I. The Challenges of Sustainable Growth in the Republic of Congo1
1. The Republic of Congo (hereafter the “Congo”) is at a crossroads. The large increase in oil exports and fiscal revenues over the last two years, together with the prospects of debt relief under the Enhanced HIPC Initiative, have created favorable financial conditions that could engender a path of higher sustainable growth over the medium-term and enable the country to reach the Millennium Development Goals (MDGs). Such an outcome will critically depend on the authorities’ policy choices.
2. Congo’s experience during the 1980s demonstrates the importance of following a prudent approach to the use of oil resources. In the aftermath of the oil price shocks of the 1970s, the Congolese government implemented a procyclical fiscal policy which used oil revenues to increase government spending, with little regard to the quality of spending and its effect on growth and poverty alleviation. Such a policy did not help raise per capita income; further, it became unsustainable once international oil prices declined rapidly in the second half of the 1980s. By 1994, per capita income had fallen 10 percent compared with 1980, and external debt had reached 218 percent of GDP, the highest ratio in Africa.
3. It is paramount for the authorities to avoid repeating the experience of the 1980s, particularly in light of the projected decline in oil production over the next decade. The following papers propose a macroeconomic policy strategy that takes advantage of this unique opportunity to foster higher sustainable growth. The first pillar of this strategy is to pin down a sustainable medium-term fiscal strategy to avoid a repeat of the boom-and-bust cycle of the 1980s. The second pillar aims at instituting reforms that will improve the quality of public spending and increase transparency in the budgetary process and in oil resource management. The third pillar consists of measures to reduce the cost of doing business in Congo, in order to attract investment, diversify the economy, and raise the economy’s growth potential.
B. Pillar I: A Sustainable Medium-Term Fiscal Strategy
4. A sound macroeconomic policy in Congo should be anchored to a sustainable medium-term fiscal strategy (MTF) that takes into account the country’s limited oil resources. As discussed in Chapter II, fiscal policy should help the accumulation of sufficient financial assets over time to prevent a decline in living standards as the country’s oil resources are depleted. Such policy would acknowledge the nonrenewable nature of oil revenues, intergenerational equity considerations, and the need to build up a large amount of fiscal reserves that would generate a sufficient return to sustain government spending as a share of nonoil GDP even after oil production declines. The level of fiscal reserves needed will critically depend on oil prices, the rate of return on financial assets, as well as on the growth of the non-oil economy.
5. Congo has one of the highest non-oil fiscal deficits in Africa (Figure I.1). The deficit is higher than Cameroon, Chad, and Gabon, and it is estimated to be higher than in Nigeria in 2006. More importantly, the non-oil primary balance has deteriorated significantly since 2003. Given that oil production will start declining in 2012 and will be exhausted in about 20 years at current extraction rates, such high deficits are clearly not sustainable.
Figure I.1.Oil Producing Countries: Non Oil Primary Balance, 2002-06
Source: Fund staff estimates.
6. The analysis in Chapter II demonstrates the need for significant fiscal adjustment over the long run. There is, however, a clear need to strike a balance between sustainability considerations and the development needs of the country, including the scaling up of spending to reach the MDGs. The MTF strategy therefore should involve a gradual but sustained fiscal adjustment over the next twenty years in order to reach a sustainable non-oil fiscal balance by 2025, when oil production is expected to come to an end, while allowing sufficient fiscal space to reach the MDGs. This would imply a moderate but steady fiscal adjustment over the next twenty years of about 1.5 percent of nonoil GDP each year. The analysis also underscores the importance of increasing the returns on government financial assets and public investment to reduce the need for such a significant fiscal adjustment.
C. Pillar II: Improving the Quality of Public Spending and Transparency of the Budgetary Process
7. Within the envelope of a sustainable MTF strategy, the government will have a key role in fostering growth in the economy, by increasing pro-poor spending and improving the ailing infrastructure of the country. Years of civil war and neglect during the 1990s have left the country with poor education and health systems, an unreliable domestic energy sector, and poor transportation infrastructure. While the World Bank is best placed to provide advice on the best investment strategies for each of these sectors, the key to the success of these strategies is to establish institutional reforms aimed at improving the quality of public spending and further increasing transparency in the management of public resources.
8. The starting point for improving the quality of spending is a transparent budget classification. The authorities have committed to implementing a new functional classification in the budget, as part of the triggers for the completion point under the Enhanced HIPC Initiative, which will allow the tracking of poverty-related expenditures among other things. With technical assistance from the IMF Fiscal Affairs Department, technical work in this area is underway and the new nomenclature is expected to be in place to monitor the 2007 budget on a trial basis. It will be operational for the 2008 budget.
9. Strengthening budget execution is another critical aspect. This would require: (i) the implementation of a new public investment management system, aimed at providing a rigorous selection and efficient execution and monitoring of projects; (ii) a new procurement code in line with best international standards to ensure a transparent and competitive public procurement; and (iii) the strengthening of the tracking and monitoring of government spending at various stages of the expenditure chain (commitment, issuance of payment orders, and cash payments).
10. A more transparent management of oil resources is also crucial. Efficient oil revenue management in Congo requires that the national oil company, the SNPC, improves its management of the country’s oil resources and performs its fiscal agency role in a more cost-effective, accountable, and transparent manner. Performance in line with international standards should be monitored on a regular basis wherever possible. Information disclosure requirements relating to the activities of the SNPC should be guided by the standards of the Extractive Industries Transparency Initiative (EITI).
