CAMEROON'S ECONOMY: BACKDROP TO A WEEK OF VIOLENCE

UNCLAS YAOUNDE 000209

SIPDIS

SENSITIVE
SIPDIS

STATE FOR AF/C
LONDON AND PARIS FOR AFRICA ACTION OFFICERS
EUCOM FOR J5-1 AND POLAD
TREASURY ALSO FOR FRANCOIS BOYE
STATE PASS MILLENNIUM CHALLENGE CORPORATION

E.O. 12958: N/A
TAGS: CM ECON EFIN EIND EMIN PGOV EINV ELAB PINR
ASEC
SUBJECT: CAMEROON'S ECONOMY: BACKDROP TO A WEEK OF VIOLENCE

REF: A. YAOUNDE 005


B. YAOUNDE 199 AND PREVIOUS


1. (SBU) Summary: Cameroon's economic outlook portends
continued tepid growth despite high oil prices, reflecting
low levels of investment, poor execution of the budget, and
the reduced competitiveness of agricultural exports. Recent
conversations with IMF and World Bank officials underscore
frustrations with Cameroon's business climate and economic
governance. For the past year, many have perceived inflation
to be rising; recent increases in the prices of fuel, beer,
bread and many other commodities reinforce inflationary
concerns and were a major factor in sparking a week of civil
unrest. While there is stated political will to jump-start
the economy, the Government of Cameroon (GRC) appears
unwilling to take bold moves to tackle the bureaucracy and
corruption holding back growth. The violence over the past
week -- the worst in Cameroon in more than 15 years -- could
undermine the investment climate and the overall economy,
especially if it leads to further unrest. Even without this
potential impact, the economy appears set to continue to
muddle along on a slow-growth path. End summary.

A Violent Week
--------------


2. (U) Over the past week Cameroon has experienced the
worst political violence since the early 1990s. As reported
ref B and through daily sitreps, transport workers went on a
national strike on February 25 to protest high fuel prices
(gas prices rose by 20 CFA in the previous week - about 4
cents - to 600 CFA per liter, about $5.06 per gallon).
However, this was the latest in a string of incremental fuel
price rises, mirroring rising international oil prices. The
strikers were joined by masses of people in Douala, Yaounde,
and the West, Littoral, South West and North West Provinces,
who voiced a mix of grievances, from rising fuel prices to
the high cost of other essential commodities and President
Biya's announced plans to amend the constitution to eliminate
presidential term limits.


3. (U) Throughout the week, groups of people (many of them
youths) barricaded roads, burned buildings (including many
gas stations),set tires ablaze, and confronted security
forces, who responded with force that left 16 or more dead
and many others injured. Commerce in the affected areas,
which included Yaounde and Douala (Cameroon's two largest
cities),came to a virtual halt. On February 26 the
government and the transport union reached an agreement to
cut the gas price by 6 CFA. President Biya delivered a
speech to the nation the night of February 27 in which he
promised to use "all legal means" to restore order. The
speech was followed by a heavy deployment of security forces,
bringing the violence to a stop (at least for now).


4. (U) While the week's violence was not all about
economics, the country's economic problems and growing
poverty were a significant contributing factor. Neither the
government's deal with the union nor the President's speech
to the nation addressed the country's underlying economic
problems. This message explores the economic backdrop of the
past week. We will report septel about the political
dynamics at work.

Weak Growth Outlook
--------------


5. (U) In his New Year's speech to the nation, President
Biya projected GDP growth at 4.5 to 5.5% in 2008. A look at
the economic data, however, suggests there is little to spur
growth much above its 3% average over the past three years.
The GRC has no control over monetary policy (which is
determined by the regional central bank, BEAC) and can offer
little fiscal stimulus. The 2008 budget straight-lined
overall spending (ref A),with only a slight increase in
public investment and, in any case, execution of the budget
is perennially weak. The December 2007 Economist
Intelligence Unit report on Cameroon predicts 2008 will bring
increases in wages and capital expenditures, financed by
marginal increases in revenue from higher oil prices, slight
increases in oil output, and enhanced tax administration.
This will reportedly have the overall effect of reducing the
fiscal surplus from 5% of GDP in 2007 to 4.1% of GDP in 2008.
The government benefited from billions of dollars in debt
relief under the HIPC program in 2006, but has not been able
to re-channel much of this money into the economy, apparently
because of bureaucratic bottlenecks.


