Republic of Congo: Staff Report for the 2015 Article IV Consultation
Author: International Monetary Fund. African Dept.
Publication Date:
16 Sep 2015
eISBN:
9781513552248
Language:
English
Keywords:
ISCR; CR; right; deficit; debt; oil price shock; diversification plan; current account; nominal GDP; fiscal policy; wage bill; Oil prices; Fiscal stance; Global
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The Republic of Congo has been hit hard by the oil price shock. Fiscal and current account balances deteriorated in 2014 reflecting increased government spending and lower oil prices. Corrective measures are now being taken. Private sector activity is held back by infrastructure gaps, a difficult business climate, and a shallow financial system. Growth and spending have yet to translate into significant reductions in poverty and progress in this area lags peers. Persistent inequality could be a source of instability.

Abstract

The Republic of Congo has been hit hard by the oil price shock. Fiscal and current account balances deteriorated in 2014 reflecting increased government spending and lower oil prices. Corrective measures are now being taken. Private sector activity is held back by infrastructure gaps, a difficult business climate, and a shallow financial system. Growth and spending have yet to translate into significant reductions in poverty and progress in this area lags peers. Persistent inequality could be a source of instability.

Background

1. Robust growth is yet to result in a broad-based improvement in living standards. Growth averaged 5 percent over the last 5 years as government spending was ramped up, financed mostly by rising oil receipts. This translated into increased activity in agriculture, industry and services. Nevertheless, the Republic of Congo continues to suffer from large infrastructure gaps and the 2011 household survey showed limited progress in reducing poverty and inequality, (Selected Issues Paper (SIP) Chapter 1). Against a background of uncertainty about the future of oil prices and growth in key export markets, sharply lower oil receipts will constrain efforts to address these development challenges. Limited progress in this area could give rise to tensions and instability.

A01ufig1

Selected Poverty and Inequality Indicators

Citation: IMF Staff Country Reports 2015, 263; 10.5089/9781513552248.002.A001

2. The oil dependence requires a recalibration of policies. The current low international oil price environment has increased the urgency for fiscal consolidation and underscores the need to address pervasive development challenges. In view of the projected depletion of oil reserves over the medium term, it is essential that the ongoing investment surge is effective and supportive of economic diversification. The public investment program should therefore be clearly oriented towards raising the potential growth of the non-oil economy – the main source of employment – and combined with a stronger policy focus on the costs of doing business and competitiveness issues.

3. Presidential elections are planned for mid–2016. The constitution does not allow President Sassou N’guesso to run for a third term. In May 2015, the government launched a dialogue with political, civil society and religious leaders to discuss constitutional reform to remove this obstacle. Opposition parties have announced a boycott of this process.

4. Policies have partially followed recent Article IV recommendations (Annex 1). An expansionary supplementary budget was approved in September 2014 for increased spending on the All Africa Games (AAG) that will be held in Brazzaville in 2015. In view of the oil price decline, however, the 2015 budget envisaged some fiscal consolidation and the Cabinet recently approved a supplementary budget with additional fiscal adjustment to fully take into account the decline in oil prices. The authorities stopped short of adopting the recommended medium-term fiscal framework, however, that targets a decline in the nonoil primary deficit. In the context of the Public Expenditure Management and Financial Accountability Review (PEMFAR), the authorities are reviewing, with development partners, the scope for improving the efficiency and quality of public expenditures. Some of the government’s deposits in China have been repatriated to the Bank of Central African States (BEAC), in line with regional reserves pooling arrangements.

Recent Economic Developments

5. Growth rose to 6.8 percent in 2014, up from 3.3 percent the previous year, driven by a rebound in oil production, and continued strong performance of the non-oil sector. Non-oil growth was buoyed by strong growth in agriculture, construction, industry, and transport and communication. Inflation decelerated from 2.1 percent at end–2013 to 0.5 percent at end-2014 (year-on-year), driven mainly by lower global food prices.

6. Nevertheless, the Republic of Congo has been hit hard by the oil price shock. The sharp increase in government spending in recent years has supported growth, but it also increased the country’s vulnerability to shocks. Fiscal and current account balances deteriorated in 2014, reflecting increased government spending and the lower oil price.

7. The overall fiscal deficit amounted to 8.5 percent of GDP in 2014, a near doubling from 2013. This reflects continued strong capital spending and lower oil receipts. Despite a 3 percent increase in production, oil receipts declined by 5 percent of GDP in line with oil prices and revisions to various profit sharing arrangements in July 2014.

8. The basic non-oil primary deficit improved from over 74 percent to 72.1 percent of non-oil GDP in 2014. This measure excludes oil receipts, grants, and foreign-financed capital spending. The improvement was due to lower off-budget spending and payments of domestic arrears:

  • Current expenditures were broadly in line with budgeted amounts, rising by 2.5 percent of non-oil GDP compared to 2013.

