC non-compliance with some program conditionalities, and to apparent French encouragement of such behavior through the Government of France's readiness to settle Cameroon's arrears with the International Financial Institutions (IFIs). In 1993 this changed. The Government of France, Cameroon's largest remaining source of external financing as well as its largest trading partner and its largest source of investment and bilateral project aid, announced it would no longer provide bilateral, non-project, assistance to the governments of Franc Zone countries unless these countries had an IMF program in place. This new French policy has restored hope that the remaining, vital, structural reforms required to place the Cameroonian economy on a growth path may be implemented more vigorously and speedily. These reforms have been included in the current IMF program. Cameroon's fiscal deficit has fluctuated around 9 percent of GDP for several years. In FY-93/94 (ending June 30, 1994) the GRC's total expenditures were equivalent to 16 percent of GDP while its expenditures obligations were equivalent to 24 percent of GDP. These figures exclude substantial (non- personnel) military and security expenditures made off-budget by the Presidency of the Republic which, apparently, has been prefinancing oil since 1992 to fuel its off-budget account. In addition to the dramatic loss of export earnings, and the persistence of inefficiencies and fraud in customs and taxation administration, the decline of GRC revenues since the economic crisis began has been exarcebated by declining oil production. Oil production peaked at 60 million barrels in FY- 87/88 but has been decreasing steadily to below 40 million barrels in FY-93/94. Tax resistance has had a significant negative impact as well: it began during the 1991 Ghost Towns operation (general strikes) and has intensified as a result of the stalled democratization process, political frustrations and generalized hardship arising from various adjustment policies. Corrective measures have been, and are being taken. Oil exploration activities have recently resumed in response to a more liberal code promulgated in 1990. Current World Bank conditionality requires the abolition of the off-budget account and insists on the transfer of all parastatal profits (including oil revenues) into the public treasury. Another conditionality seeks to reduce the GRC's civil service wage bill by reducing the size of government and streamlining civil service staffing, while a whole range of measures have been planned to increase the efficiency of the bureaucracy, notably in tax and customs administration. Recent fiscal reforms seek to broaden the fiscal base, while political reforms (necessary to reduce tax resistance) are still stalled. Between 1989 and 1992, the GRC was able to pay only about 30 percent of its external debt obligations. Rescheduling of official bilateral arrears by the Paris Club has not prevented Cameroon from accumulating further arrears. Cameroon's current outstanding debt is equivalent to more than 140 percent of estimated FY-93/94 GDP and the debt service ratio stands at 50 percent. In March 1994, the GRC (for the third time) obtained official debt relief from the Paris Club, and this time, on lower-income country terms, for up to 18 months. The agreement specifies that the GRC would lose its Paris Club debt relief at the end of 1994 if it is not in substantial compliance with the conditionalities of its third IMF standby program. In that event, the GRC will, for the first time, face unrelieved external debt service obligations greater than its total revenues. International press reports indicate that GRC debt is trading at 22-25 percent of its nominal present value (as of mid-March, 1994). Due to Cameroon's economic contraction and population growth, real per capita GDP has fallen by about 60% from 1986 to 1994. Most of the burden of this contraction was borne by the tradeables sector, notably the agricultural sector in which most of Cameroon's work force is employed. Between 1989 and 1990, part of the parastatal establishment was affected (with about 15,000 jobs lost). By contrast, the non-tradeables sector, notably the government bureaucracy, began experiencing income loss only in January 1993 when the first significant wage cut (average 15 percent) was implemented, and November 1993 when a bigger cut (average 30 percent, but 12 percent for the military) occurred. These wage cuts, the devaluation of the FCFA, and the recent increases in world prices for cocoa and coffee, have tended to equalize the distribution of Cameroon's post-1986 income loss. The effects of recent foreign and domestic policy adjustments have laid the groundwork for an improvement of Cameroon's large and previously growing overall balance of payments deficit. The share of oil exports in Cameroon's total exports performance is expected to decline from about 50 percent to 30 percent. This is due to declining oil production as well as to the downward turn of indicative world prices for petroleum observed during the first six months of FY-93/94. The recent revival of exploration may have no impact on declining oil revenues in the short-run. By contrast, non-oil exports (notably timber, cocoa, coffee, bananas, and cotton) are expected to respond rapidly to the January 1994 exchange rate adjustment. Such responses may be particularly significant in the banana sector (Cameroon's fastest growing non-oil agricultural export) and may enable Cameroon to fill its EEC quota earlier than projected. Recent increases in world market prices for cocoa and coffee are an added incentive to an increase in the production of these crops. Anecdotal evidence suggests, in effect, that Cameroon may currently be registering dramatic increases in its trade surplus as a result of recovery in agricultural exports, and that such increases may be as high as 20 percent during the next crop season. According to IFI estimates, the trade surplus may reach 6.5 percent of GDP at the end of the current fiscal year. Similar improvement