Republic of Congo
Staff Report for the 2012 Article IV Consultation
Author: International Monetary Fund. African Dept.
Publication Date:
12 Oct 2012
eISBN:
9781475512830
Language:
English
Keywords:
ISCR; CR; business climate; surplus; report; economy; budget; broad money; private sector; debt relief; revenue collection; oil revenue; Capital spending; Oil prices
Download PDF (634.9 KB)

The key issue facing Congo is how to use oil and mineral resources effectively in support of inclusive growth. Economic conditions are supportive--macroeconomic stability is in place, the terms of trade are favorable, and the external position is strong. External risks are mitigated by membership in CEMAC, under which all members benefit from the French convertibility guarantee, and large fiscal buffers. Yet, growth has not been inclusive. Over half of the population lives in poverty and a labor skills mismatch results in high unemployment and underemployment, especially among youth. The difficult business climate holds back diversification. On March 4, 2012 a munitions depot exploded in Brazzaville causing death and destruction; near-term policies focus on reconstruction and addressing the humanitarian crisis.

Abstract

The key issue facing Congo is how to use oil and mineral resources effectively in support of inclusive growth. Economic conditions are supportive--macroeconomic stability is in place, the terms of trade are favorable, and the external position is strong. External risks are mitigated by membership in CEMAC, under which all members benefit from the French convertibility guarantee, and large fiscal buffers. Yet, growth has not been inclusive. Over half of the population lives in poverty and a labor skills mismatch results in high unemployment and underemployment, especially among youth. The difficult business climate holds back diversification. On March 4, 2012 a munitions depot exploded in Brazzaville causing death and destruction; near-term policies focus on reconstruction and addressing the humanitarian crisis.

Congo at the Crossroads

1. Conditions supporting non-oil growth have arguably never been more favorable. Social peace is restored, macroeconomic stability is in place, the terms of trade are favorable, and the external position is strong. After a decade of civil conflict in the 1990s, Congo has returned to lower middle income status. Oil and mineral wealth is large, and sufficient to finance development.

2. Yet, for development to proceed, fundamental reforms are needed not only aimed at broadening the economic base but making growth more inclusive. The business climate ranks among the most challenging on earth (Congo ranks 181 of 183 countries on the World Bank’s 2011 Doing Business), the financial sector is underdeveloped with banking sector assets less than 22 percent of GDP (Box 1), and governance is weak. The 2011 Human Development Report indicates that around 70 percent of the Congolese population suffers from at least one aspect of multidimensional poverty.

3. Good progress on basic reforms was made under the three-year ECF arrangement which expired in August 2011, but tougher steps lie ahead. Oil wealth is being used to scale up investment to close the large gap in basic infrastructure and action plans have been drawn up to guide development and improve the business climate. The time has come to consolidate the gains to date and take ownership of reforms which break vested interest and strengthen governance and transparency so that the benefits of Congo’s vast natural resource wealth are shared by all.

Developments and the Challenges Ahead

A. Growth has been sustained, but not inclusive

4. Non-oil growth has been robust, buoyed by public investment-related construction, telecoms and transport. Yet the economy remains highly dependent on oil, with limited non-oil private sector activity.

5. Over half the population lives in poverty, with the vast majority living in urban areas and working in the informal sector. The oil sector by its nature is not inclusive, and acute urban migration in the 1970s and 80s led to the demise of agriculture. Other factors contributing to jobless growth include lack of economic diversification stemming from the difficult business environment, a sizable labor skills mismatch resulting from an education system ill suited to the needs of the private sector and rigid job market regulation (see Annex I).

Republic of Congo—Financial Sector Developments

The Congolese financial sector is one of the least developed in Africa. However, increased confidence in the strength of the economy, the recent acceleration in growth, improved infrastructure, and ample liquidity have laid the ground for sustained financial deepening.

The financial sector in Congo is underdeveloped. Banking sector assets account for 21 percent of GDP, and loans are mostly short term and highly concentrated in a few productive sectors. Financial depth remains very low at 6½ percent. The main barriers limiting credit supply include insufficient investor protection, weak contract enforcement, low project bankability, lack of property ownership and bottlenecks in land registration. However, the recent establishment of a postal bank, use of Mobile Money, improved infrastructure, and measures to aid the use of collateral are expected to facilitate access to banking services.

