Republic of Congo: Staff Report for the 2021 Article IV Consultation-Debt Sustainability Analysis

REPUBLIC OF CONGO

Abstract

REPUBLIC OF CONGO

Title page

REPUBLIC OF CONGO

STAFF REPORT FOR THE 2021 ARTICLE IV CONSULTATION-DEBT SUSTAINABILITY ANALYSIS

September 13, 2021

Republic of Congo: Joint Bank-Fund Debt Sustainability Analysis

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Approved By Vitaly Kramarenko and Gavin Gray (IMF) and Marcello Estevao and Abebe Adugna (IDA)

The Debt Sustainability Analysis (DSA) has been prepared jointly by IMF and International Development Association staff, in consultation with the authorities, using the debt sustainability framework for low-income countries approved by the Boards of both institutions.

The overall and external debt1 of the Republic of Congo are classified as “sustainable” but debt is currently considered “in distress” pending finalization of debt restructuring agreements with two private sector creditors and clearance of arrears. The debt restructuring under discussion with one of these two private creditors is on a small portion of the original debt and no new external arrears have been accumulated since early 20212. An agreement in principle (AIP) was reached in early 2021 with the other of these two private creditors but it has not yet been approved by the creditor’s underlying lenders. Half of the bilateral debt with China has also been restructured under DSSI.

Higher oil prices, restructured debt, fiscal discipline, and improved debt managementincluding restricting new external financing to concessional termshave resulted in all external liquidity and solvency indicators falling below the thresholds by 2026, and largely motivate the change in sustainabiiity assessment to “sustainable”.3 Oii price assumptions (including higher medium-term oii prices) and projections of growth in the non-oii economy, coupied with increased debt service (tied to high oii prices), are expected to reduce the public debt-to-GDP ratio and support no new accumulation of domestic arrears. Nevertheless, there are major external and overall debt-related risks, as signaled by the PV of public debt to GDP indicator exceeding its benchmark for the full horizon and the external debt-service-to revenue breaching its threshold through 2025. Even though the PV of public debt breaches its benchmark extensively, it is assessed as sustainable given that the liquidity risks are mitigated by i) the steady and significant declines in the relevant ratios going forward, ii) availability of financing from Congolese financial markets, and Hi) access to the CEMAC regional financial markets. Immediate liquidity needs are also supported by the DSSI. The debt sustainabiiity assessment is highly vulnerable to negative oil price shocks. Going forward, the authorities are encouraged to continue pursuing fiscal consolidation, enact policies for diversification to reduce risks and prepare for reduced long-term oil production and demand, finalize the pending restructuring agreements, clear arrears, and continue enhancing debt management.

Public Debt Coverage

1. The coverage of public debt in this DSA is limited to central government debt, but includes oil-backed debt contracted by the national oil company (SNPC), the largest state-owned enterprise. State and local governments in Congo are not allowed to borrow and depend on local taxes and transfers from the central government. Debt from oil-backed pre-financing arrangements contracted with oil traders through SNPC and guaranteed by the central government is included in the analysis and is the main source of non-central government debt. However, the debt of other state-owned enterprises (SOEs) and non-guaranteed debt of SNPC is not included in this analysis because of limited information on their debt and fiscal performance.4 Staff will continue efforts to compile information on SOEs to improve the scope of the DSA, in line with guidelines under the revised LIC-DSF. Supported by the FY 2021 performance and policy actions (PPA) under the World Bank’s Sustainable Development Finance Policy (SDFP), the authorities are making on-going efforts to address the limited coverage on SOE debt and financial performance. Efforts are also underway to centralize SOE debt information in a single debt database managed by the Congolese debt office and to include this information in annual debt reports. Technical assistance from the Fund and the World Bank is available to support these efforts.

