Republic of Congo
2008 Article IV Consultation, Requests for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Interim Assistance Under the Enhanced Initiative for Heavily Indebted Poor Countries, and Financing Assurances Review: Staff Report; Staff Statement and Supplement; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for the Republic of Congo

The staff report for the Republic of Congo’s combined 2008 Article IV Consultation and Requests for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility is discussed. To enhance external viability, the authorities recognize the need to improve competitiveness, raise output growth through diversification, and consolidate the fiscal position. The authorities are making a concerted effort to improve the business climate, liberalize trade, deepen financial intermediation, continue reform of public enterprises, improve governance and transparency, and put in place development strategies in key sectors.


The staff report for the Republic of Congo’s combined 2008 Article IV Consultation and Requests for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility is discussed. To enhance external viability, the authorities recognize the need to improve competitiveness, raise output growth through diversification, and consolidate the fiscal position. The authorities are making a concerted effort to improve the business climate, liberalize trade, deepen financial intermediation, continue reform of public enterprises, improve governance and transparency, and put in place development strategies in key sectors.

I. Introduction

1. Beginning in 2003, building upon renewed peace and political stability, the Congolese authorities turned their attention to improving economic management. A comprehensive reform program supported by an arrangement under the Poverty Reduction and Growth Facility (PRGF) in 2004 was to be anchored on fiscal consolidation, notably strict control of current non-priority spending, and ambitious structural reforms to boost nonoil growth. However, program implementation was uneven; with only two program reviews being completed through 2006. Chief among the factors that may have contributed to this performance were (1) the government’s inability to resist spending pressures as world oil prices rose and weak ownership; and (2) weaknesses in institutional and administrative capacity—especially in public financial management and in the oil sector. A Staff-Monitored Program (SMP) was introduced in 2007 in an effort to establish a satisfactory track record of performance.

2. Macroeconomic and structural policies have been more actively implemented recently because program ownership was solidified. Recognizing past failures, late in 2007 the authorities established a new reporting and monitoring structure to guide economic policies and relations with the Bretton Woods Institutions. A policy committee, headed by the President of the Republic, now oversees the economic program. It is supported by a technical committee headed by a special advisor to the President. This new structure is proving effective; during the first half of this year, the authorities satisfactorily completed a six-month SMP that has paved the way for a request for a new PRGF arrangement.

3. The political environment is stable but there are lingering social tensions. High world oil prices for the past year or so have heightened the public’s expectations and sense of urgency for improving public service delivery, the economic infrastructure, and public sector wages and salaries. The rapid increase in food and fuel prices earlier this year also created tensions, leading to a temporary reversal in some policies. Senatorial and presidential elections are slated for 2009.

4. The authorities have been receptive to the Fund’s policy advice in the context of both programs and surveillance. In line with this advice, the authorities have been making efforts to achieve macroeconomic stability, improve the conditions for private sector development, including through reforms to public financial management, and strengthening governance and transparency over the use of public resources. However, capacity constraints and weaknesses in ownership have adversely affected the smooth implementation of the authorities’ economic reform efforts.

II. Recent Economic Developments and Prospects

5. Recent economic indicators point to continuing strong growth, higher inflation, and a significant improvement in the external sector.

  • Economic growth has been robust in 2008, reflecting a resumption of oil production after an oil-platform accident and solid non-oil activity, driven by the telecommunications, construction, and transport sectors. Real GDP growth is projected to be about 7.6 percent this year, which should contribute to the trend increase in real gross domestic income (per capita) that has occurred during the past few years as real world oil prices rose (Table 1).

  • Higher food and energy costs have pushed up inflation, which rose to 5.7 percent in the twelve months through June 2008. Moreover, non-food prices rose by 6.7 percent during the same period. Recent data point to a further small rise in prices, before moderating in the period ahead.

  • Driven by high oil exports, the current account is projected to swing from a deficit of 26 percent of GDP last year to a surplus of 0.6 percent of GDP in 2008 (Table 2). Non-oil exports, which have increased only modestly in recent years, account for less than 6 percent of GDP, reflecting Congo’s narrow export base. Foreign direct investment (FDI) continues to expand in the oil sector, partly as a result of investments in newly discovered fields, and could reach more than 23 percent of GDP this year. The real effective exchange rate has appreciated sharply since 2007, mainly reflecting Congo’s higher rate of inflation relative to its trading partners.

