CAMEROON ECONOMIC UPDATE July 2011 l Issue No.2 71650 TOWARDS BETTER SERVICE DELIVERY AN ECONOMIC UPDATE ON CAMEROON With a Focus on Fiscal Decentralization Poverty Reduction and Economic Management Unit Africa Region July 2011 Towards Better Service Delivery An Economic Update on Cameroon With a focus on fiscal decentralization Poverty Reduction and Economic Management Unit Africa Region Table of Contents ABBREVIATIONS AND ACRONYMS ....................................................................................I TOWARDS BETTER SERVICE DELIVERY .............................................................................. 2 Introduction ...................................................................................................................................... 2 Recent Economic Developments ...................................................................................................... 3 Outlook 2011 .................................................................................................................................... 6 Fiscal Decentralization – Opportunities and Challenges .................................................................. 8 Figures Figure 1 : Sectoral Contributions to GDP Growth, 2005-10 (in percent) ............................................. 3 Figure 2 : Oil Production, 2002-10 (in mn barrels)............................................................................... 4 Figure 3 : Inflation Developments in Major Cities ............................................................................... 5 Figure 4 : Inflation Drivers in Major Cities (in percent)........................................................................ 5 Figure 5 : Total Public Debt, 2004-10 (in percent of GDP) ................................................................... 6 Figure 6 : Non-Oil Revenue, 2005-11 (in percent of non-oil GDP)....................................................... 7 Figure 7 : Current Expenditure, 2005-11 (in percent of GDP).............................................................. 8 Figure 8 : Capital Expenditure, 2005-11 (in percent of GDP) ............................................................... 8 Figure 9 : Access and Human Development Indicators International Comparisons ......................... 10 Figure 10: Well-Being Indicator, 2007 (average rank) ........................................................................ 11 Figure 11: Changes in Regional Living Standards ................................................................................ 12 Figure 12: CAC and FEICOM Grants, 2010 (CFAF per capita) .............................................................. 16 Figure 13: Local Budget Spending, 2007 (CFAF mn) ........................................................................... 16 Box Box 1 : Promoting Budget Transparency and Efficiency in Cameroon .............................................. 20 ABBREVIATIONS AND ACRONYMS BEAC Banque des Etats d’Afrique Centrale (Central Bank of Central African States) CAC Centimes Additionnels Communaux (local revenue surcharge) CEMAC Communauté Economique et Monétaire de l’Afrique Centrale (Economic and Monetary Community of Central Africa) CFAF CFA Franc CIT Corporate Income Tax COBAC Commission Bancaire de l’Afrique Centrale (Central Africa Banking Commission) CPI Consumer Price Index DSCE Document de Stratégie pour la Croissance et l’Emploi (Growth and Employment Strategy) FEICOM Fonds Spécial d’Equipement et d’Intervention Intercommunale (Special Council Support Fund for Mutual Assistance) GDP Gross Domestic Product GNI Gross National Income HIPC Heavily Indebted Poor Countries ILO International Labor Organization IMF International Monetary Fund MDG Millennium Development Goals MDRI Multilateral Debt Relief Initiative RFA Redevance Forestière Annuelle (annual forestry fee) SDR Special Drawing Rights SNH Société Nationale des Hydrocarbures (national oil company) SONARA Société Nationale de Raffinage (national refinery) SSA Sub-Saharan Africa TSA Treasury Single Account VAT Value-Added Tax July 2011 l Issue No.2 Cameroon Economic Update TOWARDS BETTER SERVICE DELIVERY Introduction With this Cameroon Economic Update, the Bringing services closer to users, giving users World Bank is pursuing a program of short, crisp increased voices and improved choices, and and more frequent country economic reports. strengthening the accountability of the These Economic Updates analyze the trends and authorities could lead to improved service constraints in Cameroon’s economic delivery. At the same time, if fiscal development. Each issue, produced bi-annually, decentralization is only partial, if not all the provides an update of recent economic needed building blocks are in place, the developments as well as a special focus on a expected benefits in terms of improved service selected topical issue. delivery and poverty reduction may not materialize. Yet expectations have been raised. The Economic Updates aim to share knowledge and stimulate debate among those interested in The Cameroon Economic Updates are produced improving the economic management of by the Poverty Reduction and Economic Cameroon and unleashing its enormous Management Unit of the World Bank Country potential. The notes thereby offer another voice Office in Cameroon by a Team led by Raju Jan on economic issues in Cameroon, and an Singh. The Team included James Acworth, additional platform for engagement, learning Sanjay Agarwal, Ehtisham Ahmad, Martin Luis and change. Alton, David