Cameroon - Economic Recovery Credit

K$ .2 ( ~-4& R<'(-- Q/L/7 o_tf The World Bank FOR OMCIL USE or-y Repot No. P-6359-sC MEMORAMNDU AND RECOMMEDATIlON OF THE PRESIDENT OF THE INTERK&TIONAL DEVELOPMENT ASSOCIATIION TO THE KXECUTIVE DIRECTORS ON A PROPOSED CREDIT IN AN AMUNT EQUIVALENT TO SDR 53.1 MILLION (US$75.0 MILLION) TO THE REPUBLIC OF CANEROON FOR AN ECOOMlIC RECOVERY CREDIT MAY 25, 1994 MICROGRAPHICS Report No: P- 6359 CM Type: MOP This document has a resticted distibution and may be us_d by recpin only in te perfornae of toeir official dutis. Its contents may not ohewise be dbicloed wihout Wold Ban autoriatn.  CURRENCY EQUIVALENTS Currency Unit = CFA FRANC (CFAF) * WEIGHTS AND MEASURES Metric Systen ABBREVIATIONS AND ACRONYMS ADB - Afican Development Bank CAA - Caisse Atonome d'Amortissement CAMAIR - Cameroon Airlines CAMSHIP - Cameroon Shipping Lines CAMTAINER - Societe Nationale de Transport et de Transit du Cameroun CDC - Cameroon Development Corporation FIAS - Foreign Adv*sory Service FNE - Fonds National de VEmploi BEVECAM - Soci&6 de D6veloppement H6v6a-Cameroun ICAI - imp8t sur le Chiffre d'Affaires Int6rieur MINASCOF - Ministry of Social Affairs MINDIC - Ministry of Industry and Commerce MINEDUC - Ministry of Education MINFI - Ministry of Finance MINFOPRA Ministy of Civil Service MINPAT - Ministry of Plan MINSANTE - Ministry oI 3ialth MInTPS - Ministry of Labor and Social Security PE - Public Enterprise PIP - Public Investnent Program POrI - Plans d'Organisation et d'Effectifs REER - Real Effective Exchange Rate REGIFERCAM - RWgie des Chenuns de Fer du Cameroun SCDP - Soci6t6 Cainerounaise de Dep6ts Petroliers SNH - Societe Nationale des Hydrocarbures SOCAPALM - SociSte des Palme ies du Canwoun SODECOTON - Societ6 de D6veloppement de Coton SONARA - Societe Nationale de Raffinage SOTUC - Societe des Transports Urbains du Cameroun TCA - Taxe sur le Chiffre d'Affaires TCAI - Taxe sur le Chiffre d'Affaires A lImportation TIP - Taxe Intdrieure sur la Production TU - Taxe Unique UDEAC - Union Douani6re et Economique des Pays de l'Afiique Centrale FISCAL YEAR July 1 - June 30 * The CFA Franc (CFAF) is tied to the French fianc (FF) at the ratio of FF1 to CFAF 100 The French franc is currently floating.  FOR OFFICIAL USE ONLY REPUBLIC OF CAMEROON ECONOMIC RECOVERY CREDIT Borrower: Republic of Cameroon Main Beneficiaries: Ministry of Finance; Ministry of Education; Ministry of Health Amount: SDR 53.1 million (IDA: US$ 75 million equivalent) Terms: Standard IDA terms with 40 years maturity On-lending terms: Not applicable Economic Rate of Return: Not applicable Staff Apralsal Report: No separate report 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 authoration.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED ECONOMIC RECOVERY CREDIT OF SDR 53.1 MILLON (US$75 MILLION EQUIVALENT) TO THE REPUBLIC OF CAMEROON 1. I submit for your approval the following report and recommendations on a proposed Economic Recovery Credit (ERC) to the Republic of Cameroon for SDR 53.1 million, tne equivalent of US$75 million, on standard IDA terms with a maturity of 40 years to support major economic reforms currently being carried out by the Government and to provide general balance of payment support. PART I. COUNTRY POLICIES AND BANK GROUP ASSISTANCE STRATEGY A. INTRODUCMION 2. Cameroon is among the countries in Africa with the greatest development potential. It is richly endowed with tropical forests, coastal fisheries, mineral resources (petroleum, bauxite, natural gas), fertile agricultural land and a largely favorable climate. The country's economy is served by a well-developed infrastructure and communications network, and until the mid-1980s a well-functioning financial system. During the first 25 years after Independence (1960-85), an appropriate mix of policies allowed this potential to be realized and real economic growth averaged about 7 percent a year throughout the period. Agriculture was the main source of growth and foreign exchange earnings until 1978, when oil production started and became the cornerstone of economic growth. 3. A sharp terms of trade loss and an appreciating real effective exchange rate combined with the onset of declining oil production dragged the economy into a steep depression in 1985/86 following 7 years of oil-driven economic growth. Cameroon launched an adjustment program in 1988/89 with support from the IMF and the World Bank to address the mounting economic disequilibria. However, the program failed to address the fundamental problems in the economy and the economic decline continued unabated. A major change occurred on January 12, 1994, when the Govemment of Cameroon, along with its partner countries in the CFA zone, decided to realign the parity of the CFA Franc from 50 CFA/FF to 100 CFA/FF. To take advantage of the positive effects brought about by this action, the Government, with the assistance from the IMF and IDA, quickly adopted and started implementing a comprehensive program of econonic measures and structural reforms.  2 4. To assure that the parity change leads to a significant turnaround in economic growth and faster alleviation of poverty, the Country Assistance Strategy presented below aims to increase the market orientation of the economy and the capacity of the productive sectors to employ, to invest and to produce. Key supporting policy reforms to achieve this are: retrenchnent of the public sector, better management of public resources, improved environment for productive efforts, and human resource development. B. BACKGROUND AND RECENT DEVELOPMENTS OIL BOOM AND UNADRESSED SHOCKS 5. The flow of oil revenues, while notionally improving the macroeconomic indicators, exacerbated Cameroon's mounting structural problems. The external resources balance went from a small deficit in 1976/77 to a surplus of 11 percent of GDP in 1984/85 and gross domestic savings increased to more than 35 percent. The ensuing improvement in government revenues (through royalties and income taxes) and a relatively high credit rating in the international financial markets, enabling Cameroon to gain access to external financing, generated a substantial expansion in the public sector at large and public investm,-nts in particular. However, the public sector-led expansion was driven by conspicuously high levels of consumption - i.e., civil servant wages, subsidies and transfers -- and capital intensive and generally unsustainable public investments. At the end of the oil boom, the country was thus left with an over-dimensioned irastruct-ure, a large civil service and public enterprise sector, and a significantly higher external indebtedness. 6. During the 1986-89 period, Cameroon suffered from three major shocks which unmasked the fragility of the oil-dependent development strategy. First, the sharp decline in export prices - led by petroleum in 1986 and followed by cocoa and coffee - caused Cameroon's external terms of trade to fall by more than 55 percent from 1984/85 to 1988/89. Second, Cameroon's oil production started to decline after reaching its peak in 1985/86. Third, with its exchange rate linked to a rising French Franc and unable to contain domestic inflation below those of its main trading partners, Cameroon's real effective exchange rate (REER) appreciated substantially, thus reducing the international competitiveness of the country. 7. In the absence of appropriate corrective adjustment measures, these shocks dragged the Cameroonian economy into a long and deep crisis. Real GDP fell by an average of 3.4 percent a year from 1985/86 to 1988/89 and real per capita income levels dropped by almost 40 percent. Budgetary revenues decreased by 35 percent during the same period. In the face of constant current expenditures, this drop caused a sharp rise in the overall budget deficit to above 13 percent of GDP in 1986/87. A reduction to 5 percent of GDP by 1988/89 was only achieved by slashing public investments and expenditures on maintenance. These deficits were largely financed by an accumulation of domestic arrears and by increased foreign borrowing. The external current account switched from a surplus in 1984/85 to a large deficit in 1988/89 and was  3 financed mainly through draw down of foreign assets of the banking system and a further build-up of external debt. The emergence of domestic arrears and the decline in foreign assets created a liquidity crisis in the banking system, exposing imprudent past lending practices. INTERNAL ADJUSTMENT - Too LATE AND Too LIrTLE 8. The Government launched an economic reform program which was supported by a Standby Arrangement with the LMF in 1988 and an IBRD Structural Adjustment Loan in 1989. The progran aimed at correcting the macroeconomic disequilibria based on the assumption that these objectives could be achieved through internal policies only. Progress was made in implementing reforms in a number of areas, notably in liberalizing trade. However, Government's inability to implement strong intemal measures, meant that the overall objectives were not achieved and the fundamental structural problems of the economy became increasingly apparent. 9. While external trade was liberalized significantly during 1989-93, it was associated with relative price movements which were perverse in their incentive and distributional effects as the prices for non-tradeables were maintained. In addition to a continued deterioration of the external terms of trade, estimated to have declined by 60 percent since 1984185, the rising value of the French Franc vis-a-vis the US dollar forced the Government to lower the local prices of the main exports, resulting in a sharp decline in the relative internal price of tradeables vis-a-vis non- tradeables. Incomes of rural producers were reduced by almost 50 percent while prices of public utilities and services as well as wage levels in the public and parapublic sectors remained unaffected. It was only with the recent realignment of the parity of the CFA Franc in combiination with the significant civil servant wage cuts in November 1993, that relative prices became more conducive for increased output in the tradeable sectors. 