Republic of Congo: Staff Report for the 2004 Article IV Consultation and a New Staff-Monitored Program
Author: International Monetary Fund
Publication Date:
02 Aug 2004
eISBN:
9781451808544
ISBN:
9781451808544
Language:
English
Keywords:
ISCR; CR; oil revenue certification; PRGF negotiations; government; implementation of the staff-monitored program; oil revenue; government arrears-GDP ratio; renewed determination; government import; debt service; Oil; gas and mining taxes
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This paper examines Congo’s 2004 Article IV Consultation and New Staff-Monitored Program (SMP). In the context of improved security, the pace of economic activity in the non-oil sector has increased. Non-oil real GDP increased by about 10 percent per year on average during 2000–03. Consumer price inflation decelerated significantly in the postwar period. The fiscal position in 2003 improved from the exceptionally poor performance of 2002, but the underlying fiscal effort was weak relative to the 2003 budget.

Abstract

This paper examines Congo’s 2004 Article IV Consultation and New Staff-Monitored Program (SMP). In the context of improved security, the pace of economic activity in the non-oil sector has increased. Non-oil real GDP increased by about 10 percent per year on average during 2000–03. Consumer price inflation decelerated significantly in the postwar period. The fiscal position in 2003 improved from the exceptionally poor performance of 2002, but the underlying fiscal effort was weak relative to the 2003 budget.

I. Introduction

1. The Congo is emerging from three intense civil conflicts in the 1990s. Once classified as a lowermiddle-income economy, the Congo has experienced a continuous decline in per capita income over the past 15 years or so (see accompanying figure). This negative trend coincided with the overvaluation of the CFA franc in the second half of the 1980s, three conflicts in the 1990s, an acceleration of rural to urban migration in the 1980s, and continuing institutional weaknesses.

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Republic of Congo and Comparator Regions: Per Capita GDP, 1965-2001

(1995 U.S. dollars)

Citation: IMF Staff Country Reports 2004, 232; 10.5089/9781451808544.002.A001

2. The post-conflict period ushered in by the 1999 cease-fire agreement has been conducive to the installation of democratic institutions but, thus far, has not been accompanied by the strict implementation of economic programs. Over this period, the program launched in November 2000 under the post-conflict emergency assistance and three subsequent staff-monitored programs (SMPs) have not been successful in laying the foundations for moving to possible support under the Poverty Reduction and Growth Facility (PRGF). Nevertheless, the combination of a steadily improving security situation and some encouraging results under the 2003 SMP have generated cautious optimism that a virtuous circle of political stability and economic reform has been set in motion.

3. The World Bank has also been involved in Congo’s postwar economic recovery efforts. Currently, an Economic Recovery Credit amounting to US$30 million is under preparation. Appendix II summarizes Congo’s relations with the World Bank Group.

II. Political, Social, and Economic Background

4. The enormity of the destruction left by the successive and intense rounds of civil wars (1993, 1997, and 1998–99) has been revealed as the security situation improved. Key social and economic indicators have deteriorated or stagnated in the 1990s, and the external debt burden is heavy (see Table 1 below). Over 70 percent of the population lives below the poverty line, according to World Bank estimates.

Table 1.

Republic of Congo: Selected Economic and Social Performance Indicators, 1980-2003

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Sources: Congolese authorities; and staff estimates and calculations.

Noninterest current expenditure plus domestically financed investment.

In percent of the number of children of secondary school age.

In percent of the number of children under 12 months for immunization against diphtheria, tetanus, and polio.

5. Recent developments on the security front are helping to consolidate the stability and peace achieved by the 1999 ceasefire and the 2002 elections:

  • A March-2003 peace accord with the remaining rebel group, recommitting both sides to the terms of the 1999 cease-fire, was followed by the approval in August of amnesty provisions for both rebel and government combatants.

  • With security restored in the area surrounding Brazzaville—the Pool region—the reliability of the vital rail link between Pointe-Noire (port city) and Brazzaville (administrative capital) has improved.

