Republic of Congo
Enhanced Initiative for Heavily Indebted Poor Countries: Decision Point Document

This paper on the Enhanced Initiative for Heavily Indebted Poor Countries (HIPC) for the Republic of Congo explains medium-to-long-term strategy for poverty reduction. Emerging from a conflict situation, and starting from a low base, Congo has made significant progress in implementing macroeconomic, financial, and structural reforms. Debt relief under the enhanced HIPC Initiative is expected to reduce Congo’s external debt by about one-third. The authorities have emphasized that Congo’s external debt remains unsustainably high and could further delay its economic and social reform programs.

Abstract

This paper on the Enhanced Initiative for Heavily Indebted Poor Countries (HIPC) for the Republic of Congo explains medium-to-long-term strategy for poverty reduction. Emerging from a conflict situation, and starting from a low base, Congo has made significant progress in implementing macroeconomic, financial, and structural reforms. Debt relief under the enhanced HIPC Initiative is expected to reduce Congo’s external debt by about one-third. The authorities have emphasized that Congo’s external debt remains unsustainably high and could further delay its economic and social reform programs.

I. Introduction

1. This paper presents an assessment of the eligibility of the Republic of Congo (hereafter “Congo”) for assistance under the enhanced HIPC Initiative. The Executive Boards of the IMF and IDA discussed the preliminary HIPC document (IDA Report No. 33252-CG, August 2005; IMF Country Report No. 05/391, November 2005) for Congo on August 1 and 25, 2005, respectively. On these occasions, Executive Directors made a preliminary determination that Congo could be eligible for assistance under the enhanced HIPC Initiative on the basis of its heavy debt burden, its track record of performance under IDA- and IMF-supported programs, and its status as an IDA-only and PRGF-eligible country. Directors generally agreed that Congo could reach its decision point by end-2005, provided that policy implementation under the government’s macroeconomic and structural program is satisfactory.

2. The debt sustainability analysis (DSA) herein indicates that Congo’s external debt burden 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-2004 data.1 Debt relief under the enhanced HIPC Initiative would help accelerate progress toward meeting the Millennium Development Goals (MDGs).

3. Section II provides background information on Congo’s qualification for debt relief under the enhanced HIPC Initiative, the dimensions of poverty, political and security developments, and the policy track record to date. Section III discusses the Poverty Reduction Strategy Paper (PRSP) process, medium-to-long-term macroeconomic objectives, and the sectoral and structural reforms to be implemented before reaching the completion point. Section IV presents the key DSA results. Section V presents the floating completion point triggers, specifies how the enhanced HIPC Initiative assistance after the decision point will be used and tracked, and reports the views of the authorities. Finally, Section VI proposes issues for discussion by Executive Directors.

II. Background and Assessment of Eligibility and Qualification for HIPC Initiative Assistance

4. Following the elections held in 2002 and the relative stability that has ensued, Congo has been in a position to establish the prerequisites for reaching the decision point under the enhanced HIPC Initiative. It has made satisfactory progress in building a track record of macroeconomic stability and structural policy implementation, prepared an interim Poverty Reduction Strategy Paper (I-PRSP), and made significant progress in normalizing relations with creditors. This section discusses the achievement of these prerequisites in greater detail.

A. PRGF and IDA Status

5. Congo is an IDA-only country, with a GNI per capita of US$7702 in 2004 (Box 1), and is eligible to receive resources under the IMF’s Poverty Reduction and Growth Facility (PRGF). Congo will continue to need concessional assistance from the international community and is likely to remain an IDA-only country and eligible for PRGF resources for the foreseeable future.

B. Dimensions of Poverty

6. Once classified as a lower-middle-income economy, Congo experienced a continuous decline in per capita income from the mid-1980s to the late-1990s. This adverse trend coincided with the overvaluation of the CFA franc in the second half of the 1980s, three armed conflicts in the 1990s, and institutional weaknesses. Per capita real GDP in 2004 was about 70 percent of its 1984 level. As a result, poverty increased significantly, especially in the 1990s following the conflicts.

7. Successive and intense rounds of civil wars (1993, 1997, and 1998–99) had significant negative socio-economic consequences (Box 1 and Table 1). It is estimated by the World Bank that 70 percent of the population lives below the poverty line (defined as US$1 per day) compared to about 30 percent in 1993. The 2004 United Nations human development index ranked Congo 144th out of a total of 177 countries. The pervasiveness of poverty is further reflected in labor force statistics. Unemployment affects more than 50 percent of the active population, with youth being particularly affected.

Table 1.

Selected Economic and Social Performance Indicators, 1980–2004

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Sources: Congolese authorities, and staff estimates and calculations.

Noninterest current expenditure plus domestically-financed investment.

In percent of the children of secondary school age.

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

Selected Poverty and Living Standard Indicators

(In percent, unless otherwise specified)

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Source: World Bank, Economic and Social Indicators database.

