The policy environment changed radically in January 1994. Chad and Gabon, together
with the other countries in French-speaking Africa, drastically devalued their common currency,
the CFA Franc, by 100% against the French currency to which it was, and still is, pegged.
Furthermore, under the auspices of the World Bank and the IMF, and as other UDEAC
countries, Chad and Gabon also introduced a trade and indirect tax reform in order to harmonize
the system within the region, with the objective of facilitating exchanges among member
countries and making the industrial sector more competitive.
In both countries, decrees were adopted in early 1994 to implement the trade and indirect
tax reform. The reform was initially supposed to take effect beginning in January 19951 but was
brought forward in order to limit the cost-push effects caused by the devaluation. The reform
included three main components affecting external trade. First, a unified tariff system, the
Common External Tariff (Tarif extérieur commun, TEC), applicable to imports from non-UDEAC
countries, was introduced in place of the previous somewhat cumbersome tariff structure.
Imports were classified into four categories, with tariffs ranging from 5% to 30% (compared with
rates of between 0% and 260% under the previous system in Gabon and 5% to 90% in Chad).
Second, a General preferential tariff (Tarif préférentiel généralisé, TPG) was introduced for trade
among UDEAC countries. Finally, indirect taxes were also reformed with the elimination of all
indirect tax privileges, and the introduction of a value-added tax (VAT) (TCA in Chad).
The 1994 devaluation and the accompanying reforms were quite successful in inducing a
substantial depreciation of the real effective exchange rate. In fact, although domestic prices
rose by roughly 30% in the aftermath of the reform, inflation cooled down in the following years,
so that the real exchange rate in 1996 was a good 30% lower than in 1993.
However, aggregate data are typically unable to capture the full constellation of price
incentives facing individual firms. Moreover, even if relative prices do change, institutional and
1 January 1, 1994 in Cameroon.