  • In November 2003, President Sassou-Nguesso signed into law the program for demobilization, disarmament, and reinsertion of former combatants.

6. To help convert these gains into lasting political stability, efforts are under way to strengthen the institutional framework by nominating officials and allocating budgetary resources for the Court of Accounts, the Economic and Social Council, and the Constitutional Court. The authorities stated that the bulk of the spending on post-conflict reconstruction, security, and elections was being financed from their own resources and oilbacked borrowing. They explained that a large part of the discrepancy in oil revenues recorded during 1999–2001 (about CFAF 174 billion) was used outside the usual budgetary process, principally to finance reconstruction and humanitarian projects, as well as sovereignty-related outlays, such as elections, security, and national reconciliation (Box 1).

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Republic of Congo: Selected Economic Indicators, 1970-2003

(Period average; in percent)

Citation: IMF Staff Country Reports 2004, 232; 10.5089/9781451808544.002.A001

7. The onset of peace in 1999–2000 boosted economic activity and contributed to macroeconomic stability during 2000–03 (Table 1 above; and Table 7). Non-oil real GDP increased by about 10 percent per annum on average during 2000–03. Consumer price inflation decelerated significantly, helped by a more reliable supply from Pointe-Noire to Brazzaville and a strengthening of the euro. The real effective exchange rate in the postconflict period remains about 10–15 percent below its pre-1994 devaluation level, despite the recent rise in the terms of trade and the strengthening of the euro (see accompanying figure).

Table 2.

Republic of Congo: Central Government Operations, 2000-03

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Sources: Congolese authorities; and Fund staff estimates.

Domestic revenue (excl. grants) minus primary expenditures.

Table 3.

Republic of Congo: Budget Law and Execution, 2003

(In percent of GDP)

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Sources: Congolese authorities; and Fund staff estimates.

Excluding foreign loans to finance investment.

Includes an amount of CFAF 34 billion that was automatically transferred to the Nkossa field (in line with a 2001 agreement on the allocation of previous losses on oil exploration).

Excluding foreign-financed investment.

Related to salaries, pensions, and small and medium-sized enterprises.

Table 4.

Repubic of Congo: Fiscal Profile, 2002-2007

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Sources: Congolese authorities; and IMF staff estimates and projections.

Noninterest current expenditure plus domestically financed investment.

Including net lending.

Excess oil revenue (which arises when operating costs of oil companies are lower than the limits stipulated in production sharing agreements) is partly assigned automatically to cover an existing liability (HydroCongo).

Table 5.

Republic of Congo: Elements of the Capacity to Pay External Debt, 2003-07

(In billions of CFA francs, unless otherwise indicated)

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Sources: Congolese authorities; and Fund staff estimates and projections.

Domestic revenue (excl. grants) minus expenditures (excl. foreign-financed investment and interest payments due).

Due to (i) Paris Club creditors on post-cutoff-date debt, (ii) multilateral creditors, (iii) creditors of oil-collateralized loans, and (iv) domestic debt. Excludes potential impact of Paris Club rescheduling.

From 2004 onward, relates to arrears payments on salaries and pensions, and small and medium-sized enterprises.

Additional revenues if WEO price projections are realized; budgetary projections use conservative oil prices.

Table 6.

Congo: Compliance with Regional Convergence Criteria, 2002-03

(In percent)

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Sources: Congolese authorities; and staff calculations.

Overall budget balance, excluding grants and foreign-financed investment.

Table 7.

Republic of Congo: Selected Economic and Financial Indicators, 2000–07

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Sources: Congolese authorities; and staff estimates and projections.

Saving and investment data are preliminary. Balance of payments estimates are being revised with Fund technical assistance.

Interest due on external arrears and residual financing gap.

Including grants, excluding interest due on external arrears and residual financing gap.

Revenue minus noninterest current expenditure minus domestically financed capital expenditure.

Including public transfers, and excluding interest due on external arrears and residual financing gap.

From 2005 onward, WEO price forecasts are reduced by US$2 per barrel (see note 7 on price rule).

