Republic of Congo: Staff Report for the 2003 Article IV Consultation and a New Staff-Monitored Program
Author: International Monetary Fund
Publication Date:
30 Jun 2003
eISBN:
9781451808537
ISBN:
9781451808537
Language:
English
Keywords:
ISCR; CR; government; debt; petroleum price Brent; obligations vis-à-vis; Société Nationale des Pétroles du Congo; oil revenue; U.S. dollar; debt relief; private sector; balance of payments; Fiscal stance; Africa
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This paper examines the Republic of Congo’s 2003 Article IV Consultation and a New Staff-Monitored Program (SMP). Performance under IMF-supported programs and recent SMPs was disappointing. Major progress has been made in consolidating security and peace, and in establishing democratic institutions. The public finances deteriorated in 2002, reflecting a combination of expenditure overruns and a drop in non-oil revenue collection. The drop in non-oil revenue was more pronounced at customs, owing to large-scale fraud and widespread use of ad hoc exemptions. As a result, most targets under the 2002 SMP were missed.

Abstract

This paper examines the Republic of Congo’s 2003 Article IV Consultation and a New Staff-Monitored Program (SMP). Performance under IMF-supported programs and recent SMPs was disappointing. Major progress has been made in consolidating security and peace, and in establishing democratic institutions. The public finances deteriorated in 2002, reflecting a combination of expenditure overruns and a drop in non-oil revenue collection. The drop in non-oil revenue was more pronounced at customs, owing to large-scale fraud and widespread use of ad hoc exemptions. As a result, most targets under the 2002 SMP were missed.

I. Introduction

1. Following the 1999 cease-fire agreement, the Republic of Congo (hereafter “the Congo”) received Fund support in November 2000 under the post-conflict emergency assistance policy aimed at rebuilding the country’s basic infrastructure and initiating a series of economic and structural reforms. The authorities saw their post-conflict program as a precursor to an economic program that could be supported by the Fund under the Poverty Reduction and Growth Facility (PRGF) and ultimately pave the way for debt relief under the enhanced Initiative for Heavily Indebted Poor Countries (HIPC Initiative). However, performance under the program, and subsequently under two successive staff-monitored programs (SMPs) through end-2002, was disappointing, as the authorities focused their attention primarily on consolidating peace and ushering in democratic institutions.

2. The World Bank has been supporting the Congo’s postwar economic program under a Transitional Support Strategy, initially with a Post-Conflict Economic Rehabilitation Credit and an Emergency Demobilization and Reintegration Project. In April 2002, a credit for rehabilitating infrastructure and improving living conditions in urban areas was approved. A Governance and Transparency Capacity Building Project, approved in July 2002, will help fund the financial audit of the national oil company (Société nationale des pétroles du Congo—SNPC) and, at a subsequent stage, the review of operations in the entire oil sector. The World Bank has also initiated a public expenditure management review, which will assist the authorities in the design and implementation of budget reform. Appendix III summarizes the Congo’s relations with the World Bank Group.

II. Political and Security Developments

3. The four-year transition period came to a close in August 2002 with the appointment of a new government following a constitutional referendum and presidential, legislative, local, and senatorial elections, all held during January–June 2002. President Sassou Nguesso won the March 2002 presidential election by a landslide, and his party secured a majority in the national assembly and senate (see para. 2 of the letter of intent (Appendix I)).

4. Recent developments on the security front are cause for guarded optimism that the disruptions to economic activity will end. On March 17, 2003, the government and representatives of the rebel group signed an accord recommitting both sides to the 1999 cease-fire agreement that ended the 1998–99 civil strife. Under the new accord, militiamen started surrendering their arms and are to be integrated into the regular security forces. There are reports that the vital rail service between Pointe Noire and Brazzaville is gradually returning to normal. Plans for rebuilding the road connection between the two cities can now be considered.

III. Recent Economic Developments and Performance Under the 2002 SMP

5. The completion of the turbulent four-year transition period, culminating with the installation of democratic institutions and the consolidation of political power by the President’s party, now offers the Congo an opportunity to focus on economic management. The rapid pace of postwar reconstruction has provided an encouraging backdrop to the government’s efforts to strengthen the economy and restore macroeconomic stability. Yet, the present administration inherits a difficult legacy. Decades of central planning, episodes of civil conflict, and disruptions to the normal functioning of the private and public sectors have weakened the country’s institutions and undermined the rule of law, leaving governance problems and a lingering mistrust of the market economy.

A. Recent Economic Developments

6. The Congo’s economic performance in 2002 benefited from high international oil prices and continued domestic political stabilization. Sporadic rebel attacks on the railway link between Pointe-Noire and Brazzaville caused supply disruptions in the capital and hindered agricultural production. Nonetheless, non-oil real GDP, buoyed by public sector investment and expansion in forestry production, grew strongly in 2002 (by 6.7 percent) for the third year in a row following significant gains in 2000 and 2001 (of about 17 percent and 12 percent, respectively) (Table 1 and Figure 1). However, as new production was insufficient to fully offset declines in aging fields, oil output fell by 1.5 percent, pulling down slightly overall GDP growth—estimated at 3½ percent, virtually the same as in 2001.

Table 1.

Republic of Congo: Selected Economic and Financial Indicators, 2001–08

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Sources: Congolese authorities; and staff estimates and projections.

