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Cameroon and the IMF News Brief: IMF Completes Review Under Cameroon's PRGF Arrangement and Approves US$20 Million Disbursement Country's Policy Intentions Documents
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Cameroon—Letter of
Intent,
Mr. Horst Köhler Dear Mr. Köhler, 1. The government of Cameroon is implementing a medium-term economic and financial program, which is supported under the new three-year arrangement under the Poverty Reduction and Growth Facility (PRGF) approved by the IMF Executive Board on December 21, 2000. The main goal of the policies and reforms is to achieve a sustainable reduction in poverty through high economic growth, increased private investment, improved efficiency of public expenditure, strengthened governance, and well-targeted poverty reduction measures. This letter, which supplements that of December 6, 2000 and the supplementary letter of June 28, 2001, reviews Cameroon's performance during the first annual program (October 1, 2000-September 30, 2001) supported by the PRGF arrangement. It also outlines the government's objectives and policies for the second annual program (October 1, 2001-September 30, 2002) and takes stock of the progress achieved in implementing the enhanced Heavily Indebted Poor Countries (HIPC) Initiative, including the preparation of a full-fledged poverty reduction strategy paper (PRSP). The government reiterates its resolve to achieve the objectives set forth in its medium-term program, particularly in light of a less favorable prospective international environment and the mounting domestic spending pressures that could materialize ahead of the elections expected in 2002. |
| 2. During the first annual program, the good record of macroeconomic
performance established under the previous arrangement (1997-2000) in the
macroeconomic area continued and the structural reform process progressed
further. All the quantitative performance criteria for end-March and end-September
2001 were met, with the exception of the end-March 2001 criterion for net
bank credit to the central government because of unexpected delays in the
privatization of the telecommunications company (CAMTEL). In the same vein,
all the quantitative benchmarks for end-December 2000 and end-June 2001
were also met, except for the floor on the reduction of domestic arrears,
which was missed owing to a slower-than-envisaged pace of securitization
of domestic arrears. In this regard, the government faced difficulties in
convincing small creditors to accept securities in exchange for their claims.
Furthermore, the results of the validation process carried out in 2000 were
significantly challenged for some types of claims, thus, forcing the authorities
to reopen the issue. The verification of these claims has now been completed
and the strategy is being revised, with the intention of paying all remaining
claims in cash.
3. With regard to structural reforms, all the performance criteria and benchmarks for the first half of the program year were met, with the exception of the development of a computer interface for maintaining the government payroll file updated, owing to unexpected technical difficulties encountered in the implementation of the four pilot sectoral sites (Ministries of Economy and Finance, Education, Health, and Civil Service). As regards governance, the financial audit for fiscal-year 1999/2000 (July-June) and the second phase of the organizational and operational audit of the oil company (SNH) were completed. The privatization of the electricity company (SONEL) was also completed. In contrast, due in large part to reasons beyond its sole control, the government was unable to implement a number of the structural measures envisaged for the second half of the program year, which ended in September 2001. In particular, the negotiations with the bidder selected for the privatization of CAMTEL could not be concluded. As a result of intensified efforts, however, many of these measures are now in place. The consultant's contract has been signed, and he has received the terms of reference of the mission (ordre de mission), together with the effective launching date of the technical audit of the judiciary system. The government has also begun to address the worrisome problem of saisies-attribution (see para. 13 below). Negotiations pertaining to the privatization of the national water company (SNEC) were intensified, and an offer for the tea component of the Cameroon Development Corporation (CDC) was received. Further progress was also made in the implementation of the rehabilitation plan for the Postal Savings Bank, with the appointment in October 2001 of its top management and the launching in December 2001 of the bids for the selection of consultants to assist with the restructuring. 4. Preliminary estimates suggest that the pace of economic activity in 2001/02 was broadly in line with the assumed real GDP growth of 5.3 percent. Investment related to the Chad-Cameroon pipeline proceeded more rapidly than envisaged; other private residential and business construction gained momentum; and investment in the wood processing sector expanded. However, the 12-month national consumer price inflation rate accelerated to about 3 percent on an average basis (versus a programmed annual rate of 2 percent), driven by higher foodstuff prices following a drought in the northern provinces and increased demand from neighboring countries. Budgetary performance was somewhat better than programmed, with the primary surplus for the first annual program CFAF 14 billion larger (0.2 percent of GDP) than envisaged in the program. The improved revenue performance and lower-than-programmed domestically financed public investment expenditure more than offset the overruns in domestic noninterest current expenditure. Total revenue was 0.3 percent of GDP higher than programmed, reflecting continued