6. (U) There is very little industry (less than 3% of GDP)
or growth in domestic investment. IMF figures estimate gross
investment as a percentage of GDP dropped from 19.1% in 2005
to 16% in 2006. This figure is expected to rise back to
18.6% in 2007. An expected strong performance in the
construction, forestry and (possibly) mining sectors, as well
as likely continued moderate growth in agriculture, could
help improve the results in 2008. However, a steady erosion
of trade preferences with the European Union, combined with
the appreciation of the currency (FCFA),is expected to limit
new investment in the cash crop sector. While there is no
good data on foreign direct investment (FDI),there is no
question that FDI is limited by Cameroon's difficult business
environment and lack of knowledge about business
opportunities.


7. (U) The real growth of private consumption in 2008 is
expected to remain at about 4%. Export volume growth between
2006 and 2007 dropped significantly from 8% to 3%, with no
real diversification and a reduction in exports of cotton,
coffee and bananas, three of the mainstays of the non-oil
economy. The Economist Intelligence Unit forecasts a
significant worsening in Cameroon's trade balance from $363
million in 2006 to $195 million in 2007 and negative $65
million in 2008. The overall current account balance is
predicted to slide more precipitously, from a deficit of $290
million in 2007 to a deficit of $662 million in 2008.

The IMF's Review
--------------


8. (U) The IMF Executive Board completed its fourth review
of Cameroon's economic performance in December 2007. The
Board praised Cameroon's fiscal performance and "structural
measures to strengthen public finance management." It called
for greater efforts to implement reforms in investment
execution, rural finance, and public enterprise performance.
It noted the need to expand the tax base, improve execution
of public spending, ensure prudent debt management, improve
the business climate, strengthen the financial sector, and
pursue anti-corruption efforts. The Board approved a $4.1
million disbursement, for a total of $20.7 billion disbursed
out of the $29.1 million (18.57 million SDR) committed under
the 2005-2008 Poverty Reduction and Growth Facility (PRGF)
that will end in June 2008.


9. (SBU) Malangu Kabedi-Mbuyi, the IMF's Resrep in
Cameroon, gave a decidedly downbeat assessment of the
Cameroon economy in a recent meeting with Pol/Econ Chief.
Since the start of the PRGF in 2005, the GRC had increased
transparency in monitoring government expenditures (with
better data) and made some progress in revenue collection,
she said. However, she was discouraged by the low execution
of the investment budget and the concomitant implications for
future economic growth. On civil service reform, the IMF
believes a census and broad-based reform are needed to remove
ghost workers and irregularities in the personnel system
before contemplating salary increases, she said, questioning
the GRC's political will on this issue, given its glacial
movement on reform. She was also discouraged by the lack of
progress in privatizing CAMAIR (whose annual losses total 36
billion CFA, or around $80 million) and CAMTEL, noting that
the SONARA refinery is also a major drain on government
coffers. She was also concerned about the potential for
Cameroon to take on new commercial debt.


10. (SBU) Given these issues, the problems in the business
climate, and poor infrastructure investments, Kabedi-Mbuyi

thought the GRC's GDP growth projections for 2008 could be
unrealistic. An IMF/World Bank assessment team in Yaounde
last week gave a similar review of the economy to the
Ambassador, noting improvements in budget management but
highlighting poor performance in the social sector,
frustrations with CAMAIR, and concerns about government
pressures to subsidize fuel prices.