10. By December 1993, Cameroon's economy and its external accounts had deteriorated significantly as the fundamental structural problems remained unaddressed and financial imbalances were allowed to mount. Since the onset of the crisis in 1986, real GDP had declined by about 30 percent and the real per capita income (taking into account the terms of trade loss) has declined by about 55 percent. Compared to its 1988/89 level, agricultural production, once the engine of the economy, fell by 25 percent, while the small, largely import-substituting light manufacturing sector and the service sector declined by 20 percent. The mining sector, dominated by petroleum, experienced its worst drop between 1986 and 1987, and has been in decline ever since. The current account deficit reached about 10.5 percent of GDP in 1992/93 as the resource balance went into deficit due to the petroleum-induced export decline which outweighed import compression, and as interest payments increased significantly. The absence of real adjustment during the period 1984/85-1992/93 was evidenced by the fact that overall consumption only declined slightly while domestic savings dropped from 35 percent to 10 percent of GDP by 1992/93 and domestic investments from 25 percent to less than 11 percent of GDP.  4 LEGACIES oF THE PAST AND KEY DEVELOPMENT ISSUES 11. The oil-led boom and the ensuing period of inadequate adjustment left Cameroon with several structural imbalances which today have become major obstacles to its long-term development. The principal legacies from that period which constitute major development challenges relate to: (i) an overextended, inefficient and deficit-ridden public sector; (ii) a deteriorating physical and human capital base and declining productivity; and (iii) deepening poverty. 12. Over-dimensioed4 inefficient and deficit-tidden public sector. Fiscal problems remained unaddressed throughout the period and 6-7 years of large budget deficits have resulted in a steady accumulation of both internal and external payment arrears. While revenues fell even more than nominal GDP total expenditures were not reduced in parallel thus aggravating fiscal disequilibria further and bringing the overall budget deficit to about 8.5 percent of GDP in 1992/93. On the revenue side, the decrease in oil revenues was not matched by improvements in non-oil revenues. Efforts to raise non-oil tax revenues, which were below 13 percent of non-oil GDP in 1992/93, have been undermined by the highly distorted, narrowly-based tax structure, and exacerbated by a weak tax administration and pervasive tax evasion. Unprecedented reductions in civil servant salaries went into effect in January and again in November 1993, leaving the total wage bill in December 1993 at 60 percent of the level 12 months earlier. While the wage reductions alleviated some of the pressures on the fiscal situation, it did not stop the mounting financial imbalances. To establish the premises for sustainable, non-inflationary growth and to ensure appropriate outlays for key development oriented activities, the overall budget deficit will need to be reduced sharply both through a significant increase in non-oil revenues and measures to reduce the size, cost and inefficiency of the public sector. 13. As the available financial resources grew tighter, the inefficiencies of the central administration and the parapublic sector became increasingly apparent. The fiscal adjustments primarily affected investment outlays and non-wage current expenditures. The wage bill remained unchanged until 1993 while outlays on materials and supplies were reduced by 50 percent from 1988/89 to 1992/93 and public investments were reduced from 5.1 percent of GDP to below 3 percent. The drastic 55 percent reduction in civil servant (base) salaries in 1993 further demotivated and added to the disillusion of an already ill-organiz,-i and inefficient central administration. Budget allocations and outlays for maintenance were insufficient to prevent a significant depreciation in infrastructure and capital structures such as roads and port facilities, and public services in education and health could no longer r.leet essential, basic needs. The multitude of public enterprises (PEs) created during the oil-boom, many of which are highly inefficient and/or technically bankrupt, have become a very significant burden on public finances and on the economy at large as they have crowded-out private investment and initiative. The magnitude of this burden is exemplified by the estimated budgetary costs of the 25 largest PEs under performance contracts during the period 1990-92 which amounts to approximately CFAF 450 billion, about 5 percent of GDP. To enable an appropriate maintenance of economic infrastructure and adequate delivery of basic public services, the Government will need to  S drastically improve efficiency of the central administration through retrenchment from productive sectors and refocused efforts in essential areas of public goods. 14. Deteriorating capital base and declining productive capacity. Neglect of traditional and new productive activities, deteriorating infrastructure and insufficient attention to the human resource base, have reduced Cameroon's production capacity signifcantly over the past 7-8 ycars. Heavy-handed public intervention in the traditional cash crop sectors (cocoa and coffee), together with unfavotable price developments, has led to declining productivity and reduced output in these sub-sectors by 50-55 percent since 1987/88. Oil production and proven reserves have declined steadily as a result of inappropriate regulatory and incentives framework for exploration and exploitation efforts. Following a faltered attempt to restructure the financial sector, a combination of a deteriorating loan portfolio, non-service of government debt and substantial capital flight prior to the devaluation, has again brought the banking system to the verge of collapse with little room to provide effective financial intermediation. The momentous increase in public-financed infrastructure in the 1980s largely benefited areas non-essential to the country's economic development and reduced the government's ability to ensure proper maintenance of essential economic and social infrastructures. Finally, the investmer.t in human resources development has declined significantly over the past decade. While primary school enrollment remains relatively high, estimated at 83 percent in 1992, high repetition and dropout rates underscore serious problems of efficiency and availability of resources. In conjunction with inadequate opportunities for vocational training and lack of conformity between higher education and the economy's needs, the pool of skilled labor has shrunk. Health care delivery has deteriorated, both in rural and urban areas. 15. Poverty. Based on its social indicators, Caneroon still ranks favorably compared to surrounding sub-Saharan countries. Nevertheless, 7-8 years of economic crises and a worsening fiscal situation, have taken their toll on the key social indicators. A decade ago about a fourth of the population of Douala and Yaounde lived below the poverty line and there is every indication that urban poverty has increased substantially since. While even less is known about the extent of rural poverty, it has probably also been incraasing at least until the recent devaluation. Unemployment is high among the urban population and is particularly acute amo-ig women and youth; a survey carried out in late 1993 estimates unemployment in Yaounde, the capital, at about 25 percent. In the rural areas, poverty and unemployment have been on the rise due to the decline in agriculture output. Malnutrition is recurrent among rural women and children especially in the arid north. This problem, in addition to widespread adult female illiteracy and poor health care delivery, is reflected in the high rates of maternal (300 per 100,000 births) and infant (96 per 1000 births) mortality. High fertility rates and population growth (estimated at 3 percent per annum) and continued cuts in public expenditures will put further pressure on already scarce resources allocated to health and education and worsen conditions for the poor. DEVALUATION AND RECENT DEVELOPMENTS 16. On January 12, 1994, the Govermnent of Cameoon, along with its partner countries in the CFA zone, decided to realign the parity of the CFA Franc from 50 CFA/FF to 100 CFA/FF.  6 To ensure the success of the devaluation, the Government of Cameroon has adopted a new macroeconomic program whose main -ibjective is to secure the country's international competitiveness and to return the economy on to a sustainable growth path. The underlying reform program, supported by an IMF Standby Arrangement (approved on March 14, 1994), aims to: (i) bring inflation to a level below 5 percent from 1995/96 onwards, following initial adjustments in relative prices; (ii) attain sustainable real GDP growth of about 5 percent per annum from 1995/96, primarily led by improved competitiveness and export performance; and (iii) quickly achieve primary and, eventually, overall budget surplus to enable increased domestic savings, reduce the current account balance deficit and finance an increasing share of domestic investments. 17. Observations covering the first 3-5 months after the devaluation suggest that implementation of the stabilization phase of the government's economic program has succeeded in controlling inflation, although stippages have occurred with respect to fiscal performance. Inflation is substantially lower than anticipated. Based on a consumer price index, CPI, established for Yaounde (CPI = 100 on January 12, 1994), the general price level peaked in the last week of March 1994, at which point the index reached 128. By late April, many prices had fallen, bringing the index down to 120-21. Reports from missions to the field and selective information all point to a significant and swift reaction in the agricultural sub-sectors, particularly cocoa, coffee and cotton, along with sharp rises in exports towards Nigeria. )ost-devaluation interviews carried out with a number of manufacturing and agro-processing industries confirmed a more optimistic outlook which could translate into increased output and employment within the coming 2-3 quarters when the impact of the next harvest season works itself through. Furthermore, information from the pre-shipment inspection company in place point to a somewhat larger-than- envisaged drop in imports over the first 34 months of 1994. However, fiscal revenues in general and customs revenues in particular are well below expected levels over the first three months of 1994. This is explained, in part, by a delayed implementation of the tax and tariff reforms along with a sharper-than-anticipated fall in the volume of imports and a smaller increase in nominal incomes. It is expected that revenue performance will improve significantly as the reforn measures take hold and the economy starts growing. The Government has also been disappointingly slow in assuring expeditious and appropriate financial accounting information on key pubtic enterprises. C. GOVERNMENT'S ECONOMIC REFORM PROGRAM 18. Breaking with past policies, the Government's new economic program covers three key areas: (i) re-dimensioning and strengthening efficiency of the public and parapublic sectors; (ii) improving the incentives framework for productive and production-supporting sectors; and (di) adoptLng poverty alleviating measures.  