This paper reviews Congo’s Performance Under the Staff-Monitored Program (SMP) and Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility. Improvements in the political environment and an increased focus on economic management since late 2002 have already led to stronger economic growth and lower inflation. The 2004 SMP produced good results. All the program’s quantitative budgetary and financial indicators were met. Major progress was made in improving oil sector transparency with the widespread dissemination of information on the Internet, which is particularly noteworthy and exemplary among countries in Africa.

Abstract

This paper reviews Congo’s Performance Under the Staff-Monitored Program (SMP) and Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility. Improvements in the political environment and an increased focus on economic management since late 2002 have already led to stronger economic growth and lower inflation. The 2004 SMP produced good results. All the program’s quantitative budgetary and financial indicators were met. Major progress was made in improving oil sector transparency with the widespread dissemination of information on the Internet, which is particularly noteworthy and exemplary among countries in Africa.

Background and recent developments

I would like to express the appreciation of my Congolese authorities to the staff for the support and valuable advice provided to them during the program discussions in Brazzaville and at headquarters. My authorities are also grateful to other development partners for their support, which has been instrumental in gathering assistance from the international community for the Congo’s development efforts.

The Republic of Congo has experienced continuous decline in per capita income for about 15 years through the late 1990s. This downward trend coincided with an acceleration of rural-urban migration in the 1980s, and three civil conflicts in the 1990s. In particular, these conflicts have had a severe negative impact on the economy and social development, as they led to the destruction of physical capital, displaced thousands of individuals, exacerbated poverty, worsened the debt profile, and weakened institutions.

The authorities are determined to make all necessary efforts to address the prevailing constraints to achieve high and sustainable growth. Indeed, the Congo has much potential, in terms of natural resources, but efforts to develop them have been severely constrained. 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. The non-oil sector includes forestry, traditional agriculture, and services. The exploitation of Congo’s forests, which cover about half of the country, accounts for less than 5 percent of GDP, but constitutes almost two-thirds of non-oil exports. Like other countries in the region, Congo is also a producer of diamonds. To help promote mobilize this potential, my authorities are concerned by the need to sustain the practice of macroeconomic stability, which is a key element for the development of the Congo.

Following the completion of a four-year transition period at end-August 2002, including the installation of democratic institutions, and the signing of peace agreements with rebel groups in 1999 and 2003, political stability has returned and security has been restored, contributing to the pick up of economic activity in the non-oil sector and the deceleration of inflation. With the completion of the democratization process and peace in 2002, the government began to implement a policy agenda known as New Hope (Nouvelle Espérance) under the leadership of HE President Denis SASSOU NGUESSO. In that context, the authorities adopted and implemented a staff-monitored program (SMP) in 2003.

Under the 2003 SMP, my authorities have made progress in improving transparency and governance in the oil sector and fiscal areas. In the oil sector, important achievements include the completion of the audit of the national oil company, SNPC, for 1999-2001; the completion of the certification of government oil revenues for the period January to September 2003 by an internationally-recognized, independent firm of auditors; the discontinuation of further contracting oil-collateralized debt; and the publication of oil sector data on the websites www.congo-site.cg and www.mefb-cg.org. On the fiscal front, positive developments were related to the centralization of a large portion of fiscal revenues and expenditures in the budget, and in a broader strategy to revamp the revenue administration agencies and strengthen control. Also noteworthy is the fact that the government began in 2003 to normalize relations with external creditors, by servicing on time the debt obligations due to all multilateral and Paris Club creditors for the debt incurred after the cut-off date and by settling arrears owed to a number of multilateral creditors. Nonetheless, overall effects fell short of the goals and objectives they had set for 2003.