Abouem a Tchoyi, Abel Bove, Paolo Omar Cerutti, Bernard Dafflon, Bjorn Dahlin van This second issue of the Cameroon Economic Wees, Simon Davies, Meike van Ginneken, Update is titled “Towards Better Service Delivery Faustin Koyassé, Guillaume Lescuyer, Thierry – An Economic Update of Cameroon, with a Madiès, Amadou Nchare, and Peter Taniform. special focus on fiscal decentralization�. This Greg Binkert (Country Director for Cameroon) title reflects the opportunities and challenges of and Jan Walliser (Sector Manager) provided the ongoing fiscal decentralization in Cameroon. guidance and advice, and have been an The disparity in living standards observed across invaluable source of encouragement. regions calls for better service delivery at the The Team also benefited greatly from local level. For some basic services, access is consultations with Cameroon’s key policy worse in Cameroon than on average in Sub- makers and analysts, who provided important Saharan Africa. In some regions, indicators have insights, in particular the following institutions: even deteriorated over the past decade. July 2011 l Issue No.2 / Page 2 Cameroon Economic Update the BEAC, the Ministry of Finance, the Ministry of Economy and Planning, the Ministry of Territorial Administration and Decentralization, FEICOM, and the National Institute of Statistics. The special focus on fiscal decentralization draws on the preliminary observations of extensive discussions with officials in Yaoundé and Douala, representatives of about a hundred municipalities from the Center, East, Littoral, and North-West regions, as well as with civil society and the donor community. Photo credit: Raju Jan Singh Recent Economic Developments Growth The latest information confirms the expected As expected, most of this recovery was driven by recovery in economic activity in Cameroon the tertiary sector, which accounted for more (Figure 1). Following the upturn in the global than half of the estimated growth. The sector economy and measures taken by the authorities benefitted from a pick-up in timber-related to stimulate domestic production, real GDP transport and continued strong activities in growth in 2010 is estimated to have reached 3.2 mobile telephony stemming from a greater use percent (compared to 2 percent in 2009). of fiber optic, promotional campaigns during the Soccer World Cup, and the roll-out of new Figure 1 : Sectoral Contributions to GDP Growth, 2005-10 (in percent) products. 5 4 The recovery in the primary sector, with an 3 2 estimated growth rate of about 4 percent in 1 2010, was led by a strong expansion in the 0 -1 timber sector, as well as in food crops. The non- -2 2005 2006 2007 2008 2009 2010 oil secondary sector, meanwhile, is also Primary Secondary (excl. oil) Sources: Cameroonian authorities Oil GDP Growth Tertiary and staff calculations estimated to have grown by about 4 percent, July 2011 l Issue No.2 / Page 3 Cameroon Economic Update driven by a continued pick-up in construction only by 1.2 percent and 0.9 percent, activities and a rebound in food processing. respectively. Cameroon is a relatively small and mature oil producer, where oil production is declining (Figure 2). Depleting reserves, aging equipment, and – more recently – postponements of some development projects and investments because of the financial crisis explain this profile. The contribution of this sector to GDP growth has been mostly negative in recent years and oil production is estimated to have contracted by a further 12 percent in 2010 (to 23.2 million barrels). Figure 2 : Oil Production, 2002-10 (in mn barrels) 40 35 30 25 Photo credit: Raju Jan Singh 20 These national averages hide, however, 15 2002 2003 2004 2005 2006 2007 2008 2009 2010 important differences across regions, partly Source: SNH reflecting the segmentation of local markets Inflation (Figures 3 and 4). In the North (Garoua), inflation has been declining most substantially, Average annual inflation was contained at 1.3 driven by a fall in food prices stemming from percent in 2010, compared with 3 percent in good harvests. In the rest of the country, strong 2009. This development is partly attributable to demand from neighboring countries seems to the policy measures to improve food supply have kept food prices up. As mentioned in our carried out by the authorities. The stability of January issue, Cameroon – and Central Africa in retail prices for petroleum products has also general – has the most expensive and slowest contributed to the containment of inflation. The road infrastructure on the continent. It takes, for food and transport components of the instance, four weeks to make a two-way trip Consumer Price Index (CPI) increased on average July 2011 l Issue No.2 / Page 4 Cameroon Economic Update between Douala and N’Djamena (about 1’900 be slightly lower than we had expected and km). much lower than envisaged in the September 2010 presidential decree amending the 2010 Figure 3 : Inflation Developments in Major Cities (in percent) Budget (3.5 percent of GDP). 8 7 Overall, the fiscal performance in 2010 broadly 6 5 reflects similar developments observed in the 4 3 past: under-performance in the mobilization of 2 1 non-oil revenue offset by stronger oil revenue, 0 Bafoussam Bamenda Douala Garoua Yaounde while overruns in current spending are 2009 2010 Sources: Cameroonian authorities and staff calculations compensated by lower capital expenditure. This year, however, the pattern is only more striking Figure 4 : Inflation Drivers in Major Cities (in percent) with an estimated outcome for capital spending 4 3 only slightly higher than its 2009 level. 