1. This statement contains information on developments in the Republic of Congo since the circulation of the staff report for the first review of the three-year arrangement under the Poverty Reduction and Growth Facility. The information does not alter the thrust of the staff appraisal.

2. The five prior actions related to oil sector reform and transparency, banking sector reform, and public finance management were implemented:

• The audits of oil costs for 2003 for all production-sharing contracts (as defined in these contracts) were completed by audit firms of international reputation in accordance with international standards, and the reports were submitted to the government. The auditors verified the eligibility of costs that were deducted, as well as the execution of other aspects of the contracts. Their conclusions point to substantial additional profit payments that are owed by oil companies to the government; the authorities have entered into negotiations with the companies to recover past payments due.

• A reconciliation of the amount of oil revenues deposited in government bank accounts, as reported in the quarterly certification statements, and the total oil revenues reported in the government financial operations tables (TOFEs) for 2003 and 2004 was completed by an audit firm of international reputation. The auditors noted lack of access to source documentation to verify the accuracy of some parts of the information provided by the authorities. The reports, published on the Internet site of the Ministry of Economy and Finance (www.mefb-cg.org), showed large differences between oil revenues due to the government and receipts recorded in the TOFE (of about 2 percent of GDP in 2003 and 5 percent of GDP in 2004). These reports and information received subsequently from the authorities indicate that the following factors explain the differences: (i) receipts in the TOFE are recorded on a cash basis while estimates by the auditor of oil revenues due to the government are on an accrual basis; (ii) costs of financial transactions carried out by the national oil company (SNPC) on behalf of the government are netted out from receipts reported in the TOFE, but not from the oil revenues estimated by the auditors; (iii) the price used to value government oil sales by the auditors differs, sometimes quite substantially, from the price at which the oil was actually sold and recorded in the TOFE (see Box 2 of staff report); and (iv) some short-term oil-based loans (allowed under the program) contracted by the government were not recorded in the TOFE. The staff will pursue detailed discussions on this issue with the authorities in the period ahead.

• With a view to strengthening the recovery of loans, the government established a list of the principal delinquent debtors of the Congolese banking system, based on information from the La Centrale des Risques; the list was circulated to banking establishments and Public Treasury.

• The government signed a contract with an audit firm of international reputation to conduct annual external audits of the national oil refinery for 2003 and 2004. The completion of these audits is scheduled for end-December 2005.

• The government adopted a decree on June 29, 2005, to implement a new price structure for refined petroleum products which incorporates: (i) an increase of CFAF 115/liter in the price of jet fuel sold to international airlines, (ii) an increase of CFAF 40/liter in the price of gas oil sold to international shipping companies, and (iii) a reduction of25 percent in the margins (transport, storage, distribution, and marketing) in the price structure.

3. In addition, the implementation of the structural measures at end-June 2005 was broadly satisfactory. The government prepared and submitted to Fund staff a table tracking poverty-reducing spending in 2004 (structural performance criterion). The SNPC prepared statements on the sources and uses of funds for the consolidated activities of the SNPC group (structural benchmark). Staff’s preliminary assessment is that the coverage of the cash flow table would need to be extended. Separately, the oil certification report for the first quarter of 2005 was published on the government’s Internet site (structural benchmark); the report notes that the proceeds from one oil shipment made at end-March 2005 (estimated at about CFAF 19 billion) have not yet been received by the treasury as of end-June—this shipment appears to be subject to litigation proceedings. The auditors noted continued lack of information from one of the operators (see Box 2 of staff report), and they reported that, unlike in the past, they did not have access to bank account information to verify information on government cash receipts.

4. The authorities continue to make progress in normalizing relations with external creditors. They reported that bilateral agreements have been signed with all Paris Club creditors. Discussions took place in the first half of 2005 with a number of non-Paris Club official bilateral creditors who indicated, in principle, their willingness to provide debt relief to Congo at the time of the Decision Point under the enhanced HIPC Initiative. Discussions with the remaining official bilateral creditors are envisaged for August 2005. The last meeting between the authorities and the London Club Steering Committee took place in July 2005 and the two parties agreed to pursue discussions in the period ahead. In addition, information received from the authorities indicates that as at end-June 2005, Congo was current on its external debt service obligations to multilateral and Paris Club creditors.

5. As regards budget execution, preliminary data through end-May 2005 suggest that expenditures were kept under control, and non-oil revenue mobilization continued to be strong. Nonetheless, oil revenues were lagging somewhat behind the monthly mobilization rate envisaged for the second quarter of 2005.