  • Domestically-financed on-budget capital spending increased by 2.7 percent of non-oil GDP as construction for the 2015 AAG and the urbanization program continued.

  • Non-oil revenues underperformed, falling by 0.5 percent of non-oil GDP compared to 2013, largely owing to lower than expected customs revenues.

  • Off-budget expenditures decreased by 3.2 percent of non-oil GDP.

  • Domestic arrears payments amounted to 1.5 percent of non-oil GDP in 2014, down by 4.9 percent of non-oil GDP from 2013.

  • Foreign-financed capital expenditures, which is not part of the basic non-oil primary balance, decreased by 7.1 percentage points of non-oil GDP to 11.6 percent of non-oil GDP as only about half of the budgeted amount was executed.

9. In the wake of the decline in oil prices, the government repatriated offshore deposits to finance the fiscal deficit and to bolster official reserves.

  • The fiscal deficit of 8.5 percent of GDP was mainly financed by drawing on government deposits held abroad (2.1 percent of GDP) and by borrowing from the regional central bank (about 5.2 percent of GDP).1

  • The current account deficit widened by one percent of GDP to 5½ percent of GDP in 2014. However, official reserves held at the BEAC increased by CFAF 189 billion to CFAF 2,698 billion at end-2014, thanks to the repatriation of government deposits held in China (CFAF 141 billion) and commercial banks’ deposits held abroad (CFA 427 billion, see ¶11).2

  • As a consequence, the Republic of Congo’s international reserves and government deposits at the regional central bank remain at about 9½ months of prospective imports and 20 percent of GDP, respectively, both the highest among members of the Central African Economic and Monetary Community (CEMAC).

A01ufig2

Deposits at the BEAC and Total Reserves, 2014

(percent of GDP)

Citation: IMF Staff Country Reports 2015, 263; 10.5089/9781513552248.002.A001

Sources: WEO database and IMF staff estimates.
Figure 1.
Figure 1.
Figure 1.

Republic of Congo: Macroeconomic Developments

Citation: IMF Staff Country Reports 2015, 263; 10.5089/9781513552248.002.A001

Sources: WEO database, BEAC and IMF Staff estimates.

10. The authorities are taking corrective fiscal measures. The 2015 budget is based on an oil price assumption of $70 per barrel and implies some consolidation. However, in the first quarter Congo received less than $50 per barrel from its oil exports. In response, only 30 percent of monthly budget allocations for current expenditures were released, except for the wage bill and the salary component of transfers which were executed in full. At the same time, the implementation of lower-priority projects was slowed. In late-May, the Council of Ministers adopted a supplementary budget based on an oil price of $55. Parliamentary approval is pending.

11. BEAC measures caused commercial banks’ net foreign assets (NFA) to decline. The trend increase in banks’ NFA observed in recent years reversed in 2014 when the BEAC moved in May and July 2014, facilitating and instructing banks to henceforth conduct foreign exchange transactions directly with the regional central bank rather than building foreign exchange balances abroad. As a result, banks reduced their NFA by CFAF 427 billion (6.4 percent of GDP) during 2014, to CFAF 165.5 billion at end–2014.

12. Despite rising credit growth, financial depth continues to lag peers. The growth of credit to the economy accelerated to 27.6 percent in 2014, from 16½ percent in 2013. Notwithstanding the recent acceleration of credit growth, the ratio of private credit to GDP remains at 15 percent of GDP, well below the level in emerging market economies.

13. Public debt now amounts to about 36½ percent of GDP, up from 32 percent of GDP in 2013 and from 20 percent of GDP in 2010, following the HIPC Completion Point. The increase in the government’s gross debt to GDP ratio in 2014 reflects continued borrowing, the terms of trade loss from the sharp decline in oil prices (which reduced nominal GDP growth), as well as valuation changes from the depreciation of the CFAF.

14. Two of three ratings agencies maintained Congo’s strong sovereign rating. S&P’s downgraded Congo’s rating from B+ to B, as part of a reassessment for all oil exporting countries.

15. Empirical approaches commonly used in the case of oil-exporting countries suggest that Congo’s real effective exchange rate is in line with medium-term fundamentals, but competitiveness concerns remain in the non-oil economy (Annex 2). The persistent large non-oil current account deficits (26 percent of GDP in 2014) highlight competitiveness concerns stemming from the challenging business climate and significant infrastructure gaps (Figures 2 and 3). Non-oil exports remained weak in 2014 despite the depreciation of the real effective exchange rate by 2.6 percent in 2014. Congo remains in the lowest 10 percentile rank on the World Bank’s overall ‘Ease of Doing Business’ score. Scores are particularly low for the ease of obtaining credit and electricity, and the quality of the insolvency regime.

Figure 2.
Figure 2.