Saving and investment data are highly preliminary. Balance of payments estimates are being revised extensively, with the help of Fund technical assistance.

Authorities’ definition; equals revenue minus noninterest current expenditure minus domestically financed capital expenditure.

After taking account, for illustrative purposes, of the impact of debt relief on Naples terms for eligible arrears and current maturities during 2004–06.

Figure 1.
Figure 1.

Republic of Congo: Main Economic Trends, 1997—2002

Citation: IMF Staff Country Reports 2003, 193; 10.5089/9781451808537.002.A001

Sources: Congolese authorities; and staff estimates.

7. Average annual consumer price inflation rose from 0.8 percent in 2001 to 3.3 percent in 2002, with prices of transportation and food items fluctuating widely following the supply disruptions. Largely as a result of the euro’s appreciation vis-à-vis the U.S. dollar and domestic inflation exceeding inflation in partner countries (1.4 percent), the real effective exchange rate (REER) appreciated by 3.5 percent during 2002 (Figure 2). While this has partially eroded the competitiveness gains brought about by the 1994 devaluation, the REER remains about 19 percent below its 1993 level.

Figure 2.
Figure 2.

Republic of Congo: Effective Exchange Rates, 1990–2002

(Index, 1990=100)

Citation: IMF Staff Country Reports 2003, 193; 10.5089/9781451808537.002.A001

Sources: Congolese authorities; and IMF, Information Notice System.
Figure 3.
Figure 3.

Republic of Conge—External Debt-Service Payment Profile, 2000–02

(In billions of CFA francs)

Citation: IMF Staff Country Reports 2003, 193; 10.5089/9781451808537.002.A001

Source: Caisse Congolaise d’ Amortissement (CCA).

8. Public finances deteriorated sharply in 2002, owing to a combination of expenditure overruns and an unexpected drop in non-oil revenue (Table 2).1 Notwithstanding buoyant government oil revenue, bolstered by high international prices and bonus and excess oil payments,2 the overall budget deficit widened from about 1 percent of GDP in 2001 to over 8 percent in 2002, while the primary surplus narrowed from 6.6 percent of GDP to 0.1 percent over the same period. Non-oil revenue suffered from poor collection, mainly by customs, as evidenced by rampant fraud and widespread use of ad hoc exemptions, and from economic disruptions. Primary expenditure rose by 2 percentage points to 26 percent of GDP in 2002, driven by spending associated with the general elections, unplanned security-related outlays, and ineffective expenditure control. Large fees associated with oil-collateralized borrowings also contributed to the deterioration of the fiscal position.

Table 2.

Republic of Congo: Central Government Operations, 2001–08

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Sources: Ministry of Economy, Finance, and the Budget; and staff estimates and projections.

Projections for 2004–06 assume debt relief on Naples terms for eligible arrears and current maturities.

9. The fiscal accounts for the period 1999–2002 may have to be revised to fully capture oil revenues. Estimates of oil companies’ fiscal obligations, based on the parameters of the individual production-sharing agreements and the oil revenues reported as received by the treasury, show a discrepancy of CFAF 21 billion (US$30 million, or 1 percent of GDP) for 2002. Staff estimates for (January–December) 1999–2001 that use the same methodology yield cumulative discrepancies of CFAF 174 billion (US$248 million). The government has set up a task force to clarify these discrepancies. The audit of the SNPC’s accounts for 1999–2001, currently under way, should also be helpful in this regard.3

10. With the fiscal balance deteriorating and the servicing of oil-collateralized debt claiming about one-third of total government revenue, external payments arrears on other debt obligations, including to multilateral creditors, continued to accumulate. Besides collateralized debt, the Congo honored only its obligations to the World Bank and the Fund. Although some payments were made to reduce external payments arrears toward the end of 2002, the stock of external debt arrears by year’s end had reached CFAF 2,394 billion (US$3.8 billion, or 114 percent of GDP)4. Facing tight liquidity constraints, in particular during the first nine months of 2002, the Congo drew US$300 million (CFAF 214 billion) under new oil-collateralized loans.

11. The evolution of monetary and credit aggregates in 2002 reflected the government’s large financing needs, restructuring of the banking sector, and foreign exchange inflows. Broad money demand grew by 13 percent over 12 months at end-2002, as public confidence grew in response to progress in commercial bank restructuring, and the need to reconstitute real balances following the sharp contraction registered in 2001 (Table 3). This was particularly pronounced for commercial bank deposits, which increased by 41 percent in 2002. In April 2002, the Banque Internationale du Congo (BIDC) was acquired by Crédit Lyonnais.5 The related transfer of the BIDC’s nonperforming loans, which totaled CFAF 37 billion, to the Caisse Congolaise d’Amortissement (CCA) caused a sharp drop in net credit to the economy in 2001–02 (Figure 4).6 Net credit to the government increased by 9 percent of beginning-of-period money stock in 2002, fully exhausting the margin available under the ceiling on the statutory advances of the Bank of Central African States (BEAC).

Table 3.

Republic of Congo: Monetary Survey, 2001–03

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Sources: Bank of Central African States; and staff calculations.
Figure 4.
Figure 4.

Republic of Congo: Monetary Developments, December 1999—December 2003

(In billions of CFA francs)

Citation: IMF Staff Country Reports 2003, 193; 10.5089/9781451808537.002.A001

Source: Bank of Central African States (BFAC).

