Cameroon: Second Reviews Under the Extended Credit Facility and the Extended Fund Facility Arrangements, and Requests for Waivers for Performance Criteria Applicability and Modification of Performance Criterion—Debt Sustainability Analysis
Author: International Monetary Fund. African Dept. and International Monetary Fund. Strategy, Policy, & Review Department
Publication Date:
04 Aug 2022
eISBN:
9798400217388
Language:
English
Keywords:
market financing shock; service-to-revenue ratio; SOE debt; dynamics equation; debt perimeter; Government debt management; Debt sustainability; Debt sustainability analysis; Global; dynamics-baseline scenario; debt vulnerability
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CAMEROON

Abstract

CAMEROON

Title Page

CAMEROON

SECOND REVIEWS UNDER THE EXTENDED CREDIT FACILITY AND THE EXTENDED FUND FACILITY ARRANGEMENTS, AND REQUESTS FOR WAIVERS FOR PERFORMANCE CRITERIA APPLICABILITY AND MODIFICATION OF PERFORMANCE CRITERION—DEBT SUSTAINABILITY ANALYSIS

July 13, 2022

Approved By

Vitaliy Kramarenko, Geremia Palomba (IMF) and Marcello Estevão, Abebe Adugna Dadi (IDA)

Prepared by the staff of the International Monetary Fund (IMF) and the International Development Association (IDA).

Cameroon Joint Bank-Fund Debt Sustainability Analysis

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Cameroon’s overall debt sustainability indicators have improved compared to the previous DSA, due to a faster recovery from the pandemic, improved fiscal balance, and stronger exports driven by higher oil and non-oil commodities prices. Nevertheless, Cameroon is still at high risk of external and overall public debt distress as its two external debt indicators and one public debt indicator continue to breach their respective thresholds and benchmark under the baseline scenario.1

Given that Cameroon’s external debt stock indicators continue to lie below the thresholds, and its external debt service indicators have improved supported by the authorities’ active debt management, and the authorities remain committed to fiscal consolidation efforts, staff considers there is a high likelihood that Cameroon will continue to meet its current and future financial obligations and assess its debt as sustainable.

However, downside risks remain significant. The ongoing war in Ukraine could set back the global recovery and prolong supply disruptions, casting additional pressures on the Cameroonian economy. Rising food and fuel prices could intensify socio-economic tensions, while rising subsidy costs could derail Cameroon’s fiscal consolidation efforts and/or crowd out necessary investments critical for economic development. Tightening global financial conditions could increase borrowing costs, and delayed restructuring of SONARA’s debt would further weigh on Cameroon’s debt sustainability. Continued vulnerability to the COVID-19 pandemic, and potential resurgence of regional security conflicts are adding to the challenges.

Given increased downside risks, Cameroon will need to judiciously use its increased oil revenue to ensure its debt sustainability. Reducing the fuel subsidies by gradually increasing fuel pump prices while protecting the most vulnerable would be a critical step. In the meantime, continued efforts are warranted to limit reliance on non-concessional borrowing, strengthen management of SOEs, and accelerate reforms to boost exports and output.

Public Debt Coverage

1. Debt coverage has remained unchanged since the previous DSA (Text Table 1). Public debt coverage includes debt of the central government, expenditure floats and arrears, guarantees, debt of a public oil company SONARA and external arrears of other state-owned enterprises (SOEs).2 The DSA does not cover local government debt as local governments are not allowed to borrow from financial markets and most of their debt is on domestic suppliers including SOEs. Other elements in the general government such as social security funds or extra budgetary funds are not covered due to lack of data. External debt is mainly defined based on currency but is adjusted for residency where data is available.3

Text Table 1.

