The danger of irresponsible public debt

By presenting our public debt as sustainable, representing only 34% of Cameroon's GDP, the statement of the Minister of Finance is none the less a serious cause for concern because it shows that he has not thought through the full measure of the problem of public debt and its harmful effects. In fact, there is no point, in terms of percentage of GDP, where a country's public debt is acceptable or unsustainable. Depending on the structure of a country's economy and the characteristics of its public debt, which can be unsustainable at 20% or even 10% or less, the debt burden as a percentage of GDP is simply a convenient indicator that economists use to measure or report on it. Japan has a public debt that exceeds 100% of its GDP, but it is in yen and held by the Japanese, meaning that it does not pose as serious problems in case it was held in a foreign currency by foreign creditors. In fact, the repayment of the Japanese debt by the State would remain neutral from the point of view of the collectivity, the money would move from the public economic agent (State) to the private agents. So, the resources transferred would be reused to run the economy through investment or consumption.

In contrast to Japan, the recent experience of Greece illustrates the effects of public debt owed by a country to financial markets, that is external creditors, including US pension funds, whose repayment requirements made the country to go through some drastic remedy, which the Greeks are not ready to forget the sinister effects: collective impoverishment in terms of losses of jobs or the reduction of wages leading to the plummeting of purchasing power, corporate bankruptcies, etc.

To this end, if many shrewd observers of the Cameroonian economy, including the IMF, are worried about the level of our public debt, it won’t be by chance. It is because of its characteristics including its strong foreign component, hard currencies, dollars or euros, high-interest rates, and a relatively short-term maturity. Economics is all about figures and facts, with causal links on different societal functions: the capacity to create wealth and to distribute it in an inclusive manner, so as to ensure political and social stability. In the opposite case, weak growth and inequitable distribution of wealth that contributes to widen the inequalities gap, build-up frustrations that fuel political and social instability. Why is Cameroon's public debt a worrying and dangerous cocktail? The reader will come to easily understand it.

First, why do we get into debt?

Any debt carries interest charges, which must be paid in addition to the principal repayment. The danger is not so much the principle of public debt, but more in the accumulation of unproductive debts, which finance non-viable and unsustainable projects, unable to repay them. When this is done by those who govern us, it creates a liability on future generations, whose quality of life will be compromised.

Of course, it is different from a loan that funds infrastructures that benefit present and future generations. Though, there are always other and less expensive ways of doing it when we bother to think about it. In this context, the easiness to contract public debt cannot be considered as part of good governance.

The origin of the economic crisis of the 80s

The economic crisis of the 1980s was mainly caused by an accumulation of unproductive debt, which was used to finance unprofitable projects that had been initiated a few years earlier, in the context of an economic model where the welfare state was in total control: investor, regulator of the market of the factors and the products, which goes against the rules of the efficiency of the market. The state, as the ultimate guarantor of these debts, was obliged to repay them as it became confronted with the insolvency of the companies it had helped finance, the famous white elephants. At the same time, the revenue of the state contracted, due to the economic downturn of the prices of our primary commodity export products. What ensued was the classic cycle of the subsequent events that led to the crisis: cash flow problems leading to the default of local and foreign debts; insolvency crisis of the state leading to a crisis of confidence of creditors (banks and other lenders, especially foreign ones); banking sector crisis; the blocking bank loans to the economy; contraction of economic activity, that is, recession. The result was a gradual loss of autonomy, increased dependence on external creditors and, finally, a mortgage on the growth and well-being of future generations.

This situation will be the reason of twenty years of structural adjustment, under the leadership of the Bretton Woods institutions (IMF and World Bank), during which the populations, as in the recent case of Greece, witnessed a genuine tragedy: enterprises shutdowns, massive job losses, drastic cuts in civil servants' salaries, etc. Many of our families remember this period as dark years marked by suffering and impoverishment, during which many dreams of a happy life were broken, as childcare education projects disappeared, when some parents, demoralized, did not simply lose their lives.

Responsible leaders would have said: never again!

