Staff Report-Press Release; Staff Report; Debt Sustainability Analysis, and Statement by the Executive Director for the Republic of Congo
The Congolese authorities express their deep appreciation to staff for the candid and constructive policy discussions held during program negotiations in Brazzaville over the past two years and for their patient efforts to reach a favorable outcome. They are grateful to Management for its close and decisive engagement during this period leading up to the staff level agreement reached in May 2019 on a program that could be supported by the Extended Credit Facility (ECF). They also thank the Executive Board for its support throughout the years.
The sharp decline in international oil prices during 2014–16 led to a deep economic recession in Congo. As the downturn in the oil sector spread to the rest of the economy, real GDP contracted sharply, and fiscal revenues dropped significantly. In the meantime, public debt had risen rapidly to unsustainable levels which coupled with the oil price shock led to difficulties in servicing the debt and an accumulation of arrears. The recession has also affected the financial sector and dampened liquidity.
In response to the crisis, the authorities have put in place bold adjustment measures. They have introduced significant spending cuts, initiated discussions with their creditors to restructure Congo’s external debt and launched reforms to address governance weaknesses. Although the situation started to stabilize in 2018, the authorities are cognizant that much remains to be done to put the economy back on a sound footing.
To help consolidate Congo’s macroeconomic gains achieved so far and foster a higher and more sustainable growth, the authorities request the support of the IMF under an ECF arrangement. Their reform program which builds on the regional strategy to safeguard CEMAC’s external stability, is centered around five key pillars, namely, fiscal adjustment to achieve debt sustainability, a strengthening of governance, the protection of vulnerable groups, the preservation of the soundness of the financial sector, and implementation of structural reforms to improve the business climate and diversify the economy. The program is supported by the regional monetary and financial sector policies through the implementation of policy assurances provided by the regional central bank, BEAC, and the supervisory body, COBAC.
The authorities are keenly aware that continued progress in enhancing governance, and transparency, including in the oil sector, is crucial to the success of their reforms going forward. All prior actions to the program approval have been implemented. Most of these actions seek to increase transparency of government operations and further improve governance. Accordingly, the authorities have submitted all the required reports to parliament, including on the national oil company’s (SNPC) pre-financing contracts, the special contracts to build infrastructure against in-kind payments, and on the list of projects implemented by the Ministry of Public Works between 2014 and 2017.
Recent Economic Developments and Outlook
The Congolese economy is steadily recovering from the 2016–17 recession. The policy adjustments that have been enacted to stabilize the economy have started to bear fruit. Growth has picked up in 2018, reaching 1.6 percent. The current account balance has improved significantly, turning positive in 2018. This improvement was helped by an increase in oil production and the recovery in international oil prices, as well as lower imports. Congo’s imputed foreign exchange reserves at the BEAC have also stabilized although they remain low. The overall fiscal balance in 2018 is in surplus, resulting from an increase in both oil and non-oil revenues, as well as drastic spending reductions. Public investment which had reached 77.5 percent of non-oil GDP in 2014, was cut back significantly to 5.5 percent of non-oil GDP in 2018. Inflation, however, has further slowed at end-2018 due to a still relatively weak domestic demand.
The authorities have also made significant progress in their efforts to restructure the country’s external debt and have reached an agreement with China. Congo’s public debt which amounted to 118.6 percent of GDP in 2016 decreased to 87.8 percent of GDP in 2018, of which 61.3 percent is external and 26.5 percent is domestic.
Under the Fund-supported program, Congo’s macroeconomic outlook is expected to improve over the medium-term. Growth in the oil sector will be driven by an increase in oil production, as well relatively stable international oil prices. In the non-oil sector, growth is projected to rise gradually up to 4 percent in 2022, supported by a continued implementation of reforms under the ECF-supported program to stabilize the economy, and also progress in restructuring the country’s external and domestic debt, and improvement in business confidence. Structural reforms to improve the business climate and strengthen governance will also contribute to the overall improvement of Congo’s economic outlook.
Economic Policies Under the ECF-Supported Program
Fiscal Policy and Debt Sustainability
The authorities’ key fiscal objective is to significantly reduce the non-oil primary fiscal deficit (NOPD). To reach their target of 17 percent of non-oil GDP by 2022 for the NOPD (from 28 percent in 2018), the authorities have taken necessary steps to reduce spending and increase non-oil revenue. In doing so, they will also take measures to shield poor and vulnerable groups from the effects of the fiscal adjustment. The authorities will also increase social spending substantially throughout the program period.