Cameroon: Public Debt Coverage Under the Baseline Scenario

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2. There is some scope to broaden the debt perimeter. In recent years the authorities have made significant progress in improving the comprehensiveness of debt reporting by expanding the scope of SOE debt data,4 supported by the World Bank’s Sustainable Development Finance Policy (SDFP) Performance and Policy Actions (PPA). Latest report indicates that the debt of SOEs excluding SONARA amounts to CFAF 217 billion, around 0.9 percent of GDP (Text Table 3). Authorities have noted that these debts should not be included in the public debt stock as the SOEs can borrow without government guarantee and associated fiscal risk is limited. However, oversight of SOEs in Cameroon remains weak, leading to significant uncertainties in monitoring their operations and assessing potential fiscal risks. Building on the diagnostic studies of large SOEs and an inventory of the cross-debts among SOEs and the state (structural benchmarks under the IMF program), staff and the authorities will gradually expand the debt perimeter and clarify the fiscal risks associated with SOEs. In the meantime, the authorities are also putting efforts on enhancing data collection from local governments and public pensions.5

Text Table 2.

Cameroon: Coverage of the Contingent Liabilities’ Stress Test

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The default shock of 2% of GDP will be triggered for countries whose government-guaranteed debt is no t fully captured under the country’s public debt definition (1.). If it is already included in the government debt (1.) and risks associated with SoE’s debt not guaranteed by the government is assessed to be negligible, a country team may reduce this to 0%.

Text Table 3.

Cameroon: Evolution of Total PPG Debt

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Sources: Cameroonian authorities and IMF staff calculations.

Reflects rebasing of the national accounts from 2005 to 2016 as described in foornote 8.

Staff estimate includes arrears, floats, and "floating" domestic debt at the Treasury as defined in the TMU, while authorities' estimate only includes overdue payments of more than three months.

Authorities' estimate of historical SONARA debt varys significantly with previous data. Staff maintains estimates in the previous DSAs until further clarification.

Difference in estimates is due to the scope of coverage as described in paragraph 2 and footnote 3.

3. The contingent liability stress test accounts for vulnerabilities associated with uncovered debt (Text Table 2). Shock scenario for the SOE debt is set at 2 percent of GDP (a default value reflecting the median SOE external liability identified by a Fund staff survey conducted in 2016), given the possibility of unidentified SOE debt.6 According to the latest data from the authorities, the capital stock of public private partnerships (PPPs) as of end-2021 is estimated at CFAF 1227.9 billion, about 4.9 percent of GDP, corresponding to a contingent liability of 1.7 percent of GDP. Contingent liabilities from financial markets are set at the minimum value of 5 percent of GDP, which represents the average cost to the government of a financial crisis in a LIC since 1980. Estimates for other elements not covered are currently not available.

Background

A. Evolution of Debt

4. Public debt has continued to increase, but the pace of growth has slowed in recent years (Text Table 3). Preliminary staff estimates suggest that the total public and publicly guaranteed (PPG) debt is around CFAF 11,456 billion (45.5 percent of GDP) as of end-2021. External debt stock was estimated at CFAF 7,951 billion (31.6 percent of GDP) and domestic debt at CFAF 3,505 billion (13.9 percent of GDP).

5. The composition of external debt has changed moderately, with increasing share of multilateral debt. The share of multilateral debt reached 41.1 percent of the total PPG external debt as of end-2021 (Text Table 4). Among bilateral debt, debt owed to China represents the largest share, with 62 percent of total bilateral debt. Around 40 percent of external debt is on concessional terms and 38 percent is denominated in Euros. Average maturity stood at 8.8 years for external debt (excluding SONARA’s debt), while the weighted average interest rate stood at 2.3 percent. Around 24 percent of external debt has a variable interest rate.

Text Table 4.

Cameroon: External Debt Composition

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Sources: Cameroonian authorities, and IMF staff calculations.

6. The composition of domestic debt has shifted towards a larger share of government bonds (Text Figure 1). Government bonds issuance (including Bons du Trésor Assimilables (BTA) and Obligations du Trésor Assimilables (OTA)) continued to increase, driven by increased spending needs during the pandemic, reaching 36.4 percent of the total domestic public debt as of end-2021. The share of float and arrears has declined further from about 16.2 percent in end-2020 to 12.9 percent in end-2021. Average maturity of domestic debt (excluding the float and SONARA’s debt) stood at 4 years and the average weighted interest rate at 3.0 percent.