  • Congo’s external public debt has declined sharply in the past several years, partly as a result of Paris Club debt rescheduling and debt relief from London Club creditors under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative. Recently, arrears with some Paris Club creditors have accumulated (see Box 1 below), but these are being addressed in the discussions to reschedule Congo’s external debt.1 The authorities are continuing their negotiations with litigating creditors, with a view to reaching a settlement that is—to the extent possible—fair to all creditors. Under the June 2006 framework agreement with China, the authorities are also discussing new concessional loans amounting to about US$ 1 billion to finance infrastructure projects over the medium term. The financial terms under negotiation for all these loans involve 20-year maturity, 5-year grace period, an interest rate of 0.25 percent, and biannual repayments (with an estimated grant element of about 52.7 percent).

Table 1.

Republic of Congo: Selected Economic and Financial Indicators, 2006–11

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

Including grants.

Primary revenue (excluding grants) minus non-interest current expenditure minus domestically financed capital expenditure and net lending.

Including public transfers.

Table 2.

Republic of Congo: Medium Term Balance of Payments, 2006–12

(Billions of CFA francs, unless otherwise indicated)

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Sources: BEAC; and Fund staff estimates and projections.

Includes assumed disbursements under the new PRGF.

Includes debt relief from Paris Club and London Club.

Percent of GDP; including public transfers.


Real Income and Real Oil Prices, 1995-2007

Citation: IMF Staff Country Reports 2009, 074; 10.5089/9781451808681.002.A001

Source: Fund staff estimates.

Consumer Price Developments, Jan. 2005-Jun. 2008

(Percent change, y-o-y)

Citation: IMF Staff Country Reports 2009, 074; 10.5089/9781451808681.002.A001

Source: Congolese authorities, and Fund staff estimates.

Oil Production, Prices, and Exports, and Real GDP Growth, 2002-08

Citation: IMF Staff Country Reports 2009, 074; 10.5089/9781451808681.002.A001

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

6. Implementation of economic policies improved recently, after a period of fiscal slippages and delays with structural reform.

  • Although the basic non-oil primary deficit dipped to 55.7 percent of non-oil GDP in 2007, on present policies it should improve significantly this year. Through June 2008, the authorities’ fiscal targets, in line with the objectives of the SMP, were comfortably achieved (Box 1 and Tables 3a and 3b). The shift in the fiscal stance is attributable to better control and monitoring of expenditures, especially for public investment, and unexpectedly high non-oil revenue from a pick-up in corporate income tax revenue from oil company subcontractors. The quarterly certification of oil receipts has helped ensure the satisfactory repatriation of oil revenue, although there continue to be delays, which the authorities attribute to technical difficulties and problems in dealing with litigating creditors. A supplementary budget—in line with the program’s objectives—was adopted recently to account for the higher-than-projected oil revenue, some tariff and tax reductions to help mitigate the recent increase in food and energy costs, and additional pro-poor (generic drugs) and capital spending, financed through interim HIPC assistance.

  • Monetary developments have been heavily influenced by external developments. Broad money growth was 16 percent through mid-year, net foreign assets rose to US$3.5 billion, and credit to the economy has expanded (Table 6). In an effort to better manage liquidity, the government repaid a large proportion of its statutory advances from BEAC, and stepped up its effort to coordinate treasury operations more effectively with the regional central bank. The banking system remained solid: all four commercial banks are in compliance with the prudential ratios, except the one related to risk concentration (in which banks lend mainly to a few big enterprises operating in only a few sectors, notably telecommunications, construction, and public sector subcontractors, Table 7). Nonperforming loans have increased slightly but so has provisioning. Commercial banks have seen a rise in domestic deposits as non-oil activity continues to be robust.

