Chapter

Chapter 11. Congo’s Experience Managing Oil Wealth

Author(s):
Bernardin Akitoby, and Sharmini Coorey
Published Date:
August 2012
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Author(s)
Carol Baker and Oscar Melhado 

The history of the Republic of Congo (Congo) is strongly linked to the production of oil, which began just before independence from France in 1960. From the time the first onshore field started pumping in 1957, the country has lived through periods of booms and busts, optimism and crisis, stability and war.1 Although per capita GDP returned to middle-income levels during the oil boom of the mid-2000s, social indicators have not kept pace—following a half-century of oil production, poverty rates are higher than in the early 1980s, human development indicators are in line with lower-income sub-Saharan African (SSA) countries, and infrastructure is severely lacking. The situation is now beginning to turn around, supported by high oil production and prices, and prospects are stronger than in recent memory. The newly stable macroeconomic and political environment has opened a window of opportunity to improve the lives of the 4 million Congolese people. This chapter offers reflections on lessons learned during more than 50 years of managing oil wealth, as well as on the current challenges.

Background and Context

Congo is a young nation with a complex history in which the legacy of colonialism, deep-rooted socialism, and oil production are intertwined. To understand how oil production and revenue affected economic development, the country’s history and politics, the rise of oil production, the trajectory of global oil prices, and the fiscal oil revenue regime must first be briefly explored.

The Political Context—The Blending of Oil and Politics

Shortly after independence from France, Congo adopted socialism2 and a centrally planned economic system, which would have a lasting impact on economic development. It was in this same period that oil production began. It started modestly, then increased substantially in the 1970s after two offshore fields came onstream, generating the first oil boom and the belief that there were no serious constraints on government revenue and that oil proceeds would be available to finance the country’s needs for the foreseeable future. These beliefs have permeated the vision of policymakers throughout the postcolonial history of the country.

This combination of socialism and perceived unlimited resources led to a bloated civil service and a rent-seeking culture. Volatile oil prices caused economic booms and busts, contributing to the early stages of Congo’s long-standing indebtedness.

When the ideological 1970s gave way to the difficult 1980s, increasing rifts and inequities became apparent. As oil production and revenue rose, so did the incentives to capture oil rents, and the formerly outward-oriented armed conflicts shifted to the domestic arena in the 1990s. As a result, Congo endured civil war throughout the late 1990s. The conflict was deeply rooted in ethnic and geographical differences fueled by access to the resources generated by oil. Three periods of heavy confrontation during the 1990s destabilized the economy and nearly wiped out the incipient infrastructure built during the oil bonanza of previous years.3

With the negotiated end to the conflict, a period of peace and reunification began in 2000, but the political situation remained fragile. As the economic and political situation stabilized, incremental improvements in macroeconomic management and a shift toward more market-oriented policies occurred. However, only since 2009, after a couple of years of stable policies and a relatively uncontested presidential election, has the country experienced two situations virtually unknown in its turbulent history: macroeconomic and political stability.

The Rise of the Oil Economy—Developments in Oil Production and Prices

Shortly after independence, Congo’s economy underwent a fundamental transformation from a relatively diversified economy to one dominated by oil.4 The initial jump in production coincided with the first global oil shock in 1973 (Figure 11.1), and from that moment on oil became Congo’s dominant export (Figure 11.2). From the time of the second global oil shock in 1979 through the civil war of the 1990s, oil production rose steadily to more than 150,000 barrels per day in 2000, despite lackluster prices from the mid-1980s through the 1990s. When global prices began a five-year surge in 2003, production rose again; in 2010 production surpassed 115 million barrels, making Congo the fourth-largest producer in SSA. Oil accounted for 70 percent of GDP, 85 percent of fiscal revenue, and 90 percent of exports in 2010.

Figure 11.1Oil Production and Prices, 1972–2010

Sources: IMF, World Economic Outlook database; and IMF staff estimates.