Text Figure 1.
Text Figure 1.

Cameroon: Domestic Public Debt Composition

Citation: IMF Staff Country Reports 2022, 268; 10.5089/9798400217388.002.A002

7. The stock of contracted-but-undisbursed debt (SENDs) has increased. The stock of SENDs as of end-2021 is estimated at CFAF 3,673 billion, 14.6 percent of GDP compared with 13.4 percent of GDP at end-2020 (Text Table 5). The increase was mainly driven by new loan contracts signed with multilateral creditors. Given the substantial amount of SENDs, the authorities will need to carefully manage disbursements consistent with their disbursement plan, while redoubling efforts to reassess and cancel SENDs associated with old and non-performing projects. 7

Text Table 5.

Cameroon: Stock of SENDs

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Reflects rebasing of the national accounts from 2005 to 2016 as described in footnote 8.

Excludes budget support.

Sources: Cameroonian authorities, and IMF staff calculations.

8. No new sovereign external arrears have been accumulated. The DSA includes external arrears of SONARA and other SOEs, estimated at CFAF 221.1 billion and CFAF 9 billion as of end-2021 respectively. As these liabilities fall on the indebted SOEs and not the government, the arrears do not represent government insolvency and/or illiquidity.

9. Cameroon’s capacity to monitor and manage public debt for the purposes of the IMF’s debt limits policy is adequate, but further improvements are needed. Cameroon’s public debt management has improved in recent years. All project financing proposals and projects financed through PPPs are examined by the National Public Debt Committee (CNDP) and signing of a new loan agreement is granted only when there is an unconditional approval. Procedures and responsibilities for loan operations and public debt management have been clarified in the manual published in 2019. However, CNDP’s engagement is oftentimes delayed until late in the debt contracting process, and Cameroon’s debt policy is yet to be firmly anchored by its medium-term debt management framework, resulting in significant discrepancies between announced plans and actual financing. Further efforts are warranted to strengthen active engagement of the CDNP and enhance the effectiveness of the medium-term public debt strategy (MTDS), including through improved estimates of financing needs, development of consistent annual borrowing plans, and an enhanced communication strategy to facilitate creditors’ understanding of the authorities’ debt management objectives.

10. External private sector debt has decreased. Available data from the World Bank International Debt Statistics (IDS) indicate that private external debt has decreased to CFAF 413 billion (1.8 percent of GDP) as of end-2020. Most debt is in direct investments held by foreign parent companies and official institutions.

B. Macroeconomic Forecast

11. Cameroon showed recovery from the COVID-19 shock prior to the war in Ukraine. After a record low of -2.2 percent year-on-year growth in the second quarter of 2020, real GDP growth rate recovered to 3.6 percent in 2021, supported by a strong recovery in the primary and tertiary sectors.8 Fiscal position also benefited from the increase in oil prices. Overall fiscal deficit (payment order basis, excluding grants) has narrowed from 3.3 percent of GDP in 2020 to 2.6 percent of GDP in 2021. In the meantime, Cameroon’s external position deteriorated as larger goods imports offset export gains while service deficit worsened due to rising shipping costs. The current account deficit widened from 3.7 percent of GDP in 2020 to 4.0 percent of GDP in 2021.

12. The repercussions from the war in Ukraine are weighing on Cameroon’s economy, but macroeconomic conditions are expected to improve gradually. Real GDP growth rate is projected at 3.8 percent in 2022, down from 4.5 percent in the previous DSA. The downward revision reflects a deterioration in the global economic outlook and the rapid increase in food and energy prices casting negative impact on purchasing power and household consumption. In the medium term, growth is expected to gradually improve, averaging 4.8 percent (Text Table 6). Inflation (CPI) is projected to rise to 4.6 percent in 2022 but decline in the following years, averaging below the CEMAC convergence criteria (3 percent) in the medium term. Driven by high commodity prices and large natural gas delivery, the current account deficit is expected to narrow to 2.1 percent of GDP this year, before returning to around 3.1 percent in the medium term. Macroeconomic assumptions underpinning these projections are laid out in Box 1.