  • The pace of structural reform picked up during the past several months of the SMP (Box 1); there was progress on a numbe r of important fronts, including with the floating completion point triggers for the enhanced HIPC Initiative.2 To enhance public financial management (PFM), the authorities adopted and began implementing a PFM action plan (drafted with assistance from Congo’s development partners); produced a draft plan for managing public investment; became a candidate country to join the Extractive Industries Transparency Initiative (EITI) in February 2008 and initiated work on the first EITI report, which is expected to be completed by the end of this year; and consolidated all the government’s accounts with the BEAC. In the oil sector, the authorities adopted and began to apply a reform program for the state-owned refinery (CORAF); prepared an initial draft of actions to bring the commercialization of Congolese oil up to international standards; and continued to certify oil receipts on a quarterly basis to ensure transparency and accountability.

Table 3a.

Republic of Congo: Central Government Operations, 2006–11

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

Primary revenue (excluding investment income and grants) minus noninterest current expenditure minus domestically financed capital expenditure (excluding HIPC-capital expenditure) and net lending.

Table 3b.

Republic of Congo: Central Government Operations, 2006–11

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

Primary revenue (excluding investment income and grants) minus noninterest current expenditure minus domestically financed capital expenditure (excluding HIPC-financed capital expenditure) and net lending.


Fiscal Developments, 2002-08

(Percent of non-oil GDP, unless otherwise indicated)

Citation: IMF Staff Country Reports 2009, 074; 10.5089/9781451808681.002.A001

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

Performance on the 2008 SMP

Earlier this year, Fund management approved an SMP for Congo covering the six-month period January-June 2008. The SMP was designed to support the authorities’ efforts to stabilize the economy, consolidate the fiscal stance and reverse previous expenditure slippages, and to continue structural reform in such areas as public financial management, public enterprises (mainly in the oil sector), and governance and transparency.

Performance on the SMP was broadly satisfactory. At the end of June 2008, the indicative target for the nonoil basic primary deficit was met comfortably, demonstrating the government’s ability to control and monitor public spending, although healthy non-oil tax collections certainly provided room to maneuver (Table 4). All of the other quantitative targets were observed, but external arrears to some Paris Club creditors accumulated (CFAF 10.1 billion, about US$ 23.8 million). The authorities have been servicing their external debt on the basis of the 2004 Paris Club rescheduling agreement which provided for lower payments and was predicated on being on track with the Fund program. When the program went off track, some creditors reverted to the original debt service schedule, resulting in some arrears accumulation. Paris Club creditors have provided financing assurances for the program, including with regard to the regularization of the arrears situation.

Progress was made on structural reform during the SMP (Table 5), but several structural benchmarks proved difficult to implement without further technical assistance (adoption of a comprehensive action plan with a timetable to address institutional and procedural deficiencies in the commercialization of Congolese oil, and a three-year action plan to strengthen public investment management). Also, the authorities were reluctant to adjust petroleum product prices to adhere to the budgeted level of subsidies, in an environment of high fuel and food prices earlier this year; and they did not provide timely information on petroleum product prices. The program’s other structural benchmarks were observed, including adoption of a plan and timetable for reforming the state-owned oil refinery (CORAF); completion of a technical and financial audit of current transfers and a representative sample of capital expenditures executed in 2006; quarterly certification of oil revenue by an international audit firm (KPMG); and publication on the internet of all invitations to bid and the bids themselves for government procurement contracts above CFAF 200 million.

Table 4.

Republic of Congo: Quantitative Indicative Targets, Jan 1 - June 30, 2008

(Billions of CFA francs, unless otherewise indicated; cumulative from January)

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Excluding rescheduling arrangements and disbursements from the IMF; the minimum grant element is set to 50 percent.


Table 5.

Republic of Congo: Structural Benchmarks Under the SMP, January 1–June 30, 2008

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III. Enhancing External Viability

7. The authorities recognize that, as a member of CEMAC, Congo can enhance the external viability of the currency union through policies to improve competitiveness, raise output growth through diversification, and consolidate the fiscal position. In a number of important ways Congo is lagging behind its CEMAC partners, even though it has the financial resources from oil wealth to finance development needs to meet the Millennium Development Goals (MDGs). With this in mind, the 2008 Article IV discussions focussed on several medium-term challenges:

  • How best to diversify the economy and to broaden economic activity beyond the oil sector; and

  • How to achieve long-term fiscal sustainability to ensure that Congo’s oil wealth is preserved for future generations.