12. The external position is estimated to have improved substantially in 2002. Reflecting strong oil and non-oil export revenue growth, the current account surplus is estimated to have reached 2 percent of GDP (a swing from a deficit of 3.4 percent of GDP in 2001) (Table 4). The drawing under oil-collateralized loans led to an improvement in the financial account, while the overall balance of payments deficit narrowed to 1.2 percent of GDP (from 5.1 percent in 2001). However, these estimates remain uncertain in light of statistical data weaknesses, related especially to oil sector operations, and may be subject to revision.7

Table 4.

Republic of Congo: Balance of Payments, 2001–08

(In billions of CFA francs)

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Sources: Bank of Central African States; and staff estimates and projections.

The large figure for 2002 reflects the highly preliminary nature of the estimates.

After taking into account, for illustrative purposes the effects of debt relief on Naples terms for eligible arrears and current maturities in 2004–06.

B. Performance Under the 2002 SMP

13. Performance in 2002 as a whole under the SMP was disappointing, with most targets missed (Table 8). However, there was a significant turnaround in the fourth quarter of the year in line with the understandings reached with the authorities in November 2002.8 For the year as a whole, non-oil revenue fell 1.5 percent of GDP short of target, and current expenditure exceeded the program target by 8.4 percent of GDP, with overruns in virtually all categories, except wages. Capital expenditure was contained within the target, owing to a significant shortfall in foreign-financed investment and a deceleration of project execution following the freeze introduced in the fourth quarter.9 Apart from the negative impact of the unforeseen security-related outlays to fight the rebels, repair the rails, and replace the rolling stock damaged in the attacks, the expenditure overruns largely reflected weaknesses in expenditure control and management and program monitoring, as well as the heavy cost of new oil-collateralized borrowings and related hedging transactions undertaken in late 2001 and in 2002.

14. Progress in implementing structural reforms was mixed (Table 9). Only two structural indicators out of 14 were met by the expected date. The financial audit of the SNPC was launched in March 2003, eight months later than envisaged. The plan for restructuring the remaining commercial bank (Crédit pour l’Agriculture et l’Industrie et le Commerce-CAIC), was also delayed, and the privatization is now expected to be completed by end-June 2003. The public enterprise privatization program has been beset by organizational problems and made little headway in 2002. The petroleum products distribution network was privatized in August 2002, but the investment program to repair and upgrade storage facilities and retail outlets awaits clarification of land titles and indemnity payments to employees. Similarly, a management contract for the water utility (SNDE), awarded in mid-2002, must await the completion of the due diligence process to determine the cost of rehabilitating the delivery network before it can be implemented.

15. Increased fiscal effort in the fourth quarter of 2002 produced results that were close to those expected under the program (Figure 5). The government began to address squarely the weaknesses in budget execution that had characterized much of 2002: it froze new expenditure commitments as of mid-November 2002; reviewed all tax exemptions;10 and stepped up tax compliance enforcement.

Figure 5.
Figure 5.

Republic of Congo: Fiscal Performance, 2002

(Quarterly, in billions of CFA francs)

Citation: IMF Staff Country Reports 2003, 193; 10.5089/9781451808537.002.A001

Sources: Congolese authorities; and staff calculations.

IV. Medium-Term Outlook and Vulnerabilities

16. In order to inform the discussions and provide a setting for an overview of the medium-term macroeconomic framework, the staff prepared two alternatives to the baseline scenario (pessimistic and optimistic assumptions regarding oil prices) that demonstrated the vulnerability of the economy to developments in the oil market. The results, which the authorities found useful and a realistic basis for policy discussion, are presented in Table 6.

17. The baseline macroeconomic scenario for 2003–08 is based on the authorities’ 2003 budget but uses the March 2003 World Economic Outlook (WEO) assumptions.11 The WEO average international oil price declines from US$31 per barrel in 2003 to US$25 in 2004, US$22 in 2005, and US$21 thereafter. Non-oil growth is expected to average 5–6 percent annually, within a range consistent with labor force growth of 3 percent and an investment-GDP ratio of 20–25 percent. Inflation is projected to average 2 percent annually, as domestic demand is held in check by the fiscal retrenchment and the decline in import prices in 2003 following the strengthening of the euro against the U.S. dollar. The projected inflation rate thus remains in line with the WEO world inflation outlook and implies a broadly stable real exchange rate from 2004 onward.

18. The baseline scenario assumes that the government stays the course and maintains fiscal discipline after the strong adjustment undertaken in 2003. With Moho and Bilondo, the new fields coming onstream in late 2005, fiscal oil revenue will recover by 2006 to its 2002 level of close to CFAF 400 billion (19 percent of current GDP). Primary expenditure is projected to grow at an average annual rate of 2.4 percent in real terms between 2003 and 2008, about half the rate of non-oil GDP growth, while non-oil fiscal revenue will be maintained at slightly above 20 percent of non-oil GDP. While reducing the overall non-oil fiscal deficit considerably, the baseline scenario would still leave it above a level corresponding to permanent fiscal oil income, which would be consistent with long-term fiscal sustainability (Figure 6).12

Figure 6.
Figure 6.

Republic of Congo: Long-Term Fiscal Sustainability, 1992–2008

(In millions of constant 2001 U.S. dollars)

Citation: IMF Staff Country Reports 2003, 193; 10.5089/9781451808537.002.A001

Sources: Congolese authorities; and Fund staff calculations.1/ A constant stream of income that would be generated in perpetuity from the oil wealth remaining in a given year. It is the amount that could be used to finance non-oil fiscal deficits on a sustained basis.

