Cameroon - Structural Adjustment Loan and Credit Projects

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 15167 PROJECT COMPLETION RFPORT REPUBLIC OF CAMEROON STRUCTURAL ADJUSTMENT LOAN (LOAN 3089-CM) STRUCTURAL ADJUSTMENT CREDIT (CREDIT 2576-CM) DECEMBER 6, 1995 Country Operations Division Central Africa and Indian Ocean Depretment This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  REPUBLIC OF CAMEROON PROJECT COMPLETION REPORT STRUCTURAL ADJUSTMENT LOAN AND STRUCTURAL ADJUSTMENT CREDIT (LOAN 3089-CM AND CREDIT 2576-CM) Currency Equivalent Currency unit = CFA francs * Average Exchange Rate (annual average; CFAF per I US$) 1987 300.54 1988 297.85 1989 319.01 1990 272.26 1991 282.11 1992 264.69 1993 283.16 1994 586.00 Fiscal Year July I - June 30 The CFA franc (CFAF) is tied to the French franc (FF) in the ratio of FF 1 to CFAFI 00. Before January 12, 1994, the ratio was FF1 to CFAF50. The French franc is currently floating vis-a-vis the US dollar.  FOR OFFICIAL USE ONLY REPUBLIC OF CAMEROON PROJECT COMPLETION REPORT STRUCTURAL ADJUSTMENT LOAN AND STRUCTURAL ADJUSTMENT CREDIT (LOAN 3089-CM AND CREDIT 2576-CM) WEIGHTS AND MEASURES Metnc ton (mt) 2.200 pounds = 1,000 kg Kilometer (Iam) = 0.6215 miles = 1.000 meters Cubic meter (m3) = 1,000 liters Meter (m) = 1.09 yards Square meter (m2) = 10.76 square feet ABBREVIATIONS AND ACRONYMS USED ADB - Afncan Development Bank BEAC - Bank of the Central African States CAA - Caisse Autonome d'Amoruissement (External Debt Agency) CICC - Organization of Private Marketing Agents for Export Crops CRA - Administrative Reform Comm-iittee DCE - Division of Economic Controls DGTC - Direction Generale des Travaux du Cameroun (Procurement Unit) DP - Directorate of Forecasting DPP - Directorate for Projects and Programs DRA - Division of Administrative Reform DSCN - Directorate of Statistics and National Accounts FAC - Fonds d'Aide a la Cooperation (French Cooperation Fund) ISMP - Institut Superieur de Management Public (Higher Public Management Institute) MINASCOF - Ministry of Social Affairs MINAT - Ministry of Territorial Admrinistration MINDIC - Ministry of Industry and Commerce MhINEDUC - Ministry of Education MINNFI - Ministry of Finance MINFOPRA - Ministry of the Civil Service MINPAT - Ministry of Planning and Regional Development MIINSANTE - Ministry of Health MfINTPS - Ministry of Labor and Social Security ONCC - Quality Control Institution for Export Crops PAGE - Economic Management Project PE - Public Enterprise PEP - Public Investment Program POE - Plan d'Organisation et d'Effectifs (Staffing Plan) SAL - Structural Adjustment Loan SCB - Societe Camerounaise de Banque (Commercial Bank) SGP - Secretariat de Gestion du Projet (Project Management Unit) SNI - Societe Nationale d'Investissement (Public Holding) UDEAC - Union Douaniere et Economique des Pays de l'Afrique Centrale (Central African Customs and Economic Union) 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 wiLhout World Bank authorization.   FOR OFFICLAL USE ONLY The World Bank Washington, D.C. 20433 U.SA. Office of the Director-General Operations Evaluation December 6, 1995 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on Cameroon- Structural Adjustment Loan (Loan 3089-CM) and Structural Adjustment Credit (Credit 2576-CM) Attached is the Project Completion Report (PCR) for the Cameroon Structural Adjustment Loan (SAL) (Loan 3089-CM, approved in FY89 in the amount of US$150 million) and the Structural Adjustment Credit (SAC) (Credit 2576-CM, approved in FY94 in the amount of US$50 million, equivalent to the cancelled third tranche of the SAL), prepared by the Africa Regional Office. The PCR includes Part II, prepared by the Borrower. The SAL supported the first phase of Cameroon's adjustment program. Its broad objectives were to redress the substantial decline in GDP and achieve real per capita growth by 1995; enhance competitiveness through internal adjustment measures; reorient the State from interventionist to supportive economic policies in the private sector; and reduce the scope of government economic activity and reorient public services. In addition to the maintenance of an appropriate macroeconomic framework, the adjustment program included reforms in: public resource management (improvement of budgeting