2. Contingent liabilities are elevated and pose a risk. The contingent liability stress test is customized to account for vulnerabilities associated with legally disputed claims of domestic arrears, non-guaranteed SOE debt, and litigated debt (Text Table 1). Non-guaranteed SOE debt is estimated at 9 percent of GDP, and under the stress test, it is assumed that half of this amount could end up on the central government balance sheet, while the rest can be paid through the liquidation of SOE assets. In addition, Congo’s total PPP capital stock is estimated at 4.6 percent of GDP, with 35 percent of this stock assumed to end up on the government balance sheet under the stress test. Debt vulnerabilities are also affected by claims of domestic arrears that were rejected by an audit but are being legally contested (about 7 percent of GDP), newly rejected domestic arrears claim under the current audit (about 12 percent of GDP) that could be legally contested, and an external arrears claim of 2.7 percent of GDP which is currently being litigated (and not included in the debt stock).5The contingent liability test is also calibrated to account for these potential risks to the public sector balance sheet. At the same time, the experience of previous audits and preliminary progress reported on the ongoing audit of domestic arrears suggest a strong possibility that the stock of domestic arrears incurred during 2017–18 could be revised down substantially after the conclusion of the audit.

Text Table 1.

Republic of Congo: Coverage of Public-Sector Debt and Design Stress Tests of Contingent Liability

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Background

A. Evolution and Composition of Public Debt

3. Public debt in the Republic of Congo reached 101 percent of GDP at end-2020, from 82 percent of GDP at end-2019. The increase in the debt-to-GDP ratio primarily reflects the decline in nominal GDP due to recession in the non-oil sector and the decline in oil prices. Lower than forecast project loan disbursements (with infrastructure and development projects cancelled or delayed due to the pandemic) and delays in budget support limited new external financing; however, the rescheduling of debt service under the DSSI and the issuance of new domestic debt helped alleviate financing pressures.

  • External debt increased from 57 percent of GDP at end-2019 to 63 percent of GDP at end-2020. A large share of external debt is owed to China and Chinese companies (23 percent of GDP) and oil traders (17 percent of GDP, see Table 2). The contracting of new external debt was restricted to be on concessional terms.

  • The authorities have made progress in clearing external arrears. During 2019, the authorities continued accruing arrears to commercial and bilateral creditors, but in January 2020, the authorities paid US$69 million in arrears to multilateral and official bilateral creditors. An additional US$146 million in arrears with bilateral creditors was rescheduled under the 2020 DSSI, and an additional US$175 million, including US$132 million under DSSI from China, is rescheduled in 2021. The authorities continue efforts to resolve remaining bilateral arrears (including US$148 million of pre-HIPC arrears).6 Moreover, $26 million in arrears to Chinese infrastructure companies were repaid in Q4 2020, and another $231 million (as of end-2020) in external commercial arrears were rescheduled as part of restructuring agreements reached with two external commercial creditors. Arrears of $536 million to one private creditor remain unresolved. The authorities contest $402 million of arrears to suppliers, of which US$387 million are part of a broader litigation case and US$15 million are pre-HIPC arrears for which the authorities had requested HIPC treatment; the authorities’ plan to resolve remaining external arrears to commercial suppliers (US$5 million) during the course of 2021.

  • Domestic public debt increased from 25 percent of GDP atend-2019 to 38 percent of GDP atend-2020. The bulk of domestic debt atend-2019 involved arrears currently being audited (8.7 percent of GDP), statutory advances from the regional central bank (9.6 percent of GDP), and pension arrears and unpaid social benefits (6.5 percent of GDP).7 The authorities secured financing from a pool of Congolese banks (“Club de Brazzaville”) to cover the repayment of CFAF 332 billion (5.1 percent of GDP) of domestic arrears by end-2020.8 Government debt to commercial banks has increased to 6 percent of GDP given new bond issuance in 2019 and Q1-Q3 2020.

Table 1.

Republic of Congo: Gross Public Debt by Creditor, 2019–20

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Sources: Congolese authorities and IMF staff estimates.
Table 2.

Republic of Congo: External Arrears Situation

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Sources: Congolese authorities and IMF staff estimates.

End-2015 stocks are unrestructured pre-HIPC arrears.