Republic of Congo: Business Environment and Governance

Citation: IMF Staff Country Reports 2015, 263; 10.5089/9781513552248.002.A001

Sources: Doing Business, 2015; World Bank’s Worldwide Governance Indicators (WGI), 2013, (average of control of corruption, government effectiveness, rule of law, regulatory quality, political stability and voice and accountability); Economist Intelligence Unit (EIU) ; and IMS staff calculations.LIC=Low-income country; UMIC= Upper-middle income country; OIL=Oil producers; WGI= Worldwide Governance Indicators.SSA oil exporters = Angola, Cameroon, Chad, Congo, Rep. of, Equatorial Guinea, Gabon, Nigeria.
Figure 3.
Figure 3.

Infrastructure Developments in the Republic of Congo

Citation: IMF Staff Country Reports 2015, 263; 10.5089/9781513552248.002.A001

Sources: October 2014 REO Chapter 3, African Department, IMF and IMF Staff calculations.

Outlook and Risks

16. The near- and medium-term outlook will be shaped by developments in the oil sector. Oil production is expected to decline in 2015 mainly due to the delay in the coming on stream of a new oil field. GDP growth in 2015 is projected at 1 percent and to average about 3 percent per annum during 2015–20. The lower international oil price is projected to lead to deterioration in the current account and continued pressure on the budget. This is expected to require the drawdown of government deposits at the BEAC of 6.5 percent of GDP in 2015. Over the period to 2018, the expected increase in oil production from new oil fields coming on stream should improve fiscal and external balances. From 2018, this trend reverses as oil production declines. Non-oil growth is projected to slow to about 3 percent in 2015–16, as public investment spending contracts and mining projects are delayed due to the uncertain global outlook for iron ore. Inflation is projected at 2½ percent over the medium term, underpinned by the pegged exchange rate regime.

17. The path and quality of fiscal adjustment will play a key role. In two alternative scenarios, staff highlighted the implications of continued high government spending and improving public sector investment efficiency, respectively, on the medium-term economic outlook (Text Table):

  • In a “downside” scenario with continued high spending, fiscal adjustment would be postponed by replacing declining oil revenues with external borrowing. Higher government spending compared to the baseline would provide a short-term boost to growth but increased inflation would erode competitiveness. Together with higher imports, this would lead to deteriorations in the current account deficit over the period 2016 to 2018. Moreover, in view of the projected decline in oil production and receipts from 2018, public debt would by 2019 exceed 60 percent of GDP, such that continued high spending would need to be financed by drawing down reserves. This would eventually trigger the need for a sharper fiscal adjustment in order to preserve reserves and buttress the exchange rate peg. The result in the medium to long term would be lower growth and a permanently deteriorated overall debt position.

  • An “upside policy scenario” illustrates the implications of improving public sector investment efficiency. The increase in investment efficiency could be achieved by implementing the PEFA and PEMFAR recommendations and enhanced coordination between government agencies (see ¶30–31). In this scenario, increased investment efficiency leads to higher growth in all years relative to the baseline. Although higher growth slightly worsens the medium-term current account, owing to higher imports, in the medium term, the overall fiscal balance and reserves are higher than in the baseline.

Text Table. Republic of Congo: Comparison of Baseline and Alternative Scenarios

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

Including grants.

Revenue and grants (excluding investment income and oil revenue) minus total expenditures (excluding interest payments).

18. Risks to the outlook are broadly balanced (Risk Assessment Matrix, Annex 3). Global risks relate to a prolonged period of low oil prices. In the absence of a clearly articulated medium-term fiscal consolidation plan, the accumulation of domestic expenditure arrears could accelerate and risks to debt sustainability increase. This could significantly undermine the resilience of the economy and the fiscal space that is essential to confront the challenges of economic diversification and poverty reduction. It could also give rise to tensions and instability. The upside risk to the baseline scenario relates to improvements in public sector investment efficiency.

Authorities’ Views

19. The authorities were more optimistic about non-oil growth. The authorities expect non-oil growth in 2015 to be buoyed by continued strong growth in the agriculture and industry sectors. The AAG are also expected to boost tourism, commerce, and services. The authorities expected household consumption to remain robust, supported by rising public sector wages. At the same time, they acknowledged that uncertainty from the oil price shock could impact consumer and investor sentiment. The spillover effects to the rest of the economy from the slowdown in spending in the construction sector are expected to be moderate, since large building projects are mostly undertaken by foreign companies that rely heavily on imports.

20. The authorities reiterated their commitment to prudent fiscal policy over the medium term but noted the spending pressures related to the government’s diversification plans. They were closely monitoring oil price developments and recognized the need for improvements in the quality of government spending. The authorities emphasized that it is the government’s role to make the necessary investments in basic infrastructure and in education and health to facilitate growth and competitiveness and unlock private sector activity in non-oil sectors. The Special Economic Zones (SEZ) policy is also expected to permit the private non-oil sector to take off.3 Better roads will also help to establish Congo as a ‘transit country’ for cargo unloaded in Point Noire to be shipped across the region. These investments are expected to have significant returns in terms of boosting non-oil growth in the future.