good performance in both oil and non-oil revenues. Current noninterest expenditure exceeded the target by 0.2 percent of GDP, owing to slippages in the wage bill, other goods and services, and transfers and subsidies during July-September 2001. Domestically financed capital expenditure remained significantly lower than targeted, mainly on account of delays in approving the HIPC Initiative-related spending. At the same time, however, foreign-financed public investment was higher than targeted. Monetary developments during the first annual program showed a moderate expansion of credit to the private sector and a net repayment to the banking system by the central government of CFAF 79.9 billion (1.3 percent of GDP). Cameroon's contribution to the improvement in the net foreign assets position of the regional central bank (BEAC) further strengthened and broad money increased by 17 percent by end-September 2001, reflecting mainly an increase in bank deposits. Macroeconomic and budgetary prospects for the second annual program (October 1, 2001-September 30, 2002) 5. Based on recent developments and the October 15, 2001 World Economic Outlook (WEO) projections, the macroeconomic framework assumes real GDP growth rates of 4.6 percent and of 4.9 percent (down from initial projections of 5.5 percent and 6 percent) for fiscal-years 2001/02 and 2002/03, respectively. It also assumes real non-oil GDP growth rates of 5.0 percent and 5.5 percent for the same years (down from initial projections of 6.1 percent and 6.2 percent), reflecting a less favorable external environment and the delays in structural reform. The 12-month national consumer price inflation rate is projected at less than 3 percent for the second annual program, as the supply of foodstuff is expected to improve and imported inflation to remain low. The projected decline in oil prices will result in a deterioration of Cameroon's terms of trade, which, combined with the long-term decline in oil output, is expected to have a negative impact on both government oil revenue and national income. 6. The government will continue to adhere to a cautious fiscal stance during the second annual program. Oil revenue is projected to amount to 4.9 percent of GDP in 2001/02 and to 3.3 percent of GDP in 2002/03, based on (i) average oil prices for Cameroon of US$19.9 per barrel and of US$19 per barrel, respectively; and (ii) oil output projections of 39.3 million barrels and 35.3 million barrels, respectively (versus initial projections of 38.1 million and of 37.7 million barrels-- reflecting the long-term decline in production as the major known oilfields are expected by both the oil industry and the authorities to be depleted by 2010/11). With a further strengthening of tax and customs administrations and the programmed tax initiatives (see paras. 9, 10, and 11 below), and based on the assumed growth in the non-oil sector, non-oil government revenue should remain at 16 percent of non-oil GDP in 2001/02. Noninterest expenditure is targeted to increase to no more than 16 percent of GDP. The increase is mainly driven by (i) HIPC Initiative spending of CFAF 95 billion (1.4 percent of GDP); and (ii) a higher wage bill; together, these would allow for selective new recruitments in the context of the medium-term sectoral strategies in education and health. The higher wage bill also reflects the gradual implementation of new statutes for the various professions within the civil service. Transfers and subsidies will be limited to 1.8 percent of GDP, and domestically financed and foreign-financed public investment is targeted at 2.5 percent of GDP and 1.5 percent of GDP, respectively. On this basis, the primary fiscal surplus should reach 4.8 percent of GDP in 2001/02, and the overall fiscal situation, on a commitment basis and excluding grants, will be balanced. Excluding expenditure financed by the savings resulting from the enhanced HIPC Initiative, total expenditure would be limited to 18 percent of GDP in 2001/02, with public investment expenditure targeted at 2 percent of GDP. 7. Improving public expenditure management will continue to be at the core of the second annual program. The government is aware that a swift improvement in public expenditure is critical to achieve its budgetary targets, further consolidate macroeconomic stability, and enhance Cameroon's fiscal policy credibility. To this end, some of the deficiencies of the existing fragmented and obsolete information system that monitors budget execution are being addressed on an urgent basis, in line with the action plan developed with the Fund's Fiscal Affairs Department (FAD) and other donors' technical assistance, which was finalized and formally adopted on December 28, 2001 (a prior action). The priorities, as indicated in Table 2, are to (i) implement a new budget classification; (ii) link the existing information systems at the treasury with that at the budget department of the Ministry of Economy and Finance; and (iii) pursue the work on improving the quality of fiscal data, with a view to eliminating inconsistencies between the treasury balances and the budget execution tables (including, notably, the table on central government financial operations (tableau de bord)). Moreover, the action plan sets a path to migrate successfully from the existing system to a fully integrated computerized information system to manage central government revenue and expenditure from the commitment to the payment stage (chaîne des recettes et des dépenses publiques) by end-September 2003. 