Cameroon - Structural Adjustment Credit Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-6773-CM REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 100.7 MILLION TO THE REPUBLIC OF CAMEROON FOR A STRUCTURAL ADJUSTMENT CRDIIT JANUARY 17, 1996 This document has a restricted distribution and may be used by recipients only in the perfonnance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (as of December 1995) The CFA franc (CFAF) is pegged to the French Franc at the rate of FFI = 100 CFAF Average Exchange Rate Year US$1 = CFAF 1993 265.4 1994 435.0 1995 521.5 METRIC SYSTEM WEIGHTS AND MEASURES Metric US Equivalent I meter (m) 3.28 feet (ft) I kilometer (km) 0.62 miles (mi) I hectare (ha) 2.47 acres (a) I kilogram (kg) 2.21 pounds (lb) FISCAL YEAR July I - June 30 ABBREVIATIONS AMACAM Insurance Company BEAC Banque des Etats de l'Afrique Centrale (Regional Central Bank) BNP Banque Nationale de Paris (Commercial Bank) CAA Debt Amortization Agency CAEMC Central African Economic and Monetary Community CAMSHIP Cameroon Shipping Lines CDC Cameroon Development Corporation (agroindustry) CIMA Regional Treaty on Insurance CNPS Social Security Agency CNR Insurance Company COBAC Bank Supervision Agency DGTC Central Procurement Agency EU European Union ONAPHARM National Pharmaceutical Office ONCC National Cocoa and Coffee Office PSI Preshipment Inspection Company SCDP Cameroonian Petroleum Distribution Company SNH National Oil Company SOCAR Insurance Company SONARA National Petroleum Refinery SOTUC Bus Company SRC Credit Recovery Company TCA Turnover Tax  FOR OFFICIAL USE ONLY REPUBLIC OF CAMEROON STRUCTURAL ADJUSTMENT CREDIT Table of Contents A. Public Finance Management ......................................2 1) Fiscal revenues, incentives and distortions ......................................2 2) Expenditures ......................................4 B. Domestic Debt Settlement ......................................6 C. Financial Sector Reform ......................................7 D. Public Enterprise reform ..................................... 12 E. Regulatory and Incentive Framework ..................................... 13 A. Objectives and Size of the Proposed SAC ..................................... 14 B. Tranche conditionality ..................................... 15 1) General ..................................... 15 2) Public Finance Management Tranche ..................................... 15 a) Fiscal receipts and non-wage expenditures ..................................... 15 b) Civil Service reforn ..................................... 15 c) Other ..................................... 15 3) Conditions for Financial Sector Reform Tranche ..................................... 15 C. Procurement and Disbursement ..................................... 16 D. Implementation, Monitoring and Supervision ..................................... 17 E. Benefits and Risks ..................................... 17 Annexes A. Government and Public Enterprise Debt B. Policy Matrix C. Letter of Development Policy D. Upfront Actions E. Portfolio Performance and Management This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.   REPUBLIC OF CAMEROON STRUCTURAL ADJUSTMENT CREDIT CREDIT AND PROGRAM SUMMARY Borrower: Cameroon Amount: IDA Credit: SDR 100.7 million, US$150 million equivalent Tenns: Standard IDA terms with 40 year maturity Program Description: The program aims mainly at improving public finance management, settling the domestic debt and restructuring the financial sector. The public finance component will enhance fiscal revenues through reduction of exemptions and improved tax administration; and incorporate improvements in the tax and incentive system that will encourage environmentally sustainable growth and resource use. Budgetary expenditures on priority development sectors (health, education, agriculture, road maintenance, tax administration, and justice) will rise. Civil service reform will increase both its efficiency and the quality of public services. The financial sector component will reform the regulatory framework and restructure key banks and insurance companies. A revised institutional framework will support an acceleration of the privatization program. Public enterprises will be required to operate with hard budget constraints. Continued regulatory reform will improve the business environment. Benefits: Successful implementation of the program would produce substantial benefits in the areas of public finance, the financial sector and private sector development. Improved tax administration should enhance fiscal revenues at existing tax levels, reducing the need for fiscally motivated increases in rates. This should increase public and private savings, thereby increasing investment. Reduced anti-export bias in the tax system will contribute to urgently needed export growth. Rationalizing forestry taxation will encourage sustainable exploitation of this resource. Increased budgetary resources for priority sectors and programs should improve factor productivity, enhancing growth and poverty reduction. Restructuring the financial sector will lead to an increase in the supply of credit to the private sector. Accelerated privatization of key enterprises in the agricultural and transport sectors will speed up the development of an efficient private sector, essential for a successful debt work-out and economic growth. Risks: The main risk to the program is a decline in fiscal revenues because of lower than anticipated economic growth, or political opposition on the part of vested interests. Lower revenues would make it difficult to attenuate fiscal anti-export bias and increase expenditures on key social sectors. On-time payment of external debt service obligations might also be compromised. In that event, expenditures in priority sectors would be protected by reducing expenditure in non-priority areas and, if necessary, through additional revenue-raising  ii measures. The second risk is of slow implementation of structural reforms because of political opposition to the reforms, e.g. privatization of banks' ownership and management, and improved loan recovery from delinquent debtors. Financial sector reforms involve large institutional development, which is a slow process continuing well beyond the release of tranches. Similarly, implementation of the internal debt strategy requires that the Government continues to assign to it a high priority. Recent experience with adjustment, however, suggests that the Government is increasingly able to implement difficult reforms in the face of opposition from vested interests. From the Bank's perspective this risk will be countered by linking tranche release to implementation of a number of strong prior actions. Furthermore, sufficient budget will be allocated to allow close supervision of the program. Staff Appraisal Report: There is no separate Staff Appraisal Report. Estimated Disbursements: The proceeds of the Credit would be disbursed in three tranches: US$50 million equivalent upon effectiveness; US$50 million on the satisfactory implementation of agreed measures pertaining to public finance management; and US$50 million following completion of agreed measures pertaining to restructuring of the financial sector. Release of the Public Finance Management Tranche is anticipated for the period of July-September 1996, since it will depend on adoption of a satisfactory FY97 Budget by the National Assembly (Cameroon's fiscal year begins on July 1) and verification of actual expenditure levels for FY96. Release of the Financial Sector Restructuring Tranche is anticipated for May-June 1996.  REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED STRUCTURAL ADJUSTMENT CREDIT OF SDR 100.7 MILLION (US$150 MILLION EQUIVALENT) TO THE REPUBLIC OF CAMEROON 1. I submit for your approval the following report and recommendation on a proposed Structural Adjustment Credit (SAC) to the Republic of Cameroon for SDR 100.7 million, the equivalent of US$150 million. The proposed IDA Credit would support the implementation of the Government's adjustment program in the areas of public finance management, domestic debt settlement and financial sector reform. It is an integral part of IDA's FY96-98 Country Assistance Strategy (CAS). The objectives of IDA's strategy are to consolidate the effects of the 1994 devaluation, alleviate poverty, and further ameliorate the climate for private sector development. 2. Recent economic and political developments, past experience with adjustment, the Government's strategy and the Bank Group assistance strategy are discussed in the CAS paper, circulated separately. The corresponding sections as well as the relevant Annexes have therefore been omitted from the present Report. Annex E of this report provides updated information on portfolio restructuring, in particular concerning the phasing out of remaining IBRD loans. PART I. THE FY96-98 ADJUSTMENT PROGRAM 3. Background, program content and credit design. The proposed operation is one of two Structural Adjustment Credits proposed under the CAS. It is the result of intensive preparatory work over the last eighteen months which showed that a number of key macroeconomic and financial sector issues needed urgent attention. The proposed Credit focuses primarily on public finance management, domestic debt settlement and financial sector reform and restructuring. The Credit will have three tranches, of which the first will be released on effectiveness and each of the other two, when the corresponding component of the adjustment program has been satisfactorily implemented. There is no preset order for these two tranches, referred to as the Public Finance Management Tranche and the Financial Sector Reform Tranche. In addition to the specific tranche release conditions, there will have to be satisfactory implementation of the macroeconomic framework, as evidenced by the existence of an active IMF program. 4. Over the last eighteen months, there has been substantial improvement in economic management and macroeconomic performance. Far-reaching regulatory reforms initiated under previous Bank-financed adjustment programs, concerning trade and price liberalization, coffee and cocoa production and marketing, the forestry and the petroleum sectors have been completed. The FY95 IMF shadow program was successfully implemented and a new Stand-by (50 percent of quota) approved in late September 1995. The first staff review has just been successfully completed. If Cameroon continues to demonstrate good performance, the IMF intends to transform the Stand-by into an ESAF in mid-1996. In November 1995, the Paris Club concluded a new one-year agreement in which about US$1 billion of Cameroon's external bilateral debt was consolidated, some of it on Naples terms. In December, France approved a Structural Adjustment Credit for about US$180 million. A number of strong upfront actions have been taken before presentation of the proposed Credit to the Board (Annex D).  2 A. Public Finance Management 1) Fiscal revenues, incentives and distortions 5. Overview. The main challenge for the Government is to increase public revenues from a particularly low base to finance public investment, expenditures in priority sectors and meet debt service obligations. Before oil production started to decline in 1985, the Government collected over 20 percent of GDP in revenues, half of which came from the oil sector. In the early 1990s, revenues declined to about 15 percent of GDP and in FY94 to less than 1 1 percent. This was mostly due to a breakdown in tax administration following the sharp cuts in the wage bill in 1993, and to the lowering of tariffs under the far-reaching trade liberalization implemented by the six countries of the Central African Economic and Monetary Community (CAEMC) following the devaluation of the CFA franc in 1994. The Government made a determined effort to increase taxes in FY95, including the re-introduction of taxes on exports, resulting in a 55 percent gain in revenues, to 12 percent of GDP. To further raise the revenues to a GDP ratio of 14.5 percent in FY96, the Government adopted a revenue package in the FY96 Budget Law, including an increase in the rates of the turnover tax (15 to 17 percent for the standard rate, 5 to 8 percent for the reduced rate) and specific taxes on petroleum products (50 percent for premium gasoline, 90 percent for gasoil). These measures resulted in a 34 percent increase in revenues in the first quarter of FY96 over the corresponding period in FY95. The objective of the Government is to achieve further revenue increases, but without undermining growth, competitiveness and employment. To this end, the adjustment program aims at (i) raising tax revenues through improved tax administration (import duties, turnover taxes and excise taxes) and the elimination of unjustified exemptions; (ii) rationalizing direct taxes and investment incentives; (iii) attenuating fiscal anti-export bias; and (iv) continuing with the reform of forestry taxation. 6. Tax administration and elimination of exemptions. Revenue performance in customs improved sharply in FY95 over preceding years, but revenues still remained below target owing to exemptions, tax evasion, and deficiencies in the Customs Directorate. Exemptions are reckoned to have attained up to 33 percent of non-petroleum imports in FY95. The FY96 Budget Law eliminated all customs exemptions that are not consistent with the dispositions of the 1994 CAEMC treaty. Measures are underway to complete the reform of the Customs Directorate with assistance from France, and to replace the computer system, which is unreliable and in danger of collapse. Meanwhile, the Government has decided to strengthen the role of the preshipment company (PSI), which will henceforth be responsible for determining duty assessments and verifying that duties have been effectively paid into the Government's account at the Central Bank before the goods are released. The appropriate legislation has been published, and a new contract with the PSI company has been signed. 7. Efforts are also under way to improve the administration of the turnover tax (TCA) and excise taxes. The TCA is a multistage turnover tax that was introduced in February 1994 as part of the CAEMC reform, at a standard rate of 12.5 percent (subsequently increased in steps to 17 percent). The TCA is to be eventually transformed into a Value Added Tax (VAT), but only after completion of ongoing reforms to improve the present system. First, as regards tax administration, primary attention is being given to (i) strengthening the special TCA units in Yaounde and Douala, concentrating revenue collection on the largest taxpayers, and (ii) introducing a better system of tax identification numbers, without which efficient administration is impossible, especially regarding the validation of deductions and reimbursements. Second, the TCA, as currently administered, contains a number of dispositions tending to reduce  3 competitiveness of domestically produced tradables, particularly exports. The main problem is that firms in a credit position with regard to TCA, especially exporters, are unable to effectively recover these credits because of limitations imposed on the special Treasury checks issued to that end. An action plan is being prepared for the FY97 Budget Law to solve this problem. 8. The Government is also particularly concerned about the level of smuggling and tax evasion of products subject to excise taxes (tobacco, alcohol, petroleum products). It has requested IDA's assistance in designing an appropriate response to this problem. In the area of petroleum, the Government is currently undertaking a review of the efficiency of the national oil company (SNH)'s tax collection role. This will be extended to petroleum distribution companies who are directly responsible for collection of the excise tax on petroleum products. 9. Reform of direct taxes and investment incentives. The Government is progressively reforming the direct tax system, both for business enterprises and individuals, including, as necessary, investment incentives. The objective is to create a tax system that fosters growth and employment generation without creating distortions and unjustified subsidies. In this spirit, all establishment conventions granted under the Investment Code are being renegotiated, so as to subject the beneficiaries to the standard rates of duties and TCA as adopted in the CAEMC reform. The FY96 Budget Law requires timber-processing firms operating under the aegis of the Free Trade Zone Regime to pay export duties on the log-equivalent of the exports of processed products. New agreements under this Free Trade Zone Regime have been stopped in the Forestry sector and suspended in all other sectors pending the results of an analysis of its costs and benefits. The FY96 Budget Law also introduces other reforms to the Tax Code, including the elimination of several fiscal disincentives to private sector development. This process will continue in the FY97 Budget Law, where the emphasis will be on adoption of appropriate dispositions with respect to the taxation of profits and dividends -- avoidance of double taxation (both domestically and internationally), improvement of loss carry-forward and depreciation provisions so as to make Cameroon's Tax Code intrinsically attractive to domestic and foreign investors. This approach should attenuate, if not completely eliminate, the need for special incentive regimes such as the Investment Code and Free Trade Zone Regime. At the Government's request, the IMF will be providing technical assistance in the area of direct taxation in the first quarter of 1996. IDA will be consulted during this process. 10. Reduction of anti-export bias. Exports are currently subject to a variety of taxes and levies. Excluding forestry products, these duties accounted for about 5 percent of government revenues in FY95 and constitute a handicap to Cameroon's competitiveness. In the FY95 Budget Law, export taxes of up to 25 percent were reintroduced on several products (coffee, cocoa, cotton, medicinal plants, bananas) as a substitute for income taxes, which are difficult to levy on agricultural producers. Some exports are also subject to an inspection tax of 0.95 percent. The Government wishes to replace direct export taxes, when possible, with more appropriate taxes on the agricultural sector. A first step was taken in July 1996, when export taxes were reduced to a maximum of 15 percent. Further reductions will occur following the completion of a special study that the Government has commissioned on agricultural sector taxation. A substantial reduction in export duties will be enacted, except for forestry products, before release of the Public Finance Management Tranche. 11. Forestry taxation. The Forestry sector has traditionally generated significant amounts of fiscal revenues, mainly from export taxes on logs, and to a much less extent, from stumpage fees and area taxes. In the sector, the objectives of the Government are to ensure sustainable  4 forest exploitation; develop an economically efficient wood processing industry; and mobilize an appropriate level of fiscal revenues. The Government began this process in the context of the FY96 Budget Law by increasing the concession rental (area tax) and subjecting processed wood products to export taxes. The rationalization of the forestry taxation will continue in the context of the next Budget Law so as to permit a progressive reduction of the share of the fiscal revenues coming from export taxes and increasing the share coming from trade-neutral internal taxes and concession rents. This would entail: (i) the improvement of collection of concession rentals and stumpage fees; (ii) an increase in stumpage fees and possibly of minimum concession rentals; (iii) differentiating the rate of the stumpage fee by species (higher rates for higher value species); and (iv) a reduction in export taxes. A study will be conducted in the first half of 1996 to define the measures that will be incorporated in the FY97 Budget Law. 2) Expenditures 12. Overview. The steep decline in government revenues in the past decade has translated into a sharp reduction of capital expenditures and non-wage operating expenditures. The share of investment expenditures in GDP decreased from about 7 percent in FY85 to an all time low of 0.4 percent in FY94. On the other hand, debt service obligations increased sharply, to the point where interest payments on external debt now absorb about 6 percent of GDP. The objective of the adjustment program is to raise the quality and efficiency of recurrent and capital expenditures. To this end, the program aims at: (i) reforming the civil service; (ii) increasing the share of recurrent and capital expenditures on key development sectors (agriculture, education, health, road maintenance, tax administration, justice, as well as special poverty reduction activities); and (iii) ensuring that public services are provided at minimum cost, and at acceptable quality, through improved procurement and expenditure control mechanisms. 