1 40309 INTERNATIONALDEVELOPMENT ASSOCIATION AND THE INTERNATIONAL MONETARY FUND REPUBLIC OF CAMEROON EnhancedHeavily IndebtedPoor Countries(HIPC) Initiative CompletionPointDocumentandMultilateralDebt ReliefInitiative(MDRI) Preparedby the Staffs o f the International Monetary Fundand the International Development Association Approved by David Nellor and Adnan Mazarei (IMF) Gobind Nankani andDanny Leipziger (IDA) April 12. 2006 Contents Page Executive Summary................................................................................................................... 3 IIntroduction............................................................................................................................ 5 . I1.Assessment ofRequirements for Reachingthe CompletionPoint ....................................... A.Implementation o fthe PovertyReduction Strategy.................................................. 5 9 B.Macroeconomic Performance during2001-05........................................................ 10 C.The Use o f the InterimDebtRelief......................................................................... D Reforms underIDA'SThirdStructuralAdjustment Credit (SACIII) ..................... . 13 15 E. Governance.............................................................................................................. . 20 29 G.Staff Assessment ..................................................................................................... F Social Sector Policies .............................................................................................. 32 I11.Debt Sustainability Analysis Update ................................................................................. 32 32 B Status o fCreditor Participation inthe EnhancedHIPC Initiative........................... A.UpdatedData Reconciliation andRevision o fAssistance...................................... . 33 C. Creditor Participation inthe Multilateral Debt Relief Initiative ............................. 36 D.UpdatedDebt Sustainability Analysis .................................................................... E Sensitivity Analysis andLong-Term Debt Sustainability ....................................... . 37 40 IV. Conclusions........................................................................................................................ 42 V.Issues for Discussion........................................................................................................... 43 - 2 - Boxes Box 1: Status o f Triggers for Reachingthe Floating Completion Point......................................... 6 Box 2: Performance under Fund-Supported Programs. 2001-05.................................................. 13 Box 3: Cameroon: Summary o fActions to Improve Governance and Reduce Corruption .........24 Box 4: Progress inPublic Finance Management Since Reachingthe Decision Point.................. 26 Box 5: Main Macroeconomic Assumptions. 2006-25 .................................................................. 39 Figures 1. External Debt and Debt Service Indicators for Medium- and Long-Term Sensitivity Analysis 2006-25 ........................................................................................... Public Sector Debt. 2005-25 ........................................................................................ 44 2. 45 3. Implied Savings under the MDRI.................................................................................... 46 Tables 1. Selected Macroeconomic Indicators. 1990-2005............................................................. 11 2. Revised Nominal Stocks andNet Present Value o f Debt at Decision Point by 47 Estimated Assistance at DecisionPoint (Amended) ........................................................ Creditor Groups as o f end-June, 1999 ......................................................................... 3 48 4. Status of Creditor Participation under the Enhanced HIPC Initiative ............................ 49 5. Delivery o f IMF Assistance under the Enhanced HIPC Initiative andthe 50 Delivery o fWorld Bank HIPC Assistance andMDRI, 2000-2045 ................................ MDRI,2000-2010........................................................................................................ 6. 51 7. Paris Club Creditors' Delivery o f Debt Reliefunder Bilateral Initiatives Beyond 52 Stock of Debt Relief under MDRIand HIPC at the Completion Point........................... the HIPC Initiative ...................................................................................................... 53 9. 8. Projected Additional Resources Available Resulting from the IMF MDRIDebt 54 Comparison o f Discount Rate and Exchange Rate Assumptions .................................... Relief............................................................................................................................ 10. 55 11 Nominal and Net Present Value o f External Debt Outstanding at Breakdown o f the Decrease o fNPV o f Debt-to-Export Ratio as of end-2005 ................ 57 end-December ............................................................................................................. 56 12. 13. 58 59 Net Present Value o f External Debt Beyond the HIPC Initiative.................................... Key Macroeconomic Indicators, 2005-25 ........................................................................ Selected Economic and Financial Indicators, 2001-2008................................................ 14. 15. 60 16. Key External Debt Indicators, 2005-25 ........................................................................... 61 17. External Debt Service after Full Implementation o f Debt-Relief Mechanisms............... 62 18. Sensitivity Analysis, 2006-2025 ...................................................................................... 63 19. HIPC Initiative: Status o f Country Cases Consideredunder the Initiative, March 14, 2006 ............................................................................................................ 64 Appendices I Debt Sustainability Analysis for Low-Income Country Framework-Update ...............65 I1 .. Debt Management .......................................................................................................... 72 - 5 - EXECUTIVE SUMMARY 0 The staffs of IDA and the IMFare of the view that Cameroon has met the requirements for reaching the completion point under the enhanced Heavily IndebtedPoor Countries (HIPC) Initiative. Most completionpoint triggers have beenmet, including satisfactory implementation o fthe poverty reduction strategy, maintenance o f macroeconomic stability, social sector and structural reforms, and actions to improvegovernance and reduce corruption. Nevertheless, the trigger relatedto making the regulatory framework inthe water sector operational has not been fully implemented. Onthis trigger, the government decided, following advice from World Bank staff, that the sector should be regulated through a lease contract between the government andthe private operator that will manage the provision o f water rather than through the creation o f a water agency. The regulatory framework i s in place and will be operational once the operator i s selected and the lease signed. The staffs recommend a waiver o f the trigger relatedto the water sector regulatory agency. 0 InOctober 2000, ExecutiveDirectors agreed that Cameroon's external public debt was above the HIPC Initiative sustainability threshold and the country was eligible for assistance in the amount of US$1.26 billion in 1999 NPV terms, after the full use o f traditional debt reliefmechanisms. Full delivery o f this amount o f assistance was to reduce the net present value (NPV) o f debt-to-exports ratio to 150percent as o f end-June 1999. The total amount o f IDA and IMF assistance inNPV terms was determined to be US$179 million andUS$36.9 million respectively. 0 The debt reconciliationexercise undertaken at the completion point shows that the end- June 1999 stock of debt inNPVterms has been revised upwards by US$2 million. Revisions to debt and export data result inan increase o f HIPC assistance estimated at decision point from US$1,260 million inNPV terms to US$1,267 million. As Cameroon's decision point was reached prior to the approval o f the new information reporting decision by the Boards, the country qualifies for an upward revision o f assistance. Accordingly, the NPV o f debt o f each creditor will be reduced by 27.0 percent, after the application o f traditional debt relief, insteado f26.9 percent determined at the decision point. 0 An updatedDebt Sustainability Analysis (DSA) shows that Cameroon's externalpublic debt is sustainable after HIPC and MDRIdebt relief. Assumingprudent fiscal policies, and robust non-oil real GDP growth, Cameroon's external public debt i s expected to be sustainable over the long term. The N P V o f debt-to-exports ratio is expected to increase gradually over the next twenty years but will remain much below the HIPC threshold o f 150 percent. The accompanying sensitivity analysis shows that inthe presence o f large adverse shocks (lower export prices and lower real GDP growth), Cameroon's external debt could become unsustainable inthe long run,highlightingthe need for continued fiscal prudence andpolicies insupport o f export diversification. 0 Financing assurances on the provision of assistance under the enhanced HIPC Initiative have been obtained from creditors representing 94 percent of Cameroon's total debt in NPVterms. Despite the government's continuedefforts, some non-Paris Club bilateral creditors and a few commercial creditors that did not participate inthe London Club buy- back operation have not yet agreed to provide their share o f HIPC assistance. - 4 - The staffs of the IMF and IDA recommendthat the ExecutiveDirectorsof the IMFand IDA approve the completionpointfor Cameroonunder the enhanced HIPC Initiative. - 5 - I.INTRODUCTION 1. InOctober 2000, the BoardofExecutiveDirectors o fIDAandthe IMFagreed that Cameroonhad met the requirements for reaching the decision point under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative.' The amount o f debt relief committed at the decision point was US$1,260 million innet present value (NPV) terms, calculated to bringthe N P V of debt to the equivalent of 150percent ofexports onthe basis of end-June 1999 data. This relief represents a reduction o f 26.9 percent o f the NPV o f debt as o f end-June 1999 after traditional debt relief and a reduction o f 25 percent inthe nominal value o fthe debt service over time. At the same time, the Boards o f IDA and IMF agreed to provide Cameroon with interim debt relief untilCameroonreachedthe floating completion point. Interim assistanceunder the enhanced HIPC Initiative was also grantedby the African Development Bank Group (ADB), the European Union, and the Paris Club group o f creditors (through flow rescheduling on Cologne terms).2 Executive Directors had determined that the completion point would be reached when Cameroon had complied with the triggers outlined inBox 7 o fthe decision point document. 2. This paper discusses progress on these triggers and recommends that Executive Directors of IDA and the IMF approve the completion point for Cameroonunder the enhanced HIPC Initiative, A full Poverty Reduction Strategy Paper (PRSP) was completed inApril 2003 and discussed by the Executive Boards o f IDA and the IMF inJuly 2003. Since the decision point, the authorities have prepared three Annual Progress Reports (APRs) o f the PRSP. Reforms supported under IDA'SThird Structural Adjustment Credit were satisfactorily implemented and the credit was closed inMarch2004 after full disbursement o fall tranches. The government program supported by the Fund's Poverty Reduction and Growth Facility (PRGF), however, was not fully implemented by 2004. Inearly 2005, the government adopted strong macroeconomic policy measures and a new arrangement under PRGF was approvedby the IMFExecutive Board inOctober 2005; goodperformance hasbeenregisteredunderthisprogram. 3. This paper is organized as follows: Section I1assesses Cameroon's performance in meeting the requirements for reaching the completion point. Section I11reviews the status of creditor participation and the delivery o f debt relief to Cameroon under the enhanced HIPC and MDRIInitiatives andupdates the debt sustainability analysis (DSA).Sections IV andV present the conclusions and issues for discussion. 11. ASSESSMENT REQUIREMENTS FORREACHINGTHE COMPLETIONPOINT OF 4. The completion point triggers were set out inthe decision point document and are as follows: (i) preparation o f a full PRSP and satisfactory implementation for at least one year; (ii) maintenance o f a stable macroeconomic environment; (iii) satisfactory use o f the budgetary savings from the interim debt service relief; (iv) conclusion and satisfactory implementation o f structural reforms supported by the Third Structural Adjustment Credit (SACIII); (v) satisfactory Cameroon-Enhanced Heavily Indebted Poor Countries Initiative-Decision Point Document EBS/00/194; (9/19/2000) andIDA/R2OOO-I68 (09/18/2000). Inaddition, some commercial creditors delivered their full-share ofHIPC assistancethrough participation inthe IDA-supported buyback operation. The OPEC Fundalso provided some assistance during the interimperiod, although this was not explicitly framed inthe context o f the HIPC Initiative. - 6 - implementation of governance and anticorruption measures, including inthe areas o fjudicial and procurement reforms, budget execution, and the creation o f regulatory agencies; and (vi) satisfactory implementation o f key social reforms, including combating HIV/AIDS.3 5. Inthe view of the staffsof IDA andthe IMF,Cameroonhas madegood progressin meetingthe conditionsfor reachingthe completionpoint(Box 1).This section assesses performance relative to these triggers. Trigger Status PovertyReduction Strategy Paper The full PRSP has beenprepared and Implemented. The PRSP was prepared by the government through an satisfactorily implemented for at least one extensive and comprehensive consultation process, adopted by the year. government in April 2003 and discussed by IDA and FundBoards inJuly 2003. The first PRSP Annual Progress Report (APR) was completed in April 2004 andthe JSA submittedto the two Boards inMay 2005. The second Annual Progress Report (APR) was completed in September 2005 and the JSAN o fthe second APR, covering the period January 2004-March 2005 was issuedinFebruary 2006. The thirdAPR, covering 2005 was completed inFebruary 2006, and the associated JSAN i s being issued together with this completion point document. The staffs consider that the implementation o f the PRSP was satisfactory in 2005. Macroeconomicand StructuralReforms There is continued maintenance of a Implemented. Cameroonhas broadly maintainedmacroeconomic stability stable macroeconomic environment since reaching decision point, although policy implementation has at times and satisfactory implementation o f a beenuneven.A new three-year PRGF arrangement was put inplace in new three-year PRGFprogram. October 2005, following satisfactory policy implementation under an IMF staff-monitored program during the first half o f 2005. Performance during the first six months under the PRGF-supported program has been good, and the first review is to be discussed by the IMF Board concurrently with consideration o f the HIPC completion point. Thebudgetary savings from the debt Implemented. Interim debt relief assistance hasbeenused in accordance relief have been used inaccordance with the criteria set forth at the decision point. The funds were deposited in with the criteria set forth at the a special account at the BEAC, a HIPC monitoring committee was decision point (control and monitoring established and annual audits o f the operations conducted. There were mechanisms). initial delays inusingthe debt resources to fund projects due to delays in puttinginplace the HIPC Consultative Committee and elaborating disbursement procedures. Once the framework was inplace, HIPC debt relief was used to improve public services ineducation, health, social development, urban sanitation and rural development. SACIII has been concluded and Implemented. SACIII was a broad-ranging adjustment operation (six reforms have been implementedina tranches) covering privatization o f utilities as well as key reforms inthe satisfactory manner. forestry, transport and financial sectors. The credit was concluded in ~~ Completion point triggers are described indetail in Box 7 o f EBS/00/194 (9/19/2000) and IDA/R2000-168 (09/18/2000). - 7 - March 2004 after filldisbursemento f all tranches. Although implementation o fthe privatization component was mixed, overall implementation and credit outcomes were, on balance, rated as satisfactory by Bank staff andthe Operation Independent Evaluation Group. ;overnance and anti-corruption The priority strategy and action plan for improving governance and combatingcorruption attached to the I-PRSP have been satisfactorily implemented, inparticular: o Inthe area o fjudicial reform, (i) Implemented. The law specifying the responsibilities, organization, (i)theChambredesComptes and finctioning o f the external control audit body for state finances (audit office) and (ii) Conseil the (Chambre des Comptes) o f Cameroon's Supreme Court was adopted by the Constitutionnelhave been National Assembly inMarch 2003 andpromulgatedby the Heado f State created. on April 2003. The audit chamber became operational inJanuary 2006. (ii) Implemented. The law specifying the responsibilities, organization and finctioning o f the Constitutional Council was adopted inMarch2004 and promulgated inApril 2004. InJune 2005, the President signed the decree 20051250 on the organization o f the Secretariat o f the Constitutional Council; the secretariat is expected to be inplace by August 2006, paving the way for making the Council filly operational by 2007. o Thepublic procurementsystem Implemented. Thepublic procurement system hasbeen satisfactorily has been reformed and, in reformed. A regulatory agency has beencreated andprocurement particular, audits for the preceding operations are monitored through ex-ante (independent observers) and ex- fiscal year have been completed post controls (independent audit). Audits for fiscal years 2000101,200 1102, and appropriate follow-up actions 2003 and 2004 have beenprepared and the main recommendations o f these implemented, in accordance with audits have beenimplemented. the law. o Inthe area ofbudgetary Implemented. Over the period 2003-2005, the government carried out a execution and service delivery, budget tracking and beneficiary assessment inthe health and education the results o fthe budget tracking sectors in order to evaluate the quality o fpublic expenditure and identify exercises and beneficiary bottlenecks. The results have beenpublished on the website o f the Prime assessmentsfor education and Minister's Office. Action plans to address identifiedbottlenecks have been health have been publishedand implemented in order to strengthen policy effectiveness inthe social the relevant recommendations sectors. have been implemented. Regulatoryagencies. Regulatory Substantially Implemented. Regulatory agencies for electricity and telecommunications have been set-up and made operational. Inthe water agencies for key sectors (including water, electricity, and sector, the regulatory framework is inplace. Following the advice o f World Bank staff, the authorities decided that the water sector should be telecommunications) are autonomous regulatedthrough the provisions o f a lease contract between the and are operating in an efficient and professional manner. government and the lessee company rather than through the creation o f a water regulatory agency. The regulatory framework i s ready to be operational once the operator is selected and the lease signed. Indeed, the financial model to be usedto regulate the sector through the determination o f tariffs and investments has beenpreparedand presentedat a private sector investor conference in February 2006. - 8 - Socialsectors Education sector. The sector strategy Implemented.The sector strategy has been satisfactorily implemented. As has been satisfactorily implementedin a result, there has beensignificant progress in increasing access and a timely manner, and inparticular: reducing gender and regional disparities in enrollment: (i) the Minister of (i) newclassroomshavebeen 2,500 Basic Education (MINEDUB) completedthe construction o f 3,768 new built; and (ii)teacher management has classrooms inNovember 2005 and (ii) teacher management has been beeneffectively decentralized and decentralized andnew teacher statuteshave been adopted and new teacher statutes have been implemented. adopted and implemented. Health sector. The sector strategy has Implemented. The government has satisfactorily implementedthe health been satisfactorily implementedina sector strategy. timely manner, and inparticular (i) child immunizationrates for DPT (i)Progressonimmunizationcoveragehasbeensubstantialwith have beenincreased to 70 percent; and differentials between the poor and non-poor narrowing and (ii)knowledge about protection and immunization coverage for DPT3 reaching more that 76 percent ;and prevention measures against malaria (ii) governmenthaspreparedandimplementedanationalMalaria The will have substantially increased, Le., Strategic Plan, in line with the Roll Back Malaria (RBM)initiative. 