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Private credit

(In percent of GDP)

Citation: IMF Staff Country Reports 2012, 283; 10.5089/9781475512830.002.A001

Sources: IFS; and Financial Access Survey, 2010.

The number of banks increased from six in 2010 to nine institutions in 2012. The financial sector is dominated by universal banks which are mostly privately owned subsidiaries of foreign institutions. Microfinance institutions, pension funds and insurance play a very limited role in providing financial services.

The banking system appears to be sound, and exposure to Euro area distress, limited. The ratio of the nonperforming loans to deposits is low at about 1.1 percent despite robust credit growth. Credit to the private sector picked up strongly in 2011 reflecting increasing demand in the construction, transportation, telecomm and hotel sectors. While the majority of loans are very short term, a shift toward medium-term credit has recently been observed. Yet, the diversity of financial services provided is limited and focuses on loans to enterprises in the real sector.

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Republic of Congo: Selected Financial Sector Indicators for the Banking Sector in 2011

Citation: IMF Staff Country Reports 2012, 283; 10.5089/9781475512830.002.A001

Sources: COBAC and the IMF estimations.

Compliance by Congolese banks with CEMAC prudential ratios is broadly satisfactory, although the limit on lending to a single borrower is routinely violated. The undiversified economy provides few credit-worthy large borrowers and leads to a concentration of risks. Increasing banking activity associated with a pickup in non-oil growth would require strengthening of staffing and oversight capability of the regional regulator, COBAC.

B. Scaling up is justified, but the supplemental budget poses risks to macroeconomic stability and expenditure quality

6. The 2011 budget aptly aimed at scaling up investment. Sustained high oil prices contributed to a double-digit overall surplus (oil accounted for 80 percent of fiscal revenues in 2011). However, the non-oil primary deficit (NOPD) widened by 12 percentage points of non-oil GDP, despite a strong showing of non-oil revenue collection and some rationalization of non-wage current expenditure, because of higher domestically financed capital expenditure.

7. On March 4, a munitions depot exploded in Brazzaville, leading to passage of a supplemental budget for 2012. The explosions caused widespread destruction and loss of life. The revised budget makes available additional expenditure of nearly 25 percent of non-oil GDP (Box 2). As a result, while the overall balance would remain in surplus, the NOPD would more than double relative to 2010 reaching about 75 percent of non-oil GDP. Higher imports will push the current account down to near balance.

8. So far inflation has remained subdued, but limited supply response places risks to the upside (Annex II). Transport from the port city to Brazzaville may become strained due to lagging transport (rail and road) capacity. Given low domestic non-oil production, much of the additional expenditure will flow out of the economy in the form of imports, but the sheer magnitude of the fiscal injection and the relatively large cash component is expected to push broad money growth above 40 percent.

9. Apart from inflation, the largest risk is to expenditure quality. The supplemental budget lifts total expenditure (including net lending) to over 120 percent of non-oil GDP, and represents a more than doubling of capital spending since 2010 without a commensurate increase in staffing or capacity. While it is unclear how much will be actually be executed, full execution over the remaining months of the year would likely require sidestepping the procurement code and other quality control measures.

Additional investment in the 2012 budget

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Source: IMF staff calcuations.

Republic of Congo—Fiscal Developments and the 2012 Budget

Fiscal performance was sustained under the three-year ECF arrangement (2008–11). The original 2012 budget showed a reversal of gains in non-oil revenue collection and current expenditure rationalization, while the additional spending in the supplemental budget further heightens concerns about implementation and absorptive capacity, and poses potential risks to macrostability.

In 2011 the authorities began scaling up public investment, financed in part by fiscal space created by measures to improve non-oil revenue collection. Sustained high oil prices contributed to an overall double-digit surplus, with the widening of the non-oil basic primary deficit (NOBPD) reflecting the government’s general policy of using own-financing for investment.

The original 2012 budget continued to emphasize investment, while showing a reversal of trends in non-oil revenue collection and non-wage current expenditure rationalization. The share of social spending was programmed to decline slightly, despite an increase of 26 percent in non-wage current expenditure. The budget also contained 8 percent of non-oil GDP in net lending to state-owned enterprises.