8. Furthermore, the government has started to (i) strengthen internal controls, along the lines of the recommendations of the September 2001 FAD mission on the treasury; and (ii) develop an action plan, by end-March 2002, to ensure proper external control of central government finances (through, notably, the introduction of an external audit body (Chambre des Comptes). Steps are also being implemented to (i) further enhance budgetary procedures and the quality of public expenditure; and (ii) reduce the supplementary period for closing the accounts of the preceding fiscal year to no more than 60 days. Finally, the government will also (i) pursue the implementation of the other key measures that are already contemplated under the program, including, notably, the multiyear settlement plan to clear domestic arrears; (ii) continue to further enhance the quality and timeliness of the quarterly reports on the financial and physical execution of the budget of key Ministries (including Education, Health, Public Works, and Agriculture); and (iii) improve the coordination between the debt agency Caisse Autonome d'Amortissement (CAA) and the relevant departments in the Ministry of Economy and Finance (including, notably, the treasury and the budget department), with respect, particularly, to monitoring of domestic public debt. In this regard, the CAA will start collecting information on (domestic and external) loans contracted by public enterprises. 9. The government will continue to strengthen its capacity to mobilize non-oil revenue through measures to enhance customs and tax administration. These include, notably, (i) the adoption of a code of tax procedures; (ii) the establishment, within the tax directorate, of a large-taxpayer unit to monitor and control tax liability for the 300-400 largest taxpayers; (iii) the reorganization of the central tax administration along functional lines; and (iv) improvement of the administration of the value-added tax (VAT) and forestry taxation, including the securitization of forestry receipts through the effective levy of the 17.5 percent exit tax on timber at the entrance to the points francs (entrée points francs) and the implementation of a system of adjudication for export quotas of unprocessed logs. Furthermore, the government will also pursue its preparatory work for (i) the formulation of a comprehensive reform of the income tax system; and (ii) the introduction of a property tax, based on a land survey (cadastre fiscal) that is being put in place. The government plans to submit its income tax reform plan to the National Assembly in 2002. 10. In the customs area, the government will pursue the implementation of its reform program, including the strengthening of the single processing window (guichet unique) for external trade. In addition, it will continue carrying out the other priority measures which are already contemplated in its previous letters of intent to improve the administration of customs, increase revenue, and simplify international trade procedures. In particular, the government will ensure that the computer links between the tax and the customs information systems are operational, so as to facilitate the exchange of data between the two information systems. The government will also improve the physical and documentary controls for the release of goods (prise en charge des marchandises) and ensure that the control system for exemptions and special-status traffic (transit, bonded warehouses (entrepôts), and temporary admissions) will be strengthened, procedures simplified, and the computer system (PAGODE) modernized (following its successful securitization in March 2001). The government will implement additional revenue-enhancing measures in line with the recommendations of the FAD technical assistance mission of October-November 2001. In particular, it will (i) strengthen the valuation office; (ii) improve the collaboration with the Société générale de surveillance (SGS), especially with a view to double-checking the valuation of imported merchandise; and (iii) strengthen ex post controls. 11. The government is committed to not introducing any new tax and customs exemptions, and to enhancing VAT refund procedures. In order to limit the magnitude of the negative budgetary effects of the recently introduced exemptions, the government reiterates its commitment to restrict VAT exemptions on computer material exclusively to computers and to the program period. As regards exemptions to support the development of the press, a special unit, comprising representatives from the Ministry of Communications and the customs and tax administrations, has been established for the issuance of exemption certificates to eligible companies on a case-by-case basis and in a transparent manner. The government reiterates its commitment to restrict exemptions granted to support the HIV/AIDS program to those products that are specifically required to ensure detection of the HIV/AIDS virus and treatment and to grant them only for the duration of the remainder of the current three-year program. In addition, the government is committed to (i) undertaking an evaluation of the revenue loss stemming from the existing exemptions on VAT and on the special tax on petroleum products (TSPP); and (ii) formulating a plan to reduce VAT exemptions over a five-year period in order to return to the basic regime (1998/99 Budget Appropriations Act). 