To strengthen the medium-term framework of macroeconomic management and accelerate the reforms necessary for economic recovery and poverty reduction, the authorities adopted and implemented a new SMP, covering the period of January-June 2004. This program contained two pillars, namely increasing transparency in fiscal management, especially in the oil sector, and improving fiscal discipline. The successful implementation of this program has helped the authorities to make further progress in transparency and good governance in the oil sector, as well as in fiscal consolidation. Key achievements have been in the following areas:

- On budget execution and quantitative indicators: reflecting higher non-oil revenues and better control of primary expenditures, the primary fiscal balance adjusted for higher-than expected oil revenue has exceeded the target. The budget execution was in line with the program. In particular, tax and customs administrations have been strengthened and have contributed to the increase in non-oil revenues; stricter expenditure controls, in particular on transfers, were implemented; and fiscal reporting was enhanced. Moreover, the government’s net credit position vis-à-vis the banking system has improved. In addition, the authorities have not contracted any guaranteed or nonconcessional debt, and they have met their debt service obligations on nonreschedulable external debt. Also notable is the fact that domestic arrears were settled within the limits of the ceiling set out in the program.

- On structural measures: as noted above, the authorities have made considerable progress in improving transparency in the oil sector, including through the continuation of quarterly certification of oil revenues by an independent international audit firm, and the adoption by the authorities of an action plan to reform the SNPC. Particularly noteworthy and also exemplary for oil-producing countries in Africa, is the authorities’ emphasis on the internet publication of key information. The Congo has formally joined the Extractive Industry Transparency Initiative (EITI) on June 10, 2004 and is fully committed to complying with this Initiative’s principles and made public announcement to this effect in October. Given the EITI’s participatory nature, the government has encouraged oil companies operating in the Congo to become fully involved in its implementation. The press release by the Government on the 2003 settlement of disputes with a private oil company Likouala agreement is a clear sign of the commitment of my authorities to the transparency process in the oil sector.

Since our last Board discussion in June 2004, the authorities have taken further actions including the preparation by the government of a preliminary strategy aimed at ensuring that the SNPC’s activities are restricted to the oil sector; the completion of the privatization of the commercial bank CAIC, and the effective functioning of the new private bank, la Congolaise de Banque; the completion by an international auditing firm of the 2002 external audit of the SNPC (according to the same reference terms as the previous audit and with no qualifications related to the access to information); the signing by the government of a contract with an international auditing firm to perform the external financial audit of the 2002 operations of the national oil refinery, CORAF; the quarterly certification, by an external auditor, of oil revenue in 2004; and the centralization of all government revenues in, and execution of all payments through the treasury.

For the year 2004 as a whole, improvement in the political environment, combined with higher-than-projected oil prices, augur well for stronger economic growth and lower inflation. Although the real effective exchange rate has been broadly stable in the post-conflict period and remains well below its pre-1994 devaluation level, my authorities will continue to be vigilant to preserve the economy’s competitiveness. Moreover, given the currently favorable world oil prices, the authorities will do their utmost efforts to avoid the past pitfalls of procyclical spending and curtail inflationary pressures. They recognize that progress achieved in improving transparency in the oil sector and public finances has revealed important weaknesses. This is why they are determined to make all necessary efforts to remove the constraints facing the economy, and request the assistance of external partners to meet these daunting tasks.

My Congolese authorities recognize the importance of establishing peace and security in the country, in order to lay the foundations for broad-based economic growth, required to reduce poverty. This will allow them to continue to repair the remaining damage from the successive conflicts, and consolidate the positive achievements made so far. My authorities have demonstrated resolve to break away from the past economic management practices and established a strong track record on program implementation. In acknowledging the support already received, the Congolese authorities recognize that without strong financial and technical support from the international community, the reform efforts currently underway cannot be sustained. In this context, my authorities are hopeful that in recognition of their efforts to improve macroeconomic management and governance, the Republic of Congo will be granted access to IMF financing under the PRGF, and benefit from assistance under the Heavily Indebted Poor Countries (HIPC) Initiative as soon as possible. The latter should help 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.

Medium-Term Macroeconomic Framework

My authorities are cognizant that strengthening the macroeconomic framework is a key condition for poverty reduction. The consolidation of macroeconomic stability is an important element of their Interim Poverty Reduction Strategy. The authorities’ main medium-term macroeconomic objectives are: (a) an expansion of output with the real GDP growth reaching an average of 5.5 percent; (b) the achievement of an annual inflation rate around 2 percent, and (c) the strengthening of the external position. In this regard, actions aimed at creating an investment-friendly environment, increasing transparency and good governance, implementing sound fiscal policy and pursuing prudent monetary policy are envisaged.