The 2012 supplemental budget contains nearly 25 percentage points of non-oil GDP in additional spending. Four percentage points of the increase is current expenditure aimed at compensation of victims and related expenditures. The additional investment expenditure falls into three broad categories: housing (40 percent), public works (33 percent) and defense (17 percent), with some social infrastructure spending (rehabilitation of schools and hospitals) in public works. While the overall balance will remain in surplus and the government will save 9 percent of oil revenue, the supplemental budget poses two types of risks.

  • Macroeconomic stability, through higher inflation which is detrimental to vulnerable groups. Staff estimates a rise in headline inflation of 2.4 percentage points (Annex II).

  • Expenditure efficiency, due to absorptive capacity and implementation constraints. If fully implemented, relative to 2010 investment will have more than doubled in nominal terms, rising to 25 percent of total GDP without a commensurate increase in capacity.

Government operations, budget and outturn 2008-2012

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Source: IMF staff calcuations.

Country Report No. 11/67

C. The external position is strong, but competitiveness remains an issue

10. The strong external position mainly reflects high oil prices and debt relief. The fixed exchange rate anchors macrostability. The current account is in surplus, net external debt is negative, and Congo’s large foreign assets contribute to ample reserve coverage of the CEMAC region (see Country Report No. 12/244). The government also has large offshore holdings, in contravention of CEMAC obligations.

11. Barring a large, permanent negative oil price shock, external stability does not appear to be at risk (Box 3). The balance of payments is expected to remain in surplus over the medium term, contributing to a sizeable build up of foreign assets. A fiscal sustainability assessment tailored to natural resource exporters mirrors these results, with total net wealth stabilized over the longer run following a period of scaling up (Annex III).

12. Yet, competitiveness is weak, leaving the economy highly vulnerable to volatile oil prices. Oil accounts for over 85 percent of exports, and the majority of consumption goods are imported. The unreliable electricity supply leads to high production costs for businesses running on oil-based generators, transport bottlenecks are pervasive outside major cities and labor costs exceed those in neighboring countries because of a shortage of qualified labor and the high cost of hiring and training.

13. The new National Development Plan 2012–16 (NDP) aims to address these issues through closing the infrastructure gap, strengthening the business climate and improving education (see Joint Staff Advisory Note, Country Report No. 12/243). The plan is broadly consistent with inclusive growth and the CEMAC regional development plan. The key to successful development lies in the effective implementation of the plan.

Outlook and Risks

14. The outlook is favorable, with two pillars supporting a takeoff in non-oil growth—a foundation of basic infrastructure is under construction and the authorities have started to implement their action plan to improve the business climate. Growth will be driven by public investment, natural resources (mining and forestry) and telecoms, with increasing contributions from agro-industry (biofuel, palm oil), transport and services.

15. Under the baseline, the key issue is not the financing of development, rather how to use oil and mineral resources effectively in support of inclusive growth. At current projections for oil prices, oil resources are sufficient to finance basic infrastructure, with mining resources expected to come on stream beginning in late 2017 which could support development spending over the longer term.

Republic of Congo—External Stability and Competitiveness

An external stability analysis based on methodologies tailored to resource rich countries suggests that the real effective exchange rate (REER) is broadly in line with medium term fundamentals. However, competitiveness is weak, hindered by a large infrastructure gap, complex trade regime, challenging business climate, low labor productivity and a labor skills mismatch (for more on labor, see Annex I).

Model Based Exchange Rate Assessment

Since the 1994 devaluation of the CFA franc, the REER for Congo has appreciated, broadly tracking movements in the Euro. Application of the external stability (ES) approach contained in Bems and Carvalho-Filho (2009) points to a slight overvaluation of the currency. Depending on the allocation rule employed, the level of overvaluation is estimated between 1 and 12 percent, with large confidence intervals surrounding the estimates. However, when the growth-enhancing productivity of importintensive public investment is taken into account, the REER appears broadly in line with medium term fundamentals, consistent with the finding for the CEMAC region as a whole. These results are highly sensitive to a large range of assumptions and do not include the one-off foreign investment in the mining sector starting in 2015 ($6–8 billion in investment 2015–17; large scale iron production is expected to begin in late 2017, lasting about 30 years).