Policy Discussions

A. Fiscal Policy: Developing the Non-Oil Economy to Protect the Poor

21. Against the background of the limited remaining lifetime of oil reserves, the decline in international oil prices makes the need for fiscal adjustment more urgent. Staff reiterated earlier recommendations regarding fiscal adjustment to preserve medium-term fiscal sustainability. At the same time there is a need to safeguard priority expenditures to address social and infrastructure gaps. The supplementary 2014 budget, ratified in September, deviated from a consolidation path consistent with fiscal sustainability. The supplementary budget entailed a considerable increase in domestically-financed capital expenditures, mainly for the AAG. Following the fall in oil prices, however, on-budget domestically-financed capital spending was under-executed as the authorities prioritized AAG projects and the urbanization program. Additional spending pressures emanate from elections in 2016 (presidential) and 2017 (legislative).

22. The draft supplementary 2015 budget appropriately tightens the fiscal stance. According to the authorities’ projections, the supplementary budget envisages a narrowing of the non-oil primary fiscal deficit to about 42 percent of non-oil GDP from 81.2 percent of non-oil GDP in 2014. Staff projects a smaller narrowing of the non-oil primary deficit to a deficit of 57 percent of non-oil GDP in 2015. The consolidation mostly reflects reductions in domestically-financed investment spending. In addition to postponing non-priority projects and not initiating new ones, this would entail partly reversing the doubling of on-budget current and capital expenditures that took place over the past three years. This is expected to have a significant negative impact on non-oil growth, which is projected to decline to 3.2 percent per annum in the period 2015 to 2020, compared to almost 8 percent per annum in the five years preceding. The focus of the adjustment on reductions in investment spending, which has a strong external component, reduces import growth and therefore dampens the overall impact on growth. In view of the projected reduction in expenditure, the authorities should strive to safeguard pro-poor programs, improve investment efficiency to maximize the buildup of capital and safeguard debt sustainability, and ensure that public financial management weaknesses do not generate arrears. Non-oil tax revenue collection is expected to increase from new taxes introduced in 2015, including on mobile telephone operators, and further strengthening of customs administration. Staff recommended that the Supplementary Budget clarify the basis for the strong projected growth of non-oil revenues. Staff also emphasized the importance of preparing contingency plans, given the fluid global situation, to manage downside risks should they materialize. In this regard, staff welcomed the authorities’ intention to closely monitor budget execution through comprehensive monthly fiscal reports.

23. The authorities are likely to face important fiscal policy tradeoffs in the rest of 2015. They should carefully weigh the trade-off between financing the projected fiscal deficit from drawing down government deposits at the central bank (as currently assumed in the staff’s baseline projections), additional fiscal adjustment, and additional borrowing from external or domestic sources. In particular, it would be useful to analyze the nature and expected benefits of discretionary spending and the comparative costs of alternative financing, including from using the government’s fiscal buffers. Maintaining deposits at the regional central bank would provide a buffer in the event of additional adverse shocks, including to oil prices, and would ensure the continued smooth operation of the pegged exchange rate arrangement which has served Congo well. External sustainability will require maintaining a level of reserves above five months of imports to support the exchange rate peg. The decline in oil prices, and its impact on foreign exchange reserves, reinforces the importance of compliance with existing regional reserve pooling requirements.

24. Over the medium-term, it will be important to develop a comprehensive and coherent fiscal adjustment strategy. There are several aspects to this:

  • Strengthen fiscal reporting, including regarding the government’s overseas deposits and off budget expenditures.4 In particular, the monthly preparation of the Table of Government Financial Operations (TOFE) budget execution should include off-budget spending above the line and financing from changes in offshore deposits below the line.5 Off budget spending mainly comprises in-kind oil payments to finance a number of commercial agreements and to cover losses incurred by the state oil refinery (CORAF) in maintaining regulated domestic fuel prices. At a minimum, these amounts should be included as memorandum items in fiscal reporting. This is important to make a meaningful assessment of the stance of fiscal policy and to derive a realistic fiscal consolidation path.

  • Adopt a multi-year perspective in fiscal planning. In this regard, staff recommended that over the next five years, the non-oil primary deficit should be reduced to about 40 percent of non-oil GDP in order to ensure long-term fiscal sustainability (Annex IV).

  • Strengthen commitment control. This would help stem the accumulation of domestic spending arrears and curtail increases in public debt that could significantly undermine the resilience of the economy and fiscal policy space.

  • Enhance macroeconomic surveillance and coordination at the regional level. In view of the significant and differential impact of the oil price decline in the CEMAC context, the Republic of Congo could spearhead enhanced regional coordination in order to ensure an appropriate policy mix in response to the shock.