Following a price rule, oil revenue from 2005 onward is projected on the basis of an international price estimated to be US$2 lower than the latest WEO forecasts. Alternatively, using WEO price forecasts would increase oil revenue and generate windfall oil revenues.

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Republic of Congo: Terms of Trade and Real Effective Exchange Rate, 1970-2003

(index, 1990=100)

Citation: IMF Staff Country Reports 2004, 232; 10.5089/9781451808544.002.A001

III. Program Implementation and Economic Developments in 2003

8. Building on the momentum generated by the improvements on the political and economic fronts, the government began focusing on economic management in late 2002. To pave the way for a move to a PRGF-supported program, the authorities implemented an SMP in 2003, initially covering the period January-June and then extended to September 2003. Overall performance under the SMP was weak, but the authorities took steps, especially later in 2003, to enhance transparency and governance in the oil sector and to strengthen public finance management (Box 2).

9. The Congo benefited in 2003 from a favorable international oil market but a somewhat slower-than-projected pace of domestic economic activity. The world oil price averaged US$29 per barrel (compared with US$22 per barrel in the budget), but this was partially offset by the weakening dollar (with the CFA franc per U.S. dollar exchange rate about 15 percent lower than programmed). Real GDP grew by 1 percent (compared with 2 percent in the budget), owing principally to lower-than-projected oil production. Non-oil real GDP growth slowed to 5.8 percent (from 6.7 percent in 2002) as the “catch-up” factor to a more normal pace of economic activity in the post-conflict period began to taper off.

Oil Revenue Discrepancy, 1999–2001

The 2003 Article IV consultation (Country report No. 03/193, para. 9) identified a shortfall of some CFAF 174 billion in oil revenues over the period 1999–2001. This gap related to a discrepancy between revenues recorded by treasury and tax liabilities of the oil companies as stipulated in the production-sharing contracts. Although the 1999–2001 external audit of the national oil company (SNPC) was expected to shed light on this issue, the auditors were not granted access to the underlying documentation and were thus unable to reach any conclusions. 1 The government committee charged with explaining the discrepancy was able to verify approximately half of the shortfall, as follows:

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The remainder of the discrepancy could not be verified. Off-budget expenditures, carried out by the SNPC on behalf of the government, were estimated to total 30 percent, as follows:

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Budget expenditures, identified ex post, were estimated to total 8 percent. The residual, 15 percent of the discrepancy, could not be verified or explained.

1 The terms of reference for the external audit included an examination of the fiscal agency role of the SNPC and an audit of expenditures carried out on behalf of the government. Because of concerns of national security, the auditors were not allowed access to the invoices and bank statements necessary for these evaluations.

Program Implementation in 2003

Overall performance under the 2003 SMP (covering January-September 2003) was weak:

  • The primary fiscal surplus fell short of the program target by some CFAF 57 billion (equivalent to 2.8 percent of annual GDP). The main reasons included (i) a significant shortfall in non-oil revenue, (ii) retention of tax obligations by the national oil company (SNPC), and (iii) unprogrammed expenditures. Additionally, exceptional oil receipts1 and unprogrammed oil bonus and dividend receipts were effectively used to clear unprogrammed internal arrears.

  • On the structural front, performance was mixed. The audit of the SNPC for 1999-2001 was completed, efforts were made to centralize government revenues, no new oil-collateralized debt was contracted, and initiatives were launched to publish oil sector data. Nonetheless, not all nonreschedulable debt service was paid, the privatization of the remaining publicly owned bank (CAIC) was not completed, and the end-September 2003 measures on oil sector transparency were not implemented.

The authorities had set quantitative and structural targets in the last quarter of 2003 with a view to stabilizing the fiscal slippages registered under the SMP and further enhancing transparency and governance in the oil sector:

  • On the fiscal front, the basic primary budget balance objective (which had been revised downward) was met. Nonetheless, unprogrammed outlays were made on clearance of pension arrears and the financing of structural reform costs.

