This Selected Issues paper on the Republic of Congo analyzes the challenges of sustainable growth in the Republic of Congo. The paper highlights that it is paramount for the authorities to avoid repeating the experience of the 1980s, particularly in light of the projected decline in oil production over the next decade. It proposes a macroeconomic policy strategy that takes advantage of this unique opportunity to foster higher sustainable growth. The paper also provides a summary of various recent assessments of the quality of the Congo's public financial management system.

Abstract

This Selected Issues paper on the Republic of Congo analyzes the challenges of sustainable growth in the Republic of Congo. The paper highlights that it is paramount for the authorities to avoid repeating the experience of the 1980s, particularly in light of the projected decline in oil production over the next decade. It proposes a macroeconomic policy strategy that takes advantage of this unique opportunity to foster higher sustainable growth. The paper also provides a summary of various recent assessments of the quality of the Congo's public financial management system.

IV. Governance and Transparency in the Republic of Congo10

A. Introduction

57. As part of its renewed engagement in low-income countries, the international community has both extended debt relief and announced plans to increase development aid. In June 2005, the international community agreed to cancel 100 percent of the outstanding debts of eligible Heavily Indebted Poor Countries (HIPC) to the International Monetary Fund (IMF), the International Development Agency (IDA), and the African Development Fund (ADF) and to double development aid by 2010. Of the annual $50 billion expected increase in aid, about half is to be earmarked for Africa. The 2005 G8 declaration adds to earlier agreements reached in the context of the MDGs.11

58. Congo’s eligibility for such debt relief and development aid—as well as its ability to effectively benefit from such aid—hinges on its ability to improve its governance and transparency record. Debt relief and aid programs typically benefit low-income countries with a strong commitment to growth and poverty reduction; democratic, accountable, and transparent governments; and sound public financial management policies. However, according to the World Bank, Congo continues to lag behind the average of the countries in its region, the Communauté économique et Monétaire de l’Afrique Centrale (CEMAC), on such perception indicators as government effectiveness, control of corruption, and rule of law.

59. A review of Congo’s recent record on governance and institutional transparency indicates the need for significant efforts to address corruption and fraud in order to attract foreign (nonoil) direct investment, encourage entrepreneurship, and boost growth. The adoption of a roadmap to address corruption and enhance governance, especially in public financial management, is key to Congo reaching HIPC debt relief. The triggers, included in the HIPC Decision Point Document,12 summarize the reforms Congo has committed to undertake in order to reach the HIPC completion point and thus become eligible for debt relief of about $1.7 billion in 2004 in net present value (NPV) terms. In addition, under the Multilateral Debt Relief Initiative (MDRI), at the HIPC completion point, Congo will benefit from the cancellation of Congo’s outstanding debt as of end-2004 to the IMF, IDA, and ADF.

60. The paper is organized as follows. The first section summarizes the evidence about the impact of good governance on growth and competitiveness, and reviews factors promoting good governance and the costs of having weak governance. The second section compares the World Bank’s governance rankings for Congo with those for CEMAC and other African countries. The third section provides background on Congo’s weak performance on governance and transparency indexes and measures considered to fight corruption. Conclusions follow.

B. Governance, Growth, and Competitiveness

61. High-quality institutions support economic development. The World Bank’s report, A Decade of Measuring the Quality of Governance (2006), calls it “the 300 percent development dividend.” That is, a country’s long-term per capita income will triple after governance 13 improves by one standard deviation.14, 15 Empirical evidence also suggests that governance improvements prompt per capita income gains and not vice versa. And, while improvements in governance can take time, governance institutions can deteriorate in just a few years. The report further notes that at least one governance indicator changed significantly for about one third of the countries and territories (out of a sample of 213) in 1996-2005.

62. Poor governance and corruption hurt long-term economic growth. As shown in Easterly, Ritzen, and Woolcock (2006), differences in the quality of institutions can account for much of the growth differential between countries. For a sample of 67 developed and developing countries, Mauro (1995) estimates that a one-standard-deviation improvement in the control of corruption translates into a 0.8 percentage increase in the annual growth rate of per capita GDP. A one-standard-deviation improvement in the bureaucracy efficiency index yields a 1.3 percentage point increase in the annual per capita GDP growth rate. 16 Using firm-level data for Uganda in 1995–97, Fisman and Svensson (2000) find that a one-percentage-point increase in the bribery rate is associated with a three-percentage-point drop in firm growth.

