Cameroon—Letter of Intent, Technical Memorandum of Understanding

August 28, 2002

Dear Mr. Köhler:

1. The government of Cameroon has continued to implement its medium-term economic and financial program, which is supported by a three-year arrangement under the Poverty Reduction and Growth Facility (PRGF) approved by the IMF Executive Board on December 21, 2000. This letter, which supplements that of December 6, 2000 and the two supplementary letters of June 28 and December 28, 2001, reviews Cameroon's performance during the first half (October 2001–March 2002) of the second annual program. It also outlines the government's objectives and policies for the second half (April–September 2002) of the second annual program. Finally, it takes stock of the progress achieved in implementing the enhanced Heavily Indebted Poor Countries (HIPC) Initiative, including in particular the preparation of a full-fledged poverty reduction strategy paper (PRSP) and steps toward meeting the HIPC completion point triggers. The government reiterates its resolve to achieve the objectives set forth under the program. These are (i) creating the conditions for private sector-led growth; (ii) diversifying non-oil production; and (iii) expanding the export base, particularly in light of the prospective decline in oil output, which is much steeper than envisaged at the inception of the PRGF arrangement, and of delays incurred in implementing core structural reforms to promote non-oil growth.

Performance during the first half (October 2001–March 2002) of the second annual program

2. Overall, the good record of macroeconomic performance continued during the first half of the second annual program. All the end-December 2001 quantitative benchmarks and end-March 2002 performance criteria and benchmarks were met. The five structural benchmarks for the first half of the annual program were also observed, including in particular the completion of the investigation of 48 identified cases of saisie-attribution, and the adoption of new budget classifications and of an action plan for the implementation of an audit body for external control of the state finances. However, the end-March 2002 structural performance criterion (on the completion of a computerized link between the treasury and the budget department in the Ministry of Finance and Budget, for government expenditures both at the central government level and at the local branches of government (déconcentré)), was not observed as scheduled (see also paras. 29 and 30). Moreover, the decrees to restrict value added tax (VAT) exemptions on computer material exclusively to computers and to limit those granted to support HIV/AIDS program to products specifically required to ensure detection of the HIV/AIDS virus and treatment were revised and issued in May 2002, consistent with the government's commitment to reduce tax exemptions. Moreover, a new General Tax Code (Code Général des Impôts), including a manual of tax procedures, has been promulgated. Finally, retail domestic petroleum prices were adjusted in April 2002, with a view to preventing the reemergence of government subsidies and consistent with the automatic petroleum retail adjustment price mechanism.

3. As regards governance, in addition to completing the investigation of the cases of saisie-attribution, a Country Financial Accountability Assessment (CFAA) has been prepared by the World Bank, and a precise action plan has also been agreed with the World Bank to improve transparency and accountability in the public sector. However, while the technical audit of the judiciary system had been launched as scheduled, the consultants failed to produce a satisfactory report by late April 2002. The consultants have been asked to expand and complete the discussions with the concerned legal and judiciary entities, including in the context of direct meetings with relevant officials of the Ministry of Justice (Chancellerie) and relevant magistrates more generally, and to prepare a new draft. Moreover, the effective implementation of the new procurement system has been somewhat delayed. Delays are persisting in the privatization of three major public companies, including the agricultural company Cameroon Development Corporation (CDC), the fixed telecommunications company (CAMTEL), and the water company (SNEC). As regards the CDC, an interim adjudicator has been selected for the tea crop component. As regards the SNEC, an interim administrator was appointed in April 2002 to help speed up the process. The implementation of most of the structural reforms under the World Bank's SAC III, notably in the transport and forestry sectors, also encountered further delays.

4. Economic activity was somewhat slower than projected under the program, but remained sustained during the first half (October 2001–March 2002) of the second annual program, reflecting spillover effects of the construction of the Chad-Cameroon pipeline, a strong expansion in the textile and other light manufacturing industries and in construction, and increased private sector income. The 12-month national consumer price inflation rate accelerated to 4.8 percent in March 2002 (versus a programmed annual rate of 2.9 percent), mainly driven by higher foodstuff prices. This development reflected a slow supply response in agricultural production, as the primary sector is facing many constraints (including access to land and credit for small farmers, and low productivity), as well as a strong increase both in domestic private demand and in external demand from neighboring countries. The fiscal primary surplus for the first half of the second annual program (CFAF 7 billion, or 0.1 percent of GDP) was somewhat smaller than envisaged in the program. Despite continued good performance in non-oil revenue, total revenue was 0.1 percent of GDP lower than programmed, reflecting lower oil revenue and grants. Noninterest current expenditure was somewhat above its target, reflecting higher-than-programmed outlays on transfers and subsidies. Domestically financed capital expenditure remained significantly below the target, mainly reflecting the fact that the scheduled disbursements on account of the HIPC Initiative-related projects approved by end-December 2001 did not materialize. Monetary developments during the first half of the second annual program showed a moderate expansion of credit to the private sector and an increase in drawings from the banking system by the central government of CFAF 5.9 billion (0.1 percent of GDP). Cameroon's contribution to the improvement of the net foreign assets position of the regional central bank (BEAC) further strengthened. Broad money increased by 2.7 percent by end-March 2002, reflecting mainly an increase in bank deposits.

