Trade and Exchange Rate Policy Options for the CFA Countries: Simulations with a CGE Model for Cameroon

This paper uses a computable general equilibrium model consistent with stylized facts about Cameroon to assess the impact of the 1994 regional fiscal reform. Two main elements characterize this model: it accounts for the asymmetric impact with trading partners and the dualism on product and factor markets through due consideration of both formal and informal sector's activities. Price formation in the model is standard, except that import prices are adjusted to take into account tax evasion and smuggling. Our analysis focuses on the macroeconomic impact and the welfare implications of the simulations. Overall, the various simulations lead to higher economic growth and expansion in employment. However, depending on the combination of taxes used, the sectoral effects are different. As a member of the CFA zone Cameroon can achieve a real depreciation on an individual basis through stringent fiscal and monetary policies or through a uniform tariff-cum-subsidy (UTCS) scheme, which is obtained via subsidies to selected export crops and high import tariffs. The simulation of this policy scenario leads to an increase in GDP at factor cost, while employment increases at a higher rate than in other scenarios; hence the unemployment rate falls and households' welfare increases. All households are better off in this simulation, although in the formal household category, welfare increased by a lesser amount. Our principal objective is reached via three specific objectives. The first objective is to provide a synthesis of trade and exchange rate policy options under fixed and flexible exchange rates with reference to CFA member states. The second specific objective is to construct a social accounting matrix (SAM) and a CGE for Cameroon that are conducive to the analysis of trade policy based on data portraying the prevailing structure of the Cameroon economy. The final objective is to simulate alternative trade policy options in order to investigate their impact on growth performance. The rest of the paper unfolds as follows. In section two we present the trade and exchange rate policy options in Cameroon and other CFA countries; section three provides a description of the SAM used for the calibration of the model, which is specified in section four. Section five presents the simulation experiments and section six concludes with the ensuing policy recommendations.