50 percent o fpregnant women are World Bank staff estimates that roughly 70 percent o fpregnant women using impregnated bed-nets. receive impregnatedbed-nets. The government is also distributing impregnated bed-nets to children under five with resources from the Global Fund. HIV/AIDS. Concrete progress has Implemented. The fight against HIV/AIDShas beenprioritized inthe been made to prioritize the fight overall development agenda. Concrete progress has been made through the against HIV/AIDS inthe implementation o f the 2000-05 HIV/AIDS strategic plan which provided a government's overall development sound framework for the multi-sectoral and decentralized approach to agenda and to curb infection rates combating the HIV/AIDS epidemic. among the population, with particular emphasis on education to promote the The strategy emphasizes educating the population at highriskincluding use o f condoms by truck drivers, port truck drivers, port workers, soldiers and sex commercial workers, through workers, and soldiers to 50 percent, specific communication campaigns and the distribution o f condoms. This andby commercial sex workers to education campaign has produced very good results. The 2004 DHS 70 percent. surveyindicates that (i) percent o fwomen and 82 percent of menare 68.7 aware that usingcondoms or limiting sexual relations with one partner he11 reduce contamination risk, (ii) 54.7 percent o f men and 40.5 percent o f women who had high risk sexual relations used condoms. A 2004 study indicates that 78 percent o f commercial sex workers use condoms. Inaddition to the educationcampaign and condom distribution, the government implemented a broadpackage o f curative and preventive measures. These measures were implemented beyond set targets discussed with the World Bank. Notable progress has also been made inexpanding access to voluntary counseling and testing, providing care to those living with HIV/AIDS, and expanding access to treatment. - 9 - A. Implementationof the PovertyReductionStrategy 6. InApril 2003, Cameroonadopteda fullPRSPcoveringthe period2003-15. The PRSP was prepared through intensive consultations with a broad range o f stakeholders, including the poor, civil society, the private sector, and development partners. The PRSP document presents the government's vision andpriority actions for fightingpoverty in line with the MillenniumDevelopment Goals (MDGs) set for 2015. The strategic framework o f the PRSP rests on seven pillars: (i)promoting a stable and growth-enhancing macroeconomic environment; (ii)strengthening growth through economic diversification; (iii) empoweringthe private sector as the main engine o f growth and a partner in social services delivery; (iv) developing basic infrastructure and natural resources inan environmentally sustainable manner; (v) accelerating regional integration within the CEMAC framework; (vi) strengthening human resource development and bolstering social services; and (vii) improving governance, including inpublic administration and the legal andjudicial system. 7. The PRSPwas endorsedby the IDA andIMFBoardsinJuly 2003 as a credible frameworkfor concessionalassistance. As notedinthe Joint Staff Assessment (JSA), the PRSP contains several features that the staffs consider to be good practice, notably: (i) the breadth and depth of poverty analysis which indicate that the improved growth performance over 1996-2001has translated into a 13 percentage point reduction inpoverty in~idence;~ clear (ii) linkages o f PRSP targets to the MDGs; (iii) a comprehensive development framework for sustainable growth andpoverty reduction; (iv) a careful identification o f the mainpriorities o f the regional integration agenda; and (v) an innovative approach for undertaking the costing o f sector strategies, considering boththe resource needs (the cost o f reaching the sector/MDG) and resource availability (budgetary resource constraint coming from the macro framework). 8. The governmenthas establishedthe institutionalframeworkfor participatory monitoringand evaluationof PRSPimplementation.Two committees were created in September 2003 for this purpose: an "Interministerial Committee" chaired by the Prime Minister; and a "Technical Committee," composed o f members from government, civil society and donor community. The mandate of the Technical Committee i s to monitor the implementation o f the PRSP with assistance from the National Statistical Institute and to produce regular reports on the implementation o f the PRSP including the APRs. This committee has produced three annual PRSP progress reports so far. 9. While implementationof the PRSPgot offto a slow start, it has since improved,as evidenced by the lasttwo APRs andthe accompanyingJSANs. The first APR, covering April 2003-March 2004, andthe accompanying Joint Staff Advisory Note (JSAN) were submittedto IDA andthe IMFBoards inMay 2005. The JSANconcluded that despite a record o fcontinuing The analysis is basedon monetary and nonmonetary indicators and combines quantitative analyses based on household surveys with a qualitative and participatory approach based on how the population and the poor perceive poverty. Results from the last two householdsurveys indicate that the incidence o f income poverty inCameroon fell from 53 percent to 40 percent over 1996-2001. - 10- economic growth, low inflation and good external sector performance, there were risks that weak fiscal performance and the slow pace o f improvements inthe business climate, notably the restructuring and privatization o fpublic enterprises, could underminethe implementation of the PRSP and the achievement o f its goals. The second APR, covering the period January 2004- March 2005, was prepared through a participatory process andnoted progress in a number o f areas, namely fiscal policy, budget management, governance and social policies and outcomes. The accompanying JSAN, while inagreement with the report on progress inthese areas, noted that the pace o f structural and governance reforms needed to be accelerated and capital expenditure increasedifthe objectives o f the PRSP were to be achieved. 10. The staffs consider that the implementationof the PRSPwas satisfactoryin2005. The third APR covering 2005 and accompanying JSAN, was submitted to the IMF and IDA Boards inApril 2006. This APR highlightsprogress inmany areas including fiscal and budget management, governance and corruption, and ingrowth and diversification o f the economy. Specifically, during2005, fiscal policy implementation and performance strengthened substantially, accompanied by an increase in oil and non-oil revenues and control over current spending, The authorities accelerated the preparationo f sector strategies inpriority sectors5and medium-term expenditure frameworks to further enhance the alignment o fbudget allocations with the PRSP priorities. The government also adopted an updatednational program o f governance as the framework for improving governance and fighting corruption,6 as well as taking actions to strengthen economic growth and diversification and further improve social outcomes. The staffs o f IDA and the IMFhave reviewed progress on each of the PRSP pillars and concluded that PRSP implementation and monitoring have been satisfactory over the past year, Policies in specific areas, underlying the implementation o f the PRSP and related to the HIPC completion point triggers are reviewed inthe remainder o f Section 11. B. MacroeconomicPerformanceduring2001-05 11. Since reachingthe decisionpointinOctober 2000, macroeconomicstability hasbeen broadlymaintained(Table 1). However, unevenpolicy implementation, particularly slippages infiscal policy in2004, posedrisks for macroeconomic performance and fiscal sustainability. Consequently, Cameroon was unable to reach the completion point as originally envisaged under the second PRGF-supportedprogram approved inOctober 2000. Macroeconomic policy implementation improved substantially in2005,as evidencedby performance under the IMF Staff-Monitored Program (SMP) duringthe first halfo f 2005 and a new PRGF-supported program during the second halfo f 2005. Efforts made in 2005 to correct fiscal slippages contributed to restoringthe conditions for macroeconomic stability and strengthening the foundations for sustained growth and poverty reduction. The strategies for education and health sectors were updatedand new sector strategies were prepared inother sectors includingpublic works, post and telecommunications, social development and tourism. Progress on implementation o f the National Governance Program (PNG Iand PNG 11) is reported in Section E. - 11- Table 1. Cameroon: Selected Macroeconomic Indicators, 1990-2005 Average 1990-94 1995-2000 2001-05 2001 2002 2003 2004 2005 (Inpercentage change, unless otherwise indicated) conomicgrowth and prices Real GDP -1.8 4.7 3.8 4.5 4.0 4.0 3.7 2.6 Oil -4.0 1.4 -6.5 -4.0 -4.4 -5.0 -9.3 -9.7 Non-oil -1.1 4.9 4.8 5.5 4.9 4.9 4.9 3.5 Consumer prices (period average) 7.2 3.1 1.9 3.7 2.8 0.6 0.2 2.0 Gross domestic investment 15.0 16.8 19.4 20.3 19.8 18.3 18.9 19.6 (Inpercento fGDP) ;overnment finance Total revenue (excl. grants) 13.5 15.5 16.6 18.2 16.2 16.0 15.2 17.2 Oil revenue 3.8 3.9 4.7 5.9 4.9 4.1 3.9 4.9 Non-oil revenue 9.7 11.6 11.8 12.3 11.3 11.9 11.3 12.3 Total expenditure 20.5 17.3 15.6 16.8 15.7 15.3 16.0 14.2 Current expenditure 17.3 14.8 13.2 13.6 13.6 13.2 14.0 l l . E Ofwhich: Non-interest current spending 11.7 9.2 10.9 10.5 10.9 10.9 12.1 10.2 HIPC-related spending 0.0 0.0 0.4 0.0 0.4 0.2 0.5 0.8 Capital expenditure 3.2 2.3 2.3 2.9 2.4 2.1 2.0 2.2 Overall budget balance (commitment basis, excluding grants) -7.0 -2.9 0.9 1.2 0.5 0.7 -0.8 3.c Ofwhich: non-oil primary fiscal balance -2.7 1.1 -0.9 -0.5 -1.4 -0.7 -2.0 O.( (Inpercentage change, unlessotherwise indicated) Lalanceof payments Current account bal. (excl. grants; inpercent o f GDP) -1.7 -2.3 -3.3 -1.7 -6.4 -2.6 -3.6 -2,( Export volume -6.2 8.0 -0.5 0.5 -7.0 6.9 1.5 -4.t Import volume -4.1 12.4 6.4 18.2 1.9 -0.6 11.7 0: Terms o f trade 3.4 3.6 0.7 -9.7 0.0 -0.8 -1.3 15. Real effective exchange rate (index, 2000=100) 88.4 67.5 70.9 66.3 68.7 72.6 72.8 69.d lources: Cameroonian authorities and staff estimates and projections. 12. Economic growth in the non-oil sector, most closely related to reduction in the income-based measure of poverty, remained robust during 2001-05 following a similar trend during 1995-2000, accompanied by decelerating inflation (Table 1).Non-oil real GDP growth i s estimated at about 4.9 percent per year on average duringboththese sub-periods, marking a significant turnaround from the negative growth trend registered inthe first halfo f the 1990s. Growth during2001-05 was drivenprimarily by a significant increase intertiary sector activities as well as robust growth inboth subsistence and cash-crop agriculture. Real GDP growth, however, i s estimated at about 3.8 percent per year on average during 2001-05 owing to the large decline in oil production. The increase ingrowth was also accompanied by rising investment. The deceleration ininflation, observed inthe second half o f the 199Os, continued in the first halfofthe 2000sreflecting (i) to improve the fiscal position-despite efforts the uneven fiscal policy implementation (see below), and (ii) Cameroon's membership to the Central African Economic and Monetary Community (CEMAC) which fixes its nominal exchange rate vis-a-vis the euro. 13. Significant improvements were achieved in the fiscal position in 2005, in contrast with uneven budgetary performance during 2001-04 (Table 1and Box 2). 0 The fiscal situation deteriorated significantly in2004 due to slippages both innon-oil revenues and non-interest spending; both the overall budgetbalance and the non-oil primary fiscal balance deteriorated significantly. Under the second PRGF-supported - 12- program approved inOctober 2000, the mobilization o f non-oil revenues was a key objective-in view o f declining oil production-but the record was uneven. 0 The principal achievement o fthe authorities' program in2005 was the large fiscal adjustment, which allowed the government to start clearing domestic arrears and strengthen its position vis-a-vis the domestic banking system. The government exercised restraint on its non-interest andnon-HIPC-related current spending, while also significantly improving non-oil revenue collection. 14. The external current account deficit (excluding grants) remained at a relatively low level, despite having deteriorated by about 1percentage point of GDP per year on average during 2001-05 compared with 1995-2000 (Table 1).This deterioration was due mainly to (i)declining oil exports giventhe gradual depletion o f Cameroon's reserves, (ii)fall incoffee a output, following the sharp decline inworld prices; and (iii) the curtailment o flumber exports, following government actions to promote sustainable logging. The small appreciation o f the real effective exchange rate may also have adversely affected the performance o f the tradable goods sector. Nonetheless, the external current account position strengthened in2005, reflecting an improvement inthe terms o ftrade, although non-oil exports declined involume terms primarily as a result o f reduced lumber and coffee exports. 15. The staffs of IDA and the IMF conclude that Cameroon has met the trigger on the maintenance of macroeconomic stability and satisfactory implementation of the PRGF program. Macroeconomic stability has been broadly maintained throughout the interimperiod, as evidenced by robust non-oil real GDP growth and decelerating inflation. Although fiscal policy implementation was uneven during this period, significant strides were made in2005 to improve the country's fiscal position. The reestablishment o f fiscal discipline restoredthe conditions for macroeconomic stability. Inthe view o f the staffs, Cameroon's performance under the PRGF-supportedprogramprovides a satisfactory track record o f strong and sustainable policy performance. - 13 - Box 2: Performance under Fund-SupportedPrograms, 2001-05 Second PRGF-supportedprogram.Following the successful completion o fthe first PRGF-supported program (PRGFI) in2000, the IMF Executive Board approved inOctober 2000 a new three-year PRGF arrangement (PRGFII) covering the period 2000-03 (and later extended to 2004) concurrently with the decision point. The first three reviews under PRGFII were concluded as scheduled, but the fourth review was completed with a one-year delay inDecember 2003. The fifth review could not be concludedbecause: the quantitative performance criteria on the primary fiscal surplus and net bank credit to government were missed; eight out o ften quantitative benchmarks, largely inthe fiscal area, were missed; and two structural performance criteria were not observed and the arrangement expired in December 2004. The program went off-track in2004 owing primarily to fiscal slippages, including a significant decline innon-oil revenues and expenditure overruns, accompanied by unpaidbills by the government to utilities and suppliers. Inaddition, the financial situation o f several public-owned enterprises, including the national airline (CAMAIR), deteriorated and adversely affected public finances. Staff-monitoredprogram.With the view o f reestablishing the conditions for macroeconomic stability, along with sustained growth and poverty reduction, the government adopted a staff-monitored program (SMP) inearly 2005. Public finances improved markedly inthe first half o f 2005, exceeding the SMP targets. This outcome reflected highoil prices and revenue, enhanced non-oil revenue collection, and improved expenditure control. Payments were made on domestic arrears, partly with the help o f windfall oil revenue. At the same time, the composition o f expenditure continuedto be skewed toward current spending and investment execution remained low. Progress on structural reforms was mixed. The government improved its financial management substantially and enhanced transparency in the oil sector. Third PRGF-supportedprogram.Following satisfactory performance under the SMP duringthe first half of 2005, the IMF Executive Board approved a new three-year PRGF arrangement (PRGFIII) in October 2005. Under PRGFIII, policy implementation strengthened and all quantitative and structural performance criteria and benchmarks for the period July 2005-January 2006 were met. The overall fiscal position strengthened considerably in 2005 with the increase in non-oil revenues, reflecting strong improvement in tax administration and some progress incustoms administration. Current spending and domestically-financed investment were inline with the program. The government continued clearing domestic arrears and replenishingthe HIPC account. Progress was made in structural reforms. Privatization strategies for C A M A I R and CAMTEL were adopted. Significant strides were made inthe areas o f transparency and governance including: adoption o f an updated National Governance Plan; progress toward implementing the EITI, and publication o f information on budget execution and oil sector data. C. The Use of the Interim DebtRelief 16. HIPC debt reliefgrantswere computedat the decisionpoint assumingthat Cameroonwouldreachthe completionpointby April 2003. As the interim period lastedthree additional years, interim assistance from IDA ceased when the ceiling of interimrelief o f one thirdo fexpected total debt reliefwas reached. More specifically, IDA has delivered interim assistance inthe amount of US$60 million inNPV terms through March 2003 and the IMF granted interimdebt relief of US$14.6 million inNPV terms as of end 2005. Total assistance duringthe interim period amounted to US$201million inNPV terms. - 14- 17. Interim debt relief assistance has been used in accordance with the criteria set forth at the decision point. This assessmenttakes into account, as noted below, the initial delays in the implementation o f HIPC fundedprojects. To ensure the effective use o f interim assistance for poverty reduction, at decision point, Cameroon agreed to : (i) establish a special Treasury account at the Bank o f Central African States (BEAC) where the budgetary savings from HIPC relief would be deposited; (ii) establish a monitoring committee (HIPC Consultative Committee) consisting o f representatives from the donor community and civil society; and (iii) undertake and disseminate technical and financial audits to ensure effective use o fthese resources inthe form o f the delivery o f goods and services. 0 A special account was opened at the BEAC inOctober 2000 andthe government started to make required deposits inthis account including resources on account o f HIPC Initiative debt service relief from official bilateral creditors. In2003/2004, the government fell behindindepositing HIPC relieffunds into the account but it i s now up to date with the deposits and has cleared the arrears. 0 The HIPC Consultative Committee was established inOctober 2002 and initially provided guidance for the selection o f good projects that could be eligible for the use of HIPC resources, including a percentage earmarked for civil society projects. Also, the government adopted in2003 a budget nomenclature which allows the identification o f poverty-related programs andprojects. Delays had occurred inthe implementation o f HIPC-funded projects due to difficulties inputtingthe HIPC Consultative Committee in place, preparing high-qualityprojects and establishing transparent disbursement procedure. Execution rates o f HIPC-financed projects were thus low in2003 and 2004. The government has taken steps to improve the programming and execution o fHIPC- financed projects including streamlining disbursement procedures, strengthening the capacity o f the national consultative committee, andputtinginplace an information system for monitoring project implementation. As a result, the execution rate increased from 25 percent in2003 to almost 100percent in2005. HIPC projects were targeted at improvingpublic services delivery inareas ranging from education (construction and rehabilitation o f schools, recruitment o f temporary teachers), health care (including improving against immunizations andcombating malaria andHIV/AIDS), social development (including literacy projects), urban sanitation, rural development (including rural infrastructure), andjustice. 0 Two technical and financial audit reports covering the use o f HIPC resources respectively duringJuly 2001-December 2003 andJanuary-December 2004 have beenproduced, discussed with the Consultative Committee' and made accessible to the public. The audits found that some projects were implemented without prior approval by the HIPC Consultative Committee and that part of the HIPC spending did not observe proper public procurement and execution procedures (e.g., spending without prior commitment orders). The government i s implementing the recommendations o f the audits focused on improving the management o f HIPC resources by line ministries and on compliance with 'These reports were presentedto the HIPC ConsultativeCommitteerespectivelyin September 2004 and October 2005. - 1 5 - proper procurement andpublic spendingprocedures. The government has taken actions to address these problems. It has put emphasis on improving the procedures for preparing project proposals and established a control unit within the HIPC Consultative Committee to strengthen the monitoring o fproject implementation. Inaddition, special projects coordinators were designated inline ministriesto supervise implementation o fHIPC projects. The Consultative Committee i s also encouraging the involvement o f local communities andNGOs inthe execution o f HIPC projects. For example, 350 local associations and communities were involved inroadmaintenance projects. This package o f measures has started to pay off and the execution rate for HIPC projects, including capital projects, has gradually pickedup. D. ReformsunderIDA'SThird StructuralAdjustmentCredit (SACIII) 18. SACIII was concludedandthe reformswere implementedin a satisfactorymanner; thereforethe relatedcompletionpointtrigger hasbeenmet. SACIIIwas closed inMarch 2004 after full disbursement o f all tranches and the Bank's Implementation Completion Report (ICR) ratedthe implementation as satisfactory overall, a rating confirmed by the Bank's Independent Evaluation Group.' The primary objective was to help improve Cameroon's competitiveness and thus to enhance economic growth, job creation and poverty reduction. Its components were (a) reforms o f the financial sector; (b) restructuring/privatization o fpublic enterprises, especially public utilities and agricultural parastatals; (c) reforms inthe forestry sector, inorder to enhance its sustainable development; and (d) reforms inthe transport sector to improve the efficiency o f transportation services. 