Note: Crude oil price index is a simple average of spot prices of Dated Brent, West Texas Intermediate, and Dubai Fateh.

Figure 11.2Congo’s Export Trends, 1970–80

Source: World Bank, World Development Indicators.

The Fiscal Oil Regime and Revenue Collection

Oil production in Congo is carried out by private enterprises under contracts with the Congolese government. The first legal and fiscal oil framework was established in 1968, a quarter-century before the adoption of the current hydrocarbons code in 1994.

The 1968 regime approved the contracts previously signed with two companies operating in the country and mandated government participation in both the capital and the management of the companies. Oil revenue to the government consisted of taxes on profits. This regime resulted in low fiscal revenue from oil, largely due to a lack of clarity about the revenue accruing to stakeholders, and was replaced by the current fiscal regime signed in 1994.

The current, highly complex fiscal oil regime replaced the tax on profits with royalty payments and production sharing between the oil companies and the government. The royalty is set at 12–15 percent of production, while the share of production accruing to the government depends on the oil price. For prices greater than the base cap price (currently about $30 per barrel) the government and oil company split the value of production in excess of the cap. The share accruing to the government rises rapidly with price, topping out at 85 percent for the government and 15 percent to the operator. Partly offsetting this lopsided division, the oil companies are exempted from all import and income taxes.

The 1994 regime was enacted when international oil prices were low and had been for some time. It is considered very favorable to the country, especially when international oil prices are high. Under this regime, oil revenue has increased significantly (Figure 11.3, left panel), to about 30 percent of GDP and 100 percent of non-oil GDP in 2010. During the decade 2001–10, oil production provided government coffers with revenue of $20 billion (185 percent of 2010 GDP).

Figure 11.3Past Oil Revenue and Projected Production

Source: IMF African Department database.

As of early 2012, work is under way to revise the fiscal regime to remove disincentives to new production. Cost recovery periods for oil companies operating in Congo are among the longest in the region, and the profit-sharing regime is especially unfavorable to exploitation in deep water, where production costs are higher. Without further exploration and production, Congo has a rapidly declining oil profile, with production in currently active fields projected to fall to less than 50 million barrels by 2020 (Figure 11.3, right panel).

Oil Wealth Management—The Absence of Institutions

Despite Congo’s rising oil income and wealth, institutions for managing that wealth are weak at best. The national oil company (SNPC) was established in 1998 to oversee the country’s oil interests. However, oil continues to be perceived for the most part as a source of cash flow to finance spending rather than as wealth. No national oil strategy and no fiscal institutions govern the spending of oil wealth, and fiscal surpluses are saved as the equivalent of sight deposits at the regional central bank, earning low rates of return.

The Economic Impact of Oil

Economic developments in Congo since 1970 can be broken into three periods, each largely driven by oil (Figure 11.4). The early period (1970–84) was characterized by output expansion and related boom and bust cycles. During this period, structural and financial imbalances widened as a result of ineffective economic management under a socialist model and easy access to oil-induced financing. A prolonged period (1985–99) of output collapse and conflict followed—with falling per capita GDP, worsening poverty indicators, and an unsustainable buildup of debt, and finally, output recovery (2000–10).

Figure 11.4GDP per capita, 1970–2008

Source: World Development Indicators.

Output Expansion under Boom and Bust Cycles: 1970–845

The First Global Oil Shock: 1974–78. In the early 1970s, Congo experienced a short-lived economic boom based on oil and mining (potash). Oil and mineral production rose, fostering rapid economic expansion, while oil prices shot up as an outcome of the 1973 Yom Kippur War and the oil embargo by the Organization of the Petroleum Exporting Countries (Figure 11.5). In the midst of a 20 percent increase in GDP in 1974 and highly optimistic assumptions about future production, the government launched an extensive capital expenditure program in areas for the most part not immediately productive (e.g., paving of streets in the capital). It also increased current expenditure by raising public sector wages and employment to such an extent that wages and salaries became the largest line item in the budget.

