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With this Cameroon Economic Update, the World Bank is pursuing a program of short, crisp and frequent country economic reports. These Economic Updates provide an analysis of the trends and constraints in Cameroon’s economic development. Each issue, produced bi-annually, provides an update of recent economic developments as well as a special focus on a topical issue.
The Economic Updates aim to share knowledge and stimulate debate among those interested in improving the economic management of Cameroon and unleashing its enormous potential. The notes thereby offer another voice on economic issues in Cameroon, and an additional platform for engagement, learning and change.
This third issue of the Cameroon Economic Update is titled “Unlocking the Labor Force – An Economic Update of Cameroon, with a special focus on employment”. This title reflects the country’s difficulties in unlocking the huge potential embodied in its population. As in many African countries, Cameroon’s labor market is characterized by a large share of the labor force occupied in the informal sector with few formal jobs. Unemployment is low, because most Cameroonians cannot afford not to be working. Most of these jobs, however, have extremely low productivity and generate very little money. The challenge is thus to enhance the productivity – hence the earnings – of those already employed, while at the same time creating more formal jobs. In this regard, education may be at fault with many children leaving school without mastering basic skills such as literacy and numeracy. An unfavorable investment climate, particularly inappropriate infrastructure, is also holding the country back. Against this backdrop, a cross-sectoral strategy dealing with both the supply and demand constraints would be needed to make Cameroon’s economic growth faster and more inclusive.
The Cameroon Economic Updates are produced by the World Bank Country Office in Cameroon by a Team led by Raju Jan Singh. The Team included Abel Bove, Gilberto de Barros, Fadila Caillaud, Bjorn Dahlin van Wees, Sebastien Dessus, Patrick Eozenou, Louise Fox, Faustin Ange Koyassé, Sara Giannozzi, Norma Gomez, Mombert Hoppe, Maureen Lewis, Victoria Monchuk, Paul Moreno, Amadou Nchare, Sylvie Ndze, Hannah Nielsen, Carlo Del Ninno, Peter Osei, Vincent Perrot, Gael Raballand, Jacob Robyn, Manievel Sene, and Gaston Sorgho. Greg Binkert (Country Director for Cameroon), Eric Bell (Acting Sector Manager), and Cia Sjetnan (Senior Country Officer) provided guidance and advice, and have been an invaluable source of encouragement.
The Team also benefited greatly from consultations with Cameroon’s key policy makers and analysts, who provided important insights, in particular the following institutions: the BEAC, the Ministry of Finance, the Ministry of Economy and Planning, and the National Institute of Statistics. Particular thanks go to the Director General Joseph Tedou for his support on the employment chapter. The Team is also grateful to the Cameroon country team at the International Monetary Fund.
2011 witnessed a number of spectacular events: an earthquake and tsunami in Japan, the Arab Spring, and the sovereign debt crisis in advanced economies. Despite all these developments, preliminary indications would suggest that the recovery of Cameroon’s economy gained greater momentum in 2011 than we expected in the July issue of the Cameroon Economic Update (Figure 1). After a slowdown of two years following the global economic and financial crisis, the economic rebound observed in 2010 has strengthened in 2011 with an estimated growth reaching 4.1 percent (compared with 3.2 percent in 2010). As last year, the main drivers come from the non-oil economy (expanding by a bit less than 5 percent), while oil activities continue to decline.More particularly, growth in the primary and tertiary sectors is estimated to have contributed for most of the expected expansion in economic activity in 2011 (1.6 percent and 2.5 percent, respectively). In the primary sector, these positive developments are mainly driven by efforts to expand cultivated areas and enhance agriculture productivity through the dissemination of improved seeds, equipment, and training, as well as a stronger pick-up in forestry (growing at an estimated rate of 33 percent). In the tertiary sector, telecommunications continued to perform strongly.
Consistent with this picture, credit to the private sector expanded end-September by about 25 percent year-on-year (compared to 5 percent at end-September 2010). In addition to a more vibrant economic activity, this strong expansion also reflected partly the increased competition in the banking sector, following the entry of two new banks. Manufacturing, construction, hotels and restaurants, as well as transport and telecommunications absorbed most of this new credit.