7 RE-DIMENsIoING AND IWROVING EFFICIENCY OF PUBLIC SECTOR i) Public Resource Management 19. Fiscal adjustments and improved resource managemet't constitute the backbone of the government's efforts to reduce financial imbalances and to restore economk% growth. To attain a rapid turnaround in the primary fiscal balance and eventually to establish an overall budget surplus, the Government aims to mobilize more public sector resources and to manage them better. Key measures involve: (i) tax and tariff reform; (ii) continued wage restraint, with increases in nominal wages and salaies contingent upon successful implementation of the civil service reform; (iii) significant increases in current non-wage expenditures and improved allocation of those expenditures among sectors; and (iv) substantial improvements in the programming and execution of public investments. 20. Tax and Tariff Reform. To enable an adequate provisioning of public services and to reduce the overall deficit of the central government, a key objective of the recently adopted economic recovery program is to raise non-oil revenue from 13 percent of non-oil CiDP in 1993/94 to 17 percent in 1996197. To achieve these objectives, the Goverrnent is implementing a comprehensive UDEAC-wide tax and ta-iff reform and is improving the administrative capacity of the tax and customs authorities. The tax and tariff reform includes the introduction of a value added tax and simplification of tariff structures and reduction of rates, and the elimination of exei. ptions benefiting certain goods and certain companies. An in-depth reform of the income taxation system, aimed at simplifying and lowering the rate structure and at broadening the tax base, is scheduled to take effect as of July 1, 1995. As part of the UDEAC reform, the Government has repealed provisions of the Investment Code, granting tariff and sales tax exemptions, as of July 1, 1994. Moreover, the Government has established a complete inventoty of enterprises enjoying special tax treatment under 'Convention dEtablissement' status, which will be re-negotiated before December 31, 1995. With respect to public enterprises, the Government has decided to elininate all tax and tawiff exemptions and subject these enterprises to the general tax regime before end-December 1994. 21. Wage Restraint and Civil Serviee Refornm The Government has already taken a number of decisive steps to reduce the v.age bill and, at the same time, improve the efficiency of civil service and its ability to provide adequate public services. The wage cuts effected in 1993 enable the Govermnent to contain the civil service wage bill at about CFA 220 billion in 1993/94, or about 7.5 percent of GDP, down from CFA 275 billion in 1992/93, about 10.5 percent of GDP. It is envisaged that the wage bill will be reduced further, to about CFA 191 billion in 1994/95, or 5.5 percent of GDP, and that it will be maintained below that level in the foreseeable future. To achieve this objective and, at the same time, improve the efficiency of the civil service, the Governent has accelerated the implementation of the administrative and institutional reform program. Under this program, organizational and staffing reviews have already been conducted in all ministerial departments. Organization and staffing plans are being developed on the basis of these reviews. At this point, complete studies and staffing plans have been drawn up and adopted for 8 ministries and the Government has started implementation for four of those ministries. As  8 part of this process, the Government has prepared a general outline defining how excess staff will be laid off, and the budgetary costs and savings of these staffing reductions. Implementation of this program will begin with the 1994/95 fiscal year and the Government is seeking external financial support to this effect. .urthermore and with a view to improve the efficiency of the central administration, the Government is revising the statute for the civil service which it expects to adopt shortly. 22. Other Current Expenditures To enable the central administration to function properly and to provide adequate basic services to the population, the Government realizes it is essential that an increasing proportion of total outlays be allocated for non-wage current expenditures and, within those expenditures, that an increasing portion be appropriated for goods and services in sectors essential to the country's long-term development - i.e., primary and secondary education, health, and agriculture and the maintenance of transport infrastructure. Contrary to the past, the Governmant, after discussions with the Bahk, has proposed to increase non-wage current expenditure budget appropriations for the Ministry of National Education (rrimary and secondary), Ministry of Health, Ministry of Agriculture, and the Ministry of Transport and Public Works by 30 percent in the (draft) Loi de Finances for 1994/95 compared to that in 1993/94. Furthermore, to make sure that budgeted expenditures in these key sectors are actually held in full, the Govemment has instructed the Ministry of Finance to assign first priority to these outlays in its execu.ion of the Treasury cash budget. 23. Public Investment Programming. In preparing the public investment program (PIP) for 1994/95-1997/98, the Government committed itself to increase the domestically financed part of the investment budget threefold during the period (compared to 1993/94) and to raise the share of education, health, agriculture and infrastructure in total investments significantly The public investtnent budget for 1994/95 also reflects these priorities: the government's financing contribution is up from CFAF 11 billion in 1993/94 to CFA 20 billion in 1994/95 and the sector allocation has been biased towards the development-oriented sectors. Looking ahead, the Government intends to strengthen the entire process of public investment programming as welt as the monitoring of the execution of public investments. Regarding the progranuning process, the key steps will include: (i) establishment of an overall level of public investments based on a consistent framework of macroeconomic objectives (such as growth rate, budget deficit, level of indebtedness); (ii) the distribution of investments among sectors will be determined based on a comprehensive development strategy; and (iii) the i .rra-sectoral allocations of investments and project selection will be made based on defined sector strategies and on criteria such as economic and financial rates of return. To enable this process and the steps outlined to take place in a coherent and transparent fashion every year, the Governu -nt will provide the departnents in the line ministries with clear guidelines in this respect (including selection criteria, format for presentation of projects, etc.) and empower the central department in the Ministty of Plan with sufficient clout to carry out the necessary arbitration.  9 ii) Public Enterprise Reform 24. The Government has set out its new public enterprise (PE) sector reform policy along with an action plan in a Sector Policy Declaration, adopted in June 1994 as a condition for Board presentation of the proposed ERC, which marks a break with past policies in that it explicitly acknowledges the need for the retrenchment of the public sector from ecoiioti;c activities. The overiding objective of the PE reform program is to dive.t all the public enterprises currently engaged in production activities as well as commercial service activities while improving the performanc and the monitoring of those remaining in the public portfolio. To this effect, the Sector Poli-y Declaration outlines the criteria defining PEs to be divested and the ones to remain in the state portfolio. The Sector Policy Declaration also establishes that the Governent, every year, adopts and publishes a list of at least 10 public enterprises for which a privatization and/or liquidation process will be set in motion. The flust list of PEs to be privatized and/or liquidated will be published before the effectiveness of the proposed ERC. The Government has already conveyed its intention to gradually bring private equity participation into the state oil monopoly, SNH. 25. To enable an expeditious, efficient and transparent process of divestiture and monitoring of public enterprises, the Sector Policy Declaration also outlines the need to change the current inst.iutional framework for PE reform, and to establish a powerful and autonomous unit which will be responsible for the implementation of PE reform as well as the supervision and monitoring of the enterprises remaining in the public portfolio. The entity will be staffed with a small team of professionals reputed for their integrity and experience in business management. In the meantime, and to improve efficiency and transparency in the sector, the Government intends to grant greater autonomy and accountability to the managers of public enterprises. Among other tools, private equity participation and private management contracts will be used to enhance the performance of these enterprises. Moreover, beginning in 1994 all public enterprises are required to prepare certified accounts annually and will be subject to annual audits carried out by qualified auditing firms. In addition, since March 1994, the 17 largest public enterprises will be requested to submit quarterly cash-flow statements to the Ministry of Finance and as of end-December 1994, these enterprises will also produce provisional profit and loss accounts every six months. Gradually, over the next two years, all public enterprises will be required to comp!y with generally accepted accounting standards and improve their intemal reporting system. STRENGTHEN PRODUCTION CAPACITY i) Trade and Price Reform 26. The Government realizes that Cameroon's growth potential can only be exploited in fill through economic policies which are export-oriented and allow domestic markets for all goods and services to finction freely and with a minimum of Government intervention. Thus, the Government has embarked on a comprehensive trade and tariff reform. A simplified and less distorted tariff structure (consisting of only four tariff rates) has been in effect since February 1994 and all remaining quantitative restrictions on merchandise imports were abolished at the  10 same time. To complete the liberalization on the import side, all remaining import licenses -- required for imports of products such as tea, maize, rice, edible oil, sugar and textiles - have also been eliminated and Government's trade regime (i.e., "Programme Gen6ral des Echanges") has been revised accordingly. In order to mitigate the impact of the corrective price adjustments in the wake of the devaluation, taxes and tariffs on rice, wheat/flour/bread, sugar, and vegetable oil have been reduced (suspended in the case of rice and wheat) for a temporary period of 6 months. As of July 1, 1994, these products will again be subject to normal taxation. 