63. There is a positive correlation between competitiveness and the control of corruption and the rule of law. Control of corruption and enforcement of the rule of law in 2005 are positively correlated with competitiveness 17 in 2006 (Figure IV.1). Kaufmann (2006) similarly finds that, on average, a one standard deviation increase in the control of corruption is related to a 30-position gain in a country’s GCI ranking. Controlling for the country’s income, the gain falls to 15–20 positions.

Figure IV.1.
Figure IV.1.

Competitiveness and the Control of Corruption and the Rule of Law

Citation: IMF Staff Country Reports 2007, 206; 10.5089/9781451808636.002.A004

Source: Fund staff estimates, based on the Global Competitiveness Index (GCI).

C. Causes and Consequences of Weak Governance and Corruption

64. A number of factors associated with monopoly, discretionary power, oil resources, and asymmetries in information provide opportunities to shelter weak institutions and corrupt behavior(see Box IV.1 for a detailed discussion). Weak governance and corruption practices are often encouraged by the absence of competition, policy distortions, size of the government, political systems, and public servants’ salaries among others. In this context, world economic integration, openness, and the simplification of regulatory frameworks can be seen as discipline mechanism devices against corruption and poor governance. The forces of globalization and world economic integration increase the pressure to fight corruption and enhance governance.18 Measures to be considered include: liberalization of domestic trade policies (see Gulde-Wolf et al. (2006), and Oliva (2007) for concrete trade reform measures), domestic price liberalization, privatization, and the adoption of comprehensive competition laws.

65. The consequences and costs of poor governance on growth and competitiveness can be grouped in terms of their impact on revenue and spending. Corruption and poor governance raise transaction costs and uncertainty in the economy, and tend to lead to inefficient economic outcomes (Box IV.2). As such:

  • From the revenue side, poor governance is associated with low tax revenue collection due to, among others, tax evasion and rampant concession of tax exemptions; regressive tax schemes, and income inequality. It encourages firms to operate outside the formal sector.

  • From the spending side, inefficiencies arise from the suboptimal allocation of private and public resources,19 the misallocation of talents to rent-seeking activities, the waste of resources in unproductive activities,20 the misuse of aid inflows through the diversion of funds and the loss in terms of effectiveness, the exposition of countries to crises by distorting the type of capital inflows received by the country, and others.

Literature on Causes of Weak Governance and Corruption

Factors associated with weak governance include:

  • Lack of Competition. Competition reduces incentives for red tape and corruption by reducing the profitability of economic activities (Ades and Di Tella 1999, Clarke and Xu 2002). As such, trade restrictions, price controls, and multiplicity of exchange rate practices are prime examples of government-induced sources of rents.

  • Size of the government and pervasive and cumbersome regulations. Government involvement in private markets is typically perceived as a source of corruption (La Palombara 1994, La Porta et al. 1999, Rose-Ackerman 1999, Lynn 2001, Kaufmann 1997).

  • Low civil servants’ pay relative to wages in the private sector. Evidence shows that the higher the ratio of government wages to manufacturing wages, the lower is the level of corruption in a country (Van Rijckeghem and Weder 2001, Rauch and Evans 2000, Besley and McLaren 1993, and Mookherjee and Png 1995).

  • Natural resources. Natural resource abundance has an adverse institutional impact as the generated rents can be easily appropriated; a feature that fuels insatiable rent seeking behavior (i.e., the so-called voracity effect). By directly controlling access to natural resources, officials are faced with opportunities to exploit the associated rents, and this behavior may spill over to other segments of the society (Ades and Di Tella 1999, Leite and Weidemann 1999, Sala-i-Martin and Subramanian 2003, Michael Ross 2001).

