I. Introduction

1. The Republic of Congo (hereafter “the Congo”),¹ the fourth-largest oil producer in sub-Saharan Africa, is emerging from three successive civil conflicts in the 1990s. Once classified as a lower-middle-income economy, the Congo has experienced an almost continuous decline in per capita income over the past 15 years or so. This negative trend coincided with the overvaluation of the CFA franc in the second half of the 1980s and early 1990s, an acceleration of rural-urban migration in the 1980s, and three conflicts in the 1990s. In addition, non-oil output growth has been constrained by the heavy dependence on the oil sector, poor infrastructure, and high cost of public utilities, as well as weak institutions, poor governance, and a legacy of central planning and associated antibusiness bias.

2. The Congolese economy is dominated by the oil sector, which accounts for about 50 percent of GDP, 70 percent of government revenues, and 80 percent of exports. Oil production is mainly located offshore and managed by joint ventures between foreign companies and the national oil company (Société Nationale des Pétroles du Congo, SNPC). Ancillary oil-related services are dominated by foreign groups, and the bulk of their supplies are imported. The non-oil sector is composed of a mixture of forestry, traditional agriculture, services, and a relatively large public administration. The Congo’s forests, which cover about half of the country, account for less than 5 percent of GDP but constitute almost two-thirds of non-oil exports. Agriculture employs about one-third of the active population and accounts for another 5 percent of GDP. It consists mainly of subsistence activities by smallholders, with relatively little commercialization (in part due to poor access roads) and limited export activities. Food imports, which have increased significantly since the 1980s, account for about one-third of total imports.

3. The Congo was under a socialist one-party system and the economy was centrally planned during 1964–90. The transition to a democratic state came through a tumultuous, conflict-ridden phase in the 1990s; three successive and intense conflicts destroyed physical capital, displaced thousands of individuals, and further weakened institutions. Recent developments on the political front are encouraging against the background of recurrent conflicts in the 1990s. Under the umbrella of peace, the Congo completed a four-year political transition period, held democratic elections, and installed the full complement of democratic institutions required by the Constitution.

4. Accompanying the recent positive momentum on the political front, economic activity in the non-oil sector has picked up and inflation has decelerated. Nonetheless, key social indicators have continued to deteriorate, and the external debt burden is heavy. Building on the momentum generated by the improvements on the political and economic fronts, the government has begun focusing on economic management.

5. The rest of this paper is organized as follows: Section II outlines the recent developments in the political and security situation; Section III reviews economic performance during 1970–2003, including in the context of Fund-supported programs, Section IV reviews recent developments in public finance management, Section V examines the constraints on growth and poverty reduction, Section VI analyzes the sources of economic growth during 1970–2003, Section VII discusses the feasibility of an oil fiscal rule, and Section VIII notes some key lessons and challenges for the Congo.