Statement by Kossi Assimaidou, Executive Director for the Republic of Congo

In this study, economic performance remained robust throughout the global downturn, and shows signs of further strengthening. In 2010, the external position improved significantly, as fiscal surpluses raised official foreign assets, and the Highly Indebted Poor Countries (HIPC) debt relief significantly reduced external liabilities. Macroeconomic stability is well established, and the external position has improved. Private sector development has reduced oil dependence and is assuring sustained poverty-reducing growth. Efforts should be supported by policies to increase the private sector’s access to credit, and deepen financial intermediation to improve the financial performance of state-owned enterprises.

Abstract

In this study, economic performance remained robust throughout the global downturn, and shows signs of further strengthening. In 2010, the external position improved significantly, as fiscal surpluses raised official foreign assets, and the Highly Indebted Poor Countries (HIPC) debt relief significantly reduced external liabilities. Macroeconomic stability is well established, and the external position has improved. Private sector development has reduced oil dependence and is assuring sustained poverty-reducing growth. Efforts should be supported by policies to increase the private sector’s access to credit, and deepen financial intermediation to improve the financial performance of state-owned enterprises.

I. Introduction

I would like to thank Management and Staff for their continuous support to my Congolese authorities, and for the valuable policy advice and assistance provided over the years. My authorities would like to reiterate their firm commitment to the policies under the Extended Credit Facility (ECF), and they remain determined to reaching their objectives as set out in the program i.e., stabilizing the economy, consolidating the budget, and raising growth to higher and more sustainable levels. Consistently with Congo’s PRSP, another key objective of the program is to fight poverty more efficiently and increase employment opportunities, particularly among the youth.

Performance under the ECF-supported program continues to be satisfactory with all end-June 2010 quantitative performance criteria and structural benchmarks met. In particular, steady progress continues to be made in improving governance in the oil sector through the observance of all related structural benchmarks.

Macroeconomic performance was also strong in 2010 despite the difficult global environment and volatile oil prices. While oil continues to be the country’s main engine of growth, the non-oil sector’s contribution to real GDP is increasing. Also in 2010, fiscal consolidation has accelerated despite the pressure that was put on the budget due—in part—to events outside the authorities’ control i.e., a refugee crisis and a polio outbreak.

Concerned about the need to better spread the benefits of growth to the most vulnerable segments of the population, and to create a better economic environment conducive to private sector-led growth, my authorities have embarked on a scaling up of pro-poor investment in infrastructure. However, they would like to assure Directors that they will take all necessary measures to avoid associated risks, including through a capping of the total amount of capital spending projected in 2011 and imposing strict measures to ensure project quality.

In their efforts to close the country’s large infrastructure gap, my authorities will finance the bulk of their investment through domestic resources and will seek grants and foreign assistance only on highly concessional terms. They would like to express anew their gratitude to the international community and to the IMF in particular, for the debt relief granted under the HIPC and MDRI initiatives. The fiscal space created following the reaching of the HIPC completion point and the important resources freed will continue to be used to improve the situation of social sectors, in particular the health and education sectors where they are aware that significant progress still needs to be made.

II. Policies under the Extended Credit Facility

1. Fiscal Policy

My authorities have continued their fiscal consolidation efforts in 2010, reducing the basic non-oil primary balance to approximately 34 percent of GDP, down 10 points from 2008 (44 percent). They are in a good position to achieving this year the total fiscal consolidation that was targeted for the whole period of the three-year arrangement at the time of its approval by the Board, thereby providing additional fiscal space for needed infrastructure investment. As a result of their accelerated consolidation efforts, my authorities plan to scale-up public investment in 2011 in order to ease notably transport and electricity bottlenecks, and therefore help support non-oil activity and accelerate economic diversification.

However, they are mindful of the country’s capacity constraints and the macroeconomic risks associated with a rapid increase in capital spending, including potential inflation and fiscal sustainability risks. Thus, they plan to further strengthen non-oil revenue collection and restrain current expenditure to make space for the projected 37 percent increase in domestically-financed public investment in 2011. Non-oil revenue collection will also be reinforced through measures to broaden the tax base, reducing exonerations, and improving tax administration.

As regards outlays, the higher level of expenditure in the second part of 2010 was due to the urgent need to respond to the refugee crisis in the northern department of Likouala, and a severe polio outbreak, as well as higher spending related to the celebration of the 50 years of independence. At the same time, my authorities took advantage of an exceptionally good dry season to advance a number of infrastructure projects. I would like to add that my authorities remain committed to the objective of reducing non-priority spending, and efforts to reduce current outlays will be further strengthened focusing primarily on bringing transfers and spending on materials and supplies down from the high levels attained in 2010. However, should revenues fail to materialize, domestically-financed capital expenditure will be capped at CFAF 650 billion in 2011, and projects of lower priority will be delayed. My authorities will also focus on imposing strict measures to ensure project quality. In particular, they will ensure that all projects have a feasibility study and are aligned with the medium-term expenditure framework.

2. Monetary and Financial Sector Policies

Congo being a member of the Central African Economic and Monetary Community (CEMAC) follows a regional monetary policy, with an exchange rate pegged to the Euro. This has served the country well and has been an anchor for macroeconomic stability.

In the banking sector, despite renewed competition with the opening of two new banks in Brazzaville and abundant liquidity, credit to the private sector remains weak. To improve the private sector’s access to credit, my authorities are currently implementing a financial sector reform strategy which was drafted with IMF assistance. More specifically, the reform will focus on facilitating access to credit for small businesses and households, removing interest rates ceilings to further enhance competition, and increasing transparency in the offering of loans.

3. Structural Reforms

One of the key objectives of Congo’s PRSP and its Fund-supported program is to accelerate the diversification of the economy away from the main reliance on finite oil. To this end, Congo’s authorities will pursue their efforts to improve the business climate. Through the newly adopted Action Plan to Improve the Business Climate, they have established a council for public-private dialogue to deepen the government’s understanding of the concerns of the private sector. They will work in the near-term to strengthen investment security, simplify the taxation system, and resolve issues related to land uses, including long-term leasing.

III. CONCLUSION

I would like to reiterate my authorities’ firm commitment to the policies and objectives set under the Fund-supported program. On their behalf, I would like to request Executive Directors’ support for the completion of the fourth review under the ECF and the modification of a performance criterion—the basic non-oil primary balance target for end-December 2010—that had to be revised as a result, in part, of unforeseen events as explained above.

Republic of Congo: 2010 Article IV Consultation and Fourth Review Under the Three-Year Arrangement Under the Extended Credit Facility, and Request for Modification of Performance Criteria—Staff Report; Staff Supplement; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for the Republic of Congo.
Author: International Monetary Fund