25. The impact of fiscal consolidation on longer-term growth and the poor should be minimized. Specific measures could include:

  • Strengthen non-oil revenue collection. Consideration should be given to minimizing the use of reduced VAT rates and tax exemptions, and strengthening the effectiveness of tax and customs audits and inspections and bringing non-filers into the tax net.

  • Reprioritize capital spending, including off-budget capital spending. There is scope to rationalize capital spending by prioritizing projects with clear impact on growth potential. Recent work by the IMF6 to assess investment efficiency reveals an efficiency gap for Congo which is significantly higher than the average for Low Income Developing Countries. This suggests that there is scope for improved quality of investment. In particular, project selection methods should be enhanced to boost the quality of public investment spending and maximize the level of Congo’s long-run capital stock (Annex IV). This should also entail adequate provisions for maintenance costs in budget planning. Also, any off-budget investment spending should be consolidated under the budget process and hence be subject to standardized procedures.

  • Rationalize subsidies that disproportionately benefit the people that least needs them. Energy subsidies amounted to about 4 percent of non-oil GDP in 2014. With the fall in oil prices, such subsidies have significantly declined to about ½ percent of GDP. Several countries (e.g. Cameroon, Indonesia) have taken advantage of the current environment of low international prices to phase out subsidies on petroleum products. Congo would benefit from implementing similar steps. The prices of utilities should also be evaluated. Timing the rollout of a program of energy subsidy reforms to coincide with the introduction of the pilot cash transfer program could help to mitigate the social impact of the removal of energy subsidies (SIP Chapter 2).

  • Consider options to control the growth of the government wage bill. A multi-year schedule of civil servants’ wage increases was announced in 2013, when the outlook for international oil prices was more favorable. The wage bill is forecast to peak at nearly 14 percent of non-oil GDP in 2017, from less than percent 10 percent in 2013. Part of the upward pressure on the wage bill is expected to emanate from the increase in hiring of qualified health care professionals related to the countrywide medium-term hospital building program aimed at re-balancing the significant geographical inequalities in health care provision. However, increases in wage rates should be moderated.

26. Adherence to a prudent borrowing policy is essential to avoid jeopardizing debt sustainability. External debt has risen steadily in recent years and the authorities intend to mobilize additional borrowing in addition to drawing down the country’s oil reserves. Against this background, staff urged the authorities to pursue a prudent borrowing policy that keeps the NPV of net debt below indicative Debt Sustainability Analysis (DSA) thresholds. As a result of the decline in oil prices and the consequent drop in nominal GDP, the NPV of gross external debt to GDP ratio temporarily breaches the 30 percent of GDP threshold in 2015 and 2016. Together with the sustained breaches in the standard stress tests, this would give rise to a downgrade to a “high risk of debt distress.” However, an analysis based on net debt, which takes into account Congo’s sizable government deposits at the BEAC, indicates that there are only sustained breaches of the thresholds under the stress tests. On this basis, Congo is classified as at “moderate risk of debt distress.” To the extent that new borrowing over the medium-term is on less concessional terms than recent years, the risk of debt distress could rise.

27. Staff encouraged the authorities to strengthen debt management and also take into account the drawdown of oil wealth. As the authorities seek to broaden financing sources, it would be important to develop a medium-term debt strategy (MTDS), strengthen skills for evaluating financing offers, and to enhance transparency in debt and asset management. As regards the option to issue government bonds in the local and regional markets, staff recommended strengthening institutional and analytical capacities before proceeding. This should include drawing up a strategy, in close collaboration with CEMAC partners, to develop the regional government securities market and outlining in more detail the financing requirements that would be covered by government securities and other sources, in the MTDS.

Authorities’ Views

28. The authorities had mixed views on staff’s recommendations. The authorities aimed to fast track Parliamentary approval of the 2015 supplementary budget. They also highlighted their intention to consider additional cuts in expenditure in the event of further revenue shortfalls. The expenditures related to the AAG were the authorities’ main immediate priority. The pace of other investment expenditures would be slowed and projects completed over a longer period of time. The authorities would not consider making adjustments to the announced multi-year increases in civil servants’ salaries because of their commitments to social partners. They also argued that the rural poor would be hit hardest by the removal of energy subsidies and would therefore maintain the current system of administered prices for petroleum products. The authorities acknowledged that off-budget expenditures had caused discrepancies in the fiscal accounts and agreed that, going forward, off-budget spending, including for energy subsidies, should be consolidated in fiscal reporting.

B. Public Financial Management Reforms

29. The PFM system faces a number of challenges in critical areas. Progress has been made in recent years in refining the legislative framework for the budget, strengthening the public procurement system, and in developing a medium-term budget framework. Significant shortcomings remain, however, in adhering to budget allocations during execution. In addition, the budget does not provide full coverage of government revenues and expenditures (see ¶24). Shortcomings in commitment control are also evident, in particular for investment expenditures, while there is also frequent recourse to in-year budget adjustments. These practices complicate budget management and the timely and accurate reporting of expenditures. This is further compounded by weaknesses in accounts preparation. A visible result of these shortcomings is the persistence of domestic payment arrears at some 5.5 percent of GDP and there are risks from further arrears being generated by the reduction in public spending.

