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 would like to express my appreciation to Fund management and staff for the support and valuable advice provided to my Congolese authorities in the design and implementation of their economic adjustment programs. The comprehensive staff report and the selected issues paper offer a useful guidance to my authorities for advancing economic adjustment and structural reforms.

The Republic of Congo, a post-conflict country, is emerging from a decade-long political instability, characterized by three successive civil conflicts in the 1990s. These episodes of political turmoil have entailed considerable costs to the country. They have imposed tremendous suffering on the population, in terms of loss of life, exodus of a portion of the population, and destruction of entire villages, exacerbating poverty and weakening key social indicators. They have inflicted serious damages to the economy and the basic infrastructure, and have led to a weakening of key institutions. Moreover, sanitary and health conditions have deteriorated and the country’s external debt burden is heavy. Poor economic conditions have led to a significant impoverishment of the population, and the spread of the HIV/AIDS endemics and other diseases. In evaluating the Congo’s economic performance, it is important to bear in mind these daunting constraints and adverse conditions.

Following the completion of a four-year transition period by end-August 2002, including the installation of democratic institutions, the signing of the peace agreements with rebel groups in 1999 and 2003, political stability and security have improved, contributing to the pick up of economic activity in the non-oil sector and to the deceleration of inflation. With the completion of the democratization process and peace in 2002, a new government began to implement a policy agenda known as New Hope (Nouvelle Espérance). In that context, the authorities adopted and implemented a staff-monitored program (SMP) in 2003, initially covering the first half of 2003 and then extended to September of the same year. Despite difficulties, the implementation of this program helped the authorities to make progress in improving transparency and governance in the oil sector. Important achievements include the completion of the audit of national oil company, SNPC, for 1999–2001, centralization of government revenue, non-contraction of new oil-collateralized debt, and the publication of oil sector data on an internet site (www.congo-site.cg). Also encouraging were the observance in the last quarter of 2003 of the basic primary budget balance objective and certification of government oil revenue by an external auditor.

In order to consolidate the positive results achieved in late 2003 and stabilize the macroeconomic environment, the authorities adopted and are implementing a new SMP, covering the period of January-June 2004. Up to April 2004, the implementation of quantitative and structural indicators is broadly satisfactory. The authorities are determined to place poverty reduction at the center of their medium-term strategy. In this regard, an interim poverty reduction strategy paper is at an advanced stage of preparation, and is being conducted through a participatory process.

With the return of more stable conditions, my authorities are determined to strengthen the adjustment process and establish a strong track record under the 2004 SMP. Their aim is also to enable the Republic of Congo to receive Fund support under the Poverty Reduction and Growth Facility (PRGF), and to qualify for assistance under the Heavily Indebted Poor Countries (HIPC) Initiative, so as to bring the country’s heavy debt burden to sustainable levels, and increase pro-poor outlays. To help them achieve their objectives, both technical and financial assistance from the international community will be of critical importance.

I. Recent developments and performance under the 2003 SMP

Developments on the political and security front are encouraging. The political transition period, which started at the end of the war in 1997, was completed in August 2002, after the presidential, legislative and communal elections. A peace agreement was signed between the government and the remainder of the rebel groups in March 2003, pursuant to which demilitarization, demobilization, and reintegration operations of former combatants started. With the improvement in security, displaced persons have returned to their villages, and all sites for internally displaced people were closed in May 2004. My authorities are appreciative of the support received from multilateral, bilateral and non-governmental organizations for care and resettlement of these persons. Moreover, the railway service between Pointe-Noire, the main sea port and Brazzaville has resumed its normal activity. To consolidate the gains being made and ensure lasting political stability, the authorities are strengthening the institutional framework, through the establishment of the Audit Office, the Economic and Social Council, and the Constitutional Court.

Economic activity in the non-oil sector continued to be strong in 2003, driven by favorable developments in agriculture, forestry, trade and transportation. Non-oil real GDP increased by about 5.3 percent in 2003. With regard to the oil sector, high world prices have compensated for the decline in production, leading to an increase in the government oil revenue. These additional resources were used to finance urgent reconstruction needs. Inflation decelerated to 1.2 percent from 3.1 percent in 2002, reflecting the recovery of food production; the regular supply of consumer goods, attributable to the resumption of rail traffic between Pointe-Noire and Brazzaville; and the strengthening of the euro. Moreover, for the first time in three years, credit to the private sector increased faster than non-oil GDP, reflecting a catch-up to a more reliable economic activity.

