Republic of Congo: Staff Report—Press Release; Staff Report; Debt Sustainability Analysis, and Statement by the Executive Director for the Republic of Congo

Staff Report-Press Release; Staff Report; Debt Sustainability Analysis, and Statement by the Executive Director for the Republic of Congo

Abstract

Staff Report-Press Release; Staff Report; Debt Sustainability Analysis, and Statement by the Executive Director for the Republic of Congo

Background: Anatomy of the Crisis

1. The Republic of Congo has been suffering a profound economic crisis triggered by the sharp decline in oil prices since mid-2014. The crisis has been one of the worst in the country’s history, with deep output losses, large fiscal and current account deficits, and an erosion in confidence associated with weak governance, and an explosion in public debt. The situation improved substantially in 2018 and early 2019, as the authorities pursued an ambitious fiscal consolidation program, stepped up efforts to obtain financing assurances (including debt relief), and pushed ahead with a bold program of structural reforms with a particular focus on governance and transparency issues. This section analyzes the context prior to the crisis, the anatomy of the crisis over the 2014–17 period, and the policies that initiated the turnaround in 2018 and the first half of 2019.1

From the HIPC Decision Point to the Start of the Crisis (2006–14)

2. HIPC debt relief and high international oil prices helped Congo accelerate growth and poverty reduction. After reaching the HIPC Completion Point in 2010, Congo ramped-up spending on public infrastructure and consumption financed by oil revenue windfalls and a rapid re-accumulation of debt. During the four years to 2014, current expenditure increased to 21 percent of GDP, while capital expenditure tripled to 31 percent of GDP (Text Figure 1). Most projects were financed in the context of the strategic partnership with China,2 and nontransparent oil-backed arrangements with oil traders and oil producers. The strategy helped reduce poverty from 52 percent in 2004 to 31 percent in 2015. This was largely driven by high GDP growth, which averaged 5 percent over the period — with non-oil growth averaging 6½ percent. But inequality measured by the Gini index increased to 0.46 and vulnerability to poverty remained high at 70 percent.

Text Figure 1.
Text Figure 1.

Fiscal Trends Around HIPC Debt Relief

(Percent of GDP)

Citation: IMF Staff Country Reports 2019, 244; 10.5089/9781513508399.002.A001

Sources: Congolese authorities’ data and IMF staff calculations.

The Impact and Aftermath of the Oil Price Shock (2014–17)

3. The decline in oil prices since 2014 sharply deteriorated Congo’s outlook. Average oil prices declined from over $100 from early 2011 to mid-2014 to below $40 by mid-2016. This led to a collapse in oil exports and a sharp decline in the external current account, with a deficit that exceeded 40 percent of GDP by early 2016. As a result, oil revenues, which had averaged 35 percent of GDP during 2004–14, declined to about 15 percent of GDP after the shock (2015–17) and only started to recover in 2018 with rising oil production and prices. The negative evolution of oil revenues was exacerbated by revisions in contractual arrangements in production sharing agreements that reduced the share of oil that accrued to the government (Box 1). The authorities started to adjust their ambitious program to build infrastructure, and public investment declined from about 24 percent of GDP in 2015 to 8 percent of GDP by 2017 (Text Figure 2), and collapsed further to 2¼ percent in 2018. The reduction in public investment was one of the main transmission channels of the crisis on growth in the short term (Annex III).

Text Figure 2.
Text Figure 2.

Oil Revenues and Public Investment

(Percent of GDP)

Citation: IMF Staff Country Reports 2019, 244; 10.5089/9781513508399.002.A001

Sources: Congolese authorities’ data and IMF staff calculations.

4. The oil price shock produced a large decline in growth. Growth started to decelerate in 2015, and turned sharply negative in 2016–17, with particularly large decelerations in non-oil growth, driven by severe contractions in spending on infrastructure (Text Figure 3). Business confidence was eroded, the government started to accumulate large arrears with the private sector and Congo’s gross imputed reserves at the regional central bank (BEAC) fell by over 90 percent, from CFAF 2,601 billion in 2014 to CFAF 202 billion in 2018.

