Cameroon - Second Artisans, Small- and Medium-scale Enterprise Project

Document of W 0%0%p n v The World Bank FILE CUO Y FOR OFFICIAL USE ONLY Report No. P-2890-CM REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPME TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE UNITED REPUBLIC OF CAMEROON FOR AN ARTISANS AND SMALL- AND MEDIUM-SCALE ENTERPRISE II PROJECT October 29, 1980 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.  UNITED REPUBLIC OF CAMEROON ARTISANS AND SMALL- AND MEDIUM-SCALE ENTERPRISE II PROJECT CURRENCY EQUIVALENTS Currency Unit = CFA Franc (CFAF) US$1 = CFAF 210 1/ CFAF 1 million = US$4,762 1/ Floating Exchange Rate. ABBREVIATIONS BCD - Banque Camerounaise de Developpement BEAC - Banque des Etats de lAfrique Centrale CAPME - Centre National d-Assistance aux Petites et Moyennes Entreprises CCCE - Caisse Centrale de Cooperation Economique, France FOGAPE - Fonds dAide.et de Garantie des Credits aux Petites et Moyennes Entreprises Camerounaises MINEP - Ministry of Economic Affairs and Planning SME - Small-and Medium-Scale Enterprise SNI - Societe Nationale d'Investissement du Cameroun SSE - Small-Scale Enterprise UDEAC - Union Douaniere et Economique de l'Afrique Centrale UNDP - United Nations Development Program UNIDO - United Nations Industrial Development Agency FISCAL YEAR Government and BCD: July 1 - June 30  FOR OFFICIAL USE ONLY UNITED REPUBLIC OF CAMEROON ARTISANS AND SMALL- AND MEDIUM-SCALE ENTERPRISE II PROJECT LOAN AND PROJECT SUMMARY Borrower: United Republic of Cameroon Beneficiaries: BCD (Banque Camerounaise de Developpement) and CAPME (Centre National d'Assistance aux Petites et Moyennes Enterprises) Amount: US$15.0 million Terms: 15 years including 3 years of grace at annual interest rate of 9.25 percent Relending Terms: US$14.8 million of the proceeds of the proposed IBRD loan would be relent to BCD for 15 years including a 3 year-grace period, at the current IBRD interest rate (9.25 percent). The remaining US$0.2 million would be passed on to CAPME as a grant. Onlending terms for BCD's loans to' sub-borrowers would vary, with an average term of 9 years including 2 years of grace, at an interest rate of 14.5 percent per year including taxes of about 2 percent. Project Description: The proposed project, to be implemented over a four-year period, is designed to expand the provision of technical and financial assistance to Cameroonian artisans and small- and medium-scale enterprises and to improve upon previous efforts made under the first project to further strengthen BCD. The project would consist of: (i) Credit for artisans and small- and medium-scale enterprises; (ii) Technical assistance to BCD; (iii) Technical assistance to CAPME to initiate a pilot program for artisans. Benefits and Risks: The proposed project would, in line with the Govern- ment s sectoral objectives, promote Cameroonian enter- prises, generate employment and encourage a better geographical distribution of industrial activity in Cameroon. Direct benefits would be the generation of additional direct employment for about 1,800 persons. The success of the project depends mainly on the achievement of the expected improvement of BCD-s finan- cial position and organization. Careful recruitment of the advisors and consultants, together with close monitoring of the overall technical assistance program should help achieve this objective. This document has a restricted distribution and may be used by recipients only in the performance of | their official duties. Its contenst may not otherwise be disclosed without World Bank authorization.  - ii - Estimated Costs: US$ thousand Local Foreign Total Line of Credit Artisans and SSE projects 2,140 5,000 7,140 Medium-scale enterprise projects 4,070 9,500 13,570 Sub-total 6,210 14,500 20,710 Technical Assistance 1/ Industrial engineer BCD 10 80 90 Training of BCD-s staff 10 110 120 Audit of BCD's accounts 10 110 120 Advisor to CAPME 20 200 220 Sub-total 50 500 550 Total Cost (including taxes) 6,260 15,000 21,260 Taxes 535 - 535 Total Cost (net of taxes) 5,725 15,000 20,725 Financing Plan: US$ thousand Local Foreign Total IBRD - 15,000 15,000 BCD 385 - 385 CAPME 20 20 Entrepreneurs 5,855 - 5,855 6,260 15,000 21,260 Estimated Disbursements: US$ million FY81 FY82 FY83 FY84 FY85 Annual 0.7 2.7 3.6 4.2 3.8 Cumulative 0.7 3.4 7.0 11.2 15.0 Rate of Return: Not applicable Staff Appraisal Report: Report No. 2993-CM dated October 17, 1980 Map: IBRD 12186 R2 - Population, Rainfall and Transportation 1/ Estimates include a 10 percent per year price contingency.  