Macroeconomic and fiscal prospects for the second half (April–September 2002) of the second annual program

5. Based on recent data on economic activity and international trade, and taking into account the negative impact of constrained electricity supply on the output of some industries, real GDP growth in fiscal-year 2001/02 (fiscal year ended June 30) is now estimated at 4.4 percent, with non-oil GDP growth at 4.9 percent. This outcome is expected to continue in the second half of calendar-year 2002. The 12-month national consumer price inflation rate is projected at 4.0 percent for the second annual program as a whole, as the supply of foodstuffs is not expected to improve significantly in the short run. The projected increase in world oil prices should result in a slight improvement of Cameroon's terms of trade.

6. The fiscal outcome for 2001/02 is expected to be broadly as envisaged, reflecting better-than-projected oil and non-oil revenue performance and close observance of the expenditure program through end-March 2002. On this basis, the primary fiscal surplus (excluding HIPC Initiative-related spending) would reach 5.6 percent of GDP, and the overall fiscal surplus, on a commitment basis and excluding HIPC Initiative-related spending and grants, would slightly exceed the program target. No HIPC Initiative-related spending took place prior to end-June 2002, as disbursement procedures were still being put in place (see para. 17 below).

Elements of the transition budget for June–December 2002

7. In April 2002, in line with Cameroon's commitment under the CEMAC, the National Assembly adopted a new fiscal year, beginning on January 1 (to replace the former fiscal year beginning on July 1), effective January 1, 2003. It also authorized the government to implement a six-month transition budget to cover the second half of calendar-year 2002, which is consistent with the PRGF program targets.

8. The government will continue to adhere to a cautious fiscal stance during the second half (April–September 2002) of the second annual program. Oil revenue is projected to amount to 2.6 percent of GDP, based on (i) an average oil price for Cameroon of US$20.3 per barrel (versus an initial projection of US$19.9 per barrel); and (ii) an oil output projection of 38.2 million barrels (versus an initial projection of 39.3 million), reflecting the long-term decline in production as the major known oil fields are expected by the oil industry and the authorities to be depleted by 2010/11. With a further strengthening of the tax and customs administrations and based on a projected growth in the non-oil sector of 5.0 percent for calendar-year 2002, non-oil government revenue should remain at 7.0 percent of non-oil GDP during July–December 2002. Noninterest expenditure is targeted to increase to no more than 7.9 percent of GDP, mainly driven by HIPC-related spending of CFAF 58 billion (0.8 percent of GDP) and a larger wage bill. The latter reflects (i) the gradual impact of selective new recruitments in the context of the medium-term sectoral strategies in education and health; (ii) the gradual implementation of new statutes for the various professional categories within the civil service; and (iii) the integration of the wage bill of the Ministry of Post and Telecommunications into the State's budget, following the elimination of this ministry's special budget (budget annexe). Transfers and subsidies will be limited to 1.0 percent of GDP, and domestically-financed and foreign-financed public investments are targeted at 0.4 percent of GDP and 1.3 percent of GDP, respectively. On this basis, the primary fiscal surplus should reach 1.4 percent of GDP during July–December 2002, and the overall fiscal deficit, on a commitment basis and excluding grants, would be limited to 0.6 percent of GDP. Excluding expenditure financed by the savings from the debt relief resulting from the enhanced HIPC Initiative, noninterest total expenditure would be limited to 7.9 percent of GDP, with total public investment expenditure targeted at 1.9 percent of GDP.