2 1 Fiscal Performance, 2009-10 (in CFAF Billions) 0 2009 2010 -1 Est. LFR WB Proj. Est. -2 Revenue and Grants 1926 1932 1936 1940 Bafoussam Bamenda Douala Garoua Yaounde Revenue 1839 1842 1845 1869 General Index Food Oil revenue 507 407 461 497 Sources: Cameroonian authorities and staff calculations Non-oil Revenue 1332 1435 1384 1372 Grants 87 90 91 71 Total Spending 1937 2151 2044 2067 Current Spending 1496 1552 1545 1611 Fiscal performance Capital Spending 441 599 499 456 Overall Balance -11 -219 -108 -127 Arrears -17 -172 -158 -125 The Government successfully issued its first Overall Balance on a cash basis -28 -391 -266 -252 bond in December 2010, attracting interest from Sources: Cameroonian authorities, Staff's calculations both national and foreign investors. The issue The delay in the placement of the first was oversubscribed, mobilizing the targeted Government bond has also implied a tight CFAF 200 billion (about 1.8 percent of GDP). The liquidity situation. The government used some bond carries a 5.6 percent coupon, maturing of its SDR allocation (CFAF 103 billion) to pay off from 2012 and 2015. most of its obligations to the SONARA, the national oil refinery, to compensate the Its issuance late in the year has, however, company for its losses stemming from the constrained capital spending. The proceeds government’s policy to freeze retail prices of from this operation are earmarked to finance petroleum products. At the same time, new key infrastructure projects. As a result, at 2.3 payment obligations are reported to have percent of GDP, the overall fiscal deficit accumulated. Furthermore, the tight liquidity (including grants, on a cash basis) turned out to July 2011 l Issue No.2 / Page 5 Cameroon Economic Update position has led to a near depletion of the regional central bank. Government’s usable deposits at the BEAC, the Outlook 2011 It is expected that most of the developments Infrastructure spending, especially in observed in 2010 will carry over into 2011. The transportation and power generation, can play a economic recovery would continue with growth critical role in stimulating sectors vital to growth reaching about 4 percent. The main drivers in Cameroon. would come from the non-oil economy In this context, the authorities are actively using (expanding by about 4½ percent), while oil the room provided by the country’s low level of activities would continue to decline (by about 11 public debt to finance an expansion of their percent). public investment program (Figure 5). The most More particularly, growth in the secondary recent joint IMF-World Bank low-income (excluding oil) and tertiary sectors is expected to country debt sustainability analysis carried out remain strong and contribute for most of the indicates that Cameroon’s risk of debt distress expected expansion in economic activity in remains low, opening the possibility for some 2011. This positive outlook is mainly driven by further limited non-concessional borrowing. the ongoing recovery of the global economy, the Figure 5 : Total Public Debt, 2004-10 (in percent of GDP) execution of infrastructure programs, and 70 projects to boost productivity in agriculture by 60 strengthening for instance assistance in the 50 40 production of key crops (cocoa, coffee, cotton, 30 and rice), access to finance, training, and 20 10 research. 0 2004 2005 2006 2007 2008 2009 2010 Sources: Cameroonian authorities and staff calculations % contribution towards GDP growth 2011 (proj.) Primary sector 0.9% Secondary sector (excl. oil) 1.2% Oil -0.5% Inflation is expected to pick up on the back of Tertiary sector 2.2% higher food prices, but remain below the GDP Growth 3.8% regional convergence criterion of 3 percent. As discussed in our January issue, limited Ongoing initiatives to boost agricultural infrastructure is perceived as a major bottleneck production and subsidize imports of food are to achieving the faster economic growth rates needed to reduce poverty sustainably. July 2011 l Issue No.2 / Page 6 Cameroon Economic Update likely to continue to moderate the impact from procedures, thereby reducing compliance costs. rising world food prices. Since the proceeds will be transferred to the Treasury Single Account (TSA), this reform could Concerning the country’s fiscal position, the also provide greater certainty to municipalities 2011 Budget aims at containing the about the amount of revenues they should deterioration, targeting an overall fiscal deficit receive. of 2.6 percent of GDP (including grants). This would imply an increase in the non-oil revenue On the expenditure side, current spending effort and a greater restraint on current would need to be contained to provide the spending to allow higher capital expenditure. needed fiscal room for capital expenditure to Cameroon’s non-oil revenue effort is relatively expand. This would also be a departure from weak, even when compared with other oil- past experience (Figures 7 and 8). With producing countries. The mobilization of non-oil Presidential elections approaching, pressure for revenue in general has been disappointing, increased spending may become harder to partly because of the narrowness of its taxpayer resist. base. The budget target would imply reversing In addition, a continued high stock of unsettled the recent erosion in non-oil revenue payment obligations will weigh on the liquidity mobilization (Figure 6). position of the Government