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE UNITED REPUBLIC OF CAMEROON FOR AN ARTISANS AND SMALL- AND MEDIUM-SCALE ENTERPRISE II PROJECT 1. T submit the following report and ecommendation on a proposed loan to the United Republic of Cameroon for the equivalent of US$15.0 million with a term of 15 years including three years of grace at an interest rate of 9.25 percent per year to help finance an Artisans and Small- and Medium-scale Enterprise II Project. US$14.8 million of the proceeds of the proposed loan would be relent to BCD for 15 years including three years of grace at an interest rate of 9.25 percent. The remaining US$0.2 million would be passed on to CAPME as a grant. PART I - THE ECONOMY l/ 2. A report entitled "United Republic of Cameroon Economic Memorandum" (No. 2877-CM), was distributed to the Executive Directors on April 30, 1980. Annex I provides basic country data. Background 3. Cameroon is one of Africa's most diversified countries with a wide range of ecological conditions, ethnic groups and cultures. Cameroon was a federation until the United Republic, which unified the anglophone western and francophone eastern parts of the country, was established in 1972. The Government has concentrated on the establishment and maintenance of national unity between the eastern and relatively small western parts of the country and between the sahelian zone in the north with Muslim traditions and the southern tropical regions. 4. Cameroon has a population of 8.3 million (1979) and covers an area of 475,000 km2. The main opportunities for development lie in the expansion of agricultural production, including forestry, and the processing of agricultural and forestry products for export. Soils and climatic condi- tions permit cultivation of a wide range of crops, and the southeast contains large untapped timber resources. The north holds promising potential for livestock development. Cameroon became an oil producer and exported 645,000 tons of crude petroleum in 1978. Crude oil exports reached 1.6 million tons in 1979 and are estimated to be about 3 million tons in 1980. Trade, trans- portation and transit services are other important economic activities. Cameroon's main economic centers are separated by vast areas of low population density; furthermore, the country's transport facilities also serve landlocked Chad and the Central African Republic. As a result, a large port and adequate inland transportation infrastructure are essential for promoting agriculture, forestry and industry, and for strengthening Cameroon's role as a regional trade center. 1/ This Part is identical to that of the proposed Northern Province Rural Development Project (Report No. P-2889-CM) which is being circulated separately to the Executive Directors on October 30, 1980.  -2- Past Performance 5. GDP growth was about 4.5 percent per year during both the Second Five-Year Plan (1966-71) and the Third Plan (1971-76), and accelerated to 7.3 percent during 1976/79, the first three years of the FourthI Plan. Population growth is estimated at about 1.8 percent per year in the 1960s, about 1.9 percent until the mid-1970s and about 2.3 percent from 1975 to 1980. Per capita GNP reached about US$560 in 1979. 6. Most agricultural crops, livestock, fishing and forestry experienced high growth rates during 1966-71 thanks to favorable supply and demand condi- tions including high producer prices, high domestic income growth and rapid economic expansion abroad. Lower agricultural growth during 1971-76 was due in part to the decrease in output of two major commercial crops, cocoa and arabica coffee. Important factors in this decline were the decline in rela- tive competitiveness of producer prices with food cash crop prices and the termination of the foreign supported fertilizer subsidy program for arabica coffee. The decline in cocoa and arabica coffee output was not fully offset by growth in other important commercial crops including cotton, rubber, and oil palm. Growth in forestry production dropped during 1971-76 because of reduced Western European demand and some transportation bottlenecks. 7. Manufacturing and mining grew at about 10 percent per year during 1966-71 mainly on account of the rapid development of import substitution industries, particularly manufactured consumer goods. The lower manu- facturing growth experienced during 1971-76 was due to the slowdown in new import substitution activities and to slower income growth because of the det:eriorating terms of trade. 8. Since 1976, Cameroon has experienced rapid growth in most major sectors. Agricultural growth was helped by recovery in cocoa production, as farmers responded to higher producer prices, and in forestry production. The construction industry grew by 14 percent per year during 1976-79 as large investments were undertaken for the implementation of the plan. The rapid increase in income and the high rate of economic activities has led to sub- stantial growth in most other sectors particularly food crops, trade, trans- port and other services. Investment and Savings 9. During the Second Plan period (1966-71), the investment rate, including increase in stocks, exceeded 16 percent of GDP, and gross domestic savings and gross national savings were 13.4 and 12.6 percent of GDP respectively. Foreign resources financed about 33 percent of invest- ment during this period. During the Third Plan period (1971-76), despite slow income growth, the investment rate increased to 18.1 percent of GDP. Gross domestic savings rose to 16.4 percent GDP, with debt service increasing by 60 percent from a small base, gross national savings rose only to 13.9 percent of GDP. External resources therefore continued to finance about one--third of total investment during this period. The higher savings rate in a period of slow output growth was made possible by a considerable