9. Improving public expenditure management will continue to be at the core of the government's fiscal program. This is critical to achieve our fiscal targets, further consolidate macroeconomic stability, improve governance and transparency, and enhance Cameroon's fiscal policy credibility. To this end, the government will continue to implement the action plan developed with the Fund's Fiscal Affairs Department (FAD) and other donors' technical assistance, with a view to completing the implementation of a fully integrated computerized information and management system for government revenue and expenditure (from the commitment to the payment stage (chaîne des recettes et des dépenses publiques)) by end-September 2003. Consistent with this action plan, the government has adopted the new budget classifications and integrated them into the budget application (PREBIC). It will ensure that the new expenditure management becomes fully operational and is applied in practice in the context of the latest available expenditure management software to track spending on goods and services, including the integration of the new budget classifications, by end-September 2002 (performance criterion). The next priorities are ensuring (i) the effective availability of government's key analytical financial tables (such as a summary document that traces the different stages of the expenditure process (document retraçant les dotations, les engagement, les ordonnancements et les paiements)) for policy analysis and decision making, by end-September 2002; and (ii) the continuation of 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)).

10. Furthermore, the government will (i) continue to strengthen internal controls, along the lines of the recommendations of the September 2001 FAD mission on the treasury; and (ii) start implementing the recently adopted action plan to ensure proper external control of central government finances (through, notably, the introduction of an external audit body (Chambre des Comptes)). The government will also pursue the implementation of the other key measures that are already contemplated under the three-year PRGF-supported program. These include, notably, (i) steps to further enhance budgetary procedures and the quality of public expenditure and reduce the supplementary period for closing the treasury accounts of the preceding fiscal year to no more than 60 days; (ii) the multiyear settlement plan to clear domestic arrears, as specified at the onset of the ongoing three-year PRGF arrangement; (iii) actions to further enhance the quality and timeliness of the quarterly reports on the financial and physical execution of the budget of key ministries (including the Ministries of Education, Health, Public Works, and Agriculture); (iv) improved coordination between the debt agency (Caisse Autonome d'Amortissement (CAA)) and the relevant departments in the Ministry of Finance and Budget (including the treasury and the budget department), with respect, particularly, to the monitoring of domestic public debt; in this regard, the CAA will effectively start collecting information on domestic and external loans contracted by public enterprises; (v) the launching of an audit of the CAA operations during 2000/01 and 2001/02, including transactions on account of the domestic public debt other than domestic and external debt service (structural benchmark); and (vi) an evaluation, by end-September 2002, of the stocks of commitments that have been executed without issuance of payment orders (bons non mandatés), and of public domestic debt, both as of end-June 2002 (structural benchmarks).

11. On the revenue side, the government will continue to strengthen its capacity to mobilize non-oil revenue through measures that have already been taken to enhance customs and tax administration, as specified in paragraphs 9 and 10 of its supplementary letter of intent of December 28, 2001. These include (i) measures to improve the administration of the value-added tax (VAT) and forestry taxation, including the securitization of forestry receipts; (ii) the adoption of an action plan for the implementation of a comprehensive reform of the income tax system for individual taxpayers, which has been formulated with Fund technical assistance and will be submitted to the National Assembly in November 2002; (iii) the initiation of the preparatory work to extend the income tax system to nonindividual taxpayers, and the pursuit of the preparatory work for the introduction of a property tax, based on the land survey (cadastre fiscal) that is being put in place; (iv) the computerization of the single processing window (guichet unique (GUCE)) for external trade, by March 2003; (v) actions to improve the physical and documentary controls for the release of goods (prise en charge des marchandises) and enhance the control system for exemptions and special-status traffic (transit, bonded warehouses (entrepôts), and temporary admissions); and (vi) steps to strengthen the valuation office within the customs and improve the collaboration with the Société générale de surveillance (SGS), especially with a view to double-checking the valuation of imported merchandise. Finally, the government will (i) strengthen the control of the use of the unique taxpayer identification number (identifiant unique) for all taxpayers and importers and exporters, that is, assign the same unique number to a given physical or moral person; (ii) strengthen effectively the joint tax-customs unit, to render it truly operational by end-September 2002; and (iii) restructure the tax department while establishing within it a special unit for large taxpayers, by end-December 2002.

12. The government remains committed to not introducing any new tax and customs exemptions, and to enhancing VAT refund procedures. The first step in the area of exemptions was the revision of the decrees related to computer equipment and the HIV/AIDS program (see para. 2 above). As regards exemptions to support the development of the press, the government will ensure a proper functioning of the special unit that has been established for the issuance of exemption certificates to eligible companies on a case-by-case basis and in a transparent manner. In addition, the government will pursue the work on the evaluation of the revenue loss stemming from the existing exemptions on VAT and on the special tax on petroleum products (TSPP). It will also effectively implement an action plan to reduce VAT exemptions over a five-year period in order to return to the basic regime as specified in the 1998/99 Budget Appropriations Bill. Finally, the government will implement the schedule for VAT credit reimbursement during June 1–September 30, 2002, as agreed with the IMF staff, by end-September 2002 (structural benchmark).