World Bank Views
--------------


11. (SBU) World Bank Chief Economist Abdoulayi Seck shared
many of the IMF's concerns in a separate conversation with
Pol/Econ Chief. He highlighted the GRC's inability to
adequately spend its investment budget as a result of
procurement bottlenecks, bad planning, bureaucratic
constraints, and even weather patterns (Cameroon's several
rainy seasons make construction difficult). He was
discouraged by a legion of business climate challenges,
including arbitrary taxes, and the difficulties in opening
and closing businesses, as reflected in Cameroon's low
ranking in the Bank's annual Doing Business report (154 out
of 178 economies worldwide). Private companies lose 5% of
turnover to power problems and 5% to corruption, making
industry highly inefficient, he said. Unless reforms are
implemented and investment picks up, he predicted overall GDP
growth of 3%, roughly the same as the 2006 non-oil GDP growth
of 2.9%. This is about equal to estimated population growth
and slightly below what he estimated as the accumulated
inflation of around 7% over two years (or 10% over 5 years).
This suggests essentially zero or slightly negative real per
capita GDP growth, he said.

Perception of Rising Poverty
--------------


12. (SBU) Both Seck at the World Bank and Kabedi-Mbuyi at
the IMF agree that Cameroon's relatively high per capita
income of $1,080 belies a perception of growing poverty. The
most current poverty data comes from the household survey in
2001, which showed a 13% drop in the numbers of Cameroonians
below the poverty level, from 55 to 42%. New household
survey data expected in the next few months should help paint
a better picture. The 2007/8 UNDP Human Development Index
(using 2005 data) ranked Cameroon slightly above the African
average and 64th out of 108 developing countries. However,
it was toward the bottom of the Medium Human Development
category, and 144th out of 177 countries in the index (on a
par with the previous year),just above Papua New Guinea and
Haiti.


13. (SBU) We have heard for a long time from a variety
sources of growing frustration among the poor. Cameroon
scores below the median on all of the Millennium Challenge
Account's Investing in People (health and education)
indicators. Most of the country's college graduates are
unemployed and overall unemployment and underemployment is
estimated at close to 80%. The perception of price rises is
higher than the official 4.4% inflation rate would indicate.
This may be because of data problems or the baskets of goods
used in measuring inflation, or it could just be that prices
are rising faster than incomes, heightening the perception of
inflation. Recent price rises in foodstuffs like rice and
wheat, as well as items like beer and soft drinks -- not to
mention fuel -- have heightened inflationary pressure and its
negative impact on the poor.

Comment
--------------


14. (SBU) With high oil and other commodity prices, high
liquidity in the banks, significant debt relief, and several
major power and mining projects in the works, this should be
a window of opportunity for Cameroon to boost itself onto a
higher growth path. Moreover, senior levels of the
government appear seized with the need to jump-start the
economy. The President has highlighted the imperative for
economic growth, the Prime Minister formed an Investment

Council and talks of creating a truly one-stop shop for
investors, and the Minister of Finance is overseeing steps to
improve budget implementation. The Minister of Territorial
Administration recently convoked the nation's governors to
Yaounde for a pep talk on boosting the economy. However,
despite a wealth of stated good intentions, no one can see an
easy path out of the stultifying bureaucracy and corruption
holding the economy back. When Pol/Econ Chief recently asked
why the investment climate is not improving, despite
apparently substantial political will, the Director for
Economic Affairs at the Presidency threw up his hands and
said "that's the million dollar question." He then urged
patience, noting the government's need to balance economic
growth with other priorities like preserving peace and
stability.


15. (SBU) If there is no further violence and the
government can regain some focus on economic growth, we
expect the economy will move forward, with possible new
investments this year in mining, energy and other sectors,
although the pace is likely to be frustratingly slow.
However, there is a very real possibility that the past
week's violence will heighten tensions within the government
and sharpen the focus on internal politicking, to the
detriment of progress on economic reform. Although many
observers highlighted the pocketbook grievances of the
protesters, in public remarks the GRC essentially dismissed
these. The Minister of Commerce explained that commodity
prices were high because of global conditions which the
government could not affect. The President made no mention
of economics in his February 27 speech, leaving the
impression that he was insensitive to these problems. At
this point, he gives no indication of using this crisis as a
platform to accelerate economic reforms, though we expect he
will soon try to address some of the immediate cost of living
issues. The options will be limited. For example, the GRC
already subsidizes fuel by 100 CFA, costing the exchequer a
total of $77 million in 2007. There is no doubt that the
image of Cameroon's stability -- one of its strongest selling
points to foreign investors -- has been damaged and will be
further hurt if there is more civil unrest.
GARVEY