I. Introduction and Overview

A. Introduction

1. The objective of this document is to report on progress made by the Republic of Congo in implementing the triggers for the HIPC Initiative completion point. In view of the complexity and comprehensiveness of the triggers, the IDA Board requested annual reports on progress at the HIPC decision point,¹ and this constitutes the first of such annual progress reports.

2. Following the decisions of the IMF and World Bank Boards on the HIPC Initiative decision point in March 2006, an action plan to implement the triggers for the HIPC completion point was drafted jointly by the Government, IDA and IMF staff. The action plan, which was signed on August 1, 2006, provides guidance as to how the HIPC triggers could be achieved through key intermediate steps within a realistic timeframe. The action plan is presented in Annex 1 for information.

B. Overall Review of Progress

3. Since August, progress in implementing the HIPC Action Plan has been limited. The current status can be summarized as follows.

• i. Progress in the forestry and social sectors has been broadly in line with the HIPC Action Plan. On the triggers for the forestry sector, the multi-stakeholder review of policies and legislation has been completed. On the social sector triggers, reforms are being implemented, with progress on the creation of the central purchasing authority for pharmaceuticals constituting an important step.

• ii. Progress on the preparation of the full PRSP, the reform of the public financial management system, the creation of anti-corruption structures, transparency of oil sector governance, and procurement reform, has been slower than originally envisaged.

  • Delays in the adoption of the PRSP are largely attributable to capacity constraints. At the same time, it is worth noting that a country-wide participatory consultation process was completed in 2006, and that a first full draft of the PRSP was submitted for comments and suggestions to IDA and IMF staff, and donors on February 14, 2007.

  • On public financial management, despite some delays (such as in the introduction of the functional budget classification system), the authorities’ draft of a Public Financial Management Reform Action Plan (PAGGEF) provides a good starting point for reforms. However, the draft fails to address a number of areas where progress is needed to reach the triggers for the HIPC completion point. The authorities are expected to revise the action plan based on comments from IDA and IMF staff and the donor community before its adoption.

  • Progress has been made towards the establishment of an independent anticorruption institution. However, in view of concerns of key representatives of civil society regarding government commitment to the use of independent oversight mechanisms, the possible effectiveness of such an institution remains to be tested.

  • In the oil sector, annual audits of the Société Nationale de Pétrole Congolaise (SNPC) have continued, and the 2004 SNPC accounts were declared auditable, though not yet certifiable. Whereas this represents a step forward, the staff notes that for the trigger to be met, accounts should be certifiable in successive years. The declarations on conflicts of interest related to the oil sector, mandated by presidential decree in January 2006, were certified by the Cour des Comptes and published on the web site of the Ministry of Economy, Finance and the Budget.

  • On procurement, a decision in principle on the establishment of a system compatible with international standards has been taken, though the technical work on the legal framework has not yet been initiated.

  • As regards structural reforms, the Government has also submitted to the Bank for review a set of laws on telecommunications and postal services, although amendments will be needed to ensure consistency with international standards.

• iii. The implementation of measures to enhance the quality of debt management remains unclear, where the authorities have taken actions to satisfy one of the triggers on debt centralization, but have not yet provided full evidence that would allow the staff to corroborate this.

• iv. On the trigger with regard to public investment management there has been no progress. Specifically, the design of a new public investment management system has not yet been launched.

• v. On the trigger with regard to macroeconomic stability, there has been a reversal of earlier progress. Specifically, the PRGF-supported program went off track in 2006, reflecting fiscal slippages estimated at about 5 percent of GDP and the nonobservance of most program conditionality. The quality and composition of public investment also deteriorated significantly in 2006. At the same time, inflation picked up during 2006, reaching double digits in Brazzaville, as a result of an expansionary fiscal policy and transportation bottlenecks.