A. International Competitiveness in the Non-Oil Sector

8. After two decades of relatively poor performance, Congo’s exports have picked up (in nominal terms) over the past several years. The expansion was twice as fast as the average of its CEMAC partners, and four times faster than the average for sub-Saharan Africa as a whole. However, export volume growth was still tepid, especially in the non-oil sector where export growth slowed in real terms from about 5 percent in the 1990s to about 2 percent in this decade. The share of non-oil exports in total exports plunged to about 7 percent in 2007 from nearly 20 percent in 2003.

Export growth and shares, 1990-2007 (Percent)

9. Several factors have probably contributed to Congo’s problems with nonoil exports, among them real effective exchange rate appreciation, institutional constraints, and inadequate infrastructure.

  • The prominence of the oil sector and more recently high world oil prices, have diverted productive resources from traditional exports (including timber), toward extraction and oil-related activities. In this transformation, the non-oil sector lost its weight in total exports and in value added.

  • Appreciation of the real effective exchange rate since 2003 has contributed to the erosion of Congo’s competitiveness (Box 2).

  • Congo’s institutions are not strong; many elements that could facilitate FDI and private sector development are inadequate. In particular, until quite recently the effort to enhance transparency and governance of natural resources has been at best tentative—a significant constraint in a country with abundant resources but little development.3 The financial sector is underdeveloped; the legal framework needs firming up, and the business climate could be improved substantially. The World Bank’s 2008 Doing Business survey ranks Congo near the bottom (178 out of 181 economies) in terms of ease of doing business. Procedures to start and to close an activity, hire and fire, get credit or pay taxes are so costly and cumbersome as to deter entrepreneurship.

  • The inadequacy of the economic infrastructure also holds back the non-oil export sector. The World Bank indicators show limited access to technology for Congo. Internet costs are high (as in the other CEMAC countries) compared with sub Saharan Africa as a whole. Only 5 percent of roads are paved (compared with 15 percent for the region). And rail transportation between the two main cities, Brazzaville and Pointe Noire, suffers from frequent disruptions.


Export growth and shares, 1990-2007


Citation: IMF Staff Country Reports 2009, 074; 10.5089/9781451808681.002.A001

Source: Congolese authorities; and Fund staff estimates.

Non-oil GDP and Non-oil Exports as a share of Total GDP and Total Exports, 1989-2007


Citation: IMF Staff Country Reports 2009, 074; 10.5089/9781451808681.002.A001

Source: Congolese authorities; and Fund staff estimates.

10. During the discussions, the authorities and the staff agreed that enhancing Congo’s competitiveness in the non-oil sector must therefore be a priority. A primary objective is to implement a broad-based economic program to diversify the economy, achieve fiscal sustainabihty, and qualify for debt relief to free more resources for pro-poor and pro-growth expenditures. Such a program could boost employment prospects and reduce income disparities between the oil and non-oil sectors; in the latter, poverty is most prevalent.

Real Effective Exchange Rate Assessment

Congo’s nominal effective exchange rate appreciated by about 6.2 percent in the period from end-December 2007 through June 2008, primarily on account of the appreciation of the euro to which the CFAF franc is pegged. Over the same period, the real effective exchange rate (REER) was 6.7 percent higher, reflecting higher inflation relative to Congo’s trading partners.


Real Effective Exchange Rate and Real Oil Price, 2002-08

(Index, 2000=100)

Citation: IMF Staff Country Reports 2009, 074; 10.5089/9781451808681.002.A001

Recent analysis at the regional level suggests that the CFA franc was in line with fundamentals at the end of 2007. Estimates for Congo, however, suggests that its REER was moderately above the long-run equilibrium value in 2007. One estimate of the equilibrium REER, based on such fundamental variables as government consumption, relative productivity, terms of trade, openness, and money supply, suggests an overvaluation of about 7 percent in 2007, with the overvaluation for 2003-07 driven by relatively high government consumption. This estimate, should, however, be treated with caution since it is not robust to the specification of alternative variables and variations in the estimation period. An alternative estimate using panel data for oil exporters suggested that Congo’s REER was overvalued by about 14 percent. The envisaged fiscal consolidation would help reduce the overvaluation over time (details can be found in the accompanying Selected Issues paper).