C. Recent Political and Security Developments

8. Recent political developments are encouraging against the background of recurrent conflicts in the 1990s. Under the umbrella of peace, Congo completed a four-year political transition period, held elections, and made significant progress in putting in place democratic institutions required by the Constitution. Peace and security have improved since a new government was appointed following a constitutional referendum and presidential, legislative, local, and senatorial elections, all held during January–June 2002.3 The government signed a peace accord with a hold-out rebel group and, over the past two years it has launched a program to demobilize former combatants. Nonetheless, the security situation remains fragile, as indicated by rebel attacks late last year which forced suspension of services on the vital Brazzaville-Pointe Noire rail line, the rebel attack on a UNDP convoy in the Pool region in April 2005, and skirmishes that erupted in October 2005 in a suburb of Brazzaville.

D. Macroeconomic and Structural Reform Record

9. Emerging from a conflict situation, and starting from a very low base, Congo has made significant progress in implementing macroeconomic, financial, and structural reforms. Large challenges remain, however, including the need to further enhance transparency in the management of Congo’s natural resources, and strengthen budget management, address widespread and primarily urban poverty, and continue to demobilize armed combatants.

10. The overall improving political and security conditions allowed the authorities to make good progress toward restoring macroeconomic and financial stability. Since end-2002, the government has focused on the country’s economic and social recovery within the framework of its “Nouvelle Espérance” (New Hope) program. The government’s efforts were supported by IMF, IDA, and donors:

  • On the IMF side, support was provided through an Emergency Post Conflict Assistance (EPCA) in 2000 (in an amount equivalent to SDR10.6 million) and close monitoring of the authorities’ efforts to strengthen the framework for policy implementation through four staff-monitored programs (SMPs) during 2001–04. Reform implementation had been uneven under the EPCA and the first three SMPs, but significant progress was made in enhancing oil sector transparency and public finance management under the 2004 SMP (see below). On December 6, 2004, the Executive Board of the IMF approved a three-year arrangement under the PRGF for Congo in an amount equivalent to SDR 54.99 million (65 percent of quota) to support the government’s economic program through 2007.

  • Support from IDA was provided through balance-of-payments support consisting of a Post Conflict Economic Recovery Credit of US$37.6 million in July 2001 and an Economic Recovery Credit of US$30 million in December 2004. The latter focuses on reforms in the oil sector and improving performance with respect to public investment4. IDA also has several ongoing investment projects put in place since the return of peace to strengthen governance and social welfare. These include (i) a Transparency and Governance Capacity Building Project for US$7 million, which has focused mainly on improving transparency and governance in the oil sector and in public sector financial management, and will continue to do so for the next few years; (ii) an Emergency Infrastructure Rehabilitation and Living Conditions project for US$40 million; (iii) an Emergency Recovery and Community Support Project for US$41 million; (iv) an HIV/AIDS and Health project for US$19 million; and (v) a Support to Basic Education Project for US$20 million.

  • The African Development Bank (AfDB), European Union, and bilateral donors have also provided important assistance. In addition, an agreement was reached on December 16, 2004, between Paris Club creditors and Congo for a debt stock reduction and arrears rescheduling.

11. The onset of peace in 1999/2000 boosted economic activity and contributed to macroeconomic stability (Table 1 above), helped by enhanced macroeconomic management and the significant rise in oil prices. Non-oil real GDP increased by about 9½ percent per annum on average during 2000–04, propelled by improvements in agriculture, commerce, and transportation. The basic primary fiscal balance has improved since the late 1990s. Consumer price inflation declined significantly, helped by the trend toward fiscal consolidation, a more reliable supply line from Pointe-Noire to Brazzaville, and a strengthening of the euro (to which the CFA franc is tied) vis-à-vis the U.S. dollar.

12. Following repeated setbacks in the implementation of economic reforms under the 2001–03 SMPs, a noticeable break with the past cycle of poor governance and weak economic management has been observed since late 2003:

  • The recent significant improvement in the fiscal position is attributable to tighter control of expenditure, high oil revenues, and mobilization of non-oil revenues. Noteworthy, public finance reforms have been undertaken with respect to the budget framework, revenue mobilization, and expenditure and cash management (Box 2).

  • The government placed strong emphasis on improving governance, and especially on enhancing oil sector management and transparency (Box 3). Nonetheless, more transparency has also brought to the fore remaining key weaknesses in oil sector management (e.g., SNPC’s accounting, internal control, management information system, and marketing of government oil). Yet, implementation of the action plan aimed at remedying issues raised by the SNPC audits has been slower than programmed, especially with respect to strengthening accounting, updating estimates of petroleum assets, and defining responsibilities within the corporate structure.

  • Significant steps have been taken to improve relations with creditors since the beginning of 2003, but with differing degrees of success (see Section IV.B). The government has contracted no new loans with maturity exceeding one year using oil as collateral since October 2002.

13. Further structural and sectoral reforms are being undertaken or have been initiated as follows:

  • The privatization of state-owned banks was successfully completed. Nonetheless, the government has temporarily taken over a bank in critical condition to protect depositors, allow an orderly restructuring, and prepare it for reprivatization. A restructuring plan, prepared with technical assistance from the regional supervisory agency (COBAC), was adopted by the bank’s board in December 2004. This bank is under intensive surveillance by the COBAC.

  • The government is improving the legal and regulatory framework as a way to prepare or accompany liberalization, privatization, and private/public partnership, notably in telecommunications, electricity, water, and petroleum distribution.

  • The distribution of refined oil products is being privatized, although the transfer of property titles is not yet complete.

  • The government succeeded in attracting private operators in mobile telecommunications, with improvements in quality and price of service.