Figure 11.5Oil Production and Prices, 1972–79

Sources: IMF, World Economic Outlook database; and IMF staff estimates.

Note: Crude oil price index is a simple average of spot prices of Dated Brent, West Texas Intermediate, and Dubai Fateh.

However, in 1975, oil production declined and real prices slumped, coinciding with waning demand for forestry products as a result of the recession in Europe. These developments combined to dramatically alter the country’s financial situation. During the next two years, oil production stagnated and potash production ceased after flooding irreparably damaged the mine in 1977. Industrial production and construction also fell. As a result, real GDP declined by about 3½ percent per year in 1975–76, and a further 5 percent in 1977.

The Congolese authorities maintained the expansionary fiscal policy adopted during the boom, believing that prices and production would recover. Domestic demand increased rapidly, pushing inflation into double digits and placing immense pressure on the external position.6 Large external borrowing, including suppliers’ credits, on increasingly worse terms raised public external debt to about 75 percent of GDP by end-1977, with debt service rising to about 25 percent of total revenue. While the debt stock (disbursed) continued to rise (Figure 11.6), domestic and external arrears continued to accumulate, even after debt rescheduling.

Figure 11.6External Debt Stock, 1970–80

Source: World Bank, World Development Indicators.

After three years of declining real GDP, the economy expanded strongly in 1978 almost exclusively due to rising oil production. However, this recovery was insufficient to return GDP to pre-bust levels. The expansionary stance was maintained—large spending was carried over from the previous budget exercise and the wage bill increased a further 18 percent; the 1978 budget was passed in April of that year with a projected financing gap of about 4 percent of GDP (Figure 11.7). Spending continued unabated, and by year end the cash deficit amounted to 8 percent of GDP, with the stock of arrears, 85 percent of which was domestic, rising to an estimated 29 percent of GDP.

Figure 11.7Budgetary Performance During the Boom and Bust Years, 1970–2003

Source: IMF African Department database.

The Second Global Oil Shock: 1979–84. The next great boom began in 1979, and was characterized by soaring oil production and record high oil prices after the Iranian Revolution that year. Despite continued stagnation in the agriculture and forestry sectors, Congo’s real GDP growth averaged 13 percent per year during 1979–81, with crude oil export receipts rising by 57 percent in 1979, only to double in 1980 and increase an additional 44 percent in 1981.

However, while the trade balance rose, so did the current account deficit (greater than 25 percent of GDP in 1981), owing to large and increasing net services and transfers related to the oil sector and growing interest payments on external debt. With oil prospects improving, long-term public and private borrowing surged, sending debt higher but allowing the country to broadly clear external arrears. By end-1981, gross official reserves had risen from their very low levels of the previous bust, but had reached less than 1 month of rapidly rising imports (Figure 11.8).

Figure 11.8Reserves, 1978–90

Source: World Bank, World Development Indicators.

Despite substantial growth of oil resources, the 1979–80 fiscal position remained weak, mainly reflecting inadequate expenditure restraint, poor non-oil revenue collection, and the difficult financial positions of state-owned enterprises. The budget deficit was reduced but remained high at about 4 percent of GDP, and domestic arrears continued to accumulate. As a result, the objectives of the authorities’ stabilization program supported by the December 1978 one-year IMF stand-by arrangement were not met. The program was allowed to expire after two disbursements, marking the beginning of a quarter-century of failed economic programs.

Despite this weak overall performance, the authorities stepped up efforts to improve non-oil revenue collection through improvements in tax administration. Despite a significant expansion of spending, the tax-collection efforts, together with increasing economic activity and oil revenue that had more than doubled, led to a turnaround of the fiscal situation in 1981. The fiscal surplus allowed the government to not only meet external debt-payment obligations, but also to pay back central bank advances and reduce domestic arrears by about 10 percent—misplaced fiscal exuberance was reborn.