13. Civil service reform. After considerable growth during the boom years in the early 1980s, the Government decided to freeze the size of the civil service in 1987. Since then, recruitment has been limited to graduates of the National Administration School, teachers, doctors and nurses. Reform began in 1989, with the long-run objective of reducing the size and cost of the civil service, relative to GDP, while increasing its efficiency. From 1989-1993, non- wage benefits were reduced and wages frozen. In 1993, salaries were reduced in two steps, by a total of about 45 percent. No wage increase was given following the devaluation. On the employment front, retirement has been made compulsory on reaching retirement age or after 30 years of service. As a result of these actions, the wage bill has been reduced from 9.3 percent of GDP in FY91 to 4.4 percent of GDP in FY95. The size of the civil service fell from 188,000 in June 1990 to 166,000 in June 1995, including over 38,000 in the armed forces and the police. 14. At the same time, the Government has prepared for a restructuring of all ministerial departments. Their number was reduced in the July 1994 cabinet reshuffle. A new civil service statute was promulgated in September 1994, that includes for the first time the possibility of terminating employment for economic motives. New organizational and staffing plans have been completed for seven ministries' and are under preparation for the others. The plans reflect the coverage and quality of services expected in the future and provide for a specific number of positions. Implementation of these plans has resulted in the departure of over 5300 persons in the first seven ministries by end-December 1995. Redundant staff receive severance payments, Civil service, Industry and Commerce, Economy and Finance, Education, Public Health, Women's Affairs, and Labor.  5 financed by France and the European Union. Implementation of the second series of plans by end-June 1996 will result in the elimination of additional staff. The plans for the third series of ministries will be implemented by end-1996. To better monitor the civil service, an integrated computer system is being introduced and will become fully operational before end-March 1996. Eventually, the size of the civil service will be reduced to 152,000 -- a 20 percent decline since 1991. This reduction should make room for performance-related wage increases. Adoption and timely implementation of new organization and staffing plans, acceptable to IDA, for a second series of ministries2 is a condition for release of the Public Finance Management Tranche. 15. Non-wage expenditures and public investment. During the last decade the share of capital and non-wage operating expenditures has declined from about 14 percent of GDP to less than 5 percent. This decline has taken a heavy toll on key economic and social sectors. The objective of the adjustment program is to reverse this trend, by: (i) increasing budgetary appropriations, especially for non-wage expenditure and investment in priority sectors (agriculture, education, health, road maintenance); and (ii) ensuring that actual expenditures reflect these priorities, while at the same time respecting the overall expenditure targets. 16. As a first step, in the FY96 Budget Law, budgetary allocations for priority sectors have increased from 41 to 44 percent of total budgetary allocations (excluding interest, pensions and severance payments), and their shares of non-wage allocations increased from 16 to 22 percent. A key objective of the Government's program is to ensure that these allocations are reflected by actual expenditures, which are therefore monitored on a monthly basis for all ministries. A quarterly budgeting system has been established to ensure that appropriations lead to actual payments without the accumulation of new arrears. For the next budget year, the indicative target is to set the growth rate of priority expenditures at 50 percent over the growth rate of the overall budgetary envelope (i.e. 44 percent). Conversely, should total budget allocations fall, budgetary allocations to key sectors would be protected. The conditions for release of the Public Finance Tranche are: (i) attainment of the aggregate public expenditure target for priority ministries in FY96 (over 44 percent of aggregate spending ceilings for all ministries excluding expenditures on public debt, pensions and severance payments); and (ii) allocations in the FY97 Budget Law for the same priority ministries, which in the aggregate exceed 44 percent of aggregate budgetary allocations. 17. The process of public investment programming and execution is being strengthened as part of the integration of the former Ministry of Plan into the new Ministry of Economy and Finance. The consistency of the PIP with the macroeconomic framework and current expenditure is being improved as a result. The FY96-99 PIP has been reviewed by Bank staff and is satisfactory, though perhaps too modest, given the circumstances. No public investment projects will be implemented outside the PIP, as was the case in the past through the National Oil Company (SNH). To this end, financial controls over SNH expenditures have been tightened. SNH is required to submit quarterly financial reports to the Ministry of Finance, with a detailed breakdown of actual receipts and expenditures for the preceding two quarters as well as projections for the next two. 18. The process of public procurement is being overhauled to eliminate past abuses and inefficiencies. A new procurement decree acceptable to the Bank was published in April 1995, 2 Agriculture, Livestock and Fisheries, Environment and Forestry, Scientific and Technical Research, Mines, Energy and Water, Public Works.  6 and work is proceeding apace with the revision of the statutes and regulations of the Central Procurement Agency (DGTC). The objective is to reduce the Agency's role in favor of the technical ministries. B. Domestic Debt Settlement 19. Cameroon's public sector debt is a crippling problem. Over and above the external debt which amounts to 108 percent of GDP, public sector domestic debt amounts to an additional 49 percent of GDP, mostly in arrears. The Government's domestic debt and arrears have caused serious problems in the form of non-performing assets in the financial system and a reduction in the supply of loanable funds from the banking system. Liquidity and solvency problems have also resulted for domestic private and public suppliers. Tables 1 and 2 in Annex A show that the problems are mainly caused by the Central Government, which is far more indebted than public enterprises. 20. The Government has submitted an action plan for the settlement of domestic debt and arrears. The strategy is transparent, irreversible, and involves equitable treatment for each class of creditors. To be implemented in stages, it aims at restoring the financial credibility of the State at a cost compatible with projected budget receipts in future years. The strategy will deal both with arrears and the stock of debt. Following an inventory of the debt, a validation process is being performed by a foreign accounting firm of international repute. This is expected to substantially reduce the gross debt stock. Further reductions will come from netting out cross debts between public enterprises and the Government. The public enterprise debt that remains after netting out cross debts will be dealt with on a case-by-case basis, in the process of liquidation and restructuring. The remaining government debt will be settled mainly through securitization. 21. The Regional Central Bank (BEAC) will continue to receive payment on past consolidations and statutory advances. Debt to commercial banks will be securitized over 15 years. Interest will be paid semi-annually at a fluctuating rate approximating the banks' average cost of funds plus a small margin. Half of the principal will be amortized in equal installments, starting in the fourth year; the second half will be paid in a lump sum at maturity. To make the system attractive to commercial banks, the Government has requested, and the Central Bank has agreed, to open an escrow account replenished out of tax revenues transiting through BEAC that will be used to make the interest, and after the grace period, principal payments. In later years, if resources can be found, the Government will establish a trust fund out of which the lump sum payment will be made. Part of the debt to insurance companies wiil be abandoned in the context of the liquidation of public sector companies and the rest will be securitized on conditions similar to those described for the commercial banks. CNPS, the social security agency, will be issued securities over 15 years at a low rate of interest, with five years grace on interest and principal. 22. The European Union (EU) and the Caisse Franqaise de Developpement have agreed to settle about one fourth of commercial creditors' claims in cash for the first CFAF 10 million (about US$20,000) after deduction of tax, social security arrears and sums owed to the Recovery Agency. The balance will be paid exclusively in the form of zero-coupon bonds (maturities of 2- 12 years, interest rates of 1-3 percent). Government debt to public enterprises is being reduced via (i) compensation with the enterprises' debt to Government, or (ii) voluntary abandonment of claims on the State. Remaining claims will be securitized using the same approach as for  7 commercial private enterprises. Debt to individuals, all in arrears, includes salary arrears to civil servants, as well as compensation to individuals for expropriation of property under the power of eminent domain. The latter should, on social as well as equity grounds, be given more favorable payment terms than commercial creditors, through zero-coupon bonds with shorter maturities. 23. The budgetary cost of the debt settlement strategy is CFAF 29 billion in FY96 and is expected to decline to CFAF 26 billion in FY97. Repayments of principal to the banks begin in FY99, as do payments of the zero-coupon bonds to other creditors, which leads to an increase in total debt-service charges. Implementation of the strategy has already started. Cash payments have already been made to commercial creditors. An agreement has been signed with the bankers' association laying out the detail of the securitization process. The Central Bank has notified its agreement to open up the escrow account. This arrangement, together with the Government's commitment under the adjustment program not to accumulate new arrears, should minimize the risk that its debt service obligations to commercial banks would not be honored. C. Financial Sector Reform 24. Background. Cameroon is the pillar of the Central African Monetary Union, as it accounts for more than half the regional money supply and central bank (BEAC) financing3. The crisis of the last decade has led to substantial difficulties in the country's financial sector. The first attempt (1989-1992) to restructure the banking sector was unsuccessful, mainly because it took place in the absence of a stable macroeconomic environment. It failed to involve critical regulatory and supervisory issues, did not address the weak judiciary framework and was poorly managed, in that banks were not restructured in a concerted manner. Today, the financial sector is in danger of collapse. Most banks and insurance companies are plagued by large and inadequately provisioned non-performing portfolios. Despite high lending interest rates, which discourage good borrowers, most institutions lose money, have negative net worth and are technically bankrupt. Some are illiquid as well, and restrict deposit withdrawals. A large decline in deposits in recent months reflects a generalized lack of confidence in the banking sector. CNPS is also bankrupt. After four years of operation, the specially created recovery agency (SRC) has recovered only about 13 percent of the assets entrusted to it. 25. A comprehensive reform program, building on the lessons of earlier efforts and on the need to achieve a durable, market-driven and performing financial sector, has been agreed with the Government. A strong financial sector is an essential component of the Government's efforts to encourage private sector development and elicit a supply response following the devaluation. The first phase, under the proposed program, aims at stabilizing the financial sector; a second 3 Cameroon, which shares a common regional central bank--Banque des Etats d' Afrique Centrale (BEAC) with five other countries of the region, has the most diversified financial sector in the zone. The sector is composed of: (i) eight commercial banks; (ii) eight non-bank financial institutions; (iii) a postal savings bank; (iv) sixteen insurance companies and a reinsurance company; (v) a housing bank; (vi) a social security institution (CNPS); (vii) a number of mutual savings and loans cooperatives; and (viii) a recovery agency (SRC). Two additional banks operate without being properly licensed. A Central Bank auction money market was launched on July 1, 1994. Cameroon does not have yet a bond or equity market but studies to this end are under way. Commercial banks dominate the financial sector accounting for about 64 percent of total assets; the social security institution accounts for 14 percent and the insurance industry for 12 percent. With a network of 104 branches throughout the country, commercial banks employ more than 2,200 persons; the insurance sector employs about 1,400.  8 phase, under the next adjustment operation, will emphasize financial deepening, involving housing and SME finance, rural finance, the development of term lending and equity finance instruments. The first phase builds on the fiscal stabilization program and the debt settlement strategy described above. It incorporates monetary, regulatory and supervisory reforms. It addresses the judicial framework, in addition to the specific problems of the banks and insurance companies. 26. Monetary policy and regulatory framework. The Central Bank, BEAC, which has the primary responsibility for the conduct of monetary policy, has introduced a number of encouraging reforms recently, with support from the IMF and IDA. A more rigorous annual regional and country monetary programming exercise designed to better reconcile monetary and fiscal policy in relation to macroeconomic targets has been established. BEAC has been successful in containing inflation since devaluation, but at the cost of high interest rates. Except for a short period after the devaluation, interest rates have been positive in real terms. BEAC is progressively moving towards indirect monetary controls. The regional money market established after devaluation has had a slow start, but BEAC expects to introduce "negative bidding" in early 1996, through the issue of Central Bank bills, whereby commercial banks submit offers to BEAC to invest their excess liquidity. When circumstances permit, BEAC will shift to a market-based interest rate structure. Bank margins have been fully liberalized at the national level. Regionally the maximum lending rate is set at 22 percent, well above rates charged by commercial banks. 27. COBAC, established in 1992, is the regional agency responsible for bank supervision. Its prudential regulations are generally sound and the agency has been satisfactorily carrying out reviews of banks. Improvements are needed in several areas, however, such as the reporting by banks and the speed of COBAC's intervention, especially in banking crises. More importantly, COBAC's effectiveness has been constrained by the refusal of some Cameroonian courts to accept that decisions reached in application of regional treaties take precedence over national regulations. To resolve this problem, the Government has issued a circular to magistrates informing them of the two laws, four ordinances, seven decrees and two ministerial acts abrogated or modified by the two regional treaties and advising that the 1990 ordinance on bank liquidation has been abrogated by the treaties. In addition, regulation and supervision will be introduced for the 250 or so agricultural savings cooperatives which play an important role in financial intermediation, but are currently unregulated. Finally, as a conservative measure, Cameroon will shortly increase the minimum capital requirement for banks to CFAF I billion and thereafter gradually to CFAF 2 billion. 28. Banking Sector Reform. The banking sector suffers from a pervasive presence of the Govemment as shareholder, borrower and depositor, and from distressed balance sheets. Tables 3, 4 and 5 in Annex A provide key financial indicators on commercial banks. Non-provisioned, non-performing private sector loans represent 48 percent of total private sector credits and 31 percent of total credits. Government debt accounts for a further 31 percent of total credit. Banks generally have high operating expenses, which range from 75 to 138 percent of net banking product (the difference between interest and commissions received and paid). Only one large and one small bank are considered to be sound. The biggest bank experienced a run on deposits after BNP, its foreign partner, left the country in October 1994. In 1995, the bankruptcy of the Meridien International Bank Group in the Bahamas and Luxembourg led to the freeze of the off- shore deposits of its Cameroonian affiliate. Also, the financial situation of the Credit Agricole has been seriously weakened in recent months by mismanagement. Overall, the current  9 framework is not sustainable, and funding unavailable for the additional capital injection of about CFAF 100 billion (US$200 million) that would be required to constitute adequate provisions, cover foreign exchange losses, and meet COBAC's prudential norms. 29. A transparent plan to restructure five banks will be implemented by the Government with the objective of attaining a reduced but sustainable banking sector, which should permit the operation of sound monetary policy and support the Government's goal of encouraging private investment and private sector development. The principles governing the proposals are that all institutions involved in restructuring should be the subject of independent audits (already completed); Government should not issue additional debt to cover shortfalls in assets; and shareholders (public and private) should bear their share of past losses. Restructured banks will be recapitalized from private sources and the Government will withdraw from the sector, holding only minor shareholdings, where necessary, as a stop-gap or bridging measure (in no case to exceed 20% of share capital). The overall plan is designed to minimize social and economic costs, especially for small depositors (whose deposits would be protected up to a certain ceiling), and recognizes the need to protect public and private creditors, whose deposits are essential for the operation of their enterprises. A key part of the program is the search for professional partners for banks and insurance companies that would bring sound commercial practices, solid management and internal control capacity; the Government is currently in discussion with several interested parties to this end. An advisor has been appointed under French financing, to assist Cameroon with the implementation of financial sector reform. 