This takes into account the classification of Congo as a weak performer, with an average CPIA rating for the past three years of 2.74.
This analysis can be found in Appendix I of Country Report No. 07/205.
Public debt includes central government debt only. Net debt is defined as external and domestic debt less liquid financial assets. Liquid financial assets are government deposits at the central bank, which, apart from the funds in the operations account, are allocated into one of three accounts to help manage the large oil savings: (i) short-term deposits (1-month minimum maturity), (ii) stabilization account (6-month minimum maturity), and (iii) a fund for future generations (5-year minimum maturity).
The agreement involved the swap of US$2.1 billion in outstanding commercial debt and arrears of US$0.5 billion in new Eurobonds maturing in 2029, implying relief of over US$1.6 billion. The participation rate was over 92 percent. The agreement was broadly consistent with the enhanced HIPC Initiative.
The permanent income hypothesis helps determine the level of the non-oil primary deficit that can be financed over the long term from government oil revenue, including investment income from its accumulated financial assets.
The discount on Congolese oil was between US$1 and US$ 25 per barrel in 2008, depending on the quality. The discount on gas is somewhat larger, between US$ 35 and US$ 55 dollars per barrel.
If a country maintains its Gross National Income per capita above the annual IDA operational income cutoff for two consecutive years, it receives IDA financing on “hardened” terms from the third year onwards. The concessionality of hardened terms is lower than that of regular IDA credits as the maturity is reduced to 20 years, compared with 40 years for regular IDA credits. Other conditions remain the same. Graduation to IBRD requires a country to be judged as creditworthy by the World Bank, a process that normally takes several years.
The authorities have provided the staffs with information on a number of infrastructure projects, which are to be financed through concessional Chinese loans amounting to about US$1 billion. No loans have been signed yet. The DSA assumes these loans are disbursed over 5 years, beginning in 2009. The authorities are negotiating financial terms for all these loans of 20-year maturity, 5-year grace period, an interest rate of 0.25 percent, with biannual repayments. The staffs estimate the grant element of these loans at about 52.7 percent. The impact of these loans on the DSA is limited (they contribute to a temporary 5-percent increase in the NPV of debt-to-GDP ratio) because (i) they account for a relatively small share of GDP (about 8 percent) and a fraction of the financial assets the government is projected to accumulate over the medium-term and (ii) are concessional.
In judging Congo to be at high risk of debt distress currently, the staffs have taken account of the breach of the NPV of debt-to-GDP ratio above the indicative threshold and the highly uncertain global economic environment (volatile world oil prices, and global financial crisis and slowing growth), which suggests a cautious approach, even though the long-term scenario indicates an adequate capacity to service external debt.
It should also be noted, more fundamentally, that the historical scenario introduced in the LIC DSA template is not well suited to oil-producing countries like Congo, which can accumulate net foreign assets well beyond prudential needs (i.e., more than the equivalent of a few months of imports). De facto, while this scenario replaces the non-interest current account deficits and FDI by their historical averages, it also assumes that the government accumulates the same level of reserves as under the baseline scenario. This latter assumption is unrealistic for a country with ample reserves: in the event the authorities were facing less favorable external developments (as assumed in the historical scenario), they would likely prefer to accumulate less reserves, rather then undertake external borrowing (and higher gross debt) to maintain the level of reserves.
This assumes that there is no development of a domestic bond market in the future, which is contrary to BEAC plans. This development would not, however, change the net debt and the sustainability of total public debt.
The oil price shock is calibrated as one standard deviation of Brent crude prices over the period 1970-2006. This reduces future oil prices by US$19 per barrel, corresponding to average prices of around US$49 per barrel in 2009.