Degree of Deviation From Equilibrium, 1995-2007


Citation: IMF Staff Country Reports 2009, 074; 10.5089/9781451808681.002.A001

B. Diversification of the Non-oil Economy

11. The authorities are well attuned to the need to accelerate private-sector-led growth to alleviate poverty as specified in their Poverty Reduction Strategy (PRS).4 But since the base of economic activity outside the oil sector is narrow and dominated by subsistence agriculture, diversification is critical. The authorities are moving on a broad front, but recognize that policies tailored to a few specific activities or sectors are also needed.

  • Business climate: To create more favorable conditions for private sector development, the authorities are moving to improve the business environment and reduce the cost of doing business. They are simplifying administrative procedures; working to enable application of OHADA business laws, which are common to Francophone African countries; creating a “one-stop” window for establishing a business; and making a determined effort to enhance governance and combat corruption.

  • Trade liberalization: As a small open economy Congo would benefit from closer integration with the regional and global economy; presently, trade and investment linkages are concentrated in the oil sector. Integration is to be achieved through CEMAC trade reforms, including reduction of the maximum common external tariff (from 30 to 20 percent) and tariff rates, trade facilitation, and harmonization of rules of origin. Domestically the authorities are working to bring the customs code into line with international standards, fully implement the ASYCUDA system to facilitate customs clearance, and remove nuisance taxes and surcharges that inhibit trade.

  • Financial intermediation: Financial intermediation is relatively low in Congo compared with its neighbors. For example, the ratio of private sector credit to GDP is a mere 2.1 percent (sub-Saharan African average: 17.4 percent), and the share of the population with a formal bank account is less than 3 percent (CEMAC average: 26.8 percent). The loan/deposit ratio is about 22 percent in Congo, compared with 80 percent for WAEMU countries, and 48 percent for the CEMAC. The authorities are thus giving high priority in the early stages of the reform program to deepening intermediation. A financial sector strategy, drafted with Fund staff assistance, is to be adopted and implemented over the medium term, supported by the proposed PRGF arrangement (see below). Expanding public access to banking services, lowering the cost of credit, better information on the cost of credit and credit history are priorities for action.

  • Public enterprises. Though few in number, Congo’s parastatals tend to have a disproportionately large influence on economic performance and business conditions because of the narrow economic base. Consequently, raising their financial and operating performance is crucial to achieving Congo’s development goals. The authorities are making a concerted effort to rationalize the operations of enterprises in the oil sector, but more could be done to address deficiencies in other public enterprises, especially those in transportation (CFCO, the railway company), ports, and utilities (electricity, water, and sanitation).

  • Key sectors. While the authorities believe a broad-based approach is necessary to support diversification, they also feel targeted interventions are necessary to jump-start activity in key sectors, particularly agriculture, manufacturing, mining, and forestry. The focus on the oil sector in the past several decades has slowed development in other areas, where the economic infrastructure and human and physical capital have deteriorated. For example, coffee and cocoa were historically important cash crops, but at present production is negligible; timber is the primary export after oil, but its output growth is relatively stagnant. The government is now directing its efforts, with the help of development partners, to reviving agriculture through investment and technological transfer (in cooperation with the governments of China, Israel, and South Africa, among others); encouraging exploration and development and FDI in minerals; and laying the foundations for manufacturing, including by rehabilitating the war-ravaged and dilapidated infrastructure (energy, roads, telecommunications) and improving the skills of the labor force.

Selected Financial sector Indicators, 2006

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Sources: International Financial Statistics, and Sub-Saharan Africa Regional Outlook, May 2006.

Data refer to 2004.

C. Fiscal Sustainability

12. The authorities agreed on the need to achieve long-term fiscal sustainability to ensure that future generations benefit from Congo’s current oil wealth. Staff elaborated various models and fiscal rules of thumb used by oil-exporting countries to guide fiscal policies. One such model is based on the permanent-income hypothesis (PIH), which protects future generations by ensuring that all economic agents are treated equally over time, allowing only the permanent (annual) income from oil wealth to be spent each year.5 The authorities were attracted by the benefits of using the model and the discipline it provided; and although they recognized the caveats that such models entail, their medium-term fiscal strategy for the proposed PRGF arrangement is guided by it.

