Abstract

This study assesses the impact of external debt on poverty reduction in Cameroon from 1980 to 2012. The source of data for this study is secondary.

Data was obtained from the ministry of Economy and finance, World Bank and the main objective is to examine the impact of external debt on poverty in Cameroon. Secondary sources of data were collected, regressed and analysed. The method used was the OLS technique and the correlation matrix.

From the results gotten, it was revealed that there exists a positive relationship between external debt, unemployment, and poverty and a negative relationship between government expenditure, inflation, and poverty in Cameroon. There is a need for other variables.

The coefficient of the adjusted R square is 0.774800(77.4%) shows our variable fits the model. The DW is conducted at 5%, one tail test of significance. The coefficient of the F-statistics is 5.046540 meaning the test is significant at 1% implying our result is 99% reliable and can therefore be for policy recommendation.

The study recommends the need for the government to create more jobs such as an increase in real wages, encouragement of technical and vocational education, the tax rate should not be too high in other to reduce unemployment, proper arrangement of debt repayment should be put in place from time to time to respond to change in the economy.

CHAPTER ONE

INTRODUCTION

This chapter embodies the historical background of the debt and poverty of some developing countries, the statement of the problem, and the objective of the study both main and specific, the hypothesis comprises of null and alternative, the scope and the significance of the study.

1.1 Background of the Study

Since gaining its independence in 1960, Cameroon’s economy has swung from a long period of prosperity to a decade of recession, followed by a partial recovery. The economy depends on the production of various raw commodities and has therefore been vulnerable to price fluctuations for these commodities.

The country remains primarily agricultural, but it has gradually diversified into the production of petroleum and lumber, and the provision of basic industries and services.

Its abundant natural resources, favourable geographic position, and relative political stability have allowed Cameroon to build one of the most diverse and prosperous economies in sub-Saharan Africa.

Following independence in 1960, Cameroon enjoyed 25 years of prosperity before falling on hard times in the mid-1980s. During that period, the country developed a prosperous and diverse economy, based on agriculture, petroleum production, and some basic industries.

Beginning in 1986, however, the economy shrank dramatically as low prices for oil, coffee, and cocoa reduced Cameroon’s export income. Oil production also began a steady decline during the 1980s and fell from 9 million metric tons in 1986 to 5 million metric tons in 1997. Cameroon’s GDP declined by 30 percent between 1986 and 1995.

In 1993, the government was forced to reduce civil service salaries by 30 to 50 percent in an effort to limit its spending, and, throughout this period, it tried with little success to revive the country by making structural adjustments and reforms. Only during the late 1990s did Cameroon begin emerging slowly from the doldrums, averaging annual growth of almost 5 percent from 1997-to 1999

Cameroon’s long economic crisis of the 1980s and 1990s contributed to a rising debt burden estimated at nearly US$7.7 billion, or 84 percent of GDP, in 1999. Debt service payments have reduced the value of export earnings and consumed an excessive portion (33 percent) of government budgets.

In late 2000, the International Monetary Fund (IMF) announced that Cameroon would qualify for the Heavily Indebted Poor Countries (HIPC) debt relief initiative, which will provide US$100 million annually to cover debt service payments. As a result of this Cameroon was faced with many debt problems which are explained below.

The debt problem facing majority of developing countries especially those in Africa constitutes a serious obstacle to the development effort and economic growth of these countries since it is characterized by inadequate internal capital formation arising from vicious circles of low productivity, low income, and low savings (Adepoju et al., (2007).

This implies that, there is need for technical, managerial and financial support from abroad to bridge the resources gap. Foreign borrowing allows a country to invest and consume beyond the limits of current domestic production and, also to finance capital formation not only by mobilising domestic resources but also by tapping from capital surplus countries (Klein 1994).

However, borrowing of foreign funds to finance economic development must be backed by the ability to readily and regularly service the debt payments, interest and amortization (Mbanga 1994).