4. The slow progress on the implementation of the HIPC triggers is due to a combination of factors. Capacity constraints remain an issue, leading to frequent delays in the design and adoption of policies and legislation, in particular when it comes to complex documents such as the PRSP. Donor assistance, though increasingly aligned with the HIPC process, remains limited. The government has requested additional financing for the existing Transparency and Governance Capacity Building Project to fund technical work related to the implementation of the HIPC triggers and has also committed its own resources to scale up the project. In addition, the government has also started contracting other HIPC related studies from its own budget resources. However, this is a recent development, and procedures for quality control have only recently been agreed with IDA staff. A key constraint for the effective implementation of reform remains limited political consensus on key aspects of the HIPC agenda, notably on the reform of public investment management but also on the reform of public procurement, oil sector governance and anti-corruption triggers. The need to build consensus within the government on the direction of reforms seems to be the main cause for slow progress.

5. In conclusion, while some progress has been made to implement the objectives set out in the triggers, overall this has been slow. No triggers have been fully met so far.

C. Context

Political Context

6. Legislative, senatorial, and presidential elections, scheduled for 2007,² 2008, and 2009, respectively, are likely to impose significant political constraints on the government’s ability to introduce reform measures. Most of the HIPC triggers require legislation, which in the Congolese systems needs review in both chambers of parliament. The Chamber of Deputies will de facto only have one legislative session in 2007, the March session, as the November one will be the inaugural session for the newly elected chamber.

Economic and Poverty Context

7. Congo, an important hydrocarbon exporter, has benefited from rising oil prices and production. Against this background, macroeconomic performance in 2006 was mixed, as evidenced by an acceleration of inflation despite continued growth and strengthened external position. The implementation of the PRGF-supported program in 2006 was weak.

8. Real GDP growth is estimated to have remained robust in 2006 at 6.5 percent, from 7.7 percent in 2005, sustained by a rise in oil output and continued strong non-oil activity. Consumer prices rose to 8.2 percent (year-on-year) in December 2006, mainly on account of the expansionary fiscal policy and transportation disruptions. In the fiscal area, available data through end-December 2006 indicate that domestic revenue exceeded program targets, mainly on account of higher-than programmed oil revenue. In response to the higher revenue, the authorities pursued an expansionary fiscal policy, which resulted in significantly higher-than-programmed current and capital expenditure. As a result, the non-oil primary deficit increased to 44 percent of non-oil GDP (programmed level: 32 percent), from 27 percent in 2005.

9. The resumption of growth over the past two years has led to a rise in income per capita, and to some extent, poverty reduction, as evidenced by the improvement of most social indicators since the return to peace. Per capita income (GNI, Atlas method), which had dropped from about US$1,100 in 1990 to US$570 in 2001 at the end of the conflicts (or back to its level at independence), rose significantly over the last two years to US$950 in 2005 and US$1,100 in 2006. According to the 2005 poverty survey, the incidence of monetary poverty, which was estimated to have risen from 40 percent in 1990 to 70 percent in the late 1990s, has now fallen back to 50 percent. Congo’s Human Development Index has returned to its pre-conflict levels, which is slightly above the averages for Sub-Saharan Africa (SSA) and low-income countries (LICs).

Governance Context

10. Some progress has been made by the Government on actions to address the problems of corruption and weak governance, including on the terms of reference for the establishment of anti-corruption structures.³ However, during the process of the establishment of the local Executive Committee and Consultative Committee under the Extractive Industry Transparency Initiative (EITI), dialogue between the Government and representatives of civil society has not been as smooth as might have been desired. In particular, the government has so far refused to allow the participation in the EITI committees of two oil transparency activists nominated by civil society, on the basis of a suspended conviction against them for financial misappropriation. There is still significant room to improve the quality of dialogue and to foster confidence and mutual trust among representatives of the government and those of civil society to enable them all to work cooperatively to achieve the purposes of the EITI.

II. Summary Of Progress On The Hipc Triggers

11. This section reviews progress towards meeting the HIPC triggers to reach the HIPC Completion Point. It will assess the pace of progress in terms of the intermediate steps presented in the HIPC Action Plan.

A. The PRSP

Trigger 1. PRSP: Preparation of a full PRSP through a participatory process and satisfactory implementation of its recommended actions for at least one year, as evidenced by an Annual Progress Report submitted by the government to the staffs of IDA and IMF.

