Republic of Congo: Selected Issues Paper
Author: International Monetary Fund
Publication Date:
18 Jun 2007
eISBN:
9781451808636
Language:
English
Keywords:
ISCR; CR; Congo; fiscal policy; authority; regime; CEMAC customs code; para-tariff scheme; CEMAC trade policy framework; CEMAC country; tariff regime; Trade policy; Exports; Trade barriers; Sub-Saharan Africa; Central Africa
Download PDF (358.2 KB)

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.

VI. Improving the Trade Regime for Growth42

A. Introduction

135. External trade is vital to Congo’s economy. The Congolese economy relies heavily on oil exports, which make up about 90 percent of total exports, and on imported food, machinery, transportation equipment, and medicines. The ratio of merchandise trade–to-GDP has been fairly steady at about 137 percent (Figure VI.1). Despite being highly dependent on trade, Congo’s numerous import and export barriers strain its capacity to rebuild after years of civil war, and imperil its ability to advance toward the Millennium Development Goals (MDGs).

Figure VI.1.
Figure VI.1.

Republic of Congo: Openness Indicator1, 2001-06

Citation: IMF Staff Country Reports 2007, 206; 10.5089/9781451808636.002.A006

Source: Congolese authorities and Fund staff estimates.1 Defined as the sum of merchandise exports and imports over GDP.

136. Increased import volumes, despite high import taxes, do not translate into higher customs revenues in Congo. As a member of the Economic and Monetary Community of Central Africa (CEMAC),43 Congo’s tariff scheme is formally guided by CEMAC’s trade policy framework, which applies higher and more dispersed tariff rates than other comparable regional arrangements. These higher rates, however, do not result in higher fiscal revenues, because Congo recently has greatly increased its tariff exemptions. Congo also applies a number of quantitative and qualitative trade barriers, hindering its development strategy. Indeed, without trade reforms that make the regime less complex and more transparent and predictable, Congo could falter in its efforts to develop its non-oil sector and diversify the country’s export base.

B. The CEMAC Zone: An Overview

137. Congo’s trade policy is, at least formally, defined by CEMAC and other international commitments. Congo is a member of CEMAC and (since 1995) the World Trade Organization. Its tariff regime is defined by the CEMAC customs code approved in 1994, whose Common External Tariff (CET) ranges from 5 to 30 percent. Congo also is a member of the Economic Community of Central African States (ECCAS) and is eligible for the U.S. African Growth and Opportunity Act (AGOA) (since 2000), the Economic Partnership Agreement (EPA) with the European Union (EU), and the EU’s Generalized System of Preferences (GSP) program. Congo recently signed bilateral trade agreements with Brazil, Cuba, China, South Korea, Turkey, South Africa, and Vietnam.

138. Active involvement by CEMAC countries in overlapping regional trade arrangements has failed to deepen economic integration. Like other CEMAC countries, Congo has increasingly participated in different, often overlapping regional arrangements (Figure VI.2). Congolese trade vis-à-vis other CEMAC countries, and more broadly intraregional trade in the CEMAC region, remains sluggish. The reasons for this point to a number of distinctive structural traits CEMAC economies share: high dependence on oil and forestry, lack of economic complementarities, high tariff and nontariff barriers, and de facto labor and capital minimal factor mobility (Oliva 2006, Zafar and Kubota 2003). These traits, however, are endogenously driven by the policies in place.

Figure VI.2:
Figure VI.2:

Africa’s Spaghetti Bowl

Citation: IMF Staff Country Reports 2007, 206; 10.5089/9781451808636.002.A006

Source: UNECA (2006).

139. There are strong arguments for reforming CEMAC trade policies. The CEMAC trade policy framework is more restrictive than that of other comparable groups. Although back in 1994 the CEMAC customs union was a key step toward integrating Central Africa and liberalizing the region’s trade policies, today its trade policies are outdated and overly restrictive:

  • Tariff rates are too high(Table VI.1). CEMAC’s average MFN rate in 2005 was 19.1 percent, at least 50 percent higher than in comparable customs unions, such as the West African and Monetary Union (WAEMU) and the East African Customs Union. The CEMAC’s 1994 tariff regime includes many internal taxes and duties set by each member country within a predetermined range, including (i) a statistical tax, with a rate on imports that cannot exceed 2 percent; (ii) an excise tax, with a basic rate of 0–25 percent of the customs value; and (iii) the value-added tax (VAT), also applied to domestic products, with a basic rate of 15–18 percent. The statistical tax is meant to cover the cost of computerizing customs processes, automating data collection, and administrative costs. However, CEMAC members apply other taxes, such as an automation fee and a municipality tax, that may be in violation of the CEMAC Agreement.