  • The government significantly reduced the rate of the tax on corporate profits and in parallel adopted an investment charter rationalizing tax holidays.

  • The government established a one-stop window to facilitate investment procedures.

Steps to Strengthen Public Finance Management

Budget framework

  • Centralization of revenues and expenditures within the budget framework, including phasing out of off-budget government spending by oil companies.

  • Reduction of delays in preparing and submitting the budget to parliament.

  • Improved coordination between the Ministries of Finance and Planning on budget preparation.

  • Strengthening of management and technical capacity at the Finance Ministry.

Revenue mobilization

  • Quarterly certification, by an audit firm of international reputation, that oil revenues due to the government by oil companies are consistent with proceeds registered at the Treasury.

  • Certification, by an audit firm of international reputation, of the 2004 forestry tax revenues.

  • Completion of “cost oil” audits for the year 2003, by audit firms of international reputation, for all production-sharing contracts.

  • Adoption in March 2004 by the government of a dividend policy for the SNPC, reserving at least 30 percent of the 2003 net profits to the Treasury and 20 percent in subsequent years.

  • Strengthening of the coverage of the territory by tax and customs administration through the establishment of more provincial offices.

  • Efficiency enhancement of revenue-collecting agencies through the operational audit of the General Directorates of Tax and Customs.

  • Launching of the computerization of the systems at the General Directorates of Tax and Customs.

  • Use of a single taxpayer identification number (NIU) to improve the tracking of taxpayers and limit tax evasion.

Expenditure and cash management

  • Preparation of data tracking government spending at various stages of the expenditure circuit (commitment, issuance of payment orders, cash payments).

  • Preparation of regular data to track poverty-related spending.

  • Abstention by the government from contracting new oil-collateralized debt.

  • Significant reduction of exceptional spending procedures (paiement par anticipation).

  • Preparation of consolidated treasury accounts.

Recent Reforms in the Oil Sector

Considerable progress has been made in reforming the oil sector, and in particular in improving oil sector transparency. Nevertheless, major weaknesses remain, especially with regard to SNPC’s internal controls, management information system, and accounting (with auditors noting a lack of access to adequate information), marketing of government oil, and awarding concessions on government oil contracts. Key remaining weaknesses are to be addressed in the period ahead under the PRGF arrangement as well as under different World Bank programs. Past reforms were focused on the following areas:

Ensuring full mobilization of government oil revenue

  • Creation in 2003 of the specialized Oil Monitoring Unit (OMU) in the Ministry of Finance to (i) forecast oil revenues based on fiscal parameters in Production Sharing Agreements (PSAs), (ii) compare forecasts with outcomes, and (iii) represent the Ministry’s interests in oil-related transactions.

Monitoring SNPC activities

  • Audit of the 1999–2001, 2002, and 2003 SNPC financial accounts by an audit firm of international reputation. These covered the SNPC’s financial consolidated statements, internal controls, and fiscal agency functions (notably oil sales, oil-based financing, and sovereignty expenditures).

  • Audit, by an audit firm of international reputation and in accordance with international standards on auditing, of the 2002 financial accounts of the national oil refinery (CORAF).

  • Adoption by the government in March 2004 of a plan to implement the recommendations of the 1999–2001 audit of the SNPC with a view to improving the company’s accounting, internal control, management information system, reporting and accountability.

  • Preparation by the government of a strategy aimed at ensuring that the SNPC focuses on core activities in the oil sector.

Enhancing transparency

  • Publication on official internet sites (www.mefb-cg.org) of (i) the 2003 SNPC audit, and significant excerpts from the 1999–2001 and 2002 audits; (ii) the plan to reform the SNPC’s operations; (iii) oil certification reports; (iv) PSAs; and (v) key oil-related data.

  • Organization by the government and SNPC of seminars on the oil sector for parliamentarians in Brazzaville in November 2003, and for the public in Pointe Noire in May 2004.

  • Public announcement by the government of its commitment to adhere to the Extractive Industries Transparency Initiative (EITI) (June 2004).

E. Recent Performance Under the PRGF Arrangement

14. Since the issuance of the preliminary document, indications are that performance under the PRGF arrangement has remained broadly on track (see below). A full description of performance will be undertaken in the context of the second review under the PRGF arrangement, planned for March 2006.

15. Preliminary indications are that eight of the ten quantitative performance criteria for end-September 2005 under the program supported by the PRGF were met: (i) a ceiling on the change in the net claims of the banking system on the government; (ii) no new medium- or long-term nonconcessional borrowing; (iii) no new external debt (including leasing) with an initial maturity of less than one year incurred or guaranteed by the government; (iv) no new oil-collateralized external debt by or on behalf of the central government; (v) a ceiling on new nonconcessional external debt contracted by the SNPC; (vi) no new external payment arrears on nonreschedulable debt; (vii) a ceiling on domestic arrears payments; (viii) no new domestic payment arrears. However, the floor on the primary fiscal balance was missed by a large margin (see below), and the minimum payment on external arrears was missed as the authorities adhered to the December 2004 Paris Club rescheduling agreement, entailing lower-than-programmed payments on post-cutoff-date arrears.5