11. Finally, greater transparency and accountability are needed in awarding oil concessions. As shown in the Marine XI oil concession, a non-transparent system of awarding oil concessions can lead to conflict of interests at the expense of government revenue. Future oil concessions should therefore be awarded based on a transparent bidding process, starting with the publication on the government website of the criteria for awarding the concession as well as the bids after they have been received.
D. Pillar III: Reducing the Cost of Doing Business
12. The diversification of Congo’s economy is highly dependent on a significant reduction of the cost of doing business. As shown by the World Bank’s Doing Business database, 2 Congo ranks one of the lowest countries in the World in terms of the ease of doing business (Table I.1). Of particular concern are the cost of starting a business, employing workers, registering property, getting credit, paying taxes, trading across borders, and enforcing contracts, where Congo lags behind not only OECD averages, but also most other African countries. Overall, the World Bank database makes it clear that Congo has a long way to go to be an attractive place for private sector investment.
|A. Starting a Business|
|Number of procedures||8.0||11.0||6.2|
|Cost (% of income per capita)||214.8||162.8||5.3|
|Min. capital (% of income per capita)||192.4||209.9||36.1|
|B. Dealing with Licenses|
|Cost (% of income per capita)||1243.0||1024.5||72.0|
|C. Hiring and Firing Workers|
|Difficulty of hiring index||78.0||44.3||27.0|
|Rigidity of hours index||60.0||52.0||45.2|
|Difficulty of firing index||70.0||44.9||27.4|
|Rigidity of employment index||69.0||47.1||33.3|
|Hiring costs (% of salary)||28.8||12.7||21.4|
|Firing costs (weeks of wages)||41.2||71.2||31.3|
|D. Registering Property|
|Number of procedures||7.0||7.0||4.7|
|Cost (% of property per capita)||27.2||11.6||4.3|
|E. Getting Credit|
|Legal rights index||3.0||4.2||6.3|
|Credit information index||2.0||1.3||5.0|
|Public credit registry coverage (% adults)||1.4||1.5||8.4|
|Private bureau coverage (% adults)||0.0||3.8||60.8|
|F. Protecting Investors|
|Director liability indiex||5.0||4.5||5.0|
|Shareholder suits index||6.0||5.2||6.6|
|Investor protection index||5.0||4.7||6.0|
|G. Paying Taxes|
|Total tax payable (% of gross profit)||57.3||71.2||47.8|
|H. Trading across borders|
|Documents for export (number)||12.0||8.2||4.8|
|Time for export (days)||50.0||40.0||10.5|
|Cost to Export (US$ per container)||1732.0||1561.0||811.0|
|Documents for import (number)||15.0||12.2||5.9|
|Time for import (days)||62.0||51.5||12.2|
|Cost to Import (US$ per container)||2201.0||1947.0||883.0|
|I. Enforcing Contracts|
|Number of procedures||47.0||38.1||22.2|
|Cost (% of debt)||45.6||42.2||11.2|
|J. Closing a Business|
|Cost (% of estate)||24.0||16.0||7.1|
|Recovery rate (cents on the dollar)||19.4||17.7||74.0|
13. The starting point for reducing the cost of doing business is to improve governance. As shown in Chapter IV, corruption is widespread in the country, imposing significant and nontransparent costs that hinder investment activity. Therefore, the establishment of transparent institutions and good governance practices are critical to tackling corruption and fostering the conditions for higher nonoil growth. The public sector can take the lead in transparent budgetary processes, procurement procedures, and greater transparency in oil resource management. In addition, the Doing business database highlights the need to streamline the process of paying taxes, as Congolese businesses are required to make 2.3 times more payments and spending 50 percent more time doing so than other African countries (payments and time spent are almost six and three times the OECD average, respectively).
14. Financial sector development is another critical factor in helping foster economic growth. As outlined in Chapter V, access to financial services in Congo is very low and is available only to wealthy customers in urban areas. Developing the financial sector will require: (i) widening public access and lowering the cost of financial services by promoting the introduction of new financial instruments such as credit cards, automatic teller machines, and micro credits; (ii) increasing competition through an open policy to licensing banks, liberalizing deposit and lending rates, the ability of microfinance institutions to compete with banks effectively, and cross-border competition within the CEMAC; and (iii) strengthening loan recovery procedures and widening the types of collaterals, which would help reduce interest spreads.
15. Third, a transparent trade regime is required to enhance growth prospects. Congo is part of the regional trade regime adopted by the CEMAC, but many of the trade practices both at a regional and a national level create significant obstacles to trade. Tariffs are high, exemptions are widespread (particularly for the oil sector), documentations for exports and imports are onerous, and effective pre-shipment inspections are lacking. In addition, trade with the Democratic Republic of Congo (DRC)—a natural trading partner due to its proximity—is hampered by different trade regimes and lack of transport infrastructure across the Congo river. The authorities should remove these trade rigidities by spearheading trade reform in the CEMAC countries, adopting a transparent trade regime, minimizing bureaucratic procedures for exports and imports, gradually phasing out exemptions, and building the necessary infrastructure for trade with the DRC.
Prepared by Joannes Mongardini.