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Current account balance, 2011–17

(Percent of GDP)

Citation: IMF Staff Country Reports 2012, 283; 10.5089/9781475512830.002.A001

Source: IMF staff estimates

External Stability Assessments, 2017

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Source: IMF staff estimates.

The underlying current account is different from Table 1. It has been adjusted to exclude the huge one-off foreign investment in the mining sector in 2015-17.

Competitiveness

Competitiveness is multidimensional. Congo’s Doing Business ranking (181 of 183) suggests there is significant room for improvement in the business climate, especially in the ease of paying taxes, border trade, and starting a business. The tax regime is particularly nontransparent, unpredictable and complex; the trade regime is also highly complex. Low labor productivity brought on by the rigid labor market dominated by skills mismatch, lack of technical expertise, and low mobility renders goods uncompetitive.

Doing Business Indicator, 2011–12

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Source: Doing Business Reports 2011 and 2012

16. External risks are mostly conjunctural and appear manageable. In the event of a deepening of the European crisis, inward spillovers would be limited due to weak financial interlinkages and low remittances. Moreover, Congo faces the same potential risks to confidence and the external payment system as other countries in the CFA zone, which are attenuated by the French convertibility guarantee. Risks of a large and protracted drop in the oil price, while high, are allayed by ample regional foreign exchange holdings and sizable fiscal buffers held offshore (see Country Report No. /12/244).

17. Near-term domestic risks surround the policies aimed at addressing the fallout from the events of March 4. In addition to the potential inflationary pressures noted above, government capacity has become severely strained. The need to mount a response to the crisis has overwhelmed government, and there is a significant risk that other important reforms are delayed beyond 2012. In order for the development agenda to move ahead, the authorities must balance efforts to address near-term challenges, while sustaining reform momentum.

18. Longer-term domestic risks center on uncertainties about the ability of public investment and structural reform to raise future growth and deliver poverty reduction. Mitigation of these risks requires sustained policy actions, including in the so-far elusive areas of oil wealth management and governance and transparency. It also requires improved coordination among ministries and respect by government for contractual commitments signed with the private sector.

Report on the Policy Discussions

Discussions focused on raising the inclusiveness of growth to ensure widespread distribution of the benefits of the spending of oil wealth. Key topics include strengthening fiscal policy frameworks, improving expenditure quality and making the economic environment more business friendly. Near-term risks associated with the large supplemental budget also figured prominently.

A. Near-term fiscal policy—addressing the fallout of the explosions

19. A well thought out response to the tragic events of March 4 is needed. While initial cash payments to victims will allow them to attend immediate necessities such as food and shelter, staff noted that addressing the broader impact of the crisis requires detailed assessment and costing of losses and careful consideration of the policy response. Additional spending should be clearly aimed at addressing the humanitarian crisis.

20. While a response is necessary, 2012 budgeted investment expenditure exceeds capacity and poses inflationary risks. Additional expenditure amounts to nearly 25 percent of non-oil GDP to be executed within seven months, on top of an already large investment envelope. Staff stressed that public investment should be carried out in line with absorptive and implementation capacity, and using quality control measures recently put in place such as the procurement code which may inhibit rent-seeking behavior. Limiting the fiscal impulse should also reduce inflationary pressures and the temptation to introduce new administered prices.

21. Project prioritization should be used to make space for reconstruction spending. Projects in train in basic infrastructure should continue, with lower priority projects delayed and reappraised in the context of the 2013 budget. Weaknesses in public financial management point to the important role of close collaboration with development partners in assessing the capital spending envelope.

Authorities’ views

22. The supplemental budget should be seen as indicative. In order to quickly unlock funding, rough estimates were made of the immediate spending needs to address the crisis and maintain social cohesion. This included current expenditure to provide cash to affected families, pay for camps for those displaced from their homes and deliver education services to ensure children did not lose the entire school year.

23. A high-level committee is studying reconstruction needs. A final report containing cost estimates of the multi-year reconstruction envelope is expected by end June. The 2012 supplemental budget is like two budgets together, and additional spending has been booked under the Ministry of Finance to ensure that it does not enter into the base of line ministries in the 2013 budget process. While a precise estimate of 2012 implementation is not available, for example, it is unlikely that construction of the 5,000 houses budgeted will be completed this year, and part of this spending will be rolled over into 2013. Nonetheless, projects in other areas will continue as planned.