Text Figure 3.
Text Figure 3.

The Impact of the Crisis on Growth

(Percent)

Citation: IMF Staff Country Reports 2019, 244; 10.5089/9781513508399.002.A001

Sources: Congolese authorities’ data and IMF staff calculations.

5. Budget rigidities, including from governance weaknesses, delayed the policy response. With presidential and legislative elections looming amidst mounting security challenges, the authorities ratcheted up spending3 to more than 60 percent of GDP in 2014, including on infrastructure and wages. Governance weaknesses were reflected in (i) discounts on the sale price of government oil, (ii) nontransparent oil-for-infrastructure barter arrangements and oil pre-purchase loans from oil traders, and (iii) large off-budget spending in a context of weak anti-money laundering4 and anti-corruption legal frameworks. This type of borrowing contributed to unsustainable fiscal and debt policies.

Production Sharing Agreements and Oil Revenues

Government oil revenue collapsed from 35 percent of GDP in 2014 to 13½ percent of GDP in 2015. This reflects the impact of the fall in oil prices on the value of the government share in oil production, which was exacerbated by the reduction in the government’s share in production from the introduction in 2015 of more generous fiscal terms Table 1).

The new fiscal terms increased the ceilings for costs recovered by oil companies (cost stop), and lowered the government’s shares in (i) excess oil (the difference between actual costs and cost stop), (ii) profit oil (production after royalties and cost oil) and (iii) super profit oil (which arise when international oil prices fall below a threshold price (TP) pre-set for each oil field. However, the fall in oil prices below the new TP exacerbated this fall by eliminating significant amounts of oil production that the state used to obtain when oil prices were above the TP.

Box 1.Table 1.

Republic of Congo: Oil Production Sharing Terms

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The new fiscal terms, which affected around 60 percent of production by 2017, were meant to incentivize new investments and offset the higher costs for companies operating maturing and deep-water fields. As a result, the state’s share of total oil production declined from 55 percent in 2014 to around 37 percent in 2018, which contributed to the fall in oil fiscal receipts (Figure 1).

Box 1.Figure 1
Box 1.Figure 1

Oil Production Shares

(Percent of total production)

Citation: IMF Staff Country Reports 2019, 244; 10.5089/9781513508399.002.A001

If oil prices had remained above the new TP (at around US$/bbl 95), the application of the new terms would have reduced the government share to 50 percent instead of 55 percent in 2015. If the government had retained the old fiscal terms, the oil price decline alone (below the old TP of US$/bbl 55) would have reduced the government share to 45 percent in 2015 (Annex V). The authorities indicated that the discount in the sale of Congolese oil reflects marketing challenges including delays in shipments from the terminal operated by a foreign company. However, they noted that part of it reflects governance issues in the management of the oil sector, including a lack of transparency in the Société Nationale des Pétroles du Congo (SNPC) sales.

6. The deterioration in the fiscal position, combined with the decline in GDP, led to an explosion in public debt. Total debt (including domestic arrears) almost tripled from less than 40 percent of GDP in 2011 to about 118 percent in 2017–18 (Text Figure 4). The increase was driven by (i) the expansion in commercial debt, largely associated with opaque arrangements with oil traders, (ii) increases in bilateral debt (mostly with China) to finance the ambitious public investment program, and (iii) a large increase in the stock of domestic arrears, which reached 16 percent of GDP in 2017, as result of the collapse in oil revenues and delays in the implementation of the fiscal consolidation program.

Text Figure 4.
Text Figure 4.

Evolution of Total Public Debt

(Percent of GDP)

Citation: IMF Staff Country Reports 2019, 244; 10.5089/9781513508399.002.A001

Sources: Congolese authorities’ data and IMF staff calculations.