30. More specifically, one of the five banks, endowed with a good customer base, will be restructured by its largest foreign shareholder, which will share past losses with the Government in proportion to its share of capital, bringing the bank's net worth back to zero. The bank will then be recapitalized to prudential norms, mostly by the private partner4. The Government will keep a 20% participation on a temporary basis, until other private investors can be found. Non- performing assets will be fully provisioned, and an active recovery policy pursued by the bank (no assets transferred to SRC). Proceeds from the recoveries on credits provisioned under the restructuring plan will be deposited in a special account jointly owned by the Government and the foreign partner in relation to their respective share in the absorption of losses. Operating expenses will be reduced through lay-offs and branch closings. An agreement has been signed with the foreign partner laying out a detailed action plan for the restructuring of the bank. Because of budgetary constraints, the restructuring will be completed over a 2-year period. Of the four banks, which are not viable on their own, one will be liquidated. The other three will first be allowed to transfer non-performing assets and an equivalent amount of liabilities (including deposits) to the loan recovery agency (SRC). In this regard, all depositors will receive equal treatment in that only deposits over a certain threshold will be transferred to SRC. Small depositors will be thereby protected. The banks will then be liquidated or merged into new entities that would be taken over by new foreign and/or Cameroonian banking partners and investors. The new banks will have much lower operating expenses than the original four, having fewer branches and staff. Care will be taken to limit the burden of government debt. Simulations of income statements will check on the long-term viability of the new entities. To prevent an immediate run on these new entities, their demand deposits may have to be transformed into time deposits with staggered maturities. If private banking investors cannot be found in a reasonable time, the banks will be recapitalized by non-bank investors and 4 Capital asset ratio is currently set at 5% by COBAC; the amount of capital required is further determined by fixed assets and large credits.  10 performance-based management contracts will be signed with banks, which are renowned for their good financial standing and high-quality management. The steps involved in the restructuring are mapped in the Letter of Development Policy. The Financial Sector Reform Tranche will be released after: (i) the agreement with a foreign bank referred to above has been implemented; (ii) another bank has been placed into liquidation and a banking/judiciary liquidator appointed; (iii) the non-performing assets and frozen deposits of the three other banks: (a) have been separated from performing assets; and (b) have been transferred to SRC; (iv) the three banks have been restructured in a manner satisfactory to IDA; and (v) performance-based management agreements satisfactory to IDA regarding the three banks have been executed by the respective parties thereto. 31. The cost of this program is substantial, but far less than the cost of not restructuring. Overall, about 1,300 bank employees would become redundant. The cost to Government is CFAF 20 billion and to private shareholders CFAF 28 billion, in terms of loss of equity and recapitalization. Under the program, public and private deposits totaling a massive CFAF 120 billion will be frozen at the SRC, until recoveries are made5. Measures will be taken to avoid such deposit losses in the future. Bank supervision will be improved through better bank reporting and enforcement of COBAC decisions. Discussions are ongoing with private shareholders and bank managers to improve systems and risk management, and train staff. On the other hand, if the four banks close down, the total loss of deposits would be about CFAF 300 billion. Furthermore, a banking collapse of this magnitude might well provoke a general banking sector crisis, which would in turn deprive many exporters, manufacturers and merchants of their main source of funds. Thus the restructuring is clearly advantageous in net terms to the private sector, which considers lack of credit and poor financial intermediation to be leading constraints to growth. 32. Loan Recovery. SRC was created in 1989 to help with bank restructuring. Assets of some CFAF 600 billion were transferred to it, with many of the transfers undocumented and, in the event, of little value. Overall, SRC has recovered CFAF 20 billion in cash and CFAF 60 billion has been settled through compensations with deposits. This has permitted some small private sector depositors to recover their funds. SRC has been set up as a liquidation unit rather than a recovery agency, with the proceeds of recoveries in each liquidation distributed among the claimants according to legal liquidation rules. Its mandate is ill-defined, its operating costs are excessive and it has suffered from political interference and a lack of judicial support, which has compromised its effectiveness in repossessing assets. The Government has prepared an action plan to make it more effective. It will be restructured and downsized, and its priorities will be better defined with quantitative targets (CFAF 15 billion in the first year and CFAF 20 billion in subsequent years). It will use more effectively the privilege of the Treasury granted to it in 1994, a powerful instrument to enable it to recover assets with the same seniority rights as the Treasury. The portfolio to be recovered will be ranked on the basis of agreed criteria, including age, size and the probability of recovery. Recovery efforts will concentrate on recently transferred loans from the current restructuring exercise, on a few large debtors and on high- profile individuals with the means to repay their loans. The latter, whose arrears total CFAF 48 billion will be required to regularize their payments immediately. The composition of SRC's Board of Directors will be modified, through an amendment to its by-laws, to include The only way to keep these deposits alive would have been to increase government indebtedness, in order to replace non-performing assets. This is not feasible in view of Government's budgetary constraint and the burden this debt would have imposed on the new banks.  11 representatives from groups with a large stake in the recoveries who will have at least one third of the votes. The General Manager will no longer be appointed by decree. He will be appointed by the SRC's Board with a two-thirds majority. The registry of bank borrowers in the Central Bank will also serve as registry of delinquent borrowers. Delinquent borrowers will be prohibited from borrowing from any bank, and from participating in the privatization of public enterprises and in bids for government purchases of goods and services. Release of the Financial Sector Reform Tranche will be subject to (i) amendment of SRC by-laws, (ii) implementation of a new organigram acceptable to IDA and reorganization of its personnel and their remuneration including the introduction of "performance incentives"; and (iii) publication in the media of a Government declaration stating that delinquent borrowers will not be allowed to borrow from banks, participate in bids for privatization and government purchases. Bidding documents will incorporate a clause preventing delinquent borrowers from participating in the bids. 33. Currently, the legal framework and the judicial system fail to support the enforcement of financial contracts and the recovery of bad debts. A Roundtable on Justice and Financial Institutions held in Yaounde in November 1994 concluded that three problems require attention. First, debtors should no longer be able to oppose application of the accelerated recovery procedure to the uncontested part of a claim. Second, they should no longer be able to block SRC's right to use the privilege of the Treasury. In the future, this privilege should also apply to real property, including machinery and equipment. Third, freezing of assets pending court cases will be easier, quicker and with limited recourse. Implementation of appropriate amendments to the corresponding laws (89-201, 92-008 and 94-327) to expedite judicial credit recovery will be a condition for release of the Public Finance Management Tranche. 34. The administration of justice in Cameroon is also fraught with many problems. Judgments often contradict the law and political interference and corruption are widespread; debtors are permitted to adopt dilatory measures for settlement of claims against them. The courts are overloaded. The Office of the Clerk of the Court and the bailiff system work slowly and inefficiently. These problems are attributable in part to the economic crisis of the last decade, which has led to a chronic lack of resources, equipment and supplies, as well as reduced salaries for judges who currently earn less than non-commissioned officers in the Army. Recognizing the gravity of the situation, the Government has started to increase budgetary allocations for the Ministry of Justice in the FY96 Budget Law. Government will resume publication of the official Gazette and start publication of court proceedings. It will strengthen the judiciary inspection to oversee the performance of judges. These measures will not bring overnight a clear improvement in the judicial system, but are a first step in a long process of change that goes beyond the life of the credit. 35. The Insurance Sector is also in severe financial difficulty. Premium arrears (CFAF 36 billion) exceed annual turnover, and claims are paid with substantial delays, if at all. Operating expenses are excessive and investment returns low. Investment instruments are inadequate. As a result, none of the insurance companies meets all required prudential norms. The industry has not been properly audited by the Ministry of Finance since 1988, nor has it voluntarily submitted any reports to the authorities. There is a shortfall in technical provisions and in capital of about CFAF 74 billion. Some companies are technically bankrupt but continue to operate. The sector is a net user of financial resources, whereas it should be a net source of term financing for the economy. Restructuring is urgent, for both private and public sector companies.  12 36. Regulation and supervision have been overhauled. Insurance in the franc zone is now regulated and supervised according to the terms of a treaty recently signed under the aegis of the Confirence Interafricaine Des Marches dAssurances (CIMA). While awaiting the establishment of the regional supervisory structure, the Ministry of Finance in Cameroon has restructured its insurance supervisory unit, downsizing it from 36 to 14 staff. The unit will perform off-site supervision on the basis of mandatory quarterly returns and has started on-site inspections of all insurance companies at least once every two years, in line with recently approved procedures acceptable to IDA. This will be reinforced by external audits and improved disclosure. Its mandate will henceforth cover CNPS, which currently escapes any financial regulation and supervision. 37. Restructuring should involve not only recapitalization, but also new management, internal reorganization, and establishment of adequate controls and mechanisms for collection of overdue premia. Sanctions (including the withdrawal of licenses) will be taken against companies that do not respond to the directives of the supervisory unit. Restructuring of the three government-owned companies (AMACAM, SOCAR and CNR) will proceed as follows. AMACAM has been placed in liquidation and a liquidator has been appointed. Financial and operational audits of SOCAR and CNR, to assess their financial condition and prospects for privatization, have been completed. SOCAR will be liquidated. A roundtable of potential investors led by general agents will be convened to recreate new companies around the customer base of SOCAR. The new companies (one for general insurance and one for life), should be established before end-June 1996. New partners are being sought for CNR. Its privatization will be done in two steps (June 1996 and June 1997). If private partners cannot be found, the company will be liquidated. Altogether, 550 employees may lose their jobs in the insurance sector. 38. The cost of restructuring the private insurance companies will be assessed following the inspections to be performed by the Ministry of Economy and Finance. These costs will be entirely borne by the private sector partners. In case the three public companies are liquidated, the cost to the Government would amount to CFAF 1.5 billion in lost share capital. Private partners will lose CFAF 352 million. Claims of CFAF 36 billion against the insurance companies would be erased. This is, however, no indication of the true cost to policy holders; many of these claims have been outstanding for 8-10 years and policyholders have already absorbed their losses; some of the payments are due to policyholders who have not paid their premiums and are thus not entitled to benefits. D. Public Enterprise reform 39. Public enterprise reform was addressed in the 1989 SAL, with primary emphasis on liquidation and performance contracts for enterprises deemed worthy of rehabilitation. As an initial step, 22 public enterprises and agencies were dissolved and another 39, including six banks, legally or voluntarily liquidated. Performance contracts were established for 25 of the largest public enterprises. Performance did not improve, however, with a budgetary cost to the Government of about US$2 billion in 1989-92. In FY94, financial losses of the sector are estimated at about 3.5 percent of turnover and 10 percent of value added. Because of its tight cash situation, the Government has progressively reduced subsidy payments. To this end, water rates were increased by 15 percent on September 30, 1995. Public enterprises are no longer able to get credit on demand from the banking system.  13 40. Lack of progress in addressing problems in the sector led the Government to realize that the rehabilitation approach should be supplanted by privatization. The objective is the divestiture of all public enterprises engaged in productive activities and commercial services, while improving the performance of those remaining in the public portfolio by subjecting them, when possible, to market forces. In July 1994, the Government identified 15 of the larger enterprises to be privatized, including the main enterprises in the transport and agricultural sectors. By early 1995, five enterprises had been liquidated, including the national bus company (SOTUC); the management of two others had been privatized (Airports and the banana subsidiary of the Cameroon Development Corporation - CDC); and minority share positions had been sold in three companies. HEVECAM, one of the largest agroindustries, was put up for sale. In addition, one company has been fully privatized and five others put up for sale. In July 1995, President Biya reaffirmed his support for the new approach, and expanded the scope of privatization by including the main public utilities in the list of firms whose ownership/management was to be transferred to private operators. 41. In this context, a new General Statute on Public Enterprises was enacted in August 1995, so as to expose public enterprises to market pressures and to redefine the liquidation process. Under the new legislation, public enterprises are not allowed to continue in operation if their cumulated losses exceed more than 50 percent of their paid-in capital. In addition, the Government has decided to impose a hard budget constraint to public enterprises and closely monitor their financial situation to avoid building up new arrears. The 17 largest public enterprises are now required to submit quarterly financial reports to the Ministry of Finance, including key financial data for the past two quarters, updates of prior estimates for the current quarter and estimates for the following two quarters. The scope of these reports will be widened and the number of firms required to submit them increased over the next 12 months. A new institutional framework for privatization is being established, that will effectively separate the activities of portfolio management and privatization, simplify and speed up privatization procedures, and ensure their transparency. The Government has also hired a privatization expert to help revamp and speed up the privatization program. Sales of enterprises in FY96 are projected to yield budgetary revenues of about US$60 million. To this end, a timetable has also been established for completing, before June 1997, the privatization of the main agricultural enterprises, and the privatization of the share capital or management of the principal public enterprises in the transport sector and the three utilities. The Government will also sell its minority shares in all parastatals. An IDA-financed Technical Assistance project under preparation will assist the Government with privatization of specific companies. Privatization questions will be more fully addressed in the Enterprise Development and Privatization Credit scheduled for FY97. E. Regulatory and Incentive Framework 42. Background. A substantial trade and price liberalization was achieved in the previous phase of the adjustment program. As of February 1994, all quantitative restrictions had been eliminated on imports with the exception of petroleum products, and price controls were limited to petroleum products, medicines, textbooks, maritime transport and certain public services (electricity, water, public transport and port fees). The Government recognizes that continued improvement in the regulatory and incentive framework is indispensable for efficient resource use, conservation, and private sector development. In that spirit, on July 1, 1995, the Government eliminated import surcharges on concrete reinforcing bars, plastic bags, and flatbed trailers, and reduced the rate on cement from 20 to 10 percent.  14 43. In the agricultural sector (accounting for 25 percent of GDP and 30 percent of exports), the coffee and cocoa sectors have been fully liberalized via the adoption of a new law and application decrees in August and November 1995. Reference prices and the stabilization mechanisms have been eliminated. Quality control remains under the responsibility of the National Cocoa and Coffee Office (ONCC) until June 1996, when it will be transferred to the profession. The implementation decree for the new Forestry Code was adopted in August 1995, and introduces a market-based system of auctions to allocate concessions. 44. In the transport sector, major reforms are needed after years of inadequate maintenance, deteriorating financial and technical performance by the public enterprises operating in the sector, and a regulatory framework which handicaps competitiveness in agriculture, industry and commerce. Important reforms will be undertaken to liberalize and revise the regulatory framework. Maritime transport will be liberalized. Technical discussions have begun with the Government on a series of reforms that will remove the obligation on shippers and transporters to obtain loading authorizations from either the Administration or the Shippers' Council. The liberalization would apply to liner traffic and bulk transport (including domestic cabotage). These reforms should take effect before the privatization of CAMSHIP, the shipping company. The Government also intends to take measures to simplify and speed up international trade and transit procedures for international and regional trade. Fast-track import clearance is being considered for containers that have been preinspected and sealed by preinspection companies in the country of departure, provided also that duties have been fully paid. Internal transport will also be liberalized particularly regarding allocation of traffic between competing trucking companies. These issues will be followed up in the proposed Transport Sector Project and the Enterprise Development and Privatization Credit, which will include regulatory reforms that will eliminate restrictive practices and barriers to entry in sectors being privatized. 