Statement by Damian Ondo Mañe, Executive Director for the Republic of Congo August 1, 2005

The staff report for the First Review Under the Poverty Reduction and Growth Facility on the Republic of Congo highlights economic development and fiscal policy. Reflecting the rise in oil prices, the fiscal and current account balance position improved significantly. Congo’s medium-term prospects have improved significantly because of the rise in oil prices, notwithstanding the downward revision of oil production. In the banking sector, the government’s key objectives are to promote greater market discipline and improve the governance framework as regards bank loans. Although Congo’s recent progress provides a good basis for continued program implementation, important risks remain.

Abstract

The staff report for the First Review Under the Poverty Reduction and Growth Facility on the Republic of Congo highlights economic development and fiscal policy. Reflecting the rise in oil prices, the fiscal and current account balance position improved significantly. Congo’s medium-term prospects have improved significantly because of the rise in oil prices, notwithstanding the downward revision of oil production. In the banking sector, the government’s key objectives are to promote greater market discipline and improve the governance framework as regards bank loans. Although Congo’s recent progress provides a good basis for continued program implementation, important risks remain.

Introduction

On behalf of my Congolese authorities, I would like to express my appreciation to Management and the staff for their continued support and policy advice given to the Republic of Congo under the current and past programs. My authorities welcome this first review under the PRGF and hope that in recognition of progress achieved in consolidation peace and security, maintaining a stable macroeconomic environment, deepening structural reforms, improving its ownership of program implementation and of the I-PRSP, Congo will attain the decision point before the end of this year. All these achievements under successive SMPs and the recent new three-year PRGF Fund-supported program would not have been possible without the support of other development partners, in order to lay the foundations for broad-based economic growth, needed to reduce poverty.

My Congolese authorities at the highest levels are aware of the major challenges facing the country, including those related to the need to address structural weaknesses in the banking, refined petroleum products, and electricity sectors. In this regard, I would like to point out that the authorities have implemented the five prior actions related to the oil and banking sectors, as well as public finance management. My authorities are committed to maintaining peace and stability in the Congo, in order to implement sound macroeconomic, structural and sectoral policies to sustain macroeconomic stability, alleviate poverty, and strengthen institutional capacity. They are determined to consolidate progress made in improving governance and accountability, which would help them better deal with the daunting challenges ahead. Support from the international community will also be essential to help them improve the country’s administrative and institutional capacities.

Since the Executive Board’s approval of a three-year PRGF arrangement last December 2004, Congo’s performance under this program has remained broadly satisfactory for the period from October 1, 2004 to end-March 2005. However, my authorities request a waiver for the nonobservance of the performance criteria on payments of external arrears and completion of external audits of oil costs for 2003, as well as modification of one performance criterion, in order to complete the first review. They are committed to continue to implement strong policies and reforms in the period ahead. They are also aware of the importance of establishing a sound environment in which private sector activity can flourish.

Background and Recent Developments

As Directors are aware, Congo experienced a decade of political instability characterized by three civil wars in the 1990s, which resulted in important loss of human lives and negative socio-economic consequences. Since the end of the conflicts in 1999, the political environment has improved and the authorities have seized this opportunity to implement policies aimed at restoring macroeconomic stability. The Staff-Monitored Programs have been instrumental in this regard. With the consolidation of peace, a stronger economic performance emerged in the post-conflict period, which was not only helped by enhanced macroeconomic management, but also by the rise in oil prices. Non-oil real GDP increased by about 9 ½ percent per annum on average during 2000-04, driven by improvements in agriculture, commerce, and transportation. Inflation decelerated, helped by the trend toward fiscal consolidation, a more reliable supply, and a strengthening of the euro vis-à-vis the U.S. dollar. Although some setbacks were encountered during the implementation of economic reforms under the 2001-03 SMPs, my authorities have demonstrated resolve to break away from the past economic management practices and established a strong track record on program implementation since late 2003.

In the fiscal sector, the fiscal position improved, due to tighter control of expenditure, high oil revenues, and mobilization of non-oil revenues. In the public finances, the authorities took steps to centralize a large portion of fiscal revenues and expenditures in the budget; and they improved tracking of oil revenues and budgetary outlays.

On the structural front: progress was made in enhancing oil sector transparency, and more broadly natural resource sector transparency. Unprecedented in Africa has been the authorities’ emphasis on internet publication, including of quarterly reports on oil revenue certification, as well as internet publication of the full 2003 audit report of the national oil company (SNPC), the terms and conditions of the financial transactions carried out by the SNPC for the government, and all active production-sharing agreements. The authorities have announced their commitment to adhere to the EITI.

Regarding the external sector: the authorities have taken important steps to improve relations with creditors since the beginning of the 2003. Moreover, the government has contracted no new loans with maturity exceeding one year using oil collateral since October 2002.