16. Based on preliminary data, the primary fiscal surplus fell short of its adjusted target6 by CFAF 113 billion (3.6 percent of GDP) at end-September 2005 owing primarily to exogenous factors and the authorities’ response. First, with a view to protecting Congolese assets from litigating creditors,7 an amount of CFAF 80.7 billion (2.6 percent of GDP) in revenue from oil sales not transferred to the Congolese Treasury from abroad by end-September; these revenues, however, were repatriated in their entirety in early November 2005. Second, an expenditure overrun equivalent to 0.6 percent of GDP was incurred owing to (i) higher-than-projected transfers to CORAF to cover the company’s higher losses in the face of partial adjustment of fuel pump prices, and (ii) automatic payments to private oil companies for their 2004 oil delivery to CORAF that had remained unpaid.8 Third, although the world oil prices were higher than programmed, raising the (adjusted) primary fiscal surplus target under the program, the positive revenue impact was offset to some extent by the sharp rise in the discount on Congolese crude oil.9 In addition, fees and commissions related to asset protection efforts noted above increased sharply.

17. The two structural performance criteria slated for the third quarter of 2005 were observed. First, the government adopted an action plan (including a timetable) for the introduction of an automatic price adjustment mechanism for refined petroleum products. The plan envisages implementing a new price structure in 2006, following the completion of two studies, with World Bank technical assistance, to undertake a social impact analysis and an economic and strategic review of the CORAF. Second, the certification of forestry revenues in 2004 by an audit firm of international reputation was completed and the report was submitted to the government.

18. Most structural benchmarks were also observed, including (i) adoption by the government of a strategy to refocus the activities of the SNPC on its core activities in the oil sector along with an implementation timetable; and (ii) certification of oil revenues by an audit firm of international reputation for the second quarter of 2005 and the publication of the related report on the Internet site. Nonetheless, the auditors for the oil revenue certification did not have direct access to treasury bank accounts for verifying oil revenues due to the government against cash receipts; in November, the government and the audit firm came to an understanding on direct information access for oil revenue certification starting in the last quarter of 2005. The benchmark on the adoption by the government of a comprehensive plan for the settlement of domestic arrears was missed, although the process for reaching an agreement with creditors was launched with IDA technical assistance from a private firm specializing in this field. The treatment of domestic arrears would include treatment of social arrears, including the preparation in 2006 of a settlement plan for the latter. Some progress was made toward strengthening the banking system. First, an audit firm of international reputation completed an audit of the statement of the loan portfolio as of March 31, 2005 of a bank in difficulty. Second, with assistance from of the Central African Banking Commission (COBAC), the government prepared an action plan to further strengthen recovery of the banking system’s nonperforming loans.

19. The Congolese authorities plan to request waivers for the nonobservance of the two quantitative performance criteria noted above at the time of the second review under the PRGF arrangement. Key issues for discussion with the authorities at the time of the next PRGF review would include management of oil revenues, strengthening of the quarterly reconciliation/certification of oil revenues, the marketing of government oil by the national oil company, the awarding of contracts on oil concessions, governance and transparency in general, the schedule of retail fuel price adjustment, and the status of CORAF’s losses.

III. Medium-to-Long-Term Strategy for Poverty Reduction

A. PRSP Formulation Process

20. In 2004, the government prepared an I-PRSP, based on consultations with the civil society and donors. The poverty reduction strategy proposed in the I-PRSP presents a long-term vision of development based on five pillars: (i) consolidation of peace and good governance; (ii) consolidation of macroeconomic stability and promotion of key economic sectors; (iii) improving access to basic social services and social protection; (iv) improving access to infrastructure; and (v) strengthening the fight against HIV/AIDS.

21. The staffs of the IMF and IDA consider that the I-PRSP provides an appropriate framework for poverty reduction and use of resources that could become available under the enhanced HIPC Initiative. The I-PRSP was analyzed in a joint staff advisory note (JSAN), which recommended (i) widening the participatory process to include a larger component of civil society, (ii) improving the quality and availability of data with a household expenditure survey, and (iii) continuing to focus on targeted areas of intervention such as fiscal transparency, economic growth, public finance management, and the legal framework.

22. The government has begun the preparation of a full PRSP. With IDA assistance, a donors’ meeting10 was organized in February 2005 to evaluate the I-PRSP implementation process and to prepare the groundwork for a full PRSP. A key outcome of the meeting was the creation of a donor coordination body to support the PRSP process and to facilitate donor participation in the formulation of activities. A full PRSP is expected by late 2006.

23. The participation process for a full PRSP will be broadened and deepened by including the input of civil society early in the design process. To enable an improved poverty diagnosis, a rapid poverty assessment was conducted in June 2005, and a household survey, which is underway, is expected to be completed by end-March 2006. The implementation of the Core Welfare Indicators Questionnaire (CWIQ) will be an opportunity to reassess the level of poverty in the country and the main vulnerable groups, and to provide a benchmark assessment of the state of social service delivery. Beyond the national household survey, steps will need to be taken to strengthen the country’s monitoring and evaluation system for the full PRSP.