45. The petroleum sector retains a key position in the Cameroonian economy, despite the fall in output. A major reform of this sector is under way. The monopoly of SNH over the supply of crude oil to the refinery was abolished in July 1995. The monopolies held by SONARA and SCDP over refined products and over distribution will be abolished in June 1996: 46. In the pharmaceutical sector, the regulatory framework continues to restrict the supply of essential and generic drugs, thus increasing their cost to consumers, despite the recent liquidation of ONAPHARM, the public agency responsible for the import and distribution of drugs. The Government is preparing a new regulatory framework in this area, including, inter alia, the elimination of excessive annual drug registration and certification fees. Such dispositions increase the cost of essential and generic drugs and act as an effective barrier to entry to small distributors. The new regulatory framework is expected to become effective in 1996. In parallel to these efforts, the Government is considering the creation of drug supply centers with the participation of the non-profit private sector. PART II. THE PROPOSED STRUCTURAL ADJUSTMENT CREDIT A. Objectives and Size of the Proposed SAC 47. The proposed Credit would support a medium-term government program whose long- run objective is to double per capita income in Cameroon over the next 20 years. As described in Part 1, the program focuses on improving public finance mobilization and management,  15 restructuring the financial sector and creating a favorable environment for private sector development through state divestiture and regulatory reform. The program is based on specific monitorable actions contained in the Credit Agreement and Letter of Development Policy. The Credit, in an amount of US$150 million, would be disbursed in three tranches of US$50 million each. The first tranche would be made available on credit effectiveness; the subsequent tranches could be released upon evidence of satisfactory implementation of the overall adjustment program, including a satisfactory macroeconomic framework and fulfillment of specific conditions relating to public finance management and the reform of the financial sector. These two tranches are independent and would each become available as soon as the respective conditionalities have been met. B. Tranche conditionality 1) General * Satisfactory progress in implementing the program, including a satisfactory macroeconomic framework (as evidenced by the existence of an active IMF program) and implementation of the following measures: 2) Public Finance Management Tranche a) Fiscal receipts and non-wage expenditures * Measures have been taken to reduce export taxes on the export of goods except for forestry products by at least 10 percent (para. 10); * (a) attainment of the aggregate public expenditure target for priority ministries referred to in para. 16, which should exceed 44 percent of aggregate spending ceilings for all ministries (excluding expenditures on public debt, pensions and severance payments) for FY96; and (b) allocations in the FY97 Budget Law for the same priority ministries which in the aggregate exceed 44 percent of aggregate budgetary allocations excluding debt service, pensions, and severance payments; b) Civil Service reform * Adoption of organization and staffing plans, satisfactory to IDA, and implementation in accordance with timetables relating thereto for the ministries mentioned in para. 14; c) Other * Implementation of appropriate amendments to the laws (89-021, 92-008, and 94- 327) to expedite judicial credit recovery (para. 33); 3) Conditions for Financial Sector Reform Tranche * (a) the agreement between the Borrower and the major foreign partner for the restructuring of one bank has been implemented in accordance with its terms; (b) one bank has been placed in liquidation and a banking/judiciary liquidator appointed; (c) the non-performing assets and frozen deposits of three other banks: (i)  16 have been separated from performing assets; and (ii) have been transferred to SRC; (d) the three banks have been restructured in a manner satisfactory to IDA; (e) management agreements satisfactory to IDA regarding the three banks have been executed by the respective parties thereto (para. 30); * (a) amendment of SRC by-laws; (b) implementation of a new organigram and reorganization of its personnel; and (c) publication in the media of a declaration by the Government that delinquent borrowers will be prevented from borrowing from financial institutions, participating in bids for the privatization of public enterprises and government purchases. Bidding documents will include clauses preventing delinquent borrowers from participating in these bids (para. 32). C. Procurement and Disbursement 48. A Country Procurement Assessment Report was completed in April 1994 which concluded that Cameroon's procurement practices were inadequate. Under the Economic Recovery Credit of May 1994, Cameroon started to reform its procurement regulations, strengthen the capacity of the technical ministries, improve collaboration between its customs services and the preshipment inspection company, and review the role of the Direction des Grands Travaux du Cameroun (DGTC), a parastatal institution in charge of execution of large infrastructure projects. Progress to date is as follows: (i) three Presidential decrees have been issued (June 1995) on a new Code of Public Contracts, which is satisfactory to the Bank, on the creation of ministerial tender boards, and on the strengthening of the capacity of technical ministries; (ii) the customs computer system is being upgraded; (iii) the collaboration between customs services and the preshipment inspection is being improved; and (iv) Cameroon has presented a proposal for review of the role of DGTC. 49. Both private and public sector imports would be eligible for financing and subject to ICB procedures for amounts exceeding US$2 million equivalent in accordance with procedures consistent with Sections I and II of the "Guidelines for Procurement under IBRD loans and credits", published by the Bank in January 1995. A simplified standard ICB document, advertising procedures, and format of the bid evaluation report acceptable to the Bank will be agreed upon prior to the availability of the first bidding documents to the public. For lesser amounts, imports by the public sector would follow national procurement regulations and those by the private sector would follow established commercial practices. All imports would be subject to preshipment inspection with regard to quality and quantity of imports. Preshipment inspection would also apply to price for non-ICB procurement. 50. The credit would reimburse the foreign exchange costs of Cameroon's general imports, excluding goods financed by other bilateral or multilateral agencies and goods specifically prohibited in a negative list defined under the SITC or equivalent classification. Imported goods purchased on the local market will not be eligible. Financing under the credit of imports of foodstuff and petroleum products would be limited to aggregate amounts of US$45 million and US$20 million respectively. The Caisse Autonome d'Amortissement (CAA) would be responsible for collecting the relevant supporting documentation (description of advertising procedures, evaluation summary of bids, comparative statement of prices received, dates of contract and payment, copy of contract and invoice together with import verification certificate) and for preparing withdrawal applications. All contracts for amounts estimated to cost US$10 million or more shall be subjected to prior review procedures in accordance with paragraphs 2  17 and 3 of Appendix 1 of the "Guidelines for Procurement under IBRD loans and credits". Disbursements would be against Statement of Expenditure (SOEs) for eligible contracts valued at US$1 million equivalent, or less. The supporting documentation for these would be retained by the CAA and would be made available to Bank staff and to subsequent external auditors. The nature and origin of the goods as well as the payment date would be indicated on the SOEs. Expenditures for goods procured under invoices for US$20,000 equivalent or less would not be eligible for financing out of the credit proceeds. All other disbursements would be made against full documentation submitted to IDA. The minimum withdrawal application size would be US$2 million equivalent. To enable the Government to meet urgent foreign exchange needs, IDA would disburse for payments for eligible imports which could be limited to an aggregate amount of US$30 million, for which payments were made not more than six months prior to the date of the Credit Agreement. In addition to standard auditing covenants, an audit report, completed by auditors and according to procedures acceptable to IDA, would be submitted to IDA no later than three months after the full disbursement of the Credit. D. Implementation, Monitoring and Supervision 51. The program will be implemented by the Ministry of Economy and Finance and the Ministry of Justice. More specifically, the newly created Technical Committee for the Supervision of the Adjustment Program will ensure overall coordination of the reforms. The program will be intensely and jointly monitored by the Technical Committee and the Bank. A total allocation of 50 staff weeks will be made for supervision of the operation in 1996-97. E. Benefits and Risks 52. Successful implementation of the adjustment program would produce substantial benefits in the areas of public finance, the financial system, and development of the private sector. Improved tax administration should contribute to an improvement in fiscal revenues at existing tax levels, limiting the need for additional increases in tax rates. In turn, this should permit a higher level of private savings and hence investment. Reduced anti-export bias in the tax system will increase the competitiveness of Cameroonian products in international markets, thus contributing to badly needed export growth. It will also lead to higher producer prices for the corresponding commodities, contributing to poverty reduction. Rationalizing forestry taxation will spur more efficient resource allocation and conservation, and ensure that forestry products are properly priced from an economic and environmental standpoint. On the expenditure side, rightsizing the civil service should release resources for non-wage expenditure and wage adjustment linked to performance. At the same time, the shift of budgetary resources towards transport infrastructure, health, education and agriculture will enhance factor productivity, stimulating growth and poverty reduction. Restructuring the Government's internal debt through securitization should improve the liquidity of its suppliers, provided that the financial instruments are serviced on time. Restructuring the financial sector will avoid possible chaos in Cameroon and other members of the BEAC zone, while permitting an increase in the supply of credit to real sectors. The privatization of management and ownership of banks should eliminate political interference in the allocation of credit. At the same time, progress on the privatization of key firms in transport and agricultural sectors, as well as continuing reforms on the regulatory front and in the business environment, will speed up the development of a competitively efficient and export-oriented private sector, which is essential to a successful debt workout and growth in the Cameroonian context.  18 53. The main risk for the proposed operation is that the adjustment program might go off- track on account of a revenue shortfall or because of political opposition on the part of vested interests. A revenue shortfall could arise because of an economic downturn or because of continued inefficiency in the tax and customs administration. Under these conditions, it could prove difficult to: (i) reduce fiscal anti-export bias, with attendant consequences for competitiveness and poverty reduction in rural areas; and (ii) increase budgetary expenditures in the key development sectors. On-time payment of internal debt-service obligations might also be jeopardized. This risk would be addressed through further cuts in low-priority areas and, if necessary, additional revenue mobilization measures. The second risk is of slow implementation of the adjustment program because of political opposition to the reforms, e.g. with respect to privatization of banks' management and ownership and improved loan recovery from delinquent debtors. Financial sector reforms involve substantial institutional development, which is a slow process continuing well beyond the release of tranches. Similarly, implementation of the debt strategy requires that the Government continue to assign it a high budgetary priority. However, recent experience with adjustment in Cameroon suggests that the Government can indeed implement difficult reforms in the face of opposition from vested interests. In any event, the operation requires a number of strong prior actions before the release of each tranche in order to be sure of the Government's continued commitment to adjustment throughout the life of the operation. Moreover, Bank staff will be working closely with counterpart staff to identify potential difficulties and design appropriate remedies as needed. Furthermore, sufficient funds will be allocated to allow close supervision of the project. PART 3: RECOMMENDATION 54. Recommendation. I am satisfied that the proposed credit would satisfy the Articles of Agreement of the Association and recommend that the Executive Directors approve it. James D. Wolfensohn President Attachments Washington, D.C., January 17, 1996  ANNEX A Page 1 of 2 Tables A. Government and Public Enterprise Debt Table 1: Govemrnent debt and arrears (billion CFAF) Table 2: Public Enterprise Domestic Debt as of October 1995 Debt Arrears Debt Arrears Financial sector, o.w. 573.18 229.74 Govemment (general) 10740 6290 BEAC 318.17 1.00 Government (on lent loans) 12500 41 60 Commercial Banks 199.00 199 00 Other Public Enterprises 37.50 37.50 Housing Bank 29.78 19.20 Private suppliers 19.60 19.60 Insurance Companies 26.23 10.54 CNPS 79.00 79.00 Recovery Corporation (SRC) 75.30 75.30 Private non-financial sector, ow. 411.81 393.65 Banks 64.30 0.00 Public works companies 97.69 79.53 Insurance Companies 9.60 9.60 Others 308.17 308.17 Total 517.70 325 50 SNI Bonds 5.95 5.95 Public Bodies and Enterprises, o.w. 525.80 393.60 CNPS 216.00 98.00 Commercial public enterprises 308.60 294 40 Other 1.20 1.20 Indviduals, ow. 281.09 281.09 Salaries 38.92 38.92 Frozen 214.44 214.44 Expropriations 27.05 27.05 Damages 0 68 0.68 Total 1791.88 1298.08  ANNEX A Page 2 of 2 B. Key Characteristics of the Banking Sector Table 3: Consolidated Balance Sheet of the Banking Sector, as of September 1995 (billions of CFAF) Table 4: Current Structure of Bank Ownership 1. Assets 2. Liabilities Bank Govt. % Forelgn Partner. Tresorerie 92.0 Tresorerie 61.5 BICIC 100 BNP (36%) until 10/94 claims on public sector 205.4 o.w. BEAC 28.7 SGBC 45 Ste Generale (37%), other 18% claims on private sector 193.4 Public sector deposits 139.2 SCB-CL 35 Credit Lyonnais doubfful loans, net 106.1 Private sector deposits 454.8 BMBC 25 Meridien (provisions) 78.0 SCBC 34 Standard-Chartered Other 69.6 Other 65.2 CAC 80 DEG Fixed Assets 47.7 Shareholder equity -6.5 CCEI 0 None Total 714.2 Total 714.2 Table 5: Key financial characteristics of commercial banks (1994-1995) A B C D E F G TOTAL Non Performing Credits/ PrivateSectorCredit(%) 73.9 36.3 10.6 54.7 67.2 68.3 11.3 48.3 Performing private sector loans/total credit (%) 24.0 51.8 49.1 24.9 11.5 35.7 98.2 38.3 Provisions/Non Perfoming Private Credits (%) 57.1 21.2 82.3 59.6 34.6 19.2 90.5 43.2 Additional Provisions Required (CFAF billion) 12.0 0.0 0.0 16.0 4.0 16.4 0.0 48.4 Operating Expenses/ Net Banking Product(%) 100.5 97.1 n.a. 88.9 90.1 60.4 n.a. not available Net Banking Product (CFAF billion) 8.3 6.0 n.a. 6.7 3.3 5.4 n.a. not available Profit (CFAF billion) -25.0 -1.6 n.a. -20.6 0.3 0.0 n.a. not available Additional Capital needed 29.0 26.1 0.0 34.5 3.7 16.0 0.0 109.3  ANNEX B Page 1 of 12 Policy Matrix A. Fiscal Policy Improve fiscal revenues, reduce distortions affecting corporate income tax, attenuate anti-export bias, and reform forestry taxation 1. Increase fiscal revenues Increase the rate of certain Increase of the rate of the TCA and tax on July 1995 taxes petroleum products in the context of the 1995/96 Budget Law Improve the recovery of import - Signing of decrees entrusting a December 1995 taxes and duties specialized firm with the assessment and supervision of payments of import taxes. - Signing of contract with the selected firm December 1995 Board Presentation - Coming into force of the new system Mid- January 1996 Eliminate exemptions not - Legal and administrative measures 1995-96 Budget Law and consistent with the CAEMC throughout the program as treaty (tax and customs reform) necessary Improve the recovery of - Administrative measures for TCA and Throughout the program domestic indirect taxes excise taxes, in particular for the improvement of the system of tax identification numbers 2. Reform corporate income tax Reduce distortions and tax - Reduction of the scope of preferential 1995/96 Budget Law subsidies regimes (investment code, free trade zone) December 1995 - Reform of corporate income tax 1996/97 Budget Law 3. Reduce anti-export bias Phase out export taxes except 1. Duties have been reduced and their July 1995 on forestry products ceiling fixed at 15 percent 2. Continue with the reduction of these duties July 1996 Reduction of duty rate by at least 10 percent (Public Financ Tranchce)  ANNEX B Page 2 of 12 A. Fiscal Policy (continued) - - s . -s.-reTiming.-... .......... ...... .......... ........................-..... _ ,,,, ~~~~~~~~~~~~~~~...... ....,,.-..... Improve the reimbursement Preparatory work to be carried out January to June 1996 mechanism of the TCA paid by exporters on their purchases 4. Continue with the 1. Improve the recovery of the Preparation of measures is under way rationalization of forestry stumpage fee and concession taxation so as to: rent (area tax) (a) promote sustainable exploitation; 2. Adjust the concession rent 1) Preparatory studies to be carried out January to March 96 (b) mobilize appropriate tax (area tax), the stumpage fee 2) Measures to be taken 1996-97 Budget Law revenues; and export duties so as to (c) promote an efficient domestic increase the share of domestic forestry products industry taxes and fees.  ANNEX B Page 3 of 12 B. Civil Service Improve the efficiency of the Reorganization of ministries Phase I (Civil Service, Industrial administration and the quality of through the implementation of Development and Commerce, the civil service organization and staffing plans Economy and Finance, Health, (POE) including personnel Education, Labor, Social Affairs): rationalization through a departure and redeployment - implementation of the departure and July 1995 to end-December Completion of the program. redeployment program 1995 departure program from these ministries (Board Presentation) Phase 2 2.1 (Agriculture, Livestock, Forestry, Research, Mines Water and Energy, and Public Works) - completion of preparatory studies end-March 1996 - signing of decrees defining the end-May 1996 organization and staffing plans of the ministries -implementation of departure and end-August 1996 Approval and timely redeployment program implementation of organization and staffing plans in these ministries (Public Finance Tranche) 2.2 (Territorial Administration, Youth): - completion of preparatory studies Completed - signing of decrees defining the November, 1995 - January organization and staffing plans 1996 - implementation of departure and redeployment program March 1996  ANNEX B Page 4 of 12 B. Civil Service (continued) .-g ''''''"'"""' '' W =' ................... '" ' . ............ ..................m-"m Improve the efficiency of public Reorganization of ministries 2.3 (Posts and Telecommunications, administration and the quality of through the implementation of Tourism, Transports): civil service: plans (POE) including personnel rationalization - completion of preparatory studies in progress through a departure and - signing of decrees defining the redeployment program organization and staffing plans of the ministries - implementation of the departure and before June 1996 redeployment programs Phase 3 (Urban Affairs, Transports, Foreign Affairs, Culture, Justice, Higher Education): - starting up of preparatory studies March 1996 - completion of studies June 1996 - signing of decrees defining the September 1996 organization and staffing plans -implementation of departure and December 1996 redeployment programs Improve the supervision and Implementation of the Completion of pilot phase End-January 1996 management of civil service and integrated computerized system payroll for civil service and payroll Implementation for all ministries December 1996 management (SIGIPES)  ANNEX B Page 5 of 12 C. Public Expenditures Make the budget a better tool for economic and social development 1 . Increase the volume and 1 . Increase budgetary Under the 1995-96 Budget Law, budgetary Budget Law adopted on improve the quality of public appropriations for these appropriations for these ministries represent 44 July 1, 1995 expenditures in priority sectors ministries. percent of total budget (excluding public debt, and ministries (Agriculture pensions and severance pay) as against 41 Education, Forestry,, Economy percent for the previous year and Finance, Livestock, Justice, Technical and Scientific The objective is to ensure that, for the 1995-96 Monthly follow-up of Attainment of this Research, Health, Transports, fiscal year, actual total expenditures of these implementation objective Public Works,) ministries represent at least 44 percent of total (Public Finance Tranche) expenditures of all ministries. In order to reflect changes in GDP, the 1996- 1996-1997 Budget Law Attainment of this 1997 Budget Law will be programmed and objective executed so as to increase significantly the (Public Finance Tranche) share of priority expenditures in total expenditures, as compared to fiscal year 1995- 96 Monthly follow-up to (Indicative target: the growth of priority be carried out expenditures should, in case of an increase in total expenditures and after consultation with the World Bank, be superior to total expenditures by 50 percent at least). 2. Increase the share of non- In 1995-96, non-wage appropriations rose from Monthly follow-up to wage expenditures in these 39 to 43 percent of total budgetary be carried out budgetary appropriations appropriations for these ministries; the objective is to maintain this share in terms of actual expenditures for fiscal year 95-96. Increase the volume of public Improve and accelerate the PIP The PIP has been completed for the 1995/96- March-December 1995 investment within the context of preparation process. No public 1998/99 period, after technical consultations an improved PIP, notably in investment should be carried with the IDA and other donors terms of sectoral strategies out outside the PIP. definition and project selection.  ANNEX B Page 6 of 12 D. Public Sector Debt Settle Government and Public Development of a settlement Done November 1995 Enterprises' domestic debt strategy Agreement in principle with First draft of agreement with January 8, 1996 Board APPECAM (banker's APPECAM completed. association) for the securitization BEAC gave its approval in of debt to banks and agreement principle in principle with BEAC to open a special account Signing of protocols February 1996 Financial Sector Tranche Government/commercial banks for the securitization of debt E. Monetary Policy Liberalize interest rates Liberalization of bank margins Done July 1995 Develop money market Introduction of negative bids January 1996 through the issue of Central Bank bills  ANNEX B Page 7 of 12 F. Regulation of Financial Institutions ~~~~~~~~~~~~~~~~~.......... :.. . .. ... : - : - -: ...- : - - - : ---... Ob)e~~~~~~tives . ~ ~ ~ ~ ~ .... .... ... ... .............i~~gcdii~a1 Strengthen regulation and Circular to magistrates December 1995 Board supervision of commercial banks informing them of sections of national legislation invalidated by the two COBAC conventions (1990-1991) Modification of the 1990 edict Content identified January 1996 on bank liquidations Modification of the decree January 1996 organizing the "Conseil National de Credit" Tighter control of banks by Continuous COBAC Development of regulation for December 1996 savings and loans cooperation Strengthen regulation of Harmonization of national June 1996 insurance companies legislation with CIMA code Restructuring of insurance Action plan defined; decree modifying intemal February 1996 division within Ministry of organization issued; on-site inspections have Finance begun  ANNEX B Page 8 of 12 G. Judiciary Apparatus Strengthen judiciary apparatus so Roundtable on justice and November 1994 that it provides effective support financial institutions for the enforcement of contracts and the recovery of loans Establishment of follow-up February 1995 committee and sub-committees Increase of relative share of Continuous Justice in the budget Resumption of publication of April 1996 official Gazette Publication of Court Decisions April 1996 Preparation and inscription in Preparatory work completed March 1996 Parliament of modification to laws 89-201, 92-008 and decree 94-237 Adoption by Parliament of June 1996 Resource Management these laws Tranche Restructuring of office of Clerk December 1996 of the Court .  ANNEX B Page 9 of 12 H. Banking Sector . ..cti~ . V ss T g........_ Restructuring of Banking Sector Signing of a convention with a December 1995 Board foreign partner for the restructuring of one bank Final choice of scenario of January 1996 Board bank restructuring (cleaning up of balance sheets/ mergers / liquidation) Development of legal Financial Sector framework Tranche - Elaboration of legal texts on First draft of texts January 1996 mergers and transfers; of letters of agreement between shareholders; of conventions of transfers and purchases of assets and liabilities - Publication of edict on bank First draft prepared January 1996 restructuring - Agreement in principle with Done December 1995 BEAC on consolidations Preparation of cleaning up of Financial Sector balance sheets Tranche - audit of main banks Done October 1995 - selection of assets, liabilities January 1996 and off-balance sheet items transferred to SRC - simulation of January 1996 income/expenditure statements  ANNEX B Page 10 of 12 H. Banking Sector (continued) ...........~~mS miif Implementation of Financial Sector restructuring Tranche - Elaboration and signature of February-March 1996 merger protocols - Obtainment of prior February 1996 authorization and/or licenses by new banks - Implementation of legal February 1996 transactions and transfers to SRC and the new banks - Liquidation of one bank February 1996 - Finalization of negotiations Contacts made with individuals and banks March 1996 with investors and managers  ANNEX B Page 1 Iof 12 1. Loan Recovery ~~~~.... ....... Restructure the Recovery Design and approval of First draft available December 1995 Board Corporation (SRC) restructuring plan Implementation of the new February 1996 Financial Sector corporate structure Tranche Issuing of decree modifying March 1996 by-laws Implementation of new April 1996 Financial Sector management structure Tranche Improve recoveries through Agreement with BEAC to Done December 1995 accompanying measures extend registry to cover delinquent borrowers Publication of statement in Financial Sector medias announcing that Tranche delinquent borrowers will be denied access to bank credits and to bids on privatization and public procurement. Introduction in bidding documents for privatizations and public procurement of a clause barring delinquent borrowers from presenting a bid Updating by SRC of list of Continuous delinquent borrowers sent to the Centrale des Risques List of delinquent borrowers Continuous sent by commercial banks  ANNEX B Page 12 of 12 J. Insurance Restructuring of public insurance Decree to withdraw license of Done December 1995 Board companies AMACAM Appointment of judiciary Done December 1995 Board liquidator Finalization of audit of Done December 1995 SOCAR Agreement on action plan for Done December 1995 Board SOCAR Implementation of liquidation / June 1996 privatization Finalization of audit of CNR Done December 1995 Board First phase of privatization June 1996 Second phase of privatization December 1996  ANNEX C Page I of 19 LETTER OF DEVELOPMENT POLICY I. INTRODUCTION 1. Early in 1994, the Government adopted a new economic recovery strategy that broke with past adjustment efforts. Consequently, the protracted economic downturn that the Cameroonian economy had experienced since the mid-1980s was halted at the end of fiscal year 1994/95. 2. An important element of the new strategy was the 50% currency devaluation of January 1994 undertaken jointly with other countries in the CFA zone. The economy responded favorably to the devaluation, as reflected in the expansion of exports that led to a positive real growth rate of 3.3 % of GDP in 1994/95, as against a 4 % decline a year earlier. 3. The devaluation was immediately followed by corrective adjustments, and by an increase in the rates of public utilities and prices of goods produced by public enterprises brought under the purview of the common-law tax system. Following implementation of these measures, inflation was brought under control and contained within limits consistent with the preservation of the gains in external competitiveness brought about by the devaluation. The inflation rate was maintained at 13% during 1994/95 and remained stable from January to June 1995. 4. Budgetary performance improved significantly throughout the 1994/95 fiscal year. Tax revenues rose by more than 50% relative to 1993/94, and the primary fiscal balance recorded a surplus equivalent to 3% of GDP, as against a 2 1/2% deficit for the previous year. 5. Performance in the traded goods sector improved appreciably, as reflected notably in a dramatic financial turnaround of agro-processing industries and a significant improvement in farmers' income (coffee, cocoa, cotton). Activity in domestically oriented industries, however, remains hampered by unfavorable overall economic conditions, including weak domestic demand. 6. To consolidate the economic recovery recorded in 1994/95 and foster continued improvement, the Government has adopted a new program of economic adjustment and far- reaching reforms for 1995/96. This program is supported by an IMF Stand-by arrangement approved on September 27, 1995. The present Letter of Development Policy sets out the measures recommended for implementation under the adjustment program, as well as the main reforms on which the return to sustainable growth depends. II. MEDIUM-TERM OBJECTIVES AND STRATEGIES (1995/96-1997/98) 7. To consolidate the improvement recorded in 1994/95, which has continued during the first six months of 1995/96, the Government intends to pursue resolutely the implementation of its strategy aimed at restoring macroeconomic balance and ensuring sustainable growth. This  ANNEX C Page 2 of 19 program, of which the devaluation of the CFA franc constituted a turning point, revolves around: (i) a policy of domestic demand management to contain inflation within reasonable limits, so as to preserve the gains from the January 1994 exchange rate adjustment; (ii) the disengagement of Government from productive activities transferable to the private sector, improved efficiency and greater transparency of government interventions in the provision of basic public services; and (iii) the pursuit of the trade liberalization process and the elimination of all constraints to the free functioning of the labor, goods, and services markets. 8. A major objective of the Government is the elimination of poverty generated by the drop in the purchasing power of the rural and urban population. In particular, the Government will seek to improve the access of the population, notably its poorest segments, to basic social services (health and education). To this end, the Government intends to maintain the economy on a path of positive real growth, averaging 5% of GDP per year. 9. With the Government having clearly opted for disengagement from productive activities, the private sector will become the driving force behind economic growth. To this end, the Government intends to provide economic agents with a transparent environment, free of distortions, that will encourage product diversification and the achievement of higher levels of output. III. THE ADJUSTMENT PROGRAM A. MACRO-ECONOMIC POLICIES 1) Fiscal Policy Revenues 10. A significant increase in government revenues has been recorded since 1994/95. Owing to a particularly high debt burden, however, the revenue growth has been insufficient to enable the Government to fully meet its financial commitments. 11. The growth of government revenue thus constitutes a major objective of the adjustment program. Government revenues in 1995/96 are expected to increase by 33% from 1994/95 and reach CFAF 707 billion, reflecting a growth of non-oil revenue of more than 3% of GDP. This increase in non-oil revenue is expected to result from: (i) the broadening of the tax base; (ii) the strengthening of the tax administration in general and the customs department in particular; (iii) the proceeds from the privatization of certain important public enterprises in the agro-processing sector and the transport sector; and, mostly, (iv) new fiscal measures adopted in the context of the 1995/96 Budget Law, which are expected to yield some CFAF 150 billion. These measures include: (a) the increase of the special tax on petroleum products by CFAF 40 / liter for premium grade gasoline, CFAF 35 / liter for gas-oil, and CFAF 20 / liter for kerosene; (b) the increase of the standard rate of the turnover tax (TCA) from 15% to 17% and of the reduced rate from 5% to 8%; (c) the extension of the export tax to include semi-processed logs (which, until then, had applied only to logs); and (d) the elimination of all preferential tax regimes and customs exemptions that are not consistent with existing legal provisions.  ANNEX C Page 3 of 19 12. At the same time, pre-shipment inspection has been extended to all imports with the exception of crude oil and oil companies' imports. Finally, the decree No. 95/004 of December 7, 1995 has transferred to a pre-shipment inspection company the responsibility for assessment and control of import tax collection. 13. The adjustment program aims at: (i) increasing tax revenues through improved tax administration and the broadening of the tax base (through the reduction of exemptions); (ii) rationalizing the corporate income tax; (iii) attenuating anti-export bias; and (iv) pursuing the reform of forestry taxation. 14. Raising revenues. A reform and restructuring of the tax administration (supported by France) is under way. In the meantime, the Government has decided to entrust a specialized firm with the assessment and supervision of collection of import levies. This should lead to elimination of (a) unjustified exemptions and (b) documentary fraud (underestimation of dutiable values, misdeclaration of tariff positions). The Government is also taking steps to complete and modernize the computer system of the Customs administration. In the field of domestic indirect taxes, primary attention will be given to improving the system of tax identification numbers, without which efficient administration of the TCA is impossible. At the same time, steps will be taken to better control the tax base, deductions, and the timely remittance of TCA due to the Treasury. The authorities are currently identifying measures to reduce smuggling and internal fraud for products subject to excise taxes (mostly tobacco). 15. Reform of corporate income tax. The aim of the reform is to build a tax system that fosters growth without creating distortions. In this respect, the authorities have already taken measures to reduce the scope of the preferential regimes (Establishment Conventions, Free Trade Zone). The Government intends to pursue the reform of corporate income taxation within the context of the next Budget Law. 16. Reduction of anti-export bias. Exports are currently penalized by duties and the shortcomings of the indirect tax restitution mechanism, mainly as regards the TCA. The objective of the Government is to phase out export taxes and replace them with more appropriate taxes on the agricultural sector. For the TCA, the objective is to further improve and accelerate the mechanism of TCA restitution to exporters, subject to appropriate verifications of exporters' claims. 17. Forestry taxation. At present, most tax revenues in the forestry sector are raised through export duties imposed on logs. Under the new Forestry Code, however, exports of logs will be banned within a few years. Hence, there is an urgent need to find alternative fiscal measures on forestry products so as to protect forest resources; mobilize appropriate revenues; and develop an efficient domestic forestry products processing industry. The Government has already incorporated these objectives in the 1995-96 Budget Law, with an increase in the area tax (minimum concession rent) and the introduction of export duties on industrially transformed logs. The reform of forestry taxation will continue in the context of the next Budget Law with a view to reducing progressively the share of export taxes in total revenue and raising the share of domestic taxes. This implies: (i) better recovery of the concession rent (area tax); (ii) increase in the concession rent (area tax) and stumpage fees; (iii) establishment of progressive stumpage fees (i.e. higher rates for more valuable species); and (iv) a reduction in export duties. Furthermore, the proposed measures should avoid a decrease in total revenues.  ANNEX C Page 4 of 19 Expenditures 18. Fiscal constraints demand the continuation of a tight government expenditure policy based on clearly established priorities. Within the context of the Government's policy of disengaging from the productive sector and reorienting its mission towards regulation and the provision of basic public services, the Government will continue to give priority to such essential sectors as health, education, basic infrastructures and rural development. 19. Within this context, and through the control of the wage bill, the Government will pursue its policy of public expenditure reform that rests mainly on the increase of capital expenditures in social services (health, education) and basic infrastructures. 20. Reflecting changes in nominal GDP, the 1996-97 Budget Law will be programmed and executed so as to increase the share of key sectors in total expenditures from 1995-96. In case of an increase in total expenditure ceilings relative to 1995-96, the growth rate of priority expenditures (health, primary and secondary education, transport, public works, livestock, forestry, economy and finance, justice) will significantly exceed that of total expenditures. In case of a decrease in total expenditures, key expenditures will be reduced by a lower proportion than total expenditures. 21. To ensure the permanence of these policies, the Government will periodically undertake in-depth reviews of public expenditures in conjunction with its partners, including in particular the World Bank. Public Investment Program 22. With regard to public investment, the Government will implement the measures listed in the Public Investment Program (PIP), taking into account the reorientation and redimensioning of government economic actions as well as the financial constraints faced by the economy. 