13. Consistent with the PIH model, the authorities intend to target for the long-term an annual reduction in the basic non-oil primary deficit—the program’s nominal fiscal anchor—of 3-4 percent over the next several years. This would move the fiscal stance toward sustainability, which the staff estimates would occur when the basic non-oil primary deficit is in the range of 3-5 percent of non-oil GDP.6

14. The authorities expressed concern, however, that the pace of fiscal adjustment may not allow for the flexibility needed to address immediate needs, especially for investment in infrastructure. While sympathetic to this concern and the authorities’ desire to front-load public investment in an effort to meet the MDGs, staff urged them to pursue the indicated fiscal path, since the current fiscal position is a long way from sustainability and capacity constraints limit the efficient investment of public resources. Staff also indicated that there would be room to accommodate a scaling-up of investment if concerted efforts were made to (i) re-orient spending by reducing or eliminating poorly targeted spending, such as for fuel subsidies; (ii) rationalize low-priority programs and spending initiatives; (iii) improve public financial management; and (iv) mobilize more domestic resources. As a share of non-oil GDP, non-oil revenue is relatively large at about 21 percent, but it has been stagnant in recent years and could be increased by strengthening tax and customs administration by, e.g., use of a single taxpayer identification number, computerization, and fully implementing the ASYCUDA system; reducing tax exemptions; and more aggressive collection of tax arrears to combat fraud and evasion. A broadening of economic activity would also help boost non-oil tax collections.

15. As additional fiscal space emerges, making it possible to scale up domestically-financed capital spending even further, the authorities must address the current administrative and institutional constraints. The government is pressing ahead with its efforts to complete by year-end, with technical assistance from development partners, a three-year action plan to manage public investment, which should help provide a strategic focus both in geographic and sectoral terms. This plan will take into account the findings of the recent technical and financial audit of a sample of 2006 capital expenditures and transfers, as well as input from upcoming work by the World Bank on infrastructure priorities and a public expenditure review.7 The authorities are working actively with World Bank staff to put in place modern procurement procedures and train staff accordingly.

D. External Debt Sustainability

16. The authorities concurred with the findings of the joint IMF and World Bank debt sustainability analysis and the view that Congo is at a high risk of debt distress. Owing mainly to debt relief from London Club creditors in November 2007, Congo’s net debt ratios have improved significantly and are projected to decline further over the long term, reflecting strong oil revenue and projected fiscal consolidation. However, the country is still vulnerable to movements in world oil prices, so a prudent fiscal stance will be essential to achieving debt sustainability (details can be found in the supplement accompanying this staff report).

E. Capacity Building

17. The authorities stressed the need to build institutional and administrative capacity so that their economic program can be implemented smoothly. Staff and authorities took stock of the technical assistance being provided by the Fund (much of it through the central AFRITAC), World Bank, and other donors to identify overlaps, gaps, and areas where effective use could be made of Congo’s own resources to accelerate progress. It was agreed that additional assistance is needed to successfully implement the ambitious PFM reform, particularly drafting a medium-term expenditure framework, a public procurement code in line with international best practice, and a comprehensive investment management program. Also, assistance in reforming the oil sector is urgently required given the sector’s importance and conditionality for the enhanced HIPC Initiative.

18. Provision of data to the Fund is broadly adequate for surveillance purposes, with timeliness and regularity of basic niacroecononiic data being priorities. Recently, efforts have been made to strengthen national accounts, balance of payments, and fiscal data, with the help of Fund technical assistance.

IV. The Medium-term Economic Program

19. The authorities’ PRGF arrangement is designed to support balanced growth, low and stable inflation, and fiscal and external sustainability. The medium-term macroeconomic framework (2008-11) is consistent with the PRS and aims to achieve:

  • Annual real GDP growth in the non-oil sector of about 8 percent, which the authorities believe is the minimum necessary to reduce poverty durably and to make meaningful progress toward the income and other MDGs.8

  • Low and stable inflation of about 3 percent a year, in line with the CEMAC convergence criteria, which will help preserve Congo’s competitiveness given the fixed exchange rate regime.