Text Table 6.

Cameroon: Key Macroeconomic Assumptions

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Sources: Cameroonian authorities; IMF staff calculations.

Cameroon: Medium and Long-Term Macroeconomic Assumptions Medium Term, 2023–2027

  • Real GDP growth is projected to average 4.8 percent in the medium term, revised down from 5.0 percent in the previous DSA, reflecting the repercussions from the war in Ukraine. The projection is based on a continued, albeit more gradual recovery from the pandemic, reflecting growing demand from trade partners driving production increase in export-oriented industries, including agriculture and forestry. Following the lifting of social restrictions during the pandemic, activities are expected to continue to increase in the service sector including tourism, hospitality, and transport. The projection also builds on continued implementation of growth-enhancing reforms under the IMF program, including lifting business impediments through a regular consultation with the private sector; revising the law on private investment incentives to promote competition; and revamping customs and port systems to reduce transit time and costs. The risk of COVID-19 resurgence is high given the low vaccination rates (8.6 percent of the eligible population fully vaccinated as of June 7, 2022). However, a large-scale lockdown is not assumed in the baseline as the authorities are strengthening their efforts to boost vaccination (including a new campaign launched in February 2022) and the reported infection rates are decreasing steadily.

  • Due to the rising food and energy prices, inflation is projected to rise to the level of 4.6 percent in 2022. Inflationary pressures are expected to gradually subside in the following years as supply shortages ease, while increase in domestic fuel prices could partly offset this trend. Overall, considering BEACs efforts to curb inflation, and the Cameroonian authorities’ fiscal consolidation, inflation is expected to decline gradually, averaging around 2.3 percent in the medium term. This is higher than previously forecasted 2.0 percent but below the CEMAC convergence criteria (3 percent).

  • Fiscal balance is expected to improve more slowly than previously envisaged. Despite the increase in oil revenue driven by higher oil prices, large subsidy payments to cushion the food and fuel price hike, along with heightened wage pressures will offset the revenue gains. In line with the staff proposals in the IMF program, the baseline projection assumes that fuel subsidies will be reduced gradually by increasing fuel pump prices starting in 2023. As a result, subsidies and transfers spending is expected to peak in 2022 at 3.7 percent of GDP and subsequently decrease in the following years reaching at around 2.0 percent of GDP by 2025. Overall fiscal deficit (excluding grants, payment order basis) is expected to average 0.9 percent of GDP, larger than 0.7 percent of GDP projected in the previous DSA.

  • The current account balance is projected to improve in the near term, as higher oil and non-oil commodities exports outweigh increase in imports. The current account deficit is expected to widen as oil prices decline, averaging at around 3.1 percent of GDP in the medium term. Net foreign direct investment (FDI) inflows are expected to recover and average 2.3 percent of GDP in the medium term, close to the level observed in 2019.

Long Term, 2028–2042

  • Long-term growth has been revised downward to 4.9 percent considering lingering effects from the pandemic and the war in Ukraine. The projection is predicated on a successful implementation of Cameroon’s national development strategy, SND-30, that aims to boost growth, including through accelerating structural reforms and strengthening SOE management and oversight, while promoting economic diversification.1 The strategy also aims to finalize delayed infrastructure projects (Lom Pangar dam, the Memve’ele hydroelectric dam, and a drinking water supply projects), which are expected to boost production in key sectors (agriculture, manufacturing).

  • Fiscal revenue is projected to increase, although to a lower level than previously projected, considering a more gradual pace of structural fiscal reforms given the recent shock. The implementation of the Medium-Term Revenue Strategy (MTRS) is expected to boost revenue mobilization. The baseline projection also assumes a gradual fiscal consolidation will continue beyond the program horizon. As a result, overall fiscal deficit is projected at 1.5 percent of GDP.