Consequences of Weak Governance and Corruption

From the revenue side, poor governance is linked to poor tax revenue collection and regressive tax schemes. Corruption is associated with lower government revenue that is needed to finance productive spending. That is:

  • Gap between tax revenue collected by administrators and received in the treasury. Countries with higher levels of corruption tend to have lower tax revenues collection (Tanzi and Davoodi 2000, Ghura 1998).

  • Less progressive tax systems. Corruption and poor governance are a regressive tax on the poor (Hindriks, Keen, and Muthoo 1999) as they: (i) distort the allocation of public resources and hinder access to basic services (e.g., health and education); (ii) impose higher costs on small and medium size enterprises in their access to markets relative to those faced by large firms; and (iii) force the poor to spend more on bribes (in terms of their income) relative to the well-off.

From a spending side, corruption and institutional inefficiencies hamper economic growth by taxing productivity and distorting market activity. Empirical evidence points at the negative impact corruption and institutional inefficiencies have on:

  • Lower private sector investment. Corruption and poor governance hamper investment by altering investments’ rate of return, increasing uncertainty and causing the misallocation of investments across sectors (Mauro 1995, Sevnsson 1998, Campos, Lien and Pradhan 1999, and Wei 1997)

  • Less small and medium size enterprises (SMEs). For SMEs, corruption often entails higher operating costs related to payments that do not enhance the firm’s productivity or profitability levels, but are necessary to remain in the market (the Business Environment and Enterprise Performance Survey (BEEPS), Tanzi and Davoodi 2000).

  • Less and more volatile capital flows. Wei and Wu (2001) argue that corruption biases the composition of capital inflows away from foreign direct investment and in favor of portfolio investments (say, international bank loans). In addition, political instability and poor governance propel capital flight (Lee and Rishi (2005)).

  • Less foreign direct investment (FDI) and“risk averse” modes of involvement. Corruption works as a tax on foreign investors as it brings uncertainty into the markets (Wei 2000, Smarzynska and Wei 2002).

  • More public sector investment but higher costs and lower quality. The OECD African Economic Outlook 2005/20061 cites examples in which corruption increases the cost of public investment, especially in the area of public procurement, and lowers the quality of public services (OECD African Economic Outlook 2005/20061, Tanzi and Davoodi 1997, Collier and Hoeffler 2005, Mauro 1998, Gupta, Davoodi and Alonso-Terme 1998, Gupta, de Mello, and Shartan 2000).

  • Rent seeking and misallocation of talent. Rent-seeking and corruption reduces income by encouraging able individuals to follow law courses rather than more productive engineering studies (Murphy, Shleifer, and Vishny 1991).

D. Governance in CEMAC Countries

66. Improving governance and curbing corruption remains an important challenge for CEMAC countries. According to the World Bank’s 2006 governance indicators, CEMAC countries rank well behind Botswana, Ghana, Mozambique, Senegal, and other African countries (Appendix IV.1). The World Bank indicators control for perceptions of both local citizens and CEOs of firms operating in the country. 21 As such, these measures provide an indication of residents’ assessment of government performance and policies, the extent of discretionary practices, compliance with the rule of law, and other factors (see Appendix IV.2 for the rankings and Kaufmann, D., A. Kraay, and M. Mastruzzi 2006 for a detailed description of the methodology used).

67. The average governance performance of CEMAC countries has deteriorated in recent years (Figure IV.2). Perceptions of the government’s capacity to formulate and implement its policies (i.e., the government efficiency index) and its ability to legitimately exercise authority (i.e., the rule of law) have significantly deteriorated. On the control of corruption index, CEMAC countries’ performance has been deteriorating slightly since 2002. Relative to 2004 rankings, 2005 perceptions on the control of corruption and government effectiveness have also worsened, while perceptions on voice and accountability have remained unchanged. Only the regulatory environment and political stability indexes have improved.

Figure IV.2.
Figure IV.2.

Governance Indicators for Congo, 1996-2005

Citation: IMF Staff Country Reports 2007, 206; 10.5089/9781451808636.002.A004

Sources: World Bank (2006).

68. CEMAC countries, on average, scored worse on governance and transparency than did the West African and Monetary Union (WAEMU), the East African Community (EAC), Southern African Customs Union (SACU), and the rest of Sub-Saharan economies in 1996–2005 (Table IV.1). CEMAC lagged well behind these other arrangements on five of the six governance dimensions (the exception was political stability, against which only the EAC performed worse than CEMAC).