Signs of Stabilization and Reform Efforts in 2018 and Early 2019

7. Against the backdrop of a rapidly deteriorating situation, the authorities stepped up efforts to address the crisis and governance challenges in 2018. They set up a technical committee to conduct program negotiations with Fund staff under the supervision of a political committee,5 and the National Assembly approved in late 2017 a prudent budget for 2018. The new governance structure of the SNPC, enacted in late 2017, appointed a new leadership structure with an enhanced accountability framework (Annex V). The authorities also completed a Fiscal Safeguards Review in August 2018 with IMF technical assistance. Following a recommendation by the Task Force on Money Laundering in Central Africa, Congo’s financial intelligence unit (ANIF) organized a workshop to familiarize Congolese officials with the World Bank’s methodology for assessing money laundering and terrorist financing risks.

8. Overall growth turned positive in 2018, and the fiscal position improved markedly. The primary deficit adjusted from 24 percent of GDP in 2015 to 5½ percent in 2017, and it turned into a surplus of almost 9 percent of GDP in 2018 (Text Figure 5). While this result is explained in part by rising oil production and prices, which led to a recovery in oil revenues, it also reflects efforts to contain spending. The non-oil primary deficit, which provides a more direct measure of the authorities’ fiscal effort, also improved from 35.3 percent of non-oil GDP in 2017 to 28.1 percent in 2018, and it has now reached the lowest level since 2004 (Text Figure 6). Thanks to these fiscal efforts, and higher nominal GDP associated with rising oil production and prices, total public debt declined by 30 percentage points, from 118 to 88 percent of GDP.

Text Figure 5.
Text Figure 5.

Primary Balance and Government Deposits

(Percent of GDP)

Citation: IMF Staff Country Reports 2019, 244; 10.5089/9781513508399.002.A001

Sources: Congolese authorities’ data and IMF staff calculations.
Text Figure 6.
Text Figure 6.

Non-Oil Primary Balance, 2004–18

(Percent of Non-Oil GDP)

Citation: IMF Staff Country Reports 2019, 244; 10.5089/9781513508399.002.A001

Sources: Congolese authorities’ data and IMF staff calculations.

9. The external position also improved substantially, with the external current account registering the first surplus since 2014. Both oil prices and production increased by about 25 percent between 2017 and 2018. As a result, exports grew by 45 percent, while import growth remained modest (about 5 percent) given relatively weak economic activity in the non-oil sector (Text Figure 7). Net foreign assets at the central bank increased by over 10 percent, and gross imputed reserves stabilized from the record lows of 2017, but remain at very modest levels, covering less than one month of imports. Overall, the external position of the Republic of Congo remains weaker than implied by fundamentals and policy adjustment is therefore needed. The quantitative assessment of the exchange rate using the Fund’s EBA-lite methodology, as well as alternative approaches tailored to exporters of non-renewable resources suggests the exchange rate is overvalued by 15–20 percent (See Annex II).

Text Figure 7.
Text Figure 7.

External Current Account, 2010–18

(Percent of GDP)

Citation: IMF Staff Country Reports 2019, 244; 10.5089/9781513508399.002.A001

Sources: Congolese authorities’ data and IMF staff calculations.

10. Banking sector vulnerabilities have increased but the sector remains solvent. Bank liquidity deteriorated, with broad money growth declining from 13 percent in 2014 to -12 percent in 2015–17. By end-2018, commercial bank deposits had cumulatively declined by more than CFAF 700 billion since 2014 (around a third). As a result, the deposit-to-loan ratio declined from over 170 percent in 2014 to 90 percent in 2018. NPLs rose from 4 percent of gross credit in 2014 to 10 percent in 2015–17 and further to 23 percent in 2018 (Figure 1e). These developments, together with BEAC’s tightening of monetary policy, contributed to slowing down private sector credit growth from 26 percent in 2014 to almost 4 percent in 2015–17, followed by a contraction by almost 3 percent in 2018. Nevertheless, the banking sector’s overall solvency ratio (25 percent in 2018) remains far above the regulatory minimum requirement (7.5 percent), thanks to capital increases by large banks (Annex IV). Two non-systemic banks are in distress. The banking commission, Commission Bancaire de l’Afrique Centrale (COBAC), requested in September 2018 that the authorities withdraw the license of one of these undercapitalized banks.

