Statement by Damian Ondo Mañe, Executive Director for Republic of Congo July 14, 2006

The completion of the Second Review Under the Poverty Reduction Growth Facility Arrangement was delayed to address important governance and transparency concerns. Macroeconomic performance was strong in the year 2005. Policy discussions focused on improving macroeconomic management against the background of continued high oil prices and efforts to further strengthen governance. The medium-term economic outlook is more favorable than expected, owing to higher oil price projections. The main objective of the fiscal policy is to strengthen the public sector balance sheet.

Abstract

The completion of the Second Review Under the Poverty Reduction Growth Facility Arrangement was delayed to address important governance and transparency concerns. Macroeconomic performance was strong in the year 2005. Policy discussions focused on improving macroeconomic management against the background of continued high oil prices and efforts to further strengthen governance. The medium-term economic outlook is more favorable than expected, owing to higher oil price projections. The main objective of the fiscal policy is to strengthen the public sector balance sheet.

A. Introduction

1. On behalf of my Congolese authorities, I would like to thank Management and staff for the constructive policy dialogue and advice, as well as for the support provided to the Republic of Congo in its continuous efforts to adjust and restructure the economy. I also wish to express our appreciation to Management for the frank dialogue held recently with H.E. President Denis Sassou Nguesso during his visit in Washington, DC. In the meeting with the Managing Director, my authorities reaffirmed their commitment to the achievement the program objectives and their program ownership. In addition, my authorities were pleased with the Fund’s decision to send a mission jointly with the World Bank for a short visit in Brazzaville in mid-June 2006 to discuss the calendar for Completion Point Triggers and the adequacy and quality of capital/infrastructure projects envisaged by the authorities for 2006. In this regard, I would like to reiterate my authorities’ determination to press ahead with the reform agenda, in order to lay the basis for sustained growth. However, my authorities concur that the successful implementation of the needed reforms will depend also on addressing the administrative and institutional capacity constraints. They hope that they can count on the support and technical assistance of the international community to help overcome these impediments to stronger, sustained growth and poverty reduction.

2. While substantial achievements took place since the first review under the current program, my Congolese authorities are fully committed to pursue efforts to meet all the conditions required to reach the completion point under the enhanced HIPC Initiative. However, my authorities would like to stress that improving access of the population to transportation services is crucial to the good implementation of the program. In this context, they regret the non-observance of the continuous performance criterion on the contracting of medium-term or long-term nonconcessional external debt, although the loan agreement recently signed with Export-Import Bank of China, will help to rapidly improve the movements of goods and population, thus, enhancing public consensus on the program. They would like to reassure the Board that in the future, they will consult the Fund for any future loan proposal. Therefore, they would like to request a waiver for the non-observance of this continuous performance criterion. In addition, my authorities request waivers for the non-observance of two quantitative performance criteria at end-September 2005, namely the floors on the primary fiscal balance and on minimum payments of external arrears. In view of the delay in completing the second review due to the protracted discussions on the HIPC decision point, they request a rephrasing of the three-year arrangement under the PRGF and its extension by six months, to June 2008.

B. Recent Economic and Financial Developments

3. Congo’s macroeconomic performance in 2005 was strong, largely reflecting oil sector developments. The improved security situation has also contributed to this good performance. Real GDP growth rate is estimated to have grown by 7.9 percent, due mostly to favorable terms of trade, and higher oil output. Non-oil sector GDP is estimated to have reached 5.5 percent, mostly driven by strong activity in construction and public works, transport, and communications. Inflation decelerated, helped by fiscal consolidation, and improved supply of goods and services as transportation bottlenecks between Pointe Noire and Brazzaville were eased. The sterilization of liquidity stemming from oil revenues, through government deposits at the central bank also played a role in this process. The external current account surplus stood to about 13 percent of GDP, due mostly to a sharp increase in oil export receipts.

4. In the fiscal area, performance was strong in 2005, as a result of tighter control of expenditures, higher oil revenues and stronger mobilization of non-oil revenues. The authorities continued to take steps to strengthen public finance management, although non-oil revenues were weaker than expected, owing mostly to weak customs collections. On the expenditure side, government spending remained broadly under control and pro-poor primary outlays grew by a half of percentage point to 4.9 percent of GDP.