  • The tariff structure has significant dispersion, as measured by the MFN standard deviation. The standard deviation of CEMAC’s unweighted MFN average rate in 2005 was 9.6 percent, compared with 6.8 percent for WAEMU countries and 11.9 percent for the East African Customs Union and 10.8 percent for the Southern African Customs Union (SACU). When higher average MFN rates are also taken into account the CEMAC region ranks as the most restrictive (Table VI.2).

  • Nontariff barriers abound. The number of requirements set by CEMAC countries far exceeds that in other sub-Saharan African countries (Table VI.3). The World Bank’s 2007 Doing Business survey reports that exports in CEMAC countries, on average, cost about 20 percent more than in other WAEMU countries. Excluding Cameroon (whose average cost of exports is just $524 per container), average CEMAC export costs are about $1,700, more than for sub-Saharan African economies. Furthermore, the time required to import and export goods tends to be higher in the CEMAC zone than in the WAEMU zone. Greater export diversification thus hinges on improving the region’s business climate.

  • Regional trade flows are mostly governed by North-South relations. CEMAC’s intraregional trade is an estimated 3.0 percent of total trade, far below WAEMU’s share of about 9.4 percent (Masson and Pattillo 2005). Trade between CEMAC and WAEMU is almost nonexistent. Meanwhile, trade between CEMAC and France is more than 10 times CEMAC’s intraregional trade. Nontransparent and costly procedures have hampered trade flows, contributed to inefficient resource allocation, and hurt economic diversification, leaving many CEMAC countries highly dependent on trading a few natural resources with the European Union, the United States, and China.

Table VI.1.

The Common External Tariff by Regional Agreement

article image
Source: TRAINS (2006) and Fund staff estimates.
Table VI.2.

Comparison of MFN Rate Across the CEMAC, WAEMU, and East African Customs Union

article image
Source: Trains (2006) and Fund staff estimates.
Table VI.3.

The Use of Non Tariff Barriers1

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

Averages.

C. Congo’s Trade Regime: Theory and Practice

140. Little information is available on Congo’s trade policies. The most recent data on trade flows are from 1995 (see COMTRADE and TRAINs databases, published by UNCTAD). To date, trade flow data rely on mirror statistics from trading partner countries. Exceptions include the World Trade Organization (WTO) trade policy report of September 2006 and data on United States–Congo trade exchanges under the African Growth and Opportunity Act (AGOA). The WTO report is the first on Congolese trade policies since Congo jointed the WTO in 1995.

141. Congo’s trade regime is less transparent and more restrictive than that defined by the CEMAC. Duties and taxes not envisaged in the CEMAC framework that are systematically applied to Congolese imports and exports include an automation fee, municipalization tax, routing fee, and a wood export tax (Table VI.4). Other quantitative and qualitative nontariff barriers (e.g., price fixing, quotas, licensing, fraud, lack of information, and poor transportation) also apply, putting economic development goals at risk:

Table VI.4.

Congolese Tariff Code. Summary of Main Instruments

article image
Source: Congolese authorities, WTO (2006) and Fund staff estimates.

  • Congo’s average tariff exceeds the CEMAC rate. Congo’s simple average applied MFN rate is 18.7 percent; the rate rises to 22 percent after accounting for other duties and taxes applied to imports. Such tariffs include, for example, an automation fee of 2 percent (since 2003) originally included in the statistical tax; the municipality tax on imports from the Democratic Republic of Congo (DRC); the OHADA levy, and integrationrelated duties on imports originating in non-CEMAC countries. Congo also imposes a levy of 5 percent of import value, which counts as an advance payment toward income taxes, and a maritime transportation fee to SOCOTRAM39 on all imports and exports shipped to and from Congo. Congo’s commitments under the WTO bound these other taxes and duties to zero (WTO 2006, p. viii).

  • Quantitative nontariff barriers are prominent in the Congolese trade regime. Nontariff barriers include price controls, licensing procedures, quotas, and monopolistic measures (Table VI.5). Such measures often conflict with progrowth policies, as they put upward pressure on basic product prices and can contribute to shortages. Two cases in point are sugar and wheat flow, both of which are in short supply but are subject to protection measures as licensing procedures, domestic monopolies (the companies SARIS and MINOCO, respectively, hold a monopoly on the production of sugar and wheat flour and dictate the policy on licensing for imports), administrative prices, and quotas. Along with import protection, SARIS benefits from export subsidies.