For 2004 as a whole, Congo benefited from a favorable external environment, with strong increase in oil prices, one of the main country’s export products. Real GDP growth rebounded, reflecting favorable terms of trade, and a slight increase in oil production. Inflation rate, although it increased somewhat, due to supply disruption on the Pointe Noire-Brazzaville rail line, remained subdued. As a result of increase in oil prices, the fiscal and current account balance position improved. In the fiscal area, revenue performance recorded a significant increase, stemming from higher oil prices, improved tax, and customs administration, including the reform of the computer systemic the customs office at Pointe Noire. Regarding primary expenditure, although its level exceeded the program, this was due a problem beyond the authorities’ control. Indeed, in anticipation of lower water levels in the Congo River, investment projects in the remote north planned for the first half of 2005 were executed in the last quarter of 2004. This phenomenon of lower water levels in the Congo River happens sometimes during a long and severe dry season period.

With regard to the poverty-related spending, performance was below expectations, owing to the lack of trained personnel and weak monitoring system for budget execution. The authorities are determined to take all necessary steps to correct this problem. With regard to the banking system, to address the critical situation facing one bank, the government has temporarily taken over the bank, with the view to protect depositors, allow an orderly restructuring, and prepare it for reprivatization. Other key actions undertaken by the authorities in other areas include the strengthening of governance and transparency, with the publication of information through internet, related to the quarterly oil revenue certifications, large parts of the 1999-2001 and 2002 external independent audits of the SNPC, and all active production-sharing agreements. Moreover, an external audit of the national oil refinery (CORAF) for 2002 was completed in December 2004.

Overall, my authorities are hopeful that in recognition of their efforts to improve macroeconomic management and governance, the Republic of Congo will benefit from assistance under the Heavily Indebted Poor Countries (HIPC) Initiative before the end of this year, so that the country’s heavy debt burden can be brought down to more sustainable levels and the authorities can increase pro-poor outlays.

Implementation of the PRGF-supported programs

The Congo’s program is based on two pillars, namely enhancing the transparency of public resources management, in particular in the oil sector, and improving fiscal discipline. Overall, as stressed above, the Congo’s implementation of the PRGF yielded positive results over the period considered.

Although the primary budget surplus was lower-than programmed, the end-December 2004 quantitative benchmarks were met. As stressed in the staff report, factors beyond the authorities’ control have occurred. Most quantitative criteria for end-March 2005 were observed, with the exception of targets on payments of external arrears at end-December 2004 (quantitative benchmark) and end-March 2005 (quantitative performance criterion). With regard to structural performance criteria for December 2004 and March 2005, the Congo observed two out of three, namely related to the 2002 external audit of the CORAF and the tracking of quarterly expenditure execution in 2004. Most structural benchmarks for December 2004 and March 2005 were observed, in particular, the completion of the SNPC’s 2003 external audit and publication of the entire report on the Finance Ministry’s website (www.mefb-cg.org). Regarding CORAF and SNPC, the authorities have taken good note of weaknesses in these companies’ accounting practices and internal control procedures and will take the necessary steps to address them.

Medium-Term Macroeconomic Framework and policy agenda for 2005

In light of recent developments, the macroeconomic forecast for 2005-07 was revised relative to the PRGF scenario to reflect higher oil prices; lower oil production; payments of post-cutoff-date arrears; as well as higher poverty-related spending. Thus, the authorities’ main medium-term macroeconomic objectives are as follows: (a) an expansion of output with the real GDP growth reaching an average of about 5.2 percent; (b) the achievement of an annual inflation rate around 2 percent, and (c) a primary surplus of 17.7 percent of GDP in 2005 and 10.3 percent of GDP on average in 2006-07, and (d) an external current account surplus averaging about 3.3 percent of GDP.

In the fiscal area, the main objective behind the revision of Congo’s fiscal policy is to help the authorities to raise poverty-related spending, while allowing an increase in the primary budget surplus. To address the constraints facing the economy, including the structural problems that emerged in the banking, fuel and energy sectors, the authorities intention to present a 2005 supplementary budget to parliament later in the year. They are also committed to implementing a prudent expenditure policy with the view to freeing up resources to help boost pro-poor expenditures identified in the I-PRSP. To ensure an effective use of public spending, my authorities plan to prepare a quarterly table with data tracking the various stages of the expenditure process. They also envisage accelerating preparations for the introduction of a functional classification of government spending. Furthermore, they plan to emphasize staff training in the education and health sectors to strengthen absorptive capacity.

For 2005, total revenues are expected to be higher than programmed, reflecting primarily higher oil prices. The mobilization of oil revenues is expected to further improve through the strengthening of quarterly certification process and the SNPC’s improved performance in marketing the governance’s share of oil production. Non-oil revenue mobilization will benefit from administrative reforms, including measures against fraud and tax evasion, as well as from limits on discretionary tax exemptions. Also noteworthy is the fact that the authorities are planning to settle domestic payment arrears transparently and equitably. They envisage the preparation of a plan by September this year.

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.

Structural Reforms and Governance Issues

The key reform objectives in the oil sector and public finance management will remain as initially envisaged in the PRGF program. However, the authorities are also committed to address the new structural challenges that have emerged in the banking, fuel and energy, in order to limit future recourse to the budget, as well as enhance accountability and transparency.