12. The monetary projections have been revised, taking into account recent developments, including the impact of the September 11, 2001 events on the terms of trade and the balance of payments. The reduction in Cameroon's contribution to the net foreign assets position of the regional central bank (BEAC) would be contained and net bank credit to the central government would be increased by CFAF 15 billion (on a cumulative basis from end-June 2001) by end-December 2001 (a benchmark) and reduced by CFAF 11 billion (on a cumulative basis) by end-March 2002 (a performance criterion). Money growth is projected to slow progressively over October 1, 2001-March 31, 2002. Governance 13. The government is determined to implement the programmed measures included in its letter of intent of December 6, 2000 and supplementary letter of intent of June 28, 2001. The technical audit of the judiciary system will begin in early January 2002, as specified in the consultant's terms of reference (ordre de mission) (a prior action), which are in time with those agreed with the IMF and World Bank. In the meantime, the government has also taken steps to address some of the judicial deficiencies that could have an adverse impact on the health of the banking system and private sector investment. In this regard, it has started to investigate thoroughly the cases of saisie-attribution and will forward its recommendations to the relevant bodies, in order to (i) ensure that all necessary corrective actions are taken and appropriate sanctions imposed, as required; and (ii) propose legislative, regulatory, and other provisions necessary to correct the nonfunctioning features in the saisie-attribution procedure. Moreover, the government will intensify its ongoing efforts, including, notably, by (i) conducting seminars at the provincial level to inform and train magistrates regarding the legal provisions of the Organization for the Harmonization of Business Law in Africa (OHADA) Treaty and their interpretation and implementation; (ii) rendering the general inspection office of the judicial system operational and effectively implementing controls by the Heads of Court in their respective jurisdictions; (iii) codifying the OHADA's legal provisions and communicating them to all magistrates; and (iv) promulgating the Cameroonian laws as foreseen under the OHADA Acts. 14. The government is committed to taking additional steps to improve transparency and accountability in public sector management and to combat corruption. These steps, which are consistent with the World Bank recommendations, include, notably, the following: (i) starting effectively, before December 31, 2001 the audit, by an internationally reputed independent auditor, of the government procurement contracts in fiscal-year 2000/01, with a view to completing the audit by end-March 2002; (ii) signing the decree pertaining to the tender commissions before January 31, 2002; and (iii) adopting, before December 31, 2001, an updated action plan for the implementation of the procurement reform. Moreover, with the assistance of the World Bank and other multilateral partners, the government has articulated a number of specific actions in the context of its priority action plan of August 2000 for improving governance and combating corruption. These include, in particular, (i) posting on the government's website the priority action plan; (ii) rendering operational anticorruption units in ten ministries, including the governance observatory in the Ministry of Education; and (iii) adopting an action plan, before end-March 2002, for the establishment of the jurisdictional bodies called for in the constitution, including an audit body for the external control of the State finances. Structural and sectoral policies 15. The government is determined to consolidate and deepen the ongoing reforms in several structural and sectoral core areas, with a view to stimulating private sector investment, enhancing the competitiveness and efficiency of the economy, boosting production, and consolidating the recent gains on the macroeconomic and budgetary fronts. In addition to the actions in the area of governance (paras 13 and 14 above), actions in the financial sector will continue to be designed and implemented in close consultation with the World Bank and IMF staffs. Actions in the other core areas of privatization, petroleum, transport, forestry, and agribusiness will continue to be designed and implemented in close consultation with the World Bank. 16. In the financial sector, the government will continue to follow up on the progress in implementing the single commercial bank licensing system within the Central African Economic and Monetary Community (CEMAC). It is also determined to complete the implementation of the other key measures already committed in its December 20, 2000 and June 28, 2001 letters of intent, in line with the recommendations of the Financial Sector Assessment Program (FSAP) of May 2000, in order to strengthen the financial system and ensure the viability and resilience of Cameroon's financial system. These measures include, in particular, (i) implementing the recently adopted plan for the financially troubled state-owned Postal Savings Bank, with a view to completing the rehabilitation by end-September 2002; (ii) bringing to an end, by end-December 2001, the processing of the registration requests (dossier d'agrément) of the saving and loan cooperatives (COOPECs) and eliminating from the registry of the Ministry of Agriculture the cooperatives that have not presented a request and, therefore, will be closed; (iii) supporting the ongoing work under the auspices of the Central African Banking Commission (COBAC) on the preparation of a regulatory framework for microfinance, to be adopted in early 2002; (iv) completing the bank liquidation run by the Société de Recouvrement des Créances (SRC), with the exception of the BMBC and BCCI by end March 2002 (in this regard, the government will ensure that the financial compensation to the legitimate beneficiaries is conducted in a transparent manner and equitably); (v) pursuing the ongoing work on reforming the payments system undertaken with the assistance of the World Bank and the IMF; and (vi) pursuing the broad reform of the social security system in accordance with the strategy adopted by the interministerial committee in November 1999. 17. With regard to the privatization program, the government reiterates its commitment to address the remaining issues and complete within a reasonable time frame the privatization of SNEC and CAMTEL, which is critical to the provision of better services, an increase in investment and growth, and the reduction of poverty. As regards the SNEC, the government hopes to finalize the agreement with the interim adjudicator before end-December 2001. However, in the absence of such an agreement, an interim administrator will be appointed in January 2002 and the privatization process relaunched. As regards CAMTEL, with the failure to reach agreement with the interim adjudicator, the government has turned to the second bidder, who has until January 20, 2002 to submit a final offer. 