This is possible through efficient and economically justified investment projects (i.e. projects whose Marginal Rate of Return is equal or greater than the Interest Rate) with the borrowed funds.

Thus, the default in the payment of the principal as well as the interest will defeat not only the process of international borrowing from capital surplus to capital deficit countries, but also the essence of economic development (Klein 1994)

According to Telegram (1992), foreign debt is needed to cover two types of gaps in the developing process; the foreign exchange gap which is the payment of deficit a country faces when it has reduced its external reserves to a minimum compared with projected import requirements and the investment –saving gap which is the foreign capital needed to supplement domestic savings for financing real investment levels.

By closing these two gaps will help to promote growth and reduce the poverty situation in these countries. However this is not the case because despite the increase in the debt burden poverty still remains a crucial problem (Telegram1992).

The Debt Situation of Sub-Saharan Africa

In the 1960s and 1970s, African countries became indebted to international lenders as they accepted loans for political and economic stabilization in the post-independence era. In the context of the Cold War, and with massive revenue surpluses of oil money in Western banks in the 1970s, loans were made with little thought to their purpose or to their recipients’ capacity to repay the debt. Many were made to retain the loyalty of corrupt regimes, and much of the money went into the hands of unrepresentative and repressive governments.

In the 1980s, when the shocks of the 1970s oil crisis, rising interest rates and falling global prices for primary commodities began to take a toll, the debt crisis in the developing world began to unfold.

(1), Sub-Saharan Africa’s debt crisis worsened during the 1980s, as the ratios of foreign debt to the continent’s gross national product (GNP) rose from 51% in 1982 to 100% in 1992 (2), and its debt grew to four times its export income in the early 1990s (3).

In 1998, sub-Saharan Africa’s debt stock was estimated at $236 billion, and that of the whole continent was over $300 billion (4). Africa’s debt burden is twice that of any other region in the world — it carries 11% of the developing world’s debt, with only 5% of its income (5). GNP in sub-Saharan Africa is $308 per capita, while external debt stands at $365 per capita.

Mbanga and Sikod (2001), by their studies, explained that one of the most serious problems confronting many developing countries, especially those of Sub-Saharan Africa (after the failure of the Baker and Brady plans) is the burden of external debt. African debt increased from $289 billion in 1991 to over $314 billion in 1995.

Sub-Sahara African debt rose from $194.7 billion to $223.2 billion over the same period, and from over 239 percent to almost 270 percent of export earnings. Sub-Saharan Africa’s arrears on debt service payments have nearly doubled from $32.6 billion to $62.2 billion in the 1991 – 94 periods (UN, 1996).

However the linked between debt and poverty can be direct as well as indirect. High debt service directly reduces government resources that are available for the poor, for example education and health expenditures and expenditures on social safety nets. Indirectly, a country with high debt burden is perceived by Boileau et al, 2003) international financial markets and donors as exhibiting problems of economic mismanagement and bad governance and therefore risky for investment.

As a result poverty related spending could be curtailed. In the long run the impact of the reduction in investment in social sectors would affect poverty through income (UNDP, 1999).

The Poverty Situation in Sub-Saharan Africa

Despite significant progress made in reducing poverty since 2000, there is general consensus that poverty remains a major policy challenge especially in sub-Saharan Africa. On current evidence the global target for MDG1 (halving poverty by 2015) is likely to be achieved thanks mostly to rapid gains in China and India. It should however be remembered that there will still be another half of the ‘original 1990 benchmark poor’ living in poverty.

Recent revisions suggest that the Figure may be as many as 1.4 billion people, many of who will be African. Probably a third of the people who will remain in poverty will have lived in poverty for most if not all their lives.

These are often called the chronically poor. Estimates suggest that between 30 and 40 per cent of up to 443 million people living in chronic poverty are in sub-Saharan Africa.

