Cameroon 2035: Pathways to Economic Resilience and Public Service Efficiency

Cameroon must enhance its tax revenue, reallocate spending, and improve investment efficiency to achieve sustainable growth and meet its Vision 2035 goals. Comprehensive fiscal reforms and strengthened fiscal decentralization are essential to support economic growth and improve public service delivery.

Cameroon has faced significant fiscal challenges in recent years, worsened by the COVID-19 pandemic, regional conflicts, and a decline in natural resource revenues. The World Bank’s Cameroon Public Finance Review highlights these issues and offers policy recommendations. Despite the challenges, Cameroon has pursued fiscal consolidation since 2016, reducing fiscal deficits from 6.2% of GDP in 2016 to 1.1% in 2022. This consolidation was primarily achieved through cuts in public investment, leaving domestic revenue and recurrent expenditure largely unchanged. While these measures have helped maintain macroeconomic stability, they have also left Cameroon vulnerable to further economic shocks and reduced its potential for long-term economic growth.

Tax Revenue Challenges: A Need for Reform

Cameroon’s tax revenue remains below the 15% benchmark necessary for basic government functions, despite a modest increase from 9.5% to 11.3% of GDP between 2011 and 2021. The country’s tax system heavily relies on regressive indirect taxes, with the value-added tax (VAT) accounting for over 41% of total tax revenues. Direct taxes, particularly income tax, have remained stagnant and low. Significant tax exemptions across various instruments contribute to this shortfall, and addressing these gaps could potentially boost tax revenue by up to 6% of GDP. The country’s current spending levels fall short of fulfilling growth objectives, with public investment hovering around 5% of GDP and current public spending on health and education at 1% and 4% of GDP, respectively. Insufficient spending hinders the closing of infrastructure and human capital gaps necessary to achieve growth aspirations. The low efficiency of public expenditure, particularly related to capital projects, exacerbates the country’s growth challenges.

Strategies for Fiscal Improvement

To improve its fiscal situation, Cameroon needs to enhance domestic revenue mobilization through a Medium-Term Revenue Strategy. This strategy should focus on reducing tax expenditures, broadening the tax base, and improving tax compliance. On the expenditure side, Cameroon must reallocate spending towards strategic priorities, improve budget execution, and enhance the efficiency of public investment. The education and health sectors in Cameroon also face significant challenges. The education sector has been affected by regional conflicts, leading to school closures and reduced enrollment. Despite recent reforms to increase teacher numbers and textbook access, internal inefficiencies and external pressures have led to declining performance. The health sector struggles with inadequate public spending, resulting in limited access to facilities, low service quality, and high out-of-pocket expenditures. Reforms are needed to enhance the efficiency and effectiveness of public health spending, improve governance, and ensure better resource allocation.

Addressing Social Protection Inequities

Cameroon’s social protection system remains regressive, with most spending directed towards public sector pensions and subsidies rather than targeted social assistance. Comprehensive reforms are needed to reallocate resources, improve program targeting, and expand coverage of social safety nets. Fiscal decentralization is seen as a crucial tool for improving public service delivery, reducing regional disparities, and addressing sources of fragility. However, progress has been slow, and subnational authorities suffer from weak capacity and insufficient funding. Strengthening decentralization will require investments in capacity building and a more equitable distribution of public resources.

Investment Rate and Infrastructure Needs

Cameroon faces a rising challenge as its investment rate falls short of regional benchmarks. The country's investment rate, averaging 18.6% of GDP during 2010 to 2022, trails behind the Sub-Saharan African average of 21.6%, the Central African Economic and Monetary Community average of 28.7%, and the lower-middle-income countries’ average of 40.2%. Additionally, Cameroon’s gross national savings rate, standing at 15.3% of GDP, does not measure up to the regional averages. The modest growth delivered by Cameroon’s economy has been underpinned by substantial infrastructure projects, a resilient private sector, and increased public consumption. Increased government expenditure from 2012 to 2016 helped stimulate domestic demand, but net exports contributed negatively to growth, partly owing to terms-of-trade and climatic shocks.

Enhancing Public Expenditure Efficiency

Cameroon’s fiscal consolidation, primarily driven by expenditure cuts, resulted in low levels of public expenditure that make it challenging to provide adequate public services and invest in public infrastructure. Overall public expenditure declined from its peak of 21% of GDP in 2016 to 17% in 2021. Most of the expenditure adjustment fell on capital expenditure, which declined from 8.4% of GDP to 4.6%, while recurrent expenditure remained relatively stable at 12.5% of GDP. At 17% of GDP, Cameroon’s public expenditure is low compared to other Sub-Saharan African countries, which on average allocate 23% of GDP for public expenditure.

Investment spending suffers from significant inefficiencies. Not only has public investment spending been significantly cut since 2016, but inefficiencies persist. For example, more efficient spending in the road sector could yield a 40% improvement in road quality per dollar spent. Low levels and poor quality of investment spending undermine Cameroon’s growth prospects. Enhancing the efficiency of public investment spending should be a key priority for fiscal reforms, together with prioritizing investment spending when more fiscal space opens up. The procurement reforms that the authorities have embarked on are an important step in enhancing public expenditure efficiency.

Cameroon needs to implement comprehensive fiscal reforms to improve revenue mobilization, enhance the efficiency and effectiveness of public spending, and strengthen fiscal decentralization. These measures are essential to support economic growth, improve public service delivery, and achieve the country's development goals by 2035.