Includes disputed debts (pre-HIPC claims)

4. This debt sustainability analysis incorporates the impact of two restructuring agreements concluded with external private commercial creditors (oil traders). The restructuring agreement with one of these two creditors (a large oil trader) was signed in 2021Q1—this agreement includes a nominal haircut, a maturity extension, and an interest rate reduction. The restructuring agreement with the other of these two creditors (a smaller oil trader) was signed in April 2020—this agreement included a substantial nominal haircut on the stock of outstanding debt, a maturity extension, and resolution of US$61 million in external arrears. The DSA does not incorporate the agreement in principle (AIP) that was reached in early 2021 with another large oil trader but has not yet been approved by its underlying lenders; instead, the DSA includes the original agreement (which was set to expire at end-2020) and repayment of arrears during 2022–25 (where the arrears were accumulated during 2020–21 in connection with debt restructuring negotiations). The DSA does not incorporate the terms of the formal December 2020 restructuring proposal made by the authorities to another external commercial creditor (that is not an oil trader) as they are still waiting for a formal response; instead, the DSA includes the original agreement.

5. This debt sustainability analysis also incorporates the impact of the G20 Debt Service Suspension Initiative (DSSI). Under the DSSI, the authorities obtained relief of US$146 million of debt service due to bilateral creditors between May and December 2020 (equivalent to IV2 percent of GDP), that was rescheduled under NPV-neutral terms. Under the extension of the DSSI to end-December 2021, an additional US$175 million of debt service is eligible for rescheduling, including $132 million already rescheduled by China. The authorities have committed to devoting the resources freed by this initiative to increase spending in order to mitigate the health, economic, and social impact of the COVID-19 pandemic. The DSA includes the rescheduling—according to published terms—of all eligible debt, with the exception of debt under the Strategic Partnership loans from China, which the creditors have not agreed to reschedule and for which the authorities have continued making repayments.

6. Weaknesses in public debt management and reporting remain. While the authorities published the terms of the 2019 debt restructuring agreement with China, operationalization of the agreement implied lower short-term liquidity relief than initially assessed. Moreover, the authorities continued accumulating excess deposits in the escrow account in China during 2020. In addition, the emergence of a contested claim has increased the stock of contingent liabilities; this claim has been included in the ongoing audit of domestic arrears. Technical assistance in the areas of debt management and reporting is already underway in various areas of debt management and debt reporting in the context of the Multipronged Approach to Debt Management.

B. Macroeconomic Outlook

7. Box 1 summarizes the main assumptions for key macroeconomic variables in the scenario underpinning the DSA:

  • Growth in 2020 was substantially lower than forecast in the 2019 Article IV, given the effects of the pandemic on oil production and the non-oil sector. As the recovery takes hold, growth is expected to peak at 6.3 percent of GDP in 2024, primarily on the back of increased oil production. Over the long-term growth will average 1.5 percent driven by declining oil production as oil reserves deplete.

  • The government is implementing a vaccination program, expecting to cover 60 percent of the population by mid-2022.

  • A substantially weaker fiscal position emerged in 2020 compared to the 2019 Article IV, given pandemic-related spending needs and the effect of the recession on revenues. After the pandemic subsides, the authorities are assumed to continue implementing fiscal adjustment to restore long-term fiscal sustainability and support building of regional international reserves.

  • Projected external disbursements reflect project loans only. Balance of payments (BOP) and budget support is not expected (Text Table 2). In 2020, disbursements were lower than previously anticipated because of delays in both budget support and project financing, the latter related to the pandemic. The decline in disbursements beyond 2026 is in line with the authorities’ commitment to pursue prudent external borrowing.

  • The DSA assumes that Congo continues to obtain the bulk of new external financing on concessional terms in the medium term; the grant element increases progressively and averages 43 percent over 2027–29.9 After 2029, new disbursements are assumed to become less concessional, bringing the grant element to about 27 percent over 2030–40.

Text Table 2.

Republic of Congo: Projected Loan Disbursements

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Sources: IMF and WB staff calculations and projections.