13. The monetary projections for April–September 2002 have been revised, taking into account recent economic developments and the prospects for calendar-year 2002 as a whole. The expectation is for Cameroon's net foreign assets at the BEAC to be maintained at its end-March 2002 level, while net bank credit to the central government would decrease by CFAF 6 billion (on a cumulative basis from October 2001) by end-June 2002. Net bank credit to the central government would amount to CFAF 23 billion (on a cumulative basis) by end-September 2002 (performance criterion), and to CFAF 44 billion (on a cumulative basis) by end-December 2002. These projections reflect the rephased disbursements of the HIPC-related funds held at the special account at the BEAC. Broad money is projected to increase gradually during April–September 2002.

Implementation of steps toward the HIPC completion point and creation of conditions conducive to productive investment and non-oil growth

14. The government reiterates its commitment to accelerate the implementation of the measures relating to the completion point as specified in box 7 of the HIPC Initiative decision point document of September 2000, so as to reach the completion point by end-September 2003. These are (i) the preparation of a full poverty reduction strategy paper (PRSP) and its satisfactory implementation for at least one year; (ii) maintenance of a stable macroeconomic environment and satisfactory implementation of the current three-year PRGF-supported program; (iii) the use of the budgetary savings from the debt relief in accordance with the control and monitoring mechanisms set up at the decision point; (iv) satisfactory implementation of the World Bank's SAC III; (v) governance and anticorruption measures, in particular in the areas of the judiciary reform, public procurement system, budgetary execution and delivery, and regulatory agencies; and (vi) specific targets in the social sectors of education and health and HIV/AIDS.

15. With regard to the full poverty reduction strategy paper (PRSP), the government is actively pursuing the preparation of a high-quality PRSP. The process relies on a nationally based and enhanced participatory approach. It also draws extensively on the results of the sectoral strategies, the household consumption survey (ECAM II), and other pertinent analytical and empirical studies, including, notably, those on the sources of growth in Cameroon, which are already available or are under preparation. In the meantime, a PRSP preparation status report was prepared and submitted to the Executive Boards of the IMF and the World Bank in late December 2001. Based on the progress achieved to date and given the scheduled municipal and legislative elections of June 30, 2002, the government aims at having a first-draft PRSP ready by mid-September 2002 for discussion with the civil society and donors in late September 2002, and to submit the final PRSP document to the Executive Boards of the IMF and the World Bank in October 2002.

16. Our main focus of social policies remains to ensure that strengthened economic performance translates into tangible results in terms of job creation, poverty reduction, and improved economic welfare of the population as a whole. Satisfactory implementation of our strategies for the health and education sectors is one of the specific steps among the HIPC completion triggers. Their respective preliminary costings have been taken into account in the medium-term macroeconomic framework. Significant progress is being made in formulating strategies in the other priority sectors of rural development and urban infrastructure. The government recognizes that intensified efforts are needed to ensure that reliable expenditure-tracking procedures are in place in the education and the health sectors. A first series of programs and projects to be financed through the savings resulting from 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 (0.5 percent of GDP). The selected programs and projects are concentrated in the priority poverty reduction-related sectors of education, health, urban sanitation and rural road infrastructure, and safe drinking water. In line with the orientations specified in the decision point document, the main objective of these programs and projects is to improve the delivery of social services.

17. Steps have been taken to improve the functioning of the national consultative committee for the follow-up on the implementation of the HIPC Initiative. The committee has adopted a set of provisional internal rules (réglement interne), as well as a provisional manual of procedures (code de procédure), for processing HIPC-related projects, and the responsibilities of the two supporting technical units (the permanent secretariat and the operational unit in charge of the follow-up on the preparatory work on the projects) have been clarified. The government has also taken measures to ensure that HIPC project- and program-related expenditures are carried out through a treasury special account (compte d'affectation spéciale) that has been set up within the legal budgetary framework in place and is funded from the special account opened at the BEAC on the basis of a request from the general paymaster, as supported by the relevant documentation (justificatifs); a copy of the payment authorization and supporting documentation is to be sent to the consultative committee simultaneously for information and monitoring of project implementation purposes. The follow-up of approved HIPC project implementation by the national consultative committee will be ensured by the information system (SAGE) set up within the consultative committee. The second series of programs and projects to be financed through the savings from the debt relief under the enhanced HIPC Initiative, for the total amount that was expected in fiscal-year 2001/02 of CFAF 58 billion (0.8 percent of GDP), will be discussed by the national consultative committee for the follow-up on the implementation of the HIPC Initiative in early September 2002.