Turning to the oil sector, Cameroon is a relatively small and mature oil producer, experiencing a declining production (Figure 2). Depleting reserves, aging equipment, and – more recently – postponements of some development projects and investments because of the 2008-09 financial crisis explain this profile. The contribution of this sector to GDP growth has been mostly negative in recent years and oil production is estimated to have contracted by a further 10 percent in 2011 (to 21.1 million barrels).
In line with our expectations in the July issue of the Cameroon Economic Update, price pressures have picked up mostly on the back of higher food prices (Figure 3). Inflation over the first nine months of 2011 amounted to just below 3 percent (year-on-year), the regional convergence criterion, up from 2.4 percent observed over the same period in 2010. Despite ongoing initiatives to boost agricultural production, subsidize imports of food, and improve distribution, pressure on food prices has gained momentum over the past 12 months, reaching 4.7 percent in September (up from 3.5 percent a year ago). The stability of retail prices for petroleum products has, however, continued to moderate the impact of rising food prices and contributed in containing inflation.
The overall fiscal position on a cash basis (including grants and before payment of arrears) is expected to have returned to near balance in 2011 from a deficit of close to one percent of GDP in 2010 on the back of higher than budgeted oil revenue.
This fiscal performance – better than budgeted – is remarkable in many respects. First, on the back of stronger revenue administration and a tighter management of exemptions, the mobilization of non-oil revenue in terms of non-oil GDP is estimated to have picked up, reversing the steady decline observed over the past years (Figure 4). Second, despite spending pressure related to the elections, current expenditure is expected to have remained contained within its budgetary allocation, declining in terms of GDP compared to last year’s outcome and building the needed fiscal room for additional capital outlays (Figures 5 and 6).
On the financing side, the second government bond issue had to be postponed: the preparation of the large infrastructure projects that the proceeds are to finance not being deemed advanced enough. Higher oil revenue from more favorable prices could, however, offset this resource shortfall. The government has also initiated a series of Treasury bill issues to improve its cash management and build its yield curve. The first issue was well received by the market, being subscribed more than twice, and, combined with a securitization transaction, allowed to settle part of the government’s outstanding payment obligations.However, at the same time, new payment obligations are reported to have accumulated, particularly with the SONARA, the national oil refinery, to compensate the company for its revenue shortfalls stemming from the government’s policy to freeze retail prices of petroleum products. This continued high stock of unsettled payment obligations will weigh on the liquidity position of the government and on the execution of the 2012 budget.
The unfolding sovereign debt crisis in advanced economies, particularly in the Euro zone, clouds the economic outlook and makes any projection particularly challenging. At the time of writing, the transmission channels to Cameroon’s economy are expected to be similar to those observed during the 2008-09 global financial crisis.
The global linkages of the financial system of the CEMAC region are still limited and the banking sector remains sufficiently liquid to meet the credit needs of the government and the private sector. Furthermore, the budget in Cameroon does not rely heavily on aid flows, hence any adverse impact from lower aid following fiscal austerity measures in the Euro zone should be limited. The economic slowdown in the Euro zone will thus more probably translate into lower exports and remittances. The Euro zone is still the largest market for Cameroon’s exports and hosts the largest community of Cameroonians abroad . With slower economic growth, demand for products using Cameroonian input such as housing (wood) or cars (rubber) could decline. The diaspora may have less money to transfer back to their relatives or may even return should unemployment seriously rise and migration regulations tighten.
Against this backdrop, the economic momentum observed in Cameroon in 2010 and 2011 is expected to carry over into 2012 with the construction of large infrastructure projects and continued efforts to improve agriculture productivity. Production under the emergency thermal power program is expected to contribute in alleviating power bottlenecks. In the tertiary sector, telecommunications are expected to perform strongly with a continued expansion of subscribers. Furthermore, in the oil sector, following significant exploration in the past years, the declining trend observed in production is expected to reverse in 2012 and expand by 15 percent. As a result, economic growth in Cameroon could amount to 4½ - 5½ percent in 2012. The 2008-09 global financial crisis was triggered by the bursting of a real estate pricing bubble in the US market. The crisis propagated to financial institutions globally and resulted in a sharp tightening of credit conditions worldwide. As a result, international trade declined and real global activity contracted, affecting more particularly high-leveraged sectors such as real estate.