  • An improvement in the external position with the current account moving into surplus this year, with the surplus rising into the medium term. This will make it possible to further build up net foreign assets and provide more than adequate savings to finance development. The external position will be strengthened further when Congo reaches the HIPC completion point.

20. Medium-term policies to achieve these macroeconomic objectives include:

  • Gradual but continued fiscal consolidation to ensure steady progress toward long-term sustainabihty, recognizing the finite horizon for oil production—which could be as soon as 2028 without further exploration and development—and the need for intergenerational equity. The authorities agreed that an annual decline in the basic non-oil primary deficit of 3-4 percent of non-oil GDP would be adequate to balance the short-term desire to scale up public investment to address urgent needs (rebuild infrastructure, improve physical and human capital, and support key sectors) and put the fiscal stance on a credible path to preserve oil wealth. The reduction in the basic non-oil primary fiscal deficit from a projected 43.2 percent of non-oil GDP this year to 33V2 percent in 2011 is projected to come from cuts in non-priority spending, essentially through the elimination of fuel subsidies and restraint on wages and goods and services, and domestic revenue mobilization.

  • The regional central bank’s focus on keeping inflation low and allowing foreign reserves accumulation, to help support the region’s fixed exchange rate regime.

  • Further opening of the economy through trade liberalization.

  • Structural reform in areas critical to the success of the program (see Box 3): timely and full implementation of the authorities’ action plan to strengthen public financial management and enhance tax and customs administration; improvement in the financial and operating performance of state-owned enterprises, notably in the oil sector, given implications for the budget and governance generally; and adoption and implementation of the financial sector strategy.

Structural Conditionality for the Proposed PRGF Arrangement

Structural conditionality for the proposed PRGF arrangement is focused on areas that are critical for achieving the program’s macroeconomic objectives. Consequently, it covers PFM, reform of the oil sector, and financial stability and deepening intermediation.

  • Public financial management: To support the authorities’ efforts to tighten control over budget execution and monitoring, and to achieve consistency with the PRS, the program gives priority to enhancing PFM. Reforms in this area are important to strengthen governance and transparency in the use of public resources. Program conditionality will support a new economic, functional, and administrative classification for the budget; development of a medium-term expenditure framework; and better public investment management, which is critical given the magnitude of these expenditures.

  • Oil sector: Performance of the sector is critical to the macroeconomic outlook. To safeguard oil revenue and ensure that state-owned enterprises in the sector are financially sound and efficient, the program will support the government’s efforts to repatriate oil revenue in a timely manner and certify those receipts every quarter; adopt a comprehensive plan with a timetable to address procedural deficiencies in the commercialization of Congolese oil; and finalize a strategic study of the sector. The program will also support the authorities’ efforts to establish a new petroleum-product pricing regime that would help eliminate subsidies and depoliticize pricing decisions.

  • Financial sector: The authorities recognize that financial stability and deeper intermediation are needed to support private sector development and broaden economic activity beyond the oil industry. Accordingly, the program will support adoption by the government of a financial sector strategy drawn up in consultation with Fund staff and Congo’s development partners. Implementation of the strategy could be supported through conditionality on key elements.

A. Economic Policies for 2008-09

21. In the first year (2008-09), the program targets real GDP growth of 854 percent in the non-oil sector and a moderation of inflation to 3 percent by year-end. The pickup in non-oil activity is largely attributed to strong public investment, a further broadening of growth, and spillovers from high oil production and projected investment in this sector. The near-term policies to support these targets are outlined below.

Fiscal policies

22. For the rest of 2008 the fiscal stance will remain consistent with targets established earlier this year in the SMP, including a reduction of the basic non-oil primary deficit to 43.2 percent of non-oil GDP. This target can be achieved by strong nonoil tax collections, firm control of public spending, and a projected decline in fuel subsidies by about 1.6 percent of non-oil GDP, as a result of the across-the-board increase in fuel prices by an average of 13 percent at the beginning of October (this increase was a prior action for Executive Board consideration of the authorities’ request for a new PRGF arrangement).