18. In the petroleum sector, the authorities will make sure that the provisioning by the SNH for depleted oil wells is made on a regular basis and in line with the related contractual arrangements. The bidding process for the sale of the shares held by the SCDP (the petroleum storage facility) on behalf of the government will be launched before end-May 2002, so as to transfer these shares to the private sector, which will thereafter manage the SCDP. Among the recommendations of the action plan to reform the petroleum sector formulated in late 2000, the government will, by end-June 2002, (i) redefine the role and responsibilities of the private sector, the SNH, the ministry responsible for hydrocarbons and other entities involved in the hydrocarbon sector and provide a timetable for the implementation of the reform program; (ii) submit to parliament the new natural gas code; and (iii) provide a strategy and an action plan for promoting private sector investment in the hydrocarbon sector. It will also ensure that SNH completes the installation of its upgraded financial management and accounting. Finally, should world oil prices rise above US$25 per barrel in 2001/02, the government will adjust upward the prices of gasoline (super) and gas oil, as appropriate, in the context of the automatic petroleum retail price mechanism, so as to prevent the reemergence of any petroleum subsidies. 19. In the transport, forestry and agro-industrial sectors, which are critical for improving competitiveness and enhancing job creation opportunities, the government will pursue the reforms agreed with the World Bank and other donors. As regards air transportation, the government intends to recruit a consultant to conduct a comprehensive evaluation of the national airline (CAMAIR), with a view to completing the evaluation by May 2002 and recruiting, by end-September 2002, an adviser to help launch the privatization of the company. In the port sector, in particular the port of Douala, the priorities are to (i) complete the institutional reforms, including the adequate financing of the autonomous port of Douala and the liquidation of the former Office National des Ports du Cameroun (ONPC); (ii) privatize industrial and commercial activities; (iii) reduce the clearance delays of containerized merchandise to seven days for imports and two days for exports, based on the action plan put in place in line with the ongoing customs reform; and (iv) modernize the operations of the container terminal by selecting a concessionaire through international bidding. In the forestry sector, in addition to the fiscal measures specified in para. 9 above, the government will, by December 31, 2001, (i) adopt the regulatory texts and attribute the contracts and/or conventions required to ensure satisfactory implementation and supervision of the management plans; (ii) adopt the legal instruments needed to define the priority rights of forestry communities in rural forests; and (iii) prepare a draft decree revising the statutes of the National Forestry Development Office (ONADEF), in line with the recommendations of the institutional audit of the sector. Moreover, the government will apply legal sanctions in the event of serious violations of forestry rules and management plans, and will make public the list of cases that have been dealt with and/or are in process. In the agro-industrial sector, the key policy actions are (i) the privatization of the remaining agro-industrial enterprises, including SODECOTON (a review of the strategy in the cotton sector and a launching of the bidding process) and the CDC (an analysis of the financial offer in February 2002, appointment of an interim adjudicator for the tea crop component by March 2002, and the launching of a new bidding process for the other three non-attributed crop components). Social and poverty reduction policies, PRSP preparation, and use of savings resulting from the debt relief under the enhanced HIPC Initiative 20. The main focus of the government's social policies is to ensure that strengthened economic performance translates into tangible results in terms of job creation, poverty reduction, and an improvement in the economic welfare of the population as a whole. To this end, the authorities have started to strengthen the technical and administrative capacities of several sectoral ministries in the priority sectors of health, education, and urban and rural development, with assistance from the World Bank and other donors. Comprehensive strategies for the health and education sectors have already been formulated, their respective costings are being carried out, and progress is being made in formulating strategies in the other priority sectors (rural and urban infrastructure). A first series of programs and projects to be financed through the savings resulting from the debt relief under the enhanced HIPC Initiative was adopted on October 26 and on December 6, 2001, for a total amount of CFAF 35 billion. The selected programs and projects are concentrated in the priority poverty reduction-related sectors of education, health, urban sanitation, rural road infrastructure, and safe drinking water. In line with the orientations specified in the decision point document of October 2000, the key aim of these programs and projects is to improve the delivery of social services. Moreover, the work on the formulation of a second series of programs and projects to be financed through the savings of CFAF 58 billion (expected for the current fiscal-year 2001/02) will be discussed by the national consultative committee for the follow-up on the implementation of the HIPC Initiative in the first quarter of 2002. 