World real GDP growth contracted, turning from a positive growth rate of 3 percent in 2008 to a decline of 0.6 percent in 2009. Trade volumes declined substantially, the expansion observed in 2007 (7.3 percent) giving way to a drop in 2009 (10.7 percent). Imports from advanced economies contracted by 12 percent while those of emerging economies declined by 8.4 percent. The slowdown of global demand resulted also in a sharp decline in world commodity prices (36.3 percent for oil and 8.7 percent for nonfuel commodities). Although Cameroon’s financial sector was not directly exposed to the global financial crisis, the country was indirectly affected by the crisis through the following channels deteriorating terms of trade (15 percent); slower world demand for oil, timber, rubber, cotton and aluminum, resulting in a reduction in export volumes of 4.8 percent; tighter international liquidity conditions that led to reductions in capital inflows and the postponement of some investments; and a slight decline in remittances (0.5 percent).
Compared to other sub-Saharan African economies, the impact of the global financial crisis on Cameroon was considered moderate at the aggregate level with real GDP growth slowing by one percentage point (from 3 percent in 2008 to 2 percent in 2009). This relatively good performance in weathering the crisis was achieved through countercyclical fiscal measures made possible by using some of the fiscal savings accumulated in the years preceding the crisis, and with the renewed financial assistance of the IMF (a US$144 million disbursement under a RAC-ESF agreement). The 2012 Budget aims at containing the deterioration of the overall fiscal deficit to 2.2 percent of GDP on a cash basis (including grants and before payment of arrears). This would reflect a continued expansion in public investment (to 6.2 percent of GDP) in line with the objectives of the DSCE, but a weaker mobilization of non-oil revenue (declining to 13.9 percent of non-oil GDP). Duties on some oil imports will be lowered and an increase in exempted imported goods is expected in relation to the advancement of large infrastructure projects. The VAT threshold will be revised upwards with a view to reduce administration costs. The tax regime for small- and medium-sized enterprises will also be simplified, allowing for deductions that the previous regime did not permit. These measures are expected to reduce the tax burden faced by these enterprises and are hoped to foster their development, but will imply a revenue shortfall for the budget.
Uncertainty surrounding the international outlook is, however, greater this year with developments rapidly unfolding and economic difficulties possibly spreading to other parts of the world. Projections are rapidly being revised downwards (Figure 7). Although Cameroon has a fairly diversified export base and markets, the recent declines in some of its key commodity exports may indicate that the crisis could be deeper than currently envisaged and downside risks to our projections significant.
Against this background, mitigating strategies might be considered to protect the economy should matters become worse than currently projected. In 2008-09, public spending could be protected and supportive fiscal measures introduced using the fiscal savings that had been accumulated in previous years. The reduced level of remaining government deposits at the regional central bank will only provide a limited buffer this time around.
Cameroon being an oil producer is highly dependent on oil exports, making the country vulnerable to swings in oil prices and production. Receipts from oil exports are the country’s predominant source for foreign exchange earnings, as well as a substantial source of its government revenue. On average between 2000 and 2010, oil accounted for 46 percent of total exported goods and accounted for 30 percent of total government revenue.
The accumulation of foreign exchange reserves and government deposits can help protect a country against such shocks. As a member of the CEMAC, Cameroon can access the common pool of foreign exchange reserves accumulated by all member countries at the BEAC. To mitigate shocks to government revenue, however, each country has to accumulate an adequate buffer of government deposits. The question then becomes how to define the appropriate level of fiscal reserves.
This question can be approached in a similar way as the evaluation of the appropriate level of foreign exchange reserves.1 Reserves can be considered as a shield to protect a certain level of imports or spending against shocks on income, very much like precautionary savings would do for consumption. For these calculations, the frequency and strength of past shocks are taken into account and some restriction on borrowing assumed. Although imperfect, this indicator provides a useful benchmark for fiscal reserves adequacy from a policy perspective, because it takes into account the specific frequency and size of shocks faced by a country.
