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Volatility of Resource Inflows and Domestic Investment in Cameroon

  • Sunday A. Khan
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    Cameroon is a small open economy that relies on the export of a few primary products for its foreign exchange earnings. The low rate of savings cannot meet the investment requirements, and investment has been declining despite many years of economic reform. There is consequently a resource gap that has to be filled by both official and private resource inflows, but these resource inflows have similarly been declining. They have also become highly volatile, thus undermining their positive effects on capital formation and consequently on economic growth and poverty reduction. This study examined the effect of resource inflows and their volatility on domestic investment in Cameroon. The results show that inflow volatility is high and that export revenue volatility is the prime mover of aggregate volatility. There is no evidence of inflow volatilities reinforcing or offsetting each other. Aggregate resource flow is important for both public and private domestic investment, while its volatility is detrimental. When total resource flows is disaggregated into export revenue, official flows, foreign direct investment and “other private flows”, only export revenue and “other private flows” significantly affect private investment, indicating that the impact on investment varies depending on the type of inflow. The volatility of official flows and export revenue hurts investment directly, but also negates the influence of the other inflows on both private and public investment. The study suggests that government make more efforts to attract more resource flows into the country and, especially, to reduce their volatility. Diversifying export supplies to minimize price fluctuations, complying with aid conditionalities (this should be facilitated with the country ownership of the poverty reduction strategy), developing a robust and transparent financial sector and stock exchange, and avoiding frequent and unpredictable policy shifts are among the actions that can go a long way to reduce resource flow volatility. Domestic investment, and consequently growth and poverty reduction, should be the main beneficiaries.

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    Paper provided by African Economic Research Consortium in its series Research Papers with number RP_221.

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    Length: 54 pages
    Date of creation: Jan 2011
    Date of revision:
    Handle: RePEc:aer:rpaper:rp_221
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