For many compatriots, these were years of nightmare, which still remains deep inside them as bitter memory with great sadness. They would never have thought to see the IMF coming back in their lifetime, just ten years after reaching the completion point in 2006. Indeed, the Heavily Indebted Poor Countries Initiative, one of the aspects of the Structural Adjustment Programme, had allowed the cancellation of a substantial part of our external public debt. As soon as the debt was cancelled, the race of indebtedness picked up with an astonishing acceleration, as if no lessons had been learned from the previous period of adjustment, and particularly from the sufferings of the population.

Since the same causes produce the same effects, the return of this disastrous scenario that worries all shrewd observers of our economy, as illustrated incurring debts to finance again white elephants, among which are: the tractors of Ebolowa ; the cassava plant of Sangmélima (without cassava); poultry slaughterhouses in Bafang (without poultry); the Mekin hydroelectric dam at an exorbitant cost, six times higher than industrial standards; the port of Kribi justified by the mining projects, which are all on hold, at the same time the collapsing Cameroon Shipbuilding and Industrial Shipyard, formerly presented as the flagship of Cameroon’s industry, in which an oil yard was built at the port of Limbe.

Public enterprises that destroy collective wealth...

Paradoxically, apart from these white elephants, many public enterprises of an industrial and commercial nature - like CAMTEL, SONARA, SEMRY, etc. - continue to receive public subsidies, without any prospects for recovery, within a framework of an opaque management and monitoring.

Various studies show that "a large share of subsidies and transfers benefit public enterprises and public administrative institutions, whose poor financial performance has resulted in high budgetary risks". These studies reveal that, during the period 2010 to 2015, the net results of companies with a minority public participation are positive, whereas, on the contrary, those companies with wholly or mainly public capital are in deficit. The total indebtedness of these enterprises represented 12% of GDP in 2015.

These public enterprises that are value-destructive and a source of impoverishment for the community, in fact, the poor taxpayers, that survive on subsidies and always increasing the state’s liability. Public companies have become the reason behind the worsening of the financial and economic imbalances of our country. They are unable to make important reforms required in an open and competitive world, so as to move away from this logic of administrative rent seekers to become productive agents, able to plan, innovate and participate in the creation of value in all areas.

These developments are facilitated by the lack of a performance-based public enterprise management framework, which is coherently underpinned by transparent procedures for the selection, systematic and methodical evaluation of their managers. Such a framework would aim to encourage their managers to use resources efficiently, to develop strategic skills to cope with the turbulence of an increasingly challenging environment, so as to sustainably maintain the competitiveness of these companies.

The Acceleration of Debt and the Harmful Impact of Interest Charges

Moreover, what aggravates the anxiety, besides the volume of unproductive debts, is its acceleration. The best indicator of this phenomenon is the level of the interest burden. In ten years, there has been an increased on the annual interest charges on the public debt; for instance, from 2007 to 2016, the annual interest charges increased from 45 billion FCFA to 245 billion FCFA. Their value was therefore multiplied by more than five times. For the reader to better grasp the associated effect, it should be recalled that, in 2016, for a budget of around 4500 billion FCFA, 245 billion FCFA of it (or about 5.5% of its value) is spent annually to pay interest on the public debt, excluding the principal repayment. With an equivalent amount, one could build reference hospitals in each region of the country, accompanied by several specialized health units for the management of various pathologies. For example, some of this money could even be spent on training general medical practitioners or specialists and on medical research. Therefore, it can be understood why it is advisable to reflect on alternative means of acquiring and financing public goods and services, including infrastructures, by reducing the cost of infrastructures through better planning, through the use of competitive bidding selection process, and focusing as much as possible on their financing through domestic savings.

Our leaders are generally trying to justify this soaring debt by the need for increasing the investment budget for the financing of infrastructures. In this regard, a recent World Bank study notes that "... the considerable increase in the public investment budget has not improved the overall quality of infrastructure". At the same time, it notes the inefficiencies in the management system of these projects, which contribute to the accumulation of considerable delays in their delivery (delays that go from initially planned 3 to 4 years to 7 or 10 years on completion), the excessive cost of public infrastructure (2 to 6 times compared to comparable projects in countries of similar levels of development), as well as the loss of resources allocated for other reasons that do not concern the accumulation of capital (corruption inter alia).

