Statement by Mr. Kossi Assimaidou, Executive Director of the Republic of Congo June 27, 2012

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.

On behalf of my Congolese authorities, I would like to express their appreciation to staff for the fruitful discussions held in Brazzaville under the 2012 Article IV consultation. The staff report presents a candid analysis of the economy, the progress achieved and the daunting challenges ahead. My authorities welcome the report’s focus on policies to preserve macroeconomic stability and to keep advancing towards higher and sustainable growth. The authorities broadly agree with the staff’s assessment and are grateful for their useful recommendations.

In spite of high growth rates driven by the oil sector, efforts to reduce poverty and raise employment over the years have been challenging. The emphasis in this year’s Article IV report on “making growth more inclusive” is therefore timely. The authorities share many of the analyses in the report and agree in particular that an appropriate sequencing of policies and reforms along with a better coordination in their implementation is key to enhancing growth inclusiveness. They also concur that promoting job-intensive growth requires a multi-pronged approach, and share the view that to diversify the economy away from oil which as stressed in the report is not inclusive by nature, it is essential to improve the business climate. Reforming the education system—in line with the needs of a more vibrant economy—, is also crucial to reducing labor skills mismatch.

In addition to the sound policies highlighted in the report, the authorities believe that their current efforts to scale up infrastructure investment and close the country’s wide infrastructure gap are critical to improving growth inclusiveness. They are convinced that within the broader framework of the 2011-2016 National Development Plan and the current PRSP, improving the country’s infrastructure will help accelerate the diversification of the economy, increase Congo’s growth potential, and stimulate employment. They agree, however, that careful planning of infrastructure build up is needed and that the project implementation requires the use of quality control measures, as rightly stressed by staff in the report.

On this year’s supplemental budget, they would like to emphasize that:

  • - The supplemental budget is primarily a response to the tragic explosion inside a military depot in Brazzaville in March which cost hundreds of lives, led to thousands of displaced, and destroyed a vast neighborhood of the capital;

  • - This tragic event, which deeply affected the population, led to numerous claims on the government (social, military etc.). As such, the supplemental budget is—either directly or indirectly—linked to the tragedy, as the authorities sought to address its immediate and potential consequences on the Congolese population and the country.

Macroeconomic Performance and Risks

Overall, macroeconomic performance remains strong driven by the non-oil sector, in a context of domestic and external stability, and a rapid buildup of foreign exchange reserves. Congo’s economic outlook continues to be favorable, further buoyed by recent important discoveries in the mining sector, notably iron ore.

The authorities agree that higher inflation is a risk, and acknowledge the concerns expressed by staff. In particular, the projected increase in broad money, and the country’s limited supply capacity, due notably to transport bottlenecks, could exacerbate inflationary risks.

However, while the economy could experience some degree of inflation, there are a number of mitigating factors to a sharp rise in overall prices. First, as a member of the zone Franc, the monetary authorities will remain vigilant and will continue to closely monitor any potential rapid deterioration of the inflation outlook. Although monetary policy is set at the regional level, the BEAC takes into consideration member countries’ public finances when determining the amount of central bank refinancing to be provided to domestic commercial banks, as a means of achieving price stability in the region. In this regard, while consumer prices are projected to increase by 5.1 percent this year (period average)—compared to last year’s 1.8 inflation rate—, prices in 2012 will revert to the approximate levels of the preceding three years. Furthermore, many of the investment projects underway—either by design or because they are capital intensive—are likely to have a limited impact on the country’s narrow production capacity as a large share of the inputs needed for the investments will be imported, not purchased locally. This will therefore lessen the potential pressures on domestic prices from higher capital spending.

Fiscal Challenges

It is currently projected that the authorities’ supplemental budget will “lift budget spending to over 120 percent of non-oil GDP”. The authorities emphasize however that while capital investment is being scaled up they will continue to adopt prudent policies on public sector wages, domestic and international debt, and national savings.

Thus, the increase in the overall budget envelope for this year (supplemental budget included) is driven mainly by capital spending—essential for raising the country’s growth potential—, and not current spending. In this regard, despite a substantial increase in domestic revenues (including oil), the authorities have refrained from raising public sector wages or hiring additional staff, thereby containing the increase in current expenditures. In addition, debt remains in check, as higher fiscal revenues—which have risen to almost 140% of non-oil GDP i.e. more than total expenditures—are financing the increase in spending. Also, despite higher capital spending, the authorities have continued to save part of their high oil revenues. Thus, while gross investment as a share of GDP is projected to reach 33.6 percent this year (from 25.3 percent last year), gross saving will also increase to 33.8 percent (from 26.1 percent last year).

On the issue of capacity, the authorities noted the concerns expressed by staff in the report that while total expenditures are expected to rise above 120 percent of non-oil GDP, this increase will happen “without commensurate increase in staffing or capacity”.

While the authorities remain committed to carrying out public investment “in line with absorptive and implementation capacity and using quality control measures”, they also insist that at present, the size of the supplemental budget remains a broad estimate based on a preliminary assessment made immediately after the March tragedy as they sought to react rapidly to the event. While waiting for the results of the report by the high level committee studying reconstruction needs, they believe that it is unlikely that the full supplemental budget will be executed due in part to absorptive capacity issues.

Structural Reforms and the Investment Climate

The authorities are determined to improve the business climate as they are aware that progress in this area is key to a successful diversification of the economy and the promotion of a sustainable private sector led growth. They would like to highlight that improving the business climate is at the core of the 2011-2016 National Development Plan. An action plan to that effect is currently being implemented. As required under the plan, a Council for Public-Private Dialogue was created to formalize exchanges of views between the government and the private sector and to facilitate a better understanding of mutual concerns. Also on this matter, the authorities are confident that the creation of Special Economic Zones, modeled on the successful experiences of Mauritius and Singapore will contribute to further improving the business climate and economic diversification.

Finally, on compliance with the reserve pooling requirement, the authorities indicate that the issue is being addressed at the regional level, and that a high level working group has been set up to offer proposals and modalities to strengthen compliance by all members of the CEMAC.