practices and allocations for investment and key social sectors); the civil service; public enterprises; financial restructuring; trade and price liberalization; and development of productive sectors (agriculture, forestry, energy, and industry). Technical assistance for these reforms was provided separately by an economic management project (with an outcome that has been rated as unsatisfactory). In order to improve competitiveness, and in the absence of devaluation of the CFA franc, the SAL relied mainly on deep cuts in public spending and on the compression of total demand. Some of the structural reforms were adopted although with long delays and inadequate performance. The constrained design, and weak Government commitment to the reforms, led to a worsening of the macroeconomic framework from 1989 to 1993. GDP fell by as much as 30 percent and both external and internal balances widened. In January 1994, the CFA franc was devalued and, at the same time, Cameroon became eligible for IDA financing. In February 1994, the third tranche of US$50 million of the SAL was cancelled. A successor structural adjustment credit (the SAC), equivalent in amount and conditionality to the cancelled third tranche of the SAL, was quickly appraised and approved. The SAC was immediately disbursed in one tranche on the basis of a program to maintain a satisfactory macroeconomic framework following the devaluation, and of progress made in implementing the third tranche release conditions of the SAL, with the exception of the Forestry Code, for which a waiver was granted. The approval of a satisfactory Forestry Code was later made a condition of effectiveness of the Economic Recovery Credit (ERC), approved in June 1994. The outcome of the SAL is rated as unsatisfactory, and that of the SAC as marginally unsatisfactory. The institutional development impact is rated as negligible in both operations. Sustainability of the SAL and the SAC is rated as unlikely. The PCR is of satisfactory quality. An important lesson of the Cameroon SAL, like similar early adjustment programs in CFA countries, is that, in the face of a significant overvaluation of the exchange rate, fiscal compression alone cannot restore competitiveness. An audit is planned. Attachment 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.   FOR OFFICIAL USE ONLY REPUBLIC OF CAMEROON PROJECT COMPLETION REPORT STRUCTURAL ADJUSTMENT LOAN AND STRUCTURAL ADJUSTMENT CREDIT (LOAN 3089-CM AND CREDIT 2576-CM) TABLE OF CONTENTS Page Preface .............................................i Evaluation Summary ...............................................v PART I: PROJECT REVIEW FROM THE BANK'S PERSPECTIVE 1. Project Identity .. .............................................1 2. Background . ............................................. I 3. Preparation, Apraisal and Approval ............. ................................2 4. Project Objectives and Description .............................................3 5. Economic Developments During Implementation .............................................. 6 6. Project Implementation and Results .............................................7 7. Sustainability ...... .......................................... 11 8. Bank Performance .............................................. 11 9. Borrower Performance ............................................. 12 10. Loan Documentation ............................................. 12 11. Disbursements and Auditing .................... ......................... 12 12. Findings and Lessons Learned .................... ......................... 13 PART II: PROJECT REVIEW FROM THE BORROWER'S PERSPECTIVE.... 15 PART 11: BASIC DATA/STATISTICAL INFORMATION ANNEXES Annex I Related Bank Loans ..36 Annex II Project Timetable ..37 Annex III Cumulative Estimated and Actual Disbursements 38 Annex IV Use of Staff Resources. 39 Annex V Status of Loan Covenants ..41 This document has a restricted distribution and may be used by recipients only in the performance of their oficial duties. Its contents may not otherwise be disclosed wiLhout World Bank authorization.   