24. Higher defense spending is part of a broader policy of relocating military installations outside of cities. Urban sprawl has led to many installations falling within residential areas. The additional spending aims to address the immediate needs of the 800 army staff stationed at the blast site and step up the relocation process begun in 2010.

B. Strengthening fiscal policy—anchors and expenditure quality

The absence of a hard budget constraint has led to complacency regarding non-oil revenue collection and rising current expenditure, reinforcing oil dependence. At the same time, low capacity hinders the ability of government to effectively scale up investment to meet development needs. Implementing a simple fiscal rule would help anchor policy, while redoubling efforts to improve expenditure quality.

25. Fiscal policy aims to scale up investment expenditure while saving a portion of oil revenue. This medium-term policy orientation is broadly sound, but leaves development and savings objectives vulnerable to oil prices. Staff emphasized that improving fiscal institutions should be a priority. Over the long run, with basic infrastructure in place, fiscal consolidation should resume, bringing the NOPD down to low single digits in support of fiscal sustainability.

26. Little effort is being made to rationalize current expenditure and increase non-oil revenue collection. Non-wage current expenditure is rising rapidly, led by goods and services, utilities and common charges and transfers. Pressures are expected to intensify over the medium term as operations and maintenance costs start to kick in. Staff recommended that measures be taken to reduce non-priority current spending, while raising non-oil revenue to pay for operations and maintenance through broadening the tax base, eliminating exemptions, and overhauling the unduly complex tax system.

27. Ample resources reinforce weak governance. Staff reiterated concerns about the lack of transparency regarding large offshore holdings, and urged the authorities to comply with their obligations under CEMAC. Staff noted regional efforts toward reforming the common reserve framework to offer more appropriate savings opportunities for oil exporters (Country Report No. 12/244) and urged the authorities to actively participate in this process.

28. Ample budgetary resources also reduce the urgency of raising spending quality. Staff noted that while progress has been made in PFM, further efforts are needed to strengthen expenditure quality. Regarding investment, key steps include strengthening capacity in project appraisal, selection and implementation of both the central government and sectoral ministries; providing training to line ministries to support full compliance with the procurement code; and improving oversight and reporting through on-sight audits and ex-post evaluations by external auditors and reporting the results to parliament. On social spending, staff advised the authorities to conduct an expenditure tracking diagnostic together with development partners to identify the main areas of leakage as a first step to putting in place an expenditure tracking system. More broadly, strengthening institutional capacity—including of the key oversight bodies such as the Supreme Audit Authority, State Inspectorate General and Anti-corruption commission and publishing annual reports—will serve to enhance spending quality and governance.

29. Implementing a simple oil price based fiscal revenue rule would help anchor spending and savings objectives. Such a rule would smooth revenue forecasts, reducing revenue volatility and facilitating medium-term spending decisions (Annex III). Scaling up of investment should be further pinned down by limiting spending in line with absorptive and implementation capacity. This could be set in the context of a broader regional fiscal rule containing country specific quantitative targets (see Country Report No. 12/244).

Authorities’ views

30. The authorities recognized the potential benefits of a fiscal rule. They expressed interest in learning more about possible fiscal rules which would stabilize revenue and allow for a scaling up of development expenditure.

31. Steps are being taken to strengthen expenditure quality. Under the umbrella of the recently adopted results-based management model, ministries are held accountable for achieving agreed quarterly and annual goals, as laid out in the institutional framework for monitoring and evaluation contained in the NDP. In this context, public investment projects over $2 million have been devolved to line ministries and they are working toward a functional classification of expenditure to eliminate duplication of responsibilities.

32. Specific measures have also been taken to further strengthen the expenditure chain. Building on the improvements in simplification, rationalization and accountability from the new expenditure chain adopted in 2010, (i) budget controllers have been assigned permanently to each ministry to exert control over payment orders and (ii) each ministry has a manager dedicated to the implementing the procurement code. However, challenges remain in the areas of onsite inspection (technical capacity and high cost) and eliminating rent-seeking behaviors. The key is for all control measures to be used to their full potential in all ministries. There was broad agreement that implementing a public expenditure tracking system could help identify key weaknesses driving high leakage of funds, especially in social spending. Discussions are ongoing with the World Bank and Unicef on moving these initiatives forward,

33. Work is also ongoing aimed at improving project quality. This hinges not only on appropriate project selection based on the NDP and MTEF but also project sequencing. An interministerial team from the ministries of planning and finance is working on fully integrating the MTEF into a robust macroeconomic framework, which includes the financing of development. There is also a plan to have subcommittees of the Commission for Project Selection in each ministry to identify key projects in each sector.

