widespread poverty among rural producers (tradable and non tradable goods’ farmers).<sup>9</sup> While formal sector workers recorded an average headcount index of about 47 percent in 1996, the average headcount index among informal sector workers was above 76 percent.

The prolonged economic recession was coupled with falling investment, and rising public deficits. Gross domestic investment, which accounted for over 27 percent of GDP in 1981, fell to less than 14 percent in 1992, representing about 50 percent decline (IMF [2002]). Despite the positive trend in the post-devaluation growth period of the late 1990s, gross investment remains significantly below the pre-crisis levels. The latest estimates indicate that it increased to about 18 percent of GDP in 2001.<sup>10</sup> Figure 1 depicts the trend of gross domestic investment as a percentage of GDP shown by the heavy and solid line (left scale) and external debt as a percentage of GDP depicted by the doted line (right scale). It is worth pointing out the negative association between rising external debt and declining investment; most notably illustrated by the wide gaps in the two curves during the crisis period and the narrowing gaps in the late 1990s.

Despite the unfavorable political context at the time, a fall in investment of this magnitude is relatively high, and may have been accelerated by the perceived confiscation risks, potentially associated with the unsustainably high and rising public debt (both external and domestic) and accumulation of sizable amount of arrears to domestic suppliers. Indeed, a number of empirical studies have established the negative effects of external debt on private investment in Sub-Saharan African countries (Elbadawi, Ndulu and Ndungu [1997], Iyoha [2000], Pattillo, Poirson and Ricci [2002]). On the basis of a sensitivity analysis, Pattillo, Poirson and Ricci established a threshold of “160-170 percent of exports” beyond which external debt begins to have a negative impact on growth. Between 1989 and 1996, Cameroon external debt increased from US$4403 million to US$7809 million, representing 190.8 percent and 381.2 percent of exports, respectively, significantly above the 170 percent threshold (World Bank [2002]).

At the same time, the government accumulated a sizable amount of domestic debt and arrears, which by 1996 were estimated to about US$2858.5 million, representing over 35 percent of GDP, about half of which was owed to financial institutions. Though arrears to banks and financial institutions were partly regularized in the context of the restructuring of the financial sector in the late 1990s, the accumulation of domestic debt remains a serious constraint to growth, crowding out scarce resources which otherwise would be used to finance private investment. With an external debt-to-export ratio at over 240 percent in 2000 after relief under the Naples terms, and a domestic debt-to-export ratio at 45 percent, the Cameroon debt situation, even after relief under the Enhanced HIPC initiative will remain severe (at least in the medium term), compromising the prospects for increased investment, which is key for growth and employment creation. Indeed, the projections indicate that the external debt-to-export ratio remains high in 2003, well above the 170 percent threshold (World Bank [2002]). To account for the exceptionally high level of foreign indebtedness, and to allow for ex-ante assessment of extremely high debt servicing implications for growth

> 9 For further details on the geographical and socioeconomic distribution of poverty in Cameroon, see Fambon et al. [2001].

> 10 Most recent projections suggest that gross fixed capital formation (GFCF) will reach the level of 23 percent of GDP only after 2014, remaining significantly below the levels of investment recorded in the early 80s (Cameroon [2003]).

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