21. Consistent with its action plan of September 2001 for the preparation of a full poverty reduction strategy paper (PRSP), the government is pursuing the preparation of a high-quality PRSP. The process, which relies on an enhanced participatory approach, is progressing well and is expected to be completed by June 2002. It draws extensively on the results of the sectoral strategies, the ongoing household survey, and other pertinent analytical and empirical studies. In the meantime, a PRSP Preparation Status Report is being prepared and will be submitted to the Executive Boards of the World Bank and the Fund by end-December 2001. 22. The savings resulting from the debt relief under the enhanced HIPC Initiative have been deposited into a special account opened at the central bank (the BEAC). The government remains committed to pursuing its policy of making deposits at the special account at the central bank (including the savings from bilateral debt relief). It is also fully aware of the importance of holding regular meetings of the national consultative committee for the follow-up on the implementation of the HIPC Initiative; these meetings are vital to ensure that the use of available resources is closely monitored and remains consistent with the ongoing efforts to improve public expenditure management, the orientations specified in the October 2000 decision point document, and the priorities being discussed in the context of the preparation of the full PRSP. External sector policies and debt management 23. A key objective of Cameroon's external policy remains to enhance external competitiveness in order to achieve external viability and strengthen growth prospects. To this end, the government will continue to implement and even further strengthen the efficiency-enhancing measures of the program. It will also continue to take the lead in promoting enhanced regional integration in the Central African Economic and Monetary Community (CEMAC) zone through further reductions in the common external tariff (to a maximum of 20 percent rate) and in the number of bands (from five to four), as well as through the enactment of a common investment charter. Finally, it has also started to effectively implement the new foreign exchange regulations (réglementation des changes) of the CEMAC. 24. Following the Paris Club agreement of January 24, 2001 to support Cameroon's program with a comprehensive and concessional treatment under the enhanced HIPC Initiative, the government requests that the deadline for signing the bilateral agreements be extended through end-March 2002. The government will pursue its efforts to reach agreement on commercial bank debt, following its settlement offer of May 2001 to buy all external commercial debt and insured supplier and trade credits. While the commercial banks' counteroffer of July 2001 is significantly different from the government's proposal, negotiations are expected to be completed by June 2002. The government will endeavor to ensure that the terms under all the agreements with non-Paris Club creditors are at least as favorable as those obtained recently from the Paris Club under the enhanced HIPC Initiative. Prior actions, request for waiver, and program monitoring and review 25. The government understands that the following measures constitute prior actions that would need to be in place before Cameroon's documents are issued for Executive Board consideration:
26. The government requests a waiver for the nonobservance, on September 30, 2001, of the structural performance criterion on the completion of the development of the computer interface (ANTILOPE-SIGIPES) to ensure that the salary file of the government payroll system remains current. The four pilot sites were not in place by September 30, 2001, for the reasons explained in para. 3 above. Following the implementation of these sites, the ANTILOPE-SIGIPES interface became operational on December 10, 2001. 27. To monitor program implementation, a number of quantitative benchmarks for end-December 2001 and quantitative benchmarks and performance criteria for end-March 2002 have been established, as specified in the attached Table 1. In addition, the reform measures specified in Table 2 constitute structural performance criteria and benchmarks for the first half (October 2001-March 2002) of the second annual program. The government considers that these are essential for (i) achieving the macroeconomic objectives of the program; (ii) improving public expenditure management; and (iii) enhancing the prospects for increased private sector investment. 28. In view of the uncertainties about external debt relief and oil prices, the program contains a built-in contingency mechanism for the adjustment of the quantitative benchmark and performance criteria, as spelled out in the attached technical memorandum of understanding (TMU). In the same vein, given the uncertainties surrounding the implementation of the privatization program, the related receipts are excluded from the definition of the ceiling on net bank credit to the government. If the privatization receipts materialize, the government will agree with Fund staff on the specific use of these resources. 29. The fourth disbursement under the PRGF arrangement will be subject to (i) the observance of the end-March 2002 performance criteria; and (ii) the completion of the third review by no later than mid-July 2002. The review will focus mainly on public expenditure management, budgetary non-oil revenue performance, customs and tax administration reform, detailed strategies in the poverty reduction-related priority sectors, further advancement in the preparation of the full PRSP, and progress in governance. The fifth disbursement under the PRGF arrangement will be subject to (i) the observance of the performance criteria to be established in the context of the third review; and (ii) the completion of the fourth review scheduled for mid-January 2003. The third annual program supported by the PRGF arrangement will be discussed with the staff in late 2002. 