C. Fostering inclusive growth

By its nature, the natural resource sector is not inclusive—growth is often volatile, production is capital intensive and rents are not widely distributed. In order to make growth more inclusive the government must efficiently transform oil income into growth-enhancing capital and social expenditure, while implementing policies to improve the business climate, financial sector and labor market. This should be supported by gains in institution building, governance and transparency.

34. Progress in raising the inclusiveness of growth has been uneven. Public investment and reforms to the legal framework are moving forward, while SME issues and financial sector development have lagged. A recent decline in unemployment has been offset by rising underemployment and increasing participation in the informal sector.

35. A key stumbling block is governance, including uncertainty regarding the upholding of contractual agreements. In addition, government intervention in the economy, the lack of property rights, weak investor protection and challenges to starting a business all hold back private sector participation in the economy.

36. The underdeveloped financial market represents an additional bottleneck. Bank lending to the private sector represents 6 percent of GDP, is very short-term and highly concentrated in a few industries. Lending to SME’s is limited. Progress toward easing financing constraints is slowly being made. Plans for a guarantee fund for SMEs are taking shape, although consensus regarding the exact form this should take is yet to be reached, and the recent creation of a postal bank aims to provide greater access to banking services, especially in rural areas.

37. Market participants saw potential for increasing lending, but noted that legal hurdles prevail regarding land registration and the effective use of collateral, and most activity remains in the informal sector. That said, they reported that SMEs appear somewhat better structured and more bankable, although there is still a need to improve risk assessment.

38. There is a significant skills mismatch which does not allow the labor market to clear—currently operating and prospective firms are unable to fulfill their labor needs domestically, while at the same time youth unemployment is above 30 percent. This broadly reflects the low quality of instruction resulting from inadequate implementation of the education budget, and the focus on general education over technical training.

39. A multi-pronged approach to jobless growth is needed. Staff advised the authorities to redouble efforts to not only adopt measures but truly implement the action plan to improve the business climate, with emphasis on creating a stable environment governed by the rule of law. Likewise, efforts to facilitate the banking sector’s provision of credit to the private sector should continue, including legal reforms to strengthen contract enforcement and enable the use of land as collateral. Regarding labor, the authorities should conduct a skills assessment to inform education policies aimed at strengthening technical education to better meet the demands of industry.

40. In supporting private sector development, the government should avoid creating new distortions. As an alternative to moving ahead with the development of Special Economic Zones, tax exemptions and tax holidays should be eliminated in exchange for streamlining the unnecessarily complex tax system for all firms. Staff urged caution regarding public-private partnerships in light of the contingent liabilities these entail. More broadly, the role of the state should be limited to providing a supportive environment for private sector activity.

Authorities’ views

41. The authorities noted that the NDP aims to address these challenges, but low capacity and a lack of coordination among ministries has held back progress.

42. Various initiatives are underway to increase economic diversification. Establishing Special Economic Zones will (i) overcome the difficult business climate and (ii) raise the inclusiveness of growth by jump starting manufacturing and integrating SMEs into the supply chain, thereby creating new local businesses and jobs. Work is also underway to simplify legal requirements and reduce the cost of establishing a business. Laws on consumer protection and competition are under review. The draft SME law has been vetted by the Supreme Court and will soon be sent to parliament together with implementing regulations.

43. Plans are also in the works to increase access to financial services. While some reforms fall under the purview of the regional authorities, access to banking services is expected to increase with the creation of a new postal bank and elimination of deposit minimums. Work is beginning on setting up a housing fund to encourage long-term mortgage lending and creating a specialized financial institution to guarantee lending to SMEs, although the latter requires passage of the SME law.

44. Initial steps are being taken to strengthen the labor market. A National Employment Policy is being developed with input from labor unions, which would strengthen labor rights, including the right to strike. Other initiatives under consideration include increasing technical training, paid internships, and establishment of a dispute resolution mechanism.