5. As regards the banking sector, the level of credit to the private sector remained low. As in the past, the authorities were confronted with the issue of limited lending opportunities for banks and an inadequate legal framework for loan recovery. Efforts are underway to address the latter issue. Indeed, to further strengthen the banking system, the authorities will continue to reinforce bank credit recovery, through regular updates by banks of the list of delinquent debtors. The public treasury will also continue to assist the banks in collecting the amounts due from delinquent debtors.

C. Performance under the PRGF-supported program

6. My authorities firmly implemented their PRGF-supported program over the period from April 1 to December 31, 2005. Most quantitative performance criteria for end-September 2005 were observed, with the exception of two related to the floor on the primary balance and the minimum payment on external arrears. As these were due to factors beyond the authorities’ control, they are requesting waivers for the nonobservance of the two criteria for which corrective steps were taken. The two structural performance criteria set for end-September 2005 were observed, notably the adoption by the government of an action plan for the introduction of an automatic price adjustment mechanism for refined petroleum products, and the completion and submission to the government of a report on forestry revenues in 2004 certified by an audit firm of international reputation. With regard to structural benchmarks, most of them were observed through end-December 2005. However, the one related to the adoption by the government of a comprehensive plan for settlement of domestic arrears was missed. However, the authorities have taken the necessary steps to correct the problem. It is also important to indicate that in November 2005, a plan for settlement of commercial arrears was adopted and its implementation is well underway.

7. On transparency and governance, measures laid out under the program continued to be implemented. Notably, information on government operations continued to be made available to the public on the government’s websites (www.mefc-cg.org and www.congo-site.cg); an open and competitive bid for the audit of the process of awarding the Marine XI oil field concession was launched in 2005, as was a diagnostic study of the SNPC’s marketing strategy; the certification of the report by an audit firm of international reputation of oil revenue for the fourth quarter of 2005, as well as the audit of the 2004 consolidated accounts of the SNPC were published. Regarding the issue of privatizing the COFIPA, my authorities, at the highest level, are committed to carry out this operation in a transparent manner.

8. With regard to the Extractive Industries Transparency Initiative (EITI), an EITI committee was established and a government website (www.mefbcg.org/eiti.htm) providing information on the implementation of EITI principles in Congo was launched.

9. Following the large losses revealed by the external audit of the 2003 and 2004 operations of domestic oil refinery, CORAF, corrective measures were taken to reduce its projected losses. In this regard, the prices of oil products were increased by 11 percent in June 2006. In the energy sector, the state electricity company (SNE) has begun installing 50,000 electric meters with the aim to improve cost recovery.

D. Medium Term and Macroeconomic and Structural Policies for 2006

10. The Congo’s medium-term outlook has improved due to higher oil price projections. Total real GDP is anticipated to grow by 7.5 percent in 2006 and 7 percent in 2008. Non-oil growth is estimated to remain strong, driven by high public investment and structural reforms. Inflation is expected to remain low, with average CPI inflation estimated to be about 1.5 percent in 2006. The current account surplus is expected to remain robust. The fiscal position will be sustainable, with continued primary fiscal surplus.

Fiscal Policy and Reforms in 2006

11. Among key fiscal objectives set for 2006 is the need to strengthen the framework for the mobilization of oil and non-oil revenues; raise pro-poor spending, while taking account of absorptive capacity constraints. The authorities are also determined to improve the quality of spending, strengthen the public expenditure management system and reduce losses of public enterprises.

12. On the revenue side, in order to strengthen the oil revenue mobilization, the authorities will continue their efforts to ensure that all oil companies meet their tax obligations in a timely manner. Other measures include the continuation of the quarterly certification of oil revenues and reconciliation of oil revenues accounts; an independent audit of cost oil for all production-sharing contracts for 2004 and 2005; and the completion of a diagnostic study by an independent firm of international reputation, of the economic viability of the CORAF. With regard to non-oil revenues, the focus will be on measures to strengthen tax and customs administration, combat fraud and tax evasion, and limit discretionary tax and customs exemptions. Efforts to conduct an annual certification of forestry revenues will continue be pursued.

13. On the expenditure side, poverty reduction will remain a key element in the authorities’ policy agenda. In this regard, they have considered an important increase in pro-poor spending in line with the priorities outlined in the interim PRSP. Concerning capital spending, although an understanding was reached to accommodate additional priority investment spending up to CFAF 50 billion for 2006, my authorities still believe that being a post-conflict case with almost all basic infrastructures destroyed, Congo has to accelerate the daunting tasks of rehabilitating these infrastructure and other social equipment. For instance, an adequate resource package is needed to address recurrent electricity and water shortages, the central hospital deficiencies, as well as the transportation needs. For the latter, it is crucial to improve rapidly the functioning of the railroad linking the economic center, Pointe Noire and the capital city, Brazzaville, and to repair the airfield of Maya-Maya airport in Brazzaville. My authorities share the view that the projects to be vetted by the World Bank should be undertaken through transparent and competitive procurement procedures and approved in a supplementary budget.