Clearly present and future progresses in poverty reduction after the MDGs will depend on a large extent on what happens to this core group living in chronic poverty especially in Africa.

Current evidence suggests that although the proportion of people living in poverty has declined from 58 per cent in 1990 to 51 per cent in 2005, Sub-Saharan Africa will likely miss the target for MDG1. In fact, the actual numbers of Africans living in poverty has been increasing.

Poverty has become increasingly important in Africa and continues to defy efforts to eradicate it. Hanmer et al. (1999) shows that fifteen of the 20 poorest countries of the world are in Africa, and a major finding of the World Bank poverty assessments in the 1990s was that the level of poverty in Africa is increasing.

Also, the number of poor people in sub-Saharan Africa increased from 242 million in 1990 to 291 million in 1998 (World Bank, 2001a), and close to 50% of Africa’s population survives on less than US$1 per day (which is the International poverty line).

The poverty situation in Africa has been compounded by conflicts and civil wars, political instability, droughts, and by the rapid rise and spread of HIV/AIDS (World Bank, 2001a).

Looking at the extent or incidence of poverty within the various countries in Africa, it is necessary to have an indication of the proportion of those living below the poverty line in each country. This can be done by looking at the national or official poverty line (that is the percentage of a country population living below the national poverty line) and the international poverty line (that is a country’s population living on less than US$1 per day).

The percentage of the population living below the national poverty line can be grouped into very high, high, medium and low levels of poverty.

The countries with a very high incidence of poverty include Zambia, Madagascar, Gambia, Sierra Leone, and Chad, where between 64% and 86% of the population lives below the national poverty line. Countries with a high incidence of poverty include Mauritania, Rwanda, Malawi and Uganda, where at least 50% of the population is below the poverty line. Medium-level countries include Lesotho, Benin, Kenya, Cameroon and Burundi, with more than 30% living below the official poverty line.

Finally, countries with the least levels of poverty include Mauritius, Tunisia, Morocco, and Algeria, where less than one-quarter of the population is deemed to be poor [(UNDP, 1999 and 2002) and World bank, 2001a).

According to the international poverty line, countries with very high levels of poverty are Guinea-Bissau, Zambia, Uganda, Burkina Faso and Niger —where between 62% and 87% of the population survives on less than US$1 per day.

Countries with high levels of poverty include Sierra Leone, Madagascar, Ghana and Lesotho. Examples of countries with moderate levels of poverty are Botswana, Cameroon, Guinea and Kenya, where between 26% and 38% of the population survives on less than US$1 per a day.

Finally, countries experiencing the lowest levels of poverty are Algeria, Egypt, Morocco, Tunisia and South Africa, where the proportion of the population living below the international poverty line varies between 2% and 11.5%.

Although countries in North Africa have the lowest levels of poverty on both measures, it is worth restating that this is from an income perspective, which paints a partial picture [(UNDP, 1998 and 2002) and World Bank, 2001b).

In Cameroon, external debt has been rising despite increase public attention and the initiations of a variety of debt plans by individual creditor’s government and financial institutions. In 1994 the total external debt in Cameroon was CFA Francs 3,995,902 million which was composed of CFA 849,819 million of multilateral debt, CFA 2,644,621 million of bilateral debt and CFA 291,834 million of commercial debt.

Cameroon external debt is used in filling the resource gap which is in three fold: the domestic savings gap; the foreign exchange gap, and the fiscal gap resulting from budget deficits.

External finance is necessary to finance increased investment that otherwise would not be possible because of the drain of external interest payments and low savings. Between 1990 and 1993 Cameroon external debt rose by 58% and the ratio of external debt to export earnings was 69.1%, while internal debt shifted to 18.4% during this period (MINEFI/DCEFE, 1998).

1.2 Statement of the Problem

Following independence in 1960, Cameroon enjoyed 25 years of prosperity before falling on hard times in the mid-1980s. During that period, the country developed a prosperous and diverse economy, based on agriculture, petroleum production, and some basic industries.