Short and Medium-term Outlook

11. Economic conditions remain difficult but are projected to improve in 2019. Overall growth in 2019 is expected to reach 5.4 percent, supported by an expansion in oil production (Box 2) and to a lesser extent by a recovery in non-oil growth, which is projected to reach 1 percent. This projected pick-up hinges on a recovery in public investment in 2019, which is a key driver of non-oil growth. Moreover, confidence effects are likely to result from the approval of the Fund-supported program and the partial repayment of domestic arrears. The medium-term framework is based on the oil price assumptions from the April 2019 World Economic Outlook (WEO), with average oil prices about US$/bbl 3½ higher than the assumptions used in July 2018 (Text Figure 8).

Text Figure 8.
Text Figure 8.

International Oil Prices (US$/bbl)

Citation: IMF Staff Country Reports 2019, 244; 10.5089/9781513508399.002.A001

Source: IMF World Economic Outlook.
Text Figure 9.
Text Figure 9.

Non-Oil Primary Balance, 2018–23

Citation: IMF Staff Country Reports 2019, 244; 10.5089/9781513508399.002.A001

Sources: Congolese authorities’ data and IMF staff calculations.

12. The fiscal and external positions, which strengthened substantially in 2018, are projected to improve further in 2019. Assuming a steadfast implementation of program commitments, the overall fiscal balance is expected to register a surplus of 7½ percent of GDP, while the non-oil primary deficit will adjust further to 24.8 percent of non-oil GDP in 2019. This will help rebuild government buffers, with deposits at the central bank expected to increase from CFAF 64 billion in 2018 to CFAF 213 billion in 2019. At the same time, the current account balance is projected to remain in surplus in 2019 (5.6 percent of GDP). The positive fiscal and external positions will help increase Congo’s imputed net foreign assets at the central bank to CFAF 319bn, thereby contributing to the build-up of reserves at the regional level.

Prospects in the Oil Sector

The Republic of Congo’s proven oil reserves are estimated at 1.6 billion barrels and production is expected to peak in 2019. Production was around 121 million barrels in 2018— an increase of about 20 percent compared with 2017. This helped Congo reach the third largest output level in sub-Saharan Africa after Nigeria and Angola. There are currently around 40 oil fields in operation, most of which are offshore. The projected increase in production will boost output levels to 140 million barrels in both 2019 and 2020. It results from a new offshore field (Moho Nord, the largest in Congo’s history)—expected to reach a peak level of 37 million barrels in 2019. Production from this new field, combined with Congo’s first deep-water field (Moho-Bilondo), accounted for 45 percent of total oil production in 2018. Additional capacity is expected to come from the the Banga Kayo and the Nene-Banga fields which will account for 20 percent of production.

Staff have updated oil production forecasts with information received by the authorities, recent reports by sector experts, and consultations with oil companies accounting for about 75 percent of production. These discussions suggest that there is still some potential for further upward revisions in production forecasts. Production levels in 2019Q1 suggest that the revised production estimates are attainable.

As a result, near-term production prospects have improved. Over the 2020–23 period, production capacity is expected to come from the major oil fields which will contribute around 181,000 barrels/day on average, and account for 50 percent of production. The government has also announced the second phase of the exploration licensing rounds, offering up to 18 blocks for tender, including five in shallow water, five in deep and ultradeep water, and eight onshore fields. Tendering is underway with results planned for announcement by July 2019. Absent new developments, and as fields mature, oil production is projected to decline in 2023 by 16 percent from peak levels.

13. The medium-term outlook projects a gradual recovery in economic activity, the preservation of fiscal discipline, and an improvement in the external position. In particular, non-oil growth is projected to gradually recover and reach about 4 percent in 2022–23 (Text Table 1). Strong primary surpluses of about 9 percent, on average, over the program period will help place public debt on a strong downward path, with total public debt declining to about 60 percent by 2023. At the same time, the non-oil primary deficit will decline to about 16 percent of non-oil GDP and help rebuild buffers to smooth out possible volatility in oil prices, and save a share of oil revenues to address possible exhaustibility issues (Box 3).

