As the sovereign debt crisis is unfolding, many are wondering what could be its effects on the economies of the CFA franc zone, a part of Africa with close relations with Europe, especially France. In the case of Cameroon, the Euro zone still represents the main market for the country’s exports and hosts the largest community of Cameroonians abroad.
The latest issue of the Cameroon Economic Update discusses this point and argues that the transmission channels should be similar to those of the 2008-09 global financial crisis. Furthermore, Cameroon‘s economic rebound has gained momentum in 2011 and is expected to carry over into 2012 with a growth rate between 4½ - 5½ percent.
The global linkages of the financial system of the CEMAC region are still limited and the banking sector remains sufficiently liquid to meet the credit needs of the government and the private sector. Furthermore, the budget in Cameroon does not rely heavily on aid, hence any adverse impact from lower aid following fiscal austerity measures in the Euro zone should be limited. The economic slowdown in the Euro zone will thus more probably translate into lower exports and remittances. These adverse developments will meet, however, an economy which is gaining strength.
After a slowdown of two years following the global economic and financial crisis, preliminary indications suggest that the economic rebound observed in 2010 has strengthened in 2011 with an estimated growth reaching 4.1 percent (compared with 3.2 percent in 2010). The main drivers come from the non-oil economy (agriculture, forestry, construction, and telecommunications). With the construction of large infrastructure projects and continued efforts to improve agriculture productivity, this momentum is expected to carry over into 2012.
The buffers, however, have declined substantially. In 2008-09, public spending could be protected and supportive fiscal measures introduced using the fiscal savings that had been accumulated in previous years. The reduced level of remaining government deposits at the regional central bank will only provide a limited buffer this time around.
Against this backdrop, what could the government do if matters become worse than currently projected? The low level of Cameroon’s debt level opens the possibility for the country to borrow, provided that the capacity to mobilize such resources are strengthened, such as creating a liquid secondary market for government bonds. The composition of public spending could also be examined with a view to do more with less. In this regard, the increasingly significant burden represented by fuel subsidies is a source of concern. Measures that instead scale up existing transfer programs and develop effective social protections would be cheaper while achieving the same objectives.