and on the Figure 6 : Non-Oil Revenue, 2005-11 (in percent of non-oil execution of the 2011 budget. Issuance of a new GDP) bond and treasury bills is scheduled, but could 14.4 14.2 face similar delays as the first bond issue. The 14 reduced level of remaining government deposits 13.8 13.6 at the regional central bank will, however, only 13.4 13.2 provide a limited buffer this time. In these 13 12.8 circumstances, it could be tempting for the 2005 2006 2007 2008 2009 2010 2011 Budget central government to “delay� the transfer to Sources: Cameroonian authorities and staff calculations municipalities of local revenue transiting The tax rates being already high, the projected through the TSA. With cash-strapped local additional non-oil revenue needs to be achieved governments, this would just lead to arrears and through administrative measures. In this regard, a further weakening of the budget process. the introduction of a single declaration for taxpayers paying VAT, income tax, and patents (above a certain level) is a welcome step. This reform could considerably simplify existing July 2011 l Issue No.2 / Page 7 Cameroon Economic Update Figure 7 : Current Expenditure, 2005-11 (in percent of Fiscal Decentralization – Opportunities GDP) and Challenges 15 14.5 14 Introduction 13.5 13 12.5 There are significant disparities in living 12 11.5 standards observed across regions in Cameroon. 11 10.5 In order to improve the delivery of services at 10 2005 2006 2007 2008 2009 2010 2011 the local level, bring services closer to users, Budget Sources: Cameroonian authorities and staff calculations give users increased voice and improved Figure 8 : Capital Expenditure, 2005-11 (in percent of choices, and strengthen the accountability of GDP) the authorities in delivering these services, the 6 5 Government of Cameroon is relying on 4 decentralization as its principal policy tool. 3 2 Decentralization was embedded in the 1996 1 amendment to the Constitution, but it was not 0 2005 2006 2007 2008 2009 2010 2011 until mid-2004 that the National Assembly Budget Sources: Cameroonian authorities and staff calculations adopted the implementing legislation. Effective This implies that for the coming year, the decentralization to local levels of government is authorities should pay even greater attention presented in the authorities’ latest PRSP for than in the past to (i) non-oil revenue 2010-2020 (Document de Stratégie pour la mobilization, (ii) timely access to the capital Croissance et l’Emploi – DSCE) as an essential market, and (iii) control on expenditure component of the effort to address governance commitments. Efforts to create a liquid issues and development effectiveness. However, secondary market for government bonds would the focus has been on deconcentrating the help sustain investors’ interest in future bond working of the central government by devolving issues. Furthermore, stronger project selection power to departmental units within line and preparation would contribute to ensuring ministries, or to representatives of the center, that the proceeds of new borrowing would be including prefects or sub-prefects. put at the most productive use. Recent developments in the literature have stressed that should fiscal decentralization be “partial�, the expected benefits in terms of improved service delivery and poverty reduction July 2011 l Issue No.2 / Page 8 Cameroon Economic Update may not materialize.1 Decentralized units may interpretations. To date, there is little true lack, for instance, appropriate incentives, transfer of competences and effective own- financial resources or requisite skills and source revenues are lacking: a crucial element in experience to meet their new responsibilities. establishing a hard budget constraint. The With decentralization in Cameroon at an design of the transfer mechanism could be incipient stage, it is an opportune time to take made more equalizing and the current stock and ensure the needed building blocks for budgeting process does not fully reflect local a successful transition are in place. priorities nor foster fiscal discipline at the local level. Expectations are high, and could generate a backlash if not met. Against this background, the most important issue for the authorities at this stage would be to determine how fast to move with the decentralization process and the sequencing of measures to ensure that the process is managed in a manner that enhances service delivery, and leads to greater accountability. This would help to establish a road map for effective and sustainable implementation. Disparity in living standards – call for better Photo credit: Raju Jan Singh service delivery Preliminary findings of this stocktaking suggest that the current legal framework in relation to There is a need for better service delivery at the fiscal decentralization needs to be clarified, local level. Indicators for service delivery in responsibilities are overlapping, cumbersome Cameroon tend to trail behind the standards of and in many respects open to different countries at similar income levels (Figure 9). For indicators such as primary school completion or 1 child mortality, Cameroon does even worse than For a review of the recent literature on the case for and preconditions for effective decentralization, and the average for sub-Saharan Africa. whether or not this leads to enhanced local public service delivery, see Ahmad and Brosio, eds., 2006, Handbook of Fiscal Federalism, Edward Elgar, and Ahmad and Brosio, eds., 2009, Does