14. To strengthen the expenditure management system, the authorities are committed to implement a number of measures aimed at improving the selection, evaluation, and monitoring of public investment projects. In this regard, they will establish a functional classification of government spending while pursuing modernization of the budget directorate. It is also the authorities’ intention to adopt a medium-term budget framework. As a first step in that direction, they are planning to cast the 2007 budget in a three-year framework.

15. My authorities are committed to adopt a prudent approach to using the oil proceeds deposited in a special revenue stabilization account at the central bank. Resources from that account can be used for making transfers to the budget, prepaying expensive debt, including oil-collaterized loans and liabilities due to the central bank. Moreover, this account will be subjected to annual audits by the national auditing office. As regards the special account for debt relief, similar rules will apply and an international audit firm will be hired.

Monetary Policy and Financial Sector Reform

16. Monetary policy will continue to be conducted at the regional level by the BEAC, which aims to maintain price stability and strengthen the external position. The authorities remain concerned by the low rates of return on their net foreign assets at the BEAC, and as I indicated in my statement on the Central African Economic and Monetary Community (Buff/ED/06/100 of July 7, 2006), high-level discussions are underway among member countries and other important partners to find satisfactory solution to this issue.

Structural Reforms

17. The authorities are committed to undertake major reforms to address structural weaknesses in key sectors of the economy, with the view of improving efficiency and limiting potential costs on future budgets. With regard to the fuel sector, the authorities have reaffirmed their commitment to introduce an automatic price adjustment mechanism for refinery petroleum products, following progressive elimination of implicit subsidies by September 2007. A PSIA of such a measure is being undertaken, with financial support from the World Bank. In the electricity sector, a comprehensive study will be conducted with World Bank assistance. Concerning COFIPA, the authorities will proceed with the privatization only on the basis of the report to be produced by an external consultant. The civil service will be reformed, while the two pension funds will be restructured.

18. My authorities will pursue efforts toward enhancing governance and transparency. In this vein, an anticorruption committee, which will include representatives of the civil society, will be established and an anticorruption law will be submitted to Parliament by the end of this year. Measures to improve transparency in the oil sector will be pursued. Notably, a national EITI consultative committee and a national EITI executive committee will be established. Concerning the Kimberley process, my authorities have taken actions to reintegrate the process of certification of diamonds by end-2006.

Debt issue

19. The authorities are fully engaged in making further progress towards normalizing relations with external creditors. However, reaching agreements with all commercial creditors remains a key challenge. My authorities view debt sustainability as an important element of their program and they are determined to pursue good-faith negotiations with all creditors. However, my authorities deplore the holding out of some creditors who refuse to accept the conditions agreed upon by the majority of creditors, and opt to proceed with litigations. My authorities share the view that the Fund has a role to play in bringing all creditors t the common understanding for debt resolution.

Poverty reduction strategy

20. My authorities are aware of the need to improve social indicators and accelerate progress towards achieving the MDGs. In this regard, they remain committed to strongly implement their program. Work on the preparation of a full PRSP is ongoing, with the participation of all stakeholders, including the civil society. In this area, the assistance of the World Bank remains crucial.

E. Conclusion

21. My Congolese authorities have continued to demonstrate their commitment to and ownership of their adjustment program. Under the current program, performance in the context of the second review has been satisfactory and it is my authorities’ intention to pursue their adjustment efforts. The authorities have adopted a poverty reduction strategy, and the final PRSP is expected to be completed by 2006. This strategy should allow them to implement reforms conducive to stronger and sustained growth, and job creation by developing non-oil sector activities. My Congolese authorities are committed to continuing working closely with their partners to achieve these goals of sustained growth and poverty alleviation and to strengthen capacity building. In this context, my authorities are hopeful that they can continue to rely on the support of the international community.

Republic of Congo: Second Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility, and Requests for Waiver of Nonobservance of Performance Criteria, Rephasing, and Extension of Arrangement—Staff Report; Staff Supplement; Press Release on the Executive Board Discussion; and Statement by the Executive Director
Author: International Monetary Fund