Table IV.1:

Six Indicators on Governance: CEMAC Performance

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Source: World Bank (2006).

E. Congo’s Record on Governance

69. Congo’s overall governance record is weak. Except for the voice and accountability index, Congo scores below the CEMAC country average on the six indexes of governance published by the World Bank (Table IV.2). Important improvements have been achieved in the area of political stability, though it still ranks in the last quartile. However, little improvement has been achieved in the control of corruption.

Table IV.2.

Republic of Congo: Summary of Governance Indicators, 1996-2005

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Source: World Bank (2006).

70. Perceptions of the government’s capacity to formulate and implement policies, observe the rule of law, and control corruption deteriorated from 2004 to 2005. Congo’s ranking fell on a number of indicators (by 10 for rule of law, 7 for regulatory quality, and 2 for government effectiveness), making it one of the worst governance performers in a sample of 213 countries and territories. The publication of two court cases and press reports detailing Congo’s governance and transparency problems in the oil sector ahead of the HIPC Decision Point document may have also significantly affected the governance perceptions in 2005, as measured by the World Bank indicators.

71. Governance indicators for Congo generally do not appear to be highly correlated (Table IV.3), though control of corruption appears closely related both to the regulatory environment and political stability. Improvements in the political stability index, however, cancelled out with the worsening in the regulatory quality index. In contrast with other sub-Saharan economies, in Congo (but also in other CEMAC economies), there seems to be no relationship between political stability and voice and external accountability, likewise between the rule of law and accountability. In the case of CEMAC countries, government effectiveness tends to be highly correlated with the voice and accountability index, while in Congo the correlation is moderate. Rule of law and regulatory quality move hand-in-hand in CEMAC countries, but not in Congo.

Table IV.3.

The Correlation between Alternative Indicators of Governance

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Source: World Bank (2006) and Fund staff estimates.

F. Strengthening Governance and Fighting Fraud

72. As shown in the previous section, governance and the fight against corruption are a long standing issue in Congo. According to the 2005 Transparency International’s corruption perception index (CPI), Congo ranks 130 out of 158 countries, compared with 113 out of 135 countries in 2003. In early 2003 the Congolese government, in partnership with the United Nations Development Program (UNDP) and with the support of an international expert from Transparency International, conducted a survey on fraud and corruption within the public sector. The overall survey objective was to assess the level of fraud and corruption as well as its causes and consequences in the development of the country. The survey confirmed the perception of widespread corruption in the public sector (Box IV.3).

2003 Corruption Survey: Five Main Findings

The main findings of the corruption perception survey22 are as follows:

1) There is widespread corruption, misappropriation of public funds, and fraud in the public sector; monetary corruption is the principal form of corruption.

2) Corruption mostly affects public sector agents; the main causes of corruption are lack of control, low salaries, poverty, inefficiency in the legal system, and patronage (particularly in election periods).

3) The most-affected sectors or institutions are the customs and tax offices, the police, the judiciary, education, the treasury, state procurement systems, and the health sector.

4) The least-effected sectors or institutions are churches, the senate, and the national assembly.

5) The legal and regulatory system is inadequate in fighting fraud and corruption.

The findings of the survey were analyzed and discussed during the “National days to fight fraud and corruption” held at Brazzaville from 11 to 13 December 2003 and involving civil society and the private sector.

73. The Congolese authorities responded to the 2003 survey with a number of measures that have, to date, lead to elusive results(Box IV.4). The World Bank and Transparency International indicators on corruption show advances have been quite limited. Allegations of widespread misuse of public funds, and corruption practices have found support in recent international court cases23 that detail irregular oil marketing practices by the Congolese government. Initiated by the so-called judgment creditors, 24 these Court rulings contributed to corroborate accusations of mismanagement. As a result, in approving Congo’s access in March 2006 to the HIPC Decision Point, the Fund and the World Bank Executive Boards focused on a number of measures to tackle weak governance concerns in oil management, and resource management in general as triggers for reaching debt relief.