REPUBLIC OF CAMEROON PROJECT COMPLETION REPORT STRUCTURAL ADJUSTMENT LOAN AND STRUCTURAL ADJUSTMENT CREDIT (LOAN 3089-CM AND CREDIT 2576-CM)) PREFACE 1. This is the Project Completion Report (PCR) for the Structural Adjustment Loan (SAL) to the Republic of Cameroon for US$150 million and the Structural Adjustment Credit (SAC), which replaced the SAL's third tranche, when Cameroon was declared eligible for IDA resources and no longer found creditworthy for IBRD lending (February 1994). As a member of the CFA franc zone, Cameroon could not adjust its exchange rate to improve its competitiveness and had to rely on internal measures to reduce costs. The program aimed at reorienting the role of the State from direct intervention in the production of goods and services to a supporting role for private sector development. To achieve these objectives, the program identified concrete actions in the areas of public resource management; public enterprise reform; financial and banking reform; and measures to promote the productive sectors (agriculture, forestry and manufacturing) development, including trade and pricing reforms. 2. The implementation of the program was supported by an Economic Management Project (Ln. 3110-CM for US$9.0 million) designed to finance studies needed to formulate and implement specific reforms (civil service and the parapublic sector) and strengthen economic management, particularly in public investment programming, debt management and the generation of statistical information for policy-making. 3. The loan was approved on June 14, 1989, signed on July 17, 1989 and became effective on November 28, 1989. The last disbursement (second tranche) was made on April 17, 1991. The worsening macroeconomic conditions led to a significant delay in fulfilling third tranche conditions. On January 12, 1994, the parity of the CFA franc was changed from a rate of CFAF50/FFl to CFAF100/FF1. Following the devaluation of the currency, and in view of Cameroon's lack of creditworthiness for IBRD lending, the Government requested the cancellation of the IBRD balance of US$50 million of the SAL in February 1994. Subsequently, a Structural Adjustment Credit was approved for US$50 million with the same conditions as those established for the canceled third tranche of the IBRD SAL. The SAC was approved and signed on March 10, 1994 and disbursed on March 14, 1994.  ii 4. This PCR was prepared by the Country Operations Division, Central Africa and Indian Ocean Department (AF3), Africa Region (Preface, Evaluation Summary and Parts I and III), and the Borrower (Part II). The PCR mission took place in March 1994, immediately after disbursement of the SAC. 5. This report is based inter alia, on the President's Report for the SAL, the Memorandum of the President for the SAC, the legal documents of the IBRD loan and IDA credit, the President's Report of the Economic Recovery Credit, project supervision reports, correspondence between the Bank and the Borrower, interviews of Bank staff involved in project implementation, and internal Bank memoranda.  iii REPUBLIC OF CAMEROON PROJECT COMPLETION REPORT STRUCTURAL ADJUSTMENT LOAN AND STRUCTURAL ADJUSTMENT CREDIT (LOAN 3089-CM AND CREDIT 2576-CM) KEY PROJECT DATA Loan 3089-CM US$ Million Original Actual Canceled Bank Loan Amount 150.0 100.0 50.0 Terms: Interest Rate: Standard variable interest rate Maturity: 17 years Grace: 5 years Commitment Fee: 3/4 of 1% Borrower: Government of Cameroon Executing Agency: Ministry of Planning and Regional Development Institutional Development: An Interministerial and a Technical Committee were established to prepare and execute the project. Credit 2576-CM US$ Million Original Actual Canceled IDA Credit Amount 50.0 50.0 0.0 Terms: Interest Rate: 3/4 of 1% Maturity: 40 years Grace: 10 years Commitment Fee: 1/2 of 1% Borrower: Government of Cameroon Executing Agency: Ministry of Planning and Regional Development Institutional Development: The committees established for the SAL were responsible for the SAC.  iv REPUBLIC OF CAMEROON PROJECT COMPLETION REPORT STRUCTURAL ADJUSTMENT LOAN AND STRUCTURAL ADJUSTMENT CREDIT (LOAN 3089-CM AND CREDIT 2576-CM) KEY PROJECT DATA Timetable of Key Events Loan 3089-CM (a)Project prepared by: Government of Caneroon with Bank assistance (b)Presentation to the Bank: June 1988 (c)Appraisal mission: July 1988 (d)Post-appraisal mission: February-March 1989 (e)Completion of negotiations: May 1989 (f)Board approval: June 14, 1989 (g)Loan