B. Macroeconomic Objectives

24. Given that the decision point is being presented on a standalone basis, the macroeconomic projections used are those discussed in the preliminary HIPC document (Tables 4 and 5).11 The forecasts are based on assumptions of continued progress on peace and reconciliation, sound macroeconomic policies, increased investment in infrastructure and human capital, structural reforms that promote a business-friendly environment, and policies that significantly enhance transparency and governance and promote sound institutions and the rule of law. The baseline scenario assumes that Congo benefits from traditional debt relief mechanisms, with a significant downward impact on debt service. In addition, the composition of public expenditure is expected to shift in favor of pro-poor capital outlays. More broadly, and in line with the authorities’ I-PRSP, the projections assume that the share of pro-poor spending in overall outlays will increase in order to allow Congo to make progress toward the MDGs.

Table 4.

Republic of Congo: Selected Economic and Financial Indicators, 2001–07

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

Including grants.

Revenue (excluding grants) minus noninterest current expenditure minus domestically financed capital expenditure and net lending.

Including public transfers.

From 2005 onward, world oil price forecasts incorporate a prudence factor. As a result, WEO price forecasts are reduced by US$4 per barrel.

Additional revenue that would be generated by using WEO forecasts for world oil prices, that is, without applying the price rule.

Table 5:

Republic of Congo: Selected Indicators of Long-Term Macroeconomic Projections, 2004–24

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Sources: Congolese authorities; and staff estimates and projections.

25. Reflecting the above assumptions, real GDP growth is projected at close to 5 percent per year during 2005–24, with a rise in investment (Tables 45). In view of depleting oil production, the non-oil sector’s importance is projected to rise significantly over the long run. Oil production is expected to increase until 2010 as new oil fields come on stream, and then to decline over the following two years as this positive effect is offset by the depletion of older oil fields. Non-oil real GDP growth, by contrast, is projected to rise steadily over the period, largely on account of higher investment, reflecting the positive impact of structural reforms designed in particular to promote greater private sector activity. The projected economic growth is below that needed to halve the proportion of the population living below the poverty line (i.e., about 8 percent per annum in the non-oil sector), but it is considered realistic. As a point of reference, non-oil real GDP growth has averaged about 3.3 percent per year during 1980–2004.

26. As a member of a monetary union, sound fiscal policy is the main domestic policy instrument to secure macroeconomic stability. Inflation is projected to average about 2 percent annually, mostly reflecting a prudent fiscal policy. The macroeconomic projections assume an improvement in the non-oil basic primary fiscal balance from non-oil revenue mobilization and better expenditure management. A number of recent measures have been taken to widen the tax base and extend the reach of the central administration (Box 2). Medium- to -long-term measures to enhance non-oil revenues include: the conduct of regular tax audits; the establishment of computerized links between the various customs and tax administration offices; the use of the single taxpayer identification number; and the streamlining of discretionary tax exemptions. It is expected that compliance by taxpayers would rise significantly on the basis of improved government services. Thus, non-oil revenues are projected to rise steadily to reach about 16½ percent of GDP by 2024.

27. The overall budget balance is projected to remain positive throughout the forecast period, but to decline significantly from 2012 onward reflecting a projected decline in oil revenues. The authorities are assumed to continue implementing a conservative fiscal rule regarding oil revenue projections; under the rule, oil revenues (and, consequently, expenditures) should be projected on the basis of conservative oil price projections (IMF WEO projected price minus US$4 per barrel).

28. Export and import volumes are expected to grow by 3½ percent and 5 percent respectively per year on average during 2005–24. As a result, the external current account balance would move to a small deficit position on average during this period (from a small average surplus position during 2000–04). Congo has an immediate balance-of-payments need stemming primarily from the need to settle large external arrears to commercial creditors amounting to some US$3.4 billion (74 percent of 2004 GDP). Debt relief will be key to meeting these financing requirements. In 2005, however, financing is assured, thanks to resources already committed by bilateral and multilateral donors, and financing assurances provided by Paris Club creditors.

C. Governance, and Structural and Institutional Reforms

29. In view of Congo’s heavy dependence on oil, enhancing transparency in oil sector operations is a key aim of the government’s reform program. To this end, the government has implemented a number of reforms, supported in part by the IDA-financed Governance and Transparency Capacity Building Project. This included audits of the SNPC’s accounts (Box 3) while key recommendations of the 1999–2001 audit were incorporated into an action plan, designed with the support of IDA.

30. The SNPC action plan is being implemented, although with some delays, and, in order to improve implementation, the government has hired a private consulting firm to assist in the process. An evaluation, undertaken in early January 2006, indicates that 9 out of the 20 actions have been completed, another 5 are near completion (including reinforcement of the Hydrocarbons unit in the Ministry of Finance, establishment of a human resources and training strategy, reconciliation of cross debts with the State for the period 1999–2003), leaving 6 which are far from completion at this time. These pertain to the study to model reserves and oil revenues (action 1), the reform of the accounting system (action 6), the verification of partner accounts (action 10), the verification of past petroleum costs (action 12), the study of petroleum reserves (action 13), the elaboration of operating procedures and manuals for SNPC departments (action 15), and the establishment of a management information system (action 19). The government has stressed the need to improve the quarterly reconciliation of revenues, to ensure that the marketing of oil by SNPC, whether undertaken directly or indirectly, is in line with best international practice as regards prices obtained, the fiscal take, and the timely transfer of revenues to the Treasury. To this end, it intends to commission appropriate studies with the assistance of the international financial community, in particular IDA and the IMF. These studies are expected to be completed and their recommendations implemented before the completion point. Furthermore, the government intends to take all measures needed to permanently eliminate potential or actual conflicts of interest, whereby senior SNPC officials are able to have interests in companies with which SNPC has a business relationship. It has already taken a number of steps to eliminate several such conflicts of interest that have been made public during 2005.