Main Macroeconomic Assumptions

  • Non-oil sector: Non-oil real GDP is projected to grow only slightly by 0.9 percent in 2021, dueto the continued impact of the pandemic. In 2022, assuming the pandemic subsides, the non-oil sector is projected to begin recovering. Non-oil growth gradually improves to 3.6 percent by 2026 (averaging 3.1 percent during 2021–26), as investment recovers, the implementation ofstructural reforms bears fruit, and the economy diversifies. Beyond 2026, non-oil growth is projected to average 3.6 percent, somewhat lower than the historical average of 5.3 percent over 2008–17. Near-term downside risks are elevated given uncertainties related to the pandemic, low vaccination rates,1 and oil prices and production, but medium-term risks are balanced, as governance reforms and the implementation of efforts to diversify and build resilience to climate change are expected to support development of the non-oil sector. GDP is expected to contract for a brief period in 2028 and 2029 dueto reduced oil production and rebound thereafter when non-oil growth due to diversification efforts start to dominate the sharp decline in oil production.

  • Vaccination: The government aims to vaccinate 60 percent of the population by mid-2022—costing $88 million (0.7 percent of GDP, 2021 Article IV Staff Report, Text Table 1).The World Bank and the African Union are combining to finance the EVAX scheme, covering one million people, with $12 million in WB financing. China and Russia are covering 1.1 million people.

  • Oil production and prices: In the second and third quarters of 2020, oil production was subdued due to the negative impact of the pandemic on oil demand. Accordingly, oil production declined to 112 million barrels in 2020 (from 140 million barrels projected in the 2019 Article IV). Production is projected to peak at 125 million barrels by 2024whileremaining roughly at the 2020 levelsin 2021,2 2022 and 2023, with new fields coming online, and then to steadily decline to about 11 million barrels in 2041, barring new oil discoveries. The high volatility in international oil prices and production uncertainties are substantial near-term risks; however, the contribution of oil to overall GDP, as well as exports and revenue, is expected to decline in the next 20 years, reducing long-term risks related to oil price volatility.

  • Inflation: Overall inflation is expected to remain moderate, at 2.7 percent (y/y) at end-2021; inflation is expected to gradually increase to 3 percent by 2023 and remain close to 3 percent over the long term, consistent with the CEMAC’s convergence criteria of a 3 percent ceiling.

  • Current account balance: A current account surplus of 12.1 percent of GDP is anticipated for 2021, up from a balanced current account (-0.1 percent of GDP) in 2020. The surplus is primarily linked to the rebound in global oil prices in 2021. The current account is projected to remain in surplus over 2021–24 given high oil prices, and slow recovery in the non-oil sector. The current account deficit is projected to reach an average of 16 percent of GDP over 2028–41, reflecting a long-term decline in oil production. Continued investment efforts as part of the diversification strategy keep imports elevated, only partly offset by the increased exports. Economic diversification continues to support the projected GDP growth.

  • Primary balance: Given increased pandemic-related spending needs and oil and non-oil sector revenue losses, the primary surplus is estimated to have declined from 8 percent of GDP in 2019 to 0.1 percent of GDP in 2020. Absent any external financing, an adjustment to the non-oil primary balance of about 4 percent of non-oil GDP is assumed over 2021–26, which would help re-build fiscal and external buffers.

  • Domestic arrears payments: The authorities’ medium-term fiscal strategy prioritizes domestic arrears repayments—critical for economic and political confidence—while safeguarding social and domestically-financed capital spending and reflecting commitments to enhance debt sustainability. A 4 percent of non-oil GDP (1 percent of GDP) improvement in the non-oil primary balance during 2021–26 (based on adopted measures—outlined in the 2021 Article IV Staff Report—and their lagged effects) supports this strategy. Part of these fiscal gains will finance domestic arrears repayments both under the remaining Club de Brazzaville coverage and the authorities’ new scheme (which is still under development). Absent resumption of budget support from development partners or an improvement in regional financing conditions, the feasible increase in development spending under this strategy will fall far short of what is needed for Congo to substantially reduce poverty and exit fragility. Against this backdrop, preserving fiscal space for critical development spending by unwinding pandemic measures faster than currently planned, slowing domestic arrears repayments if revenues fall short, and diligently pursuing the revenue and expenditure reforms initiated over the past 3 years will be critical.