Decentralization Enhance Service Delivery and Poverty Reduction? Edward Elgar. July 2011 l Issue No.2 / Page 9 Cameroon Economic Update Figure 9 : Access and Human Development Indicators International Comparisons July 2011 l Issue No.2 / Page 10 Cameroon Economic Update Furthermore, within Cameroon, there is a wide the East. Also, in the richest regions some dispersion in service delivery across regions. A indicators have deteriorated—especially in ranking of relative “well being� in Cameroon Yaoundé for access to drinking water; sanitation shows wide regional discrepancies.2 As and infant mortality; and access to drinking expected, Douala and Yaoundé score best, and water in Douala. the Far North is consistently the lowest (Figure 10). While the index does not imply that Douala and Yaoundé have no needs, in relative terms the Far North, North and East regions fare the worst. Figure 10: Well-Being Indicator, 2007 (average rank) 12 10 8 6 4 2 0 Sources: ECAM 3, National MDG Report 2008 and Staff calculations Note: For definitions and components of the wellbeing indicator, see text The situation in some of the less developed regions worsened in the past decade or so (Figure 11). Particularly striking is the declining access to sanitation and drinking water, as well Photo credit: Raju Jan Singh as the increase in child mortality in some of the Spending assignments – no effective regions. Despite the emphasis on primary transfer of competences education, there was a decline in attendance in Much of the focus to date has been on 2 To build a composite index, a set of commonly used deconcentrated operations. As far as needs and criteria has been taken: (1) poverty (less than 738 CFAF/day; % of population); (2) primary decentralization is concerned, line ministries education attendance (6-14 yrs); (3) access to have “decided� to spin off administrative “sub- drinking water (% of population); (4) access to electricity (% of population); (5) literacy (15+); (6) areas� to lower levels, often without the child mortality (per 1000 live births; children under 5 years); (7) under-employment (ILO definition; % of requisite human resources or financial means. population); (8) access to clean toilets (% of For instance, the typical responsibility population); and (9) births assisted by qualified staff (% of births). A rank order for each is determined (1= transferred is that of building additional the best score). classrooms in schools—in locations determined July 2011 l Issue No.2 / Page 11 Cameroon Economic Update Figure 11: Changes in Regional Living Standards Poverty, 2001-2007 Access to Improved Sanitation, (Change in %) 2001-2007 (Change in %) 40 20 20 0 0 -20 -20 -40 -40 -60 -60 -80 Sources: ECAM 2 & 3, Staff calculations Sources: National MDG report 2008 and Staff calculations Births Assisted by Qualified Staff, Access to Drinking Water, 2001-2007 2004-2006 (Change in %) (Change in %) 60 30 20 40 10 20 0 0 -10 -20 -20 -30 -40 -40 -60 -50 Douala East South Littoral Yaounde North West Adamaoua West North Center Far North South West Sources: ECAM 2&3 and Staff calculations Sources: National MDG report 2008 and Staff calculations July 2011 l Issue No.2 / Page 12 Cameroon Economic Update Child Mortality, 1998-2004 Primary Education Attendance, 2001-2007 (Change in %) (Change in %) 60 20 40 15 20 10 0 5 -20 0 -40 -5 Sources: National MDG report 2008 and Staff calculations Sources: ECAM 2&3 and Staff calculations Literacy, 2001-2007 Access to Electricity, 2001-2007 (Change in %) (Change in %) 25 100 20 80 15 60 10 40 5 20 0 0 -5 -20 -10 -40 Sources: ECAM 2&3 and Staff calculations Sources: ECAM 2&3 and Staff calculations July 2011 l Issue No.2 / Page 13 Cameroon Economic Update by the Ministry. These may, however, not reflect A major lacuna in the Cameroonian the priorities of the local populations. decentralization story is thus the lack of effective own-source revenues. By own-source This peeling of administrative arrangements at revenues we refer to the ability of the local the discretion of line ministries will not result in government to influence or set the rate or base effective decentralization. It will neither transfer of a significant tax handle. The distinguishing the competences that are required by local feature of own-source revenues is that this head populations, nor will it facilitate the local can be increased at will by the local government electorates holding mayors or local officials should the need arise (e. g., in meeting debt responsible for the effective implementation. obligations or arrears). It is a crucial element in Yet expectations have been raised, and there is establishing a hard budget constraint and is not a danger that these will not be met. linked to whether or not the government administers the tax itself or uses the central tax Inadequate local own-source revenues agency to collect the revenues on its behalf. Transfers design – need for a more modern The main sources of sub-national financing include shares in the main taxes: the Value- system of equalization Added Tax (VAT) and the Corporate Income Tax The current transfer mechanism is opaque. (CIT), the grant elements of the loans provided Ostensibly the per capita transfers are to ensure by FEICOM (Fonds Spécial d’Equipement et “equality�, but this is not achieved, given d’Intervention Intercommunale – Special Council differences in infrastructure and unequal capital Support Fund for Mutual Assistance) to local endowments. Moreover, there are significant governments, as well as the annual forestry