30. As in the past, program implementation will be regularly examined in cabinet meetings chaired by the Prime Minister, Head of Government. An Interministerial Supervisory Council, chaired by the Minister of Economy and Finance and comprising the key economic and social sector ministers, has effectively started to coordinate program implementation with the assistance of the CTS (technical committee for the implementation of the economic programs). The CTS will provide Fund staff with all the necessary data on a timely basis to effectively monitor the program. To this end, the government also will continue to improve data quality, coverage, and timeliness in the context of the General Data Dissemination System (GDDS). Sincerely yours, /s/ Peter Mafany Musonge
Prime Minister Head of Government
CAMEROON Technical Memorandum of Understanding on the Definitions, Including Prior Actions and Structural Performance Criteria and Benchmarks, and Modalities of the Built-In Contingency Mechanism for the Adjustment of Quantitative Performance Criteria and Benchmarks Under the Second Annual Program Under the PRGF Arrangement A. Introduction 1. This memorandum supplements the technical memorandum of understanding annexed to the memorandum of economic and financial policy of December 6, 2000 and the supplementary technical memorandum of understanding annexed to the letter of intent of June 28, 2001. It sets out the understandings between the Cameroonian authorities and the staff of the International Monetary Fund regarding the definitions of the quantitative and structural performance criteria and benchmarks for the program supported by the Poverty Reduction and Growth Facility (PRGF) arrangement and the built-in contingency mechanism, as well as the related reporting requirements. B. Definitions External debt 2. The size and rate of growth of external indebtedness are important factors in the design of a program for a country, especially one benefiting from the Initiative for Heavily Indebted Poor Countries (HIPC) assistance like Cameroon. Consistent with the Guidelines on Performance Criteria with respect to Foreign Debt (Decision No12274- (00/85), August 24, 2000), external debt will be understood to mean a current, that is, not a contingent, liability created under a contractual arrangement by the government of Cameroon, or guaranteed by the government of Cameroon, with a nonresident party through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. Debt can take a number of forms, the primary ones being the following:
3. Under this definition of debt, arrears, penalties, and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are debt. Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt. Concessionality of external debt 4. Debt is considered concessional if it has a grant element equivalent to 35 percent or more, using the available currency-specific commercial interest reference rate (CIRR) and following the methodology set out in staff paper SM/96/86 (4/8/96) and approved by the IMF Executive Board on April 15, 1996. Cash relief from external debt rescheduling 5. For the purpose of the program, the only debt relief that will be subject to the contingency mechanism described below is one that leads to an effective reduction in programmed debt service. This excludes debt relief given on debt that has been in drawn-out rescheduling/restructuring negotiations with non-Paris Club creditors and for which no debt service has been paid in the past year-- for example, debts to be considered under the debt- and debt-service-reduction operation with commercial creditors, and for which no provision in debt service has been explicitly made in the fiscal program (except for up-front costs). Domestic arrears 6. Domestic arrears include nonstructured domestic debt contracted by the government. Nonstructured debt is defined to be a liability for which there has been neither a formal agreement, nor a cash payment, nor securitization. Specifically, this debt includes salary arrears; commercial debt; rental/lease arrears; debt on account of indemnities and expropriations; fees and tax refunds or reimbursements; and debt on account of social adjustment programs arising from the restructuring of public enterprises. The government intends to settle these liabilities in the form of cash payments. Net claims of the banking system on the central government 7. Net claims of the banking system on the central government comprise the stock of all outstanding claims on the central government (loans, advances, and all other government debt instruments, such as long-term government securities) by the banking system, less all deposits held by the central government with the banking system. Privatization receipts are excluded from the definition of the ceiling on net claims of the banking system on the central government. Primary balance of the budget 8. The primary budget balance is calculated as total central government revenue (oil and non-oil), excluding foreign grants and privatization proceeds (counted as financing), less noninterest expenditure, excluding foreign-financed investment and restructuring expenditure. Privatization receipts 9. For the purpose of this memorandum, privatization receipts will be understood to mean all monies received by the central government through the sale or concessioning of a public company, organization, or facility to a private company(ies) (including ones fully owned by foreign governments), organization(s), or individual(s). All privatization receipts should be presented on a gross basis; if costs are incurred in the sale or concessioning, they should be recorded separately as expenditure. C. Modalities of