12. The preparation of the full PRSP was launched in early 2005 and it is expected to be completed in the second half of 2007. The poverty diagnosis has improved, based on household surveys conducted in 2005. Participatory and inclusive community consultations were completed in 2006. Sector and thematic consultations were also finalized, in particular those aimed at identifying performance indicators related to the Millennium Development Goals (MDGs), and the costing of sectoral strategies. A first draft of the full PRSP was finalized in February 2007 and was submitted for suggestions and comments to IDA and IMF staff. A further round of consultations with civil society, NGOs, community organizations, and the donor community is envisaged for March/April 2007. The full PRSP is expected to be adopted by the government and submitted to Parliament after the legislative elections in June/July 2007.

B. Macro-Economic Stability

Trigger 2. Macroeconomic stability: Maintenance of macroeconomic stability as evidenced by satisfactory performance under the PRGF-supported program as well as any IMF successor program.

13. The PRGF-supported program went off track in 2006, owing to large expenditure overruns and delays in implementing structural reforms, including those aimed at meeting the triggers for the HIPC Completion Point on transparency and governance. The authorities missed the end-June 2006 performance criterion on the adjusted primary fiscal balance by 2.7 percent of GDP. The slippage reached an estimated 5 percent of GDP by end-2006, ⁴ as a result of the additional spending authorized by the 2006 supplementary budget passed by parliament in mid-October.⁵ While the structural performance criterion on the certification by the national auditing office that public officials are not benefiting from oil sales by the SNPC or its subsidiaries was met, the performance criterion on the diagnostic study of the commercialization of government oil and most other structural benchmarks were missed. In particular, the structural benchmarks related to the adoption of a strategy for eliminating petroleum product subsidies by end-September 2007 and the diagnostic study of the economic viability of the national oil refinery (CORAF) were not met. The audit covering the awarding of the Marine XI oil concessions was published, albeit with delay.⁶ It revealed serious weaknesses in the decision-making process and the legal framework on oil concessions, which could lead to significant conflicts of interest. Discussions on a staffmonitored program to get the PRGF-supported program back on track are ongoing.⁷

C. Public Expenditure Prioritization

Trigger 3. Alignment of public spending priorities in accordance with the priorities identified in the I-PRSP, and, when completed, the PRSP, reflecting an emphasis on pro-poor growth.

Aligning Public Expenditure Priorities with the I-PRSP

14. Public expenditure over 2005-2006 was broadly in line with poverty reduction priorities identified in the I-PRSP. Pro-poor expenditure increased from 4.0 percent of GDP in 2003 to 6.4 percent in 2006, with primary health care increasing from 0.2 percent of GDP to 1.1 percent. The share of basic education stagnated at 1.6 percent (Table 1). The proportion of pro-poor expenditure as a proportion of total public expenditure has also increased from 13.8 percent in 2003 to 24.0 percent in 2006 (Table 2).

Table 1

Republic of Congo - Pro-Poor Expenditure, 2003-06

(In percent of GDP)

1/ DDR: Disarmament, Demobilization, Reintegration

Table 1

Republic of Congo - Pro-Poor Expenditure, 2003-06

(In percent of GDP)

		2003	2004 Executed	2005	2006 Prelim.
Basic health and VIH/AIDS		0.2	0.4	0.6	1.1
Basic education		1.6	1.6	1.5	1.6
Infrastructure relieving isolation		0.3	1.3	1.2	1.3
Power, water and sanitation		0.9	0.3	0.7	1.2
DDR and food for soldiers		0.9	0.8	0.8	0.8
Employment and social protection		0.1	0.1	0.1	0.1
Agriculture		0.0	0.0	0.1	0.3
	Total	4.0	4.5	4.9	6.4
Memorandum Item
GDP (in billions of CFA Francs)		2,072	2,294	3,150	3,862

1/ DDR: Disarmament, Demobilization, Reintegration

View Table

Table 1

Republic of Congo - Pro-Poor Expenditure, 2003-06

(In percent of GDP)