Beginning in 1986, however, the economy shrank dramatically as low prices for oil, coffee, and cocoa reduced Cameroon’s export income. Oil production also began a steady decline during the 1980s and fell from 9 million metric tons in 1986 to 5 million metric tons in 1997. Cameroon’s GDP declined by 30 percent between 1986 and 1995.

In 1993, the government was forced to reduce civil service salaries by 30 to 50 percent in an effort to limit its spending and, throughout this period, it tried with little success to revive the country by making structural adjustments and reforms.

Only during the late 1990s did Cameroon begin emerging slowly from the doldrums, averaging annual growth of almost 5 percent from 1997-1999. The problems are started below;

External debt from all sources has over the years remained the sine-quo-non for filling the resource gap in Cameroon. This resource gap is threefold: the domestic savings gap; the foreign exchange gap, and the fiscal gap resulting from budget deficits. External finance is necessary to finance increased investment that otherwise would not be possible because of the drain of external interest payments and low savings.

The Harrod-Domar model is useful in determining the number of foreign resources that will be necessary to realise the target growth rate in case domestic savings are inadequate in developing countries like Cameroon.

The necessity of external financing in the filling of the fiscal gap in Cameroon can be seen in the various five-year socio-economic development plans. In the first plan (1960 – 65), external financing made up about 72 percent of total investment. In the second plan (1966 – 71), it represented 37 percent. Under the third plan (1971 – 76), 25 percent of the funding came from external sources.

The fourth and fifth plans maintained almost the same characteristics with external debt representing 168 million CFA Francs and 107 million CFA Francs respectively. Despite its strong growth rate of 9.8 percent in the course of the sixth plan (1986 – 91), external debt remained below a reasonable level (Ndoh Mbanga 1994).

Despite the increase in external debt in the country the poverty situation in Cameroon is still a big problem. The struggle against poverty and the entering of more Cameroonians into the core poverty class remains a big challenge not only to Cameroonians but also to World Bank and IMF policies put in place to fine-tune the economy to high growth rate and development hence alleviating poverty.

Statistic provided by the Ministry of Economy and Finance sponsored by the World Bank (2009) holds that the proportion of the poor in relation to the total population of Cameroon has increased in recent years for over 20% in spite of the rich natural and human resources, which the country is blessed with (Forgah, (2010))

In the year 2000, the Poverty Alleviation Program was launched with the aim of reducing poverty in Cameroon by 80% in the year 2010. It was accompanied by the National Good Governance Program (NGP) launched in 2000.

As a support to the Millennium Development Goal, the Operation Declaration of Assets (ODA) of 2006 and the admission of Cameroon into the Heavily Indebted Poverty Countries (HIPC), Initiative in 2000. Cameroon finally met with the completion point decision in 2006. The fights against corruption and poverty since 2000 among others are ongoing.

Between 2000 and 2006, it was expected that Cameroon will provide its citizenry with the best social welfare packages after Cameroon must have attained the completion point of the HIPC Initiative.

However, this was not the case as all hopes were dampened in 2008 when the welfare situations of the majority of Cameroonians measured using the basic needs requirement, inequality index and the consumer price index were worse-off compared to their 2000 situations (Forgha, 2010th).

Given the aforementioned, the explicit link between external debt and poverty has been lacking in empirical literature. This pa is therefore an attempt to partially fill this void. At this point the following questions are asked;

1. What are the determinants of poverty in Cameroon?
2. What is the impact of external debt on poverty in Cameroon?

 1.3 Objective of the Study

The objective of this study is made up of the main and specific objectives; the main objective of this study is to examine the impact of external debt on poverty in Cameroon.

In order to achieve this, the following specific objectives are designed which includes:

1. Investigate the determinants of poverty in Cameroon.
2. Evaluate the effect of external debt on poverty reduction in Cameroon.
3. Make necessary recommendations.

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