30. Since the adoption of the Organic Law in 2012, reforms have mainly focused on the transposition of the six CEMAC PFM Directives. The government is taking important steps to transpose the CEMAC PFM Directives through draft legislation on fiscal transparency, budget classification, and the chart of accounts. The draft fiscal responsibility and transparency (FRT) law would establish guiding principles for other PFM laws and includes provisions on natural resources revenue transparency which would complement Congo’s compliant status under the Extractive Industry Transparency Initiative (EITI) since February 2013. This should be implemented expeditiously and remain consistent with the relevant CEMAC directive. The authorities have also made efforts to work on improving the expenditure management under the IT system (SIDERE), and program budgeting is being developed. While the efforts to transpose the Directives are welcome, implementation of PFM reforms is lagging in some critical areas. These are highlighted in the recent PEFA assessment, which presents an opportunity to refocus reforms on these critical shortcomings (Box 1). At the same time, reinvigorating the reform process will require a clearer institutional framework and a review of the timeline of activities in order to ensure appropriate sequencing.

31. Staff encouraged implementation of measures to enhance the equity and efficiency of government spending based on the findings of the PEMFAR. This includes:

  • Prioritizing the budgetary allocations to the agriculture and social sectors (health and education) and building capacity of staff in these ministries in PFM issues whilst improving monitoring and evaluation of projects to address low execution rates;

  • Improving the allocations of public resources, including by providing a geographic coverage of the budget by regions or rural vs. urban areas;

  • Piloting, and eventually mainstreaming, a pro-poor cash transfer program that is well-targeted and adequately monitored;

  • Improving access to health care, for example by waiving user fees for the poor and compensating providers as part of the government’s universal health care coverage, to be rolled out over the medium term; and

  • Prioritizing infrastructure spending with a stronger growth and human development impact.

Public Expenditure and Accountability Framework Assessment and Recommendations

A follow up to the initial 2006 assessment under the PEFA was undertaken in 2014. The PEFA recognizes progress made since the earlier assessment in introducing a medium-term budgetary framework, reforms to the procurement system and the clearer legal underpinnings provided by the 2012 budget framework law. At the same time, the assessment finds continued important scope to strengthen the credibility of budget allocations; the scope and coverage of budget documents; timeliness and accuracy of accounting data; internal control and transparency. In addition, a critical cross-cutting issue that hampers progress across the cycle of budgetary operations is the performance of the various IT systems underpinning the PFM system.

Against this background, staff recommended that an updated reform plan should contain the following critical elements:

  • Broadening the scope of budget documentation and fiscal reporting and consolidating off-budget spending;

  • Ensuring reliable forecasts of fiscal aggregates and strengthening commitment controls and procedures to help prevent further accumulation of arrears;

  • Tightening procedures for in-year budget adjustments;

  • Taking a multi-year perspective in fiscal planning, in particular for commitments on investment projects;

  • Reinforcing the link between the National Development Plan (NDP) and budgetary allocations; and

  • Rationalizing IT systems to ensure full coverage and inter-operability between key departments and modules.

Authorities’ Views

32. The authorities gave high priority to PFM reforms and considered that their focus on the overarching legal framework, as set out in the CEMAC Directives, was appropriate. In particular, they noted their intention to move ahead with the FRT law before the end of the year. The authorities emphasized that ongoing projects were not being cancelled and only postponed. For this reason, the costs of the projects should not increase and arrears should not accumulate. The authorities consider that the problem of payment arrears may be overstated, depending on the accounting conventions used for their recording, as their definition of arrears differs from that of private sector companies. The authorities nevertheless broadly agree that a more comprehensive presentation of government fiscal operations is appropriate, and indicated their willingness to further engage with IMF staff on how to move ahead with this. The question of providing geographical information on budget allocations, meanwhile, was something that the authorities considered to be best addressed in the context of their ongoing efforts to move towards a program budgeting approach to budget preparation.

33. With regard to public investment efficiency, the authorities indicated that they intended to give higher priority to quality concerns in the public investment program. In terms of sectoral priorities, however, they considered that agriculture allocations were appropriate and that a range of flanking policies in rural areas (health, electricity, water, transportation, etc.) were equally important for developing agricultural potential. With regard to the proposed cash transfer program, in the second half of 2015 the authorities plan to roll out the Lisungi project, with World Bank support, across a number of pilot districts.