		2003	2004 Executed	2005	2006 Prelim.
Basic health and VIH/AIDS		0.2	0.4	0.6	1.1
Basic education		1.6	1.6	1.5	1.6
Infrastructure relieving isolation		0.3	1.3	1.2	1.3
Power, water and sanitation		0.9	0.3	0.7	1.2
DDR and food for soldiers		0.9	0.8	0.8	0.8
Employment and social protection		0.1	0.1	0.1	0.1
Agriculture		0.0	0.0	0.1	0.3
	Total	4.0	4.5	4.9	6.4
Memorandum Item
GDP (in billions of CFA Francs)		2,072	2,294	3,150	3,862

1/ DDR: Disarmament, Demobilization, Reintegration

Table 2

Republic of Congo - Pro-Poor Expenditure, 2003-06

(In percent of total public expenditure)

1/ DDR: Disarmament, Demobilization, Reintegration

Table 2

Republic of Congo - Pro-Poor Expenditure, 2003-06

(In percent of total public expenditure)

		2003	2004 Executed	2005	2006 Prelim.
Basic health and VIH/AIDS		0.7	1.5	2.4	4.1
Basic education		5.6	5.6	6.2	6.1
Infrastructure relieving isolation		1.0	4.5	5.2	4.8
Power, water and sanitation		3.1	1.0	2.8	4.5
DDR and food for soldiers		3.0	2.6	3.2	3.0
Employment and social protection		0.4	0.2	0.4	0.4
Agriculture		0.0	0.1	0.6	1.2
	Total	13.8	15.6	20.7	24.0
Memorandum Item
Total Public Expenditure (in billions of CFA Francs)		605	656	745	1,031

1/ DDR: Disarmament, Demobilization, Reintegration

View Table

Table 2

Republic of Congo - Pro-Poor Expenditure, 2003-06

(In percent of total public expenditure)

		2003	2004 Executed	2005	2006 Prelim.
Basic health and VIH/AIDS		0.7	1.5	2.4	4.1
Basic education		5.6	5.6	6.2	6.1
Infrastructure relieving isolation		1.0	4.5	5.2	4.8
Power, water and sanitation		3.1	1.0	2.8	4.5
DDR and food for soldiers		3.0	2.6	3.2	3.0
Employment and social protection		0.4	0.2	0.4	0.4
Agriculture		0.0	0.1	0.6	1.2
	Total	13.8	15.6	20.7	24.0
Memorandum Item
Total Public Expenditure (in billions of CFA Francs)		605	656	745	1,031

1/ DDR: Disarmament, Demobilization, Reintegration

15. One key problem hindering a full assessment of the true volume of pro-poor spending is the absence of a functional budget classification and the incomplete computerization and integration of public expenditure management systems. This makes it impossible to track the actual composition of public expenditure systematically to inform budget allocations. Finally, weaknesses in the public investment management system (discussed in section D.2 below) raise questions on the quality of public investment.

16. The full PRSP provides medium-term public expenditure projections and identifies pro-poor expenditure. The consolidation of public expenditure management systems, to be effective by 2009, is expected to allow for real time tracking of all public expenditure, including the use of interim HIPC relief. This will again depend on the implementation of a functional budget classification.

Use and Monitoring of Enhanced HIPC Initiative Debt Relief

17. As agreed at the decision point, a special Treasury account was opened in 2006 at the Banque des Etats d’Afrique Centrale (BEAC) to deposit interim HIPC assistance. So far, the government has not spent these resources and the balance was reportedly CFAF [13] billion at end-2006. No audit of the account was commissioned for 2006. It is therefore not possible at this stage to indicate whether all debt relief granted in 2006 was saved in the account. ⁸