Staff Appraisal

45. Conditions are favorable for sustained non-oil growth. Macroeconomic stability is in place, the terms of trade are favorable, and the external position is strong. Yet, the benefits of growth have not trickled down and over 50 percent of the population lives in poverty. For development to proceed fundamental reforms are needed not only aimed at broadening the economic base but at making growth more inclusive. While the strategy contained in the National Development Plan is broadly appropriate, the key lies in implementation. The tragic events of March 4, while colossal, should not have a long-term impact on growth or sustainability.

46. The medium-term outlook is favorable, provided that public investment and measures to improve the delivery of public services and the business climate are successfully implemented. Barring a large and permanent negative oil price shock, the key issue is not the financing of development, rather how to use the vast natural resource wealth effectively to diversify the economy and create jobs.

47. While a response to the March 4 explosions is necessary, the 2012 supplemental budget poses risks to expenditure quality. It is unclear how much will be actually be executed, but full execution over the remaining months of the year would likely require sidestepping the procurement code and other quality control measures. Fiscal space for reconstruction efforts should be opened through project prioritization. Projects in train in basic infrastructure should continue, with lower priority projects delayed and reappraised in the context of the 2013 budget.

48. The medium-term orientation of fiscal policy is broadly appropriate, aiming to scale up investment in support of development objectives while saving a portion of oil revenues. Such a stance could usefully be grounded in a simple fiscal oil price rule to help anchor spending and saving objectives in the face of volatile oil prices. Once basic infrastructure is in place, fiscal consolidation should resume in order to bring the non-oil primary deficit down to low single digits in support of fiscal sustainability.

49. The scaling up of investment should be consistent with absorptive and implementation capacity to avoid waste of public resources. Improving PFM is critical to strengthening expenditure quality. An expenditure tracking diagnostic should be carried out for social spending to identify areas of leakage. Improvements in expenditure control and the adoption of a results-based management framework are welcome and should serve to strengthen spending quality and accountability.

50. Diversification requires actions to improve the business climate, the financial sector and the labor market. A multi-pronged approach is needed. Measures to improve the business climate should focus on creating a stable environment governed by the rule of law. A cautious approach is warranted regarding Special Economic Zones. A first-best option would be to improve the overall business climate, including more coordination among ministries, and to avoid creating a dual tax system by simplifying the tax code. A skills assessment will be useful in informing labor policies aimed at eliminating the skills mismatch and reducing youth unemployment.

51. The fixed exchange rate regime has anchored macrostability in Congo and external stability does not appear at risk, but competitiveness remains an issue. Efforts should focus on eliminating the infrastructure gap, providing a reliable energy supply, simplifying trade procedures and taxes, and raising the quality of education, including technical training. Regarding the exchange rate regime, the authorities should comply with all CEMAC obligations, including the repatriation requirement, while working with the CEMAC on institutional reform in the area of oil wealth management.

52. Data continues to suffer from shortcomings but is broadly adequate for surveillance. Transparency regarding the financing of fiscal operations is particularly detrimental. Policy making would also benefit from more timely data reporting; an upgrading of the base year, report form and periodicity of national accounts data; and improvements in data coordination among ministries.

53. Staff recommends that the next Article IV consultation take place on the standard 12 month cycle.

Table 1.

Republic of Congo: Selected Economic and Financial Indicators, 2008–17

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

Non-oil growth includes a large foreign private investment in the minining sector starting in 2015.

Including grants.

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

HIPC completion point reached in January 2010. In March 2010, the Paris Club granted 100 percent debt relief.

Table 2.

Republic of Congo: Medium Term Balance of Payments, 2008–17

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Sources: BEAC; and Fund staff estimates and projections.

Country Report No. 11/67.

Includes stock debt relief of the HIPC completion point.

Includes flow debt relief from Paris Club and London Club, and payments to litigating creditors.

Table 3a.

Republic of Congo: Central Government Operations, 2008–17

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

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

Fund staff estimates based on preliminary data.

In 2012 this includes loans of treasury funds to the regional development bank BDEAC (CFAF 50 billion).

Table 3b.

Republic of Congo: Central Government Operations, 2008–17

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

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

Fund staff estimate based on preliminary data.

In 2012 this includes loans of treasury funds to the regional development bank BDEAC (CFAF 50 billion).