1 As of August 9, 2021, only 1.6 percent of the Congolese population has been vaccinated (https://africacdc.org/covid-19-vaccination/)2 Theslow0.9 percent growth in the non-oil sector and a moderate decline in oil production in 2021 will translate into a slight overall GDP contraction of 0.2 percent in 2021.

8. Realism tools flag risks around the forecast, but there are mitigating factors. The fiscal adjustment-growth realism tool suggests that the projected growth path could be lower but staff assesses the projected growth and the fiscal path to be realistic and with a low fiscal multiplier since it is essentially driven by developments in the oil sector. Improvements in the primary surplus (owing to sustained consolidation efforts) is the main driver in reducing debt, with real GDP growth also contributing marginally (Figure 3). The realism tools show a history of large unexplained increases for external and public debt.

Figure 1.
Figure 1.

Republic of Congo: Indicators of Public and Publicly Guaranteed External Debt Under Alternatives Scenarios, 2021–31

Citation: IMF Staff Country Reports 2021, 225; 10.5089/9781513595511.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2031. Stress tests with one-off breaches are also presented (if any), while these one-off breaches are deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.2/ The magnitude of shocks used for the commodity price shock stress test are based on the commodity prices outlook prepared by the IMF research department.
Figure 2.
Figure 2.

Republic of Congo: Indicators of Public Debt Under Alternative Scenarios, 2021–31

Citation: IMF Staff Country Reports 2021, 225; 10.5089/9781513595511.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2031- The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.
Figure 3.
Figure 3.

Republic of Congo: Drivers of Debt Dynamics—Baseline Scenario

Citation: IMF Staff Country Reports 2021, 225; 10.5089/9781513595511.002.A002

Sources: Congolese authorities and IMF staff projections.1/ Difference between anticipated and actual contributions on debt ratios.2/ Distribution across LICs for which LIC DSAs were produced.3/ Given the relatively low private external debt for average low-income countries, a ppt change in PPG external debt should be largely explained by the drivers of the external debt dynamics equation.
Text Table 3.

Republic of Congo: Comparison of Assumptions Between Current and Previous DSA

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Sources: Congolese authorities; IMF and WB staff calculations and projections.

C. Country Classification and Determination of Stress Test Scenarios

9. The composite index (CI) is assessed at 2.28 and is based on the April 2021 World Economic Outlook (WEO) and 2019 World Bank CPIA data, indicating a weak debt carrying capacity for Congo. The methodology relies on computing a composite indicator (Cl) based on information from the CPIA score, external conditions as captured by world economic growth, and country-specific factors, including import coverage of reserves. The Republic of Congo’s low Cl score indicates a weak debt carrying capacity, reflecting mainly a low CPIA score and a low level of foreign reserves (Text Table 4). The Cl score is similar to that in the previous DSA based on the October 2019 WEO data, and the debt carrying capacity is unchanged compared to the previous (2019 Article IV) DSA

Text Table 4.

Republic of Congo: Composite Indicator (CI) Score

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Source: IMF staff calculations. The Cl cutoff value for medium debt carrying capacity is 2.69.

10. The DSA considers commodity price and market financing shocks. Since oil exports represent more than 80 percent of Congo’s exports, the commodity price tailored stress test is triggered. Similarly, as a holder of a Eurobond (issued in the context HIPC debt restructuring), the market financing module is also activated.

Debt Sustainability Analysis

A. External Debt Sustainability Analysis

11. Under the baseline, the breaches of the present value (PV) of debt-to-GDP and both the external debt service indicators vis-a-vis Congo’s indicative thresholds are contained within 5 years (Figure 1). Under the current terms on the already restructured debt, all threshold breaches will be eliminated by 2026 under baseline scenarios. The PV of external debt to GDP is 62 percent at end-2020 and is projected to decline but remain above the indicative threshold of 30 percent only until 2023. The debt service-to-revenues ratio, at 34 percent in 2020, is above the indicative threshold of 14 percent; this ratio is projected to decline to 15¾ percent in 2025 and to 10 percent in 2026 (well below the 14 percent threshold), when most of the external commercial debt will have been repaid. In addition, the debt service-to-exports ratio is currently above its indicative threshold of 10 percent but is projected to decline below 10 percent by 2025 and remain below the threshold in subsequent years. The PV of debt-to-exports ratio is below its indicative threshold and projected to decline to an average of 44 percent over 2026–31. Text Table 5 highlights the changes between the current DSA and the 2019 Article IV DSA, which illustrates that the economic crisis triggered by the pandemic has contributed to a substantial worsening of the debt burden and liquidity ratios over the medium term, offsetting some of the positive effects of the debt restructuring agreements achieved and expected to be achieved in the near future (as included in the baseline).10

Text Table 5.