D. Public Financial Management

18. The public financial management reform trigger is broken down into four subtriggers, which are discussed below. On the overall direction of public financial management reforms, a Country Integrated Fiduciary Assessment (CIFA) was conducted in 2006 in conjunction with a public financial management performance assessment based on PEFA methodology, supported jointly by IDA, the EU and the French government. The PEFA assessment, completed in July 2006, notes that progress has been made in reforming public financial management: (i) financing of public expenditure by oil companies has been eliminated; (ii) tax and customs administration have improved; and (iii) the establishment of a General Inspection Directorate (Inspection Générale des Finances) and a Supreme Audit Court (Cour des Comptes) have improved external control. A medium-term reform action plan, including some actions to meet the HIPC completion point triggers in the area of public finance management, was drafted and submitted to development partners for comments in February 2007. IMF and IDA comments were provided on March 19, 2007.

E. Governance and Natural Resource Management

27. The governance triggers consist of a set of overall actions to reduce levels of corruption and enhance the quality of governance, as well as two specific sets of triggers to address concerns related to the oil and forestry sectors.

F. Structural Reforms: the Regulatory Framework for Telecommunications and Postal Services

Trigger 6. Structural Reforms: Review and adoption of a regulatory framework for the telecommunications sector establishing competition at the level of international gateways and the wireless local loop.

40. In order to fulfill this trigger, the authorities agreed with IDA and IMF staff on the following actions included in the Annex: (i) the full and unambiguous repeal of Decree no 2004-466, which reserved international gateway services and the wireless local loop to be the exclusive preserve of SOTELCO, the public operator; and (ii) the adoption of three draft laws covering: a) the creation of a regulatory authority for Post and Telecommunications; b) the regulation of the postal sector; and c) the regulation of the telecommunications sector. The draft laws are being prepared in consultation with IDA staff.

41. On decree 2004-466, two other relevant decrees have been passed since 2004, but neither satisfies the conditions of the triggers. On the draft regulatory laws, three laws covering the areas specified have been prepared and reviewed by IDA staff. The laws conform to the basic structure of legislation found in other civil law countries, although they will need to be improved to be consistent with international practice in order to meet the completion point trigger.

G. Social Sectors

H. Debt Management

Trigger 8.(i). Publication of the quarterly external debt data and projections on a government website.

46. This trigger has not yet been met. Although quarterly debt data are reportedly available at the government’s debt agency, they are not yet posted on the Government website.

Trigger 8.(ii). Centralization of all information on debt, including collateralized debt, in the government’s debt agency (CCA).

47. This trigger has not yet been meet. The government’s debt management capacity has improved over the last two years. However, the government has not yet provided the necessary evidence that would allow staffs to verify that the HIPC trigger is met.

III. Critical Issues in Action Plan Implementation

48. Overall, performance in implementing measures to reach the HIPC Completion Point is limited. In particular, four critical elements of the reform process have been identified by the Bank and IMF teams as critical for making progress on the HIPC Action Plan:

• a. In terms of the finalization of the PRSP, it should be possible for the Government to adopt a credible PRSP in the second semester of 2007, in time for reflecting its priorities in the 2008 budget and the 2008-2010 medium-term fiscal framework.

• b. It is essential that the PRGF-supported program be brought back on track as soon as possible. This will critically depend on sound macroeconomic policies, a medium-term fiscal strategy, the introduction of budget management reforms, and the establishment of a public investment management system that can ensure the quality of spending.

• c. The establishment of institutional structures to monitor reforms. This is a key test of the resolve of the government to meet the HIPC triggers. The establishment and operationalization of the planned ‘Observatory’, which should become a platform for dialogue and confidence building between the government, the oil industry, and civil society, depend on the ability of government and civil society to engage in a constructive dialogue to resolve the current stalemate on civil society representation in these institutions.

• d. The initiation of a fundamental reform of public investment planning and execution. If the Republic of Congo is to effectively use the resources generated by the oil windfall to reduce poverty and ensure sustainable and equitable growth, improved prioritization of public investment resources and improved project management practices are required. Concrete actions are needed to introduce a credible public investment project preparation, implementation, and monitoring system for the 2008-2010 budget period. At the same time, there is strong institutional and political resistance to the reform of the current system, which will continue to impede progress.