Text Table 1.

Republic of Congo: Program Scenario, 2016–23

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Sources: Congolese authorities’ data; and IMF staff estimates and projections.

14. Risks to the outlook stem from the volatility in oil prices, possibly uneven policy implementation, and potentially weaker security conditions.

  • Lower oil prices would put pressure on fiscal and external balances, while a weaker Euro would increase the debt burden and widen the current account deficit given difficulties to expand non-oil exports due to supply side constraints. This could affect negatively Congo’s capacity to repay the Fund. The debt restructuring with commercial creditors should be robust to commodity sector price volatility and assure that Congo achieves a moderate risk of external debt distress by 2023. To this end, staff recommended, and the authorities agreed, that any debt restructuring agreement with oil traders should consider contingency mechanisms in case oil prices fall below reference levels (MEFP¶33).

  • Domestic downside risks stem from difficulties to sustain political support for the reform program, including the government capacity to sustain large fiscal surpluses over time or pursue the implementation of reforms to improve governance. Possible delays in clearing domestic arrears is another risk, which would hurt the private sector and damage financial sector stability. A resurgence of conflict in the Pool area would also have a negative impact on the business environment.

  • These risks are mitigated by the willingness expressed by the highest political authorities to Fund-supported program objectives, prospects of higher oil production levels, and the authorities’ prudent fiscal policies—as demonstrated in 2018 and early 2019—which would gradually rebuild buffers, including government deposits, and help smooth out unexpected shocks. The authorities have also implemented a large package of structural reforms, including decisive measures to improve governance prior to the program approval.

ECF-Supported Program Objectives

15. Discussions toward a possible Fund-supported program (July 2019–July 2022) focused on the importance of restoring fiscal sustainability, protecting vulnerable groups and improving governance. In particular, the Fund-supported program centers around (i) fiscal consolidation and debt restructuring to restore debt sustainability, while ensuring adequate resources to mitigate the burden of adjustment on vulnerable groups, and (ii) structural reforms to improve governance and ensure a more efficient use of public resources (including measures to boost human capital), and promote financial stability. The program is backed by the authorities’ strong commitment to restore high, sustainable and inclusive growth (LOI ¶2), and by policies to restore medium-term fiscal sustainability (MEFP ¶19).

16. The ECF-supported arrangement for the Republic of Congo will also contribute decisively to the regional stability efforts of the CEMAC region. In particular, it will be the fifth country in the monetary union with a Fund-supported program in line with the December 2016 strategy agreed by CEMAC Heads of State. As the largest oil producer in the region, the Republic of Congo is also expected to play a substantial role in the accumulation of net foreign assets (NFA) at the BEAC – contributing about ¼ of the expected accumulation for the region over 2019–22. To achieve this objective, it will be necessary to maintain fiscal discipline, and rigorously enforce initiatives by regional institutions, including sharing of contracts with the BEAC (structural benchmark for end-September 2019) to identify exemptions to foreign repatriation requirements, repatriation of public sector deposits abroad, and modification of escrow accounts offshore to bring them under the control of BEAC.

A. Restoring Fiscal Sustainability

Fiscal Consolidation Strategy

17. Restoring fiscal sustainability requires the maintenance of high primary surpluses and a gradual adjustment in the non-oil primary balance. Despite the recovery in non-oil growth over the medium term, overall GDP growth will average about 2 percent over 2019–23 given substantial declines in oil production after 2021. As a result, placing public debt on a strong downward path requires large primary surpluses. At the same time, there is a need to consider the exhaustibility of natural resources and build substantial fiscal buffers to deal with oil price volatility. The medium-term fiscal anchor is provided by an estimate of the primary balance required to bring the debt sustainability indicators below the thresholds needed to achieve a moderate level of debt distress by 2022–23 (DSA supplement). This objective also helps place public debt on a strong downward path toward 60 percent of GDP by 2023, and the associated non-oil primary balance is broadly consistent with a PIH (see Box 3)6. The proposed fiscal strategy would also help rebuild buffers and bring gross imputed reserves to 3–4 months of imports by the end of the program, thereby providing critical support to the regional CEMAC strategy.