18. The government remains committed to pursuing its policy of making deposits at the special account opened at the BEAC (the regional central bank), including the savings from official bilateral debt relief. It will make sure that the national consultative committee for the follow-up on the implementation of the HIPC Initiative holds meetings on a regular basis to monitor closely the proper and effective use of the HIPC resources. The government understands that the use of these resources will remain consistent with the ongoing efforts to improve public expenditure management, the policy orientations specified in the September 2000 decision point document, and the priorities being discussed in the context of the preparation of the full PRSP.

19. As regards governance, following the investigation of the 48 cases of saisie-attribution and the relevant recommendations, the government will (i) ensure that all necessary corrective actions are taken and appropriate sanctions imposed, as required; and (ii) propose legislative, regulatory, and other provisions as necessary to correct the nonfunctioning features of the procedure of saisie-attribution. In this context, it will issue a circular specifying the nature of the executory titles (titres exécutoires) and clarifying the computation methodology for calculating penalties (astreintes) by end-September 2002 (structural benchmark). As regards the technical audit of the judiciary system, the government will formulate an action plan, satisfactory to the IMF and the World Bank, based on the recommendations of the audit, by end-December 2002. Moreover, it will pursue the actions that have already been undertaken, notably, to conduct 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. The government will also effectively implement the steps that have already been taken to (i) render the general inspection office of the judiciary system operational, and effectively implement controls by the Heads of Court in their respective jurisdictions; (ii) codify the OHADA's legal provisions and communicate them to all magistrates; (iii) adjust the Cameroonian legislation to make it compatible with the OHADA Acts; and (iv) promulgate the Cameroonian laws as foreseen under the OHADA Acts. Finally, the government will ratify shortly the agreement between the BEAC (headquarters and national branches) (Accords de siège) and Cameroon.

20. Furthermore, the government remains determined to implement the other programmed measures included in its letter of intent of December 6, 2000 and supplementary letters of intent of June 28 and December 28, 2001, as well as those that are included among the HIPC completion point triggers. Among the latter, and consistent with the government's priority action plan of August 2000 for improving governance and combating corruption, the government has already started to put in place the public procurement commissions (as established under decree No. 2002/03, dated January 28, 2002), in accordance with the understandings reached with the World Bank. It will also adopt an action plan, with a view to establishing a Constitutional Council (Conseil Constitutionnel) by end-September 2002 (structural benchmark).

21. The government reaffirms its determination to pursue the reforms included in the World Bank's SAC III, whose satisfactory implementation is also a HIPC completion point trigger. With regard to the privatization program, it will continue to address the remaining issues, with a view to completing 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, following the appointment of the interim administrator in April 2002, the government hopes to reach an agreement shortly. As regards CAMTEL, following the failure to reach an agreement with the interim adjudicator and to conclude negotiations with the second bidder, the government is redefining its strategy and will relaunch the privatization process, based on the recommendations of the recent evaluation by the World Bank, with a view to completing the privatization by end-September 2003.

22. 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 under the World Bank's SAC III and with other donors. As regards air transportation, the government has selected the consultant, who is expected to complete a comprehensive evaluation of the national airline (CAMAIR) by end-November 2002, with a view thereafter to recruiting an adviser to help launch the process of privatizing the company. In the port sector, in particular, the port of Douala (PAD), the key priorities are to (i) complete the institutional and financial reforms, including the adequate financing of the PAD and the liquidation of the former Office National des Ports du Cameroun (ONPC); (ii) launch an invitation to bid for the computerization of the port platform (plateforme portuaire); and (iii) launch the bids for the transfer of industrial and commercial activities to the private sector by September 15, 2002.

23. In the forestry sector, the government has (i) signed the contracts and/or conventions required to ensure satisfactory implementation and supervision, and provision of bank guarantees (cautionnement) for the management plans; and (ii) signed the decree on the restructuring of the National Forestry Development Office (ONADEF) and the related joint circular (arrêté) of the Ministry of Finance and Budget and the Ministry of Environment and Forestry, and adopted an action plan for the transitory phase up to the point when the new structure will become operational. Moreover, the government will apply legal sanctions for serious violations of forestry rules and management plans, and will publish the cases that have been dealt with. To this end, it has already established a list of all the cases of serious violations since November 2000. In the agro-industrial sector, the key policy actions remain the privatization of the remaining agro-industrial activities and enterprises, including, in particular, (i) SODECOTON (following the completion of the review of the cotton sector strategy by end-October 2002); and (ii) the CDC (following the completion of the sale of the tea crop component and the formulation of a new strategy for the privatization of the three other crop components, with a view to relaunching the bidding process).