Fiscal performance improved in 2003, although it remained below the objective of the approved budget. The basic primary surplus increased from 1.2 of GDP in 2002 to 6.8 percent in 2003. This encouraging upturn was due to lower-than-expected expenditures and higher-than-expected oil revenue, leading to a significant improvement in the overall fiscal balance in 2003. Moreover, the authorities have taken corrective measures to address difficulties encountered in the collection of non-oil revenue and the management of treasury resources.

The monetary policy implemented by the regional central bank, BEAC, has served the country well. Reflecting a pickup in non-oil sector activity, credit to the economy increased at a faster rate than non-oil GDP growth for the first time in three years. The recent privatization of the remaining state-owned bank, Crédit pour l’Agriculture, l’Industrie et le Commerce (CAIC), together with the expectations that activity in the non-oil sector will continue to improve, augurs well for ensuring a healthy banking system in the Congo.

Regarding the external sector, the Congo’s external debt, currently estimated at 185 percent of the GDP, remains a heavy burden on the country’s limited finances. Moreover, two-thirds of the external stock of debt represents arrears. Despite their limited resources, the authorities have started to normalize relations with external creditors, notably by remaining current on debt-service payments to multilateral institutions and Paris Club creditors on post-cutoff-date debt, and by clearing arrears to a few multilateral creditors.

Although performance in 2003 as a whole under the SMP turned out to be less favorable than projected, the authorities took steps during the last quarter of 2003 to stabilize the fiscal position and made progress in implementing structural measures. On the fiscal front, the objective set for the basic budget balance, which was revised downward, was attained. In order to ensure the payments of pension arrears and to cover the costs of structural reforms, the authorities were induced to carry out some additional spending. On the structural front, the authorities completed the certification, by an external auditor, of government oil revenue for the period January-September 2003. Other actions taken included the appointment of new directors in the General Directorates of Budget, Customs, and Taxes, as well as at the General Inspectorate of Finance; the signing of agreement among the government, SNPC, and CORAF, to have the latter pay for its purchase of government crude oil; and the production of the 2000 budget review law. All these actions go in the direction of improving the tracking of government revenues and enhancing governance.

II. Economic program for 2004

For 2004, the focus of the authorities is on putting the economy on a sustainable path of growth and poverty reduction in the context of an arrangement under the PRGF. In this connection, the authorities are implementing a new SMP covering the period January-June 2004. The main objectives of this SMP are to strengthen fiscal discipline and transparency in fiscal management, particularly in the oil sector. In the area of public finance, the key objectives are to ensure full revenue centralization and enhance expenditure control. The authorities are determined to improve the health of public finance, so as to create appropriate conditions for more effective fiscal management over the medium term. In the context of the SMP, efforts will be intensified to complete the restructuring of the banking sector.

The 2004 macroeconomic objectives are as follows: real economic growth of 3.6 percent, a rate of inflation of 2 percent, a basic primary fiscal surplus of 5.8 percent of GDP. The current account is expected to remain roughly balanced.

Fiscal policy

For 2004, fiscal policy aims at fostering discipline in public finance management. On the revenue side, the authorities are committed to ensuring that all revenue payable to the state is immediately transferred to the treasury. In this regard, they have continued the certification of oil revenue by an independent auditor. Measures are also being taken to achieve a sustained increase in non-oil revenue. The implementation of a customs warehouse control program has begun. The authorities are also taking the necessary steps to develop a better identification and monitoring of large taxpayers, and modernization of management of customs and tax administrations.

On the expenditure side, the authorities are taking steps to ensure strict adherence to budgetary procedures. In this regard, efforts are ongoing to strengthen control over outlays, while ensuring that poverty reduction expenditure is protected. However, total traditional transfers are expected to record an important increase relative to 2003, due to the establishment of new institutions in support of democratization, including the Audit Office, the High Court of Justice, the national Commission on Human Rights and the Economic and Social Council.

To improve the social environment for productive activity, the authorities signed with labor unions a “social truce”, which will allow a gradual payment of wage and retirement pension arrears to begin in 2004. Moreover, the Treasury is being strengthened with expertise provided by the French Cooperation on public accounting. The authorities will gradually introduce a functional classification system for expenditure that will permit the allocation of a greater portion of public spending for poverty reduction programs. For the future, they will avoid procyclical fiscal expenditures related to oil revenue. In this connection, starting in 2005, the authorities will adopt a fiscal rule under which oil revenue will be projected on the basis of a conservative projection of oil prices.