31. The government publicly announced in June 2004 its commitment to adhere to the Extractive Industries Transparency Initiative (EITI).12 While progress has been slow toward full participation in this initiative, the following developments since the June 2004 announcement are noteworthy:

  • The government reaffirmed its commitment to the EITI at a round table organized by Publish What You Pay, an NGO, in Pointe Noire in February 2005; this meeting was also attended by representatives from other NGOs, the national oil company (SNPC), and private oil companies operating in Congo.

  • Following the EITI conference in London in March 2005, Congo was named in a press communiqué as one of nine countries that had made progress in improving transparency in the management of their oil revenues.

  • In September, the government convened an EITI workshop with civil society and oil companies, during which a 25-member EITI Executive Committee was nominated. The authorities have also recently launched a website (www.mefb-cg.org/eiti) with information on EITI implementation in Congo. The next step will be the preparation of the Committee’s Action Plan.

32. With regard to public expenditure management, the government plans to (i) adopt a functional classification of budget expenditure including for poverty related expenditures, with IMF and IDA technical assistance; (ii) streamline the spending chain in order to strengthen the framework for tracking expenditures from commitment to payment stage; (iii) complete the computerization of budget execution; and (iv) review the public procurement system, with IDA technical assistance. In addition, with technical assistance from IDA and IMF, the government plans to adopt a medium-term budget framework. Such a framework would enable improved management of both oil- and non-oil revenues and a better mapping of expenditures with the priorities identified in the PRSP, taking into account the sustainability of these expenditures. Bearing in mind the importance of oil revenues in total government receipts, as well as the volatile and uncertain nature of oil revenues, a regular update evaluating the level of reserves and the trajectory of oil production will be undertaken so as to obtain the best estimates over the medium-long term.

33. World Bank and IMF staffs will assist the authorities in the evaluation of existing systems of public finance management, and the identification of areas where reforms and technical assistance are needed. The World Bank expects to undertake a Country Integrated Financial Assessment in the next few months, and to hold a seminar in May/June 2006.13 This process will help identify the key reforms needed with respect to revenue mobilization and expenditure management, control and auditing, as well as procurement reform. The Bank will conduct a Public Expenditure and Financial Accountability (PEFA) exercise. Subject to requests from the authorities, the IMF would provide technical assistance through the Fiscal Affairs Department, and the Bank through the Transparency and Governance Project, as well as the Emergency Recovery and Community Support Project. Through these actions, major reforms are expected to be designed and implemented between the decision and completion points, particularly as regards the efficiency of public expenditure, especially those related to poverty reduction and public investment, as well as procurement. On the revenue side, further improvements are to be expected in the certification and reconciliation of oil revenues and the mobilization of non-oil revenues.

34. The forestry sector has a number of weaknesses, including modest transfer of receipts to the treasury, illegal logging, weak regulatory framework, and lack of transparency and competition in awarding concessions. Actions taken by the government to start enhancing forestry sector management include: (i) hosting, in February 2005, a Summit of Central Africa Heads of States which focused largely on resource management and governance issues; (ii) auditing forestry sector revenues for 2004 by an independent auditor; and (iii) initiating, in October 2005, a three-month test project to strengthen the control operations against illegal logging, with assistance from international observers. Looking ahead, with technical assistance from IDA, the government plans to undertake regulatory and institutional reforms, and adopt market-based instruments.

35. Private sector development is key to pro-poor growth, but Congo’s external competitiveness suffers from the high cost of doing business (see, for example, the World Bank’s Doing Business database).14 Actions underway to promote the sector include reforming the legal and judicial framework for business, with better guarantees of property rights and the independence of the judiciary. Progress with privatization in the areas of refined petroleum products distribution, as well as banking and telecommunications, are expected to be consolidated. In particular, the telecommunications sector is jeopardized by regulatory bottlenecks and competitive restrictions that need to be addressed in order to ensure open and fair access and a positive investment climate. Furthermore, the water and electricity utilities will be rehabilitated and their management upgraded in order to improve service delivery and the prospects of privatization. Efforts would also continue to complete the concession of the vital Pointe Noire-Brazzaville railways link.

36. Finally, and more generally, the government intends to adopt and implement the recommendations of a diagnostic governance and anti-corruption study, to be undertaken by an independent group of internationally reputed experts, assisted by the national anticorruption committtee.

D. Social and Sectoral Policies

37. Congo is far from meeting the MDGs relating to mortality, health, and education. Public sector contribution to social services has been inadequate to restore services that were diminished or lost due to the effects of conflict. The government plans to take a number of actions to enable Congo to make significant progress in reaching the social MDGs.