C. Promoting Financial Sector Development and Inclusion

34. An analysis of macro-financial linkages suggests that the decline in oil prices may have important spillover effects to the financial sector. Banks’ compliance with CEMAC prudential ratios remains, on average, broadly adequate. Three (out of the 10) banks do not maintain capital above the COBAC CFAF 10 billion minimum. Two of these have drawn up time-bound recapitalization plan. The third bank may be turned into an SME bank with the government taking a share in it. The non-performing loan (NPL) ratio more than doubled, albeit from low levels, to 2.5 percent in 2014. The stress tests in the January 2015 FSAP highlight that Congolese banks would be most vulnerable to a re-classification of performing loans to NPLs. In light of this, anecdotal reports of a buildup of government arrears to domestic private sector operators underscore the risk that the large decline in oil revenues and the resulting need to reduce government spending could lead to a further increase in NPLs.

35. Increased financial access and intermediation could have important economic benefits. The Republic of Congo’s financial sector is shallow, highly concentrated, and characterized by limited inclusiveness (SIP chapter 3). Staff’s analysis suggests that increasing access to bank lending and other financial services, increasing the quality of loan collateral and lowering bank intermediation costs could have an important impact on growth, productivity, and inequality. In light of this, staff advised to (i) accelerate the implementation of a centralized balance sheet bureau to strengthen the quality of accounting data; (ii) strengthen the credit registry; (iii) establish a property registry and a unique window to register land titles; (iv) strengthen the judicial framework by boosting the judges’ and tribunals’ capacity to address financial sector issues. In addition, there is scope to encourage microfinance and mobile banking by fostering collaboration between commercial banks, microfinance institutions and telecommunication companies and move forward with the ongoing implementation of the electronic payment system for taxes and utilities and developing the bank branches network. The authorities are encouraged to work in close collaboration with COBAC and BEAC on financial innovations to ensure consistency with regional regulations. Staff encouraged the authorities to put in place a strategy to develop the financial sector that includes a roadmap of prioritized time-bound actions, involves all the relevant stakeholders, and whose implementation is proactively monitored.

36. AML/CFT. Staff encouraged the authorities to move forward with ensuring financial sector compliance with customer due diligence (CDD) and operationalizing the recently created financial intelligence unit (ANIF-Congo) and ensuring that it has an adequate budget that will allow it to immediately undertake its core functions independently.

Authorities’ Views

37. The authorities highlighted that the FSAP findings showed that the Congolese banks were the most resilient to shocks among the banks in the CEMAC region. They recognized the importance of encouraging financial sector development in order to promote the diversification of the economy. The authorities acknowledged that the successful development of the sector requires reforms of the legal system to facilitate use of collateral. They considered that progress has been made in requiring civil servants to receive salaries through bank accounts and the development of mobile banking. More generally, the authorities are in the process of reviewing and updating their 2006 financial sector development strategy which would also ensure that national measures are fully integrated with regional objectives in the CEMAC context.

D. Other Surveillance Issues

38. The quality and timeliness of macroeconomic data needs to be improved. This would benefit the implementation of the Republic of Congo’s important agenda of macroeconomic and structural reforms, as well as ensure compliance with data provision obligations under Article VIII (e.g. in relation to IIP data, off-budget spending, and deposits held abroad). In this regard, staff encouraged the authorities to operationalize the National Strategy for Statistics Development (NSSD) to address data issues and technical capacity constraints over the coming years. Staff also underscored the need to ensure adequate funding to the statistics agency and emphasized the need to clarify which agency is in charge of compiling and providing national accounts and debt data and to make sure that all government agencies unify their data in a coherent manner.

39. The authorities are encouraged to improve policy coordination and monitoring. This would be instrumental in ameliorating the efficiency and effectiveness of macroeconomic and structural reform policies. For instance, the PEMFAR highlights that the planning, budgeting, and implementation of public investment would benefit from enhanced coordination between all institutions relevant to public investment spending. At the same time, the impending need to renew the 2012–16 NDP in 2016 presents an opportunity to more firmly embed Congo’s development objectives in the context of further regional integration, including transportation infrastructure.

Authorities’ View

40. The authorities noted that the implementation of the NSSD is underway. They recognized the assistance from development partners (the World Bank, AFRISTAT, IMF) and indicated that the aim is for all official statistics to be unified and to eventually have the National Institute of Statistics be the single entity responsible for disseminating statistics.

41. The NDP provides the overall strategic vision within which public investment expenditures are made. Building on an evaluation of the second period of the NDP, the authorities will prepare a new development plan which will encompass the post 2015 Millennium Development Goals agenda and the objectives of the continent.

Staff Appraisal

42. Growth was strong and inflation moderated in 2014. Growth rose to 6.8 percent in 2014, driven by a rebound in oil production. Inflation eased to 0.5 percent at end–2014 (year-on-year), driven mainly by lower global food prices.

43. But Congo has been hit hard by the oil price shock. The fiscal deficit amounted to 8.5 percent of GDP in 2014, a near doubling from 2013, owing mostly to increased spending and the lower oil receipts. The current account balance also deteriorated.