27. The Government also intends to complete the process of domestic retail price deregulation initiated in 1988/89. All price controls on goods and services were abolished in January 1994, with the exception of petroleum products, medicines, textbooks, and monopoly public utility rates (electricity, water, public transport, maritime services and port fees). Prices for public utilities (electricity and water), public transportation and petroleum products will be closely monitored and the Government will ensure that productivity gains and cost savings are translated into price adjustments at the consumer level. To ensure that the benefit of the devaluation is passed-on to the producers, minimum producer prices for cocoa and coffee have been doubled for the rem'ainder of the current crop marketing year, while the producer price for cotton has been raised by more than 50 percent; the less-than-full pass-through of the devaluation in the cotton sector reflects the decision to try to restore and assure financial equilibrium in the processing and marketing parastatal, SODECOTON, by granting it higher margins. (ii) Agriculture Sector 28. The Government's overall strategy for the agriculture sector aims at: (i) strengthening the incentives for the private producers of primary commodities and of transformed products through ful liberalization of the sector, and (ii) leaving all productive activities to the private sector, while improving the efficiency of public intervention in the few areas which are crucial to a well- functioning productive environment. 29. The production and marketing of non-traditional export crops and arabica coffee has been futly liberalized and the Govermment intends to do likewise in the case of robusta coffee, cocoa and cotton. As far as cocoa and robusta coffee are concemed, the Government intends to completely abolish the current system of "reference" prices for producers and marketing margins ("couits incompressibles") before the start of the 1994/95 marketing season. In the meantime and to ensure that the benefits of the devaluation were passed on to the producers, the 'reference' prices for cocoa and robusta coffee have been doubled. With respect to cotton, the Government intends to graduatly liberalize the sector and to introduce private capital participation in SODECOTON. In line with its new PE reform policy, the Government intends to accelerate the divestiture process with the objective of disengaging from productive activities in the agricultural sector and allow the private sector to take over. The enterprises to be privatized are currently being identified and, among those, divestiture efforts are expected to focus on those with the largest impact on the economy and public finances.  (iii) Forestry Sector 30. To ensure a more efficient and transparent management of Cameroon's forest resources, the Government has outlined a new policy with respect to the sector in a Policy Declaration. A new law was drafted to implement this policy but was s6bstantially revised by the Parliament before it was promulgated in January 1994. The law as approved and adopted contains a number of provisions which are not consistent with the government's policy. Consequently, the Government intends to propose amendments that will bring the law back into conformity with the policy for consideration and adoption by the Parliament during its session in November 1994. In the meantime, an implementation decree for the Forestry Law is being prepared in consultation with the Bank, and its adoption is a condition for effectiveness of the proposed Economic Recovery Credit. 31. The present Law provides an adequate policy framework for the implementation of biodiversity conservation and forest management programs with local participation, both in the State forests and on forested land in the public domain. It provides an improved regulatory framework for the management of bushfires. The weaknesses of the Law lie in the lack of transparency of proposed procedures for awarding logging concessions, in the excessive role envisaged for State institutions, and in the perverse economic effects of the proposed ban on log exports. The Government is aware of these weaknesses and intends to correct them at the earliest possible opportunity. (iv) Petroleum Sector 32. To increase petroleum production and to improve the efficiency and resource allocation of the energy sector at large, the Government is currently preparing a new energy reform policy which will be finalized by September 1994 with support from IDA. While still under preparation, the broad lines of the envisaged sector reform are already established and aim at (i) reducing the cost of oil products, (ii) securing an appropriate level of fiscal revenues from the sector, (iii) improving transparency in the sector and (iv) improving the incentives system for exploration and production of petroleum. 33. The level and structure of petroleum product prices have been revised not only in response to the devaluation but also to reduce price distortions between different products and to minimize the impact of the devaluation on consumers. In particular, para-fiscal charges, such as the contributions to the stabilization and equalization funds ("p6r6quation"), have been abolished. Effective March 1994, petroleum products, with the exception of kerosene, are subject to standard customs and indirect tax regime as weli as the specific tax on petroleum products. While allowing an increase in tax receipts, these measures have made it possible to contain the increase in the retail price of petroleum products and thus limit the impact of the devaluation on transportation costs. To ensure that retail prices reflect developments on the world markets, the Government introduced a mechanism of quarterly price adjustments, effective April 1994.  12 34. Furthermore, the Government intends to complete the liberalization of the petroleum sector over the next two years. The SNH monopoly over crude oil supply wili be eliminated before end-June 1995, thereby allowing the refinery to import crude directly at world market prices. Subsequently, the monopolies of SONARA (over refined product) and SCDP (over distribution) will be abolished before end-June 1996; henceforth, petroleum distribution companies would be free to import directly and contract out transport services on a competitive basis. The Government intends to implement a number of measures aiming at improving the efficiency and transparency of the petroleum sector. Along with the other public enterprises, SNH, SONARA and SCDP will be required to prepare annually certified accounts within six months of the close of their financial year and will be subject to annual audits carried out by qualified auditing firms. Moreover, given the importance of oil revenue to government finance, the SNH is, as of January 1994, required to produce consolidated quarterly statements of all financial operations carried out in its own name and in the name of the Government. Furthermore, the Government also intends to bring private equity participation into SNH and the other state enterprises in the petroleum sector. Finally, the Government has set out to review the contractual arrangements currently in place with petroleum companies with a view to establishing an incentives framework conducive to increased exploration and production efforts. This will be accomplished before end-1994. (v) Transport Sector Reform 35. After years of inadequate maintenance of essential transport network and deteriorating financial and technical performance of transport public enterprises, the Government has adopted a new strategy for the transport sector. The overall objective of this strategy is to restore transport efficiency through sector-wide reform, rational investment and maintenance planning to be carried out in several phases supported by distinct operations over a ten-year period. The strategy aims to contribute directly to establishing competitiveness and growth by making the transport system more efficient, thereby reducing producer costs, and eliminating the distortions it is currently causing in the public finance and the financial systems. Sustainable transport development in a policy based, coherent sector-wide framework supported by donors and Government - as opposed to the past unsuccessful and uncoordinated project-by-project sub-sector approach - is another major objective of the strategy, which will involve all the key transport sub-sectors, institutions and investments. 