  • Exports of goods and services are projected to decline as a share of GDP to around 15.4 percent of GDP, reflecting falling oil production. The current account is assumed to continue to improve as non-oil exports remain dynamic and imports grow at a lower rate. The strength of non-oil exports is predicated on the success of measures envisaged—under SND-30 and the African Continental Free Trade Area (AFCTA)—to diversify export products, including through a new agency dedicated to export.

1Staff simulations of policy reforms scenarios show sizeable positive implications on potential growth, including through greater economic diversification, financial deepening strengthened investment efficiency, and a gradual elimination of subsidies to SOEs and the removal of cross-sectoral distortions.

13. Baseline projections also reflect policy parameters in the context of the IMF-supported program and PPAs under the World Bank SDFP. The IMF-supported program envisages a gradual fiscal consolidation path reflecting revenue measures including strengthening tax and customs administrations, streamlining tax exemptions, and recovering tax arrears. It also assumes a gradual fuel subsidy reform and policies to contain other current spending broadly at the current level while improving the efficiency of capital spending. In addition, the baseline projection assumes that Cameroon will continue to remain on track implementing the PPAs on management of fiscal risks and on contracting of non-concessional debt, as part of the government’s efforts to address key debt vulnerabilities. These measures will create space to support spending with higher economic and social impact and strengthen public investment, which would result in a gradual recovery in the medium term, followed by a more benign growth outlook, higher export bases, and stronger revenue mobilization in the long run.

14. Risks remain elevated and tilted to the downside. Prolonged supply disruptions including in energy, seeds, and fertilizers could further constrain Cameroon’s growth while adding inflation pressures. Rising food prices could intensify socio-economic tensions and trigger resurgence in regional security conflicts. Higher oil prices could boost fiscal revenues, but their impact on the fiscal balance is likely to be offset by larger subsidy payments. Without adequate fuel price reforms, rising subsidy costs and associated fiscal pressures could crowd out domestic investment and delivery of infrastructure projects necessary for catalyzing growth. New outbreaks of COVID-19 variants and a further increase in global risk premia following the monetary policy tightening in advance countries could also add to the challenges.

15. Financing assumptions have been updated based on the most recent data. Cameroon’s public gross financing needs over the 2022–2024 period are estimated at CFAF 4,514 billion (15.5 percent of GDP), of which average 73 percent is assumed to be financed externally.9 The DSA reflects IMF financing of CFAF 280 billion and prospective budget support from donors amounting to CFAF 480 billion in 2022–2024. The DSA also reflects SDR usage of CFAF 70 billion in 2022 on top of CFAF 50 billion in 2021.10 These amounts have been reflected in domestic debt through the government finance statistics data. Cameroon participated in the three phases of the Debt Service Suspension Initiative (DSSI) from May 2020 to end-2021 and benefitted from a debt service suspension estimated at CFAF 287.3 billion (about US$ 514 million). External project financing is based on the budget, and the mix of new disbursements is assumed to follow the composition of SENDs as of end-2021. After 2025, the composition gradually shifts towards commercial borrowing, decreasing the grant element.11 Financing terms for IDA loans were updated to reflect Cameroon’s status as a blend county, and account for the new IDA 20 instruments. Financing terms for new bilateral and commercial loans were adjusted to reflect higher interest rates.12 In line with the previous DSA, domestic financing assumptions reflect gradually increasing share of longer maturity bonds following the authorities’ MTDS but adjusted given the lack of sufficient investor base for long-term bonds.