By end-1981, GDP had risen sharply and Congo’s external position had improved, but policy remained highly expansionary. Monetary aggregates grew rapidly, and credit to the economy rose by more than 60 percent that year. Fiscal spending was rising sharply. The resulting strong domestic demand coupled with the depreciation of the French franc led inflation to accelerate to 17 percent in 1981, from 7½ percent (average) during 1979–80.

It was in this context of unfounded exuberance that the government adopted an ambitious and highly expansionary Five-Year Economic and Social Development Plan for 1982–86. Based on very optimistic assumptions, the plan envisaged total investment equivalent to nearly four times 1981 GDP, with the public sector accounting for more than half. The plan was to be financed by external borrowing. However, both oil production and prices came in significantly lower than anticipated, and external credit started to dry up, but the policy response was slow and limited. Non-oil GDP turned negative as state-owned enterprises were closed or suffered declining production due to mismanagement.7

Large external and internal imbalances quickly reemerged, and despite already-large subsidies, the government took over the rising debt obligations of financially strapped state-owned enterprises. With sustained current account deficits of more than 20 percent of GDP (Figure 11.9) and limited external capital inflows, by end-1984—a mere three years after peaking—gross official foreign reserves had dropped to the equivalent of only a few days of imports.

Figure 11.9Current Account Balance, 1972–82

Source: World Bank World Development Indicators.

Note: Data for 1973, 1976, and 1979 are not available.

Output Collapse and Conflict: 1985–99

In this environment of large imbalances, the oil bonanza crashed to an end in the second half of the 1980s, with prices averaging only about half the level of the previous five years. As in the past, the policy response was slow and limited, and expenditures were reduced far less than the decline in available resources. Despite falling revenue, the government continued to raise agricultural producer prices and made transfers to weakly performing public enterprises, while assuming their debt obligations. Adjustment focused on slashing capital expenditure, with little structural reform.

As a result, the economy started on a downward spiral. The budget deficit widened further in 1985–89, owing, in part, to the deflationary impact on the economy of the reduction in public investment. Real GDP declined by about 3 percent per year on average, public sector and external balances widened markedly, and the external public debt and debt-service burden grew to unsustainable levels—large payment arrears accumulated. It was during this period that the Coopération Financière en Afrique Centrale (CFA) franc became overvalued.

By the time civil war erupted, macroeconomic stability had long fallen by the wayside. Per capita GDP was falling, and inflation was in double digits. The economy had become almost completely dependent on oil and subject to the vagaries of volatile oil prices. Despite rising oil production, the country ran acute fiscal and current account deficits, and international reserves fell to mere days of import coverage. The armed conflict exacerbated these trends. Agricultural production declined further, and fighting damaged or destroyed much of the infrastructure that had been built.

With the country embroiled in conflict and given the magnitude of the imbalances, by the early 1990s it became increasingly clear that a strategy based on internal adjustment alone would be insufficient to restore external competitiveness. In January 1994, the CFA franc was devalued by 50 percent and the government adopted a 12-month IMF stand-by arrangement, which quickly went off track from policy slippages, weak management capacity, and conflict-induced disruptions of railroad transportation. Perversely, the 1994 devaluation of the CFA franc did not restore competitiveness but added to the country’s economic woes by driving inflation higher and by raising the domestic price of imports.

The conflict raged on for nearly a decade, fueled and financed by rising oil production. Throughout the period, the government sought several times to place the economy back on the path to sustainable growth and poverty reduction, only to be derailed by flare-ups in the intermittent civil war, lack of fiscal discipline, and insufficient ownership of the structural reform agenda.

By the end of 1999, the results of conflict and economic mismanagement were dishearteningly apparent: although oil production had risen to more than double its 1985 level (in excess of 80 million barrels per year), real GDP had fallen to a mere 70 percent of its 1984 level, about a third of the population had been displaced by the war, and much of the infrastructure built in the boom years had been damaged, destroyed, or neglected. Congo—once a middle-income country—had fallen back to low-income status with double the incidence of poverty and a debt burden exceeding 200 percent of GDP (Figure 11.10).