36. The specific objectives of the strategy for transport are to: (i) improve extenal efficiency of the transport system, including the maritime and port apparatus, as well as the domestic road, rail and airport management systems, and promote participation of the private sector in transport enterprises and road maintenance; (ii) reduce PE deficits and losses and prevent the creation of additional domestic arrears; (iii) strengthen sector management and public sector perfommance through reorganization of the sector management institutions (Ministries of Public Works and Transports), local capacity building, and restructuring of key transport enterprises; (iv) improve resource mobilization through harmonization of road taxes and better road financing mechanisms; (v) establish and implement improved rehabilitation and maintenance of transport infiastructure to  '3 reduce the high cost of transport; and (vi) facilitate transit through refoms in customs procedures and improved road transport. (vi) Human Resources Development 37. To establish the agenda for the preparation of new eduaion sector investments, the Government is conuitted to organizing a national debate on education sector policy (Etats G(ntraux) by the end of 1994. Given the poor state of educational data, the Government will undertake studies in 1994, to identify the most pressing social sector/education issues and serve as an input for developing an education sector development program. The Government intends to give higher priority to basic and vocational education, involving: (i) monitoring the execution of central govermnent budget allocations for education; (u) increasing the primay education budget; and (iui) increasing budgets for pedagogic materials at all levels of education. The Govermnent will agree anually with IDA upon the composition of the investment budget in education to ensure that it emphasizes the quality of primay and secondary education and the relevance of vocational training to the labor market needs. The Govenunent is also determined to cotinue the process of redefining its role in the financing and management of the teaching profession atrd that of private education. 38. While the health status of Cameroon's population has improved considerably over recent decades, infectious diseases, malaria, intestinal parasites, sldn diseases, traumas, and nutritional disorders remain serious problems; and sexually transmitted diseases, including AIDS, are a growing threat. Over the past 1S years, Govenment policy bas emphaized curative care and hospital construction at the expense of preventive services, while marked disequilibria emerged in health sector management and the referral system lrgely broke down. Confronted with these problems the Govemment approved a new Primary Health Care Policy in December 1992. In implementing this policy the Goverunent is committed to: decentralizing health service delivery and management; sharing the financing and management of health care with beneficiaries; and implementing an essential drugs policy. In March 1993, the Government also published a national population policy. Through this policy the Government is committed to: facilitating access to voluntary family planning services; ensuring the availability of information and education programs conceming contraceptive methods, sexually transmitted diseases (including AIDS), reproductive health, and causes of sterility; promoting responsible parenthood through educational efforts; and improving research and coordination to ensre efficiency and popular participation in the implementation of the policy. POVERTY ALLEVUATION 39. The economic decline during the past 7-8 years (a decline of per capita GDP of 55 percent in total), with its attendant increase in poverty painfully demonstrates the importance of restoring growth as the front-line defense against poverty. It is clear that the legacy of policies pursued before the devaluation has done more to deepen and spread poverty than will the specific impact of the devaluation on certain groups. Thus, the entire thrust of the government's program -  14 beginning with the devaluation and strengthened by the measures proposed here, aim to combat poverty. 40. Nonetheless, the devaluation and the ensuing adjustment process wil affect the various social groups differently and unevenly. The rural population involved in production and, more generally, the tradeable goods sector should benefit from the devaluation almost imnediately. In contrast and in conjunction with the recent wage cuts and the envisaged reduction in the civil service, the devaluation will adversely affect real incomes in the nontradeable sectors, in particular that part of the primarily urban population whose livelihood depends on spending by public sector employees. While the improvement in the country's international competitiveness and a general liberalization of the economy, including the labor market, should lead to higher income levels and provide new opportunities to all social groups, the Government sees a need for targeted measures to alleviate the transitory hardships experienced by the poorest segments as a result of the adjustment process. 41. To alleviate these problems and to lay the groundwork for subsequently addressing structural poverty, the Government has already taken a number of specific measures. First, to mitigate the impact of the corrective price adjustment on wage earners' purchasing power, trade liberalization has been combined with the phasing out of stabilizatior. tax mechanisms and the additional temporary reduction of tariffs and taxes on four main staples: rice, flour, sugar and palm oil. The temporary reduction in tariffs on these four staples will be abolished as of July 1, 1994 and price adjustments thereafter will be limited to the range of the tariffs imposed (i.e., between 10 and 20 percent). The possible adverse impact on the vulnerable poor is expected to be partly mitigated by employment-creating and labor-intensive activities currently being launched by the Government. Second, the level of non-wage expenditures for health and education has been raised; this will also allow for the strengthening of basic health services and primaty education, particularly in rural areas. Third, the Government has designed a CFAF 17.2 billion Eimergency Action program (EAP) as an integrated part of its adjustment program. 42. Starting immediately and covering the 18 month period of the main program, the EAP will take over certain unfunded components of Cameroon's Social Dimensions of Adjustment (SDA) Program: (i) the SDA Technical Coordination Committee (CTCIDSA), which will manage the implementation of the EAP; (ii) the National Employment Fund, which promotes employmnent through counseling, vocational training, and support for micro-enterprises; (iii) a household survey to monitor social evolution with a view to preparing poverty-related activities; and (iv) an expanded education component. These components, amounting to CFAF 8. 1 billion, constitute the Social Action Program (SAP) prepared in the context of the proposed E:RC. In addition, the EAP is to consist of urban sanitation operations, including waste collection; extension of water and electricity services; road and gutter maintenance carried out through labor-intensive techniques, both to create employment and improve the urban environment; and health services in rural areas, with support to local pharmacies and the purchase of essential and generic medicines. The Government, following consultations with the World Bank, has incorporated the nature of these targeted actions in the draft Loi de Finance and their financing in the Tableau des Operations Financieres for 1994/95.  15 D. MEDIUM TERM PROSPECTS AND EXTERNAL ENVIRONMENT MEDIUM TERM PROSPECTS 43. The government's economic recovety program is expected to end the recession and return the country to a path of positive real growth. Real GDP growth is projected to average about 5 percent per annum from 1996 onwards primarily as a result of improved performance in the tradeables sector (such as coffee, cocoa, agro-processing industries and light manufacturing) sustained by increased investment levels as confidence is re-established. Public sector investments are projected to recover gradually from 2.2 percent of GDP in 1992/93 to about 3.5 percent in 1996197. In response to the envisaged reforms of the trade regime, the financial system and public enterprise sector, and as the public finance situation is brought under control, private investment is expected to rise from 8.7 percent of GDP in 1992/93 to about 12-13 percent in 1996/97. Owing to a serious external debt overhang, most of the increase in investments will have to be financed by domestic savings which will need to increase from 9.8 percent of GDP in 1992/93 to about 20 percent in 1996/97. Private savings will be stimulated by the recovery of econornic growth and the improvement in the external trade position. Public sector savings are projected to turn around from a negative level in 1992/93 to about 8-9 percent of GDP in 1996/97. (See Annex IV for Key Economic Indicators) 44. The principal objective of fiscal policy is to generate primary surpluses and public sector savings sufficient to cover an increasing share of the country's extemal interest obligations and to raise public investments. It is thus expected that the primary fiscal balance will be reversed from a deficit of 1.8 percent of GDP in 1992/93 to a surplus of almost 6 percent in 1996/97. To produce this turnaround in the fiscal imbalance, the Government intends to increase non-oil tax revenues from 12 percent of GDP in 1992/93 to about 16 percent in 1996/97. To achieve this, Government will rely primarily on the replacement of a plethora of specific taxes by a turnover tax (and, eventually, a value-added tax), and on the reduction of non-interest current expenditures from almost 15 percent of GDP in 1992/93 to about 8 percent in 1996/97, as the relative weight of the wage bill is expected to fall further. This will allow the Government to increase its capital outlays which are to be directed, as a matter of priority, towards education, health, agriculture and infrastructure maintenance. ExTEAL FiNANCING REQuIEMENTs 45. As shown in table 1, Cameroon's financing requirements will remain considerable over the coming years. The Government expects that with the parity change and the implementation of the accompanying fiscal, monetary and structural adjustment policies, the international donor community will be favorably disposed to provide Cameroon with the temporary increase in external financial support required to ensure successful implementation of this ambitious program and, thereby, the country's return to a sustainable growth path. Timeliness in the availability of external financing is of the essence or else the stabilization effort may be jeopardized and the impact on the vulnerable poor could be serious. To this effect, the IMF is supporting the government's program under a Standby Arrangement, in the amount of SDR 81.1 million, which  16 was approved on March 14, 1994. The Paris Club convened later in March and granted Cameroon rescheduling on relatively generous terms. The Government of France has also made large financial commitments to support the progran, and it is expected that the African Development Bank, the European Union, Switzerland and a number of other bilateral donors will be prepared to extend financial assistance. Given its external debt burden, its recent eligibility to IDA funds, and plans to start discussions shortly on a Policy Framework Paper, Cameroon was also accepted as a beneficiary of the Special Program for Africa (SPA) during the meetings in April 1994. 