16. Financing assumptions regarding SONARA reflect latest information on debt restructuring. In October 2021, SONARA signed an agreement with the local banks to restructure its debt. Total amount owed to the bank is agreed at CFAF 261 billion, to be repaid over 10 years with an interest of 5.5 percent per year. The DSA reflects this revised repayment schedule, assuming that the difference between the restructured amount (CFAF 261 billion) and the end-2020 bank debt (CFAF 287 billion) has been repaid in 2021. As in the previous DSA, letters of credit provided by domestic banks (CFAF 171.8 billion as of end-2021) were excluded from SONARA’s debt stock given their short-term revolving nature. Negotiations with external creditors are ongoing, with some early signs of progress. Draft restructuring agreement negotiated with traders has been approved by the CNDP and awaiting feedback from the traders. In addition, the authorities have agreed to prepare a plan for a financial, industrial, and functional restructuring of SONARA (structural benchmark under the IMF program). As the agreement hasn’t been finalized, restructuring of SONARA’s external debt is not assumed in the baseline. Short-term external debt from external oil traders (CFAF 213 billion) and medium- and long-term external debt due for repayments in 2020 and 2021 (estimated at around CFAF 31 billion respectively) were classified as arrears, reduced by CFAF 54 billion reflecting repayments made by the state.13 In terms of operation, SONARA is assumed to continue functioning as an importer of refined oil, while gradually recovering its production capacity starting from 2024 and reaching 60 percent of the pre-crisis level in 2027. Among SONARA’s revenue, only financing expenses (CFAF 20 billion per year) and net income are assumed to be used for debt service and accounted for as part of the fiscal revenue in DSA. The cost of potential reconstruction of the refinery operation is not incorporated in the baseline as it is still being assessed by the authorities and discussions with the insurance company are ongoing.

17. The realism tool highlights risks to the baseline projections (Figure 3). The projected 3-year fiscal adjustment is considered ambitious but achievable given distribution of LIC fiscal adjustments under the past IMF programs. The growth projection deviates from the paths implied by the projected fiscal consolidation, but they may not fully capture other drivers of growth such as the rebound from opening up the economy following the COVID-19 pandemic or stronger net exports driven by higher oil and non-oil commodity products.

Figure 1.
Figure 1.

Cameroon: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2022–2032

Citation: IMF Staff Country Reports 2022, 268; 10.5089/9798400217388.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2032. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.2/ The magnitude of shocks used for the commodity price shock stress test are based on the commodity prices outlook prepared by the IMF research department.
Figure 2.
Figure 2.

Cameroon: Indicators of Public Debt Under Alternative Scenarios, 2022–2032

Citation: IMF Staff Country Reports 2022, 268; 10.5089/9798400217388.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2032. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.
Figure 3.
Figure 3.

Cameroon: Realism Tools

Citation: IMF Staff Country Reports 2022, 268; 10.5089/9798400217388.002.A002

18. The forecast error tool indicates different debt dynamics compared to historical developments, suggesting potential challenges (Figure 4). Contribution of the current account and FDI is expected to be much smaller than observed in the past, while the real GDP growth is projected to further draw down external debt. Projected change in the public debt is driven by a negative contribution of primary deficit reflecting fiscal consolidation, and stronger contribution of real GDP growth. The unexpected increase in public debt during the past 5 years is higher compared to other LICs. Large unexplained residuals for past debt-creating flows highlight risks but may be explained by broadened debt perimeter including domestic arrears and SONARA’s debt.

Figure 4.
Figure 4.

Cameroon: Drivers of Debt Dynamics-Baseline Scenario

Citation: IMF Staff Country Reports 2022, 268; 10.5089/9798400217388.002.A002

1/ Difference between anticipated and actual contributions on debt ratios.2/ Distribution across LICs for which LIC DSAs were produced.3/ Given the relatively low private external debt for average low -income countries, a ppt change in PPG external debt should be largely explained by the drivers of the external debt dynamics equation.

C. Country Classification and Determination of Scenario Stress Tests

19. Cameroon’s debt carrying capacity remains ‘weak’. The CI score based on the April 2022 WEO projections and the 2020 World Bank CPIA score is 2.67, signaling a weak debt-carrying capacity. The CI score from the previous DSA vintage was 2.70 corresponding to a one signal for medium debt-carrying capacity.14 The lower CI score compared to the previous DSA mainly reflects lower reserves level and world economic growth. (Text Table 7).

Text Table 7.

Cameroon: Calculation of the CI Index

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20. Stress tests follow standardized settings, with the addition of a market financing shock and a commodity price shock. The standardized stress tests apply the default settings, while the contingent liability stress test is based on the quantification of contingent liabilities discussed above. The tailored stress tests for Cameroon include a market financing shock and a commodity price shock due to an outstanding Eurobond and exports of fuel and other commodities making up more than 50 percent of total exports. For these shocks the standard scenario designs are applied.