  • Compared with other CEMAC countries, it takes less time to export and import goods to Congo, though the time required is still fairly significant(Table VI.6). The average costs associated with importing and exporting goods to Congo, however, far exceeds the average in CEMAC, WAEMU, and other sub-Saharan economies.

  • Qualitative nontariff barriers may further distort the picture. Factors that render the current regime unpredictable and noncompetitive include lack of information and uncertainty related to imperfectly implemented preferential arrangements, poor and inefficient customs administration, costly and cumbersome transit procedures, double taxation, the discretionary application of exemptions, and Congo’s weak and costly infrastructure.

Table VI.5.

Congo’s Use of Non tariff Barriers

article image
Source: WTO (2006)

The import licensing procedure is being revised.

Table VI.6.

The Use of Non Tariff Barriers1

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

Averages.

142. Trade barriers are hurting Congo’s development efforts and its external competitiveness. As a first step, authorities approved in February 2007 a decree liberalizing the price and importation of cement. Besides price controls and a cumbersome import regime, imported cement and food staples must go through heavy red tape and withstand a poor and costly inland transportation network (Box VI.1). Inconsistencies between the current trade regime and a progrowth strategy result in artificially high import costs on key inputs (e.g. cement, manufacture of electrical appliances, manufacture of rubber products); other duties, taxes, and surcharges on exports; departures from the WTO transaction-based import valuation methods; administered prices on 14 products in short supply; lack of storage capacity, which promotes price volatility; and lack of transparency.

D. A Strategy to Simplify Congo’s Trade Regime

143. Simplifying Congo’s applied tariff and para-tariff schemes and making its trade regime more transparent and predictable would facilitate trade (Appendix 1). The following measures would simplify Congo’s applied trade policy scheme:

  • Consolidate trade taxes and eliminate para-tariff measures (e.g., the automation fee, transportation fees, and the municipality fee) that remit little revenue to Congo’s treasury and may conflict with the country’s international commitments. Such consolidation would enhance trade and reduce the scope for discretionary practices.

  • Limit the uncertainty faced by importers and exporters, enhance transparency, and make Congo’s business environment more efficient. Corrective measures include publishing: (i) the full list of tariff lines subject to para-tariff measures; (ii) all applicable quantitative nontariff measures (e.g., licensing requirements, prohibitions, and quotas among others); (iii) exemptions to the VAT and excises; and (iv) earmarked subventions to exports.

  • Ease staple-food shortages and reduce capacity constraints by eliminating quantitative and qualitative trade barriers that inflate prices on such products as sugar and wheat flour. Recommended measures include: (i) easing import restrictions (e.g., eliminating the SARIS and MINOCO’s monopolies and simplifying licensing procedures); (ii) eliminating subsidies and tax concessions favoring domestic monopolies; (iii) phasing out administrative prices; and (iv) strengthening customs administration.

The Case of Cement

Formally, under the 2001 Congolese customs code, cement is subject to the following taxes:

  • the common external tariff, which is around 30 percent, on average

  • the automation fee of 1 percent of cement’s customs value

  • the VAT with a rate of 18 percent

  • the CEMAC regional tax of 1 percent of the customs value and a 0.4 percent of customs value financing the CEEAC

  • a transportation fee (redevance fluviale) of CFAF 650 per ton on imports from the Democratic Republic of Congo

  • the price of cement sold in Congo is an administered price fixed by the government. And, the reference value used to calculate the customs value was increased from CFAF 20,00 per ton to CFAF 40,00 in 2006.

Such high level of trade protection creates substantial bottlenecks for construction activity.

144. Congo mostly trades with large countries and, even when eligible, often fails to receive preferential treatment. Congo mostly trades with the United States (mostly through oil exports), the European Union, and China. Congo tends to import textiles and footwear, machinery and transportation equipment, and electronic products. Congo reaps little benefit from preferential arrangements, despite being a beneficiary of several preferential programs (i.e., AGOA with the United States; the Africa, Caribbean, and Pacific-European Union Economic Partnership Agreement, which is now being renegotiated; and the generalized system of preferences granted to least developed economies). According to the WTO, no product exported to the United States has yet benefited from the AGOA program. Analysts often attribute the agreement’s limited use to stringent rules of origin and standards and to trade barriers and economic constraints in Congo, including high production costs, chaotic and unregulated cross-border activity, and non transparent goods transshipment procedures (USAID 2004).