19. SACIII was a politicallyandtechnicallycomplex adjustmentoperationinvolving several components andsectors. The operationprovided an umbrella for dialogue between the Bank and the government on structural/governance reforms and for buildingnational ownership of the complex reform agenda. Although there was highlevel political support for the reforms, the commitment andtechnical capacity at the management level for the implementation o fthese measures were unevenand the reforms o f SACIII were demanding on the national administrative apparatus. These factors, as well as a strong resistance to reforms by vested interests, particularly on the forestry, port and privatization areas, slowed the pace o f reform. Nevertheless, SACIII achieved its development objectives inthe financial, forestry and transport sectors and the privatization o f agro-industries partially met its objectives. With the exception o f the mobile telephone sub-sector, the privatization o futilities did not meet their development objectives although the actions taken on them met the credit requirements. Since the closing o f SACIII, the government buildingon the experience under the credit, has continued its efforts to fully complete the privatizations. With assistance from the World Bank, it has prepared the water and telecom companies for privatization. Inmost cases, the process i s now inadvanced stages and the prequalificationprocesses have indicated significant investor interest. WorldBank,ImplementationCompletionReport,Republic ofCameroon,Third StructuralAdjustmentCredit, ReportNo. 29996,November30,2004. - 16- Financial sector 20. S A C I I I development objectives were achieved and all financial sector conditions linkedto S A C I I I were satisfactorily implemented. The objectives o fthe reformprogram were to develop a stable, sound and efficient financial sector, boost public confidence inthe financial system, and increase its capacity to finance productive economic activity. The bankingand insurance systems were restructured. The state-owned commercial bank (BICEC) and insurance (SOCAR) were privatized, while the state-owned reinsurance company (CNR) was closed down. New banks have enteredthe markettoday and Cameroonhas several banks that are solvent and profitable and meet internationalprudential standards. Privatization of utilities and agro-industries 21. The objective of privatizing the utilities was to improve the availability and efficiency of services. The privatization o f these utilities was politically sensitive, as these enterprises were not only among the largest employers inCameroon, but also important instrumentso fpolitical patronage. Progress inthis area has differed across sectors. With respect to mobile telecommunications, the government opened the sector to competition by issuing two cellular licenses which has ledto improved service and lower costs (particularly on international calls). The number of mobile subscribers (prepaid andpostpaid subscriptions) now exceeds 2 million compared to less than 3,500 before the privatization began in 1997. The electricity company was also successfully privatized in2001. However, while the fixed telecommunications (CAMTEL) and water (SNEC) companies were brought to the point o f sale, fulfilling the requirements o f the credit, the negotiations with the successful bidders were unsuccessful, the companies were not privatized' and the development objective was not achieved. As noted earlier, the government has continued its efforts to privatize these utilities. 22. With regard to CAMTEL, the government has focusedits efforts on establishing a policy, legal, and regulatory framework as well as strengthening o f the incumbent operator, with the intention to re-launch the privatization process. For this purpose, in2002, the government issued an interimconcession to CAMTEL in2002 with performance and minimuminvestments targets. A specialized international firm was recruited in2003 to assist CAMTEL's management to prepare its privatization, repositioningthe company to operate ina very competitive sector and enhancing its value. The management introducednew business practices and made some essential investments. InMay 2005, the government hired a consortium, ledby an investment bank, to re-launch the privatization inaccordance with the new telecommunication and privatization strategies. The transaction envisages the sale o f at least 51percent o f the company to a strategic partner with the fiber optic cable installed along the oil pipeline and SAT3 (the international submarine fiber optic cable laid between South Africa and Portugal and linking more than ten African countries) included inthe privatization package. The pre-qualification 'On CAMTEL, negotiationswith the first andsecondrankedbidders could notbe concluded; as a result, the interministerialcommitteedeclaredthe biddingprocessunsuccessfulinApril 2002.On SNEC, the bidder notified the governmentinJuly 2003 that it was no longer interestedinproceedingwithin the agreed framework; the governmentthus declaredthe biddingprocess unsuccessfulinSeptember, 2003. Details canbe found inthe IDA tranche release memo of the secondprivatizationsupportfloatingtranche(IDNR2004-0047, March5, 2004.). - 17- process was launched inFebruary 2006 and several international operators have expressed interest inbidding. 23. With regard to the water utility, the award o f a concession for SNEC could not be completed because of limited investor interest. There was only one bid," and after a long negotiating process, the biddernotified the government inJuly 2003 that it was no longer willing to proceed within the agreed framework. The government appointed an interim administrator in March 2002 to manage SNEC and stem the deteriorationo f the company, which was on the verge o f bankruptcy, while it considered its options for moving forward. The approach has met with some success. The new management team improvedthe operatingperformance andthe financial position of SNEC-through strengthened billing and collection and made some essential investments. As a result, the "distribution ratio"" significantly improved (reaching 77 percent in2004) and the company enjoyed a slight positive surplus in2003 and 2004. In2004, the government decided to restructure SNEC as a public-private partnership (PPP). The government created the asset holding company CAMWATER that will carry the investment responsibilities, while the private partner will operate the facilities and deliver services under a lease contract. The prequalification process for the private partner was launched inJanuary 2006 and several international operators expressed interest. The investment conference was organized inFebruary 2006, andthe invitation for bidsis expectedto be launchedbymid-2006. Once a successful bidder i s selected, the government and the operator will negotiate a lease contract, which will be one o fthe instrumentso fthe regulatory framework for the sector (para 40). 24. In agro-industries, the objectivewas to lift barriers to entry and attract new operators with capital, production and marketing know-how. This reform was to be completed through the sale o fthe four largest remainingpublic enterprises: Cameroon Development Corporation (CDC), Cameroon Palm Oil Company (SOCAPALM), Cotton Development Company (SODECOTON), and Cameroon Sugar Company (CAMSUCO) inorder to mobilize the investments requiredto finance a large replanting and extension program. SOCAPALM and CAMSUCO were successfully privatizedwhich has led to increases inplanted surface and production. But the privatization o f SODECOTON and the main agro-industrial complex CDC were unsuccessful. The sale o f SODECOTON on a non-competitive basis prior to 1998 to a group o fprivate investors was later cancelled by the government. The investors contested this action incourt but the latter ruled in favor o f the state in2002, effectively nullifyingthe transaction. For CDC, the tea estates, a small part o fits assets, were sold in October 2002. The three other crop units (palmoil, rubber, and bananas) received no bids. The government i s working on a new strategy to ensure the successful privatization o f SODECOTON and the palm oil and rubber plantations o f CDC. The banana plantations have been under private management since 1987 and will remain so until2010. loThere was limited interest inconcession contracts inthe water sector o f Sub-Saharan African countries. `IThe "distribution indicator" is computed as the ratio o f "invoiced water "over "produced water", which takes into account technical and commercial losses. - 18- Transport sector 25. In the transport sector, the objective was to ensure that the sector contributed to growth and poverty reduction through lower costs and more widely available, higher- quality services, both internationally and domestically. To this end, the SACIII called for regulatory, institutional, and management reforms inthe port sector, maritime, rail and air transport and road maintenance. 26. For the port sector, institutional andregulatory reform, privatization o fport activities, the rehabilitation of facilities, and the introduction o fthe single trade processingwindow made the port more efficient and operationally focused, and increase the availability and quality o fport services. The Autonomous Port of Douala (PAD) i s considered one o fthe principal gateways to West and Central Africa, and hence improvement inits operational efficiency was o f major importance. The National Port Authority (APN) was created with responsibility for overall management and oversight o f the four main ports including the PAD." Operations at each port were put under the management of autonomous teams and a consultative committee with private sector representation was created inthe PAD. Commercial and industrial port activities of the PAD, including the container terminal, were privatized. The maintenance o fthe access channel, piers and basins was carried out through contracts awardedunder competitive biddingprocesses, As a result, the maritime access to the PAD was improved and dwelling times were reduced, with the average stay inquay per ship reduced from 3.8 days to 1day andthe availability o f navigation aids to the access channel improved. A single trade processing window was set up to expedite the services involved inthe import/export o f goods. A facilitation committee, chaired by the private sector to closely monitor the efficiency o fport and clearance operations, was established. As a result, clearance time has been shortened. 27. Inthe road sector, SACIII development objectives were achievedthrough a steady increase inthe amount and quality o froadmaintenance financed by the Road Fundsince its creation, which has ledto a decrease intransportation costs. The reforms reorganizedthe Ministry ofPublic Works andestablished anautonomous RoadFundandmade it operational. The government took actions to: (i) strengthen the planning and programming capacity o f the Ministry o fPublic Works; (ii) the adequacy andtimely disbursement o fthe funds for road ensure maintenance activities; and (iii) train private contractors and communities to incorporate environmental considerations into road maintenance. The Road Fundhas improved the programming o f road maintenance operations, revitalized private civil engineering and construction firms and reduced delays inpayments to private contractors. Recently, the government has enlarged the mandate o f the Road Fundto include rehabilitation work. 28. Inthe railways sector, a concessionaire, CAMRAIL, was selected in 1999, andhas proved successful inraising the traffic level, while eliminating the need for government financial support to the sector. This concession i s progressingwell. CAMRAIL's operational perfor~nance'~has improved while CAMRAIL's financial performance in2005 was the best l2 This includes the Autonomous Port of Douala, Kribi, Limbeand Garoua. For the latter, its management was delegated to the Urban Community of Garoua. l3 Operational performance is measured interms of wagon turnaround time, personnelproductivity, personnel costs and annual kilometers per locomotive. - 19- since 1999, with a total turnover of CFAF 48.4 billion and net profit of about CFAF 2 billion, The rail sector has become a net income provider to the government (through tax and duty payments), which more than offset the remaining subsidies for passenger services. In2005, the concession was amended (as per the conditions o f the initial concession agreement) to clarify the respective responsibilities o f the government and the concessionaire for investments and passenger services. Investments will be needed to expand overall traffic volume and improve service reliability, andthis i s currently under discussions betweenthe government and lenders. 29. Inthe air transport sector, reforms aimedat improving competition andefficiency, are still under implementation. Key actions included: (i) revision o f the civil aviation code to enforce competition inthe sector and increase security inair transport; (ii) auction to private sector o fthe traffic rights to the twenty-seveninternational andregional routes not being operated; and (iii) privatization of the airline company (CAMAIR). Only the first objective was achieved. The financial losses at CAMAIR continuedto increase and in2004, the government decided to privatize the airline through'a process wherein CAMAIR would be liquidated with the government settling all its debts, and a new private airline would inherit its route rights. In January 2006, the government accepted the recommendations o f the team o f advisers from the International Finance Corporation andthe transaction has now moved into the implementation phase, commencing with the prequalification o fpotential airline partners. InMarch 2006, the government pre-selected four international airline companies. The process for orderly liquidation of C A M A I R has begunand will require the government to make the requisite funds available in a timely fashion. Forestry sector 30. Reforms in the forestry sector were to promote sustainable exploitation of Cameroon's forests and contribute to economic growth and poverty reduction. Specifically, these reforms focused on: (i) preservation o f ecological stability; (ii) promotion o f economically efficient, highvalue-added, unsubsidized processing industries; and (iii) encouraging participation o f all stakeholders inforest conservation and management. The main actions included: adoption o fnew legislation on community forests, the environment, social and environmental impacts, and a new approach for managing protected areas; demarcation o f the permanent forest estate into commercial, protected, and community and communal zones; suspension o f all unmonitorable logging permits and the introduction o f competitive biddingfor all harvesting rights; the award o f longer and more predictable concession contracts; definition o f forest management requirements with clarity and the enforcement o f the obligation to design and implement forest management plans; use ofpublic information and independent observers to ensure transparency inforest allocation and law enforcement ina weak institutional environment; adoption of new forest taxation structure and revenue recovery system; and obligation to holdbank guarantees to facilitate compliance with fiscal and environmental regulations. 3 1, Overall, the forestry sector has been reformed in fundamental ways. These reforms have introduced and institutionalizednew approaches to forest governance, brought transparency inawarding concessions, andledto the distributiono fpublic forest revenues between local and national governments. Revenues from forestry to the state and local communities increased substantially. Access to "production" forests has become competitive, and a functioning market - 20 - for forestry operations emergedfor the first time. The forest industry has been restructured significantly; volumes harvested have declined; a number o f companies have soldtheir activities to new investors and new firms have beenestablished. New investments, focused on advanced processing, have resulted instrong employment growth inthe sector. 32. Nonetheless,there is needfor continuingvigilance to ensure that the gains of the reformare enhanced and preservedand that the sector adapts to evolving challenges.The strides made against illegal logging inCameroon's formal sector show little parallel results inthe informal sector. While the establishment of community forests addresses the imbalance between corporate and local stakeholders, the capacity of forest dependent communities to utilize the resources newly available to them remains weak. Capacity buildingfor government ministries and agencies therefore needs to be extended downward to support forest communities and local municipalities. A recently-approvedIDA Forestry Development Policy operation i s part o f these on-going efforts to further strengthenforestry management.I4 E. Governance 33. InJune 2000, the government adopted the five-year (2000-05) National Governance Program (PNG), a comprehensive package o f measures aimed at improving governance, which includes: fighting corruption, strengthening public financial management, transparency, accountability and participation inpublic affairs, and improvingjustice and human rights. In addition, a subset o fpriority actions from the PNGwas attached to the I-PRSP as a Priority Action Plan (PAP) for improvinggovernan~e.~~ The adoption o fthe PNGandthe preparation of the priority action plan reflected acknowledgements o f Cameroon's poor record o f governance at the time o f the decision point. In2000, Transparency International's Corruption Perception Index for Cameroon was 2.0 (on a scale o f 0 to 10, with a higher number indicating better governance), and Cameroon was 84`h out o f 90 countries ranked. As a result o f the reforms under the PNGin the last five years, including on public procurement and financial management, andthe participation o f the civil society inpublic affairs, there have beengains in governance and some improvements ingovernance rankings. Nevertheless, the challenges to improving governance remain significant and, with the institutional frameworks inplace inmany areas, sustained emphasis on implementation i s required to progressively achieve concrete results. Onbalance, the staffs' judgment i s that progress has been made inthe area o f governance, including fulfilling the specific triggers o f the enhanced HIPC Completion Point and that prospects for further improvement are good. Enhanced HIPC Triggers 34. The actionshave beenimplemented satisfactorily and the completion point triggers have been met. The enhanced HIPC triggers, a sub-set ofthe PAP are the: (i) creation o f the Charnbre des Comptes (Audit Chamber) of the Supreme Court and the Constitutional Council l4The Executive Directors of the Bank and IDA approved a Development Policy Grant o f SDR 17.3 million (about US$25 million) and a grant from the Global Environment Facility (GEF) o f US$10 million to Cameroon for a Forest and Environment Sector Development Program (GEF/R2006-00 1 and IDAIR2006/0015; February 6,2006). l5The Priority Strategy and Action Plan for Improving Governance and Combating Corruption consists o f a subset of priority actions from the PNG. - 21 - called for by the 1996 Constitution; (ii) o f the public procurement system; (iii) reform completion o f budget tracking and beneficiary assessments for education and health, and (iv) establishment o f autonomous regulatory agencies for key sectors (including water, electricity and telecommunications). 35. The Chambre des Comptes hasbeencreated.The law specifying the responsibilities, organization, and functioning of the Chambredes Comptes was adopted by the National Assembly inMarch 2003, promulgated by the Head o f State on April 21,2003. InOctober 2003, the authorities set up an ad-hoc committee to prepare and implement a planto make the Chamber operational. The Committee was charged inter alia with the (i) preparation o f the content and format of the administrative and management accounts, (ii) preparation of the text defining the statutes of its members, (iii) preparationo f the budget, (iv) recruitment o f financial magistrates and support staffs and(v) development o ftraining modules. Twenty-two magistrates were recruited inlate 2005, and the Chambre des Comptes became operational inJanuary 2006 and started examination o fthe 2004 financial accounts. 36. The ConstitutionalCouncilhasbeencreated. The enabling legislation for its establishment was adopted by the National Assembly inMarch 2004 and promulgated on April 21,2004. InJune 2005, the President signedthe decree 2005/250 on the organization o f the Secretariat o f the Constitutional Council. The related secretariat is expected to be inplace by August 2006, paving the way for making the Council fully operationalby 2007. 37. The publicprocurementsystem hasbeenreformed. The centerpiece ofthe reforms was a new Procurement Code o f 2004, which has a legal and regulatory framework that conforms to international standards and is characterized by respect for competition, transparency, efficiency and economy. A regulatory authority (ARMP) to oversee the public procurement function was created inFebruary 2001. Procurement committees have been set up inagencies at national and local level and independentobservers have been appointed to these committees. Annual audits o fpublic procurement contracts havebeenconductedby an independent consulting firm for the period July 2000-June 2001, July 2001-December 2002, January- December 2003, and January-December 2004. On the basis o f the conclusions o f the audit reports and an evaluation o fthe first years o fthe reform, in2004 the government organized a round table in 2004 with private partners, donors andgovernment officials and discussed the progress and obstacles inthe implementationo f the reforms and made recommendations for strengthening implementation including: 0 Sanctions:Inline with the identifiedneed for systematic sanctions on violations o fthe procurement rules, the ARMP has conducted a study to develop a framework for the application o f sanctions andprepared a manual o f procedures. With regard to the dissemination o f information on non-compliance, the government has publishedall sanctions taken since 2004. It i s now enforcing the statute barring any enterprise that has violated the procurement rules from biddingfor contracts and all enterprises are now required to provide a certificate o f "non exclusion" from the A M P in order to compete. 0 Addenda and slicingof contracts: The legal position on contract addenda (additional work to an existing contract) and the slicing o f contracts to fall below the threshold requiringpublic tender havebeen addressed inthe Procurement Code. Furthermore, to - 22 - discourage slicing, the paymentof registry fees has been made mandatory for all contracts. 0 Operational manuals: To facilitate the implementation o f the reforms, the A M P has prepared andpublishedseveral operational manuals, including a user's guide, a draft manual of procedures for executing agencies, and a draft General Conditions o f Contracts, as well as draft models o ftender documents. 