fee spatial price differences having an impact on the (redevance forestière annuelle – RFA). While the net access to services that could be purchased shared revenues from the VAT and CIT are by the transfers. transferred through the CAC (centimes additionnels communaux) and belong to the Current transfers local government by law, these shares are There is a considerable emphasis on equality in determined automatically, or by formula, and the design of the transfer of CACs to local are not subject to control by local governments, governments. This translates into equality of which are not able to increase this amount in transfers on a per capita basis. This is often case of need. justified on the grounds of being easy to understand and politically attractive as a proxy July 2011 l Issue No.2 / Page 14 Cameroon Economic Update for cost of service provision. However, the use discern a model underlying the system of capital of the population basis for transfers poses a grants: it is not based on any “equalization� number of significant difficulties: framework, nor do the transfers appear to be  Attaching revenues transferred in linked with a growth and development strategy. relation to the population figure runs Although there has been considerable work the risk of politicizing the census; undertaken to define local preferences, there  The costs of providing public services in does not appear to be an explicit attempt to link remote areas, such as in the North and these grants to the local priorities identified in in the Eastern forest region, are likely to the local development plans, for example. be higher than the average for all regions. Costs may also be higher in Overall effects densely populated urban regions. Thus, an equal per capita transfer may not As a result, the allocations of CACs and FEICOM’s generate equal access to public services; capital grants component are heavily tilted  The basis for the transfer is likely to towards Douala and Yaoundé, and appear to be generate expectation of entitlements negatively correlated with need, the full extent rather than a focus on the delivery of of which is not fully captured in the ordinal services; rankings of the well-being index (Figure 12). The  The equal per capita transfer would inclusion of the RFA – expected to offset to seriously bias an effective service some extent the biases in the CAC and in the delivery, if there are uneven levels of FEICOM grants arrangements given that they are basic infrastructure. Without schools in generated largely by the poorer municipalities in some regions, spending current dollars the East – does not change the picture. may not be as effective as in other Moreover, there is an implicit “asymmetry� in regions with schools. the spending assignments in that the RFA is expected to cover some deconcentrated responsibilities in the forested regions that are Capital transfers direct central responsibilities in others – adding to the confusion as to who is responsible for The criteria for the allocation of capital transfers which function. are not clear. In addition to the CACs, FEICOM manages a lending window for local governments. These loans could have grant elements of up to 90 percent. It is hard to July 2011 l Issue No.2 / Page 15 Cameroon Economic Update Figure 12: CAC and FEICOM Grants, 2010 (CFAF per capita) not properly synchronized. Central transfers 12 14000 (budgeted in mid-November) are not known at Wellbeing indicator 12000 10 CAC and FEICOM grants 10000 the time that the local budgets are put together 8 8000 6 6000 (early November). In addition, the actual 4 4000 2 allocations are not known until February or 2000 0 0 March of the year in which spending is incurred. This leads to problems in achieving a realistic Sources: ECAM 3, National MDG Report 2008, MINATD, FEICOM and Staff calculations local budget. For 2007, for instance, a year for which full figures are available, the gap between Budgeting and macroeconomic stabilization – need to be more conducive budgeted figures and actual spending is to fiscal discipline substantial (Figure 13). To the extent that local governments provide Figure 13: Local Budget Spending, 2007 (CFAF mn) basic functions, and do not have access to 3000 2500 significant own-source revenues or access to Appropriation Execution 2000 credit, it is appropriate that the stabilization 1500 1000 function should remain with the central 500 government. A consequence of this is that local 0 governments should be assigned revenue Sources: FEICOM and Staff calculations sources and transfers that do not fluctuate significantly over time. A more significant difficulty is that the central government passes on part of the stabilization In budgeting terms, the center should provide function to local governments. This comes about reasonable multi-year forecasts of the transfers partly through the fluctuations in the share of that it proposes to allocate, perhaps with a floor revenues, as well as the arbitrary recent that provides assurance and certainty for the downward movement in the RFA: during 2009 local governments to carry out their budgets and 2010. Given the problems faced by timber within a reasonable framework. This is critical to companies, the central government reduced by establishing accountability at the sub-national half the RFA due, to the benefit of the level. companies, without consulting local governments. The ad hoc reduction in the RFA The current budgeting process does not, was criticized as introducing uncertainties for however, engender