23. Within this context, public investment should seek to: (i) effectively support economic growth in the short and medium term through a rigorous selection of public investment projects; (ii) improve the conditions for sustainable development, notably in the social service sectors (health, education, employment) and communication infrastructures; and (iii) support the private sector, particularly in sectors in which the economy has a comparative advantage (such as the wood industry, the mining industry and, mostly, the agro-pastoral industry). 24. For the medium term, the four-year programming of public investment will be maintained. The Government will come to an agreement with its partners regarding size and structure of the Public Investment Program (PIP), and no public investment will be carried out outside the framework of the latter. 2) Monetary and Credit Policy 25. Monetary policy will be conducted with a view to controlling inflation and strengthening the foreign assets position. To achieve the latter, the authorities' interest rate policy (borrowing and lending rate) will involve maintaining a non-penalizing differential between Cameroon and its main trading partners (notably France). Real interest rates will be kept positive. In the context of the interest rate liberalization pursued by Cameroon together with its other BEAC  ANNEX C Page 5 of 19 partners, the Cameroonian authorities have eliminated the ceilings on bank spreads. The maximum lending rate was recently raised to 22% by the regional authorities. 26. A money market auction came into being on July 1, 1994. Negative bidding through the issuance of Central Bank securities will be introduced in January 1996 in order to allow commercial banks to invest their excess liquidity. B. STRUCTURAL REFORMS AND SECTORAL POLICIES 1. Structural Reforms Civil Service Reform 27. The civil service reform comes within the scope of the measures adopted by the Government in order to improve public sector management. As expressed in the June 1995 declaration by the President of the Republic on the country's economic policy, this reform is based on the principle of good governance as a guarantee of confidence, justice, transparency and equity. Indeed, the strategies adopted and the measures implemented so far convey the Government's determination to improve the current environment and to build an efficient civil service in terms of its operation and delivery of services to the population. These measures and strategies also aim at making the civil service more attractive and ensuring civil servants a decent standard of living and an acceptable work environment. 28. Since 1987, the Government has implemented several measures to reduce the civil service staffing levels. These measures included: (i) freezing recruitment, which has been strictly limited to schools for training of civil servants; (ii) pensioning off all personnel that have reached retirement age; (iii) establishing the same age-limit for retirement for all categories of staff; (iv) making retirement mandatory after 30 years of service; and (v) implementing the civil service departure program (plan social). 29. Following implementation of these measures, the number of active personnel (including armed forces and police) has been brought down, from 188,000 officers in June 1990 to 166,000 in June 1995, representing a decrease of close to 12% of total staff. 30. Several measures have also been implemented to reduce the wage bill: (i) since 1989, salary increments due to civil servants on the occasion of their promotion have been withheld; (ii) in 1991, the level of mission travel expense allowances was scaled back; (iii) non-wage benefits for civil servants were reduced in 1991; (iv) in January and November 1993, civil service wages were reduced by 50%; and (v) three censuses have been conducted (1987, 1992 and 1993) to ensure the elimination of ghost personnel from the payroll data base. As a result of these measures, the annual wage bill has been contained at CFAF 190 billion since 1994/95, as against CFAF 300 billion in 1990/91, amounting to a 37% decrease. 31. The Government will continue and accelerate the implementation of civil service reform, the objective of which is the improvement of efficiency in public services. To this end, the main measures and actions will aim at: (i) completing the preparation and implementation of the organizational and staffing plans in all ministries; (ii) rightsizing the workforce relative to needs,  ANNEX C Page 6 of 19 while improving the skills match; and (iii) implementing the integrated computerized system for civil service and payroll management (SIGIPES). 32. The Government intends to pursue the restructuring of the ministries through the implementation of the organizational plans adapted to their mission and to reduce the civil service workforce in accordance with the conclusions of the studies on the organization and staffing plans (POEs). The objective is to have an overall civil service workforce below 160,000 by 1996/97, taking into account retirements and the departures from civil service in the context of the civil service restructuring plan. 33. The reduction of the civil service workforce is being carried out through two mechanisms: a redundancy departures program and voluntary departures. The departures program aims at improving the efficiency of the civil service through the elimination of excess staff as well as personnel whose profile does not match the requirements of the particular position they occupy (in terms of education, experience, age). It also includes provision for the gradual absorption of redundant staff into the private sector. 34. In application of the principles set out above, the POEs have been completed in seven ministries: Civil Service and Administrative Reform, Industrial and Commercial Development, Economy and Finance, Education, Health, Labor, Social Affairs and Women's Affairs. Including retirements, employment in these ministries have been reduced by 7,102 officers by end-December 1995 (4,094 redundancies and voluntary departures, and 3,008 retirements). The timetable for the continuation of the POEs is set out in the following paragraphs. 35. For the ministries intervening in the rural sector, that is: (i) the Ministry of Agriculture (MINAGRI); (ii) the Ministry of Livestock, Fishing and Animal Husbandry (MINEPIA); (iii) the Ministry of Environment and Forestry (MINEF); (iv) the Ministry of Scientific and Technical Research (MINREST) and the Ministry of Mines, Water and Energy (MINMEE): (a) the POE studies will be completed before the end of March 1996; and (b) the new organizational and staffing plans will be approved and the corresponding decrees signed by end-May 1996, and staff will be redeployed by end-August, 1996. 36. For the ministries whose POE studies are at a relatively advanced stage, that is: (i) the Ministry of Territorial Administration: (a) the studies undertaken by the experts from the Permanent Secretariat for Administrative Reform (SPRA) are completed; (b) the new organizational and staffing plans were approved in September 1995; (c) the corresponding decrees were signed in November 1995, and the staff restructuring will be completed by March 1996; and (ii) the Ministry of Youth and Sports (MINJES): (a) the studies undertaken by the SPRA experts are completed; (b) the approval of the staffing plans occured in September 1995; (c) the corresponding decrees will be signed in January, 1996 and the staff restructuring will be completed by March 1996. 37. For the other ministries whose studies will be financed externally, that is: (i) the Ministry of Urban Affairs and Housing; (ii) the Ministry of Foreign Affairs; (iii) the Ministry of Higher Education; (iv) the Ministry of Culture; (v) the Ministry of Justice; (vi) the Ministry of Communication; (vii) the Ministry of Post Office and Telecommunications: (a) the POE studies will start in March 1996; (b) the completion date for the POE studies has been set for end-June 1996; (c) the new organizational and staffing plans will be approved by end-September 1996, and the staff restructuring will be completed by end-December 1996. Finally, with a view to  ANNEX C Page 7 of 19 improving staff moral and efficiency of public services, the Government intends to improve, within the limits of available resources, employment conditions of the remaining civil servants. Public Enterprise Reform 38. Since 1986, the Government has recognized the need to completely reorganize its public sector portfolio (220 enterprises). To this end, it created the Public Enterprise Rehabilitation Mission in June 1986, charging it with formulating a new policy on government equity participation and developing regulations for the supervision, control and management of state- owned enterprises. 39. After an initial phase of studies, the implementation of the reform started in 1988/89 and went through two distinct stages: (i) a first phase, which ended in June 1994, the main component of which was the review of the scope of the portfolio and the rehabilitation of the largest enterprises; and (ii) a second phase, which started in July 1994, the main objective of which was government divestiture. Despite numerous difficulties, the action plan for the first phase of reform, adopted by the Government in consultation with the World Bank and set forth in Economic Strategy and Recovery Declaration adopted in May 1989, was implemented with the following results as of June 30, 1994: (i) a significant reduction of the government portfolio through the liquidation of close to 36 percent of the enterprises, of which 22 were statutory bodies and 57 limited companies. This portfolio reduction resulted in appreciably lower direct government subsidies, which went from a yearly average of CFAF 150 billion to less than CFAF 20 billion in 1993/94; (ii) the technical and financial rehabilitation of 25 public enterprises, including some of the most important ones, and a significant rationalization of the Government/enterprise relationship including the definition of precise economic and financial objectives for the enterprises; and (iii) the privatization of five enterprises (OCB, SEPBC, SOCAMAC, COCAM, SCDM) and the compulsory liquidation of three others (SEAC, CREVCAM and GETRAM). 40. The Declaration of General Policy relative to public and parapublic enterprises adopted by the Government in May 1994 defined new rules for government involvement in the economy. These regulations imply a disengagement from the productive sector and the reorientation of government activity towards basic development. The legal and institutional framework that served as the basis for the implementation of this new policy consists of: (i) the ordinance of June 22, 1990, regarding the privatization of public enterprises and its application decree of August 30, 1990; and (ii) the ordinance of August 17, 1995, defining the General Statute of Public Enterprises. 41. This new orientation of public enterprise reform was reflected as of July 14, 1994 in a presidential decree that listed 15 new enterprises to be privatized. This brought to 22 the total number of enterprises to be privatized by that date. An additional step was taken on June 1, 1995 with the decision to associate the private sector in the management of public utilities (water, electricity and telephone), for which preparatory work has started. 42. The first implementation measures of this new policy have led to the divestiture and liquidation of seven enterprises during the last 18 months (Onaphram, OPV, Socatour, Seda, Sotuc, Soderim and Cenafop) and the privatization of eight others, including three by sale of the Government's minority share (SPFS, SRL and CHOCOCAM), two by management contract (Aeroports du Cameroun and a banana plantation) and three by sale of assets (ONDABP  ANNEX C Page 8 of 19 Yaounde and Muyuka, as well as Sofibel). The preparatory work for the privatization of the four key enterprises of the transport sector (CAMSHIP, CAMTAINER, CAMAIR, REGIFERCAM) has also been started. 43. However, the Government is aware that the privatization process has been slower than expected, and that improvements are urgently needed. In order to support the emerging economic recovery, it intends to: pursue methodically, and at a sustained rhythm, its policy of divestiture; accelerate the restructuring of the sector; and reinforce the financial supervision of the enterprises maintained in the Government's portfolio. The following measures will be taken: (i) simplification of the decision-making procedure as regards privatization, so as to reduce the number of steps; (ii) adjustment and clarification of the legal framework for privatization in some key areas; (iii) privatization of public enterprises in a more sequential fashion, so as to allow for the completion of preparatory work before adoption of the decree disclosing the short- list of enterprises admitted to the privatization procedure (the objective is to shorten the time lag between the publication of these decrees and the actual transactions); and (iv) for the privatization of enterprises in monopoly situations, implementation of mechanisms putting an end to these monopolies and/or, in the case of certain public services, establishment of a regulatory framework to avoid any abuse of dominant position. The same approach will be adopted for public enterprises whose divestiture is not immediate. 44. The Government is equally aware that, owing to the size of the enterprises put up for sale, the privatization process will succeed only if substantial external investments are mobilized and the Government promotes broad national participation. To this end, it intends to implement the following additional measures: (i) launching a large-scale communication's campaign to present the privatization program both domestically and abroad; and (ii) implementing arbitration mechanisms to settle potential disputes that could arise in the context of the transactions, in lieu of domestic courts of law. It will also encourage the creation of an investmentlprivatization fund to support the participation of nationals in the privatization process. 45. The implementation of the policy of divestiture should result as a matter of priority in: (i) privatization of the four public enterprises of the transport sector, that is, CAMAIR, CAMSHIP, CAMTAINER and REGIFERCAM, as well as the CNIC; (ii) privatization of the largest agro-industries, including HEVECAM, SOCAPALM, CAMDEV, SODECOTON, CAMSUCO, SCT, Station ONDAPB de Douala, and Station Pilote Laitiere de Ngaoundere; (iii) association of the private sector in the management of the three main public utilities, water, electricity and telecommunications; (iv) continuation of the divestiture of banks, insurance companies and other financial institutions (SOCAR, CNR, BICIC, etc.); (v) progressive privatization of the various semi-public companies operating for the most part in the processing industry; and (vi) completion of the liquidations begun as of June 30, 1995 under the scope of activities of the Rehabilitation Mission and not yet completed. 46. As regards the reorganization and restructuring of the public enterprises that will be maintained within the Government's portfolio, priority will be given within the next three years to those whose economic and social function is particularly sensitive. The relations of these enterprises with the Government will henceforth be governed by performance contracts and other appropriate mechanisms. In addition to the removal of subsidies to enterprises operating in markets, these measures will aim mainly at reducing their production costs, improving their technical and financial performance, and strengthening transparency in management. In order to  ANNEX C Page 9 of 19 assess the impact of these actions, the Government will regularly publish a report for public enterprises highlighting: (i) the consolidated financial accounts of these enterprises; (ii) financial flows between the Government and public enterprises; and (iii) changes in arrears and cross debts. This report will be completed for 20 enterprises before June 30, 1996, and be progressively extended to all enterprises within two years. Financial Sector Reform 47. The financial sector has continued to deteriorate. Five commercial banks, representing 70% of the assets of the banking sector, are technically bankrupt. The contraction of money supply and foreign assets indicates a loss of confidence in the banking system. No insurance company meets the prudential regulations of the Inter-African treaty on the insurance industry (Confirence Inter-Afticaine des Marches d'Assurance or CIMA). Under these conditions, the restructuring of the financial sector takes on particular urgency as an essential component of the structural adjustment program. 48. In this context, the Government intends to implement a strategy focusing on the institutional environment and restructuring of banks as well as the insurance sector. Institutional Environment 49. The Government will reduce its share in the capital of financial institutions and to withdraw from their management. From now on, government share in capital will be temporary and limited to a maximum of 20%. 50. The Government commits itself to support the Central Africa Banking Regulatory Agency (COBAC) in the supervision of financial institutions and to take the necessary steps to enforce COBAC decisions. (Appeals against such decisions will be lodged in conformity with the procedures defined by the treaties creating the Banking Regulatory Agency and harmonizing banking regulations in Central Africa). In particular, the Government will ensure the harmonization of the domestic regulations with these two treaties. The monetary authorities (MINEFI) have issued in December, 1995 a circular notifying magistrates of the two laws, four ordinances, seven decrees, two circulars (arret6s) and four decisions abrogated or modified by the COBAC Conventions. This circular will mention the changes introduced by the Treaties to the Ordinance of 1990 on the liquidation of financial institutions. This Ordinance will be further modified in January 1996 to take into account the specificities of SRC. The decree organizing the Conseil National de Credit will also be modified in January, 1996 to make it compatible with the two treaties. 51. Similarly, the Government will take the necessary steps, before June 1996, to harmonize domestic regulation with the Inter-African treaty on the insurance industry (CIMA). 52. Regulations on credit and savings cooperatives will be introduced before December, 1996. The Minister of Finance has asked the regional monetary authorities to be involved in the preparation of such legislation. Work on this matter has already started. 53. The substantial domestic public debt seriously hinders economic recovery. The Government is aware of the necessity to face up to this problem without delay for the economic recovery to be sustainable. Public debt will be settled with the assistance of Cameroon's foreign partners in line with a strategy adopted in November, 1995. The objectives of the strategy are:  ANNEX C Page 10 of 19 (i) to allow Government to regain the status of good borrower and become a key actor in the development of financial markets; (ii) to help the financial sector manage the payment system more efficiently and carry out resource mobilization and allocation for the benefit of economic development; and (iii) to allow the private sector to clearly comprehend the institutional and financial environment in which it functions. 54. The strategy, which covers all debt categories, rests on a four-step approach: (i) inventory of the debt; (ii) validation of the debt through an audit by firms of international reputation; (iii) definition of the regulatory framework; and (iv) settlement of the debt. The recommended debt treatment, based on the principles of transparency and equality among creditors of a same category, is irreversible. A document describing this strategy in detail has been sent to the World Bank. 55. The regulatory framework of this strategy has been defined respectively by the legal provisions that govern the privatization/liquidation of public and semi-public enterprises, as well as by the Ordinance No 95/003 of August 17, 1995 that defines the statutes of these enterprises; the decree No 94/61 1/PM of November 30, 1994 defining the regulations that apply to the issue and management of negotiable Government securities; the ministerial circular No 417/M1NEFI/CAB/CAA of December 30, 1994 defining the organization and functioning of the Management Committee of negotiable government securities; and the ministerial circular No. 95/00094/MINEF/CAB/CAA/DG of August 4, 1995 defining the mode of determination of the maturity of zero coupon bonds. 