19. Nevertheless, financing requirements will remain large, reflecting heavy scheduled external debt-service obligations (48 percent of government revenue in 2003, declining to 35 percent in 2006), as well as the projected phaseout of the central bank financing of budget deficits in Central African Economic and Monetary Community (CEMAC) countries. As a result, financing gaps from 2004 onward are projected to range from 2 percent to 6 percent of GDP annually, even after taking into consideration, for illustrative purposes, debt relief for reschedulable debt obligations falling due in 2004–06.13

20. The pessimistic scenario assumes a steady drop in oil prices, coupled with a delay in the development of new fields beyond the projection horizon. For 2003, this scenario corresponds to the authorities’ budget assumptions. The limited scope for fiscal adjustment over and above what is envisaged under the 2003 budget underscores the need for additional debt relief and increased external financing. The optimistic scenario, meanwhile, assumes that the current baseline price of US$26.50 per barrel for 2003 will remain constant in real terms throughout the projection period. Under an unchanged policy stance, the financing gap indicated for 2003–05 would turn into a small financing surplus by 2006.

V. Report on the Discussions

21. Against this background, the discussions focused on (i) reasons for the disappointing performance under past Fund-supported programs and SMPs; (ii) the prospects and main challenges facing the Congo in 2003 and over the medium term, with emphasis on long-term fiscal sustainability in the face of stagnating and possibly declining oil production; and (iii) the country’s long-term development challenges, namely, the promotion of non-oil sector activity and poverty reduction.

22. There was a convergence of views on the major issues discussed. Given the difficult legacy of the lax policies of recent years, the progressively deteriorating fiscal position, and the recurring slippages under the consecutive SMPs since 2000, the authorities indicated that fiscal consolidation was their key near-term objective. The staff concurred that immediate steps were needed to shore up public finances and underscored the importance of creating the necessary conditions for achieving medium-term macroeconomic stability and improving prospects for growth of the non-oil economy. These actions will include revitalizing the structural reform agenda, reforming and streamlining the public sector, and developing greater pro-business acumen in government interactions with the private sector.

A. Key Lessons and Main Challenges

23. The staff held discussions with a broad spectrum of civil society, including representatives of labor unions, employers’ associations, nongovernmental organizations (NGOs), the church, and the bankers’ association. The discussions revealed broad public support for the government’s efforts to put public finances on a sound footing and improve governance and transparency in the use of public resources. Still, the staff was reminded on several occasions that breaking entrenched habits would present a difficult challenge for the new government and that progress might not come as quickly as desired.

Key lessons

24. Pressures from sociopolitical imperatives. The authorities recognized that the objectives set under their post-conflict program had been only partially met, as sociopolitical priorities during the postwar transition period had taken precedence over considerations of fiscal prudence.

25. The legacy of the past has played a role in the Congo’s poor performance. Decades of centrally planned economic management, episodes of civil conflict, and disruptions to the normal functioning of the private and public sectors have weakened the country’s institutions and undermined the rule of law, leaving a legacy of governance problems.

26. Lack of broader program ownership. Stakeholders indicated that they had not been involved in the discussions leading to the adoption by the government of the programs supported by the Bretton Woods institutions. In contrast, the government used the 2003 budget debate effectively to generate support for its policies of revenue centralization and budget discipline. The staff recommended that the authorities build on this success by introducing more informative budget documentation along the lines of the recommendations in the fiscal transparency code. More generally, the staff encouraged the authorities to systematically involve civil society in their policy debate and indicated that the PRSP process should provide a good opportunity to ensure the broadest participation possible. The staff welcomed the recent submission to parliament, at the government’s initiative, of proposed production-sharing contracts for new oil fields. Although the decision by parliament represents a temporary setback for the development of the new oil reserves,14 it attests to the keen interest in oil sector policy matters in the Congo and serves as a reminder of the importance of close consultation and information sharing with all stakeholders.

27. The success of future programs will also hinge on the authorities’ ability to demonstrate an equitable burden sharing of the necessary sacrifices. A common theme that emerged from the discussions with representatives of civil society was that, despite the adverse impact of the 1994 devaluation of the CFA franc and the demand-constraining measures introduced thereafter, the population was prepared to endure the hardship of adjustment if the related measures were clearly explained and all segments of society shouldered their share of the burden.15 The need to have an adequate social safety net in place to protect the most vulnerable groups was also emphasized. Finally, stakeholders were of the view that, in order to sustain the reform momentum and public support for its strategy, the government would need to demonstrate some benefits of that strategy in the near term.

Challenges for the future

28. In addition to the immediate task of ensuring near-term fiscal consolidation, all parties agreed that the key medium-term issues that needed to be addressed were the following:

  • long-term fiscal sustainability in the face of stagnating and possibly declining oil production, and avoidance of procyclical public spending;

  • transparency and accountability in oil sector transactions and improvement in governance;

  • promotion of non-oil sector activity; and

  • sustained efforts at poverty reduction.