24. Beyond the commitments under the World Bank's SAC III, 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 it committed itself to in its December 20, 2000 letter of intent and its June 28, 2001 and December 28, 2001 supplementary letters of intent, in line with the recommendations of the Financial Sector Assessment Program (FSAP) of May 2000 to strengthen the financial system and ensure the viability and resilience of Cameroon's financial system. To this end, we will continue to (i) implement the restructuring plan for the financially troubled state-owned Postal Savings Bank, with a view to completing its rehabilitation by end-December 2002; (ii) support the implementation of the recently adopted regional regulatory framework for microfinance; (iii) ensure the effective implementation of the reform of the payments system, undertaken with the assistance of the World Bank and the IMF, as defined by the Brazzaville workshop of December 2001 and validated by the general managers of all the commercial banks on January 8, 2002; and (iv) pursue the reform of the social security system, in accordance with the strategy adopted by the interministerial committee in November 1999. In this regard, the government intends to complete the preparatory implementation studies by October 2002 and complete the reform of the social security system by end-September 2003 at the latest.

25. In the petroleum sector, the authorities will continue to make sure that the national oil company, the SNH, sets aside the required provisions on account of the depleted oil wells on a regular basis and in line with the arrangements in place. 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 by end-February 2003, so as to transfer these shares to the private sector, which will thereafter manage the SCDP. Acting on the recommendations of the action plan to reform the petroleum sector formulated in late 2000, the government will, by the end of 2002, (i) redefine the role and responsibilities of the private sector, the SNH, the ministry responsible for hydrocarbons, and other entities involved in the hydrocarbons sector and provide a timetable for the implementation of the reform program; (ii) submit to parliament the new natural gas code; and (iii) prepare a strategy and an action plan for promoting private sector investment in the hydrocarbon sector. It will also ensure that the SNH completes the installation of its upgraded financial management and accounting system. Finally, should world oil prices rise above the threshold of US$25 per barrel, the government stands ready to adjust upward the prices of gasoline (super) and gas oil, according to the automatic petroleum retail price adjustment mechanism in place, so as to prevent the reemergence of petroleum subsidies.

External sector policies and debt management

26. A key objective of Cameroon's external policy remains to enhance external competitiveness in order to achieve external viability and strengthen the growth prospects. To this end, the government will continue to implement and 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 rate of 20 percent) and in the number of bands (from five to four). Cameroon has adopted a national investment charter, which is consistent with the CEMAC's common investment charter. Finally, it reiterates its commitment to effectively implement the new CEMAC foreign exchange regulations (réglementation des changes) by September 2002, following the completion of an information campaign.

27. Following the agreement with the Paris Club on January 24, 2001 to support Cameroon's program with a comprehensive and concessional treatment under the enhanced HIPC Initiative, the government has signed bilateral agreements with seven creditors. The deadline for signing the bilateral agreements with the remaining creditors was initially extended through end-June 2002 and has been further extended through end-October 2002. The government reaffirms its intention to provide debt relief for Chad, under the enhanced HIPC Initiative. As regards commercial debt, the negotiations with the commercial bank creditors were concluded on May 24, 2002. The resulting cash buyback agreement involves a discount of 85.5 percent on the initial nominal amount of the principal due and total forgiveness of all interest payment obligations, and opens the way for an IDA financing operation to finance the cash payment in the context of the enhanced HIPC Initiative. We 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. The government will also activate, by end-September 2002, the reporting system within the Ministry of Economic Affairs, Programming, and Regional Development (Ministère des Affaires Economiques, de la Programmation et de l'Aménagement du Territoire) for project-related external financing commitments and disbursements; the system was set up in December 2000 with World Bank assistance, to enhance the timeliness of such external financing data.

Prior action, waiver, program monitoring, and review

28. The government understands that the submission to the Fund of a report by the budget department of the Ministry of Finance and Budget, stating the expenditure process from the commitment to the payments stage for all operations registered by the treasury for the period April 22–May 31, 2002, constitutes a prior action that would need to be in place before Cameroon's documents for the third review under the PRGF arrangement are issued for Executive Board's consideration.

29. The government requests a waiver for the nonobservance, on March 31, 2002, of the structural performance criterion on the completion of the link between the information system of the treasury and that of the budget department in the Ministry of Finance and Budget in order to follow all expenditures from the commitment to the payments stage carried out both at the central government level and by the local branches of government (déconcentré). The government completed the implementation of the system, which also became operational for the transition budget for July–December 2002, on July 31, 2002, following the implementation of the related prior action specified in paragraph 28 above.