46. An improvement in Cameroon's economic situation, restored investor confidence, and implementation of the economic recovery program should provide the appropriate setting for increased project and budget financing as well as for resumption of foreign direct investments and the anticipated return of capital which left the countty before the devaluation. However, Cameroons external debt service will continue to weigh heavily on the balance of payments. For the period 1993/94-1995/96, currently identified external financing amounts to about US$3.0 billion, of which US$2.5 billion has been forthcoming in the form of exceptional financing (debt relief and exceptional budgetary support). The Paris Club rescheduled Cameroon's current maturities of eligible bilateral debt on Enhanced Toronto terms (while arrears were accorded Houston terms). Cameroon will also seek an agreement with its commercial banks to restructure outstanding claims, the bulk of which has not been serviced since 1989. However, this agreement is only expected to be reached in FY95; until then, Cameroon will defer its debt service to its commercial creditors. Despite this relatively high level of rescheduling, the identified additional exceptional financing is still less than expected debt service payments and Cameroon will need another US$886 million to fuilly close the financing gap over the period FY94-96. The proposed Bank Group Strategy (paras. 52-82) will provide essential financial support to this end while responding to the country's development priorities.  17 TADs 1: CAmotooN FIANCIN REQURMENUtTS FY94-FO (US$ Mwou) US $ Million FY94 F9 5 FY 94-6 A. Requirements 2.110 1.096 on Current Account Deficit excluding interest due on public debt 95 (149) (205) (258) Debt Service due on Public debt 939 1,223 965 3,127 of which interest 483 480 482 1,446 of which amortzation 456 743 482 1,681 Reduction in Arrears 1,062 1,082 Central Bank Reserves 14 22 104 139 S. Resources Identified & Committed 1.902 638 Public project financing 95 114 142 351 Private Sector Flows (net) (11) 74 130 193 Program financing 241 0 0 241 Resch & Debt relief obtained 1,577 459 363 2,399 C. Gross Financing Gap (A-B) 208 450 886 IDA: ERCfTSAC/AGSALIJ5th Dim 75 112 117 304 Other Program Financing & SPA 133 338 111 582 0. Residual Financing Gap 0 0 0 EXTERNAL ENVIRONMENT 47. With a relatively narrow export base of primary commodities, the Cameroonian economy is vulnerable to developments in the world market prices for its main exports (petroleum, coffee, cocoa and timber) and will remain dependent on foreign savings to maintain needed levels of investment. 48. With petroleum accounting for about 50 percent of the country's exports and 25 percent of budgetary revenues, Cameroon's economy and its foreign exchange earnings are obviously highly dependent on world price developments for petroleum. Following a period of fairly stable world prices since 1991, a sharp decline in oil prices occurred in the third quarter of 1993. Oil prices are expected to persist at that level for another 8-12 months, with the World Bank forecasting a nominal increase of about 8 percent per annum, on average, for the remainder of the decade. In spite of relatively encouraging price forecasts for oil, export and fiscal revenues are projected to decrease significantly as Cameroon's oil production is expected to continue to decline sharply, reflecting past lack of investments in exploratory activities due to inadequate incentives. If exploration efforts were to pick-up anew, however, it is possible that significant reserves could be found and brought on-stream within the next 4-8 years.  18 49. Three other primary commodities - cocoa, coffee and timber - account for another 25 percent of Cameroon's export eanings. Timber (sapelli) prices are projected to increase by about 4 percent per annum over the medium term. Paying due respect to environmental concerns and observing an optimal exploitation of forest reserves in Cameroon, the quantity of timber cannot be expected to increase significantly. World market prices for both cocoa and coffee are projected to increase by an annual average of 13-15 percent in 1994-95; thereafter and for the rest of the decade, coffee prices are expected to increase by an annual average of 8 percent while cocoa prices are expected to be much less buoyant. Contrary to what is the case for both petroleum and timber, production and export quantities for cocoa and coffee are expected to increase significantly over the next 2-3 years as the beneficial effects of the devaluation play themselves through. 50. Cameroon's prospects are also clouded by its foreign debt service and its dependence on foreign financial assistance. External donors provide financing to ensure that basic public and social services are delivered. Furthermore, foreign donors bear the brunt of servicing and rescheduling a large part of the government's external debt. Given the right economic policies and in view of the country's growth potential, this dependency could be eliminated over the medium term. Foreign direct investments could reach significant proportions - particularly in agro- processing industres and in the petroleum sector. However, the most important source of funds could come from Camneroonian entrepreneurs and capitalists - initially through halting capital flight, and eventually through a reflow of the capital which was transferred abroad prior to, and in anticipation of, the devaluation. The key determinant for these private capital inflows to. resume and replace foreign aid is the government's credibility and transparency in economic management. The swiftness and determination with which the Government carries out the current economic reform program wiHl be the important factor in re-establishing its credibility. Equally important, beyond a certain period of time external aid/financial flows will no longer be forthcoming unless the Government has taken decisive and far-reaching measures to address its main structural problems. 51. On balance, medium-tern prospects with respect to the key external factors affecting the Cameroonian economy allows for a cautiously optimistic outlook. Price forecasts for petroleum, coffee and cocoa are relatively buoyant and the devaluation has brought about a renewed willingness among donors to provide important financial assistance to Cameroon. While changes in these external parameters could brighten or dim Cameroon's development prospects, the main problems facing the country continue to be internal. E. THE BANK GROUP'S COUNTRY ASSISTANCE STRATEGY 52. Reinforcing the Policy Dialogue. The level and quality of the policy dialogue has been very uneven over the past few years and has not resulted in laying the groundwork for sustainable development. Government's decision to embark on a stabilization and adjustment program in the wake of the devaluation of the CFA franc is an indication of the level of improvement in the policy dialogue which is being extended to address sector reforms. Cameroon's future success  19 will depend on its timely implementation of structural reforms and the government's willingness to tackle complex reforms which are likely to be met by considerable resistance from powerfil interest groups. This requires a strong leadership which is committed to change and is able to resist the temptation to delay reforms or reverse policies. Cameroon's track record to date is poor. However, recent commitments undertaken by the Government under the Structural Adjustment Credit (FY94) and the proposed Economic Recovery Credit (ERC) are an indication of government's readiness to push for institutional and sectoral reforms in a number of priority areas. IDA can facilitate the dialogue by focusing sufficient attention to the process of change and by providing support to government's economic recovery efforts through its lending program, ESW and the development of a new IDA portfolio tailored to Cameroons current development priorities. AssIsrANcE OBJEcrsES 53. IDA's Strategy. The key macroeconomic and sector objectives of WIMAs assistance strategy are to support government's overall objectives to attain: (a) redimensioning, focusing and improing the public sector, through (i) a stronger mobilization and more efficient use of public resources, the downsizing and reorganization of the civil service, and the divestiture and restructuring of parastatals; and (ii) improving macroecononic management in such areas as institutional reforms of the public procurement system, environmental profection and the rational use and management of natural resources; (b) increasing productve cap&city through (i) better macroeconomic management, deregulation and liberalization and reform of the legal and regulatory environment; (ii) maintenance and development of basic inftastructure; (dii) supporting development of the human resource sector; and (iv) strengthening the financi sector, and (c) strongly focused interventions to alleviate poverty, including improvements in the delivery of social services to low-income groups. REDIMENSIONING AND IROVING THE PUBLIC SECrOR 54. Support for public enterprise reform (PE) (paras. 24-25) will be a focal point of IDA assistance . IDA will provide the financial assistance and other support to help the Government carry out the divestiture of key enterprises in transport under the transport sector adjustment project (FY95) and a,.iculture under the agriculture sector adjustnent project (FY96). On civil service reform, the Govemment intends to accelerate the implementation of the administrative and institutional reform program (para. 21). These efforts at civil service reform will be supported under an IDA-financed public administration reform project in FY96. On reform of the public procurement system, Government is committed to implement long-term institutional reforms as outlined in the Action Plan agreed with Government following the November 1993 procurement seminar (para. 75). However, given the time-lag implicated by such far-reaching reforms, in the interim, IDA will agree with Government at appraisal on the specific procurement requirements for individual investment operations.  