the Built-In Contingency Mechanism for the Adjustment of Quantitative Performance Criteria and Benchmarks 10. In view of uncertainties about program financing and oil prices, the program contains a built-in contingency mechanism for the adjustment of the quantitative criteria and benchmarks relating to the ceilings on the increase in the net claims of the banking system on the central government (performance criterion). Deviations from programmed oil revenue 11. The programmed oil revenue is based on oil price assumptions of US$18.5 and US$18.2 per barrel (for Cameroon) for the first and second quarters of the second annual program (October 1, 2001-September 30, 2002), and on volume estimates of 10.3 and 9.8 million barrels, respectively. Based on these assumptions, the oil revenue contribution to the central government's budget is estimated at CFAF 62 billion and CFAF 53 billion in the first and second quarters of the second annual program, respectively. 12. In case of lower-than-programmed oil revenue (owing to events beyond the government's control), the government will compensate 50 percent of the shortfall by expenditure savings and/or additional revenue from other sources. For the remaining 50 percent of the shortfall, the above-mentioned quantitative performance criteria and benchmarks will be adjusted upward. For a shortfall beyond a threshold of CFAF 35 billion per quarter, the authorities will consult Fund staff to formulate corrective policies to adjust performance criteria. 13. The entire amount of the oil revenue above the programmed amounts will be placed in a treasury account at the Bank of Central African States (BEAC). A maximum of 50 percent of the windfall will be used to (i) increase high-priority infrastructure investment and social expenditures; and (ii) reduce domestic arrears. The remainder of the windfall revenue will be sterilized by lowering the ceilings on the above-mentioned quantitative performance criteria and benchmarks. Deviations from programmed external assistance and reductions in domestic and external arrears 14. The above-mentioned quantitative performance criteria and benchmarks will be adjusted (i) upward for a shortfall in exceptional external financing (i.e., program financing and external debt relief) up to an amount equivalent to 50 percent of the shortfall (for a total cumulative shortfall of CFAF 35 billion); (ii) downward for the full amount of any excess in external assistance (i.e., program financing and external debt relief); and (iii) downward by the full amount of any shortfall in the reductions of domestic and external payments arrears in comparison to the program. Program exchange rate 15. Amounts denominated in SDRs will be converted to U.S. dollars at the fixed exchange rate of US$1.284 per SDR, and converted into CFA francs in accordance with the exchange rates agreed with the authorities. IMF liabilities, which are included in the definition of net claims on the central government by the banking system, will be valued at this exchange rate. Any deviations in the exchange rate will lead to a full adjustment in the valuation of the stock of IMF liabilities at the central bank, and to a similar adjustment in the ceiling on the net claims of the banking system on the central government. D. Prior Actions, Structural Performance Criterion, and Structural Benchmarks 16. The prior action relating to the "effective functioning of the operational interface (ANTILOPE-SIGIPES) for keeping the government payroll updated" will be deemed to have been in place if (i) the SIGIPES application is effectively in operation and its network actually connected with ANTILOPE; and (ii) the SIGIPES-ANTILOPE application is also in operation as the functional links between the Ministry of Civil Service and the three other pilot ministries or sites, namely the Ministry of Economy and Finance, the Ministry of National Education, and the Ministry Health, are actually operational. 17. The structural performance criterion relating to the completion of the link between the information system of the treasury with that of the budget department of the Ministry of Economy and Finance will be deemed to have been observed upon verification that the computer link between the information system of the treasury with that of the budget department in the Ministry of Economy and Finance, based on the required integrated applications, actually tracks all expenditures from the commitment to the payment stage for transactions carried out both at the central government level and by local branches of the central government. 18. The structural benchmark relating to the completion of the link between the information system of the treasury with that of the budget department in the Ministry of Economy and Finance will be deemed to have been observed upon verification that the computing link between the information system of the treasury and that of the budget department in the Ministry of Economy and Finance, based on the required integrated applications, actually tracks all expenditures from the commitment to the payment stage at the central government level. 19. The structural benchmark relating to the finalization and validation of the new budget classification will be deemed to have been observed once the Minister of Economy and Finance has officially notified the Fund that this new classification (nomenclature budgétaire) has been put into effect. E. Reporting Requirements 20. The Cameroonian authorities will send to the Fund the following data within the time limits set out in the attached Table 1. Except as otherwise indicated, data transmission will take the form previously agreed between the authorities and the Fund. The authorities will supply the Fund with any additional information that the Fund requests in connection with monitoring performance under the program on a timely basis.
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