56. Debt settlement must lie within the scope of government financial operations and, as such, is subject to budgetary constraints which dictate that cash payments be limited and settlement be carried out mainly though securitization. The latter is under way for the commercial debt. Banking debt will be securitized as part of the restructuring of the sector. Other instruments recommended for internal debt settlement may include compensations and equity conversions within the context of the privatizations. The inventory and audit are under way. The Government, together with the World Bank and other donors, will determine the need to extend the terms of reference of the auditing firms or undertake other reviews, for example of the Treasury. 57. Within the context of the banking sector restructuring, government debt will be securitized at a floating interest rate adjustable on a yearly basis and reflecting the average cost of banking resources plus a small margin. Half the debt will be amortized linearly over 12 years after a grace period of 4 years on repayment of the principal. The principal on the other half will be paid off in one single payment at maturity (30 years). To comfort the banks, and upon the request of the Government, the Central Bank has accepted to open a depository account to make interest and/or principal payments to the banks. This account will be provisioned by the commercial banks' fiscal receipts, complemented if necessary by other government resources transiting through BEAC. The Government will ask the Central Bank to remunerate this account. Interest payments on the securitized debt will be made half-yearly. At each maturity date and after the payment has been made, any amount in the depository account exceeding 30 percent of the following maturity will be transferred to the government account with BEAC. COBAC will ensure that the prudential treatment of those government securities does not affect the current banking sector restructuring scheme. For the part repaid in fine at maturity, the Govermnent will establish an offshore trust fund as soon as its financial situation permits it. The Government will sign in early January 1996 an agreement in principle on securitization with the  ANNEX C Page 11 of 19 bankers' Association, APPECAM. It will sign in March-April 1996 the agreement with the BEAC on the depository account. The settlement of the other debts will be carried out by securitization in accordance with the conditions set out in the document defining the debt settlement strategy. 58. The Government will strengthen the judicial system with the aim of improving the enforcement of financial contracts and the recovery of bad debt. A Round-Table on Justice and Financial Institutions was held in Yaounde in November 1994. The Round-Table follow-up Committee will carry on with its work. To facilitate the recovery procedure and the seizure of goods, appropriate revisions will be implemented to law 89-021 of December 29, 1989 establishing a simplified procedure for the recovery of civil and commercial claims; law 92-008 of August 14, 1992 laying down the provisions relating to the enforcement of court orders; and decree 94/237 of June 24, 1994 setting out the details of implementation of the "privilege du Tresor" granted to the Societe de Recouvrement des Creances du Cameroun. The preparatory work for the amendments will be carried out in March, 1996. The bills will be presented to Parliament during the June session. The inspection department of the Ministry of Justice will be reinforced. The publication of the Official Gazette will resume before April, 1996. Carefully selected court orders will be published. The Office of the Clerk of the Court dealing with commercial cases will be reorganized before December, 1996, and the necessary measures will be taken to accelerate the handling of court decisions. The Government commits itself to raising the share of the Ministry of Justice in its budget. 59. Other measures will be taken to improve the recovery of bad debts, which constitutes an essential component of the financial sector reform. A specific strategy has been developed to that effect, as described in the following paragraphs. 60. A plan has been adopted for the restructuring of the Recovery Agency (Soci6te de Recouvrement des Creances du Cameroun, SRC). First, this plan provides for the downsizing of SRC, improved allocation of responsibilities and establishment of an internal structure geared to recoveries'. The internal audit department will report hierarchically to the Board of Directors, while maintaining a functional relationship with the general manager. Its role will be to control, not to manage. The recovery departments, as well as the debt verification services, require the support of lawyers. A Legal Department will provide support to the Recovery Department and the Claims Department. The recovery will be carried out by specialized agents organized in groups. The cases will be distributed among agents by debtor, rather than by bank. With this new structure, a system of allocation of recovery proceeds will have to be established for cases in which a single debtor has obligations to several banks. In an initial stage, this allocation will take into account existing guarantees. The rest will be prorated according to the debt owed to each bank, under the supervision of the internal audit department. 61. Second, a staffing plan will be implemented to lay off inefficient employees and select officers better able to pursue loan recoveries. 62. Third, the portfolio will be restructured to increase the recovery rate through: (i) a more thorough treatment of the pool of recoverable credits; (ii) the preselection of credits according to their size and probability of recovery; and (iii) an inventory of all guarantees. An annex to this letter, describing organization and tasks, is available upon request.  ANNEX C Page 12 of 19 63. Finally, an incentive framework will be implemented. An expatriate recovery expert will have as a mandate to organize recovery efforts to maximize proceeds and assess the new credits that will be moved from restructured banks as a result of the current restructuring. The expert will be assisted by two local employees that he will train. The preselection of credits should aim at focusing the recovery efforts on large debtors and personalities with means to repay their loans. It is likely that these efforts can concentrate on a few thousand cases. Computerization should involve as a priority preselected credits, as well as the centralization of information by debtor and/or creditor for all banks. The computer system should be kept at an appropriate size and adapted to the specific requirements of loan recovery. To purchase the necessary computer equipment, SRC will make an invitation to tender after having established adequate terms of reference. The new organizational structure will be implemented in February, 1996. The SRC will be assisted by the World Bank for the computerization, the selection and the fees to be paid to the recovery expert. 64. Quantitative recovery targets have been established. They are CFAF 7.5 billion for the fiscal year ending June 30, 1996, and CFAF 9 billion (for the existing portfolio) for the following fiscal year, plus 7% of the new portfolio transferred from restructured banks. 65. The by-laws of SRC will be modified by decree to ensure the presence of the beneficiaries of the recoveries on its Board of Directors. Representatives of depositors and APPECAM will have at least a third of all votes on the Board. The by-laws will be modified so as to confirm with the new General Statute of Public Enterprises. In particular, the general manager will be appointed by the Board of Directors with a two-thirds majority. The by-laws will also set out the appointment procedure of the representatives from Government and the beneficiaries. The decree modifying the by-laws will be issued in March, 1996 at the latest, and the new Board of Directors will be in place by April, 1996. 66. The Registry of Bank Borrowers (Centrale des Risques) established by BEAC contains a list of delinquent borrowers in its column 14. This document is updated every two months. Commercial banks send their lists regularly. SRC will update its list immediately and will send updated lists every second month. 67. Before February 1996, the Government will publish in newspapers a notice stating that delinquent borrowers will not be allowed to have access to bank credits nor to bid in the privatization process, investment funds and public procurement. Invitations to tender for privatizations and public procurement will clearly mention this ban. 68. COBAC has committed itself vis-a-vis the Government to supervising commercial banks more closely and sanctioning those which grant loans to debtors mentioned in column 14 of the Centrale des Risques. Bank Restructuring 69. The restructuring of the banking sector follows a global approach. It is undertaken in close collaboration with BEAC and COBAC. The restructuring plans developed for each bank include a financial package and specific measures to: (i) decrease operating costs (notably through staff reductions and the closure of some branches); (ii) improve internal controls; and (iii) strengthen debt recovery.  ANNEX C Page 13 of 19 70. A restructuring of five banks is proposed. In the case of one bank, an agreement in principle has been reached between its major foreign partner and the Government. Both will share past losses in proportion to their participation in the capital of the bank. The foreign partner undertakes to recapitalize the bank in conformity with prudential regulations while the Government will keep on a temporary basis a maximum of 20% in the capital. In total, the Government will bring CFAF 13 billion and the partner CFAF 17 billion. Payments will be made over a period of two years. The agreement for the restructuring of the bank has been signed in December, 1995. 71. Given existing constraints one bank will be liquidated. Three other banks will undergo a thorough "cleaning up" of their balance sheets whereby non-performing assets and corresponding liabilities (including deposits) will be transferred to the SRC. This process started end-September 1995 by a study of the legal framework; it will end with the identification of new shareholders. 72. The healthy parts of one of these three banks will remain independent, in association with a new private partner. This partner will organize a round table to finalize the privatization of the bank. If such a partner cannot be found by a reasonable date, a management contract will be signed with a bank. The management contract will ensure that the manager shares the losses or profits from its management. A round table will be organized by this manager, who will be free not to invest in the bank. The healthy parts of the other two banks will be merged and a 2 round table will be organized to this end . To facilitate the search for the private partner, the Government intends to hire a specialized firm. 73. To allow for the protection of more deposits, government debt will be kept in the healthy structures of the banks. Debt to the banks will be securitized for all banks according to the principles elaborated -in the debt settlement strategy. If need be, the Government will also negotiate with BEAC the consolidation of the refinancing granted to some of these banks in order to ensure a satisfactory degree of liquidity for the new institutions. This consolidation will not increase total government debt vis-A-vis the banking sector (including BEAC). BEAC has given its agreement in principle to these consolidations. 74. The following steps will be followed: elaboration of a legal framework for mergers and transfers, letters of understanding among shareholders, and conventions for the purchase and/or takeover of assets (January, 1996); publication of the decree relating to the restructuring of financial institutions under the 1995/96 Finance Law (January, 1996); certification of the bank accounts (December, 1995); establishment of assets, liabilities and off-balance sheet items transferred to the SRC, with particular attention given to the selection of deposits (January, 1996). The Government commits itself to keeping the small depositors in the healthy bank structures. A detailed study of the larger accounts will be carried out to minimize social and economic costs. Also, efforts will be made to protect the deposits made by the Social Security Institution and the postal savings bank. In order to prevent a run on the restructured banks, deposits transferred to them will be the subject of a moratorium on withdrawals during a transitional period. Before the finalization of the individual plans, simulations of income statements will be carried out to verify that the burden of government debt is not too high; that the envisaged mergers will be carried out at the lowest possible cost; and that operating costs 2 It is not impossible, however, that these two banks remain independents.  ANNEX C Page 14 of 19 have been minimized (January, 1996). The plans will be submitted to the World Bank. These measures will be followed by the elaboration and signature of merger protocols (February- March, 1996); obtainment of authorizations and/or agreements by the new banks (February, 1996); structuring and enforcement of legal transactions and transfers to the SRC and the new banks (February, 1996); and finalization of the negotiations with investors and/or management operator (March, 1996). At the same time, the Government will sign with all banks protocols of securitization of government debt in accordance with the agreement in principle with APPECAM (February, 1996). The Restructuring of the Insurance Sector 75. Procedures laid out by the CIMA Code will be fully respected. The decree of August 16, 1995 reorganizing the Ministry of the Economy and Finance defines the structure of the Insurance Division within this department. The Government has undertaken the restructuring of this division with a view to adapting it to the framework set up by the ClMA code and reducing operating costs (notably through a downsizing that will bring the number of staff from 34 to 17). At the same time, the internal organization has been modified and a new organizational chart has been established. Implementation of the new structure is expected for February, 1996. 76. The insurance division will perform on- and off-site supervision of private insurance companies within the framework of CIMA. It will require from these companies that corrective measures be taken if necessary, and will take appropriate action to ensure enforcement of these measures (including the withdrawal of the agreement). 77. For public companies, the Government will cancel AMACAM's agreement in December, 1995 and a liquidator will be appointed at that time. 78. An audit of SOCAR shows that the company cannot continue to operate. The Government will take the necessary steps to liquidate SOCAR. A healthy customer base will be preserved and will constitute the basis of two new companies (Casualty and Life) according to the principles defined by CIMA. The Government will seek legal support to establish the framework within which this procedure can be carried out. The Govemment will undertake additional studies to determine if these entities are viable in the long run. If they are not, SOCAR as a whole will be liquidated and its customer base distributed among other companies. If they are viable, the market value of these entities will be assessed and the Government will organize a round table (with general agents and other possible partners) to constitute the capital of these two new insurance companies. This procedure will be carried out in consultation with the World Bank. The privatization will be completed by June, 1996. 79. An audit of CNR has shown the precarious situation of the company. The Government is determined to privatize the company in two steps. The first step, to be completed by June, 1996, will include restructuring measures (without government cash outlay) and a partial privatization with the assistance of regional reinsurance underwriters. The second step will be completed by December, 1996. If the privatization proves impossible, the company will be liquidated.  ANNEX C Page 15 of 19 2. Sector Policies Agricultural Sector 80. The agricultural sector has been profoundly affected by the economic crisis; however, it has shown signs of a vigorous and sustainable recovery since the upturn in the price of Cameroon's main exports since 1993, especially since the devaluation of the CFA franc. 81. In order to achieve the desired turnaround in the agricultural sector, the Government has taken a set of measures along the following lines since 1989: (i) progressive liberalization of the marketing of inputs and traditional exports; (ii) progressive privatization of the operations linked to the development of agriculture; (iii) restructuring/privatization of agricultural sector public enterprises, so as to attain a better financial situation and a stronger autonomy in internal management; and (iv) greater self-reliance of agricultural producers in terms of cost recovery and the creation of new cooperatives. 82. These measures aimed mainly at creating an environment propitious to the stimulation of agricultural production, ensuring the availability of food supplies, and, most importantly, improving the productivity of farms and reducing their cost of production in order to make agricultural products more competitive at home and abroad. These measures were complemented by the devaluation of the CFA franc. 83. The main objective of the Government for the agricultural sector within the context of its medium-term strategy is to consolidate the gains in competitiveness of Cameroonian products, and to lead producers to significantly increase their production. 84. Within the context of this medium-term strategy, a special emphasis must be placed on the improvement of the institutional framework and the restructuring/ privatization of public enterprises in the agricultural sector. A thorough revision of traditional government services in this sector is proposed in order to allow the private sector to play a more important, if not predominant, role in these services, and to encourage greater self-reliance of producers in the future. This is notably the case in the coffee and cocoa sectors, for which the implementation decree on the law on trade of coffee and cocoa has just been published. 85. In the medium term, setting up a framework of improved incentives for all the producers of the rural sector is one of the main objectives of the Government in order to restore sustainable competitiveness and sector growth. By and large, this framework requires measures that will lead to greater liberalization of agricultural products and inputs, and to a greater simplification of the regulatory and fiscal incentive framework. 86. The Government also intends to ameliorate the incentive framework within the agricultural sector through a tax system adapted to the profitability of the sector and to its specificities. On the basis of the studies already undertaken, a detailed review of the current situation will be carried out with a view to proposing the implementation of a tax system that favors investments in the sector, notably the creation of small and medium enterprises (simplified tax regime, tax relief). The current system of export taxes will be revised so as to boost production and avoid penalizing competitiveness.  