With regard to the banking sector, the authorities of the Republic of Congo recognize the need to address the fragility of the banking system. Their key objectives are to promote greater market discipline and improve the governance framework as regards bank loans.

Among near term measures are the need to intensify surveillance of the COFIPA bank by the COBAC and the conduct of an audit of the quality of the bank’s portfolio. Moreover, the bank’s restructuring plan will be revised to incorporate the results of the audit and more forceful cost-cutting measures. The authorities’ plan is to privatize this bank without delay and through a transparent and competitive bidding process. For the recovery of nonperforming loans, action will be taken, which will strengthen market discipline.

In the fuel sector, key objectives envisaged include curtailing losses and reforming the CORAF. To limit future losses, the government will lower margins and raise the prices of jet fuel and gas oil; the CORAF will adopt a plan to curtail its operating costs; a strategy and economic study of the CORAF will also be conducted in collaboration with the World Bank, which will lay the groundwork for restructuring the enterprise. My authorities have requested assistance from the World Bank to conduct a social impact analysis of introducing an automatic price adjustment mechanism in the fuel sector.

In the energy sector, reform of the electricity sector is continuing in the context of the project to rehabilitate the energy and water infrastructures. The authorities are determined to reduce the losses of SNE and the resulting burden on the government budget. Near-term priorities are to improve the SNE’s financial situation and its bill collection capabilities. A reconciliation of SNE’s arrears to the SNEL is envisaged. A medium-term objective is to improve the sector’s bill collection ratio through investment in new meters and other equipment.

My authorities are determined to enhance the transparency of natural resource management. Following the EITI conference in London last March, the Congo was named in a press communiqué as one of the nine countries that had made progress in improving transparency in the management of their oil revenue. Going forward, the authorities intend to work closely with industry and civil society to implement the EITI objectives. Moreover, the authorities are taking steps to bring the Congo back into the Kimberley Process for the certification of diamonds. A geological and mining research firm has been contacted with a view to conducting a study of raw diamond production capacity in the Congo.

Eligibility under the HIPC and DSA

It is evident from the staff preliminary document that country meets the criteria set the enhanced Heavily Poor Countries (HIPC) Initiative. Indeed, ranked 144th out of 177 countries under the 2004 United Human Development Index, Congo counts among the poorest countries in the world and it is heavily indebted. 70 percent of the population is estimated to live below the poverty line of 1$ a day. Unemployment affects more than 50 percent of the active population, with youth being particularly affected. The Congo’s financial situation has been made worse by an unsustainable external debt burden. From staff calculation, it is evident that external debt would remain above the HIPC threshold, even after application of traditional debt relief mechanisms, with a ratio of net present value of debt to government fiscal revenues well above the threshold of 250 percent on the basis of end-2003 data. Therefore, debt relief will be crucial to help accelerate progress toward meeting the MDGs. My authorities are fully committed to the adjustment process and to the objectives of poverty reduction. They have also achieved remarkable track record of program implementation. In light of these, they look forward to benefiting from the enhanced HIPC Initiative and reaching of the decision point in 2005.

Poverty Alleviation Strategy

Work on the preparation of the final PRSP is continuing. The steps that the authorities will implement in 2005 are the following: (i) strengthening the national Committee on Combating Poverty; (ii) strengthening the representation of civil society organizations on the Permanent Technical Secretariat; (iii) organizing a government seminar on the formulation and implementation of the poverty reduction strategy, and proposing measures to address the concerns of private sector and civil society; (iv) developing an action plan for the effective participation of civil society organizations, the private sector, and Parliament in the process of preparing and drafting the final PRSP; (v) conducting surveys on household expenditures and on demography and health; and (vi) preparing a detailed timetable for implementing a functional classification of government expenditures.

In light of some weaknesses encountered in the implementation of the I-PRSP in 2004, as the share of pro-poor spending in total primary expenditures was somewhat below the target, the authorities are determined to refocus their attention on poverty reduction. They plan also to monitor pro-poor spending on a quarterly basis.

My Congolese authorities are aware of the constraints surrounding the implementation of the I-PRSP. In that regard, to further deepen ownership, they remain committed to strengthening the participatory process.

Conclusion

My Congolese authorities have continued to make significant efforts to consolidate peace and political stability since the country emerged from a conflict situation, which has helped them achieve a good track record of policy and reform implementation.

The authorities have prepared an interim poverty reduction strategy paper, and the final PRSP is expected to be completed by 2006. My Congolese authorities are committed to continuing working closely with their partners to achieve the goals of sustained growth and poverty alleviation and to strengthen institutional capacity. In this context, my authorities are hopeful that they can continue to rely on the support of the international community to help them create a solid foundation for economic development and poverty reduction. Being a post conflict country, my authorities are confronted with daunting challenges. The authorities are determined to address them. However, the high debt burden constitutes a serious obstacle to development. In light of progress achieved so far, they are hopeful that the Congo will access to debt relief this year.