reduction in t:he real growth of consumption, particularly private consumption, to less  -3- than 3 percent per annum. One of the prices paid for the substantial improve- ment in savings during the Third Plan was, however, a limitation on farmers- earnings in tree crops, providing insufficient incentives for them to maintain and expand production capacity through efficient use of the existing trees and new plantings; this situation may have serious implications for the longer term future of these crops. The maintenance of a high investment rate during this period was offset by a decline in the efficiency of investment. Some reductiorn in capital productivity was attributable to projects, such as oil exploration and transport infrastructure, which would lead to production increases only a number of years later, and to social infrastructure invest- ments, which would improve welfare but have a limited impact on output. During 1976-79, the investment rate reached an average of 23.8 percent of GDP. Due largely to the record cocoa and coffee export prices, gross domestic savings and gross national savings increased further to 20.8 and 18.6 percent respectively of GDP. As a result, external resources financed about 30 percent of total investment during these three years. Public Finance and Balance of Payments 10. Budgetary revenue amounted to about 15 percent of GDP during each of the past two plan periods, and increased slightly to an average of 15.2 percent in 1976-79. Public savings after debt service as a percentage of total public investment declined from about 39 percent in 1966-71 to about 36 percent in 1971-76. During 1976-79, this ratio reached 55 percent thanks to the public savings mobilized by the Stabilization Funds. The balance of payments did not become a problem until 1974-76 while agricultural exports declined, particularly exports of cocoa and timber, resulting in sizeable current account deficits. The bulk of the current account deficits was financed by net capital inflows but a substantial drawdown of international reserves also took place in 1975. Therefore, net official international reserves decreased from more than two months of imports in 1974 to less than one month in 1975. In 1977-80, exports rose substantially (at an average annual rate of 26 percent) but imports also increased (at an average annual rate of 29 percent) because of rapid economic growth and expanded investment. Gross official international reserves were rebuilt in 1976-80, in part by the use of IMF credits but net official international reserves were about one month of imports at mid-1979. This was a low level by international standards but still acceptable considering Cameroon s membership in the Central African Monetary Union. Development Issues and Prospects 11. Cameroon-s main medium- and long-term potential lies in the develop- ment of a diversified agricultural sector relying upon export crop production to generate foreign exchange and domestic food crop production to meet the needs of a growing urban population. Realizing this potential depends upon an appropriate mix of public intervention and policy measures aiming at stimulat- ing private initiative. Factors that further complicate the agricultural development effort in Cameroon are the dispersion of the main economic and population centers, regional and institutional diversity, the competition between export and cash food crops for the dwindling agricultural labor in  - 4 - some parts of the country, the dependence of a substantial part of public revenue and savings on cocoa and coffee, and the limited availability of skilled agricultural agents and administrators. Through technical assistance and education projects and through normal project work, the Bank is supporting Cameroon-s effort in manpower training and development in agricultural services, and in other sectors. In industry the Government has moved to channel more financial resources for investment directly through the public sector, in addition to the indirect support provided by tax incentives and other measures, which have been in existence for many years. The Government has actively participated in a Bank study of the manufacturing sector which will help to identify bottlenecks and opportunities to develop existing as well as new industrial activities. 12. The outlook for agricultural and industrial growth during 1980-86 is quite favorable. Agricultural growth expectations are based on the mainte- nance of cocoa output at about 110,000 tons; recovery of robusta coffee; continuing expansion for arabica coffee; increased production of most other commercial and food crops, as well as of livestock; and expansion of commer- cial forestry production. Growth of industrial and mining production is expected to result from existing and expanded manufacturing facilities (par- ticularly for food, beverages and construction materials), some new industrial projects and from crude oil and new mining ventures. Given the stepped-up production and investment activities, a high growth rate is also expected for construction and services. 