Congo’s Trade Policy, Customs Revenues and Exemptions

145. The CET and VAT account for about 44 and 35 percent of customs revenues, respectively. After the CET and VAT taxes, royalties on wood exports and the automation fee generate the most revenue. Tax instruments that have gained prominence since 2001 include the automation fee, export duties and royalties on wood, the Chamber of Commerce and Industry (CCI) fee, and pre-inspection fees. Together, these instruments make up 20–25 percent of total revenues from trade taxation. A number of instruments do not contribute to tariff collection (e.g., export duty, the road fund, the municipality tax) and simply make the regime cumbersome and less transparent.

146. Congo’s high tariff and tax rates have failed to boost trade-related revenue collection. As a percentage of GDP, Congolese revenue from taxation of international trade fell to about 3.6 percent of total trade in 2003 and 2004, from 4.7 percent in 2001 (Table VI.7). Despite high tariff rates and a jump in imports, import duties also declined in 2002–03 and 2004–05, raising questions about the effectiveness of customs administration (the computerized ASYCUDA is expected to be fully operational by December 2006), the number of exemptions in recent years, and difficulties in applying the WTO-agreed transaction-based customs valuation system.

Table VI.7.

Republic of Congo: Revenue from Taxation of International Trade

article image
Source: WTO (2006) and Fund staff estimates.

Preliminary estimates based on first semester data.

147. Exemptions have more than doubled in recent years, hurting revenue collection (Table VI.8). Overall first-half of 2006 exemptions were comparable to the year-end 2005 level, which was already more than double that at year-end 2004. Overall exemptions in 2005 were CFAF 109 billion (3.5 percent of GDP and about 9 percent of non-oil GDP), more than twice earlier levels. Exemptions in 2004 were 2.3 percent of GDP. Exemptions in 2005 were especially heavy for oil products (which make up about 84 percent of the total), for wheat flour imports by MINOCO, and for exceptional reasons by the presidency. In the first half of 2006, most exemptions were for the oil sector and imports under the statutory classification. Officially, Congo exempts products in transit that have been granted temporary admission and products placed under customs warehousing. In practice, though, a number of other products, such as those related to municipalization (see the pro-investment rubric in Table 7), also are exempted, suggesting that there is a need to strengthen the preshipment regime for import shipments valued at CFAF 3 million or more and to end discretionary practices in granting exemptions.

Table VI.8.

Republic of Congo: Trade Exemptions1

article image
Source: WTO (2006), Congolese authorities and Fund staff estimates.

2006 data refers up to June 2006.

148. Eliminating all exemptions could greatly impact revenue collection(Table VI.9). Exemptions in 2005 account for an estimated 60 percent and in 2006 an estimated 54 percent of potential trade-related fiscal revenue, meaning that trade revenues are expected to be less than the amount spent on tax exemptions.

Table VI.9.

Republic of Congo: Revenue from Taxation of International Trade

article image
Source: WTO (2006) and Fund staff estimates.

Preliminary estimates based on first semester data.

149. To strengthen customs duty collection, authorities must takes steps to consolidate and harmonize tax measures, rationalize exemptions, improve preshipment inspections, and strengthen customs administration (Table VI.10). Such measures would lessen external trade distortions and reduce trade inefficiencies.

Table VI.10.

Summary of Recommendations

article image
article image
Source: Fund staff.

E. Conclusions

150. Economists widely agree that more open trade supports growth. Open trade can also have positive spillover effects on other aspects of policy reform.40 For Congo, such effects may be especially relevant given the economy’s dependence on exports and imports and its struggle to overcome capacity constraints after years of civil war.

151. Congo’s coastal city Point-Noire could become the transit center and main distribution port of Central Africa. Poor inland transportation, however, limits city access and is a major stumbling block to increasing economic activity there.

152. With oil production expected to decline, diversifying Congo’s trade structure is essential to its economic vitality. Enhancing the business environment, promoting entrepreneurship, and removing supply-side barriers would help promote diversification. Reviewing the economic structure to identify potential new growth sectors with increasing world demand, as under the Integrated Framework Initiative,41 could help the authorities take such steps. The Diagnostic Trade Integration Study (DTIS) has been very useful in identifying potential growth sectors and in understanding trade bottlenecks.

153. In sum, the authorities are encouraged to take the following measures to enhance Congo’s trade performance:

  • Simplify applied tariff and para-tariff schemes by consolidating trade taxes and eliminating para-tariff measures (e.g., the automation fee, transportation fees, and OHADA levy) that may violate the country’s international commitments and yield little revenue.

  • Increase transparency and predictability to enhance trade volume and limit discretionary practices and corruption. Corrective measures could include the publication of (i) the full list of tariff lines subject to para-tariff measures as well as VAT and excises exemptions; and (ii) all applicable quantitative nontariff measures (e.g., licensing requirements, prohibitions, and quotas).