B. Fiscal Policy

29. With oil price fluctuations exerting an important influence on the flow of income in the Congo’s economy, it is imperative to strengthen the fiscal framework, with a view to turning fiscal policy into a stabilizing factor. This was not the case in the past, as public spending was closely correlated with oil export revenues and tended to reinforce, and possibly trigger, movements in private spending. The staff emphasized that any progress in safeguarding macroeconomic stability and creating conditions for broad-based economic growth and poverty alleviation would require a clean break with the stop-and-go policymaking of the past decade.

30. Fiscal policy remains a cornerstone of the government’s efforts to restore macroeconomic stability. The ambitious fiscal adjustment proposed in the 2003 budget should provide the authorities with much-needed room to maneuver and liberate them from daunting day-to-day cash management problems, shifting their focus toward better budget planning and implementation within a medium-term framework.16

31. While the short-term effect of government measures will be crucial for attainment of the 2003 budget objectives, it is equally important to consider their longer-term sustainability. In this regard, the adverse reaction by forestry companies to the proposed overhaul of the forestry tax regime could jeopardize attainment of the medium-term revenue objectives.17 The staff argued that the authorities also needed to consider ways of drawing the large informal sector into the mainstream, such as through initially low tax rates so as to enhance compliance and create a culture of paying taxes. Finally, the government’s timely payment of its own bills and preparation of a specific plan to clear arrears to suppliers would send an important signal about its commitment for change.

32. Public expenditure should be planned for a multiyear period and guided by prudent medium-term assumptions about international oil prices. Greater prominence should be accorded to the non-oil fiscal balance, which excludes the effect of volatile oil revenue, both as a policy target and indicator of fiscal performance. Multiyear spending plans could be usefully complemented by some form of a price-based policy rule under which temporary excess oil revenue would be placed in a stabilization fund. The 2003 budget assumption of an oil price of US$22 per barrel (North Sea Brent) corresponds to a long-term historical average (Figure 7) and, given the recent high level of international oil prices, imparts a welcome pro-saving bias to the authorities’ budget. Going forward, systematic adoption of appropriately conservative price assumptions would ensure that a pro-saving bias is maintained. This would help promote longer-term fiscal sustainability and the buildup in precautionary reserves needed to make a price-based policy rule operational.

Figure 7.
Figure 7.

International Oil Price Evolution

(Constant 2001 U.S. dollars per barrel)

Citation: IMF Staff Country Reports 2003, 193; 10.5089/9781451808537.002.A001

Source: BP, Statistical Review of world Energy; and staff calculations.#1653817 v8 - COG—SR M03-1 June 18, 2003 (6:58 PM)

33. The authorities were receptive to the possibility of exploring, over time, a price-based policy rule along with a stabilization fund. Such a policy rule would need to be supported by adequate safeguards to ensure that any budget savings realized under it would not heighten spending pressures. In contrast, the staff and the authorities agreed that an oil savings fund, designed to promote generational equity in the use of oil revenues, would not fit well in the Congo’s circumstances—large external debt and existing institutional weaknesses—at present. Furthermore, practical difficulties and pitfalls in setting up and administering oil funds and the negative experience of such funds in some other developing countries would also tend to weaken arguments for using an oil fund as an instrument to achieve greater intergenerational equity. Rather, at least in the near term, any realized savings should be used to accelerate repayment of the high-cost debt and reduce the stock of external and domestic arrears.

C. Transparency in the Transactions of the Oil Sector

34. Ensuring an effective, transparent stewardship of oil resources that would bring benefits to society as a whole represents an important challenge that the country is beginning to address (Box 1). Government, parliament, and civil society appear to be finding common ground in advancing the agenda for reform and greater transparency. The oil sector, despite an uncertain production outlook, will likely remain the key contributor of revenue to the state treasury. Therefore, the focus on full mobilization of oil revenue needs to remain an essential part of the government’s efforts to strengthen its fiscal position. The system of oil revenue monitoring—up to the point of the marketing of the state’s share of oil by the SNPC and transfer of the proceeds to the treasury—needs to be strengthened.

35. The government also needs to explore ways of turning the SNPC into a net contributor to the budget. None of the SNPC’s after-tax income (US$43 million in 2001) has been transferred to the budget. The increases in the SNPC’s stake in oil ventures and its expansion into non-oil sector activities, financed largely from retained earnings, deprive the treasury of potentially significant sources of revenue.18 One way to ensure a steady flow of at least part of the SNPC’s profits would be by formalizing a dividend policy.

Transparency in the Oil Sector

Transparency is needed for the following reasons:

  • It is an essential first step toward more effective management of oil revenues and their use in the interests of society as a whole—a task made urgent by the disparity between the Congo’s human development indicators (see Figure 8) and the size of pure economic rent generated in oil production.

  • Adherence to high standards of transparency and accountability, by demonstrating good governance, should help foster societal consensus at home and earn the Congo greater credibility abroad—essential for attracting foreign investors and donors’ assistance.

  • The oil fiscal regime under which the government collects its revenue in kind—largely through the national oil company (the SNPC)—is prone to misuse of oil resources. For example, the direct utilization of oil fiscal revenues for a predetermined purpose undermines the principle of centralized cash management.

  • The SNPC has taken on multiple roles as oil tax collector, marketer of the government’s share of oil, contractor of loans on the government’s behalf, and disburser of funds for some public investment projects.