Monetary and financial issues

Monetary policy will remain consistent with the objectives of preserving the exchange rate arrangement under the currency union and maintaining adequate level of reserves, while containing inflation. The expansion of credit to the economy is projected to meet the increasing needs of the private sector.

With regard to financial sector, besides the recent privatization of the CAIC, a reform of the insurance sector is also envisaged, with technical assistance from the World Bank. The role of the microfinance institutions in the expansion of the private sector will be enhanced. The authorities have launched a series of seminars to assist this sector in complying with the new regional regulations.

External debt

Based on a preliminary analysis, the Congo’s debt burden, at 185 percent of GDP, even after application of full traditional Naples terms rescheduling, will remain unsustainable. While my authorities are committed to a prudent debt management policy, they will be unable to service their external debt’s obligations fully. My Congolese authorities are hopeful that they could benefit shortly from the HIPC Initiative. In the meantime, they are making every effort to remain current on their nonreschedulable debt obligations and, to the extent allowed by higher-than-projected oil prices, to make payments to reduce the large stock of outstanding arrears.

Implementation of the SMP during the first quarter of 2004

The implementation of the SMP through end April 2004 remains broadly satisfactory, both in terms of quantitative and structural indicators. Noteworthy are the fact that the primary fiscal balance was met by a comfortable margin, due to higher-than-projected nonoil revenue and enhanced expenditure control, and that no new arrears were accumulated. On the structural front, the authorities have made progress in publishing information, on the internet, of full report on oil revenue reconciliation for the first half of 2003, the SNPC action plan, and summary of the report on the 1999–2001 audit of the SNPC. They continue to take additional steps to strengthen transparency, and enhance policy credibility. My authorities remain committed to ensuring a good implementation of all measures envisaged under the SMP.

III. Governance issues

The authorities have taken important steps to strengthen transparency since 2003. In this context, it is important to note that the authorities carried out a corruption survey, commissioned a study on the issue and organized a seminar with the participation of officials, experts and representatives from civil society and the international donor community. Based on the views expressed at the seminar, the authorities are in the process of establishing a National Anti-Corruption and Anti-Fraud Commission. Under the chairmanship of the President of the Republic, this commission would monitor the implementation of anticorruption policies; centralize all information necessary, in order to assist government agencies or enterprises in tackling corruption.

IV. Poverty alleviation and medium term strategy

A poverty reduction strategy is under preparation and is at an advanced stage, and should become an integral part of the authorities’ medium-term economic strategy. The main objectives of this strategy will be to stimulate a sustained growth and to promote development centered on the poor. It is the authorities’ intention to promote growth that will generate employment and resources that will benefit a large portion of the population. Moreover, my authorities are also committed to promoting the development of private sector activity, mostly in the non-oil sector.

Constraints to economic development are related to high dependence on oil, weak infrastructure, heavy public debt burden, high cost of public utilities, and low degree of financial depth. The legacy of central planning and the associated anti-business bias have also been a cause of severe constraint. Moreover, the civil wars of the 1990s, which affected the economy, weakened the institutions and undermined the rule of law. The authorities have begun to address these problems and important progress has been made. These constraints have also been a source of program failure in the past, but all these are in the process of being changed, with the economy moving gradually but steadily towards a market economy. The authorities have learnt lessons from these past experiences and are determined to take necessary steps to create conditions for broad-based economic growth and poverty alleviation.

V. Regional integration

Being a member of the CEMAC, Congo has met two convergence criteria, namely the basic balance-GDP ratio and inflation rate. However, it has missed the remaining two criteria related to public debt-GDP ratio and net change in arrears in government arrears-GDP ratio. On the integration of product markets, key actions undertaken were the promulgation of the CEMAC’s investment charter and the issuance of two implementing regulations. The National Law on Investment is expected to be revised, in compliance with the CEMAC charter, by the end of this year. Congo remains in compliance with the implementation of the regional customs code. The authorities have also established the national financial intelligence unit that is in charge of coordinating regional efforts to combat money laundering and the financing of terrorism.

VI. Conclusion

My Congolese authorities have made significant efforts to emerge from a postconflict situation. Remarkable achievements towards peace and political stability have been made. My Congolese authorities are committed to continuing to work closely with their partners to help them achieve the goals of sustained growth and poverty alleviation. The results achieved up to now under the 2004 SMP are encouraging and reflect the authorities’ firm determination to restore fiscal discipline. However, strong support from the international community remains critical for the consolidation of the progress achieved. In this context, they hope that their efforts will be well recognized and will help to pave the way for Fund support under the PRGF, which will be the basis for the creation of a solid foundation for economic development and poverty reduction.