13. Cameroon s vast and still largely unexploited natural resources, particularly agricultural, forestry and mineral resources, will continue to provide a fundamental basis for its growth and development in the next twenty years. With the revenue from the likely prospects of oil production considerably exceeding its current level of 3 million tons per year, in addition to resources from traditional agricultural exports and external borrowing, the constraints on the pace of development in Cameroon in the 1980s and 1990s will be increasingly non-financial. The extent to which Cameroon succeeds in expanding its manpower and institutional capacity will determine the rate of growth of an effective investment program to promote economic and social development. Fourth Development Plan (1976-81) 14. Cameroon is now implementing its Fourth Economic and Social Develop- ment Plan. Private investment is encouraged, under Government guidelines, to expand production capacity in agriculture, forestry, mining and manufac- turing. Part of the financing of private investment activities, however, will be publicly guaranteed borrowing. Planned investment of some US$3.1 bill:Lon (in 1974/75 prices) is about 40 percent higher in real terms than the estimated level achieved during the last Plan period and more than double previous Plan expenditures in nominal terms. Actual investment during the first three years of the Plan was estimated to be about US$2.2 billion (in 1974/75 prices) or at an annual rate about 60 percent higher in real terms than annual investment during the last Plan.  - 5 - External Borrowing and Creditworthiness 15. Total public and publicly guaranteed debt outstanding and disbursed rose from US$515 million at the end of the Third Plan Period to US$1.6 billior, at the end of 1979, and is expected to exceed US$2.0 billion in 1981, the last year of the Fourth Plan. Debt service payments rose from US$39 million in 1976 to US$126 million in 1979, while exports of goods and services increased from US$715 million to more than US$1.3 billion during the same period. Not- withstanding a hardening of average terms since the early 1970s, Cameroon s debt service ratio was still less than 10 percent at the end of 1979, up from 5-1/2 percent in the mid-1970s. The debt service ratio is projected to peak at about 16 percent in 1982 and decline gradually throughout the remainder of the decade to about its 1979 level in 1990. This projection assumes that the amount of new loans contracted during 1982-86 will be slightly above the average annual amounts contracted in 1977-81, and that there will be no dramatic change in the assistance programs and project intentions of official donors. Borrowing on non-concessionary terms would account for about two- thirds of total new commitments, and average terms would become harder during the period. Because of higher debt service payments, projected average annual net disbursements would be less than during the preceeding five year period but, with Cameroon's favorable export and savings prospect, would be suffi- cient to allow an investment rate of some 25 percent and a restoration of a healthy foreign exchange reserve position. Cameroon is thus judged to be creditworthy for Bank financing on the basis of its ability to productively utilize the country-s resources and its favorable potential to further diver- sify the economy. However, in view of the country s record of performance as well as the need to maintain debt service within the range mentioned above, foreign donors should be prepared to continue to provide some 50 percent of public capital assistance on concessionary terms. PART II - BANK GROUP OPERATIONS IN CAMEROON 1/ 16. The Bank and IDA commitments in Cameroon now amount to US$538 million and cover 34 projects: 16 in agriculture, 11 in transportation, three in education, two in public utilities, one small- and medium-scale enterprises project, and one technical assistance project. Transport accounts for the largest share (48 percent) of these commitments, followed by agricul- ture (39 percent). Annex II contains a summary statement of Bank loans and IDA credits as of August 31, 1980, including notes on the execution of ongoing projects. Although delays and setbacks have occasionally been encountered in the implementation of projects, the Government has consistently shown willing- ness to collaborate with the Bank in finding solutions to such problems. 17. The Bank Group's strategy for the future is to support the Govern- ment in its effort to increase agricultural production, including export- oriented crops, and in the process create productive employment in rural areas; to upgrade and improve the operation and maintenance of the country-s 1/ This Part of the report is substantially the same as that of the pro- posed Northern Province Rural Development Project (Report No. P-2889- CM) which is being circulated separately to the Executive Directors on October 30, 1980.  -6- infrastructure; to stimulate investment by local entrepreneurs and increase employment in urban areas; and to enhance the efficiency of Cameroon-s institutions. 18. The Government's objectives in the agricultural sector are: (a) to achieve balanced and integrated regional development; (b) to improve income distribution and to raise living standards in t