Transparency could be achieved through:

  • well-designed reporting and accounting systems (from the delivery of oil to the point of the transfer of the proceeds of the sales) that ensure that all revenues due (the government’s share of profit oil, taxes, and other payments) are received by the treasury;

  • timely, comprehensive, and accurate financial reporting by all parties—the government, private operators, and the SNPC;

  • the conducting of regular external audits of the SNPC’s consolidated financial statements by an internationally recognized auditing firm;

  • completion of annual financial audits of the private companies, as stipulated under the production-sharing agreements—to be carried out by government or an appointed auditor;

  • completion of an in-depth evaluation of the effectiveness of the June 2001 Convention (being carried out by the Ministry of Finance); and

  • publication by oil companies of all payments made to the government each year under the Publish What You Pay (PWYP) campaign.

Steps taken to date to improve transparency include the following:

  • the phasing out of the earmarking of oil revenue and the centralization of all resources in the state budget, and submission of all expenditure, including capital to budget procedures (structural indicator in the 2002 SMP);

  • the launching of the external audit of the SNPC’s 1999–2000 accounts and 2001 consolidated accounts (structural indicator in the 2002 and 2003 SMPs); and

  • preparation of the World Bank-financed review of operations in the entire oil sector.

36. The staff urged that the timely production of consolidated financial statements—following international accounting principles and subject to external audits—become standard practice for the SNPC. The SNPC’s 2001 consolidated financial statements and their external audit—currently under way—are an important step forward in establishing normal governance for the state’s participation in the oil sector. The 2002 consolidated statements are to be produced by the June 2003 legal deadline. The staff suggested that these statements should be the basis for strengthening the SNPC’s accounting practices and evaluating its role in the economy against the backdrop of the government’s public investment, privatization, and poverty reduction strategies. While other state-owned enterprises are being privatized, the SNPC is expanding, with major investments not only in upstream but also in downstream oil operations, and even outside the oil sector—a trend that seems to run counter to the SNPC’s stated mandate. The authorities explained that they used the SNPC to underwrite economic ventures in situations where domestic participation was desirable but other potential domestic private investors were not sufficiently strong. They would use their upcoming in-depth evaluation of the experience with the June 2001 Convention between the government and the SNPC as an opportunity to reflect on the range of the company’s operations.

37. The staff concluded that a rigorous, routine verification of oil sector revenues was urgently needed. Given that most of the government’s receipts are in kind, this process must not only compare volumes received with contractual and tax obligations, but also cover the subsequent marketing of the oil and the transfer of the funds to the treasury. The authorities agreed, stating that all necessary information was available and that the institutional capacity could be readily developed.19 The mission proposed that the envisaged evaluation of the convention be used to examine the SNPC’s marketing strategy to ensure that it was being done in the government’s best interest.

38. Transparency in the SNPC’s transactions has improved but remains problematic. The authorities provided details on the volume and terms of the oil-collateralized debt transactions, the absence of which the staff identified during the 2001 Article IV consultation discussions as a major impediment to its attempts to evaluate oil sector developments. The government’s public affirmation in the context of the 2003 budget not to contract any new such debt will serve to strengthen its commitment.

39. The review of operations in the entire oil sector should also help improve transparency. The planned review, to be carried out with the assistance of the World Bank by end-2003, has been accepted by all parties involved and will help enhance the effectiveness of the government’s oversight of the sector. The staff discussed with oil company representatives and government officials international initiatives for improving oil revenue transparency, in particular the Publish What You Pay (PWYP) campaign. Company representatives raised concerns about confidentiality clauses in their contracts that prevented disclosure.

D. Governance

40. The staff agreed with the authorities on the importance of combating fraud and corruption. The authorities’ anticorruption program—still in its early stages—will stress prevention as much as sanctions. It will include a public relations campaign and a participatory process for designing an anticorruption law, in addition to targeted enforcement actions. The staff recommended that any new legislation be properly aligned with the anticorruption conventions under preparation in the United Nations and the African Union. It welcomed the fact that the Republic of Congo was one of the first ten countries to sign, in March 2003, onto the African Peer Review Mechanism of the New Partnership for Africa’s Development (NEPAD), which aimed to strengthen political and economic governance through voluntary self-assessments.

E. Monetary and Financial Sector Issues

41. Monetary and credit policies are conducted by the BEAC in the regional context of the CEMAC.20 The central objective is to ensure the stability of the common currency. In principle, the peg to the euro leaves no scope for an independent monetary policy. Nevertheless, the existence of administrative frictions means that capital mobility is not perfect, and, as a result, administered and market rates of the CEMAC zone do not track closely euro-area rates.

42. In 2002, the main challenge for monetary policy in the CEMAC zone was the excess liquidity in the banking system. The BEAC addressed the problem by gradually raising reserve requirements to 6.0 percent and 4.0 percent for demand and term deposits, respectively, by end-December 2002, from 2.5 percent and 1.5 percent in December 2001.21 However, the effectiveness of monetary policy continues to be constrained by the lack of an active interbank market and by the nature of the monetary programming exercise, which is done on a country-by-country basis. The planned elimination of the BEAC’s monetary financing of government deficits, to be accompanied by the establishment of a regional government securities market, should help improve the effectiveness of monetary policy. The phaseout will start on January 1, 2004 and is scheduled to take ten years. In that context, the staff, in its discussions with BEAC and Ministry of Finance officials, emphasized fiscal policy credibility and a well-designed government securities issuance program as prerequisites for a receptive market.