30. To monitor program implementation, a number of quantitative benchmarks and performance criteria for end-September 2002 have been established, as specified in the attached Table 1. In addition, the reform measures specified in Table 2 constitute either structural performance criteria or structural benchmarks for the second half (April–September 2002) of the second annual program. The government considers that these are essential for (i) achieving the macroeconomic objectives on the program; (ii) improving public expenditure management; and (iii) enhancing the prospects for increased private sector investment.

31. 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 reach agreement with Fund staff on the specific use of these resources.

32. The fifth disbursement under the PRGF arrangement will be subject to (i) the observance of the end-September 2002 performance criteria; and (ii) the completion of the fourth review by no later than end-January 2003. The review will focus on medium-term fiscal sustainability, public expenditure management, budgetary non-oil revenue performance, customs and tax administration reform, improvements in governance, poverty reduction strategies under the PRSP, actions to strengthen the tracking of poverty-reducing public spending, and general progress in implementing the HIPC completion point triggers and the full PRSP. The discussions with the IMF staff on the third annual program supported by the PRGF arrangement and of progress toward the HIPC completion point will be held in late October–early November 2002.

33. Program implementation will be regularly reviewed in cabinet meetings chaired by the Prime Minister, Head of Government. Moreover, the Minister of Finance and Budget and the Minister of Economic Affairs, Programming, and Regional Development will coordinate program implementation, according to their respective responsibilities, with the assistance of the technical committee for the implementation of the economic programs (CTS). 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 will endeavor to effectively improve data quality, coverage, and timeliness, notably in the context of the General Data Dissemination System (GDDS).

Sincerely yours,

Table 2. Cameroon: Structural Performance Criterion and Benchmarks for the Second Half of the Second Annual Program, October 2001-September 30, 2002

Performance criterion for end-September 2002

Ensure that the new expenditure management becomes fully operational and is applied in practice in the context of the latest available expenditure management software to track spending on goods and services, including the integration of the new budget classifications.

Benchmarks for end-September 2002

Implement the action plan for value-added tax (VAT) credit reimbursement, as agreed with the Fund staff. Launch an audit of the debt agency (Caisse Autonome d'Amortissement-CAA) operations during 2000/01 and 2001/02, including transactions on account of the domestic public debt other than domestic and external debt service. Evaluate the stocks of commitments, which have been executed without issuance of payment orders (bons non mandatés), and of the domestic public debt, both as of end-June 2002. With respect to the procedure of saisie-attribution, issue a circular specifying the nature of executory titles (titres exécutoires) and clarifying the computation methodology for calculating penalties (astreintes). Formulate an action plan for the establishment of a Constitutional Council (Conseil Constitutionnel).

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 policies of December 6, 2000, the supplementary technical memorandum of understanding annexed to the letter of intent of June 28, 2001, and the supplementary technical memorandum of understanding annexed to the letter of intent of August 28, 2002. 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

Prior action, structural performance criterion, and structural benchmarks

2. The prior action relating to "the submission to the Fund of a report by the budget department of the Ministry of Economy and Finance, stating the expenditure process from the commitment to the payment stage for all operations registered by the treasury for the period April 22-May 31, 2002" will be deemed to be in place if the government can produce, for each key budget item, a statement of all operations from the authorization stage to the effective payment stage.

3. The structural performance criterion for end-September 2002 relating to the action of the government to "ensure that the new expenditure management becomes fully operational and is applied in practice in the contect of the latest available expenditure management software to track spending on goods and services, including the integration of the new budget classifications," will be deemed to have been observed, upon submission of a formal report (procès verbal) on the completion of the work by the committee in charge which also certifies that the migration of the expenditure management application (DM) in an Oracle environment has effectively been completed.

4. The benchmark for end-September 2002 relating to the implementation of the action plan for value-added tax (VAT) credit reimbursement, as agreed with Fund staff, will be deemed to have been observed upon verification that the stock of all the VAT credits due to be reimbursed from May 15, 2002 onward has effectively been eliminated. This stock consists of all the VAT credit claims that have been validated by the tax department of the Ministry of Economy and Finance as of May 15, 2002. To this end, the government will submit to the Fund the list of all VAT credit to be reimbursed as of May 15, 2002; this list should itemize each of the claimants of a VAT refund, the amount due for refund, the period from which the VAT refund arose, the date at which the claim for the refund was submitted to the tax department, and the date when the refund was approved by the tax department.

5. The benchmark for end-September 2002 relating to the "launching of an audit of the debt agency (Caisse Autonome d'Amortissement-CAA) operations during 2000/01 and 2001/02, including transactions on account of the domestic public debt other than domestic and external debt service" will be deemed to have been observed once (i) the terms of reference of the auditor in charge of the above-mentioned audit have been approved by the Fund staff; and (ii) that above-mentioned auditor has effectively started the said audit.