Interest Rates and Country Risk Perception

The more the lender perceives the borrower as a risk, the more he tends to raise his loan associated interest rates. One will note that the loan of about US $ 900 million that Cameroon obtained a few years ago on the international financial market had an interest rate of about 10%, Saudi Arabia at the same period obtained from the same markets more than three times this amount for about 2% of interest rate; the difference in interest rates - eight points - indicates the difference in the country risk assessment by the financial markets on both countries. In a country perceived as a high risk, the transaction’s cost tends to be onerous, especially the interest rate, which is the cost of credit.

The Country Credit Risk, Interest Rate and the Quality of Governance

The rating of country credit risk, a significant determinant of the level of interest rates on financial resources lent to a state or its nationals, is closely linked to the markets' assessment of the quality of country’s leadership and governance.

For example, in the World Bank's Doing Business 2019 report, which measures the easiness of doing business in different countries, Cameroon lost three places, from 163rd to 166th out of 190 countries in the world (40th out of 43 in Africa). Among the constraints that seriously hamper the business environment, and in turn the rating of country credit risk, business managers always focus on corruption that has gangrened and compromised the effectiveness in all other sectors, to the availability and effectiveness of infrastructure services (for instance longer delays and increased production costs for transport services), access to finance, tax administration, the judicial system, etc. But the absolute evil that determines everything else is corruption that permeates the governance of public affairs. The period of uncertainty and political turbulence, which Cameroon is currently facing, will only aggravate it. The acquisition or development of assets in our country will increasingly become difficult in this context.              

Persistent Liquidity Crisis

The real threat of such a crisis, as it is the case of some European countries today, is the loss of sovereignty and autonomy of action of a state.

The recurrence of cash stress signals the difficulties of an economy that does not generate enough revenue (wealth) to honor its operating and investment expenditures, as well as those related to its debt. By strongly constraining the state's intervention capacities, the persistence of this situation is likely to jeopardize our efforts for vigorous and resilient, job-creating, inclusive growth. By contributing to the widening of budget deficits and the balance of payments, such difficulties would lead to the insolvency of the State, which would thus find itself at the mercy of creditors.

Irresponsibility, Negligent Leadership and Governance, Corruption and Impunity

This current situation is the result of a negligent leadership and governance, with the striking feature being that the public servants contracting those debts are not exposed to any personal risk in relation with the consequences of their actions. The risk associated to their decisions is always eventually endorsed by the state, and ultimately by the people. This was the case years back of those who committed colossal sums in the name of the State to construct white elephants - such as CELLUCAM, SOCAME, CERICAM, CAMSUCO - as it is the case today for similar investments.

What Legacy for Future Generations?

At the current level of the commitments of our sovereign liability, the real short-term threat is the narrowing to a narrowing of our manoeuvre space, resulting from the accumulation of financially inappropriate decisions.

The performance so far achieved is, unsurprisingly, consistent with the careless governance of public affairs, and more particularly the management of public debt, through the slowing down of the growth dynamic; the poor business environment, associated with the persistent difficulty in attracting foreign direct investment; the deterioration of public finances resulting from the harmful effects of the preponderant role of the state in resources allocation, as proven by the aggravation of internal and external deficits; the insignificant change over the years in the production and trade of our country, that is continuously characterised by a concentration of exports on a dozen unprocessed goods, with a very slow trend towards industrialization.

If this trend is not reversed, the persistence of these developments will contribute to aggravating internal and external macroeconomic imbalances, with adverse effects on the living conditions of the population and, consequently, on political and social stability.  People can be deceived people once, but not forever so. we will not be able to deceive them all the time. Cameroonians are by now mature and know their oppressors, beyond any tribalism gimmick

Christian Penda Ekoka

President of the ACT-AGIR movement

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