43. Despite the near completion of the restructuring and privatization of commercial banks, their financial health remains fragile and financial intermediation shallow. The authorities are poised to complete the restructuring and privatization of commercial banks by June 2003.22 Yet data from the regional banking supervision agency (COBAC) indicate that only one out of the four commercial banks in operation at end-December 2002 met all prudential ratios fully. Also, insurance companies and the two social security institutions face acute financial difficulties, entailing serious contingent liabilities to the public finances.

44. The Congo’s economy remains largely cash-based despite the progress of the past two years in restoring confidence.23 Commercial banks service only a small segment of the market—mainly branches of foreign-owned oil and logging companies that need to make transfers or receive payments from abroad—leaving a large number of customers without access to banking services. Broader access to commercial banking services would facilitate the development of a large number of small- and medium-sized enterprises. For this to happen, weaknesses in the legal and judicial system—an ineffective bankruptcy law and the lack of a functional land title system—that undermine the ability of creditors to enforce their rights vis-à-vis debtors must be forcefully addressed. Microfinance institutions (the Mutuelles congolaises d’épargne et de crédit—MUCODECs) have so far offered a viable option for some small businesses, but their development is constrained by internal problems (Box 2).

Overview of Microfinance Institutions in the Republic of Congo

Microfinance institutions grew strongly during the 90s. The Mutuelles Congolaises d’Epargne et de Crédit (MUCODEC) enjoyed a remarkable development while most traditional banks faced recurrent difficulties and had to be restructured. The MUCODEC weathered the financial crisis and the prevailing sociopolitical turmoil. Their resources were safeguarded when the monetary authorities permitted, on a temporary basis, the MUCODEC to deposit their resources directly with the central bank. Financial and technical assistance provided by the French Cooperation and the group Crédit Mutuel (CICM) also played an important role in the MUCODEC’s financial stability.

Deposits with the MUCODEC more than doubled, rising to CFAF 22 billion at end-2002 from CFAF 9 billion in 1998 (Figure 1). However, lending was not commensurate with the increase in deposits, as the MUCODEC adopted a cautious lending policy stance and shielded their operations from political interference. The bulk of their lending operations and activities were concentrated in urban areas (84 percent of the outstanding loans were extended to members in Brazzaville and Pointe-Noire) (Figure 2).

Figure 1.
Figure 1.

Deposits and Loans, 1998–2002

Citation: IMF Staff Country Reports 2003, 193; 10.5089/9781451808537.002.A001

Figure 2.
Figure 2.

Geographic Distribution of Loans in 2002

(in percent)

Citation: IMF Staff Country Reports 2003, 193; 10.5089/9781451808537.002.A001

Credits extended by the MUCODEC financed consumption. The short-term nature of the MUCODEC’s resources was a major impediment to their ability to extend medium-and long-term credits. Thus, 72 percent of the volume of credits distributed at end-2002 was for consumption purposes. By meeting the consumption needs of its members, the MUCODEC contributed to the fight against poverty. (Figure 3).

Figure 3.
Figure 3.

Distribution of Loans by Sector in 2002

(in percent)

Citation: IMF Staff Country Reports 2003, 193; 10.5089/9781451808537.002.A001

The microfinance institutions could contribute further to the deepening of financial intermediation in the Congo. The ratio of MUCODEC deposits to broad money increased from 4.4 percent in 2000 to 7.4 percent in 2002, as the MUCODEC brought financial services to segments of the population that do not have access to traditional banks. The recovery rate of credit is very high, with nonperforming loans virtually nonexistent, in sharp contrast to the banking system. Backed by a combination of a prudent lending policy and a set of guarantees securing loans, the loan recovery rate at the MUCODEC was 70 percent on average during 2000–02, despite the prevailing socioeconomic context. In contrast, nonperforming loans of commercial banks reached 65 percent in 2000 before the banking restructuring program began.

Much remains to be done to enhance microfinance institutions’ contribution to financial deepening and the fight against poverty. Under the Central African Economic Monetary Community (CEMAC) harmonized regulations adopted in 2002, the regional banking supervision agency (COBAC) exercises the external control of the sector. However, to achieve better results, the MUCODEC would need to: (i) strengthen their internal control; (ii) upgrade their information system; and (iii) enhance the capacity of their personnel, as currently only 4 percent of the personnel meet qualification requirements. With the return of the population to the areas recently affected by fighting, the MUCODEC could further extend their reach by promoting income-generating activities.

45. A regional anti-money-laundering agency (Groupe d’action contre le blanchiment d’argent en Afrique centrale—GABAC) has been set up by CEMAC. GABAC’s mandate is to develop and coordinate measures to be implemented by member countries to combat money laundering and the use of proceeds from criminal activities, and to protect the financial sector from the impact of these activities. Appropriate domestic regulations still need to be introduced to ensure full compliance with international agreements.

F. Sectoral Policies and Other Issues

Sectoral policies and poverty alleviation

46. Although well endowed with natural resources, including significant petroleum reserves and abundant forestry resources, the Congo has not succeeded in converting this potential advantage into a measurable advancement in terms of human development. In fact, over the past decade, the Congo fell behind other developing countries in per capita GDP growth performance (Figure 8). The Congo also underperformed vis-à-vis its peers in terms of human development and poverty became widespread.24

Figure 8.
Figure 8.