discipline at the local level. local governments that they are ill-equipped to Part of the difficulty is that the budget cycles are handle. July 2011 l Issue No.2 / Page 16 Cameroon Economic Update With no autonomous sources of revenues (over payment obligations are generally not known by which they control rates or base) and little scope those who should monitor them, including local for adjusting spending, the typical local treasurers. government response is to run arrears, in particular where it affects the center—social Any lending agency should examine the full insurance contributions as well as utility extent of local government debt and assess this payments. On these accounts, the Ministry of in relation to its ability to repay. FEICOM is, Finance has assumed local governments’ however, not generally aware of total liabilities. payment obligations, a move authorized by the It is assured of CAC resources, and easy bailout clause in favor of local governments rescheduling, so has little incentive to examine included in the existing legislation. the full set of liabilities being incurred by local governments. What information it has largely relates to its own lending and captive revenue sources (CAC over which it has control). Reform issues – some building blocks Spending assignments The functions (or sub-function or sub-sub- functions) over which the local governments have jurisdiction, and for which they would be held responsible, could be clarified. Primary education is a typical sub-function that is often assigned to lower levels, even if the center generally continues to set the curricula and standards. In the Cameroonian case one could think of beginning the process with full Photo credit: Raju Jan Singh functional responsibility (covering all aspects of Moreover, no single institution is able to wages, current and capital spending) for water monitor and assess all sub-national liabilities. sanitation for instance. Such a decentralization The current cash-based system does not track process would become more operational with stocks of debt. Arrears are building up, but are better information on the allocation of funds as not being systematically tracked. Even pending well as the results of spending. July 2011 l Issue No.2 / Page 17 Cameroon Economic Update In some countries, such as Peru, a gradual Work also needs to be done on establishing a decentralization process has involved a level of cadastre (this could be maintained at the central certification of competences and ability of the or regional level), as well as valuation local government to carry out the functions. The mechanisms and a system to track property argument that local governments lack the transactions. For the more advanced capacity to carry out certain functions cannot be municipalities, such as Douala and Yaoundé, made too strongly, as the transfer of human consideration could be given to applying the resources and financing can easily address any techniques of modern tax administration—using shortcomings that might be apparent under the self-assessment and applying sanctions for present circumstances. misdeclaration (i.e., purchasing the property at above declared values). This could emulate the Revenue assignments success seen in cities such as Bogotá. In order to address the issue of local own- In addition, the resulting assignments should: (i) sources of revenues, the government could rebalance own and shared revenues to minimize initiate a reassessment of local revenue local budget fluctuations; (ii) enhance local assignments with a view to clarify and accountability by enhancing the local ability to determine which heads of own-source revenues resort to own-revenues at margin; and (iii) avoid would be most appropriate in the Cameroonian complex revenues-sharing arrangements (for context. Capacity constraints can be overcome instance the CAC could be rolled into an by using modern methods of self-assessment equalization transfer). and audit. Some of the functions can be outsourced, including to the Directorate General Transfer design of Taxation. The authorities may wish to examine a more The property tax could be developed as the modern system of “equalization�. As in the basis for local own-revenues. Current amounts Scandinavian countries and Australia, the collected are meager, and are shared with objective could be to “provide resources so that FEICOM. Consideration should be given to local governments could provide equal making the property tax entirely “local� with standards of service at equal levels of tax setting of the relevant rate (e.g. within a band effort�. Very simply, the equalization framework that could be legislated nationally, if needed, as would be based on “standardized� factors. This is common in several unitary states where the ensures that local governments would not be legislative authority remains with Parliament). July 2011 l Issue No.2 / Page 18 Cameroon Economic Update able to influence the magnitude of the transfer to improve the predictability of central transfers by their actions or lack of actions. to permit efficient budgeting. The standardized transfers thus become more or Part of the difficulty is that the budget cycles are less “lump sum� and should not distort not properly synchronized. This could be incentives at the local level. The standardized relatively easy to adjust, e.g., with sharing the spending responsibilities would address likely central budget envelope in advance, differential costs of provision for services perhaps along