20 Table 2:Policy Matrix IDA Assistance Stratemt FY94-97 Areas of Focus Policy Reforms Lending Instruments ESW and Related Activities 1) Redlmensioning, (1) Improve FY- - FY9-: Focusing and macroeconomic . E G Improving the Public management, including ERC CEM Sempov the revision of the public I________ - PF t procurement system * Successful implementation of the SPupr te reve - Better government (ii) Adopt a sectoral policy economic reform program Agricusture sector review functioning declaration for PE Reform X Transport Sector Adjustment Constrants to petrobum (Uii) Pursue implementation Credit (TSAC) sector growth of ciil s rvic refrm _ ____ ____ ____ ____ ____ ___ a Urban Sector Strategy - Reducing size of of Nivit service reform |fYe public sector program .- ;Nt (iv) Increase resource * Agrcultural Sector Adjustment * CPPR - Strengthening mobilization Credit (AGSAL.) * Counti'y Environmental management of (v) Outline an * Public Admnistraton Rehmi Strategy Paper resources in public environmental strategy Proec * Donor Meetg domain rF - - . ;1 . * - -- .; .;. - -;..PEReform TAPj.c- . . .Y. . -7 . - 1 *.Pubic Expenditure * Environmental Management Review project * Agnculture Research N F9. . * Urban Management Project * Manufacturing Development 2) iceasing (i) Improve the Incentive 7797 FY5: -. Productive Capacit andreg(i) Maintenance and * Health, Feriy and NutrNon e Compettveness Study - Reducing restrictions development of basic Prolect * Education Sector Issues on private sector infrastructure * Financial Sector Oeration activity (iii) Improve efficiency of FY9: -_-_____ urban land markets * Private Sector Development F9 - Improve support (iv) Increase non-wage Opeation * Human Resource Sector services for productive expenditures for health * Educaton Sector Project Strategy activity (infrastructure, and education * Transport Sector Project * Agricultural sector human resource (v) Improve primary health * Energy Project work development care services 17 agriculture) (vi) Increase access to primary education, with * Women Initatie - Provide adequate emphasis on girls' education and education; appropriate health (vii) Promote programs services aimed at women 3) Poverty Allviation (i) Assess the extent. FY94 i" FY9: "; - Reduce population depth, characteristics, growth distribution and causes of * Social Action Program (ERG) *Poverty Assessment - Initiate long-term poverty in Cameroon; FY95: I dialogue on poverty (ii) Target assistance * Urban Sector TA issues strategies explicitly IFY97: focused on poverty L Poverty Ae viation reduction; 55. A strengthened program of assistance for urban management, with special focus on the urban environment, will emphasize improvement in managerial capacity of local municipalities, mobilization of local resources, development of a housing and land development policy and the  21 upgrading and maintenance of essential infrastructure and services. Progress made under this operation will be supported under the urban management project (FY97) whose principal objective will be to continue to support implementation of the government's urban strategy. 56. Cameroon's long-term development depends on an efficient management of natural resources and environment sector. The Government recognizes that reversing the trend of resource depletion is fundamental to achieving long-term sustainable growth. The Goverunent is preparing an Environmental Action Plan, with assistance from IDA and the UNDP. The Action Plan will form the basis for IDA's assistance. A biodiversity/GEF project is under preparation with Japanese grant funding. It aims at protecting fragile ecosystems by the introduction of pilot approaches to community-based resource management around threatened forests and protected areas. The proposed agricultural sector adjustment operation (FY95) wil also seek to halt the degradation of natural resources by targetting actions on three important fronts: the resource markets, the regulatory framework and the institutions needed to implement and improve it. Given an appropriate macroeconomic environment, IDA will support goverrnent efforts to improve institutions and the regulatory framework for the management of forestry resources under an environmental management project (FY96). In addition, IDA would support government's efforts to restructure the agricultural research system to make it more responsive to clients' needs and constraints and to improve the system's financial viability through the second agricultural research project (FY97). Encouraging and Diversifying the Productive Sector 57. A private sector assessment (PSA) being carried out by the Bank in FY94 will identify the key constraints to the establishment of a favorable investment climate for private sector investment in Cameroon. Support for private sector development will be provided under a private sector operation (FY96) which includes the following key elements: (i) support for policy and institutional reforms which promote private investment, including the incentive and regulatoryframework and provide technical assistance on privatization matters and environmental management; (ii) assistance to small- and micro- entrepreneurs as part of the approach to poverty reduction; and (iii) support for government efforts to increase domestic and foreign private investment in key sectors, especially agriculture and energy. Small- and medium-size entrepreneurs will be the focus of the urban and transport operations. 58. In the hydro-carbon sector, IDA's assistance strategy aims at (i) increasing transparency in the management of the sector, including partial privatization of some of the key enterprises in the oil sector and (ii) supporting government effort to improve the incentives framework for further exploration and development of new oil and gas fields. Given the sector's substantial investment requirements, IDA expects to continue to place a major emphasis on increasing private sector investment, while facilitating and coordinating the mobilization of additional resources from external donors. Planned future IDA lending consists of an energy sector project (FY96) to realize these objectives and to lay the groundwork for the future privatization of some of the key parastatals in the sector (para. 34).  22 59. The financial sector has an important role to play to support the development of the productive sector. However, to achieve this, Government must adopt a coherent set of policies in order to settle the arrears of the public sector to the private sector. To this effect, IDA will provide technical assistance to the Government under a financial sector restructuring credit (FY95). The project will assist in providing budget support, in the preparation and strengthening of regulations and in setting the stage for the restructuring of banks. 60. The agricultural sector is of first priority in terms of adjustment efforts given its potential for rapid supply response. IDA's assistance aims to support government's policy in exploiting the potential for growth offered by the sector and consists of support for macroeconomic reforns and special sectoral interventions. These elements of the policy will serve as the basis for an agricultuwe sector adjustment operation in FY95. The operation would target action on two main fronts: the incentives framework and the institutions. Strengthening incentives for the private sector to produce and invest is key to restoring growth and competitiveness in the sector. 61. Improvement of Cameroon's extensive but deteriorating transport infrastructure is considered another fundamental element of the enabling environment for private sector development. The Government has adopted a transport sector reform policy and has asked IDA to play the lead role in supporting its implementation. The transport sector adjustment operation (FY95) will help the Govemment in laying the basis for restoring sector efficiency. Actions envisaged under the operation would also help the Government to introduce commercial management criteria in the sector and to improve productivity and competitiveness. The expansion of private sector participation in transport is expected to enhance the sustainability of the envisaged reforms and to foster govermment retrenchment from the key public enterprises in the sector, namely, the railways, the national airlines, the ports and the urban public transport system. Further reforms in the sector would be supported under an investment operation, the tranwport sector project (FY96) which would finance the first two years of a medium-term transport investment, rehabilitation and maintenance program for the road, rail, airport and port subsectors including institutional and regulatory system reforms and transit facilitation. 62. Under the economic recovery program, the Government is committed to increase the level of non-wage expenditures for health and education. This will also allow for the strengthening of basic health services and prima.y education in urban areas, and in particular, in rural areas. In the health sector, govermnent policy emphasizes the strengthening of family planning activities, the improvement of primary health care services and the establishment of programs to combat nutritional deficiencies. IDA will support the implementation of this policy through the health, fertility and nutrition project (FY95). In the education sector, priority will be given under the education sector project (FY96) to reorient expenditure to maintain access to primary education, with a particular emphasis on girls' education, the restructuring of technical and vocational training and reducing input in higher education. Longer-term follow-up to these projects will be the subject of the human resource sector strategy (FY97).  23 Poverty Alleviation 63. IDA's efforts to address poverty reduction encompass initiatives in a number of areas. First, a major poverty assesment (FY 95) is under way, including a substantial participatory component using beneficiary assessment methodologies. It aims to: (i) assess the extent, depth, characteristics, distribution, and causes of poverty in Cameroon; (ii) articulate specific poverty- reducing country strategies and actions across the fill range of tasks and instruments available to the Bank in its dialogue and operations with Cameroon; and (iii) initiate a longer-term process of dialogue on poverty issues and further assessment of poverty in the country. Second, in the context of the ERC, the Government and IDA have agreed upon priority expenditures under the government's Social Action Program. The program places particular emphasis on basic education, employment support, and poverty monitoring (paras. 