23. For 2009 the program envisages a decline in the basic non-oil primary deficit to 40.2 percent of non-oil GDP, based primarily on nominal cuts in non-priority spending, including a further decline in fuel subsidies. Pro-poor and domestic ally-financed capital spending would rise as a share of non-oil GDP, consistent with the authorities’ PRS. Non-oil tax revenue would increase only slightly as a share of non-oil GDP (to about 21.1 percent) because improvements in tax and customs administration would be mostly offset by the full-year impact of recent tax and tariff reductions aimed at mitigating the adverse impact of food and fuel price inflation through most of 2008.9 To execute and monitor the budget better, the authorities intend to undertake a number of PFM measures, such as preparing and submitting to parliament, next year’s budget consistent with the targets under the proposed PRGF arrangement and using economic, functional, and administrative classifications, and to finalize and adopt a three-year action plan to improve public investment management (both structural performance criteria for December 2008). They will also prepare a medium-term expenditure framework (structural performance criterion for June 2009). To ensure the transparency and accountability of oil revenue, they will continue with quarterly certification of it by a reputable international auditor and lodge the proceeds in the Treasury within 45 days of oil sales (both continuous structural performance criteria).

Monetary and financial sector policies

24. BEAC projects broad money growth for Congo of about 13 percent for 2009, consistent with the projected expansion of nominal growth in the non-oil sector. Credit to the private sector should continue to increase strongly as private sector development speeds up and financial intermediation deepens. To facilitate implementation of monetary policy, the authorities intend to continue to reduce the stock of statutory advances, with a view to repaying them fully by the end of 2008, and to work closely with its CEMAC partners to develop the regional securities market.

25. To initiate reforms, the government will adopt by the end of this year the financial sector strategy established in collaboration with Fund staff. It is expected that this strategy will contribute to expand credit to the private sector, strengthen the legal framework, improve information on the cost of credit and credit history, diversify financial instruments, and ensure that the country’s pension system is placed on a sound footing.

External sector policies

26. The authorities have reaffirmed their commitment to finance development mainly through their own resources and to seek foreign financing only on highly concessional terms (with a minimum grant element of not less than 50 percent). They also intend to accelerate efforts to regularize relations with all creditors, including non-London Club and litigating creditors. In the coming year a priority will be to complete implementation of a new debt management strategy in line with CEMAC regional guidelines. Over the next year, the government will continue to urge its CEMAC partners to liberalize regional trade by reducing the maximum external tariff; removing remaining exemptions, surcharges and export taxes; harmonizing the rules of origin; and otherwise facilitating trade.

Structural policies

27. As well as continuing to strengthen PFM and initiate financial sector reform, the authorities intend to accelerate progress in rationalizing the oil sector. The focus in the first year of the program will be to establish a new fuel pricing mechanism (structural performance criterion for March 2009), which would help phase out fuel subsidies by moving prices toward import parity and depoliticize pricing decisions; continue to implement the action plan to improve the operations and financial performance of CORAF; adopt a plan (with the assistance of Congo’s development partners) to address institutional and procedural deficiencies in the commercialization of Congolese oil (structural performance criterion for March 2009); and prepare a strategic study on how the oil sector can make the greatest contribution to economic development.

B. Program Financing and Capacity to Repay the Fund

28. Congo has not achieved debt sustainability, although because of rising oil production and exports it has the capacity to service external debt, including that owed the Fund (Table 8). External public debt service (before debt relief) has recently declined significantly as a result of debt rescheduling with Paris and London Club creditors on favorable terms. The authorities are making a good faith effort to reach a collaborative agreement with other commercial and litigating creditors, on terms comparable to those of the London Club. Debt service is projected to decline to about 4.2 percent of exports in 2009 and to 1.9 percent over the medium term. Consequently, proposed access for the PRGF arrangement is low, amounting to SDR 8.46 million (10 percent of quota), to be disbursed in seven equal tranches (Table 9).

Table 8.

Republic of Congo: Indicators of Capacity to Repay the Fund, 2006-151

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Sources: IMF staff estimates and projections.

Assumes a new PRGF arrangement of SDR 8.46 million (10 percent of quota).

Total debt service includes IMF repurchases and repayments.