On the revenue side, critical areas of reform include a review of tax exemptions and the introduction of a fuel pricing mechanism. The authorities will reassess exemptions included in the investment code. In the meantime, they have prohibited the granting of exemptions on a discretionary basis. As agreed under the program, they will also approve by end-October 2019, a revised price structure for petroleum products that includes higher taxes and an automatic indexation mechanism which will help raise fiscal revenues.
To contain fiscal expenditures, major reforms have been introduced to reduce subsidies and control the wage bill. On subsidies, the authorities will cap the transfers to the state-owned oil refinery CORAF, and subsidies will be subject to CORAF’s efforts to reduce operating expenditures under a new performance contract. Similarly, subsidies to the electric power company, CEC, will, as well, be conditional on a quarterly assessment of its expenditures by the Ministry of Finance, justifying the level of subsidies. With regard to the wage bill, an action plan will be adopted to gradually reduce it, as a share of non-oil GDP. Under the plan, retiring public sector employees will no longer be systematically replaced by new hires, except in social sectors. The authorities also intend to limit capital spending through improved prioritization and enhanced effectiveness of public investment projects.
The recent agreement reached with China on the restructuring of Congo’s external debt along with the authorities’ renewed commitment to prudent debt borrowing will help bring public debt below the regional ceiling of 70 percent of GDP by 2022. The authorities will only seek external financing on concessional terms during the period of the program. In addition, as agreed under the program, they will approve by end-October 2019 a domestic debt restructuring strategy following the completion of the audit recently carried out by an international accounting firm. They will also pursue in good faith their negotiations with commercial creditors with the objective of finalizing an agreement before the first ECF review.
The Congolese banking system has been adversely affected by the crisis although the overall solvency of the banking system remains sound. The authorities will also continue to world closely with COBAC to strengthen the stability of the financial system, including on the issue of compliance with the AML/CFT framework. While the banking system continues to feel the effects of the crisis, none of the Congolese banks that are in a difficulty pose a systemic risk. Regarding the two banks that are in a difficult situation, the authorities, in close collaboration with COBAC, will adopt a resolution plan for the bank that has become insolvent and will sell the second bank to private investors. With respect to the AML/CFT framework, the authorities will improve their legislative and institutional framework to address the weaknesses identified by the Task Force on Money Laundering in Central Africa, in 2015.
Governance and Transparency
With the assistance of the IMF, the authorities have prepared and published in June 2018, a diagnostic report that analyzes the impact of weak governance and corruption on the economy, particularly in the oil sector. To address the shortcomings identified in the report, Congo’s parliament has approved amendments to SNPC law, requiring the state-owned oil company to publish its audited financial statements annually. The Parliament has also adopted a new law requiring that all oil production sharing agreements be made public. Also, an anti-corruption commission with investigative powers has been established, and the Parliament has made it mandatory for senior political officials to declare their assets. Besides, they will ensure that the Transparency Committee on the Management of Natural resources and Public Spending envisaged under Congo’s Transparency Law draws at least one-third of its members from civil society.
In their efforts to fight poverty, the authorities have identified a number of social sectors and programs that they intend to focus on and preserve moving forward. These include health, basic education, the promotion of women, and infrastructure to open up isolated areas. To improve social conditions of the poorest households, they have, with the help of the World Bank and the French Agency for Development, put in place a social safety net program that provides cash transfers to the neediest households, conditional on greater access to health and education services. The performance of the program is monitored against established benchmarks in health and education and has yielded positive results so far. The authorities will expand their cash transfer program in 2019 to add additional poor households and will also increase the amounts provided to households.
Progress in the implementation of structural reforms to improve the business climate and diversify the economy will continue. The authorities have put in place a reform agenda to improve the business climate with the support of their development partners. They will focus on measures that address key weaknesses identified in the World Bank’s doing business reports, including on creating a national real estate registry and on simplifying the procedures and reducing costs involved in starting a business, among other vital reforms. To ensure that progress is made in the identified reform areas, they have put in place an Interministerial Committee on Business Climate that comprises the country’s development partners. To diversify the economy, the authorities have adopted an action plan with the assistance of the World Bank and the African Development Bank (AfDB). The focus will be on promoting the development of agriculture, as well as the food and lumber industries, while improving supply and access to electricity, particularly in remote areas. The authorities will also adopt by October 2019, as agreed under the program, a privatization strategy. A study is underway with the support of the AfDB to identify public enterprises and assets that can be sold.
The Congolese authorities reiterate their firm commitment to the sound policies and reforms envisaged under the ECF-supported program and seek Executive Directors’ approval of the arrangement to support their reform agenda. They also call on their partners to continue to support their efforts to promote the development of the country. Congo is grateful to the partners, both bilateral and multilateral, that have contributed to the financing of the program, including through debt restructuring. The continued support of the international community will be crucial for the success of the program.