Figure 11.10External Debt Stock, 1970–2009

Source: World Bank, World Development Indicators.

Output Recovery and Renewed Opportunities: 2000–10

In the early postconflict period, non-oil GDP growth surged to double digits and inflation decelerated as supply lines were restored. The government made several attempts to establish macroeconomic stability, including under IMF informal (i.e., staff-monitored) programs and formal arrangements. Early efforts met with limited success given the fragile political situation and entrenched culture of rent-seeking. Peace and security improved following a constitutional referendum and elections held during the course of the first half of 2002. A peace accord was signed and a program was launched to demobilize former combatants, but the situation remained fragile.8 In late 2002, the government launched an economic and social recovery plan in the context of an IMF staff–monitored program, although it would be another year before the cycle of poor governance and weak economic management would be broken.9

As oil production continued to rise and reforms started to take hold, Congo benefited at end-2003 when international oil prices embarked upon a five-year surge. In what initially appeared to be déjà vu, the government embarked once again on a National Development Plan to foster a dynamic non-oil sector and reduce poverty by using oil wealth to build up basic infrastructure, but this time the surge in oil prices and resulting windfalls proved sustained. Realizing that success would be hampered by poor economic management and the resulting burden of outstanding debt, the government vowed to start afresh. In the mid-2000s, Congo began to work with development partners, including the IMF and the World Bank, not only to establish macroeconomic stability, but to use oil wealth more effectively by improving budgetary procedures, investment planning, and procurement procedures. After a somewhat rocky start, reforms began in earnest during a 2007–08 IMF staff–monitored program and continued throughout the subsequent three-year Poverty Reduction and Growth Facility arrangement signed in December 2008.

Not until 2009, when the war-weary country established a climate of social peace, could policymakers begin to concentrate on economic development with a minimum of political noise. Momentum for change was fairly steady, if uneven, and the reforms and measures implemented as part of the IMF and World Bank arrangements allowed Congo to break free of an unsustainable debt burden by achieving the Heavily Indebted Poor Countries completion point in January 2010.

Along the way, the government’s resolve was tested by the global downturn of 2008–09, during which oil prices plunged, but in contrast to the missteps of the 1970s and 1980s, the government demonstrated its desire to move ahead by maintaining an overall fiscal surplus and implementing the economic reform program. Macroeconomic stability has now been established, external debt has been reduced to a sustainable level, the current account is in surplus, and reserve coverage is ample. In July 2011, Congo successfully completed its first full IMF program (IMF, 2011). Although these achievements are but the first steps in the long process of institution building and oil wealth management, the stable environment has opened a long-closed window of opportunity.

Lessons and Challenges

The Congolese experience highlights the difficulty of maximizing the benefits of oil in a country with weak institutions. After a half-century of oil production and some recent success in strengthening policy making, little progress has been made in improving the quality of life of the Congolese people—the majority of the population remains poor, social service provision falls well short of that in countries with similar per capita incomes, and the business environment is among the most difficult on the planet.10

To this day, institutional weakness continues to hold back economic development in Congo. The institutions executing the budget have not been effective in channeling resources from oil into pro-growth and pro-poor spending, in part because of pervasive rent-seeking but also because of lack of budgetary discipline and weak administrative capacity. The national oil company serves, in effect, as a source of budgetary financing and rents rather than gatekeeper of a well-defined national oil strategy. Therefore, perhaps it is unsurprising that governance and transparency of oil and oil wealth management are weak; only recently have transparency initiatives begun to partially disclose oil revenue and the spending of oil wealth.

Yet, the government has control over the country’s destiny and has started to move in the right direction. Congo is in a privileged financial position relative to many SSA peers, and its oil wealth is being channeled to rebuilding infrastructure. Significant strides have been made to improve public investment, including through adoption of a new procurement code and better project appraisal, implementation, and monitoring, and the debt burden has been reduced to a sustainable level.