is expected to occur on the services account as well. The doubling of annual interest payments on GRC external debt, occasioned by the exchange rate adjustment, has been reduced by substantial French debt forgiveness as well as by the third Paris Club rescheduling concessions. All together, the current account deficit should continue to decline during the current fiscal year, and is projected by the IFI's to reach about two-thirds of its FY-92/93 level by July 1995. The deficit on the capital account which worsened as a result of massive, speculative, transfers on the eve of devaluation has improved according to local bank officials who report the return of some capital from abroad. However, the repayment of short-term borrowing by Cameroon's petroleum corporation, SNH, and the increased cost of amortization, should slow down the rate of recovery in the capital account. Continued improvement in Cameroon's current account will depend in part on GRC compliance with a commitment to fully liberalize the export of cocoa and robusta coffee. This is contained in the World Bank's agricultural sector reform paper which is part of the current structural adjustment plan for Cameroon. Reversing the capital account deficit would require determined efforts to attract foreign investments. A new investments code lays the groundwrok for attracting such investments. But substantial improvements in governance and in the functioning of the judiciary are necessary to provide confidence to foreign investors who have not responded as expected to the outstanding incentives of the investment code. The GRC continues to wield considerable influence in the economy. Prior to 1985, Cameroon's economy was dominated by about 153 non-financial parastatal monopolies and monopsonies whose influence created overall price and wage rigidities in the economy. Since 1989, however, 44 parastatals have been liquidated and 4 have been privatized. The parastatal sector has lost about 18,000 jobs through liquidation, restructurization, and privatization. Over 90 parastatals are still to be privatized, of which about 15 have been earmarked for transition beginning in 1994. The liquidation process has been slow due to the absence of an appropriate legal framework. The GRC continues to own equity in major banks where it wields enough power to appoint directors. About 33 percent of Cameroon's non-performing loans are shared between two banks in which the government owns substantial shares. The build-up of government arrears to the banking sector during the economic crisis, including the suspension of debt-servicing to banks, exacerbated the contraction of the economy. Cameroon has removed practically all barriers to trade and investments, and is pursuing efforts to foster competition by liberalizing the regulatory environment. Import and export regulations have been liberalized; price and margin controls have virtually been abolished; the GRC's investment code, drafted with foreign investors prominently in view, is operational and offers world class guarantees and incentives in exchange for minimal, liberal, eligibility/performance requirements. Cameroon's labor force is fairly literate (65 percent country literacy rate), but is largely wanting in technical skills such as mechanics and electro-mechanics, computer science and electronics. Unemployment is running at more than 25 percent and is expected to increase with the expected downsizing of the government, the streamlining of the civil service and the privatization of parastatals. With the devaluation of the CFA and the heavy cuts in civil service wages, Cameroon's labor market is expected to be competitive. A new labor code which reduces the role of government in hiring, wage-setting, and firing also creates conditions for free market determination of wage levels. Third-country competition in Cameroon is led by the French. The French dominate in distribution. Many American transnational corporations such as General Motors, IBM and Colgate-Palmolive, do business in Cameroon through their French-based subsidiairies. Lebanese and Indians follow closely in the distribution sector. The French are in the lead in the petroleum sector, closely followed by the Americans. In the telecommunications sector, the French are followed closely by the Germans, while in forestry, the Italians are second to the French. Cameroonians dominate in food production for local consumption and in such export crops as cocoa, coffee, cotton and tobacco. Processing of these crops is dominated by the French. Americans have positioned themselves closely behind the French in banana production and are competeting successfully with the French in the supply of fertilisers to Cameroon. The textiles industry is controlled by the Indians and the French. While Cameroon's infrastructure for the distribution of goods may not be fully developed, it does permit accessibility to the entire territory. Cameroon's main industrial and commercial port city, Douala, is linked to the major Southern cities by good roads. It is linked to Yaounde, the second major city, also by rail transportation. Distribution to the Northern provinces is mainly by train to Ngaoundere where regional warehouses stock goods for onward road delivery to Garoua, Maroua and Ndjamena (Chad). The railway line also links Douala to the East province, a transit point for goods bound for the Central African Republic. Cameroon is served by three international airports at Douala, Yaounde and Garoua which have facilities for air freight. There are over 50 small airports and airstrips, of which only 9 have permanent surface runways. As a result of the economic crises, only three of the smaller airports are in service. No major infrastructural project has been initiated in Cameroon for several years. Projects lined up by the African Development Bank and the World Bank have been frozen as a result of Cameroon's insolvency. Cameroon's various sectoral plans have also been frozen. The Directorate for Major Contracts (DGTC) is drawing down due to the paucity of contracts.