The Fiscal Anchor for the Republic of Congo as a Resource Rich Country

A Permanent Income Hypothesis (PIH) rule is a conservative fiscal anchor. It assumes that a substantial share of oil revenues needs to be saved to build up a stock of non-resource financial assets. The return on these assets generates a stream of resources to help sustain real government spending in the future once extraction has ended. In line with IMF (2012)1, in the case of Congo, the non-oil primary balance (NOPB), in percent of non-oil GDP, is the appropriate fiscal indicator given that the resource horizon is short (i.e. less than 20 years) and exhaustibility considerations are an important concern. Anchoring fiscal policy on this indicator also helps delink fiscal policy from the volatility of oil prices. The fiscal target can be set in a variety of ways. In the traditional PIH approach, the NOPB is set at a level that is consistent both with accumulated and expected financial wealth, basically treating resource wealth in the ground as “virtual” financial wealth, computing the present value given the resource horizon, and assuming an implicit rate of return. This implies a calculation of the resources in the ground and the oil revenues that will accrue to the government in the future.

The PIH Rule may be necessary when the resource horizon is short, and there are high levels of debt and a poor track record of public investment management. Deviations from the PIH rule can be appropriate when the country has large development needs and investments in infrastructure and human capital may yield higher value for money than the rate of return from the accumulation of financial assets. In such case, wealth on the ground is transformed into other forms of capital (i.e. infrastructure, health and education) that can help the economy diversify, increase competitiveness and boost non-oil growth. In the case of Congo, the massive increase in public investment has not been associated with adequate investment planning, execution and evaluation, or with transparent procurement practices. Once the Republic of Congo has (i) restored debt sustainability, (ii) rebuilt adequate buffers to smooth out oil price volatility, and (iii) improved the transparency and efficiency of its public investment management system, there would be scope to revisit the fiscal anchor taking into account the country’s large development needs.

1 See “Macroeconomic Policy Frameworks for Resource Rich Developing Countries”. 2012. International Monetary Fund. https://www.imf.org/en/Publications/Policy-Papers/Issues/2016/12/31/Macroeconomic-Policy-Frameworks-for-Resource-Rich-Developing-Countries-PP4698

18. Fiscal consolidation relies on strong domestic revenue mobilization and efforts to contain current expenditures. Non-oil revenues are projected to increase by about 11 percent of non-oil GDP over the program period (Text Table 2). This will help offset most of the projected decline in oil revenues associated with the downward trend in oil production over 2021–22. Current spending will be reduced by about 10¾ percent of non-oil GDP, with the bulk of the adjustment based on reductions in transfers to the oil sector. At the same time, public investment is expected to recover from the low levels observed in 2018. The authorities also intend to adopt a privatization strategy to create fiscal space (structural benchmark by end-September 2019 and MEFP ¶22).

Text Table 2.

Republic of Congo: Composition of Fiscal Adjustment, 2018 and 2022

(Percent of non-oil GDP)

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Source: Congolese authorities’ data and IMF staff projections

19. The medium-term fiscal program will require, as a first step, the rigorous implementation of the authorities 2019 Budget (MEFP ¶28–30). It projects a substantially stronger non-oil primary balance but is based on excessively optimistic assumptions regarding non-oil revenues (Text Table 3). Staff suggested prudence with respect to non-oil revenue projections based on a detailed analysis of measures. The authorities have also taken steps to cap the level of transfers and subsidies, by reducing by CFAF 100bn the transfers allocated to the oil sector, especially the oil refinery (CORAF)7. There are good prospects to achieve this objective given fiscal trends observed in 2019Q1. As a result, staff suggested an increase in pro-poor social transfers of about CFAF 50bn given the need to mitigate further the impact of fiscal consolidation on the poor (MEFP ¶31) (see below).8

Text Table 3.