ANNEX C Page 16 of 19 87. The implementation of a framework of improved incentives is a key element supporting the Government's policy of diversification and processing of agricultural products. The Government intends to favor the diversification of exports and products for the domestic market. The recovery of output must necessarily include the development of new exports. A pilot project is being carried out by a private firm to establish appropriate organizational and institutional arrangements for the fruit and vegetable industry. These actions will be reinforced both at the international and regional levels. 88. The agricultural sector reform cannot be envisaged without revision of the institutional framework. Harmonizing the diverse sub-sector policies is essential because the multitude of ministries and departments dealing with the agricultural sector has created serious coordination problems at all levels. Special emphasis will therefore be placed on coordination, management and supervision of the medium-term program, which covers all agricultural sub-sectors. 89. The creation in July 1994 of the Ministry of Economy and Finance (also in charge of Economic Stabilization and Recovery) facilitates this coordination. It should be noted, however, that the civil service reform will also affect the ministries that deal with the agricultural sector. 90. In the field of research, the Government's objective is to restructure agricultural research activities thoroughly. To this end, the Government has already developed, with the support of donors, a restructuring plan that aims at merging the current research institutes into a single entity in charge of all agricultural research activities in Cameroon. A technical audit has been carried out to define the priorities of the new structure and build its organization on new foundations. Within the next three years, efforts will be made to clarify the Government's policy in terms of research. This policy will aim at ensuring the durability of research financing through cofinancing between the Government and users. Eventually, a Common Research Fund financed by donors and the Government will allow for efficient on-site research. Research will be managed by an autonomous management system. The long-term National Plan for Research has been developed with the support of the FAO and was adopted in 1995. 91. The necessary link between research and agricultural development will be ensured by a regional management committee in charge of advising regional centers. As regards the various industries, the regional centers will implement, through the research programs, the research orientations necessary for the national development of agriculture. On the basis of contract relationships, prospective research clients will have to provide a part of the necessary resources to finance specific projects. 92. The Government intends to implement a new policy of agricultural training and extension. Training schools have been taken out of the public service and brought closer to users. The improvement of the qualifications of the officers in charge of extension will permit the shift from the traditional approach to actual counseling. As regards the general training system, a study is under way to strengthen basic technical training. Special emphasis will be placed on (a) the elimination of illiteracy in rural populations and on (b) immediately usable and operationally relevant training. Further, the courses and existing syllabi will be revised; the objective is to develop a framework for the revision of syllabi and rural training institutions before end- 1996. 93. The Government has implemented a credit policy for the rural population based on a better definition of future development efforts and the regulatory framework. This new policy  ANNEX C Page 17 of 19 should allow access to credit on conditions in line with investment profitability in the agricultural sector. At the same time, it should stimulate the mobilization of domestic savings. 94. An information service has been created which discloses information on prices in the coffee-cocoa sector. On the basis of this experience, and to the extent that appropriate structures are available, similar devices will be put in place in other industries (fruits and vegetables, palm trees and hevea, cotton, meat, fish, etc.). The early-warning system put in place by the Government to secure sufficient food supplies on markets will be extended to all agro-pastoral products in the country so as to facilitate their marketing. 95. The implementation of these reform measures, proposed in the context of the Government's medium-term strategy, should allow all agricultural sectors to return to a path of growth, and the economy to growth of 4% to 5% per year, beginning 1995/96. The expected growth of the agricultural sector as a result of this strategy is an essential condition for the takeoff of the economy as a whole. It is also the only means of ensuring the success of the Government's efforts towards poverty elimination. The envisaged reforms thus aim largely at alleviating the regulatory burden that paralyses the development of the private sector, and at creating a new balance between the respective roles of the private sector and the Government; the latter should mainly focus on the creation of a propitious environment for private production activities. Transport Sector 96. The objective of the Government is to ensure greater efficiency as well as the sustainable and coherent development of the transport sector, so as to enhance its contribution to economic growth, the alleviation of poverty and the protection of the environment. 97. The strategy to meet this objective is: (a) improve sectoral policy management through the redefinition of the Government's role: disengagement from activities transferable to the private sector and concentration on planning, regulation, and policy development; (b) provide a more balanced allocation of resources between investment and maintenance expenditures through the strengthening of institutional capacity; (c) improve the efficiency of the sector through regulatory reform aimed at liberalization, improved competitiveness and the establishment of market-based incentive mechanisms; and (d) implement an environmental protection policy. 98. To implement this strategy, the Government has prepared a medium-term program that aims at: 1) privatizing or liquidating enterprises from the transport sector (CAMAIR, RNCFC, SOTUC, CAMSHIP AND CAMTAINER) that have a significant impact on the efficiency of the transport system and government revenues; 2) divesting Matgenie; 3) restructuring Labogenie and opening the market to competition; 4) rehabilitating the road network, the channel to the port of Douala, the railway and the port system;  ANNEX C Page 18 of 19 5) maintaining these transport infrastructures through a broader privatization of work execution, the development of labor-intensive techniques and, for road maintenance, the definition of a priority network; 6) reorganizing the Ministries in charge of roads and transport; 7) liberalizing maritime transport and other means of transport; 8) restructuring the ONPC to improve port efficiency and ensure the provision of services at a lower cost; 9) redefining the role of CNCC so as to provide better support to shippers; 10) facilitating transit transport in the context of the UDEAC regional reform program; and I 1) providing a better alignment of the various regulations with the reform program. The Government's action plan to implement this strategy appears in the annex to the transport sector strategy declaration. Social Sectors Health 99. A program to improve health and nutrition has been developed with the support of the World Bank. This program respects the principles of the "Bamako initiative", in the sense that health expenditures must benefit the entire population. It is based on the concept of Health Districts. A network of preventive health centers will be developed around each hospital district. Government resources will be rationalized, while additional resources will be mobilized from the population and donors. 100. The strategies of this sector program revolve around: (i) the provision of health care at every level of the system; (ii) the rationalization of the management of infrastructures, equipment and human resources; (iii) the sustained access to essential medicines; and (iv) decentralized management and involvement of the local communities. 101. The Primary Health Care approach makes up an essential dimension of the new health policy. In this respect, the strategies adopted aim at: (i) revitalizing the outlying health units; (ii) focusing on priority programs; (iii) promoting community participation in the management of health care services; and (iv) social mobilization. Education 102. With respect to the distribution of resources in the country (number of nursery schools, primary and secondary schools, higher education institutions, number of teachers), there is an imbalance among the endowments allocated to the various provinces. The provinces that are traditionally behind with respect to schooling are also relatively poorly endowed with infrastructures. 103. As a whole, the programs of the formal education system do not tally with the needs of the desired socio-economic environment. Technical education is not adapted to the needs of  ANNEX C Page 19 of 19 Cameroon's agriculture-based economy, explaining the training/job inadequacy that has prevailed for several years. 104. The Government intends to increase the enrollment ratio, which has been seriously affected by the economic crisis. Emphasis will be placed on energizing of the technical and professional secondary education system, which needs to train students in sufficient numbers and quality to allow for their direct integration into the workplace. Guidelines for the development of professional education will also be developed. Employment 105. The labor market in Cameroon is characterized by two features: (i) rapidly increasing labor supply, in terms of both quantity and quality; (ii) stagnating labor demand, especially the demand for wage labor. The primary result of this dynamic of the Cameroonian labor market is an explosion in unemployment which is around 20% on average. The urban unemployment rate in Cameroon is one of the highest in Africa. Another effect is the high unemployment rate of university graduates. While the economy suffers from structural employment deficiencies, the education system continues to glut the job market with a labor force trained to serve the modern sector, which, at present, can absorb only a limited volume of workers. 106. With respect to job promotion, the Government intends to emphasize improvement of the productivity of agro-pastoral activities and the promotion of small and medium enterprises, as well as microenterprises. Road building appears to be an essential element for the promotion of rural employment. The strategies followed by the National Employment Fund (FNE) need strengthening and financial support. Environment 107. Efforts to address the degradation of the environment have focused primarily on the development and adoption of a forestry policy, the preparation of a general strategy of management of parks and reserves, the clarification of migration policies, the revision of forestry taxation, the progressive adaptation of land legislation, and research on the agriculture-breeding association, agro-forests and fertility management. 108. Cameroonian authorities will also encourage the rational exploitation and long-term preservation of natural resources. The Forestry Code, which has just been revised, has laid down the principles and procedures of sustainable management of resources. The planning of domestic forestry activities has been enriched in the last few years with the adoption of the first Plan d'Action Forestier Tropical (PAFT) developed in Africa with the support of the FAO and donor countries. 109. The Government attaches great importance to environmental management. A national plan for the management of the environment is being prepared that will lay the foundations of a coherent policy in this field and will define its legal and institutional framework. The forestry policy has already been revised and a new Forestry Code has been promulgated.  ANNEX D Page I of 4 Supplemental Credit Data Sheet Section I: Timetable of key processing events Time taken to prepare: 14 months Project prepared by: Government with IDA assistance Appraisal: October-November, 1995 Negotiations: December 20-22, 1995 Board Presentation: February 8, 1996 Closing date: December 31, 1996 The Task Team Leader is Brendan Horton (AF3C1). Richard Westebbe (AFRCA) is Lead Advisor, and Hasan Tuluy (AFSCO) Peer Reviewer. The Public Finance component team consists of Brendan Horton, Gloria Bartoli (AFTPS), Katrina Sharkey (EDIRP), Vicente Ferrer (AF3AE), and Leif Muten, Consultant. The Financial Sector Team is directed by Andr6 Ryba (AF3IE) and includes Shinichi Mori, Chau Huong and Bernard Mensah (AF3IE), Christian Chedeville, Pierre Leduc and Marguerite Jouet, Consultants. The Public Enterprise Team is led by Eric Boucheny (AF3IE) and includes Vicente Ferrer (AF3AE), Jean-Noel Guillossou (AF3IN), Bernard Mensah (AF3IE) and Ghislaine Bouillet-Cordonnier, consultant. Substantive inputs were also provided in a variety of different areas by the Resident Mission, in particular Joseph Ingram, Bernard Momo and Clotilde Ndomb, Economists. Christine Moumal (AF3C1) is the Staff Assistant. The Managing Division Chief is Jerome Chevallier. The Department Director is Andrew Rogerson.  ANNEX D Page 2 of 4 Section II: Special conditions Actions taken during Project Preparation: * Adoption of Budget Law for FY96 including: 0 Increase in TCA rates (standard rate from 15 to 17 percent, reduced rate from 5 to 8 percent), and excise rates for petroleum (50 percent for premium grade gasoline, 90 percent for diesel oil); revision of forestry taxation (increase in rates of stumpage fees and minimum concessional rentals, extension of export taxes to processed timber products, including those exported by firms with Free Trade Zone status); 0 Increase in budgetary allocations on priority sectors from 41 to 44 percent of total budgetary appropriations; * Completion of organization and staffing plans in three Ministries (Civil Service, Industry and Commerce, Economy and Finance); * Preparation of a global strategy for settlement of Government's internal debt; * Promulgation of a new General Statute on Public Enterprises (regarding both management and liquidation); * Liquidation of five public enterprises including Sotuc (national bus company), privatization of managmentlownership of two large companies, seven companies privatized, and three major companies put up for sale (sugar, tobacco, and rubber); privatization process launched for main agricultural and transport sector parastatals; * Adoption of implementation decree for new Forestry Code; * Adoption of new law completing liberalization of coffee and cocoa sectors, and corresponding implementation decrees; * Elimination of the monopoly of SNH over deliveries of crude oil to the National Petroleum Refinery (SONARA); and elimination of SNH subsidy in its delivery price to SONARA. Board Presentation conditions: 1) General: * Satisfactory first review of the Stand-by Arrangement. 2) Publicfinance management: * Publication of a decree, acceptable to IDA, stipulating that (a) import duties are henceforth payable on basis of PSI's company assessment, (b) goods are released to the importer only on said company's certification that duties have been effectively paid into the Treasury's account in BEAC;  ANNEX D Page 3 of 4 * Signature of contract with designated PSI company; * Effectively terminated employment of at least 5300 civil servants, in line with Organizational and Staffing Plans for seven ministries. 3) Financial Sector and Judicial reform: * Issued a circular to magistrates informing them of the four ordinances and seven decrees abrogated or modified by the two regional treaties; and amended the 1990 ordinance on bank liquidation and the decree establishing the "Conseil National du Credit"; * Signed with Soci&e Gdn6rale (Paris) an agreement for the restructuring of SGBC and submitted to IDA a satisfactory plan for the restructuring/liquidation for four other commercial banks; * Announced its decision on the future of SOCAR, CNR; * Appointed a judiciary liquidator for AMACAM; * Signed an agreement with the bankers' association for the securitization of Government debt to commercial banks and secured agreement from BEAC to open an escrow account. Tranche Release Conditions: 1) General: * Satisfactory progress in implementing the program, including a satisfactory macroeconomic framework (as evidenced by the existence of an active ESAF) and implementation of the following measures: 2) Public Finance Management Tranche a) Fiscal receipts and non-wage expenditures: * Measures have been taken to reduce export taxes on the export of goods except for forestry products by at least 10 percent (para. 10); * (a) attainment of the aggregate public expenditure target for priority ministries referred to in para. 16, which exceeds 44 percent of aggregate spending ceilings for all ministries (excluding expenditures on public debt, pensions and severance payments) for FY96; and (b) allocations in the FY97 Budget Law for the same priority ministries which in the aggregate exceed 44 percent of aggregate budgetary allocations excluding debt service, pensions, and severance payments; b) Civil Service reform: * Adoption of organizational plans, satisfactory to IDA, and implementation in accordance with timetables relating thereto for the ministries mentioned in para. 14;  ANNEX D Page 4 of 4 c) Other: * Implementation of appropriate amendments to the laws (89-021, 92-008, and 94- 327) to expedite judicial credit recovery (para. 33); 3) Financial Sector Reform Tranche: * (a) the agreement between the Borrower and the major foreign partner for the restructuring of one bank has been implemented in accordance with its terms; (b) one bank has been placed in liquidation and a banking/judiciary liquidator appointed; (c) the non-performing assets and frozen deposits of three other banks: (i) have been separated from performing assets; and (ii) have been transferred to SRC; (d) the three banks have been restructured in a manner satisfactory to IDA; (e) management agreements satisfactory to IDA regarding the three banks have been executed by the respective parties thereto (para. 30); * (a) amendment of SRC by-laws; (b) implementation of a new organigram and reorganization of its personnel; and (c) publication in the media of a declaration by Government that delinquent borrowers will be prevented from borrowing from financial institutions, participating in bids for the privatization of public enterprises and Government purchases. Bidding documents will include clauses precluding delinquent borrowers from participating in these bids (para. 32).  ANNEX E Page I of 1 PORTFOLIO PERFORMANCE AND MANAGEMENT As indicated in the CAS, the Cameroon portfolio has been in active transition falling from 14 IBRD-financed operations in 1991 to five operations (Table 1), of which two are IDA Credits and three are IBRD-financed Loans, which are being rapidly wound down. X_hI~I~~Is Struc~r~ $ I~RD .~,4XA f"I" m U Project Original Cancellation Undisbursed Amount A. IBRD Livestock Development Project 34.6 13.6 7.24 Agricultural Extension and Training 21.0 11.10 Food Security 23.0 16.46 B. IDA Transport Sector TA 10.2 10.28 Fertility Health and Nutrition 43.0 43.96 Considerable progress was made recently under the Agricultural Extension and Research Project. The extension service has been streamlined and is much more focused on key activities to improve farmers' yields. It will be closed by December 1996 and replaced by an IDA- financed project in FY97. The IDA project would also incorporate key successful components of the Livestock Project and in particular the tsetse fly eradication component, while the others, which have all received unsatisfactory ratings, will be canceled. Similarly, the Food Security Project will be downsized to the two components with satisfactory ratings (financing of micro- projects and nutrition education), whose primary beneficiaries are women. The other components will be canceled.   IMAGTIN -T R e ipiO r t N o : F- .7i73 CM 4 Type: FR