38. In 2005, the government and the World Bank, in collaborationwith the civil society, the private sector and other donors, carried out a country procurement assessment review (CPAR). Followingthis, a procurement improvement action plan for the period 2006-2008 was adopted and i s now under implementation. The CPAR, which used the baseline indicators developed by OECD-DAC,l6 concluded that significant progress hadbeenmade over the last five years and that the foundations of the national procurement system are inplace, with a score of 69 on a scale o f 100. The authorities have also agreed to make the CPAR public. 39. In 2003-2005, the government carried out budget tracking and beneficiary assessment surveys in the health and education sectors. These surveys found a number o f problems related to omission o f some facilities from the budget, lack o ftimely information of facilities on amounts of budget allocations, and poor record keeping on finances at the facility level. The findings and recommendations o fthe surveys have been disseminated and actions have since been taken to deal with the bottlenecks. There are ongoing efforts by the government to use: (i) the media to keepthe public informed o fthe progress inthe preparation o fthe budget and its approval by the legislature, and (ii) participatory PRSP monitoring system to the disseminate information on the budget and assess performance. Civil society organizations have become engaged inbudgetmonitoring, independent o fthe government. 40. Autonomous regulatory agencies have been established for key sectors. The agencies for the electricity and telecommunications sectors are inplace and are operating satisfactorily. For the water sector, following the advice o f World Bank staff, a simplified regulatory framework that does not involve a self-standing agency has been adopted. 0 Inthe telecommunicationssector, an autonomous and independent regulatory telecoms agency (ART) has beenestablished and is developing its capacity as a regulator. ART has tackled several key regulatory issues with the advent o f competition inthe sector such as issuance and monitoring o f licenses and authorizations, andtariff and interconnection regulation. The government and ART are currently reviewing the mobilization o f the Universal Access Fundand its allocation mechanisms in order to start investing in selected areas. 0 In the power sector, an independent electricity regulatory agency (ARSEL) was created and began operating in2001. It i s not financed by the government but draws its resources from a surcharge on power tariffs collected by the power company, AES Sonel. ARSEL, l6This evaluationsystem includes twelve indicatorsunder the four pillars ofa modernprocurement system Le., (i) the legislative and regulatory framework, (ii) institutional framework, (iii) procurement operations and private sector practices, and (iv) integrity o f the public procurement system. - 23 - which started exercising its mandate effectively in2004, i s fully operational and compares well with regulators inneighboring countries. It reviews and authorizes changes of power tariffs requested by AES Sonel, assesses the business plan o f the utility and its long-terminvestmentplan, monitors the process for the granting o f licenses, and participates inpower sector planning. Inaddition, it has coordinated the preparation of the complex studies for the L o m Pangar dam project. It i s therefore active inthe key functions of power sector regulation. The government and ARSEL have prepared, with the support of the World Bank, a plan for the reinforcement o f the capacity o f ARSEL. 0 Inthe water sector, following the advice o fWorld Bank staff, the authorities decided that the framework for the regulation o f the sector should be through the provisions o f a lease contract betweenthe government and the lessee company rather than through the creation of a water regulatory agency. Such a framework i s more efficient for regulating a single provider. The regulatory framework is inplace and will be operational once the operator i s selected and the lease signed, a process that i s underway (para. 23). The framework consists o f (i) a lease contract provisions that set up performance incentives and penalties for the private operator; (ii) a performance contract between the government and the public asset-holding company; (iii) the use o f a sectoral financial model to set tariffs and investments; and (iv) a Technical Monitoring Committee to monitor both the lease contract and the performance contract and propose the tariff revisions on the basis o f the outcomes o f the sectoral financial model. The financial model was completedby end-November 2005 and was presented and discussed at the private investor conference inFebruary 2006. Progresson Governanceand anti-CorruptionReforms 41. Since reaching the Decision Point, Cameroonhas carried out a range o f reforms under the PNG, focusing on those actions inthe PAP. Actions have been taken to improve public financial management, enhance the transparency o f petroleum sector operations, strengthen the judicial sector, and enhance the participation o f civil society inpublic affairs and their access to public information. Furthermore, the structural reforms undertakeninforestry (paras. 30-32), transport (paras. 25-29), social sectors (para. 52), and procurement (para. 37) have stressed transparency, accountability and participation and thus contributed to better governance. Box 3 provides a summary o f the actions inthe areas o f governance and anti-corruption reforms. Although the implementation o fthese reforms began slowly, its pace and scope has pickedup inthe last two years. As a result of the reform efforts, Cameroon's rankings on corruption, such as those from Transparency International's Corruption Perception Index (from 2.0 in2000 to 2.2 in2005) and the Governance Research Indicator Country Snapshot (GRICS) indices o f governance and control o f corruption compiled by WBI, have beenimproving. Inthe latter, Cameroon's index on control o f Corruption has consistently improved since 2000 with the percentile rank rising from 7.5 in2000 to 25 in2004. With the essential elements o f the legal and institutional framework for improving governance and combating corruption inplace, the challenge going forward i s to put emphasis on and sustain implementation. - 24 - Box 3: Cameroon: Summary of Actions to Improve Governance and Reduce Corruption The government, concerned about the adverse impact ofpoor governance and corruption on socio-economic development, adopted the National Governance Program (PNG) in2000 to support sustainable growth, poverty reduction, and social inclusion. It established anti-corruption institutions such as the National Anti-Corruption Observatory (under the leadership of the Prime Minister), a permanent watchdog body inthe education sector; anti- corruption units in all ministries and some public agencies, andpositions o f inspector-general inministries to liaise with the anti-corruption units in fighting corruption. It also adopted and is implementing a new public procurement code; established a regulatory agency to overseepublic procurement; and has imposed and published sanctions for violations o fpublic procurement rules inthe Public Procurement Journal. To improve public financial management, it implemented reforms inbudget preparation and execution, and strengthened budget management information systems (Box 4). Together with reforms inthe forestry, maritime, air and road transport sectors, these measuresrepresent a major departure from the earlier decades. The reforms under the PNG have also resulted inmore openness in the economy and, inspiredby the PRSP, a greater participation o fthe civil society inpublic affairs. Following the elections in 2004 and the appointment of a new government inNovember, the authorities have stepped up the pace o f implementation o f fiscal, structural and governance reforms. Since then, Cameroon has moved expeditiously on governance related actions to: (i) improve budget reporting and transparency; (ii) establish and make operational the Audit Chamber (Chambre des Comptes);(iii) to and implement the adhere EITI; (iv) apply sanctions for violations ofprocurement rules; (iv) sensitize the population on corruption; (v) publish in local newspapers the names o f more than 70 top civil servants accused o f embezzling public funds; and (vi) dismiss and arrest a number o f top public officials including ministers suspected o f corruption. A revised national governance program was adopted inNovember 2005 and is under implementation. 42. Progresshas been madein improvingpublic finance management(PFM). While the PFM systemstill faces many challenges, the reforms undertaken over the years with the support of the World Bank, the IMF and other donors, have resultedin systemic improvements. Inthe HIPC AAP reviews, Cameroon has progressed from satisfactory ratings in4 out o f 15 areas in 2001 to 7 out o f 16 areas in2004. Box 4 contains an assessment o f the Cameroonian budget management system, based on the HIPC monitoring framework." Budget allocations to the priority sectors of the PRSP, particularly education, health and infrastructure, have progressively increased since 2000. An integratedpublic finance information system (SIGEFI) i s inplace and hnctioning and has improved the monitoring o f the flow o f resources and the timeliness o f fiscal reporting. As noted earlier, a supreme audit body (the Chambre des Comptes) has become operational. The government intends to expandthe mandate o f the Chamber to conform to the norms of the International Organization o f Supreme Audit Institutions (INTOSAI) after two years of operations within its current mandate and once the appropriate capacity has had a chance to develop." The foundations for the introduction o f the MTEF approach to budget management are inplace, with the development o f sector strategies and expenditure plans consistent with the strategies. Indeed, the government has defined several criteria to guide ~~ Incollaboration with the World Bank, IMFandother partners, the government has gradually implementedthe recommendations called for in the Country Financial Accountability Assessment conducted in2001 and the 2001 and 2004 HIPC AAP reports. l8 mandateoftheauditchamberwillberevisedtoempower itwiththelegalcompetence, beyonditscurrent The focus on examining the accounts, requiredto judge the management performance o fbudget authorizing officers within the public administration as well as within any public structure using/managing public funds. - 25 - resource trade-offs inbudgetallocation and i s revisingthe budgetpreparation calendar to make the MTEFthe cornerstone of budget preparation. The staffs estimate that Cameroon is now ready to use its global MTEFto prepare the 2007 budget". A few ministries already use their MTEF during the 2005 budget conferences. - 26 - Box 4: Progressin Public FinanceManagementSinceReachingthe DecisionPoint Budget formulation The budget is now more comprehensive as it incorporates central government operations, the road fund, and more recently the integration into the budget framework spending that usedto be financed directly through national oil company (SNH). The budget preparation process now involves pre-budget and budget conferencesto strengthen involvement o f line ministries and allow sufficient prior detailed discussion o f their proposals. The budget nomenclatureadopted in2003 allows expenditure classification on an administrative, economic and detailed functional basis. The fimctional nomenclature permits the tracking o f expenditures devoted to the fight against poverty. The new nomenclature is detailed and comprehensive but lacks program and outputhesults codes. Further work will be needed to simplify it and provide for program classification. Sector strategies and MTEFshave beendeveloped, with World Bank support, for the ministrieso f education, health, rural development and public work to support budget preparation and align the budget to its strategic priorities. The preparation o f sector strategies and MTEFs for a number o f other ministries (including justice, telecommunications, and social development) i s underway. Budget allocations to the priority sectors of the PRSP, particularly education, health and infrastructure, have been progressively increased since 2000. Budget execution An integratedpublic finance information system(SIGEFI) was introduced. It has improvedthe tracking ofthe flow o fresources through the budget execution chain, facilitated the preparation o fbudget execution reports and the regular reconciliation ofreceipts andpayments, and improved the transparency o fbudget management. Budget execution management improvedthrough (i) computerizing budget transactions; (ii) discontinuing the use o f special procedures that bypass the expenditure chain inJanuary 2006; (iii) payment o f domestic debt and arrears according to a multi-year payment plan adopted in2000; and (iv) regular payment by the government o f its quarterly bills to public utilities (water, telecommunications, electricity, and transport services) and the monitoring of public enterprises, including their external debts. Procurementreforms have included(i) decentralization of procurement responsibility by individual the ministries, with oversight by a regulatory agency; (ii) the appointment o f independent observers inthe deliberation o f all public procurement committees; (iii) annual independentaudits o f public procurement since 2001; and (iv) posting o f prices for various services provided by the government to reduce the scope for corruption. An internal control system exists butremains weak due inpart to the lack o fclarity o fthe mandates o fthe various control units and some difficulties causedby the transition from manual data to computerized information systems. The payroll management i s being decentralized inorder to make line ministriesaccountable to the daily management o f their personnel. This program i s now operational within several pilot ministries-primary and secondary education, health, finance and civil service. A computer management information system (SIGIPES) has beenintroduced to facilitate and coordinate this decentralization. In2005, the government updated the personnel file, which led to the elimination o f about 3,000 so-called "ghost" employees. The authorities are now tightening the security o f the payroll management system against fraud and mismanagement before extending this decentralization process to other ministries. Treasury and debt management: The majority o f government accounts heldincommercial banks have been closedand their balances transferred to the single treasury account at the BEAC. Procedures have been adopted to centralize cash management through the creation o f a permanent committee in charge o f managing the treasury, An independent audit o f domestic debt was undertaken and a new debt service schedule for 2006 and beyond i s being implemented. The quality and timeliness of fiscal reporting have improved.Monthly fiscal data are now available within one month of the reporting period and are consistent on a commitment and cash basis. The government has begun publishing monthly budget execution monitoring documents on a regular basis since mid-2005. The accounting nomenclature has been adapted and harmonized with the budgetnomenclature, thus facilitating the preparation oj financial accounts. The Audit Chamber became operational inthe beginning o f 2006. - 27 - 43. The task now facing the authorities is to build on the past reforms to progressively enhance the effectiveness of the financial management system. The Donor Public Finance Platform has recently been organized to assist the government ina coordinated manner inthis task. Inthis context, discussions have beenheldwith the government on a multi-yearplan for improving the PFMand provided the basis for government reform actions and coordinated donor support. A number of tasks are underway to support the preparation o fthis plan. Inthe meantime, the government i s revising the Public Finance Act (which i s dated from 1962) to: (i)improvetheaccountabilityofpublicmanagersandthemanagementofappropriations; (ii) streamline public finance procedures and simplify the accounting systemto fbrther improve transparency; and (iii) introduce performance-based multi-year budgetingsystem anchored on programswith monitorable indicators. This will facilitate the implementation o fthe medium- term expenditure framework (MTEF) that is critical for aligning the budget with the PRSP. 44. In the oil sector, the government has adhered to the Extractive Industries Transparency Initiative (EITI) and has moved rapidly to the implementation phase. In 2005, past audits of the national oil company (SNH), certified by a public accounting firm, were made public and subsequently, SNHpublishedproduction, sales and revenue data for the first half o f 2005 and pledged to update this information quarterly." InOctober 2005, a multi- stakeholder EITICommittee was created with the mandate to formulate an action plan to implement the EITI. Prior to its adoption on January 16,2006, this planwas published inmajor newspapers and discussed with the civil society and oil companies. Civil society and other stakeholders have since then been increasingly involved inthe efforts to increase transparency in the oil sector. Inparticular, the authorities approached oil companies to agree to publishkey parameters o fproduction sharing. The government has created a technical EITI Secretariat, established a steering committee and i s recruiting a qualified independent conciliator to collect and reconcile data on petroleumproduction, payments made by the companies to the government andthe correspondingreceipts by the government for 2001-2004 and2005. The first EITIreport i s expected to be available by July 2006. This report will consist o f a compilation and analysis o f production and financial data o f the oil companies, including payments made to the government and its agencies, and the payments receivedand recordedby the government and its agencies. 45. Some progress has been made in strengthening the judicial sector. The government conducted a technical diagnostic study in 2002 that identified the causes o fpoor performance o f the Cameroonjustice system. The studyrecommendedactions to improve the operations o fthe courts and the application of judicial procedures, improvements inremuneration o fjudges and other justice staff, capacity buildingrenovation and expansion o f facilities, and the reforms o f judicial organization and procedures. Consequently, a new penal code was approved inJune 2005 and promulgated inJuly 2005. A priority action plan to reform thejudicial sector i s under implementation. This plan aims to (i) consolidate judicial independence; (ii) the anti- step-up corruption drive inthe judicial system; and (iii) improve the application o f laws, court decisions and penalties. To help reduce bottlenecks inthe system, the Ministry o f Justice has been recruiting and trainingmagistrates. The government also ratified the UNConvention against cross border crime. 2o These accounts are available on the website of SNH: www.snh.cm. - 28 - 46. Since the decisionpoint,the participationof the civil society inpublicaffairs has beenstrengthened.Some examples already includethe presence o findependentobservers in procurement committees, the establishment o f a facilitation committee chaired by the private sector inthe Port of Douala, the presence o f independent observers inbiddingprocess for forestry allocations and inmonitoring the implementationo f forestry management plan, and the participation o f the civil society inthe EITIprocess. The authorities have also institutionalized stakeholder participation inthe implementation andmonitoring o f the PRSP. This arrangement was recognized as good practice ina World Bank comparative assessment of PRS processes2'. In particular, the government has made significant efforts to strengthentransparency through the regular publication of: budget execution reports, accounts o f the SNH, various audits reports (e.g., execution of HIPC expenditure, compliance with forestry rules22)as well as sanctions (e.g., for violating procurement or forestry rules), and the use o f the media to publicize government policies and other activities. 47. InNovember2005, the governmentadoptedan updatedPNG(PNGII) andits priority actionplan,with emphasis on high-impact resultsto be measuredthrough monitorableperformanceindicators.This PNGcovers democratic, administrative and economic governance, with a specific subcomponent on the fight against corruption. The government intends to sustain the recent accelerated pace o freforms in2006 andbeyond to underpinits efforts to accelerate economic growth andmeet the ambitious targets o fthe PRSP. It has launched the implementation o f PNGwith two important actions: (i) establishing an independent agency to spearhead the anti-corruption drive, and (ii) presenting a draft bill to the 2006 parliamentary session that would require asset declaration by public officials, including the President, the PrimeMinister,other ministers, highofficials ingovernment and public enterprises and members of the National Assembly. 48. The progresson governancereformssince the DecisionPoint, and especiallyinthe past two years, providesthe basis for beliefthat the governmentwill sustainthe pace of implementationof these reforms, with continuedimprovementsin governancetrends. Apart from the commitment o f the government to these reforms and the involvement and support of other domestic stakeholders, the continued support o f Cameroon's main development partners will be crucial for sustaining the momentum o fthe implementation o fthe reforms. The government has worked closely with the development partners infinalizing the PNGII and i s seeking donor support in its implementation. The Donor Platform for public finance, created initially to support the government on improving public financial management, will also work with the authorities to provide coordinatedsupport for the broader governance agenda o fthe PNGII. 2'See "Enabling Country Capacity to Achieve Results: 2005 CDF Progress Report", World Bank, 2005, inwhich Cameroon was cited as one o f only 7 (out o f 59) countries with well-developed arrangements for participation by civil society in the PRS process. 