38. In the education sector, the government has prepared an “Education for All Action Plan” which aims to reach universal primary enrollment by 2015 by improving access, quality and efficiency. The efforts in the short term are focused on rehabilitating facilities destroyed during the war and on improving the quality of education, notably through: (i) decentralizing management and delivery of services, (ii) strengthening of partnerships with civil society at the community and school level, (iii) training and hiring teachers, and (iv) enhancing efficiency and transparency of the system (in particular eliminating fictitious teachers). The Ministry of Education has joined the campaign against HIV/AIDS by educating teachers and students. Over the medium term, a key objective will be to improve access, quality, and relevance at secondary and higher education establishments by updating technical education and university curricula, improving efficiency, and introducing reforms in higher education financing.

39. The health system is severely damaged and cannot deliver minimum preventive and curative services to the population. This is due to several factors, including the state of disrepair of many health facilities, the contraction of personnel accompanied by their concentration in cities and low morale, and long standing problems in the pharmaceutical sector which contribute to making access to health care too costly for the poor. The Ministry of Health and Population has recently developed a National Health Development Plan, ratified in June 2005, which is to serve as a basis for reform. The Ministry has since started recruiting health personnel. In addition, the government has been negotiating a health project with the European Union. The objectives of this project are to provide support to the pharmaceutical sector, in particular to establish an independent national drug agency with management autonomy, and to assist with service provision in three sub-regions. The government also maintains an ongoing dialogue with IDA and intends to request its assistance to finance reforms in the health sector.

40. With regard to HIV/AIDS, in 2003 the government prepared a National Strategic Plan for Combating HIV-AIDS for 2003–06 (Cadre National de Lutte contre le VIH-SIDA). The plan was based on recommendations made during consultations throughout Congo during the second half of 2003, including the need for prevention and changes in behavior through counseling and early testing. In 2004 the government obtained an IDA grant designed to finance the implementation of the National Plan in five sub-regions (covering 82 percent of the population), including interventions to be carried out by NGOs. The sectoral plans included a strategy to inform and assist particular vulnerable groups by ministry (e.g., the Ministry of Defense has a strategy to inform, screen and assist soldiers, and the Ministry of Education focuses on students and teachers). Recently Congo was granted funding from the Global Fund for HIV/AIDS, Malaria and Tuberculosis, which will make it possible to implement the “National Strategic Plan for Combating HIV-AIDS for 2003–06.” Financing from IDA and Global Fund will ensure that the necessary resources will be available to carry out the fight against HIV/AIDS over the next three years. During 2006, the National Commission for HIV/AIDS will evaluate the progress made since 2003 and develop a new national strategic plan for 2007–09.

41. Congo is highly urbanized, with about 70 percent of the population residing in urban areas. Urban living conditions are characterized by an imbalance among inner-city neighborhoods, which are sparsely populated and have access to functioning infrastructure, and the peripheral neighborhoods, which are often densely populated and lack basic socioeconomic amenities. During consultations held with civil society on urban poverty in June/July 2005, the government decided to focus on the following two constraints: (i) securing land ownership and tenure, and (ii) setting up of financing mechanisms to improve the supply of housing to the population. Addressing these constraints would reduce the vulnerability of city dwellers.

IV. Debt Sustainability Analysis and Possible HIPC Assistance

A. Debt Reconciliation Status

42. The DSA presented below was prepared jointly by the authorities and the staffs of IDA and IMF.15 It is based on loan-by-loan data provided by the authorities and creditors for outstanding external public and publicly guaranteed debt as of end-December 2004. The debt reconciliation exercise was carried out by a joint IDA-IMF mission to Brazzaville in September 2005. As of December 2004, about 80 percent of outstanding debt has been reconciled with creditors.16 Financial obligations of the SNPC to private oil companies, amounting to US$ 941 million, do not constitute external debt.17 In staff’s judgment, the data, including for the oil sector, underlying the debt sustainability analysis are reliable.

B. Structure of External Debt

43. Congo’s public and publicly guaranteed external debt is estimated to be US$9.2 billion in nominal terms, or $9.0 billion in net present value (NPV) terms as of end-December 2004, before considering the Paris Club debt treatment (Table 2 and 6).18 This level of debt corresponds to an NPV of debt of 661 percent of fiscal revenues, and 252 percent of exports as of end-2004.

Table 2:

Net Present Value of External Debt, end-2004

(In units indicated)

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Sources: Congolese authorities; and Fund and Bank staff estimates and calculations.

Excluding potential debt of the SNPC.

Assuming Naples terms.

Table 6.

Republic of Congo: Nominal and Net Present Value of External Debt by Creditor Group at Decision Point, End-2004 1/

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Sources: Congolese authorities; and staff estimates.

Figures are based on data as of end December 2004, before signing of the bilateral agreement minutes from the December 2004 Paris Club agreement.

After a stock of debt operation on Naples terms at end-2004 on official bilateral and commercial debt.

European Economic Commission loans administered by IDA classified as multilateral loans in the preliminary document have been reclassified as Paris Club bilateral loans at decision point.

44. There are a number of features of the Congolese external debt that make it relatively unique among HIPCs; key features of the debt structure (in NPV terms) at end-2004 are as follows (Figure 1, Table 2):

Figure 1.
Figure 1.

Republic of Congo: Net Present Value of Outstanding Debt at end-2004 by Creditor Group before Traditional Debt Relief Operations

Citation: IMF Staff Country Reports 2006, 148; 10.5089/9781451808605.002.A001

Sources: Congolese authorities; and staff estimates.
  • Together, debt to multilateral and official bilateral creditors accounts for about 63 percent of the total outstanding debt stock. Multilateral debt represents merely 4 percent of the total stock, while official bilateral debt accounts for 59 percent.