  • Ease quantitative and qualitative nontariff barriers. Key measures could include eliminating the SARIS and MINOCO monopolies and simplifying licensing procedures; eliminating subsidies and tax concessions favoring domestic monopolies; phasing out administrative prices; and strengthening customs administration. Measures that would reinforce customs could include modernizing its operations, improving the training of customs officials, increasing anticorruption resources, and extending customs operations at the border. Improving inland transportation and easing measures that limit the mobility of goods and services would also help strengthen regional trade.

  • Work at the regional level to reduce CEMAC’s official external tariffs and other import barriers on extraregional goods as well as to consolidate all integration-related import taxes. The CEMAC framework, which is the basis of Congo’s trade regime, is outdated and overly restrictive. The existing WAEMU CET has a maximum rate of 20 percent; the CEMAC’s maximum is 30 percent. CEMAC code’s structure also has mixed escalation patterns.

  • Rationalize sub-Saharan Africa’s “spaghetti bowl” of regional arrangements to minimize overlapping membership costs and reconcile complex rules of origin. To keep from making the system even more cumbersome and unpredictable, and to limit the costs of regional arrangements, the authorities should (i) participate in regional integration projects that do not penalize outsiders; and (ii) negotiate clear, transparent, and liberal rules of origin. The main goal of preferential arrangements is to boost trade and reduce trade-related costs. Recommended measures to ease exchange costs at the regional level include enhancing customs operations, harmonizing product standards, and rationalizing “other duties and charges” (other than the customs tariffs) that apply exclusively to imports (e.g., automation fees, customs fees, and surcharges).

  • Enhance cooperation with the CEMAC Secretariat and facilitate surveillance(see Martijn and Tsangarides 2006). Owing to lack of data reporting, Congo’s most recent trade flow statistics are from 1995. Timely data collection—both on trade flows and on country-specific regulations and practices—is essential for the CEMAC Secretariat to be effective. The staff urges the authorities to keep the CEMAC Secretariat well informed about trade data and policy implementation.

References

  • Berg, A., and A. Krueger, 2003, “Trade, Growth, and Poverty: A Selective Survey,” IMF Working Paper 03/30, (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation

  • Martijn, J.K., and C. Tsangarides, 2006, “Trade Reform in the CEMAC: Developments and Opportunities. Selected Issues,” IMF Country Report No.06/309, August 2006, (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation

  • Masson, P., and C. Pattillo, 2005, “The Monetary Geography of Africa,” (Washington: Brookings Institution Press).

  • Oliva, M., 2006, “Trade Policies in Congo,” mimeo, (Washington: International Monetary Fund).

  • UNECA, 2006, “The Case for Rationalization: The Inefficiency and Ineffectiveness of the Regional Economic Communities, in ARIA II: Rationalizing Regional Economic Communities,” (Addis Ababa, Ethiopia: UNECA).

    • Search Google Scholar
    • Export Citation

  • USAID, 2004, “National AGOA Strategy Report for Congo Brazzaville, in The East and Central Africa Global Competitiveness Trade Hub,” (Washington: USAID).

    • Search Google Scholar
    • Export Citation

  • World Bank, 2006, “Doing Business 2007,” (Washington: World Bank).

  • World Trade Organization, 2006, “Trade Policy Review,” (Geneva: World Trade Organization).

  • Zafar, Ali, and Keiko Kubota, 2003, “Regional Integration in Central Africa: Key Issues,” mimeo, (Washington D.C.: World Bank).

42

Prepared by Maria Oliva.

43

CEMAC succeeded the Customs and Economic Union of Central Africa in 1994. Under CEMAC, member countries agreed to liberalize trade and establish a single market. See Oliva [2006] for a detailed analysis of CEMAC’s trade policy scheme and trade reform agenda.

39

SOCOTRAM is a state-own company that holds the national traffic rights for 40 percent of operations. Although, Congo officially abolished traffic sharing back in 2000, traffic sharing continues in practice.

40

See Berg and Krueger (2003) for a survey of the literature on the links between trade and growth.

41

See http://www.integratedframework.org for further details.

Other IMF Content

Other Publishers

Cover IMF Staff Country Reports
Republic of Congo: Selected Issues
Author: International Monetary Fund
Volume/Issue:
Volume 2007: Issue 206
Publisher:
International Monetary Fund
ISBN:
9781451808636
ISSN:
1934-7685
Pages:
102
DOI:
https://doi.org/10.5089/9781451808636.002

Republic of Congo: Openness Indicator1, 2001-06

Africa’s Spaghetti Bowl