22The reports of the IndependentObserver inthe Forestry sector are postedon the web: www.observation- cameroun.info. - 29 - F. Social Sector Policies Education sector 49. The staffs have concluded that the government has met the triggers for education. In 2000, the government launched reforms of the education systembased on the sectoral strategy preparedwith the participation of major stakeholders. This has resulted insignificant progress in enrollment as well as gender and regional equity inprimary and secondary education. Recent statistics show that the admission rate of six year-old children into grade one has reached 95 percent, the gender parity index 85 percent andthe gross enrollment rate 101percent in primary education, compared with significantly lower rates a few years before. However, progress inthe quality of education has been relatively modest, and efficiency rates remain low. Inparticular, only six childrenout often currently complete their primary educationand repetition rates inprimary and secondary education remain at about 25 percent. Recognizing the ineffectiveness of current assessment practices and their adverse impact on repetition rates, the Ministryo fBasic Education (MINEDUB)has introducedmodern assessmentmethodsand is retraining all teachers intheir use. At the same time, administrative measures23have been introduced to curb the higher-grade repetition inprimary education. The government completed an in-depthreview o f its education systemin2004 (Country Status Report, 2004) and i s currently updating the 2000 strategy to address shortcomings inquality and efficiency, explore long-term financing options, andprepare an action plan for universal basic education by 2015. 50. With regardto school construction, by November 2005, the MINEDUBcompleted the construction of 3,768 new classrooms. Given the inadequate supply o f classroom and the expected growth of enrollment, this effort would needto continue while rationalizing the distribution o fnew classrooms among provinces to reduce current disparities. 51. Regarding teacher statutes and the decentralization of teacher management, new teacher statutes were adopted in December 2000 and the decentralization of the management of teachers started in2001. For the implementation o f decentralization policy, the Ministry o fBasic and Secondary have adopted the SIGIPES software as a centerpiece of its teacher management system. The system i s currently implemented at the central government level and its deployment inthe ten provinces i s plannedover the next few years. Provincial decentralizationneed further empowerment to take teacher assignment decisions that are necessary to reduce disparities among schools. 52. The Ministry o f Education has confronted corruption by encouraging the audit o f schools and administrative entities by a permanent regulatory body (Obsewatoire de la Gouvernance). The membersofthe Obsewatoire comprise prominent and independent-minded citizens, and report directly to the Minister o f Education. The Obsewatoire's missions are to: (i) monitor the administration o f the education system, (ii)signal cases o f dysfunctional activities and practices, and (iii) propose corrective measures. Since its establishment three years ago the Obsewatoire has beendocumenting and reporting corruption cases, andhas triggered a number o f sanctions on corrupt public officials. ~ 23 Arr& No.315/B1/1464/MINEDUB;02/21/2006. - 30 - Healthsector 53. The staffs have concluded that the governmenthas met the triggers for the health sector.The Health Sector Strategy, prepared through extensive consultations with key stakeholders, was issued inJuly 2002. Its main goals were to: (i) decentralize health services, promote partnerships and improve transparency and efficiency inpublic resource management; (ii) rolesandresponsibilitiesofallstakeholdersintheprovisionandfinancingofhealth clarify services; and (iii) prepare sub-sectoral strategies for addressing priority public health issues (e.g., HIV/AIDS,malaria, childrenhealth, reproductiveandmaternal health) and for improving access to basic health services. Implementationhas beensatisfactory. The Ministry of Healthhas been restructuredand a number o fthe major public health programs (e.g., immunization, malaria, HIV/AIDS) have beenrevamped. The government has also tackled the issue o f human resources that i s central to improving access to health services. In2001, new legal statutes were adopted, to allow salary supplements for work inunderserved areas, lay out rules on staff conduct, and assign personnel management responsibilitiespreviously handled centrally to the Ministryo f Health. The ministry i s puttinginplace a computerizedpersonnel management information system and a human resource plan that deals with, inter alia, performance incentives, deployment o f personnel and the recruitment o f contractual staff for underserved areas on a competitive 54. Progresson immunizationcoverage hasbeen excellentwith the narrowingof differentialsbetweenthe poor and non-poor.The coverage rate for DPT3 (diphtheria, pertussis, tetanus) increased from 43 percent in 1998 to 76 percent in 2005. While in 1998 coverage rates for children inthe highest wealth quintile were 2.2 times higher than inthe lowest, by 2004 this differential was narrowed to 1.5. These improvements were achieved through the introduction o f important organizational, financial, and programmatic measures. The national program has adopted the "Reach EveryDistrict" strategy to address inequality in coverage rates by focusing on poorly performing districts. The program has beguncontracting health districts and making them accountable for results. Inparallel, financing of immunization services has also received a major boost from HIPC resources particularly inthe acquisition o f vaccines and equipment. Specific efforts are also beingmade to monitor individual children and program performance through the reintroduction o fvaccination cards. 55. Progresshasbeenmadeon restructuring,reinforcingandimplementingthe malaria program.25The World Bank estimates that roughly 69 percent ofpregnant women received impregnatedbed-nets.26This demonstrates considerable progress compared to the situation prevailing at the decision point where the use o f impregnated bed-nets was close to zero, HIPC resources and resources from the Global Fundwere instrumental inthe distribution o f free impregnatedbed-nets to pregnant women and children under five through the establishment o f 24Some 1,800 staffs were recruited to serve in 50 districts experiencing difficulties in attracting staff. 25Malariaremains the main cause o f morbidity inCameroon, representing up to 50 percent o f outpatient consultations, 23 percent o f hospitalizations and 40 percent of householdhealth spending. 26Intotal over 555,000 impregnatedbed-nets were distributed to pregnantwomen over the 2003- 2005 period. Based on the results o f the 2004 DHS, the number o fpregnant women is estimated at 800,000. - 3 1 - 10NGO-runprovincial impregnationcenters. Inaddition, over 300,000 bed-netswere distributed to children under five through the Global Fundexecuted grant. This progress has resulted from the government's implementation o f a national Malaria Strategic Plan, in line with the Roll Back Malaria (RBM) initiative. A RBMcommittee has been established, and technical groups were formed and training provided at central and provincial levels, and an excellent national communications plan was launched with some 100,000 fliers distributed in 2005. HIV/AIDS 56. Cameroonhassatisfactorilyimplementedthe measuresto fulfill the triggerson HIV/AIDS. The government has made the fight against HIV/AIDSa priority inits development agenda. The 2000-05 HIV/AIDS strategic plan provided a sound framework for the multi- sectoral and decentralized approach to combating the HIV/AIDSepidemic. According to the 2004 Demographic andHealth Survey (DHS), the HIV infection rate i s estimated at 5.5 percent with substantially higherrates for females (6.8 percent) than males (4.1 percent). Notable progress has been made inincreasing the availability o f condoms (Le,, 37 million distributedin 2005), carrying out mass media campaigns with special actions targeted at highrisk groups, rapidly scaling up and implementing the prevention o f Mother to Child Transmission Program through the establishment o f some 420 sites nationwide, expanding access to voluntary counseling and testing through the establishment o fnationwide network o f 19 sites which have tested over 53,000 persons, providing care to those livingwith HIV/AIDS, and expanding access to treatment through the decentralization of the 21 accredited treatment centers to an additional 30 sites to bringservices closer to those inneed and facilitate follow up. 0 Condomuse: Condom use has improved substantially. The 2004 DHS survey indicated that 54.7 percent o fmen and 40.5 percent o f women who hadhighrisk sexual relations usedcondoms. A behavioral study in2004 found that 78 percent o f commercial sex workers use condoms. 0 Communicationcampaign:The DHS survey indicates that (i) percent ofwomen 97.8 and 99.2 percent of men are aware o f HIV/AIDS; (ii) 68.7 percent o f women and 82 percent of men are aware that using condoms or limitingsexual relations with one partner, helpto reduce the risk o f contamination. 0 The Preventionof Mother to ChildTransmissionprogram:Intotal, about 80,000 pregnant women or 13 percent o f all pregnant women attending antenatal clinics are covered through the program. 0 ARV treatment: Cameroon has also made good progress inscaling up accessto treatment for people living with AIDS. As o fthe end o f 2005, roughly 18,000 people are estimated to benefit from the government's subsidized anti-retroviral therapy program. The cost o f treatment for AIDS patients has been reduced in2005 (Le., from CFAF 16,000 to CFAF 3,000) to cover exams inaddition to the drugs. - 32 - G. Staff Assessment 57. The staffs recommend a waiver for the nonobservance of the completion point trigger related to the establishment of a regulatory agency inthe water sector. Inthe case o f the water regulatory agency, the authorities decided, following advice by World Bank staff, that the sector should be regulated through the provision o f a lease contract between the government and the lessee company, rather than through the creation o f a water regulatory agency. The regulatory framework i s already inplace and will become operational as soon as the lessee company will be recruited. Given the satisfactory implementation of the reform inthe water sector, staffs are o f the view that a waiver be granted. 111. DEBTSUSTAINABILITY ANALYSISUPDATE A. Updated Data Reconciliation and RevisionofAssistance 58. Staffs o f IDA and the IMF, together with the Cameroonian authorities, have reviewed the stock o f debt at end-June 1999 against creditor statements. Nominal stock o f debt at end-June 1999 has increased by US$17 million to US$7,8 19 million andthe NPV o f debt after the delivery o ftraditional debt relief increases by US$2 million to US$4,693 million (Table 2). Revisions to debt and export data2'result inan increase o f HIPC assistance estimated at decision point from US$1,260 million inNPV terms to US$1,267 million. As Cameroon's decision point was reached prior to the approval o f the new information reporting decision by the Boards, the country qualifies for an upward revision o f assistance.28Accordingly, the NPV o f debt o f each creditor will be reduced by 27.0 percent, after the application o f traditional debt relief, instead o f 26.9 percent determined at the decision point (Table 3). 59. The somewhat higher stock o f debt outstanding at the time o f the decision point reflects new information pertaining to the debt o f state-owned enterprises (SOEs) and revisions inthe outstanding stock o f debt at the time o f the decision point. Inparticular, the newly reconciled stock o f debt at end-June 1999 includes US$19 million inloans contractedby SOEs, not considered at the time o f the decision point. Discrepancies with the decision point data were noted duringconsultations with creditors after the decision point documentwas published.The main data revisions are as follows: 0 Multilateral Creditors. The N P V o f debt to IDA was revised downwards from US$359 million to US$345 million as a result o f revised debt service projections.*' 27The averageo fexports for the three fiscal years before the decision point were revised downwards to US$2,284 from US$2,287 as estimated at decision point. 28 "Information Reporting in the Context of HIPCInitiative Assistance", approved by the members of the Executive Board of the IMF (EBS/O2/06) and IDA (IDA/SECM2002-0131), March 4, 2002. 29Principal and interest repayments to IDA were simulated according to the full committed amount o f the credits and not on the basis o f the amount actually disbursedat decision point. Therefore, principal repayments projected on loans not fully disbursed where higher than principal repayments projected according only to the disbursedamounts, Accordingly, repayment periods o f loans not fully disbursed did not extend to the full maturity o f the loans, but were truncated at the year when the outstanding debt at decision point would have been fully repaid. Repayment periods of not fully disbursedloans were generally shorter than the normal IDA maturity period, resulting in an overestimation o f the NPV o f debt to IDA. - 33 - Similarly, a revision o frepayment terms loweredthe NPV o f debt to the African Development Fund(AfDF) from US$30.3 million to US$29.7 million. The NPV o f debt o f the Islamic Development Bank (IsDB) was revised downwards from US$7.3 million to US$6.0 million to account for lower arrears than considered at the time o f the decision point. Finally, the NPV o f debt owed to the Central African States Development Bank (BDEAC)was revisedupwards from US$2.7 millionto US$6.2 millionto account for a loan to a SOE not included inthe stock o f debt at the time o fthe decision point. 0 Bilateralcreditors.The NPV of debt to Austria andFrance after delivery o ftraditional debt relief was revisedupwards by US$O.9 million and US$2.6 million respectively. The N P V o f debt to Germany after traditional debt reliefwas revised downwards by US$ I.4 million.30 0 Commercialcreditors.The NPV o fCameroon's commercial debt after delivery of traditional debt reliefwas revisedupwards by US$12 milli~n.~' B. Statusof CreditorParticipationinthe EnhancedHIPC Initiative 60. Cameroonhas received financing assurances o f participation inthe enhanced HIPC Initiative from creditors representing 94 percent o f the NPV of HIPC assistance estimated at the decision point. Most multilateral and Paris Club creditors have confirmed their participation in the HIPC Initiative andthe authorities are working toward reaching agreements with all remaining creditors (Table 4). Multilateralcreditors 61. The amount o f HIPC assistance from multilateral creditors totals to US$322 million in NPV terms or 25 percent o ftotal HIPC assistance (Table 3). IDA,the IMF,the AfDB, andthe EuropeanUnion, have provided interima~sistance.~~creditors, with the exception o f BDEAC All have committed to provide the requiredassistance once Cameroon reaches the completion point.33 62. The IMF.Enhanced HIPC assistancefrom the IMF amounts to SDR 28.6 million (US$37.0 million) inN P V terms at decision point. Ofthis amount, the IMFhas already disbursed as of end-2005 SDR 11.3 million (US$14.6 million) inthe form o f interim 30Cameroon's debt vis-a-vis Austria and Germany was revised due to new information providedby the creditors on the nominal stock o f debt. With respect to France, the upward revision is due to the addition o fpublic enterprise loans omitted at the time of the decision point. 31The increase inCameroon's debt vis-a-vis commercial creditors is due to the addition ofpublic enterprise loans omitted at the time o f the decision point. 32The OPEC Fundprovided some assistance during the interim period (arrears clearance) which counts as part of its share o f HIPC assistanceto be delivered at the completion point. 33BDEAC has provided some debt relief as a result o f the clearance o f outstanding arrears at end-2005. Nevertheless, it has not formally agreed to provide assistanceunder the HIPC Initiative. - 34 - as~istance.~~completion point, the IMFwill provide the remaining amount o f HIPC assistance At totaling SDR 22.3 million (equivalent to US$28.8 million).35IMF assistance i s estimated at SDR 35.0 million (US$45.3 million) innominal terms and represents a reduction indebt service o f 21 percent on average over the period 2000- 10, excluding the year o f suspension (Table 5). 63. The World Bank.Debt relief from the World Bank amounts to US$176 million inNPV terms at decision point (Table 4). Ofthis amount, IDA has deliveredUS$60 million inNPV terms (US$64 million innominal terms) as interim relief36through IDA grants providinga reduction o f 45 percent of IBRDdebt service falling due from September 2000 to March 2003.37 At the decisionpoint, Executive Directors agreedthat IDAwouldprovide the remaining debt relief at completion point through (i)supplemental IDA HIPC debt relief credit to repay a outstanding IBRD debt; and (ii) a reduction o f IDA debt service falling due after completion point. Following the adoption o f the IDA14 grant allocation framework, countries are eligible for IDA financing through credits or grants according to their riskof debt distress.38Under this framework, Cameroon i s eligible for 100 percent grant financing from IDA infiscal year 2006. It i s therefore proposedthat the remaining debt reliefbe provided through (i) IDA grant to an prepay US$26 million of IBRD debt outstanding at completion point, corresponding to a reduction o f US$20 million inNPV terms at decision point; and (ii) a reduction o f 57 percent of debt service on IDA debt disbursed before end-June 1999 for the period May 2006 -June 2020, resulting ina reduction o fUS$97 million inNPV terms at decision point (Table 6). Executive Directors o f IBRDwill need to decide whether to grant a waiver o f the IBRDprepayment penalty that would normally be applied. The nominal assistance i s estimated at US$94 million from 2000 to 2011inrespect o f debt to IBRD and US$204 million for debt to IDA from 2006 to 2020, amounting to a total o fUS$298 million innominal debt relief inrespect of debts to the World Bank. 64. The AfricanDevelopmentBank(AfDB).Debtrelieffrom the AfDB amounts to US$79 million inNPV terms (Table 4). Ofthis amount, the AfDB has already provided US$38 million as interimrelief.39At completion point, the AfDB is assumed to provide the remaining amount 34 Interim assistancewas suspendedin2004 with the termination o f the original PRGF arrangement but has resumed in2005 with the approval ofanew PRGF arrangement. 35 The amount o f HIPC assistance to be disbursed at the completion point includes completion point interest, 36 InMarch 2003, interimrelief reached the ceiling ofone-third oftotal NPV ofHIPCrelief from the World Bank Group. 37 Cameroon is one o f three countries for which IDA needs to provide debt relief on IBRDdebt outstanding. This is due to the composition of World Bank debt service inthe medium-term, with 74 percent o f total World Bank debt service during 2000-06 attributable to IBRD loans. The other two countries are Honduras and C6te d'Ivoire. The approved debt relief modality i s outlined inparagraph 14 o f the paper "Heavily IndebtedPoor Countries (HIPC) Initiative: Note on modalities for Implementing HIPC Debt ReliefUnder the Enhanced Framework", IDA/R2000-4, January 10,2000. 38 See "Additions to IDA resources: FourteenthReplenishment (IDA14)-Working Together to achieve the Millennium Development Goals", March 10, 2005; and "Debt Sustainability and Financing Terms inIDA14: FurtherConsiderations on Issuesand Options," November 2004. 39 Interim assistancewas provided during October 2000-October 2003. Itwas suspended in October 2004 when the 40 percent ceiling of total AfDB HIPC reliefprovided as interim relief was reached. - 35 - o f reliefthrough an 80 percent reduction o f debt service on debt outstanding at end-June 1999, applied from July 2006 through to June 2009. 65. The EuropeanCommission(EC) andthe EIB.Combined debt relief from the EC/EIB amounts to US$18 million inNPV terms (Table 4). Interimrelief amountedto US$7.4 million in NPV terms (US$8.8 million innominal terms) and was deliveredthrough a cancellation of debt service falling due over the period from July 2002 to April 2006 on selected loans. At completion point, remaining relief will be provided through cancellation o f debt service on selected EC loans from July 2006 to October 2018. 66. Other multilateralcreditors.The modalities o fassistance for all other multilateral creditors are summarized inTable 4. Bilateraland commercialcreditors 67. ParisClub creditorshave agreed inprinciple to provide their share of assistance under the enhanced HIPC Initiative (US$866 million inNPV terms) (Tables 4 and 7). Interim assistance has been providedthrough a flow treatment under Cologne terms, as agreed on January 24, 2001.Inthe corresponding agreed minutes, participating Paris Club creditors declared their readiness inprinciple to provide their full share o f assistance through a stock o f debt operation at the completionpoint, provided Cameroonmaintained satisfactory relationswith the participating creditor countries. Bilateral agreements following the extension o fthe consolidation period to end-March 2006 have been signedwith most Paris Club creditors with the exception o f Belgium, Denmark, Germany, Italy, and UnitedKingdom, with whom Cameroon has exchanged draft agreernent~.~'Most creditors have also indicated that they would provide additional assistance beyond HIPC relief, estimated at about US$1,010 million inend- 2005 NPV terms. 68. Non-ParisClub bilateralcreditorsare expected to provide treatment comparable to that of the Paris Club, with assistance under the enhanced HIPC Initiative amounting to US$13.2 million inNPV terms. While only one creditor has committed to provide HIPC assistance, some creditors have already provided part o f their assumed share o f traditional debt relief.41To meet their obligations under the HIPC Initiative, all non-Paris Club creditors are expected to provide their share o f traditional debt relief, as well as enhanced HIPC assistance at the completion point. 