In the fiscal area, the authorities are committed to adopting a prudent fiscal stance with respect to future oil revenues, so as to avoid the adverse effects of pro cyclical expenditures driven by oil revenue receipts. They will implement measures to strengthen both oil and non-oil revenues. Performance of oil revenues are expected to improve as a result of the strengthening of revenue collection through quarterly certifications, audits of cost oil, and improvement of the commercial performance of the SNPC. On non-oil revenues, improvement is expected from measures aimed at combating fraud and tax evasion, controlling and limiting discretionary tax exemptions, expanding the tax base and improving tax administration. My Congolese authorities are also committed to implementing a prudent expenditure policy with the view to freeing up resources to help boost pro-poor expenditures and the country’s capacity to meet its debt service obligations. Among key actions envisaged are: a gradual reduction of transfers to the national refinery, CORAF, until they are completely eliminated in 2007; the streamlining of subsidies on oil products; an equitable, transparent clearance of domestic arrears, based on the availability of funds and the priorities established in the budget.

Efforts to address the constraints to Congo’s development will be steadfastly pursued, in the context of the Public Investment Program. This will include projects aimed at ensuring a regular supply of electricity in the country (Imboulou dam, upgrading of the Moukoukoulou dam, Brazzaville thermal power plant, and construction and strengthening of the distribution network); improving public infrastructures, opening up hinterland, and strengthening utilities and infrastructure in local communities (safe water, schools, dispensaries).

Monetary policy will continue to be carried out within the regional framework of the CEMAC to ensure low inflation and keep the foreign exchange reserves at a comfortable level. Cognizant of the risks of inflation stemming from the inflow of financial resources, given that international oil prices are expected to be buoyant over the next few years, the authorities stand ready to take corrective actions, in accordance with current CEMAC and BEAC rules.

Regarding the Millennium Development Goals (MDGs), the authorities’ immediate objectives are based on the eradication of extreme hunger, the attainment of 100 percent youth literacy, and the promotion of gender equality. However, should additional resources become available from oil receipts and debt relief under the enhanced HIPC Initiative, the authorities stand ready to make efforts towards achieving other key MDGs. In order to strengthen implementation capacity, the authorities’ poverty reduction strategy envisages recruitment in priority sectors within the constraints of the overall wage bill under the program and improving transparency.

First-Year Program under the PRGF

The objectives for the first year of the program, covering the period from October 1, 2004 to September 30, 2005, are the following: an annual growth rate in non-oil real GDP of about 5 percent; an inflation rate of about 2 percent; a primary surplus representing about 10.1 percent of GDP in 2004 and 13.2 percent of GDP in 2005; and a current account surplus equivalent to 1.6 percent of GDP a year.

In the fiscal area, a prudent policy will be pursued in the context of the 2005 Budget Law. The expenditure structure will be reoriented toward pro-poor projects. In this context, the authorities undertake to increase the share of resources allocated to the priority sectors, as identified on the basis of the I-PRSP, namely basic health care and action to combat HIV/AIDS; basic education; basic infrastructure; water, energy, and urban sanitation; disarmament and reintegration of former combatants; and agriculture. In so doing, the authorities are determined to enhance the mobilization of oil and non-oil revenues, and ensure a better control of other spending. The forestry revenue collection system will be evaluated with a view to improving its performance.

To meet the pressing needs and promote social peace, my Congolese authorities have signed a “social truce” with the labor unions, so that they can gradually pay wage and pension arrears starting in 2004. To this end, they plan to transfer a sum equivalent to about 1 percent of GDP in 2004 to clear these social arrears. They have also budgeted an amount equivalent to 0.9 percent of GDP in 2004 for payment of commercial domestic arrears to small and medium-sized enterprises, with the view to stimulating business-based economic growth. For 2005, an amount equivalent to 2 percent of GDP has been identified to finance the settlement of domestic arrears that have already been audited and certified.