3942). Tird, the urban and agriculture sector operations (paras. 55 and 56) will support the expansion of income generating opportunities for small farmers and for small- to micro-size enterprises. Fourth, the urban technical assistance project (FY95) will focus on the development of small- and medium-scale enterprises to foster private sector delivery of urban services and employment generation through labor-intensive techniques for infrastructure works and maintenance, and foster the creation of mucro-enterprises in the supply and delivery of urban services. The dialogue on poverty reduction covers economic performance iqsues which affect the ability of the economy to grow and create new jobs; resource mobilization and expenditure allocation issues which affect the capacity of the Government to meet its human resource development goals; and policy actions which aim at improving coverage and efficiency of basic health and education services. 64. Areas of Special Emphasi. Poverty reduction is a major area of emphasis (para 63). This objective will be integrated into nearly all IDA operations in Cameroon. Thus health and education sector operations will focus on increasing access to primary-level services for the poor and women, urban and infrastructure projects will contain programs of labor-intensive works to promote employment, and private sector development will emphasize promotion of micro- enterprises. The promotion of women's activities and initiatives is also being addressed through sectoral projects wherever appropriate, notably in the areas of transport, agriculture, urban development, health, and education. The Government has adopted a population policy whose implementation IDA intends to support under the health, fertility and nutrition project (FY95). This policy gives priority to increasing the awareness of the impact of population growth on Cameroon's population through education and programs to substantially increase the use of contraceptives and reduce population growth. The promotion of women's activity and initiatives is also being addressed within each sector project, such as the transport sector project, the agricultural sector adjustment project and the urban sector maagement project. Institutional capacity and administrative reform will also be approached on a cross-sectoral basis; each project includes a sector capacity building and management strengthening component. 65. ESW IDA's assistance strategy will be underpinned by intensive development of ESW and a systematic review of portfolio performance. The ESW program will increasingly use a participatory approach through the involvement of local technical staff, and includes in FY95 (a) the preparation of a country economic memorandum; (b) a PFP; (c) a competitiveness study-, (d)  24 the completion of the poverty assessment; (e) an agricultural sector review; (f) an urban sector strategy note; (f) an education sector issues study; (g) assistance in the preparation of a national environmental action plan; and (h) a Country Environmental Strategy. In FY96, the ESW program will focus on (a) a public sector expenditure review with regular updates and follow-up; and (b) an update of the constraints to petrol3um sector growth. In FY97, the ESW program will focus much more on sectoral strategies to support productive activities, especially in agriculture, manufacturing and human resources. IDA will carry out a Country Performance Review (CPPR) in FY95 with a inii-CPPR scheduled in November 1994 as a follow-up to the portfolio restructuring of FY94 (para. 74). Given the importance that IDA attaches to effective portfolio management, emphasis will be in ensuring that project design applies lessons learned from past operations in order not to repeat past mistakes and to ensure that upfront measures are taken to address existing constraints to efficient project implementation. Greater effort will be made to tailor project design to quality at entry and to coordination and implementation capacity within the administration. PRoposED LENDING LEVELS AND LENDING INSTRUMENTS 66. Lending Strategy and Program. In FY89-91, IBRD supported the Government's adjustment efforts through the Structural Adjustment Loan (SAL I) which accounted for 39 percent of total commitments. Investment lending emphasized the expansion of agricultural production through projects in livestock, agricultural extension and training, and food security. Other sector investments were mainly oriented towards the rehabilitation of infrastructure, urban management, economic management and the social dimensions of adjustment. Government failure to implement SAL I delayed disbursement of the SAL's three tranches. As a result, IBRD only made one new commitment over FY92-94 in agriculture. The recent devaluation of the CFA franc and government's adoption of a comprehensivelforward-looking reform program in the immediate aftermath have opened the way for more lending from the Bank group. 67. IDA Lending Program (FY94-9;). Given Cameroon's lack of creditworthiness for IBRD lending and its eligibility for borrowing on IDA terms, Cameroon was declared IDA-eligible in February 1994. IDA made its first lending operation to Cameroon in FY94 under the Structural Adjustment Credit. To date, IDA lending amounts to SDR 36.3 million for a total of one fast- disbursing credit. In March 1994, Cameroon was granted a supplemental credit of SDR 37.1 million under the IDA Reflow Program. 68. Adjustment scenaio. The IDA lending strategy for FY94-97 aims at helping Cameroon to maxilize the benefits of the restoration of external competitiveness as a result of the devaluation of the CFA franc. For FY94-97, the Country Assistance Strategy proposes an adjustment scenario of $US 340-500 million conditioned upon the triggers outlined in para. 71 in which adjustment lending would represent about 40 percent of total lending. Provided there is satisfactory progress in the implementation of the stabilization and adjustment program, total lending for FY94-97 under the adjustment scenario is expected to significantly exceed the normal IDA allocation. Adjustment lending is expected to be phased-out after FY96 when sector and policy issues will be dealt with in the context of sector-specific operations which will be designed  25 to take account of linkages across sectors. Sectoral adjustment lending will thus account for 26 percent of total lending in the FY94-97 portfolio. Other projects will support Government's efforts to improve the public sector, encourage and diversitfy activities in the productive sector, including addressing the role of the environment, human resource development and poverty alleviation. Given that most projects will deal with issues that cut across traditional sectors, and that they address several objectives, any classification of loans is somewhat arbitrary. However, as an indication, 37 percent will support public management, 37 percent will aim to strengthen productive capacity and 26 percent will help to alleviate poverty. Within this categorization, 10 percent deals with environmental issues. 69. The proposed ERC will focus on the critical cross-sectoral policy issues on the reform agenda, and will serve as the primary vehicle for advancing public sector adjustment and improving the policy and regulatory environment for supporting and diversifying the productive sector. In the absence of these reforms, the strategy calls for a base case scenario which, beyond the ERC, would consist of investment operations in support of human resource development, environmental protection and targeted poverty alleviation. Total IDA commitments would be within a range of US$270-340 million for the period FY94-97 in conformity with the normal IDA allocation. To improve the quality of health care, education and other social services, two credits will finance a time slice of investments which are clustered around health, education and nutrition and poverty alleviation (the health and nutrition, education sector, and the urban sector TA projects) and are part of a PIP agreed with IDA. 70. Further deterioration in the macroeconomic and institutional frameworks would trigger IDA to move to a low case scenario with no adjustment lending but with investments inpoverty alleviation, gender issues and environmentalprotection Under the low case scenario, IDA will place emphasis on ESW and will support government's efforts to mobilize other external financial support for projects in health and nutrition and education. These projects will be limited in scope and will address the most urgent needs in the sector. 71. Triggers. Given Cameroon's poor past performance in pursuing even the most timid reform program, progress on the following four specific triggers are essential to pursue the adjustment scenario: (i) the satisfactory implementation of the government's economic reform program supported under the proposed ERC; (ii) adoption of a strong reform policy for the public enterprise sector; (iii) agreement and satisfactory implementation of a PFP; and (iv) satisfactory progress in public procurement reform and adoption of a public procurement code satisfactoiy to IDA. A base case scenario would be triggered by lack of progress in the implementation of the economic reforms envisaged under the adjustment scenario but assuming continued progress on key institutional reforms, including procurement and project implementation (see pams. 72-75). Failure to implement either the adjustment program or the institutional reforms satisfactorily would lead IDA to move to the low case scenario with emphasis on ESW and a limited program of assistance (para. 70).  26 Table 3: PROPOSED LENDING PROGRAM FYO4-FYP7 LNO SCENARO TiRoouER PoNs .340-500 million FY94: ERC (1) Satsfactory implementation of FY95: Transport Sector Adjustment; Health, govemments economic reform program as Fertility & Nutrition: Financial Sector; Urban measured by an increase in public savings and ADJUSTMUEN Sector Technical Assistance. improved public resource allocation ScEiuo FY