Republic of Congo: Approved Budget and IMF Projections, 2019

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20. Decisive efforts to boost non-oil revenues will be key. Staff and the authorities agreed that a floor will be set on non-oil revenue (TMU ¶15). Policy discussions focused on specific measures that can help increase non-oil revenues by 5.9 percent of non-oil GDP in 2019 (MEFP ¶29) (Text Table 4). Increased revenue mobilization originates from three types of measures: (i) the strict implementation of new fiscal measures incorporated in the 2019 Budget, including the elimination of the reduced VAT rate for imports, reductions in the VAT threshold, and new provisions on excises, including on beverages and tobacco; (ii) administrative measures to strengthen tax compliance and collection of tax arrears, with a focus on compliance with existing conventions, the investment code, and taxation of refined oil imports; and (iii) other legislative measures, including telecommunication taxes of 10 percent on television subscriptions and a one-percent fee on e-transactions. Improvements in non-oil revenue mobilization would also reflect a gradual increase in fuel taxes after the government adopts a revised fuel price structure with higher taxes and automatic indexation mechanisms (structural benchmark for end-October 2019). The authorities’ new pricing strategy will be guided by a study on the current fuel pricing mechanism completed with assistance from the AfDB (MEFP ¶29). Should there be delays in the effective implementation (or actual tax collection results) of the revenue mobilization measures,9 the authorities would likely need to adjust public investment, which is projected to expand by about 5¾ percent of non-oil GDP.

Text Table 4.

Republic of Congo: Estimated Yield of the 2019 Budget Revenue Measures

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Sources: IMF staff estimation based on the discussion with Congolese authorities.

21. Fiscal consolidation should also take into account the burden of adjustment on vulnerable groups (MEFP ¶31)10. The budget envisages CFA 306 billion (4.7 percent of GDP) in social spending, including measures to mitigate the impact of the adjustment on vulnerable groups. CFA 50 billion associated with savings on oil transfers will be transferred to social spending and distributed between the Lisungi cash transfer system and other priority social programs, in health, education, and programs for women. Over the next 4 years, the Lisungi project will invest CFA 199 billion to expand coverage to 192,065 households, with a first effort to expand the program in 2019 (structural benchmark for end-December 2019). The authorities will also prioritize the early repayment of social sector arrears (especially pensions).

22. The strategy also envisages plans to clear a large stock of domestic arrears. At end-2018, the estimated stock was 986 billion CFAF (15 percent of 2018 GDP)1. This included (i) social arrears (pension contributions) of about CFAF 223bn, and (ii) arrears to government suppliers of about CFAF 528bn that had been accumulated over the 2014–16 period (Text Table 5). After an independent audit from Ernst and Young finalized in April 2019, about 3/4 of this stock was rejected due to irregularities, leaving a stock of audited commercial arrears from the 2014–16 period equivalent of CFAF 138bn. However, the authorities accumulated new arrears over the 2017–18 period, increasing the stock of arrears by an additional CFAF 626bn, of which CFAF 506bn to government suppliers and CFA 120 bn to public administration entities (floating checks unpaid for more than 90 days). This amount will now be subject to a new audit (structural benchmark for end-October 2019). The adoption of a credible plan to prioritize the repayment of social arrears (especially pensions) and resolve domestic arrears to government suppliers will be essential to protect basic income, support growth and preserve financial sector stability (Annex IV). This has become one of the most urgent economic priorities in the short term. The government strategy is to clear social arrears over 3 years, starting in 2019, and the rest of the arrears over five to seven years (MEFP ¶33).

Text Table 5.

Republic of Congo: Stock and Amortization of Domestic Arrears

(Billions of CFA francs, unless otherwise indicated)

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Sources: Congolese authorities' data and IMF staff projections.

Most of these arrears are associated with unpaid goods and services associated with the Ministry of Infrastructure and Public Work.

Unpaid claims associated with payment orders not yet settled less than 90 days may have elapsed from the issuance of the payment order.

Claim associated with infrastructure projects rejected by the authorities after an administrative review, due to errors of nondelivery of goods and services.