with the budget circular that is assigned to them, with higher costs in remotely also sent to central spending agencies. populated areas, as well as densely populated Consideration could also be given to establishing urban districts. Similarly, the own-revenue a minimum level of transfers to ensure financing potential would be based on standardized of basic spending and facilitate budget revenue (spatial distribution of bases, assuming preparation at local level. average rates), and the fact that a local government chooses not to exploit a revenue Debt management and governance base would not lead to a higher grant. Thus, there would be an incentive to better utilize The legal framework needs to be modified to (i) assigned revenue bases. remove bail-out provisions; (ii) introduce limits on debt stocks and flows as percentage of own- Overall, the modern equalization framework revenue, for instance; and (iii) establish shifts the focus from “entitlements� to a political sanctions for exceeding these thresholds. The focus on service delivery by local governments. Ministry of Finance should monitor all sources of This helps with local oversight and could sub-national liabilities and risks, including the generate “yardstick competition�, with buildup of arrears (in particular to social important political economy and accountability insurance and utilities). advantages. More generally, improved information flows on Budgeting all aspects of local operations are needed, not just for the governments at all levels, but also to It is important to avoid fluctuations in local inform the public and recipients of resources, so government financing. Besides assigning more that they might exert pressure on their elected stable revenue sources to local governments representatives in case of substandard and clearly giving the stabilization function to performance (Box 1). the central government, efforts should be made July 2011 l Issue No.2 / Page 19 Cameroon Economic Update Box 1 : Promoting Budget Transparency and Efficiency in Cameroon Worldwide, governments, donors and civil society organizations alike have committed to increase budget resources to improve basic service delivery and accelerate progress towards the Millennium Development Goals. A more efficient use of resources is critical to achieve these goals. Citizens, who ultimately are the end beneficiaries, often do not have information on the use of public funds, are often left out of the allocation decisions, and cannot provide adequate and timely feedback on the use of these scarce resources. Transparency in budgetary processes reduces opportunities for wasteful or corrupt spending, consequently increasing the resources available to fight poverty. In Cameroon, two regions – the North-West and the Adamaoua – are piloting an initiative to promote greater budget transparency. The initiative supports three objectives, namely: (i) simplification, analysis, and disclosure of budgets at multiple levels (regional, divisional, municipality, school and health center); (ii) awareness and capacity building of government officials and local/regional institutions to promote a public dialogue regarding public expenditures by encouraging demand-side governance; and (iii) documentation and dissemination. Steering committees in each of the two regions under the chairmanship of their Governors are coordinating these activities. In the first phase of the initiative3, a simplification of the budget and its dissemination are being undertaken in 60 primary and secondary schools, 20 health centers and 12 local councils. Simplified budget templates for schools, health centers and local councils have been designed and field tested. Schools and health centers are currently populating these templates with performance and budget data to create snapshots for wide public dissemination. At the municipal level, the administrative accounts of selected municipalities are being processed and simplified. Furthermore, a budget transparency index for municipalities is being developed to assess their budget openness. This will facilitate exchange of best practices in budget transparency between municipalities. At the regional and divisional levels, budgetary allocation and expenditure data for FY2010 are being analyzed. Discussions with stakeholders at all levels - from parents, to health center officials, local mayors and the governors – revealed that there was a high demand for budget disclosure. They were, for instance, surprised by the preliminary results for the North-West showing: (i) a high inter-divisional variation in investment expenditures on basic/secondary education and public health4; and (ii) higher government spending on secondary education than on primary education in the region.5 These initial results indicate that there is much scope for improving budget transparency in Cameroon and stakeholders were confident that disclosure of budget information would help prevent misuse of funds, enhance transparency and increase community participation. 3 The first phase of the budget transparency initiative is expected to end in August 2011. 4 The share of investment expenditure on basic education to total expenditure in 2010 varies from 10.4 percent to 20.8 percent. Similarly, in health the variation ranges from 6.0 percent to 16.2 percent. 5 The share of investment expenditures to total expenditures on basic education, secondary education and public health were 13.4 percent, 20.7 percent and 10.8 percent, respectively. July 2011 l Issue No.2 / Page 20