  • The remaining 37 percent of the debt is owed to commercial creditors. Of this amount, about 55 percent (or 22 percent of the total stock) is owed to non-litigating London Club creditors. The rest is owed to creditors of oil-collateralized loans (4 percent of total stock) and litigating creditors (10 percent of total stock).

45. Some of the same characteristics described above help to explain why financing assurances have been obtained for only 60 percent of the outstanding debt at the time of the decision point under the enhanced HIPC Initiative. Additional financial assurances—required to reach the 70 percent threshold for the IMF to provide its interim debt relief—are expected in 2006. Indeed, as noted below, a debt deal with the London Club in line with the enhanced HIPC framework will allow financing assurances to exceed 80 percent (the minimum required at the completion point). The absence of financing assurances to the tune of 70 percent at the time of the decision point would not, however, prevent other multilateral creditors from providing interim debt relief.

46. On December 16, 2004, Congo and its Paris Club creditors agreed to restructure the Congolese public external debt under Naples terms. Assuming comparable treatment from other bilateral and commercial creditors and clearance of multilateral arrears, the stock of outstanding external debt would then amount to US$5.2 billion in NPV terms as of end-2004 (Table 6). Congo has either cleared, or put in place plans to clear, all arrears.

C. Debt Sustainability Analysis

47. The DSA analysis shows that in 2004 Congo had significant debt in excess of the enhanced HIPC Initiative fiscal revenue threshold of 250 percent, even after the application of traditional debt relief mechanisms.19 After traditional bilateral debt relief, Congo’s debt burden is projected to fall slightly below the threshold in 2005 and subsequently to hover close to this level until 2007. After the full delivery of relief under the enhanced HIPC Initiative, the NPV of debt-to-revenue ratio (including new borrowing) is estimated to fall from 250 percent at end-2004 (after traditional relief) to 162 percent in 2005 (Figure 2; Tables 3, 7, and 8). Staff projections indicate that—assuming continued healthy GDP and export growth (5 percent and 9 percent a year respectively)—the ratio could be expected to fall subsequently and to remain well below the HIPC threshold of 250 percent over the entire projection period, reaching about 66 percent by 2024.

Figure 2.
Figure 2.

Republic of Congo: External Debt and Debt-Service Indicators, 2004–24

(In percent)

Citation: IMF Staff Country Reports 2006, 148; 10.5089/9781451808605.002.A001

Sources: Congolese authorities; and staff estimates and projections.1/ For 2005–07, it includes the arrears clearance of the Paris Club post cut-off debt as agreed in the December 2004 Naples flow agreement. Under this agreement the post cut-off arrears are repaid with less favorable terms than under the traditional relief mechanism. As a result, the debt service under traditional relief is lower than the one after enhanced HIPC for the period 2005–07.
Table 3:

External Indicators 2004 and 2005 1/

(In percent)

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Sources: Congolese authorities

All debt indicators refer to public and publicly guaranteed (PPG) debt and are defined after rescheduling, unless otherwise indicated.

Reflect a hypothetical stock-of-debt operation on Naples terms at end-2004 for official bilateral and commercial creditors.

Revenue is defined as central government revenue, excluding grants.

Exports of goods and services as defined in IMF, Balance of Payments Manual, 5th edition, 1993. Based on a three-year average of exports on the previous year.

Table 7.

Republic of Congo: Net Present Value of External Debt, 2004–24

(In millions of U.S. dollars; unless otherwise indicated)

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Sources: Congolese authorities; and staff estimates and projections.

Refers to public and publicly guaranteed external debt only and assumes a stock-of-debt operation on Naples terms (67 percent NPV reduction) at end-2004, and at least comparable action by other bilateral and commercial creditors.

Discounted on the basis of the average six-month commercial interest reference rate for the respective currency as of end-December 2004. The conversion of currency-specific NPVs into U. S. dollars occurs for all years at the base date exchange rate (December 2004).

NPV of total debt assuming the entire HIPC Initiative assistance is fully delivered as of end-December 2004.

After debt relief beyond HIPC offered by some of the Paris Club creditors on a voluntary basis.

Total assistance level under a proportional burden-sharing approach as measured by end-2004

Table 8.

Republic of Congo: External Debt Indicators, 2004–24 1/

(In percent, unless otherwise indicated)

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Sources: Congolese authorities; and staff estimates and projections.

All debt indicators refer to public and publicly guaranteed (PPG) debt and are defined after rescheduling, unless otherwise indicated.

Reflect a hypothetical stock-of-debt operation on Naples terms at end-2004 for official bilateral and commercial creditors.

Exports of goods and services as defined in IMF, Balance of Payments Manual, 5th edition, 1993.

Based on a three-year average of exports on the previous year (e.g., export average over 2002–2004 for NPV of debt-to-exports ratio in 2004).

Revenue is defined as central government revenue, excluding grants.

Assuming full and unconditional delivery of HIPC assistance in end-December 2004.

Assuming full delivery of HIPC assistance in end-December 2007.

Based on a three-year average of revenues on the previous year (e.g., revenue average over 2002–2004 for NPV of debt-to-revenue ratio in 2004).