23. These domestic arrears reflect delays in fiscal consolidation prior to 2018, severe cash constraints, and weak PFM practices. While the result of the recent audit of domestic arrears suggest that a substantial part of the new arrears may be rejected due to accounting errors or irregularities, the authorities should also strengthen PFM controls to ensure that government ministries (especially the ministry of infrastructure) do not sign procurement contracts before the resources to honor the commitments have been properly secured. For example, the authorities have recently rejected, after an administrative review, gross claims related to public works for CFA 415bn or 6.4 percent of 2018 GDP. Rejecting payments for services that were not provided is appropriate, but the PFM and accounting system should have prevented the appearance of these claims in the first place.

Debt Restructuring

24. Public debt, including domestic arrears remains high. Despite its considerable decline compared with 2017, total public debt is estimated at 87¾ percent of GDP in 2018, with external debt representing 61¾ percent of GDP (Table 7). A large share of external debt is owed to China (21.4 percent of GDP) and oil traders (16.4 percent of GDP). External payment arrears increased from CFAF 453 billion (US$817 million) at end-2017 to CFAF 520 billion (US$908 million) at end-2018 (Table 8), though this increase reflects the accumulation of arrears with oil traders as part of the government’s debt restructuring strategy. Although total official arrears remain unchanged in 2018 compared with the previous year, post-HIPC official bilateral arrears increased from CFAF 33 billion (about $60 million) to about CFAF 75bn ($130 million).11

Table 1.

Republic of Congo: Selected Economic and Financial Indicators, 2016–23

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

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

Overall balance minus 20 percent of oil revenues and minus 80 percent of the oil revenue in excess of the average observed during the three previous years.

Before IMF-ECF financing, other expected financing and exceptional financing due to external debt restructuring net of restructured contingent liabilities.

Table 2A.

Republic of Congo: Central Government Operations, 2016–23

(Billions of CFA francs)

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Sources: Congolese authorities; and IMF staff estimates and projections. Note: SR refers to projections in the July 2018 draft staff report.

Includes net spending (i.e. spending minus revenues) associated with decentralized government entities.

Revenue and grants excluding oil revenues minus total primary expenditures (excluding interest payments).

Non oil revenue excluding grants minus total expenditures excluding interest payments and foreign-financed investment.

Basic non-oil primary balance minus oil revenue and oil-related transfers. This is a Performance Criterion/Indicative Target.

CEMAC definition: overall balance minus 20 percent of oil revenues and minus 80 percent of the oil revenue in excess of the average observed during the three previous years.

Post-HIPC external arrears accumulated since 2016 are consolidated in outstanding debt. The projected repayments are included in amortization of external debt.

Projected repayments of domestic arrears are included in domestic financing.

Includes estimates of domestic arrears audited by the the Caisse Congolaise d’Amortisation (CCA) and reported but not yet audited arrears.

Net of restructured contingent liabilities.

Table 2B.

Republic of Congo: Central Government Operations, 2016–23

(Percent of non-oil GDP)

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Sources: Congolese authorities; and IMF staff estimates and projections. Note: SR refers to projections in the July 2018 draft staff report.

Includes net spending (i.e. spending minus revenues) associated with decentralized government entities.

Revenue and grants excluding oil revenues minus total primary expenditures (excluding interest payments).

Non oil revenue excluding grants minus total expenditures excluding interest payments and foreign-financed investment.

Basic non-oil primary balance minus oil revenue and oil-related transfers. This is a Performance Criterion/Indicative Target.

CEMAC definition: overall balance minus 20 percent of oil revenues and minus 80 percent of the oil revenue in excess of the average observed during the three previous years.

Post-HIPC external arrears accumulated since 2016 are consolidated in outstanding debt. The projected repayments are included in amortization of external debt.

Projected repayments of domestic arrears are included in domestic financing.

Includes estimates of domestic arrears audited by the the Caisse Congolaise d’Amortisation (CCA) and reported but not yet audited arrears.

Net of restructured contingent liabilities.