With macroeconomic stability in place and a strong external position, Congo has arrived at a crossroads—it can continue to muddle through or it can take the necessary strides to move the country toward becoming a strong emerging market. At present, conditions are more supportive of change than at any time in the past four decades, and without decisive policy actions the risk of a return to past bad habits is high. The massive fiscal expansion in response to the March 4, 2012 munitions depot explosions bodes poorly for raising expenditure quality.

To move ahead, the government must sustain momentum in three areas: strengthening institutions, improving the governance and management of oil wealth, and maintaining consistent and sustained policies to foster robust, private sector–led, non-oil growth. Critical steps include implementing full transparency in the oil sector, beginning with an international audit of the national oil company; ensuring that oil wealth is spent efficiently on pro-growth and pro-poor projects; and fully embracing and implementing the market-based reforms contained in the action plan to improve the business climate. To break the rent-seeking culture, both capacity and fiscal institutions will need to be built up, almost from scratch.

Such reforms are not easy, but they are within the control of policymakers.

The window of opportunity is open.

References

For the background to oil production in the Congo, see Bhattacharya and Ghura (2006). On political and economic developments in the early years of Congo, see World Bank economic reports, various years.

The governments of Alphonse Massamba-Débat (1963–68) and Marien Ngouabi (1968–77) openly embraced socialism and became engaged in supporting insurgency in neighboring countries. President Ngouabi officially declared the Republic of Congo the first Marxist-Leninist country in Africa.

About a third of the population was displaced by the war, more than half of all health facilities were damaged or neglected, and service along the vital Pointe Noire-Brazzaville rail line was suspended for extended periods because of attacks on the line.

The pre-oil economy was based on agriculture, exploitation of timber resources, transport, and public administration. The large public administration sector stems from Brazzaville’s years as the capital of French Equatorial Africa. Over time, regional administration was decentralized, but the legacy of a large bureaucracy persevered for at least three decades.

For background on the early economic history of Congo see World Bank economic country reports for 1959, 1965, 1971, and 1979.

Congo has had a fixed exchange rate since independence. As a member of the Coopération Financière en Afrique Centrale zone, convertibility of the currency is guaranteed by the French Treasury.

By the early 1980s, the public sector’s role in the economy had risen to three-quarters of non-oil GDP, in overstaffed, inefficient, and poorly managed state-owned enterprises ranging from agriculture through manufacturing. Financial losses were significant and subsidies increased over time, in part due to inappropriate pricing policies and overstaffing. Even as its own financial position continued to deteriorate, the government sought not to close loss-making state-owned enterprises, preferring to rehabilitate them through externally financed modernization and capacity expansion, while taking on their debt obligations.

As late as 2005, rebel groups carried out attacks on the rail line and a United Nations convoy in the southern region.

At the end of the civil war, the government put in place a policy framework entitled “Nouvelle Espérance” or New Hope, which was supported by the 2000 IMF Emergency Post-Conflict Assistance facility and four staff-monitored programs during 2001–04. Implementation of reforms under the programs through end-2003 was mixed. Performance improved, and in December 2004, the IMF Executive Board approved a three-year Poverty Reduction and Growth Facility arrangement, which went off-track after two reviews (for a summary of performance under IMF programs, see IMF, 2004, p. 13). The World Bank also provided assistance during this period through a 2001 Post-Conflict Economic Recovery Credit and a 2004 Economic Recovery Credit, as well as through projects in transparency, infrastructure rehabilitation and reconstruction, community support, health, and basic education.

In 2010, Congo ranked 129 of 172 countries on the United Nations Development Programme’s Human Development Index and ranks within the worst group in health indexes. In 2011, Congo ranked 181 of 183 countries on the World Bank’s Doing Business Indicators (World Bank, 2012).

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