69. Commercialcreditorsare also expected to provide treatment comparable to that o fthe Paris Club. InAugust 2003, Cameroon settled part o f its commercial debt through an IDA- supported buy-back operation at 14.5 percent o f face value, resulting ina debt cancellation o f US$870 million. As a result, participating commercial creditors delivered their full share o f 40 The consolidation period was extended following the approval o fthe current PRGF arrangement to March 2006. 4' The People's Republic o fChina and Saudi Arabia are among the non-Paris Club bilateralcreditors which provide debt relief on a case by case basis. Duringthe interim period, the People's Republic o f China cancelledinNovember 2001 some of Cameroon's obligations representing US$20.4 million inNPV terms, and Kuwait provided inJuly 2001 debt relief through a stock reschedulingunder ODA terms, representing US$0.2million inNPV terms. - 3 6 - HIPC assistance. Some non-participating creditors, however, put pressure on Cameroon to settle claims by resorting to litigation and other unilateral action.42 C. Creditor Participationinthe Multilateral DebtReliefInitiative 70. Contingent uponapproval o fthe completion point under the enhanced HIPC Initiative, Cameroon will qualify for additional debt relieffrom the IMF,IDA and the African Development Fund(AfDF) under the Multilateral Debt ReliefInitiative (MDRI).43 71. MDRIrelief to Cameroon would implya stock ofdebt reduction ofUS$1,124 millionin nominal terms at completion point (Table 8). This would result indebt service savings o f US$38.2 million on average over the period 2006-25. 72. Debt Relief from the IMP. The IMFwouldprovide debt reliefunder the MDRI amounting to SDR173.3 million (or US$248.2 million), covering the full stock o f debt owed to the IMF at end-2004 that remains outstanding at the completion point. O f this amount, SDR 149.3 millionwould be financed from the MDRI-I1Trust and the remainder fromthe HIPC Umbrella sub-account (Tables 5 and 8),44MDRIrelief from the Fundwould imply average debt service savings net o fprojected HIPC assistance o f SDR 20.1 million (or US$29 million) per year over the next 8 years. 73. Debt Relieffrom IDA. IDAwould provide debt reliefto Cameroon under the MDRI amounting to SDR 557 million (or US$794 million) innominal terms, to be delivered upon the effectiveness for IDA o f the MDRI,which i s expected at the beginningo f FY07 (Table 6).45 Debt reliefunder the MDRIwould cover all remaining debt service obligations on eligible IDA credit balances through the end o f maturity, after any debt service relief available under the enhanced HIPC Initiative. IDA would provide MDRIdebt forgiveness by irrevocably canceling the borrower's payment obligations underthe eligible credits. MDRIdebt relief from IDA would imply average debt service savings for Cameroon o f SDR 15.1 million (or US$21.5 million) per year over the next 37 years. This debt relief would decrease the stock o f debt owed to IDA by US$886 million on July 1,2006 (Table 8) and would correspondto a reduction inthe NPV of debt owed to IDA by US$383 million inNPV terms at completion point after HIPC assistance. 74. Debt Relieffrom the AfDF. The AfDF would provide debt reliefto Cameroon under the MDRIamountingto UA156.5 million(US$243 million)46innominal terms, starting onJuly 1, 2006.47This amount i s calculatedbased on debt disbursed as o f December 31, 2004 and still outstanding on July 1,2006. The debt stock cancellation would be delivered by forgiving Cameroon's post-completion-point repayment obligations in full. MDRIdebt relief from the AfDF would imply average debt service savings for Cameroon o fUS$5.1 million per year over 42Twenty-two commercial creditors, holding about 20 percent (US$240 million inclaims, including US$78 million principal) o f the total debt to commercial creditors inAugust 2003, didnot accept the buy-back deal, and some sold claims in the secondary market. Recently, four commercial creditors (Winslow Bank, Del Favero SPA, Sconset Ltd., and Grace Church Capital) have pursuedlegal recourse through litigation and seizure o f Cameroonian assets abroad. Inearly 2005, Winslow sued, andunder acourt ruling seized US$50 million from Cameroon's state oil company's deposits inFrance, while DelFavero froze the account o f the Cameroonian embassy inLondon. Five other commercial creditors have formally requested repayment. - 37 - the next 48 years. This debt relief would decreasethe NPV of debt owed to AfDF by US$91 million inNPV terms at completion point after HIPC assistance. D.UpdatedDebt SustainabilityAnalysis Debt sustainabilityat end-2005 75. The DSA includedinthe decisionpoint document was updated on the basis ofend-2005 loan-by-loan debt data; usingupdated exchange and interest rates (Table Based on 94 percent debt data rec~nciliation,~~Cameroon's nominal stock o f external debt reachedUS$6.2 billion at end-2005, compared with US$7.8 billion at end-June 1999 (Tables 11).Bilateral creditors accounted for 64 percent o ftotal debt, while multilateral and commercial creditors for 30 percent and 6 percent respectively. France, the World Bank (IBRD and IDA) and Germany remain Cameroon's largest creditors, accounting for 25 percent, 18 percent and 17 percent respectively o f total outstanding debt. 76. The NPV of Cameroon's externaldebt at end-2005, after full deliveryof the assistance committedunderthe HIPC Initiativeat the decisionpoint, is estimatedat US$2.2 billion, equivalentto 61 percentof exports,compared with a decision point projection of 109percent (Table 12). Taking into account bilateral debt reliefbeyondthe HIPC Initiative, the NPV o f debt i s further reduced to US$1.2 billion or 31percent o f exports. 77. The NPV of debt-to-exportsratioafter HIPC assistance is considerablylower than what was projectedat the time of the decisionpoint,mainlydue to the delay inreachingthe completionpoint, lower new borrowingandbetter exportperformancethan anticipatedat the time of the decision point(Table 12). At decision point, Cameroon was expected to reach 43Decisions to grant debt relief are taken by each institution individually, inaccordance with the specific implementation modalities adopted for each institution. For IDA, the Board o f Executive Directors approvedthe MDRIimplementation modalities on March28, 2006, andIDAis scheduled to start implementing the MDRIupon its effectiveness, which is expected to be as o f the beginning of FY07. The IMF started providing relief from January 1,2006. The AfDF i s expected to approve the modality o f implementing MDRIinApril 2006 (consideration by the Boardo f Governors is scheduled for May 2006), with implementation starting retroactively from January 1,2006. 44 The MDRIreliefwould come from the MDRI-I1Trust because the annual per capita income for Cameroon exceedsUS$380. 45This amount is calculated based on debt disbursed as ofDecember 31,2003 and still outstanding at the end o f FY2006, the fiscal year during which the country reaches its completion point. 46The cost o f MDRIfor the AfDF i s estimated using the UA/u.S. dollar exchange rate at end-December 2004 (UA/US$=1.55301). 47 According the AfDF implementation modality, each country reaching completion point would be entitled to MDRIrelieffrom thebeginningofthe calendar year following the completionpoint date. For 2006 only, countries reaching completion point inthe first 6 months of 2006 would be entitled to MDRIrelieffrom July lst 2006. 48The DSA covers public andpublicly guaranteed external debt outstanding and disbursed. 49 This corresponds to a full reconciliation o fmultilateral debt data and a 92 percent reconciliation o fbilateral and commercial debt data at end-2005. - 38 - the completion point inMay 2003. Because o f compounding, the nearly three-year delay in reaching the completion point means that the amount o fHIPC assistance required to reach the NPV o fdebt-to-exports ratio of 150percent at decision point has increased intoday's terms. As a result, the NPV of debt-to-exports ratio at decision point terms is reducedby about 31 percentage points. Lower borrowing than projected at the decision point accounts for about one thirdofthe total reductionintheNPV ofdebt-to-exports ratio. Inparticular, new borrowing from end-June 1999 to end-June 2005 was expected to amount to US$1.2 billion inend-June 1999 NPVterms accordingto projections at decisionpoint." Instead, from end-June 1999to end- December 2005, the NPV o f new borrowing amounted to only US$739 million in decision point terms. This reduction reflects the net effect o f lower borrowing and reduced conce~sionality.~~ Higher exports than projected at the decision point also account for about 25 percent ofthe reduction inthe NPV o f debt-to-exports ratio at end-2005. At decision point, the three year backward-looking average o f exports o f goods and services was projected to reachUS$3,292 million inFY05 or 12percent lower than the actual three-year backward-looking average o f US$3,692 calculated over 2003-05. Finally, the combined effect o f changes in discount and exchange rates used to calculate the N P V o f debt at decision and completionpoint (Table 10) increases the NPV o f debt by 9 percent at end-2005. DebtsustainabilityOutlook,2005-25 78. The macroeconomicframeworkunderpinningthe medium-to long-termdebt sustainabilityoutlookhasbeen revisedto take into account recent developments (Tables 13-14). Over the medium-term, the macroeconomic framework i s inline with the government's medium-term program supported under the current PRGF arrangement. Long-term assumptions are based on the latest WE0 prices, recent trends, and information provided by the authorities over sectoral strategies. The main elements o f the long-term macroeconomic framework underpinning the debt sustainability analysis are outlined inBox 5. 79. It is expected that growthwill be generatedprimarily from export agriculture, manufacturingandservices. Agriculture is projectedto grow at about 5 percent, influencedby strong demand inneighboring oil exporting countries; nevertheless improvements in transportation and communications are essential for achieving and sustaining this growth rate. Manufacturing currently hamperedby energy shortages, can grow considerably faster with improved energy supplies. The commercial services sector can also experience strong growth in the medium-term,drivenby developments intelecommunications; sustaining this growth inthe long term will hinge on adequate investment. Overall, real GDP growth is projected to grow on average by about 5.5 percent per year inthe long-term. ' OCameroon HIPC Debt Initiative: Decision Point Document, EBS/00/194 and IDAR2000-168, Table 8. Total net disbursementwas projected to amount to USs2.0 billion innominal terms, equally dividedbetween multilateral creditors andbilateral and commercial creditors. InNPV terms at decision point, net new disbursements were projected to amount to US$589 million from multilateral creditors and to US$604 million from bilateral and commercial creditors. 5 1Borrowing during the interimperiodwas expected to amount to about 4.2 percent o f GDP according to projections at the time of the decision point. Actual borrowing turnedout to be considerably lower, averaging about 0.8 percent o f GDP. The lower borrowing than projectedat the decision point reflects primarily slippages in program implementation, and administrative capacity constraints. - 39 - 80. While increasedpubliccapitalspending will providea stimulus to the economy and accelerate growthinthe medium-term,long-termgrowthwill depend on the pace of governance and structuralreforms.Investments ininfrastructure andhuman development are essential for long-term growth. To this end, governance reforms and concrete progress in addressing corruption will play a key role inattracting official development assistance, private investmentand know-how. Governance reforms can also act as a catalyst for reducing the cost of doing business and enhancing productivity growth, further stimulating growth. Trade liberalization and regional integration also provide opportunities for growth. 81, The full delivery of HIPC and MDRIdebt relief at the completionpointwould further reduce Cameroon's externalpublicdebt. InNPV terms, the stock o f debt would be reduced from US$5.7 billion at end-2005 to US$525 million at end-2006 (Table 15). Nominal debt service relief in2006 would amount to US$128 million. Ofthat amount MDRIwould total US$47 million. Box 5: Main Macroeconomic Assumptions, 2006-25 RealGDP growth i s expectedto accelerate to 6 percent in2011 reflecting economic stimulusfrom increased capital spending, and the implementationo f structural reforms under the PRGF-supported program. Over the long-term, growth in the non-oil economy i s expectedto stabilize at about 5.5 percent, while oil GDP will gradually decline. Investment i s expected to remain at about 21.5 percent o f GDP, a level considered to be supportive o f long-term economic growth. The averagenon-oil growth rate over the entire projectionperiod is 5.4 percent, slightly higher than the 10-year average o f 4.9 percent during 1995-2005. Inflation is assumed to hold steady at 2 percent over the long-term, inline with recent historical experience and reflecting the regional central bank's commitment to keep inflation under control. Fiscalpolicy would be supportive o f economic growth and poverty reduction, although over the medium-term the non-oil primary balance i s expected to deteriorate, reflecting considerable social and infrastructure needs. Government revenues are projected to decline over time as a result o f declining oil proceeds. Non-oil revenues are expected to rise from 12 percent o f GDP in2005 to 15 percent at the end o f the projection period, reflecting sustained implementation o f measures to strengthen tax and customs administrations. Government expenditureis expected to rise over the medium-term and then gradually decline to the more sustainable level o f 17 percent of GDP. This path i s consistent with a gradual increase incapital expenditure over the medium-term, control o f current spending growth, and a rise inpro-poor spending. Exports of goods and services are projected to gradually decline over time reflecting the decline inpetroleumexports. Non-oil exports inreal terms are projected to accelerate over the medium-term reflecting increasedinvestment inkey sectors of the economy (primarily services). Thereafter, they are expected to grow by an average o f 6.6 percent, somewhat higher than the average inrecent years. The share o f oil exports i s assumed to decline gradually from about 50 percent in 2005 to 11percent in2025. Imports of goodsand services will increase modestly over the medium-term before gradually declining to about 16 percent at the end of the projection period. Inreal terms, non-oil imports will accelerate inthe medium-term inline with non-oil GDP, and then decline to an average annual growth rate o f 4.8 percent over the outer period, consistent with the economy's needs. Current account deficit, includinggrants, is expectedto increase to about 4 percent o f GDP over the medium-term, and gradually improve thereafter. The deficit is expected to be financed through foreign direct investment and loans, a mixture of which will be from IDA and the rest from other creditors on less concessional terms. External borrowing i s expectedto rise gradually to 1.8 percent o f GDP in2015 (compared to an average o f 0.8 percent o f GDP during2001-05) and then to decline gradually to about 1percent by 2025. IDA borrowing is assumed to constitute 47 percent o f new borrowing, with the remainder originating from other multilateral and bilateral creditors on less concessionalterms. Assumingthat Cameroon will cross the IDA-only threshold in 2010, disbursements from the Bank will also be on less concessionalterms. - 40 - 82. Cameroon's externalpublicdebt is expectedto remainsustainablethroughout the projectionperiod(Table 16). After HIPC relief, the NPV of debt-to-export ratio for Cameroon i s projected to remain well below the average o f the 18 post-completion point HIPCs at end- 2004 (NPV o f debt-to-exports of 140percent), evenwhen assuming less concessional borrowing starting from 2011.52 Following enhanced HIPC assistance, as well as additional bilateral and MDRIreliefat the completionpoint, theNPV ofdebt-to-exports ratiowould drop from 153 percent at end-2005 to 13 percent at end-2006. It would subsequentlyrise to 96 percent by the end o f the projectionperiod. The NPV o f debt-to-GDP ratio53would decrease from 33 percent at end-2005 to 3 percent at end-2006. It i s expected to rise modestly over the medium- term while staying at about 13 percent inthe long-run. Finally, the NPV o f debt-to-revenue ratio54would decline from 194 percent at end-2005 to 17 percent in2006 and would average 83 percent in2016-25. The increase inthe NPV o f debt assumes that Cameroon would borrow on IDA "hardened" t e n d 5after 2010 when itsper capita income exceeds the IDA-only threshold. The grant element of new borrowing is assumedto decline from 41 percent on average during the period 2006- 10 to 35 percent thereafter. 83. Debt service is projectedto increaseover the medium-termreflectinginpart less concessionalnewborrowingandthe government's increasedfinancingneeds.After HIPC relief, annual debt service would average US$207 million on average during 2006-15, the equivalent o f less than 5 percent o f exports o f goods and services. This i s well below the average o f 7.3 percent for all 28 HIPCs that reached the decision point by end-2004.56After additional bilateral relief and MDRI, debt service would not exceed US$73 million on average during 2006-15, or 1.5 percent o f exports o f goods and services. During2016-25 debt service would increase to almost 4 percent o f exports o f goods and services.57 E.SensitivityAnalysis andLong-TermDebtSustainability 84. Cameroon's debt couldbecomeunsustainableinthe longruniffacedwith large adverseshocks (see below). Cameroonis expectedto be able to withstand adverse shocks over the medium-term,reflecting its favorable starting position. Nevertheless, over the long-term the NPV o fdebt-to-exports ratio is expected to exceed the HIPC threshold of 150percent inboth scenarios. Thus, the sensitivityanalysis underscores the importance o f pursuingexport diversification and prudentborrowing policies inorder to avoid potential risks for debt sustainability. ~~ 52 The G8Debt Relief Proposal: Preliminary Costsand Issues, August 4,2005, IDA!SecM2005-0414. 53 The country-specific sustainability threshold for the NPV o f debt to GDP is 40 percent under the Low Income Country DSA framework. 54 The country-specific sustainability threshold for the NPV o f debt to revenue is 250 percent under the Low Income Country DSA framework. 55 IDA credits at hardenedterms have 20 years ofmaturity and 10years of grace, compared to the normal IDA lending terms of40 years of maturity period, 10 years o f grace. Charge fee remains at 0.75 percent. 56 Heavily Indebted Poor Countries (HIPC)Initiative-Status of Implementation, August 19, 2005. 57 The country-specific sustainability threshold for the debt service ratio is 20 percent under the Low Income Country DSA framework. -41 - Scenario 1: Lower export prices 85. This scenario (Figure 2) assumes a permanent deterioration inthe prices o f Cameroon's three main exports: oil, cocoa, and aluminum. Inparticular, oil prices are assumed to fall by 40 percent relative to the baseline, while the prices o f cocoa and aluminum are assumed to decline by 20 percent relative to the baseline scenario.58The deterioration in export prices leads to a reduction innominal exports by about 24 percent in2006. The volume o f exports i s assumed to decline by 10 percent for cocoa and al~minum.~' As a result ofthese changes, real GDP growth falls only marginally relative to the baseline scenario as the contribution o f cocoa and aluminum inthe real economy i s rather small. The reduction inoil revenues and nominal GDP growth result ina net financing need, and the government i s assumed to resort to additional borrowing to finance its expenditures.As a result, the NPV o f debt-to-exports ratio rises rapidly and exceeds the HIPC threshold o f 150 percent by 2015. The ratio levels off toward the end o f the projection period, but it remains above 150 percent. Scenario 2: Lower growth 86. This scenario assumes a permanent reductioninreal non-oil GDP growth by one percentage point relative to the baseline scenario. The volume o f exports i s permanently reduced as a result o f a weakening o f confidence and reduced investment. Import volume adjusts inline with the reduction inreal GDP growth. As lower growth has a negative net effect on public finances, it i s assumed that the government closes the ensuing financing need through borrowing. Hence, the NPV o f debt-to-exports ratio rises steadily over time, exceeding the HIPC threshold of 150percent at the end o f the projection period. 87. The results o f the sensitivity analysis need to be viewed with caution as the size o f the shocks analyzed (primarily inthe case o fthe lower export prices shock) was intentionally large inorder to ascertain the worst-case scenario for debt sustainability. Nevertheless, given the current volatile environment for commodity prices (inparticular oil), these results highlightthe importance for the authorities to remain committed to the reformprocess and to follow prudent borrowing policies. 58The size o f these shocks was determined after examining the prices o f Cameroon's three main exports duringthe past twenty years. The objective was to determine how a return o f Cameroon's three main export prices-which currently are at an all-time high (oil, aluminum) or above average (cocoa beans)-to more representative levels would affect debt sustainability. Based on past experience, the average deviation (shock) from the mean is about 40 percent for oil and 20 percent for aluminum and coco beans. These shocks can therefore be viewed as representative ofthe shocks that Cameroon is likely to face inthe future. 