Debt Sustainability

A. External Debt Sustainability

21. External risk of debt distress is assessed high as two indicators breach the thresholds under the baseline scenario (Figure 1 and Table 3). The external debt service-to-exports ratio and the external debt service-to-revenue ratio breach their respective thresholds. The former particularly shows a large and sustained breach, underscoring a fragile liquidity situation. On the other hand, debt service-to-revenue ratio shows gradual downward path due to stronger revenue prospects, declining below the threshold after 2025.

22. Under stress tests, thresholds for all four indicators are breached. Primary balance is the most extreme shock scenario for the PV of debt-to-GDP ratio. The most extreme shock for the PV of debt-to-exports and the debt service-to-exports ratios is the exports shock, under which the latter shows large breaches throughout the projection period. For the debt service-to-revenue ratio, the most extreme shock is the commodity price shock. Historical scenarios point towards exploding PV of debt-to-GDP, PV of debt-to-exports, and debt service to exports ratios, which reflect large historical current account deficit. This differs from projections under the baseline, which assume a gradual improvement in the current account balance driven by dynamic non-oil exports and moderate imports growth supported by fiscal balance converging to the CEMAC criterion.

B. Public Debt Sustainability

23. Overall risk of public debt distress is assessed high as the PV of debt-to-GDP ratio breaches the benchmark under the baseline scenario. However, after a single breach in 2022, the ratio is projected to fall below the benchmark. The PV of debt-to-revenue ratio and the debt service-to-revenue ratio are also projected to decline gradually. The most extreme shock for all three ratios is the commodity price shock.15 This contrasts with the previous DSA where the most extreme shock for all the indicators was the combined contingent liabilities shock. The shift is largely driven by the use of a lower estimate for unaccounted SOE debt (see paragraph 3). The historical scenario projects an explosive path for the PV of debt-to-GDP and PV of debt-to-revenue ratios, which is mainly driven by large historical primary deficits compared to projections. As discussed above, baseline projections in this DSA are based on a somewhat more gradual adjustment towards the CEMAC convergence criteria.

C. Market Module

24. The market financing tool points to low risks associated with market financing pressures (Figure 5). Cameroon’s maximum three-year gross financing needs is estimated at 7 percent of GDP, which is lower than the suggested benchmark (14 percent). The latest available EMBI spread for Cameroon (306 as of July 28, 2021) is also below the benchmark (570). With neither indicator breaching thresholds, the module signals low market financing pressures.

Figure 5.
Figure 5.

Cameroon: Market-Financing Risk Indicators

Citation: IMF Staff Country Reports 2022, 268; 10.5089/9798400217388.002.A002

Sources: Country authorities; and staff estimates and projections.

D. Risk Rating and Vulnerabilities

25. Cameroon is at high risk of debt distress, but debt remains sustainable. The risk of external debt distress remains high as two out of four indicators continue to breach the thresholds under the baseline scenario. In addition, the PV of public debt-to-GDP ratio is above the benchmark, indicating a high risk of overall debt distress. However, Cameroon’s external debt stock indicators continue to lie below the thresholds, and its external debt service indicators have improved thanks to the authorities’ active debt management. Moreover, in line with the IMF-supported program objectives, the authorities remain committed to maintaining fiscal consolidation. As such, staff considers there is a high likelihood that Cameroon will continue to meet its current and future financial obligations and assess its debt as sustainable.

26. This rating is vulnerable to a range of risks. The ongoing war in Ukraine could set back the global recovery and prolong supply disruptions, casting additional pressures on the Cameroonian economy. Rising food and fuel prices could intensify socio-economic tensions, and without successful implementation of reforms, rising subsidy costs could derail Cameroon’s fiscal consolidation efforts and/or crowd out necessary investments critical for development. Delayed restructuring of SONARA’s debt would further weigh on Cameroon’s debt sustainability. Tightening global financial conditions would increase borrowing costs, and less-than-expected exports growth and rising imports could add to the challenges. Given the slow pace of vaccination, a new variant of COVID-19 might resurge, taking a toll on the nascent recovery. Other risks include realization of contingent liabilities from bank restructuring and from SOEs not included in the baseline of the DSA, and accelerations in disbursements due to the large stock of SENDs. On the other hand, stronger exports driven by rising international oil prices could reduce Cameroon’s debt service burden.