Monetary policy will remain consistent with the objectives of CEMAC arrangement and that of 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 the financial sector, the authorities of the Republic of Congo recognize the need to address the fragility of the banking system, and they are working in close collaboration with the regional banking commission, COBAC, in this direction. Measures to be considered are related to the preparation by end-December 2004 of a restructuring plan for a bank in difficulty. The plan will include financial, as well as operational measures, aimed at ensuring the bank’s medium-term viability. The authorities will continue to consult the Fund and World Bank staffs on this issue. They are also committed to reforming the nonbank financial sector, which will involve pension funds, the postal and savings institutions, as well as microfinance institutions.

Regarding the external debt situation, the country’s indebtedness remains heavy. For the first part of the program, the Republic of Congo is expected to use about 80 percent of the primary fiscal surplus and other resources to meet its financial obligations, and to normalize relations with creditors. My Congolese authorities are hopeful that the Congo will receive exceptional treatment on non reschedulable arrears and will benefit soon from the HIPC Initiative. In the meantime, they will continue to make every effort to remain current on debt obligations and, to the extent allowed by higher-than-projected oil prices, to make payments to reduce the large stock of outstanding arrears on non reschedulable debt.

Structural reforms and Governance Issues

The program of structural reforms is aimed at ensuring robust growth and poverty reduction, promoting private sector development, improving transparency and governance in the oil sector, and increasing the effectiveness of the public sector.

In the oil sector, strong efforts toward further transparency and better monitoring of operations will be pursued. The government is working in close collaboration with the U.K. Department for International Development on the implementation of the EITI principles. In order to maximize revenue collection, actions envisaged are: (a) the pursuit of a quarterly certification of oil revenue, by an internationally-recognized audit firm, with the collaboration of the Hydrocarbons Unit in the Ministry of Finance, and implementation of the nine administrative recommendations made by the auditor; (b) the adoption of a strategy to enable the SNPC to maximize dividends; and (c) the arrangement for yearly independent audits of cost oil for all production-sharing contracts, based on international standards and carried out by internationally-recognized audit firms. Actions are also envisaged with regard to the surveillance of SNPC operations and the publication of information to the public on websites. For 2005, the authorities are also planning to conduct an economic and strategic assessment of CORAF.

Determined to break away from the legacy of past weak public management, my authorities have taken important steps to strengthen transparency since 2003. A National Anti-Corruption and Anti-Fraud Commission was recently approved by the authorities. Under the chairmanship of the President of the Republic, this commission will monitor the implementation of anticorruption policies and centralize all information necessary, in order to assist government agencies or enterprises in tackling corruption. The preparation of a final anti-corruption law is ongoing.

To generate sustained growth in non-oil sectors, the authorities plan to implement measures to improve the business environment. In particular, they intend to enhance the overall governance framework and effectively combat corruption, as well as to improve the operation of the public utilities and delivery of public services. In order to raise investor confidence, the government plans to make the customs and tax administrations more efficient, eliminate quasi taxation, and make the tax system more transparent. It is also their intention to pursue efforts to place under private management the supply of water and electricity, as well as the railroad between the largest cities, Pointe Noire and Brazzaville.

Following the country’s exclusion from the Kimberley Process last July, due to the non observance of international standards in the diamond business, the authorities have been working closely with the Kimberley Process on diamond certification issues. Actions already taken include the suspension of licenses granted to diamond-purchasing bureaus, the punishment of civil servants involved in issuance of unauthorized Kimberley certificates, and the strengthening of the bureau of mines administration. A regional meeting of Mining Ministers was organized in Brazzaville on November 16, 2004, in which Ministers agreed to set up a committee to oversee the trade of diamonds and other gems in the region.

With regard to the legal, forestry and judicial frameworks, reforms in these areas will be carried out with World Bank assistance.