59The volume o f oil exports does not respond to the oil price decline as Cameroon's oil reserves are fixed and no new investments are envisaged under the baseline. - 42 - IV. CONCLUSIONS 88. The staffsof the IMFand IDA consider that Cameroon'sperformanceon the conditionsestablishedin October2000 for reachingthe completionpointunder the enhancedHIPC Initiativehasbeenbroadlysatisfactory.The poverty reduction strategy is grounded ina broadrangingreform agenda, laid out inconsultation with civil society and embedded in a sound macroeconomic framework. The government has recently prepared its third PRSP annual progress report. Cameroon's implementation o fthe PRSP has been satisfactory. Following some slippages infiscal policy implementationin2004, a satisfactory track record of performance has been established under the current PRGF-supportedprogram. Cameroon has also made progress inimplementingits structural reform agenda as evidenced by the satisfactory conclusion o f the IDA Third Structural Adjustment Credit. Cameroonhas carried out a range of governance reforms which have focused on actions to fight corruption, improve public financial management, enhance the transparency o fpetroleum sector operations, strengthen the judicial sector, and enhance the participation o f civil society inpublic affairs. These reforms took off slowly but the pace o f implementation has accelerated inthe last two years. Regardingthe completion point triggers, the staffs recommendthat a waiver be granted on the establishment o f the water regulatory agency. The government has satisfactorily implementedits education and health strategies as attested by the improvement inkey social indicators. 89. Achievingandsustainingstrongeconomic growthwill require, in additionto maintaininga sound macroeconomicframework,sustainedeffort on structuraland governancereforms.Itwill require that the government sustain the recent accelerated pace o f implementation of reforms, increase and implement better its public investment program, strengthen partnership with donors and work with the other member countries of CEMAC to make the institution a more effective instrument for development. Coordinated technical assistance from the Donor Platform on Public Finance will reinforce ongoing efforts to strengthen government's expenditure management system, particularly the budget planning and programming usingthe MTEF approach to consolidate the alignment o f budget appropriations with the Poverty Reduction Strategy. 90. The staffs considerthat with enhanced HIPC assistance, Cameroonwill achieve a sustainabledebt profileas definedunder the Initiative.Assurances have been obtained regarding participation inthe enhanced HIPC Initiative from creditors representingmore than 94 percent o f the relief to be provided. After full delivery o f the enhanced HIPC Initiative and additional debt relief from some Paris Club creditors and MDRI,the NPV o f debt to export ratio would be reduced to about 13 percent in2006. Nevertheless, Cameroon's economy remains vulnerable to external shocks. The sensitivity analysis shows that Cameroon's external debt sustainability could bejeopardized by a failure to implement strong macroeconomic and structural reformpolicies, supported by prudent external debt management. 91, Importantchallengesandrisksremainon Cameroon's developmentpath.First, pressures for higher spending inthe post-completion point period, financed by external borrowing, couldjeopardize macroeconomic sustainability, undermine debt sustainability, and endanger external competitiveness. Second, uncertainties continue to exist about the projected commodity output and prices; a sharp fall inthese prices couldjeopardize the sustainability o f - 43 - the external position. Third, the government needsto maintain the pace o f governance and structural reforms beyondthe completion point to attract private and official resources inorder to sustain strong economic growth and reduce poverty. 92. Inlight ofthe above, the staffs ofthe IMFandIDArecommendthat the Executive Directors determine that Cameroon has reached the completion point under the enhanced HIPC Initiative. v. ISSUES FORDISCUSSION 93. Executive Directors may wish to focus on the following issues and questions: 0 Completionpoint:Do Directors agreethat Cameroon has met all but one floating conditions for reaching the completion point underthe enhanced HIPC Initiative, as established at the time o fthe decisionpoint? 0 Datacorrection:Do Directors agree with staffs' recommendationthat the proposed revision inthe stock o f debt inNPV terms warrants a revision inthe amount o fHIPC Initiative assistance? 0 MDRI:Do IMFDirectors agree that Cameroonqualifies for anamount ofdebtreliefby the Fundequal to SDR 173.3 million, o f which SDR 149.3 million would be financed from the MDRI-I1Trust and the rest from Cameroon's HIPC Umbrella sub-account? D o Directors agree that the authorities have adequate monitoring mechanisms to ensure that debt reliefis usedaccording to its intendedpurposes? 0 Creditor participation:Do Directors agree that sufficient assurances have been given by Cameroon's creditors to commit HIPC assistance to Cameroon on an irrevocable basis? 0 Debt Sustainability:Do Directors agree with staffs' assessment that Cameroon's debt sustainability i s likely to be maintained over the medium- and long-term? D o Directors share the staffs' assessment regarding possible risks that may emerge ifthe authorities do not actively pursuepolicies that encourage export diversification and prudent fiscal and debt management policies? 0 Do the Directors agree that Cameroon should continue to seek debt relief from its non- Paris Club creditors within the framework o f the HIPC Initiative and that the staffs should continue to monitor the delivery o f the debt relief from all creditors? 44 Figure 1. Cameroon: External Debt and Debt Service Indicators for Medium- and Long-Term Public Sector Debt, 2005-25 (In percent) N e t Present Value o f External Debt-to-Exports - -- 180 - - - - After traditional debt reliefmechanism After EnhancedHIPC assistance After bilateral debt reliefbeyond HIPC assistance 165 After MDRIandbilateral debt relief beyond HIPC assistance 1/ HIPC threshold line: I50 percent 135 120 105 90 75 60 45 30 15 0 ' 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 9 . - -- - -After traditional debt relief mechanism After Enhanced HIPC assistance After bilateral debt reliefbeyond HIPC assistance - I l s - m 8 - \ - After MDRIand bilateral debt relief beyond HIPC assistance l/ I- --- 2 - " 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 Sources: Cameroonian authorities; and IDA and IMF staff estimates and projections. 1/Theprojected NPVof debt and debt service ratio after MDRIassumes MDRIimplementation modalities presented in "ADF-X: Additions to ADF Resources Financing the Multilateral Debt Relief Initiative," expected to be approved by the AfDF Board o f Directors in M a y 2006. - 45 - Figure2. Cameroon: Sensitivity Analysis, 2006-25 1/ NPV ofExternalDebt-to-Exports - 240 I I 220 L -Baseline Scenario Ahematye Scenario 1: Lower ex ort prices Alternative Scenano 2: Lower G 8 P growth 200 c HIPC threshold / # - - - - - 180 0 k / 160 1 HIPC threshold h e l5Opercent 0 0 140 r 0 0 120 r 0 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 Debt Service-to-Exports 14 -__ 1 -Baseline -- Scenario Alternative Scenario 1: Lower export pnces S I l2 t Alternative Scenario 2: Lower GDP growth 0 I I 0 0 10 I 0 I / / 8 - 0 0 I 0 6 L 0 I I 0 I 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 Sources: Cameroonian authorities; and Bank-Fund staff estimates and projections. l/The projected NPV of debt and debt service ratio after MDRI assumes MDRIimplementationmodalities presented in"ADF-X: Additions to ADF Resources Financing the Multilateral Debt Relief Initiative," expected to be approved by the AfDF Board of Directors in May 2006. Figure3. Cameroon: ImpliedSavings under the MDRIl/ (Inmillions ofU S dollars) 45 ! I BIMF IDA Cd AfDF Sources: IMFandWorldBankstaffestimates, 1/ Assumes MDRIimplementationmodalities presentedin "ADF-X: Additionsto ADF Resources Financingthe MultilateralDebt ReliefInitiative," expectedto be approvedby the AfDF Boardof Directors inMay2006. - 47 - Table 2. Cameroon: RevisedNominal Stocks andNet Present Value o f Debt at Decision Point by Creditor Groups as o f end-June, 1999 l/ Nominal Debt Stock at End-June 1999 NPV of Debt After Rescheduling21 At DecisionPoint RevisedAt At DecisionPoint RevisedAt CompletionPoint CompletionPoint US$million Percent US$million Percent of total of total US$ million Percent US$ million Percent of total of total Total 7,802 IO0 7,819 100 4,691 100 4,693 100 Multilateral 1,642 21 1,641 21 1,206 26 1,195 25 African DevelopmentBank Group 304 4 304 4 293 6 292 6 African Development Bank 230 3 231 3 262 6 262 6 African DevelopmentFund 74 1 74 1 30 I 30 1 World Bank Group 1,023 13 1,018 13 666 14 653 14 International Bank for Reconstructionand Development 294 4 294 4 307 7 307 7 International DevelopmentAssociation 728 9 724 9 359 8 345 7 International MonetaryFund 176 2 176 2 137 3 137 3 International Fundfor Agricultural Development 15 0 15 0 1 1 0 12 0 Arab Bank for Economic Development inAfrica 7 0 7 0 7 0 7 0 CentralAfrican States DevelopmentBank 3 0 6 0 3 0 6 0 EuropeanUnion 94 1 94 I 68 1 68 1 EuropeanInvestmentBank 20 0 20 0 20 0 20 0 EuropeanDevelopment Fund 74 1 74 1 47 1 47 1 OPEC Fund 1 0 1 0 1 0 1 0 Islamic DevelopmentBank 7 0 6 0 7 0 6 0 Nordic Investment Bank 13 0 13 0 13 0 13 0 Paris Club 5,365 69 5,368 69 3,205 68 3,207 68 Post-cutoffdate 1,276 16 1,275 16 1,094 23 1,093 23 Pre-cutoffdate 4,088 52 4,092 52 2,111 45 2,115 45 ODA 834 1 1 851 11 562 12 564 12 Non-ODA 3,254 42 3,239 41 1,549 33 1,548 33 by country: Austria 512 7 512 7 267 6 268 6 Belgium 206 3 206 3 124 3 124 3 Canada 309 4 309 4 128 3 127 3 Denmark 118 2 118 2 59 1 59 1 Finland 1 0 1 0 1 0 1 0 France 1,955 25 1,959 25 1,548 33 1,55 1 33 Germany 1,410 18 1,410 18 536 11 535 11 Italy 199 3 199 3 130 3 130 3 Japan 34 0 34 0 35 1 35 1 Netherlands 58 1 58 1 27 1 27 1 Spain 100 1 100 1 91 2 91 2 Sweden 124 2 124 2 48 1 48 1 Switzerland 47 1 47 1 32 1 32 1 UnitedKingdom 209 3 209 3 132 3 132 3 UnitedStates 82 1 82 1 48 1 48 1 Other official bilateral 99 1 100 1 49 1 49 1 Post-cutoffdate 23 0 24 0 23 0 23 0 Pre-cutoffdate 76 1 76 1 26 1 27 1 ODA 51 1 51 1 20 0 20 0 Non-ODA 25 0 25 0 6 0 6 0 by country: The People'sRepublic of China 51 1 51 1 18 0 18 0 Kuwait 25 0 25 0 21 0 21 0 Saudi Arabia 24 0 24 0 I O 0 I O 0 Commercial 696 9 711 9 230 5 242 5 Sources: Cameroonianauthoritiesand staffestimates. I/Informationbasedonlatestdataavailableatcompletionpoint. 21Stock of debt operation on Naples terms from officialbilateraland commercialcreditors, - 49 - Table 4. Cameroon: Status o f Creditor ParticipationUnder the Enhanced HIPC Initiative Debt Relief in Percentageof SatisfactoryReply NPV Terms Total to Participatein Modalities to Deliver Debt Relief (US$mil.) Assistance Initiative The World Bank Group (IDAIIBRD) 176 14 Yes Interim debt reliefprovided from Oct. 2000 to March 2003 in the form of grants equal to 45% of IBRD debt service falling due. At the Completion Point an IDA debt reliefgrant will repay outstanding IBRD debt and 57% ofthe IDA debt service falling due will be reducedbetweenthe Completion Point and June 2020. International Monetary Fund 37 3 Yes Assistanceto be deliveredthrough partial paymentof debt servicefalling due to IMF by the PRGF-HIPC Trust. Interim reliefstartedas ofOctober 2000. The share of debt service due on current IMF obligations coveredby total IMF assistanceaverages21% over 2000-2010. African Development Bank Group 79 6 Yes Interim debt reliefprovided from Oct. 2000 to Oct. 2003. Completion point (AtDB/AtDF) assistancewould cover 80% ofthe debt service falling due through June 2009. EuropeanUnion(EDFIEIB) 18 1 Yes Interim debt reliefprovided on identified EDF and EIB loans. Debt relief at completion point will be providedthrough grants to pay off EDF loans. International Fund for Agricultural 3 0 Yes 100%debt service reliefuntil NPV target is achieved. Relief will begin at Development the Completion Point. Arab Bank for Economic 2 0 Yes Concessional clearanceofarrears; concessionalreschedulingof debt and Development in Africa reduction of interestrates. Central African StatesDevelopment 2 0 Pending Bank OPEC Fund 0 Yes Restructuringof existing andprojected debt Islamic DevelopmentBank 0 Yes Reschedulingofdebt over amaximum period of 25 years Nordic InvestmentBank 0 Yes NIB will makea country specific contribution from Completion Point. Total multilateral 322 25 ParisClub creditors 866 68 Yes Interim assistance is being provided through Cologne flow, and some creditors have cancelled 100%of flow during interim period. Stock of debt operationunder cologne terms (90 percent inNPV reduction) is expectedat completion point. Non-Paris Club creditors 13 Some The People's Republic of China has provided debt relief on abilateral basis People's Republic of China 5 No under their own terms. They have alreadycancelledinNovember 2001 some of Cameroon'sobligations which representedasubstantialshare of traditional debtrelief. Kuwait has agreedto provide HIPC assistance to Cameroon. InJuly 2001, Kuwait Yes creditor provided debt reliefthrough a stock reschedulingunder ODA terms which countedas part of their assumed share of traditional debt relief. Saudi Arabia No SaudiArabia agreed to an arrearsrepaymentplan in 2000 but has not indicated its intention to provide HlPC debt reliefto Cameroon. InAugust 2003, an IDA buyback operation was acceptedby some Commercial creditors 65 5 Some creditors which delivered their full share of HlPC assistance. The remaining creditors still refusethe standingbuyback offer andhavenot provide any debt relief. Total bilateral and commercial 944 15 Total 1,267 100 Sources: Cameroonian authorities, and staff estimates. - 5 0 - f B x 0 I q ... n x B x n 0 x n n x 2 n P- 0 B 2 0 P- a T i y F - 0 0 0 0 x 0 0 ' 0 ' 12 2 0 0 9 2 N 0 'I rl 6 - 5 1 - - 52 - - 53 - Table 8. Cameroon: Stock of DebtReliefunderMDRIand HIPC at the Completion Point 1/ (InmillionsofUS.dollars) MDRI HIPC Total IMF 213 34 247 IDA 721 165 886 AfDF 190 2 192 Total 1,124 201 1,325 Sources: Bank-Fundstaffestimates. 1/ Assumes MDRIimplementationmodalitiespresentedin"ADF-X: Additionsto ADF Resources Financingthe MultilateralDebt ReliefInitiative,"expectedto be approvedby the AfDF Board of Directors inMay 2006. - 54 - Table 9. Cameroon:ProjectedAdditionalResourcesAvailableResultingfrom the IMF MDRIDebtRelief 1/ (In millions of SDRs) 2006 2007 2008 2009 2010 2011 2012 2013 2014 Total May-Dec. A. Principal 21.2 40.4 37.1 29.4 21.3 12.7 8.0 3.2 - 173.3 B.Interest21 0.9 0.7 0.5 0.3 0.2 0.1 0.0 0.0 2.6 C. ProjectedHIPC Assistance 5.8 9.5 7.3 2.1 0.4 - 25.1 D.Net savings (D=A+B-C) 16.3 31.5 30.3 27.7 21.1 12.8 8.0 3.2 - 150.8 Sources: IMF Finance Department. liAssumingCameroonisgoingtoreachHIPCcompletionpointatend-April2006. 21EstimatedPRGF principal and interestrepayments associatedwith disbursements madeprior to end-2004. - 55 - Table 10.Cameroon: Comparison o f Discount Rate and Exchange Rate Assumptions Discount Rates l / 2 Exchange Rates (inpercent per annum) (US dollar per currency) At decision point At completionpoint At decision point At completion point End-June 1999 End-December 2005 End-June 1999 End-December 2005 Currency Austrian schilling 4.61 3.95 0.08 0.09 Belgian franc 4.61 3.95 0.03 0.03 Canadian dollar 6.02 4.69 0.68 0.86 CFA franc 4.61 3.95 0.00 0.00 Swiss franc 3.74 2.76 0.64 0.76 Chinese yuan 4.87 4.30 0.12 0.12 Deutsche mark 4.61 3.95 0.53 0.60 Danishkrone 4.81 3.88 0.14 0.16 Euro 4.61 3.95 1.03 1.18 Finnishmarkaa 4.61 3.95 0.17 0.20 French franc 4.61 3.95 0.16 0.18 U.K.pound 5.82 5.28 1.57 1.72 Italian lira 4.61 3.95 0.00 0.00 Japanese yen 2.32 1.91 0.01 0.01 Kuwaiti dinar 4.87 5.08 3.26 3.42 Dutch guilder 4.61 3.95 0.47 0.54 Norwegiankronor 6.02 4.17 0.13 0.15 Saudi Arabian riyal 4.87 4.30 0.27 0.27 Special Drawing Rights 4.87 4.30 1.34 1.43 US.dollar 6.00 5.08 1.oo 1.oo Sources: EuropeanCentral Bank; IMF, International Financial Statistics ;OECD; andstaff estimates. I/ discountratesusedaretheaveragecommercialinterestreferencerates(CIRRs)fortherespectivecurrenciesoverthesix-month The periodending in December2005 for the completionpoint andin June 1999 for the decisionpoint. 21For all Euro area currencies, the Euro CIRR i s used. For the Kuwaiti Dinar, the US dollar CIRR i s usedfor completionpoint calculations (comparedto the decisionpoint calculations, when the SDR CIRR was used), inaccordance to the explicit pegof the Dinar to the US dollar in the beginningof 2003. For all currencies for which the CIRRs are not available, the SDR discount rate is used as aproxy. - 56 - Table 11. Cameroon: Nominal andNet Present Value of ExternalDebt outstanding at End-December 2005 li (Inmillions of US$,unless otherwise indicated) Legal Situation21 Net PresentValue o f Debt 31 Nominal Percent NPV of Percent After enhanced After additional After additional Debt of total debt of total HIPC relief bilateral relief bilateral relief (inpercent of total debt) Total 6,200 100 5,671 IO0 2,241 1,154 100 Multilateral 1,847 30 1,277 23 988 988 86 African DevelopmentBank Group 310 5 220 4 168 168 15 African Development Bank 100 2 109 2 61 61 5 African DevelopmentFund 210 3 111 2 I08 108 9 World Bank Group 1,112 18 686 12 516 516 45 International Bank for Reconstructionand Development 84 1 82 1 457 457 40 International DevelopmentAssociation 1,028 17 604 11 55 55 5 International Monetary Fund 272 4 249 4 212 212 18 International Fundfor Agricultural Development 19 0 13 0 9 9 1 Arab Bank for Economic DevelopmentinAfrica 4 0 3 0 0 0 0 EuropeanUnion 98 2 19 1 62 62 5 OPEC Fund 4 0 3 0 3 3 0 Islamic DevelopmentBank 25 0 20 0 18 18 2 Nordic Investment Bank 3 0 3 0 0 Paris Club 3,914 63 3,970 70 1,209 121 11 Post-cutoff date 1,071 17 976 17 870 27 2 Pre-cutoff date 2,844 46 2,994 53 339 94 8 ODA 696 I 1 655 12 115 27 2 Non-ODA 2,148 35 2,338 41 224 67 6 by country: Austria 353 6 343 6 10 I O 1 Belgium 164 3 166 3 15 5 0 Canada 190 3 196 3 11 11 I Denmark 71 1 67 1 8 2 0 France 1,551 25 1,576 28 858 24 2 Germany 1,080 17 1,132 20 224 25 2 Italy 123 2 115 2 25 4 0 Japan 71 1 75 1 19 8 1 Netherlands 14 0 15 0 4 0 0 Spain 32 1 29 1 27 27 2 Sweden 65 1 61 1 1 1 0 Switzerland 33 1 29 1 1 I 0 United Kingdom 136 2 133 2 4 4 0 United States 32 1 33 1 1 1 0 Other official bilateral 63 1 48 1 4 4 0 Post-cutoff date 33 1 25 0 3 2 0 Pre-cutoff date 31 0 23 0 2 2 0 ODA 31 0 23 0 2 2 0 Non-ODA 0 0 by country: China 43 1 34 1 4 3 0 Kuwait 13 0 8 0 0 0 0 SaudiArabia 7 0 6 0 1 1 0 Commercial 376 6 376 7 40 40 3 Sources:Cameroonian authorities and staff estimates. I/Figuresarebasedondataasofend-2005. 21Includes the 1995 and 1997 Naples flows as well as the 2001 Cologne flow and the 2003 IDA buyback. 31 Assumes full deliveryof HlPC assistance as ofend-2005. - 57 - Table 12. Cameroon: Breakdown of the DecreaseofNPV of Debt-to-Export Ratio as of end-2005 11 Percentage Percent of Points Total NPV o f debt-to-exports ratio (as projected at Decision Point) 108.6 NPV of debt-to-exports ratio (actual) 60.7 Total increase -47.9 100 1. Due to changes in the parameters 8.9 -19 01w due to changes in the discountrates 3.3 -7 01w due to changes inthe exchangerates 5.6 -12 2. Due to unanticipated new borrowing -13.8 29 o/w due to lower than expected disbursements -23.6 49 01w due to lowerr concessionality of the loans 9.8 -21 3. Due to changes in exports -11.8 25 5. Other factors 2/ -31.3 65 Memorandumitem: NPV of debt after HIPC assistanceas projected in the decision point document 31 3576.3 NPV of debt after HIPC assistanceas estimated at completion point 41 2241.4 Projected exports inthe decision point document 51 3291.6 Actual exports 51 3692.4 Sources: Bank-Fundstaff estimates. I1NPV of debt-to-exports ratio after enhancedHIPC assistance. 21Due to revisions inthe end-June 99 database and changes inthe timing and mechanismsof delivery of assistancecomparedto the assumptions in the decision point projections (mainly due to delays inreaching the Completion Point). 31At decision point terms, at end fiscal year 1998199. 41At completion point terms, at end-2005. 51Three-year backward looking average (2003-05). - 58 - Table 13. Cameroon: Selected Economic and Financial Indicators, 2001-09 I / 2001 2002 2003 2004 2005 2006 2007 2008 2009 Est. Prog. Est. Prog. Pro]. Proj. Proj. Proj. (Annual percentagechanges, unless otherwise mdmted) National income and prices GDP at constant prices 4.5 4.0 4.0 3.7 2.8 2.6 4.2 4.2 4.3 4.3 5.1 Oil -4.0 -4.4 -5.0 -9.3 -9.0 -9.7 6.0 6.1 2.7 -8.2 -3.0 Non-oil 5.5 4.9 4.9 4.9 3.7 3.5 4.1 4.1 4.5 5.1 5.6 GDP deflator 2.2 3.2 0.7 1.1 1.7 4.8 2.9 2.3 0.7 1.7 1.8 Consumer prices (12-month average) 2.8 2.8 0.6 0.3 1.3 2.0 1.8 2.6 1.0 2.1 2.0 Nominal GDP.(in billions ofCFA francs) 6,837 7,583 7,946 8,334 8,757 8,959 9,393 9,546 10,033 10,638 11,381 Oil 608 535 486 54I 618 714 752 788 696 614 578 Non-oil 6,229 7,048 7,460 7,792 8,139 8,246 8,642 8,758 9,337 10.024 10.803 011 output (tn thousandsofbarrels a day) II4 102 98 89 82 82 88 88 89 82 79 External trade Export volume 2.5 -7.0 6.9 1.5 -5.3 4.6 6.2 5.8 4.0 2.2 4.1 Ofwhich : Non-oil sector 4.I -6.6 12.3 5.9 -3.7 -3.6 4.8 4.8 4.9 5.4 5.9 Import volume 12.5 1.9 -0.6 11.7 1.0 0.7 2.8 6.0 2.3 2.7 3.3 Average oil export price (U.S. dollars per barrel) 25.5 23.6 27.3 34.9 45.3 50.4 48.0 49.2 43.3 42.0 41.0 Nominal effective exchange rate -2.8 6.6 4.I 1.6 ,.. -3.3 Real effective exchangerate 4.9 5.8 1.9 0.4 ... -2.0 Terms o f trade 4.5 0.0 -0.8 -1.3 9.0 15.1 4.9 3.1 -7.6 -4.9 -3.8 Non-oil export price index (in CFA francs) 3.4 2.8 -5.5 -6.1 7.8 6.2 5.4 8.5 -0.2 0.2 -3.2 Money and credit (end ofpenod) Net domestic assets 21 4.1 4.1 I.8 0.3 1.1 -5.3 2.7 5.4 3.3 4.6 3.3 Net credit to the public sector 21 0.6 1.0 -0.6 0.1 -0.7 -8.7 -0.9 1.6 -0.7 0.4 -0.9 Credit to the private sector 8.7 11.6 8.9 I.4 6.0 109 7.0 7.2 7.7 8.0 8.0 Broad money (M2) 17.9 18.3 -0.9 7.3 4.7 4.2 9.0 9.7 6.0 7.0 6.I Velocity (GDPlaverage M2) 6.0 6.0 5.8 5.8 5 9 6.0 6.2 5 8 5.7 5.7 5.7 Central government Operations Total revenue -6.I 0.5 3.6 -0.4 16.7 21.8 12.8 9.0 2.7 2.7 5.6 Ofwhich : Non-ail revenue 1.3 -2.8 10.4 -0.7 15.1 17.3 6.4 5.7 8.8 7.4 9.7 Total expenditure 1.8 0.2 2.4 9.2 0.2 -4.0 19.4 25.9 6. I 8.4 8.9 (In percent of GDP, unless otherwise indicated) Gmss national savings 14.9 14.6 16.3 15.5 17.4 18.1 19.6 20.1 19.6 18.8 18.6 Gross domestic investment 18.6 19.8 18.3 18.9 19.8 19.7 20.7 21.5 21.5 21.5 21.5 Central government operations Total revenue (excluding grants) 19.4 16.2 16.0 15.2 16.9 17.2 17.8 17.6 17.2 16.7 16.4 Oil revenue 6.8 4.9 4.1 3.9 4.5 4.9 5.5 5.4 4.6 3.8 3.3 Non-oil revenue 12.6 11.3 11.9 11.3 12.4 12.3 12.3 12.2 12.7 12.8 13.1 Non-oil revenue (in percent of non-oil GDP) 13.8 12.2 12.7 12.1 13.3 13.4 13.3 13.3 13.6 13.6 13.9 Total expendimre 17.2 15.7 15.3 16.0 15.3 14.3 17.0 16.9 17.0 17.4 17.7 Noninterest expenditure 3/ 12.0 12.4 12.4 13.1 12.5 12.3 13.4 13.4 14.7 15.0 15.4 Capital expenditure 41 2.6 2.0 I.9 1.9 2.4 2.3 3.7 3.7 4.0 4.6 4.9 Fiscal balance (excluding net changes in arrears) Excluding grants 2.2 0.5 0.7 -0.8 1.6 3.0 0.7 0.8 0.2 -0.7 -1.2 Includinggrants 2.6 1.8 1.4 -0.5 2.0 3.5 1.2 1.4 0.6 -0.4 -1.0 Primary balance 51 6.5 3.5 3.4 1.9 3.9 4.9 3.4 3.3 2.2 I.4 0.9 Non-oil primary balance (in percent ofnon-oil GDP) S I 0.I -1.5 -0.7 -2.1 -0.7 0.0 -2.3 -2.3 -2.5 -2.6 -2.5 External sector Current account balance (including grants) -3.7 -5.2 -2.0 -3.4 -2.4 -1.5 -1.2 -1.4 -1.9 -2.7 -2.9 Gross official reserves 5.7 11.3 8.5 9.5 9.1 8.7 9.9 10.9 9.4 11.1 10.1 (In percent of exports ofgoods and services, unless otherwise indicated) NPV o f external debt after HIPC, bilateral reliefbeyond HIPC. and MDRl i6 ... 