  • On the structural front, a significant step was taken to enhance transparency in the oil sector with the completion of the certification, by an external auditor, of government oil revenue for the period January-September 2003. Measures in the fiscal area included (i) the appointment of new directors in the General Directorates of Budget, Customs, and Taxes, as well as at the General Inspectorate of Finance, in order to reinvigorate the revenue departments and strengthen control; (ii) the signing of an agreement among the government, SNPC, and CORAF, to have the latter pay for its purchase of government crude oil; and (iii) the production of the 2000 budget review law (Loi de règlement).

1 Resulting from the settlement of a legal dispute with a private oil company (see para. 13)

10. The fiscal position in 2003 improved from the exceptionally poor performance of 2002, but the underlying fiscal effort was weak relative to the 2003 budget (Table 2; and Table 8). Higher-than-budgeted oil revenue together with lower-thanbudgeted investment and interest expenditures generated a significant improvement in the overall fiscal balance in 2003. However, effective budget execution was hampered by weaknesses in expenditure controls, ineffectual treasury management, and delays in the implementation of nonoil revenue measures. Nonetheless, measures were taken later in 2003 to start correcting these deficiencies (Box 2).

Table 8.

Republic of Congo: Central Government Operations, 2000–07

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

Revenue minus noninterest current expenditure minus domestically financed capital expenditure and net lending.

Including grants.

Interest due on external arrears and residual financing gap.

Following a price rule, oil revenue from 2005 onward is projected on the basis of an international price estimated to be US$2 lower than the latest WEO forecasts. Alternatively, using WEO price forecasts would increase oil revenue and generate windfall oil revenues.

Nonreschedulable debt service only, excluding IMF but including oil-collateralized debt.

11. In an encouraging sign of a pickup in non-oil sector activity, credit to the economy grew in 2003 at a faster rate than non-oil GDP for the first time in three years (Table 9). Bank deposits decreased by 8 percent in 2003, partly in response to the difficulties in effecting current transfers (Box 3) and the diminished confidence in the remaining stateowned bank, Crédit pour l’Agriculture, l’Industrie et le Commerce (CAIC). Overall, the banking system remains fragile as, in addition to the CAIC, two out of the other three commercial banks have failed to meet some of the key prudential ratios.

Table 9.

Republic of Congo: Monetary Survey, 2001-04

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Sources: BEAC; and Fund staff calculations.

Control by the Regional Central Bank of External Transfers, 2003

Monetary developments in 2003 were marked by the regional central banks (BEAC)’s tightening of controls on external transfers, a response to low external reserve coverage in the Republic of Congo. Over the first half of 2003, the Congo suffered a sharp decline in reserves with the currency cover ratio1 falling below the minimum threshold of 20 percent in April; the primary cause of the sudden drop was a large outflow, including to service external debt.

In tightening control, the BEAC set a ceiling above which transfers require the prior written consent of its headquarters. In the case of the Congo, the ceiling was progressively lowered until reaching zero in June 2003; public sector transfers were excluded from these controls. The local BEAC authorities assured the mission that this process did not cause undue delays in effecting current transfers.

1 Calculated as the ratio of gross official assets to short-term liabilities of the central bank.

12. The external current account deficit remained relatively unchanged, at 0.3 percent of GDP, in 2003 (Table 10). The decline in oil export value1 was offset by lower government imports and interest due on external debt. In the non-oil sector, exports of tropical wood increased significantly as new production capacity came on-line. Efforts were undertaken in 2003 to start normalizing relations with external creditors by (i) remaining current on debt-service payments to multilateral institutions and Paris Club creditors (with the exception of one bilateral creditor) on post-cutoff-date debt, and (ii) clearing arrears (of about US$12 million) to a few multilateral creditors. The Congo remains a heavily indebted country, with an external debt stock equivalent to about 185 percent of GDP at end 2003, two-thirds of which represents arrears (Table 11).

Table 10.

Republic of Congo: Balance of Payments, 2000–07

(In billions of CFA francs)

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Sources: BEAC; and Fund staff estimates and projections.