Government Responses to the 2003 Corruption Survey

In response to the 2003 survey, the Congolese government:

  • adopted a national plan to fight corruption, the misappropriation of public funds, and fraud (2004);

  • created a National Commission to fight both corruption and the misappropriation of public funds (July 2004) and appointed commission members by a presidential decree (September 2005);

  • established the Court of Accounts to monitor the use of public money (early 2005);

  • ratified the United Nations and the African Union Convention on the prevention and fight against fraud (2005); and

  • adopted a presidential decree to prevent conflicts of interest between SNPC’s board of directors and those with management responsibilities within SNPC and its subsidiaries (January 2006).

74. Improving governance has been and remains a key pillar of Congo’s program with the IMF. The Fund-supported policy of transparency and good governance in Congo is aimed at maximizing government oil revenues and improving financial management of natural resources, and relied on three main pillars: (i) institutional and legal; (ii) the government budget; and (iii) the national oil companies. In addition, transparency in the form of internet publication of audited data is seen as a key tool in the strategy to fight fraud and to encourage good governance (Box IV.5).

75. To reach debt relief under the HIPC Initiative, the Congolese authorities need to redouble their efforts to address a number of governance challenges. The negative impact of poor governance on the fight against poverty has prompted international institutions (notably the IMF and the World Bank) to stress conditionality on governance and resource management.25

76. A number of weaknesses have been identified at the operational and institutional level in Congo. Improvements in governance encompass improving Congolese check and balance institutions, the awarding of natural resources’ concessions, and competitive and transparent procurement practices, among others:

Congo’s Progress on Governance Since 2003

The authorities’ key governance reforms since 2003 are summarized in the bullets below:

  • Establishment in 2003 of the specialized oil monitoring unit within the Ministry of Finance to help the government better project oil revenues and negotiate production sharing agreements with private oil companies.

  • Adoption in 2003 of a convention clarifying the legal and financial relationships between the state, the national oil company (SNPC), and the national oil refinery (CORAF).

  • Adoption by the government in 2004 of a dividend policy allocating 20 to 30 percent of SNPC’s net profit to the treasury.

  • Membership since 2004 in the Extractive Industries Transparency Initiative (EITI), a transparency initiative in extractive industries (see http://www.eitransparency.org/).

  • Publication on the internet of key oil data, oil-related audit reports, and data on oil and gas transactions (see http://www.mefb-cg.org/).

  • Centralization of all government oil revenues collected by the treasury (since 2003).

  • Audits of oil costs to maximize the government’s share of oil profits (since 2004).

  • Phasing out of costly and nontransparent oil-backed loans (since 2002).

  • Phasing out of extra budgetary financing by national oil companies (since 2003).

  • Quarterly certification of government oil revenues by a reputable auditor (since 2003).

  • Audits of SNPC accounts (since 1999) and creation of a plan to implement audit recommendations, particularly items pertaining to the internal control, accounting, and marketing of oil on behalf of the state.

  • Audits of the CORAF annual accounts (since 2002).

  • Completion of a certification report in 2006 that public officials are not personally benefiting from government oil sales by the SNPC or its subsidiaries.

  • Operational weaknesses in Congo’s control and audit institutions. In fact, the Parliament has very little control over the executive branch on public finance matters. Indeed, budgets are voted with long budget delays, because the government does not communicate to parliament the draft budget on time. Late reporting typically weakens budget oversight. The relatively new National Audit Office (Cour des Comptes) is understaffed both in terms of human capacity and material means; its magistrates, who are mainly lawyers, have little background in government finance. Strengthening the capacities of parliament and other institutions overseeing the government is thus a priority.

  • Poor management standards, limited accountability, and lack of financial integrity. Oil sector audits have evidenced there is still ample scope for improvements in the internal control and accounting of SNPC and CORAF and the cost structure of refined petroleum products.