6. The benchmark for end-September 2002 relating to the evaluation of the stock of the domestic public debt (as of end-June 2002) will be deemed to have been observed upon verification that the authorities have produced a reconciliation of quarterly stocks and flows from end-September 2000 to end-June 2002.

External debt

7. 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 Initiative) assistance, like Cameroon. Consistent with Point 9 of the Guidelines on Performance Criteria with respect to Foreign Debt (Decision N^o. 12274- (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, 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:

• Loans. These are advances of money to the obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans, and buyers' credits) and temporary exchanges of assets that are equivalent to fully collaterized loans, under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements).
  
  
• Suppliers' credits. These are contracts where the supplier permits the obligor to defer payments until some time after the date on which the goods are delivered or services are provided.
  
  
• Leases. These are arrangements under which property is provided that the lessee has the right to use for one or more specified period(s) of time that are usually shorter than the total expected service life of the property, while the lessor retains the title to the property. For the purpose of this memorandum, the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement, excluding those payments that cover the operation, repair, or maintenance of the property.

8. 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

9. 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

10. 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

11. Domestic arrears include nonstructured domestic debt contracted by the government. Nonstructured debt is defined as 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

12. 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

13. 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

14. 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

15. 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

16. The programmed oil revenue for the period April 2002 to September 2002 is based on oil price assumptions of US$22.0 and US$21.4 per barrel (for Cameroon) for the third and fourth quarters of the second annual program (October 1, 2001-September 30, 2002), and on volume estimates of 9.7 and 9.0 million barrels, respectively. Based on these assumptions, the oil revenue contribution to the central government's budget is estimated at CFAF 84 billion and CFAF 64 billion in the third and fourth quarters of the second annual program, respectively.

17. 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 the performance criteria.

18. 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

19. 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

20. Amounts denominated in SDRs will be converted to U.S. dollars at the fixed exchange rate of US$1.283 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. Reporting Requirements

21. The Cameroonian authorities will send to the Fund the data in Table 2 within the time limits set out in that table. 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.

ANNEX I

Table 1. Cameroon: Data- Reporting Requirements
Category of Data	Table/Report	Frequency	Target Date
Financial and monetary data	Central bank balance sheet, consolidated commercial bank balance sheet, monetary survey	Monthly	25th of the month for the previous month
	Interest rates	Irregular	One week after new changes announced
	HIPC Initiative BEAC account transactions	Monthly	25th of the month for the previous month
	Status report of government deposits at the BEAC	Monthly	10th of the month for the previous month
Fiscal data	Tableau de bord, including details on revenues, expenditures, financing and domestic debt payments (including settlement of arrears)	Monthly	25th of the month for the previous month
	Treasury balances	Monthly	25th of the month for the previous month
	Treasury "flash" reports	Monthly	10th of the month for the previous month
	Domestic debt settlement plan execution report	Monthly	25th of the month for the previous month
	VAT refund balances	Monthly	25th of the month for the previous month
	Investment budget execution report	Quarterly	One month after end of quarter
	Expenditure reports by selected ministries	Quarterly	One month after end of quarter
	National oil company (SNH) operations, including export volumes, exchange rates, prices and values, transferable balance, and summary accounts	Monthly	25th of the month for the previous month
	HIPC Initiative spending plans and budget execution	Quarterly	One month after end of quarter
Real sector data	Consumer price index, Yaoundé and Douala	Monthly	10th of month for previous month's data
	National consumer price index	Quarterly	20th of month for previous quarter's data
	Index of industrial production	Quarterly	One month after end of quarter
	National accounts	Annual	Summary estimates; six months after the end of year
Balance of payments data	Imports by use and exports by major product, trade balance	Monthly	25th of the month for the previous month's data
	Price and volume indices of imports and of exports	Quarterly	One month after end of quarter
	Consolidated estimates of the balance of payments	Annual	Summary estimates; six months after the end of year
External debt	Debt service due before and after debt relief	Quarterly	At beginning of fiscal year; updates as needed
	Cash debt service paid	Monthly	25th of the month for the previous month's data
	Debt service reconciliation table ("access table")	Quarterly	25th of the month for the previous quarter's data
	Stock of outstanding debt and arrears	Quarterly	25th of the month for the previous quarter's data
	Drawings on new loans	Quarterly	25th of the month for the previous quarter's data
External grants	Disbursements	Monthly	25th of the month for the previous month's data