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FISCAL POLICY LETTER – No2: Overcoming The Challenge Of Fiscal Transition In Cameroon

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Foreword

Fiscal Policy LetterOn 16 November 2020, Cameroon’s government published the 2030 National Development 2020- Strategy (SND30), which operationalises the second phase of the emergence vision for 2035. This 10-year plan aims to implement favourable conditions for sustainable economic growth and an accumulation of national wealth through structural changes essential for industrialisation.

The strategic objectives to be achieved can be summarised as follows:

  • achieve approximately a double-digit economic growth
  • attain the 25% threshold as the share of manufacturing production in GDP
  • reduce poverty to less than 10% in 2035
  • consolidate the democratic process and strengthen national unity while respecting the diversity that characterises the country

To achieve these clearly defined objectives, public authorities must increase their efforts to encourage local production. In other words, local producers need to be supported and supervised by being rewarded with a package of tax relief measures. The challenge is to promote the “made in Cameroon” and progressively reduce the dependence on manufactured products’ imports.

Among the choices made by the government is a range of tax practices that may encourage or discourage free enterprise. This second issue of the Tax Policy Letter presents the urgency of successful tax transition in Cameroon. As such, it highlights some acceptable tax practices in Sub-Saharan Africa that could inspire Cameroon in the 2020 to 2030 decade.

Beforehand, we present the factors explaining the tax burden in Cameroon. We show that the prevailing socio-economic conditions strongly influence the tax burden. However, variables referring to the informal sector’s predominance, the degree of digitalisation of the economy, and democracy and corruption also significantly affect taxation. Finding practical and rational solutions to these factors is essential to alleviate economic activity from asphyxiating taxation.

Also, we examine the issues and challenges of fiscal exemption in the agricultural sector in Cameroon. The objective is to present the need to reduce dependence on imports and promote the “made in Cameroon.” This study shows that such a measure certainly generates losses in budget revenue in the short term, but allows the country to produce more and import less, which compensates for the deficit caused by removing specific tariffs non-tariff barriers.

We then analyse the sensitivity of foreign direct investment to taxation in Cameroon. Based on empirical work carried out by Pesse (2018), we show that taxation negatively influences FDI fluctuations. In other words, the attractiveness of FDIs would strongly depend on the authorities’ tax policy. This study encourages the Cameroon public authorities to reduce Cameroon companies’ tax burden to meet other sub-Saharan African countries.

We conclude the letter by illustrating the need to accelerate fiscal transition process in Cameroon. Indeed, based on Cameroon’s trade commitments with the rest of the world, it is clear that customs tax revenues will experience a significant decline in the coming years. However, achieving fiscal transition involves collecting more tax revenue domestically when customs revenues are reduced. To accomplish it in Cameroon, we recommend reducing the number of informal enterprises by at least 10% each year and accelerating the economy’s diversification process. We also recommend speeding up the tax administration’s digitalisation, further simplifying the tariff barriers to export local products and, revise the agreement establishing the preferential trade regime with certain countries by taxing a little more imported goods that can be produced locally.

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