  • Deficiencies in awarding procedures of contracts. The audit on the Marine XI concession revealed gaps in the awarding of oil concessions (http://www.mefbcg.org/petrole/dp) in the legal and regulatory systems, which fail to prevent potential conflicts of interest and enable Congo to maximize its gains from oil concessions. Forward-looking correcting measures proposed in the audit include: (i) the clarification of SNPC’s role in the awarding process; (ii) a review of the legal and regulatory framework of the sector; (iii) the establishment of an auction procedure suitable for the awarding of oil concessions; and (iv) the reform of Congo’s legal code to address conflicts of interest.

  • The procurement system needs overhauling. According to a 2006 procurement review by the World Bank, most procurement operations are nontransparent and noncompetitive. The procurement system relies on two different institutions (both of which are headed by the President’s Office): the « Direction Centrale des Marchés et Contrats de l’Etat (DCMCE) », which handles contracts of less than CFAF 500 millions, and the « Délégation des Grands Travaux (DGT) », which processes contracts of more than CFAF 500 million.

77. Transparency in the management of natural resources will bring about the necessary changes. The Congolese authorities have committed to implementing two transparency-related international initiatives:

  • Extracting Industries Transparency Initiative (EITI). Congo adhered to this Initiative in June 2004. Since then, there has been some progress but much more in needed before the first EITI report is published. To date, the authorities have approved two decrees creating the national consultative and the executive EITI committees were signed in October 2006. Members of the two EITI committees, however, remain to be named.

  • Congo has yet to be readmitted to the Kimberly process on diamond certification.26 Before being excluded from the Kimberly process in July 2004, Congo was exporting 4 to 5 million carats a year but officially producing only 50,000 carats (most of the excess was believed to come from the Democratic Republic of Congo). To be readmitted to the Kimberly process, Congo needs to: (i) explain the export-production gap; (ii) report on its mining legislation; and (iii) submit an assessment of its diamond production potential. To comply with these demands, the authorities changed the mining law and funded two official studies. Experts from a French geological service completed a survey and submitted it in May 2006 to the Kimberly Process Secretariat.

G. Conclusions

78. The Congolese authorities need to intensify their efforts to improve governance and transparency in order to achieve sustainable growth, and reach debt relief under the Enhance HIPC Initiative and the MDGs. The theoretical literature on governance is clear: good governance and transparency promote growth. The World Bank, in distilling this literature, has identified a “development dividend” that shows that the implementation of good governance and transparency can triple per capita income. While the case for good governance has been clearly incorporated into a series of IMF-supported programs, governance and transparency in Congo continue to lag behind the level of most developing countries in Africa and other parts of the world. The March 2006 HIPC Decision Point document incorporates a number of triggers for debt relief that have been identified as key measures for improving governance in Congo in the next few years. Implementation of these measures will be essential for economic development and securing the debt relief.

Appendix IV.1: Governance Indicators

Table 1.

Governance Indexes by Region and Country, 1996-2005

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Table 1.

Governance Indexes by Region and Country, 1996-2005 (concluded)

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Source: World Bank (2006), and Fund staff estimates.

Appendix IV.2: Defining Governance

Governance can be defined as the process and institutions by which authority in a country is exercised. The World Bank 2006 governance indicators capture six aspects of good governance. The operational notion of governance includes (Kaufmann 2001 and 2006):

  • Dimension 1: Measures of the process by which governments are chosen, held accountable, monitored and replaced. These include the indexes of (i) voice and external accountability, which measures political, civil and human rights and the extent to which citizens are allowed to participate in the selection of their government; and of (ii) political stability and absence of violence, crime and terror, which measure perceptions of the likelihood the government will be destabilized and of violent threats including terrorism;

  • Dimension 2: Measures of the capacity of governments to manage domestic resources, to provide services efficiently and to implement sound policies and regulations. These include the indexes of (i) government effectiveness, which control for perceptions of the quality of public and civil services, the degree of independence from political pressures, the credibility of the government's commitment to its policies; and of (ii) regulatory burden, which controls for the ability of the authorities to formulate and implement sound policies and promote the development of the private sector.

  • Dimension 3: Measures of the respect for the institutions that govern economic and social interactions. This include the indexes of (i) the rule of law, that measures the perception about the respect and enforcement of the rules of the society, contracts, courts’ outcomes; and of (ii) control of corruption, which controls for perceptions that public positions are being used for private gain.

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