44. The economy is projected to expand by about 3 percent per annum during 2015–20 as new oil fields come on stream. Though necessary, the fiscal consolidation implied by the supplementary budget is expected to result in growth slowing to 1 percent in 2015. Risks to the outlook relate to oil price volatility, persistently low oil prices, accumulation of domestic payment arrears, and domestic instability. While Congo’s real effective exchange rate is broadly in line with macroeconomic fundamentals, the performance of non-oil exports is weak and points to competitiveness concerns.

45. The 2015 supplementary budget should be passed swiftly and its implementation monitored closely. The authorities should weigh carefully their response to revenue shortfalls and expenditure overruns. Maintaining deposits at the regional central bank would provide a buffer in the event of additional adverse shocks. Contingency plans should be prepared to address downside risks.

46. Safeguarding fiscal and debt sustainability will require a coherent medium-term fiscal adjustment strategy. In view of the limited remaining lifetime of oil reserves, and continued low prices, fiscal policy should be anchored on a gradual multi-year reduction in the non-oil primary deficit. The rise in government debt since the 2010 HIPC/MDRI relief in addition to the drawdown of oil reserves, underscores the importance of continued adherence to a prudent borrowing policy that keeps the NPV of net debt below indicative DSA thresholds. This should also be coordinated within the context of a revised CEMAC macroeconomic surveillance framework (See CEMAC Staff Report).

47. Public expenditure should increasingly be oriented towards policies to support inclusive growth and pro-poor programs. The link between the actions in the NDP and the annual budgets should be clearly established during budget preparation, with a stronger focus on economic diversification. The selection, evaluation, and monitoring of investment projects, as well as the budgeting of their operating and maintenance costs, need to be strengthened. More broadly, the authorities are encouraged to follow up on the recommendations from the PEFA and PEMFAR to strengthen budget execution, procurement and disbursement processes and improve the efficiency and quality of spending.

48. Fiscal adjustment should be underpinned by improved revenue policies and PFM reforms. There is scope to boost non-oil revenues by limiting the use of reduced VAT rates and tax exemptions whilst reinforcing tax and customs administration. PFM reforms should focus on improving the quality of investment, resolving the accumulation of arrears, and ensuring comprehensive fiscal reporting that consolidates off-budget spending, possibly with IMF technical assistance.

49. Financial sector reforms are essential to underpin growth, diversification and reduce inequality. The financial sector should benefit from the authorities’ plans to revise its strategy in this sector with a view to covering recent innovations and consistency with regional objectives. Key priorities remain the improvement of the credit registry, establishing a property registry and a unique window to register land titles, and strengthening the judicial framework. Promoting broader usage of microfinance and mobile banking should also enhance financial access.

50. External sustainability should aim at maintaining a level of reserves above five months of imports to support the exchange rate peg. The decline in oil prices, and its impact on foreign exchange reserves, reinforces the importance of compliance with CEMAC reserves pooling requirements to underpin the pegged exchange rate arrangement. In this regard, staff welcomes the repatriation of part of Congo’s overseas deposits and recommends a continuation of this policy.

51. The quality and timeliness of macroeconomic statistics needs urgent strengthening, to help improve macroeconomic analysis and policymaking and ensure compliance with obligations under Article VIII. Progress needs to be made in improving capacity and operationalizing the NSSD. In particular, macroeconomic statistics should be unified across government agencies and the national statistics agency should have adequate funding.

52. It is recommended that the next Article IV consultation take place on the standard 12–month cycle.

Table 1.

Republic of Congo: Selected Economic and Financial Indicators, 2013–20

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

Including grants.

Revenue and grants (excluding investment income and oil revenue) minus total expenditures (excluding interest payments).

Revenue (excluding investment income and grants) minus total expenditures (excluding interest payments and foreign-financed investment).

Basic primary balance minus oil revenue.

Table 2.

Republic of Congo: Medium Term Balance of Payments, 2013–20

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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.

Staff estimates based on preliminary data.

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

Table 3.

Republic of Congo: Central Government Operations, 2013–20

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

Revenue and grants (excluding investment income and oil revenue) minus total expenditures (excluding interest payments).

Revenue (excluding investment income and grants) minus total expenditures (excluding interest payments and foreign-financed investment).

Basic primary balance minus oil revenue.

Fund staff estimates based on preliminary data.

Overall budget balance, excluding grants and foreign-financed investment.

Reflects the supplementary budget approved by the ministerial cabinet and awaiting formal ratification by parliament

Table 4.

Republic of Congo: Central Government Operations, 2013–20

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

Revenue and grants (excluding investment income and oil revenue) minus total expenditures (excluding interest payments).

Revenue (excluding investment income and grants) minus total expenditures (excluding interest payments and foreign-financed investment).

Basic primary balance minus oil revenue.

Fund staff estimates based on preliminary data.

Overall budget balance, excluding grants and foreign-financed investment.

Reflects the supplementary budget approved by the ministerial cabinet and awaiting formal ratification by parliament