agreement signed on: July 17, 1989 (h)Actual date of effectiveness: November 28, 1989 (i)First disbursement: January 29, 1990 (j)lnitial closing date: December 31, 1993 (k)Actual closing date: June 30, 1994 (I)Last SAL disbursement date: April 17, 1991 Credit 2576-CM (a)Project prepared by: Government of Cameroon with Bank assistance (b)Presentation to the Bank: January 1994 (c)Appraisal mission: February 1994 (d)Completion of negotiations: February 1994 (e)Board approval: March 10, 1994 (f)Credit agreement signed on: March 10, 1994 (g)Disbursement date: March 14, 1994 (h)Initial closing date: June 30, 1994 (i)Actual closing date: June 30, 1994  v EVALUATION SUMMARY OBJECTIVES 1.01 The Structural Adjustment Loan (SAL) supported the first phase of the government's adjustment program, whose broad objectives were to redress the substantial decline in GDP and achieve a real per capita income growth by 1995; enhance competiveness through internal adjustment measures; reorient the role of the State away from direct market intervention in the production of goods and services and into a supporting role for private sector development; and reduce the scope of government economic activity and reorient public services. The Structural Adjustment Credit (SAC), replacing the third tranche of the SAL, which maintained the SAL's third tranche release conditions, aimed at supporting the new macroeconomic framework put in place after the devaluation of the CFA franc in January 1994. 1.02 The SAL-supported program had a broad coverage with specific reform components in the areas of public resource management, placing emphasis on budget practices and allocations for investment and key social sectors, and the budget shares for wage and non-wage expenditures; civil service; public enterprises; financial sector; liberalization of trade and prices; and development of productive sectors (agriculture, forestry, manufacturing). PROJECT DESCRIPTION 1.03 The basic components of the program were: (a) restructuring public finances over the medium term through improved programming and budgeting of government resources, better control of salaries, revamping of the administrative structure and staffing of the civil service to increase its efficiency; and higher non-oil tax revenues; (b) restructuring of the public enterprise (PE) and banking sectors; (c) promoting agricultural development through progressive liberalization of the trade of major export crops (coffee, cocoa, cotton), a redefinition of the role of the National Produce Marketing Board and stabilization of its finances, and creation of incentives to increase food security and promote non-traditional agricultural exports; (d) deregulating internal commerce to lower domestic costs, and rationalizing external trade regulations and effective rates of protection; (e) improving incentives for petroleum exploration and production; (f) reorienting policies in the forestry, health and education sectors; and (g) establishing specific action programs to mitigate the social costs of the adjustment program. RESULTS 1.04 While achievements were made in selected areas, overall program results were unsatisfactory. The macroeconomic framework, rather than improving as envisaged, deteriorated sharply in 1989-93 as external and internal imbalances widened and real GDP shrank by an estimated 30 percent. Implementation of program components was delayed  vi significantly and diverged frequently from the established objectives. The main factor for the lackluster performance was the government's lack of political will and uncertain leadership to carry through the reform program. These factors were exacerbated by weak public institutions, poor coordination and rivalries among ministries and agencies. Implementing the far-reaching reform program placed a heavy burden on a weak public administration. More importantly, it is clear now with the benefit of hindsight that the design of the SAL was flawed. It aimed at reestablishing the competitiveness of the economy through deflationary, internal policies alone which, without an exchange rate adjustment, proved unrealistic. As a result, the macroeconomic framework of the SAL program became increasingly irrelevant as the economy continued to deteriorate and the current account balance of