Republic of Congo: Comparison of PPG Gross External Debt Indicators, Baseline Scenario

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Sources: Congolese authorities; IMF and WB staff calculations and projections.

12. All indicators of external public debt breach their indicative thresholds in stress test scenarios (Figure 1). Standard shock scenarios examine the implications of various shocks to the debt and debt-service paths based on the historical volatility of the country’s economic indicators, resulting in sharp increases in the debt burden and liquidity indicators in all cases. The exports shock stress test is the most extreme for most indicators, reflecting the Republic of Congo’s high dependence on oil exports. A decline in exports to a level equivalent to one standard deviation below their historical average in the second and third years of the projection period would cause the PV of debt-to-exports ratio to rise and remain elevated over the medium term, while the PV of debt-to-GDP would peak at 89 percent. For the debt service-to-revenue ratio, a combined shock has the largest impact. The commodity price shock, triggered due to Congo’s reliance on oil exports, also leads to prolonged breaches of liquidity indicators and the PV of debt to GDP. The market financing risk module indicates a moderate risk of heightened liquidity pressures. However, because of no plans to access international markets, a heightened market stress event would not have a substantial impact on debt burden indicators (Figure 5).11

Figure 4.
Figure 4.

Republic of Congo: Realism Tools

Citation: IMF Staff Country Reports 2021, 225; 10.5089/9781513595511.002.A002

Sources: Congolese authorities and IMF staff estimates.1/ Data covers Fund-supported programs for LI CS (excluding emergency financing) approved since 1990. The size of 3-year adjustment for program inception is found on the horizontal axis, the percent of sample is found on the vertical axis.2/ Bars refer to annual projected fiscal adjustment (right-hand side scale) and lines show possible real GDP growth paths under different fiscal multipliers (left-hand side scale).3/ The changes in investment reflect a change in the methodology for computing the price index used to convert norm inal investment to investment at constant prices; this does not reflect a change in actual investment rates.
Figure 5.
Figure 5.

Republic of Congo: Market-Financing Risk Indicators

Citation: IMF Staff Country Reports 2021, 225; 10.5089/9781513595511.002.A002

Source: Data Stream, https://www.federalreserve.gov/releases/h15/.Note: there are no EM BIG data available for the Republic of Congo. The bond, due to mature in 2029, was trading at a discount of 20 percent over par with an interest yield of 7.6 percent as on August 11, 2021, with an interest spread of 655 bps

13. Reflecting unresolved external arrears, and ongoing restructuring negotiations, the Republic of Congo is classified to be “in debt distress”. Pending confirmation of the implementation of the DSSI for all eligible debt, nearly all post-HIPC bilateral official arrears have been cleared by end-2020. The clearance of remaining external arrears—primarily with suppliers— and finalization of debt restructuring agreements with two private sector creditors would be required to end the ongoing episode of debt distress.

B. Public Debt Sustainability Analysis

14. An analysis of the Republic of Congo’s overall public debt highlights heightened overall debt vulnerabilities (Figure 2). The projected evolution of debt burden indicators suggests heightened vulnerabilities arising from public debt. Under the baseline scenario, the present value of public and publicly guaranteed debt-to-GDP (including domestic arrears and direct financing from BEAC) remains significantly above the 35 percent benchmark level associated with heightened vulnerabilities for countries with a weak debt carrying capacity until 2031 and then remains slightly above the threshold for the full horizon. Even though the PV of public debt breaches its benchmark for the full horizon, it is assessed as sustainable given that liquidity risks are mitigated byi) its downward path on going forward, ii) availability of financing from Congolese financial markets, and iii) access to the CEMAC regional financial markets. Immediate liquidity needs are also supported by the DSSI. This assessment of debt vulnerabilities is further supported by stress-tests; the exports shock stress test is the most extreme for public debt burden indicators, highlighting downside risk related to the oil sector.