Poverty alleviation strategy

It is important to stress that since mid-1980s, the Congo has experienced difficult economic problems which, compounded with social and political unrest that culminated with the tragic events of the 1990s, have harshly hurt the Congo’s people. This has resulted in very high unemployment, increasing poverty, reduced life expectancy at birth, deteriorating healthcare and education, as well as food insecurity. To address these problems, and provide the people with equal opportunity for access to jobs and improvement in their standards of living, the authorities are committed to making poverty reduction their top priority.

The government and its national and international partners have opted for a participatory approach in preparing and implementing the Poverty Reduction Strategy. The Interim Poverty Reduction Strategy Paper (I-PRSP) was prepared under the supervision of a National Ministerial Committee for Poverty Reduction (Comité National de Réduction de la Pauvreté, CNLP) jointly chaired by the Ministers of Planning and Finance. In addition, the formulation of the I-PRSP was decentralized at the departmental and local levels through the creation of departmental and local Poverty Reduction Committees. Further broadening of the participatory process is being considered.

The approach laid out in the I-PRSP is an integral part of the authorities’ medium-term economic strategy. The strategy is built on the following five pillars: (a) consolidation of peace; (b) consolidation of macroeconomic stability and promotion of key economic sectors; (c) improving access to basic social services and social protection; (d) developing infrastructure; and (e) reinforcing the fight against HIV/AIDS.

With regard to the profile and the characteristics of poverty, my authorities recognize the limited quality of statistical data used to fully appreciate the extent of poverty in Congo. However, they are determined to improve the diagnostic study through supplementary studies and surveys that would be conducted within the scope of the final PRSP. The ongoing Congolese Households Expenditure Survey (ECOM), of which the Core Welfare Indicators (CWIQ) results are expected in 2005 and the Demographic and Health Survey currently under preparation, would make it possible to establish a reliable outline of the poverty.

With regard to strategic areas and priority actions, my authorities are committed to consolidating peace and promoting good governance. Peace and security are essential, since the Republic of Congo, a post-conflict country, is emerging from a decade of political instability marked by three civil wars. The I-PRSP considers that good governance, notably in the oil and forestry sectors, is a key condition of civil peace, economic growth and poverty reduction. The decentralization is viewed as an effective way to improve the efficiency of government intervention and citizen participation. On public finances, the I-PRSP highlights the need to rationalize public resources through increased revenue, expenditure control, and the strengthening of public expenditure management.

My Congolese authorities are aware of the risks and constraints surrounding the implementation of the I-PRSP. In that regard, to further deepen ownership, they are committed to strengthening the participatory process; to consolidate the fiscal process, they are determined to maintaining peace and security and preserving the gains achieved in terms of national reconciliation; in regard to oil prices volatility, my authorities would ensure that fiscal stance is not induced by cyclical booms and busts of oil prices. With respect to the ability to reach agreement with the international financial community on debt issues, my authorities are committed to pursuing efforts they have initiated with creditors in the Paris Club and in the London Club that would lead to the international community support for debt relief.

The PRSP being an ongoing process, my authorities will address the weaknesses identified, and continue to fine tune their policies. Lessons learned from past experiences will be used to improve the process, and efforts will continue to create conditions for broad-based economic growth and poverty alleviation. They also hope that transparency in the process will increase the success of the PRS.

Conclusion

My Congolese authorities have made significant efforts to re-establish peace and political stability since the country emerged from a conflict situation. Remarkable progress has been made in a wide number of areas, as described above. This progress has contributed to a good track record of policy and reform implementation established under the 2004 SMP. The authorities have prepared an interim poverty reduction strategy paper, and are requesting a three-year adjustment program, under PRGF, which would help strengthen growth prospects, improve resource allocation in the economy, and consolidate progress made under the SMP. My Congolese authorities are committed to continuing working closely with their partners to 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 financial discipline. However, these results are still fragile, and strong support from the international community remains critical for the consolidation of the progress achieved. In this context, my authorities are hopeful that their efforts will be well recognized and will help to pave the way for Fund support under the PRGF, which in turn will be the basis for the creation of a solid foundation for economic development and poverty reduction.