27. Significant efforts are warranted to ensure debt remains on a downward trajectory and sustainability is strengthened. A gradual fiscal consolidation, coupled with reform of the fuel price structure to contain subsidy expenditures, a steadfast implementation of structural fiscal reforms, and a prudent borrowing policy skewed towards concessional loans remain essential to keeping public debt dynamics on a sustainable path. Given the significant share of variable interest rate loans, and rising global interest rates, the authorities will need to closely monitor their debt servicing costs and actively manage their debt portfolio to minimize interest rate risks. Allowing for new non-concessional borrowing would further weaken debt sustainability. Vulnerable debt indicators expressed as a proportion of exports point to the need for improving competitiveness and achieving economic diversification. SONARA’s debt restructuring efforts need to be strengthened while fundamentally building its financial viability. Finally, sound management of the SENDs needs to be maintained.

Authorities’ Views

28. The authorities emphasized that reducing debt vulnerabilities is a key priority to support Cameroon’s economic development. They acknowledged that the risk of debt distress remains high and subject to significant downside risks including intensified trade disruptions due to the war in Ukraine, resurgence of the COVID-19, and intensifying socio-political tensions. They concurred on the importance of SONARA’s debt restructuring and reiterated their commitment to conclude the negotiations on the restructuring of the debt vis-à-vis the traders as soon as possible. They noted that the tightening of monetary policy in the U.S. has led to an increase in non-concessional borrowing costs. The authorities remain committed to an improvement of Cameroon’s debt risk assessment which will depend on continued active debt management, export and tax revenue performance, as well as the country’s CI score, which reflects the country’s debt carrying capacity.

Table 1.

Cameroon: External Debt Sustainability Framework, Baseline Scenario, 2019–2042

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.1/ Includes both public and private sector external debt.2/ Derived as [r-g -ρ(1+g) + εα (1+r)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate;g = real GDP growth rate, ρ = growth rate of GDP deflator in U.S. dollar terms, ε=nominal appreciation of the local currency, and ε= share of local currency-denominated external debt in total external debt.3/ Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments For projections also includes contribution from price and exchange rate changes.4/ Current-year interest payments divided by previous period debt stock.5/ Defined as grants, concessional loans, and debt relief.6/ Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).7/ Assumes that PV of private sector debt is equivalent to its face value.8/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.
Table 2.

Cameroon: Public Sector Debt Sustainability Framework, Baseline Scenario, 2019–2042

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.1/ Coverage of debt: The central government, central bank, government-guaranteed debt, non-guaranteed SOE debt. Definition of external debt is Residency-based.2/ The underlying PV of external debt-to-GDP ratio under the public DSA differs from the external DSA with the size of differences depending on exchange rates projections.3/ Debt service is defined as the sum of interest and amortization of medium and long-term, and short-term debt.4/ Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period and other debt creating/reducing flows.5/ Defined as a primary deficit minus a change in the public debt-to-GDP ratio ((-): a primary surplus), which would stabilizes the debt ratio only in the year in question.6/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.
Table 3.

Cameroon: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2022–2032

(In percent)

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Sources: Country authorities; and staff estimates and projections.

A bold value indicates a breach of the threshold.

Variables include real GDP growth, GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Includes official and private transfers and FDI.

Table 4.

Cameroon: Sensitivity Analysis for Key Indicators of Public Debt, 2022–2032

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Sources: Country authorities; and staff estimates and projections.

A bold value indicates a breach of the benchmark.

Variables include real GDP growth, GDP deflator and primary deficit in percent of GDP.

Includes official and private transfers and FDI.