Following this approach, the level of fiscal reserves in Cameroon were measured in months of current spending (considered to be more difficult to cut than investment) and the past development of exports and oil revenue between 1980 and 2009 were taken into account.2 The results would suggest that the country should be holding at the minimum fiscal deposits to cover about nine months of current spending to be sufficiently protected against shocks affecting fiscal oil revenues.3 At the end of 2010, net government deposits (measured as government deposits minus its liabilities to the regional central bank) were only sufficient to cover 1.9 months of current spending. Usable government deposits (measured as non-earmarked government deposits) amounted to ¼ month of current spending.
The most recent joint IMF-World Bank low-income country debt sustainability analysis carried out indicates that Cameroon’s risk of debt distress remains low, opening the possibility for some limited non-concessional borrowing. In this context, the authorities are actively using the room provided by the country’s low level of public debt to tap non-traditional creditors and the nascent domestic capital market by issuing a government bond last year and Treasury bills this year (Figure 8). These provide alternative sources of financing for the budget, complementing any possible shortfall in fiscal savings. Tapping the emerging domestic capital market could, however, also be a source of vulnerability: the 2012 Budget relies on further debt financing amounting to CFAF 250 billion. In this regard, efforts to create a liquid secondary market for government bonds would help sustain investors’ interest in future bond issues. Improvements in fiscal reporting would also foster investors’ confidence, since it will make the government’s fiscal position more transparent. Furthermore, stronger project selection and preparation would contribute to ensuring that the proceeds of new borrowing would be put at the most productive use.
As the government is turning to non-traditional creditors and non-concessional external borrowing, its debt management capacity would need to be strengthened, building on recent achievements. The authorities have formulated a medium-term debt management strategy for central government debt; they are also producing their own debt sustainability analyses; and a National Debt Committee has been instituted. However, the legal framework governing debt management could be clarified, institutional responsibilities centralized, and capacity strengthened to carry out more sophisticated negotiations and analyses on risks and costs, as well as making the National Debt Committee fully operational.
The composition of public spending could also be examined to enhance its efficiency. In this regard, the increasingly significant burden represented by subsidies, particularly fuel subsidies, is a source of concern (Box 4). The costs in terms of GDP related to the decision to freeze retail fuel prices are the highest in the region, benefitting mostly the richest segment of the population (the fifth quintile: the richest 20 percent of the population). Measures that instead scale up existing transfer programs and develop effective social protections, while achieving the same objectives, would be more cost-effective.
SONARA, the national oil refinery, has been benefitting from assistance to compensate it for its revenue shortfalls stemming from the government’s policy to freeze retail prices of petroleum products (diesel, gasoline, kerosene, and LPG). Subsidies for energy products are provided both: i) directly to SONARA through direct budgetary transfers from the treasury; and ii) indirectly through tax reductions on the prices of energy products.
Budgetary allocations have been insufficient to cover the actual costs of freezing petroleum prices. These costs are calculated as the difference between the retail price applied and the price that would be needed for SONARA to generate a guaranteed margin on its domestic operations. These amounts have substantially increased, reaching an estimated 2.6 percent of GDP in 2011 (14 percent of the budget), the highest level in the region.
Furthermore, the freeze on petroleum products has mostly benefitted the richest segment of the population. About 80 percent of the benefits from fixed fuel prices are estimated to accrue to the top income quintile because richer households consume more petroleum products than do poorer households, especially diesel and gasoline.
As in other parts of Africa, the formal manufacturing and service sectors have the potential to be an important source of employment, but because they hire such a small share of the labor force, even with very high growth rates, they will not be able to absorb more than a fraction of the new entrants. Most Cameroonians are thus likely to continue working in low-productivity agriculture and non-agriculture informal sector activities over the next two decades.
This observation calls for greater emphasis on measures to increase the productivity, and hence the earnings, of those employed in the informal sector, while at the same time working to create more jobs in the formal sector. Like most Africans, Cameroonians already have jobs: they cannot afford otherwise. The problem is that these jobs have extremely low productivity and generate low earnings.
Labor productivity enhancement can come from two sets of interventions: (i) those that improve the supply of labor; and (ii) those that stimulate the demand for goods and services produced, and hence for labor. When discussing labor supply, skills are important. Significant among demand-side interventions are those that reduce the costs of production, such as infrastructure investments.
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