25.7 ... 10.3 ... 10.6 13.4 16.8 20.3 External debt service 71 10.1 10.0 8.7 7.0 6.7 6.4 3.6 3.6 0.9 1.0 1.3 External debt service (as a percent of government revenue) 71 15.7 15.5 13.0 10.8 9.7 9.2 4.8 5.2 1.0 1.2 I.5 Sources: Cameroonian authorities and IMF staff estimates and projections. liDatafor2001refertothefiscalyear2000101 21 In percent of broad money at the beginning o f the period. 31 Excluding foreign-financed investment, restructuring expenditure, and separation grants. 41 Excludingrestructuring expenditure. 51 Excluding external grants and foreign-financed investment. 61 NPVs calculated using the LIC DSA methodology developed in 2004. 7i Actual payments through 2004 and atler all expected debt relief from 2006 onward. - 5 9 - - 60 - c,m m d h h 0 N h Q 0 0 N b Q - m - - d d o n n c c r m o m - n n n m = r N N 0,'- 13 m N - - N d - \ m - .I A - N m I I - 61 - vi c;1 50 N vi 0 0 IN 0 vi N 0 -o ? ? ? ? ? - 2o N Z m b m r . N 0 ? ? ' 4 ? ? ? N 3 c- r m a m m m N o \ h vi c 0 N m y ? ? : : m m m m m v i v i h -x h E .-02 2 U bl M Q E - 62 - b v i o Q o m N v i N - - vi t U8 84 - 63 - - 64 - Table 19. HIPC Initiative:Statusof Country Cases ConsideredUnderthe Initiative, March 14,2006 Target EstimatedTotal NPV of Debt-to- AssistanceLevels I/ Percentage Nominal Debt Decision Completion Gov. (In millions of US.dollars, present value) Reduction ServiceRelief Country Point Point Exports revenue Bilateral and Multi- World in NPV of (Inmillions of (in percent) Total commercial lateral IMF Bank Debt 21 U.S.dollars) Completion point reached under enhanced framework Benin Jul. 00 Mar. 03 150 265 77 189 24 84 31 460 Bolivia 1,302 425 876 84 194 2,060 originalframework Sep. 97 Sep. 98 225 448 157 291 29 54 14 760 enhancedframework Feb. 00 Jun. 01 150 854 268 585 55 140 30 1,300 Burkina Faso 553 83 469 57 231 930 originalJramework Sep. 97 Jul 00 205 229 32 I96 22 91 27 400 enhancedframework Jul. 00 Apr. 02 I50 195 35 161 22 79 30 300 lopping-up Apr. 02 150 129 16 112 14 61 24 230 Ethiopia 1,982 637 1,315 60 832 3,275 enhancedframework Nov. 01 Apr. 04 150 1.275 482 763 34 463 47 1.941 lopping-up Apr. 04 150 707 155 552 26 369 31 1,334 Ghana Feb. 02 1ul.04 I44 250 2,186 1,084 1,102 I12 781 56 3,500 Guyana 591 223 367 75 68 1,354 originalframework Dec. 97 May 99 107 280 256 91 I65 35 27 24 634 enhancedframework Nov. 00 Dec-03 150 250 335 132 202 40 41 40 719 Honduras Jul. 00 Mar-05 IIO 250 556 215 340 30 98 18 1,000 Madagascar Dec. 00 Ocr-04 150 836 474 362 19 252 40 1,900 Mali 539 I69 370 59 185 895 originalJramework Sep. 98 Sep.00 200 121 37 84 14 43 9 220 enhoncedframework Sep. 00 Mar. 03 I50 417 132 285 45 143 29 675 Mauritania Feb.00 Jun. 02 137 250 622 261 361 47 100 50 1,100 Mozambique 2,023 1,270 753 143 443 4,300 originalframework Apr. 98 Jun. 99 200 1,717 1.076 641 125 381 63 3,700 eirhaiicedframework Apr. 00 Sep. 01 I50 306 194 112 18 62 27 600 Nicaragua Dec. 00 Jan. 04 150 3,308 2,175 1,134 82 191 73 4,500 Niger 663 235 428 42 240 1,190 enhancedJramework Dec. 00 Apr. 04 I50 521 21 I 309 28 170 53 944 lopping-up Apr. 04 150 143 23 119 14 70 25 246 Rwanda 696 65 63 1 63 383 1,316 enhancedframework Dec. 00 Apr-05 150 452 56 397 44 228 71 839 lopping-up Apr-05 I50 243 9 235 20 154 53 477 Senegal Jun. 00 Apr. 04 133 250 488 212 276 45 124 19 850 Tanzania Apr. 00 Nov. 01 150 2,026 1,006 1,020 120 695 54 3,000 Uganda 1,003 183 820 160 517 1,950 originalframework Apr. 97 Apr. 98 202 347 73 274 69 160 20 650 enhancedframework Feb. 00 May 00 I50 656 110 546 91 357 37 1,300 Zambia Dec. 00 Apr-05 150 2,499 1,168 1,331 602 493 63 3,900 Decision point reached under enhanced framework Burundi Aug. 05 Floating 150 826 124 701 28 425 92 1,465 Cameroon Oct. 00 FIoating 150 1,260 874 324 37 179 27 2,800 Chad May. 01 Floating 150 I70 35 134 18 68 30 260 Congo, Democratic Rep. of Jul. 03 Floating I50 6,3 1I 3,837 2,474 472 83 I 80 10,389 Congo Rep. of Mar. 06 FIoating 250 1,679 1,561 118 8 49 32 2,881 Gambia, The Dec. 00 FIoating 150 67 17 49 2 22 21 90 Guinea Dec. 00 FIoating 150 545 215 328 31 152 32 800 Guinea-Bissau Dec. 00 Floating I50 416 212 204 12 93 85 790 Malawi Dec. 00 Floating 150 643 163 480 30 331 44 1,000 SZo Tome and Principe Dec. 00 FIoating 150 97 29 68 24 83 200 SierraLeone Mar. 02 Floating 150 600 205 354 123 122 80 950 Decision point reachedunder original framework Cdte d'lvoire Mar. 98 31 141 280 345 163 182 23 91 6 41 800 Total assistance providedlcommitted 34,749 17,234 17,379 2,588 51 8,205 59,104 Preliminary HIPC document issued Cdte d'lvoire 61 ... 91 250 2,569 1,027 918 166 438 37 3,900 Sources:IMF and World Bank Board decisions,completion point documents, decisionpoint documents,preliminary HIPC documents,and staffcalculations. I/Assistancelevelsareatcountries'respectivedecisionorcompletionpoints,asapplicable. 2/ In percent of the net present value ofdebt at the decision or completion point (as applicable), after the full use of traditional debt-relief mechanisms. 3/ Cdted'lvoire reachedits decisionpoint under the original framework in March 1998. The total amount of assistancecommitted thereunderwas U S 3 4 5 million in NPV terms 41 Nonreschedulabledebt to non-ParisClub offlcial bilateral creditors and the London Club, which was already subjectto a highly concessionalrestructuring, is excluded from the NPVofdebt at the completion point in the calculation of this ratio. 5/ Equivalent to SDR 1,804 million at an SDRRTSDexchangerate of0.6972, as ofMarch 14, 2006. 61 ItISsuggested that enhanced HIPC relieffor CClted'lvoire overtakethe commitmentsmade under the original HIPC framework, - 65 - APPENDIX I Debt SustainabilityAnalysis for Low-IncomeCountryFramework-Update 1. This appendixupdatesthe debtsustainabilityanalysis (DSA) preparedin October 2005 (EBS/05/149,Appendix 11). The DSA, which i s preparedjointly by the IMF and the WorldBank, is based onthe common standard framework for low-income countries approved by the Executive Boards o f the IMF and IDA.60 Three key differences underpinthe results o fthis update relative to those inEBS/05/149: (i) update uses the this reconciled debt database and debt service projections o fthe HIPC completion point DSA; (ii)includesfullMDRIdebtreliefinthebaseline;and(iii) borrowinghasbeen it new revised in line with the long-term framework discussed with the authorities. 2. The updateconfirmsthat Cameroonremainsinthe categoryof low-income countrieswith a low risk of debt distress. After the full delivery o fHIPC assistance, bilateral debt reliefbeyond the HIPC Initiative and MDRI, Cameroon's external debt is projected to remain comfortably below the country-specific policy dependent thresholds in the long run. Standard stress tests reveal that, after Cameroon crossesthe IDA-only threshold, the risk o f debt distress would increase ifexternal debt i s contracted at terms less concessional than IDA "hardened" terms. Background 3. Recent developments Public External Debt concerningCameroon's (InU.S. dollar) public and publicly 2004 2005 guaranteed (PPG) external debt havebeen positive. Total 6,984 6,200 Nominal PPG debt declined Multilateral 2,056 1,847 World Bank 1,194 1,112 from US$ 7.0 billion in2004 to Development Bank 33 1 310 US$6.2 billion in2005, 318 272 Other 213 530 4,696 3,977 points o f GDP decrease inthe corresponding to 7.7 percentage "!&~~&, 4,560 3,914 Non Paris Club 136 63 stock o f debt. External debt Conunercial 233 376 service was reduced from 8.8 Source: Staff estimates; and Cameroonian authorities. percent o f GDP in2004 to 6.8 percent in2005, reflecting debt reliefby Paris Club creditors as well as HIPC assistance notably by the IMF and the EuropeanUnion. Debt service is For the IMF, see TheActing Chairs Summing Up, Operational Frameworkfor Debt Sustainability Assessments in Low-Income Countries-Further Considerations (BUFFl05/69,4/13/05). The Bank's Executive Board endorsedthe framework on April 12, 2005. For additional information on the LIC DSA framework, see the followingjoint Fund-World Bank staff papers: Debt Sustainability in Low-Income Countries-Proposal for an Operational Framework and Policy Implications (SMl04/27,2/3/04), Debt Sustainability in Low-Income Countries-Further Considerations on an Operational Framework and Policy Implications (SMl04l118, 9110/04), and Operational Frameworkfor Debt Sustainability Assessments in Low-Income Countries-Further Considerations (SMl051109, 3129105). - 66 - APPENDIX I well below the average o f 7.3 percent for all 28 HIPCs that reached the decision point by end-2004. MediumTerm MacroeconomicFramework 4. The underlyingmacroeconomicassumptionsof the HIPC DSA and the LIC DSA are identical.GDP growth is expected to accelerate over the medium-term to 6 percent in2011, reflecting economic stimulus from higher capital spending, and the implementation o f structural reforms (Table 1). Over the long-term, growth inthe non-oil economy is expected to stabilize at about 5.5 percent, while oil GDP will gradually decline. Investment i s expected to remain at about 21.5 percent o f GDP, a level considered to be supportive o f long-term economic growth. Inflation will average 2 percent inline with the central bank long-term commitment to low inflation. Exports o f goods and services are projected to gradually decline over time reflecting the decline inpetroleum exports. Non- oil exports inreal terms are projected to accelerate over the medium-termreflecting increased investmentinkey sectors o f the economy (primarily services). Thereafter, they are expectedto grow by an average o f 6.6 percent, somewhat higher than the average in recent years. The share o f oil exports i s assumed to decline gradually from about 50 percent in2005 to 11percent in2025. The current account deficit, includinggrants, is expected to increase to about 4 percent over the medium-term, and gradually improve thereafter. The external current account deficit i s expected to be financed through foreign direct investment and loans, a mixture o f which will be from IDA and the rest from other creditors on less concessional terms. 5. New public borrowingi s assumed to graduallyincreaseover the medium-term to help finance new investment. External borrowing i s expected to rise gradually to 1.8 percent o f GDP in2015 and then to gradually decline to about 1percent by 2025. IDA borrowing i s assumed to constitute 47 percent o f new borrowing, with the remainder loans originating from other multilateral and bilateral creditors on less concessional terms. When Cameroon crosses the IDA-only threshold in2010, disbursements from the Bank will also be on less concessional terms. Debt SustainabilityAnalysis 6. All debt ratioshave improvedrelativeto the resultsof the LIC DSA conducted last October because o fthe impact o f MDRIrelief inthe baseline scenario. All debt indicators will remain substantially below the relevant country-specific debt burden threshold inthe longrun(Box 1 and Table 1). Nevertheless, as inthe October 2005 L I C DSA debt indicators are expected to steadily increase inthe long term, reflecting additional borrowing to meet the country's development needs and reduced concessionality from 2010 onwards. The risk of debt distress will remain low assuming that GDP and export growth inthe non-oil sector remain robust inthe long run, and the authorities maintain a prudent fiscal andborrowing policies. The debt sustainability outlook also hinges on the ability o f Cameroon to attract significant foreign direct investment by the private sector. 7. The combinedeffect of HIPC relief at completionpointandMDRIsets the stage for long-termdebt sustainability.Assuming full delivery o fHIPC relief andMDRI - 67 - APPENDIX I in2006, the NPV ofdebt would decreasefromUS$5.7 billionat end-2005 to US$480 million or 2.8 percent o f GDP at end-2006 (Table l).61 Debt burden indicators are projected to increase steadily over the longterm, while remaining comfortably below the country- specific policy dependent thresholds. Debt service i s projected to decrease from 3.6 percent o f exports in2006 to 2.1 percent in2015, before rising to 5.8 percent in2025. Risksand Vulnerabilities 8. There are some risksto debt sustainabilityinthe presence of exogenous shocks. Ifnewborrowing is contracted on less concessional terms than under the baseline, all debt ratios will start deteriorating, and the NPV o f debt-to-export ratio may exceed the indicative thresholds (Figure 1and Table2).62 9. The sustainabilityofCameroon'slong-termdebt hinges on continuingstrong macroeconomicperformanceand sound policies.These include an average real GDP growth o f about 5.5 percent annually, low inflation, strong tax effort, and expenditure restraint. Furtheradvances on governance, a strong commitment to reforms, export diversification, and prudentborrowing policies will be essential for maintaining debt sustainability. 6'TheNPV o f debt is calculated by applying a single discount rate o f 5 percent to debt service converted indollar terms using the WE0 average exchange rate with respect to the U.S. dollar, and maintaining the exchange rates constant thereafter. This differs from the HIPC methodology, where the NPV o f debt is calculatedby applying currency specific discount rates to debt service converted into dollar at fixed end-2005 exchange rates. 62The historical scenario implies a growth rate o f4 percent inline with the assumptions o fthe low growth scenario usedinthe sensitivity analysis (section E o fthe main text). The reason that debt indicators under the historical scenario appear more favorable than those resulting from the sensitivity analysis i s primarily due to differences in the non-interest external current account balance. Specifically, under the historical scenario the external current account balance is more favorable than that assumed under the sensitivity analysis. As a result, the financing need i s lower, which implies less borrowing and more favorable debt indicators. - 68 - APPENDIX I - 69 - APPENDIX I 0 - w o c : c : W C i o m m v B r $ - 70 - APPENDIX I Table 2. Cameroon:SensitivityA n a l p ofpublic andPubliclyGuaranladExternal Debt. 2005-25 (Inpmsnt) Proplions 2M5 2006 2W7 2008 2W9 2010 2015 2020 2021 2022 2023 2024 2025 NPV of debt-IcCDP rallo (lhreshold4O) Barlime 3 3 3 4 4 5 I O 13 13 13 13 13 13 A. Allern~llvexerdrlos A I Key vsnsbla 11 their hirtoncal averages m 2006.20 I1 3 3 4 4 4 4 5 6 6 6 7 7 8 A2. Nrw public yclor loanson lcs fsvmblc Imin 2006-20 21 3 3 1 4 5 7 16 23 24 24 25 25 25 B. Boundleu 81. Rul GDPgmwh11 himoncslsvmgcminuoneaandrrddevillion m2 W 7 3 3 3 4 5 10 13 13 14 I 3 I 3 I 3 82 Expn YSIUC god! 81hmonial avmpc mlnuonc asndrrddcvinlionin200607 31 3 4 6 7 7 12 14 14 14 14 14 I 3 83 U.S.dollar GDPdeflator al histoncnl avenge minusonc anndnrddeviation in 2006-07 3 3 4 4 5 I 1 I5 I5 I5 I 5 14 14 84.Net nandebiemling flows a1hiaonal svmge minusMIC smndird dcvinlion in 2w6-07 41 1 3 4 5 5 II 13 13 13 13 I3 I 3 85.Combmalion of 81.84 usingone-halfmndnrddcvmllon rhoekr 3 4 4 5 5 II 14 14 14 14 14 13 86. hK t m 30 pcrcmimmtnsl dcprccialionnlalive Io lhe baxlirr in 2W6 SI 3 4 5 6 6 I5 19 19 19 19 19 18 H P V of debt-to-exports ratlo (threshold-IS) B i v l l n i I O II 13 17 20 24 57 85 88 90 91 91 89 A. A l l e m l i w urnarbs AI. Key vmsblcs 11 their histoncdavmges in 2006.20 I1 I O 12 I5 16 17 17 28 37 40 41 45 49 53 A2 New pubiic s t o r loanson lafsvmblc t e r n tn 2006.20 21 I O 10 12 16 24 )4 92 150 158 166 I72 176 179 B. Bound le11 81, Ral GDPgmd! PIhiaoncal avenge minumc nnndrrddeneon m 2 W 7 10 I 1 13 17 21 25 58 86 89 90 91 91 90 82 Expn value gmwlh PI hinoncalavenge minusone standarddcvmon ~n200667 31 I O 17 27 31 36 40 75 101 IC4 IO5 105 IM 102 83.U.S.dollar GDP&flator a h~nmal ivmgc minusone ann& dcmauonm 200647 I O II I 3 17 21 25 58 86 89 90 91 . 91 90 84. Nct mndcbl matingflows PIhinonmllvmgc minu OIK swdud&vialion in20667 41 I O 12 17 21 25 29 61 88 91 92 93 92 91 85 Cmbinalimof81.84 usingone-half Jtsndnrddevation h l s I O I5 17 21 25 28 61 87 90 91 92 91 90 86 Onc limc 30 p " m t nominaldcpwialion nlalivc Io the basline in 2006 SI I O II 13 17 21 25 58 86 89 90 91 91 90 Debt-servicrratio (threshold=IO) 7 4 1 1 1 I 2 4 4 5 5 5 6 7 3 1 1 1 I 2 2 2 2 2 2 3 7 3 1 1 1 2 5 II 12 I 3 14 14 I 3 7 3 1 1 1 5 5 5 6 7 4 1 1 2 6 6 7 7 7 3 1 1 1 5 5 5 6 7 1 1 1 1 4 5 5 6 6 7 4 1 1 1 4 5 5 6 6 7 3 1 1 1 3 5 5 5 6 36 36 36 36 36 ---- 36 36 36 36 36 36 36 16 -71 - APPENDIX I Figure 2. Cameroon: Indicators o f Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2005-25 (Inpercent) 60 NPV of external Dublic debt-to-GDP ratio ........................................................................... Indicative sustainabilitvthreshold 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 NPV ofexternal aublic debt-to-exoort ratio 30 Debt service-to-exaorts ratio 25 - Indicativesustainabilitv threshold 20 ............................................................................ 15 - I O - 5 - n v - ~ 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 -Baseline scenario with debt relief associated with the completion point -Scenario o f nonconcessionalnew borrowing Source: staffprojections andsimulations. - 72 - APPENDIX I1 Cameroon-Debt Management 1. Since 1990, Cameroon's public debt has been managed by an autonomous government agency, the CaisseAutonome d 'Amortissement (CAA), which has its own board o f directors. By law, the C A A acts on behalf o fthe government inthe following areas: (i) managing the public and publicly guaranteed external debt and the public domestic debt; (ii) safekeeping all loan agreements andrelated documents; (iii) ensuring timely disbursements o fnegotiatedloans and making regular debt service payments; (iv) participating inthe renegotiation o f debt agreements with official and commercial creditors; and (v) providing regular statistics on the external and domestic debt for official publications. The C A A participates inthe definition o f medium-term macroeconomic policy with other government's agencies. 2. Internal directives establish the tasks of different units and the staff i s adequate to fulfillthe maintasks ofdebtmanagement. Considerable technical assistance hasbeen given inrecent years by the Commonwealth Secretariat, the Agence Franqaise de Ddveloppement, DebtReliefInternational, the IMF,and the World Bank. 3. Since 2000, C A A staff received training indebt rescheduling techniques, the use o f debt management software, the regulatory framework o f debt management, portfolio analysis, debt sustainability analysis and the formulation o fborrowing strategies. The debt management practices at the CAA have considerably improved and the debt management unit provides up-to-date data on all external and domestic debt aggregates. C A A uses a dated version o f the Commonwealth Secretariat's Debt Recording and Management System (CS-DRMS 7.2), the main application for record keeping and debt service projections. This software is set up ina broad-bandnetwork environment, which i s fully operational. The C A A plans to update the current version o f the CS DRMS to a Windows-based version (CS-DRMS 2000+) inorder to improve its user-friendliness. The upgrade o f the debt management software to CS-DRMS 2000+ would improve the quality and timeliness o f debt reporting (including to the Debt Recording System o f the World Bank) by facilitating data transfers among different software usingthe same operative system. The DebtPro software i s also used for debt rescheduling simulations such as Paris Club reschedulings and the HIPC completion point. It thus serves as a tool for debt service projections, and feeds into the macroeconomic framework. Staff cooperated closely with thejoint IMF-World Bank mission to complete the debt reconciliation exercise. 4. The CAA lacks sufficient internal and external control procedures. The C A A should establish procedures to verify debt aggregates with creditors' statements on a regular basis. Even though the C A A maintains regular contact with all creditors, payment data available through the debt management system often differ from creditors' invoices. Inaddition, disbursementsor cancellations are not regularly recorded. The debt reports andrepayments made throughautonomously managed bank accounts should be regularly audited by an independent agency. - 73 - APPENDIX I1 5. Coordinationwith other agenciesinvolvedindebt managementneedsto be strengthened.The coordination among the CAA, the Treasury andthe CentralBank (BEAC) should improve'to avoid overpayments or delays inmaking payments, which are sanctioned with the accrual o f interest penalties. Delays inthe past have often occurred because the treasury has tendedto "bunch-up" payments insteado f effecting regular transfers on a daily or weekly basis. The delays are also due to major weaknesses incash management at the treasury. 6. The qualityof debt managementinthe future depends criticallyon the CAA's ability to assess risks.The current government debt strategy aims at borrowing on only highly concessional terms. However, the level o f concessionality of Cameroon's external debt could be reduced beginningin2010 when its per capita income crosses the IDA-only threshold.`j3 It i s essential that C A A staff acquire the necessary skills to assess the risks o f borrowing at different terms, and to convey effectively to the government these risks. 7. Domesticdebt managementhas improved.The governmenthas made substantial progress inauditing domestic arrears and launching a securitization program. Since the conclusion o f the audit o f domestic arrears in 2004, the government has started repaying the securitized debt according to a schedule that the government agreed with the IMF.Progress is also beingmade inreachingagreements with creditors ofnon securitized domestic debt. 63Operational cut-off for IDA eligibility for FY06 is US$965. In2004, Cameroon's GNIper capita amounted to US$800andthe country has limited access to capital market inthe oil sector.