Risk Rating and Vulnerabilities

15. The overall and external debt of the Republic of Congo are assessed to be sustainable but debt is currently in distress. The assessment of debt distress is a result of the ongoing debt restructuring negotiations with two commercial creditors and outstanding arrears. Owing to higher oil prices and the downward trend in all the debt and solvency indicators, the breach in the debt service-to-revenue indicator is contained by 2026 and the breach in the present value of external debt-to-GDP indicator is below the threshold by 2023. These, combined with no new accumulation of domestic and external arrears, result in the overall and external debt being sustainable.

16. Risks of overall and external debt distress remain high given liquidity risks and vulnerability to negative oil price shocks. Liquidity risks, associated with an elevated public debt-to-GDP ratio (exceeding the threshold through 2040) and a large external debt service-to-revenue ratio (the indicator exceeds the threshold through 2025), are mitigated by the steady and significant declines in these ratios going forward, the DSSI, the availability of financing from Congolese financial markets, and enhanced access to the CEMAC regional financial. Going forward, the authorities are encouraged to continue pursuing fiscal consolidation, enact policies for diversification to reduce risks and prepare for reduced long-term oil production and demand, finalize the pending restructuring agreements, clear arrears, and enhance debt management.

17. The authorities concurred with staff’s assessment that Congo is in debt distress, and that debt is sustainable owing to favorable oil prices and the authorities’ reform efforts. They expressed their commitment to maintain prudent fiscal and debt management policies and to continue pursuing their strategy to restructure Congo’s public debt in order to enhance debt sustainability. The authorities also indicated that macroeconomic assumptions underpinning the DSA analysis, including projections for oil production, should remain appropriately cautious while information on new oil discoveries is still being analyzed. The authorities agreed that while there are downside risks to the growth outlook, the Congolese economy has the potential to benefit from the development of new sectors, and from increased social spending and diversification efforts to cope with challenges facing oil sector in the context of climate change.

Table 3.

Republic of Congo: External Debt Sustainability Framework, Baseline Scenario, 2018–41

(Percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.1/ Includes both public and private sector external debt.2/ Derived as [r – g – p(1 + g)]/(1+g + p+gp) times previous period debt ratio, with r – nominal interest rate; g – real GDP growth rate, and p – growth rate of GDP deflator in U.S. dollar terms.3/ Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.4/ Current-year interest payments divided by previous period debt stock.5/ Defined as grants, concessional loans, and debt relief.6/ Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).7/ Assumes that PV of private sector debt is equivalent to its face value.8/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.
Table 4.

Republic of Congo: Public Sector Debt Sustainability Framework, Baseline Scenario, 2018–41

(Percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.1/ Coverage of debt: The central, state, and local governments plus social security, central bank, government-guaranteed debt. Definition of external debt is Currency-based.2/ The underlying PV of external debt-to-GDP ratio under the public DSA differs from the external DSA with the size of differences depending on exchange rates projections.3/ Debt service is defined as the sum of interest and amortization of medium and long-term, and short-term debt.4/ Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period and other debt creating/reducing flows.5/ Defined as a primary deficit minus a change in the public debt-to-GDP ratio ((-): a primary surplus), which would stabilizes the debt ratio only in the year in question.6/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.
Table 5.

Republic of Congo: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2021–31

(Percent)

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Sources: Country authorities; and staff estimates and projections.

A bold value indicates a breach of the threshold.

Variables include real GDP growth, GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Includes official and private transfers and FDI.

Table 6.

Republic of Congo: Sensitivity Analysis for Key Indicators of Public Debt, 2021–31

(Percent)

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Sources: Country authorities; and staff estimates and projections.

A bold value indicates a breach of the benchmark.

Variables include real GDP growth, GDP deflator and primary deficit in percent of GDP.

Includes official and private transfers and FDI.