Republic of Congo: Growth and Human Development Index

Citation: IMF Staff Country Reports 2003, 193; 10.5089/9781451808537.002.A001

Sources: IMF International Financial Statistics; and United Nations Development Program1/ Includes only countries for which data are available for all periods.#1653817 v8-COG—SR M03-1 June 18, 2003 (6:57 PM)

47. Poverty reduction should be placed high on the agenda. The staff urged the authorities to give greater prominence to social sectors in their economic strategy. The authorities recognized that little attention had been given to social outlays, and that poverty had become widespread in a period marked by armed civil strife, and the destruction of education and health infrastructures. They made a commitment to take steps to restructure the composition of expenditure toward the priority sectors (education, health, and basic infrastructures), starting with the 2004 budget.

48. An interim poverty reduction strategy paper (I-PRSP), which will be the framework for the authorities’ poverty reduction efforts, is under preparation. The draft I-PRSP has benefited from the United Nations Development Program (UNDP) and World Bank assistance and will be finalized in the coming months. The staff underscored the paramount importance of following a participatory approach in the development of the strategy, with a view to fostering ownership and ensuring successful implementation. It would be essential to link the poverty reduction strategy with the macroeconomic objectives and to develop a statistical database of social indicators to facilitate diagnosis and program design and monitoring.

Structural reforms and sources of growth

49. With future oil prospects uncertain, the authorities recognized the growing urgency of creating favorable conditions for investment and growth outside the oil sector. Forestry is an important prospective source of growth over the medium term (Box 3). The staff noted that the main short-term risk to further expansion of the industry had been the logging companies’ adverse reaction to the government’s efforts to revise the forestry taxation system; in that connection, the authorities needed to strengthen their partnership with the private sector so as to create a constructive business environment.

50. The authorities are focusing their efforts on the development of basic infrastructure and improving public services. At the regional level, this includes promoting an environment conducive to private sector development through the promulgation of the CEMAC’s investment charter, supplemented at the national level by sectoral codes. They also envisage reviving the Congo’s role as a regional transportation hub for maritime, river, and road traffic and with air transport links. The rehabilitation of the supporting infrastructure—in particular, reliable provision of water, electricity, and telecommunications—is critical to further economic development.25 In this context, the staff recommended that the authorities speedily implement their privatization program, and urged them to give greater consideration to potential investors’ capacity and readiness to undertake the investment necessary to rehabilitate decrepit facilities and restore them to full operation. The staff noted the potential for non-oil sector GDP expansion (see Box 4), emphasizing the need to streamline government rules and procedures and eliminate those that unduly burdened private sector operations.

G. External Sector

51. The Congo’s balance of payments remains heavily dependent on oil and is vulnerable to developments in the international oil market. Despite a steady rise in exports of timber and wood product exports and the emergence of nontraditional products (mainly sugar), oil remains the dominant export, accounting for close to 90 percent of total export receipts in 2002. In view of the gradual erosion of the competitiveness gains and the need for greater diversification of the productive base (see para. 7), the staff recommended that additional analytical indicators of competitiveness (unit labor cost, productivity, etc.) be developed and monitored. The authorities indicated that this would be undertaken in the context of a revamping of the country’s statistical apparatus.

52. The trade and payments system is largely free of restrictions. The Fund index of trade restrictiveness is estimated at 3 (on the standard 1–10 scale, with 1 being the least restrictive), with a simple average tariff rate of 16 percent. Within the CEMAC, the Congo is committed to regional integration, including trade liberalization and tax harmonization. The differential value-added tax (VAT) treatment of selected products of basic consumption-—exempt status for domestic production and 8 percent rate for imports—has been discontinued, with the rate set at 8 percent for both categories. While the payments system is relatively liberal, economic operators complained about the recent reduction in the threshold for transfers (to CFAF 100 million, or US$150,000) requiring authorization from the BEAC head office—a procedure that may take up to two weeks.26

Forestry Sector Policy Issues

Forests are Congo’s second most important natural resource after oil, covering 20 million hectares, of which 14 million are readily exploitable. This stock of forestry resources places the Congo in a more favorable position than neighboring countries Cameroon and Gabon. Hence, forestry offers important opportunities for economic diversification as the security situation improves, especially in the southwest.

Forestry output has been growing rapidly, reaching 1.1 million cubic meters in 2002 from 0.6 million cubic meters in 2000. This rapid growth is expected to continue, with total production projected at 2.5 million cubic meters by 2005. Also, man-grown forestry output, mainly eucalyptus, has been expanding rapidly. Employment in the forestry sector in 2002 stood at 4, 100, roughly double that of 2000, and another 50 percent increase is anticipated by 2005.

The government has targeted forestry as a sector that can help raise the level of non-oil tax revenue. Following a study, carried out under the auspices of the World Bank, that showed forestry taxation in the Congo to be lower than in neighboring countries, the government decided as of 2003 to increase overall taxation by raising a number of rates and the fob values to which they are applied. At the same time, measures were taken to reinforce the principle of centralization of all revenues in the budget. Assuming unchanged production, the measures are expected to raise annual forestry tax revenue from around CFAF 6 billion in 2002 to CFAF 16 billion in 2003.

This projection is consistent with industry estimates of a tripling of the tax bill for a typical enterprise. The industry criticized both the extent and speed of the tax increase, arguing that transportation costs in the Congo were high because of the security situation, and that their operations generated valuable employment in underdeveloped regions.

The increase in forestry taxation is a source of controve