payments showed large deficits. The devaluation of the CFA franc in January 1994 created the basic condition to restore macroeconomic equilibria and enhance competitiveness. Renewed government commitment to a stabilization and adjustment program, with IMF support, paved the way for the release of the third tranche under IDA terms after Cameroon was declared IDA eligible in February 1994. The general condition of a viable macroeconomic framework was met as well as the other specific conditions earlier established for third tranche release, with the exception of the condition on the Forestry Code. 1.05 The January 1994 devaluation, however, while crucial for the revitalization of the Cameroonian economy, needed to be complemented by strict fiscal and monetary management and a series of structural measures. These supplementary measures were supported through an Economic Recovery Credit (ERC) approved on June 16, 1994. Moreover, the reform agenda is still unfinished after the ERC, and the dialogue continues with the authorities about additional measures to be supported through future IDA adjustment lending. FINDINGS AND LESSONS LEARNED 1.06 An accurate diagnosis of the economic prospects and of the impact of the reform proposals is essential for a successful implementation of a SAL program. The Cameroon SAL aimed at an in-depth restructuring of the public sector with a broad spectrum of actions in a short period of time and, as it turned out, proved too ambitious in its objectives. The SAL President's Report (PR) conceded that many of the proposed reforms would require three to five years to be completed. The SAL operation, which supported only the first phase of the government's program, was approved in June 1989 and was expected to be fully disbursed by December 31, 1991. This was too short a period for effective implementation. 1.07 Second, the successful implementation of the SAL required strong government commitment to reforms, which proved elusive. It took repeated missions and protracted discussions to develop the SAL program, which was eventually accepted reluctantly by the government. The weak capacity of the government administration to implement the program was identified by the PR as a major risk. To remedy this, an Economic Management Project for US$ 9 million was approved in parallel with the SAL. The  vii deteriorating economic environment led to civil unrest in 1991-92. This exacerbated the fiscal and economic crises in a country with significant ethnic and religious differences. 1.08 Third, Cameroon's growth prospects were not properly assessed, indeed the extent of the economic crisis at the outset was not fully appreciated. After years of steady growth fiieled by favorable prices for its agricultural exports and increased oil production, Cameroon suffered from three shocks in the mid-1980s. The terms of trade fell by more than 50 percent from 1985 to 1989. Oil production started to decline from a peak of 8.9 million metric tons in 1985 to less than 6 million in 1993. Finally, the appreciation of the CFA franc made the economy increasingly uncompetitive. Against this background, it was not realistic to expect resumption of economic growth solely through internal adjustment. 1.09 Fourth, reforms requiring Parliamentary approval of new legislation may take longer to achieve. The draft Forestry Code was agreed between the Executive branch and the Bank and amended by Parliament in an unsatisfactory manner. This experience should not, however, preclude the Bank from suggesting legislation changes to be presented to Parliament in other structural adjustment programs, provided there is a positive assessment of the commitment of the Executive, Parliament, and public entities involved to implement the program. If this assessment is not positive, alternative ways of carrying the reform should be sought, such as using pre-existing legislation, regulations or administrative actions to accomplish the same results.   REPUBLIC OF CAMEROON PROJECT COMPLETION REPORT STRUCTURAL ADJUSTMENT LOAN AND STRUCTURAL ADJUSTMENT CREDIT (LOAN 3089-CM AND CREDIT 2576-CM) PART I: PROJECT REVIEW FROM THE BANK'S PERSPECTIVE 1. PROJECT IDENTITY * Project Name: Structural Adjustment Loan/Structural Adjustment Credit * Loan and Credit Nos.: Ln 3089-CM, Cr 2576-CM