Republic of Congo: First Review under the Three-year Extended Credit Facility Arrangement, Requests for Modification of Performance Criteria, and Financing Assurances Review-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Congo
Author:
International Monetary Fund. African Dept.
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Publication Date:
18 Jul 2022
eISBN:
9798400213922
Language:
English
Keywords:
oil revenue; arrears payment; financing gap; senior debt; control arrears accumulation; Arrears; Fiscal stance; Debt service; Global
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1. Ripple effects of the Ukraine war are benefitting the Republic of Congo’s oil exports but weighing on households and businesses (Box 1). High oil prices have increased export receipts for Congo’s unprocessed oil, bolstering the fiscal and current account balances. However, households and businesses are suffering from higher food and fuel import bills, transit costs for all imports, and prices of import substitutes. Notably, cereals (40 percent sourced from Russia) are one quarter of food imports. Continued regulation of fuel and certain staples prices provides some protection to households but at the cost of eroded profit margins for producers, distributors, and some state-owned enterprises (SOEs). Spillovers from international financial market volatility will be contained given Congo’s limited integration into these markets.

Abstract

1. Ripple effects of the Ukraine war are benefitting the Republic of Congo’s oil exports but weighing on households and businesses (Box 1). High oil prices have increased export receipts for Congo’s unprocessed oil, bolstering the fiscal and current account balances. However, households and businesses are suffering from higher food and fuel import bills, transit costs for all imports, and prices of import substitutes. Notably, cereals (40 percent sourced from Russia) are one quarter of food imports. Continued regulation of fuel and certain staples prices provides some protection to households but at the cost of eroded profit margins for producers, distributors, and some state-owned enterprises (SOEs). Spillovers from international financial market volatility will be contained given Congo’s limited integration into these markets.

Context

1. Ripple effects of the Ukraine war are benefitting the Republic of Congo’s oil exports but weighing on households and businesses (Box 1). High oil prices have increased export receipts for Congo’s unprocessed oil, bolstering the fiscal and current account balances. However, households and businesses are suffering from higher food and fuel import bills, transit costs for all imports, and prices of import substitutes. Notably, cereals (40 percent sourced from Russia) are one quarter of food imports. Continued regulation of fuel and certain staples prices provides some protection to households but at the cost of eroded profit margins for producers, distributors, and some state-owned enterprises (SOEs). Spillovers from international financial market volatility will be contained given Congo’s limited integration into these markets.

2. This latest crisis combined with existing pressures from the COVID-19 pandemic and climate change are aggravating Congo’s fragilities (Annex 1). New pandemic cases are currently low but, since 2020, the pandemic’s cumulative human and economic toll has been significant (Box 2)—including through erosion of the population’s earnings potential. Pandemic-driven poverty and the on-going adverse impact of climate change are raising food insecurity, where the urban food insecure totaled 700,000 people in 2021. This number is set to rise with accelerated food inflation sparked by the Ukraine war. While there are no signs of social unrest ahead of the Summer 2022 parliamentary elections, there are serious public concerns over rising poverty, a lack of economic opportunities, poor quality public services, and weak governance. Absent economic diversification, further challenges lie ahead with the repercussions of reduced global oil demand following the expected global transition to low-carbon economies. Deep structural and governance reforms—backed by development partner financing and capacity building support—will be needed to overcome all of these challenges and raise medium-term incomes, inclusiveness, and resilience.

Ukraine War’s Impact on the Republic of Congo

The war in Ukraine has resulted in wheat prices surging to levels of the 2007-08 global food crisis, a tripling of fertilizer prices, and record high oil prices—all fueling inflation.1 These effects are expected to worsen as the duration of the war extends. The uncertain global situation could also raise risk aversion and volatility of global financial markets. Despite benefits from high oil prices, the Ukraine war’s impact will weigh on the Republic of Congo’s economy.

High oil prices are bolstering fiscal and external positions.

  • Increased oil prices are expected to raise oil revenues by 4.7 percent of non-oil GDP in 2022 (relative to pre-crisis projections, IMF Country Report No. 22/49) net of increased debt service due to payments to the two largest commercial creditors being tied to oil prices. This windfall far exceeds the additional costs of policies to address food insecurity (¶12). Higher dividends are also expected from the SOE managing oil sector development (exporting unprocessed oil). However, transfers to SOEs dependent on imports of processed oil—such as the electricity company (CEC) and the refinery (CORAF) will also rise.

  • The current account is projected to improve by 11.7 percent of GDP in 2022 (relative to pre-crisis projections, IMF Country Report No. 22/49). Oil exports (80 percent of total exports) projected to rise by 12.6 percent of GDP will more than offset the 1.9 percent of GDP increase in fuel imports and food imports—cereals account for one quarter of food imports, 40 percent of which are sourced from Russia. Rising costs of other imports due to higher transport costs will be largely offset by continued momentum in import substitution initiated during the pandemic.

Inflation is on the rise, projected to grow from 2.0 percent in 2021 to 3.5 percent in 2022.2 This is largely owing to increased import costs, which are partially passed through to consumers while producers’ and distributors’ margins are also eroded—especially for fuel and food companies where fuel and staple food prices (about 25 percent of the CPI basket) are regulated. Cereals’ shortages are also raising the price of substitutes whose prices are unregulated.

Food insecurity will worsen. High food prices and supply shortages are adding pressures to high urban food insecurity—there were already 700,000 food insecure people in Brazzaville and Pointe-Noire in 2021. Domestic food production covers only 30 percent of the country’s needs. Farming, including for cassava, is largely for subsistence and cannot be quickly scaled up.

Non-oil economic growth will face headwinds.

  • High inflation, eroding households’ purchasing power and increasing business’ operating costs will weigh on domestic demand. Rising fertilizer prices (Congo is a net importer) could adversely impact agricultural activity from 2022H2 onwards. High oil revenues are supporting financial sector liquidity which combined with improved access to finance (¶20) will support gradual expansion of agriculture and assist businesses facing eroding margins.

  • Spillovers from international financial market volatility will be contained given Congo’s limited integration into these markets. However, in the near term, increased risk aversion may limit new foreign investment, even in the oil sector. Over the long term, if high prices for oil, fertilizer, and metals are sustained, investment may rise in new production sites and mines—Congo has a globally significant potash basin.

1 April 2022 IMF World Economic Outlook. 2 The 2007–08 food crisis raised inflation from 2.6 percent in 2007 to 6 percent in 2008.

COVID-19 Pandemic in the Republic of Congo1

Currently, new cases are low following the surge from Delta and Omicron variants earlier in the year (Panels 1 and 2). As of May 2, 2022, there were 24,079 confirmed cases, 385 deaths and 23,602 recoveries. In March 2020, government policies in response to the pandemic were stricter than the world average; however, these policies have gradually become less strict with some tightening of restrictions in recent months (Panel III)—including curfew extensions and vaccine or negative COVID-test requirements to enter public buildings. All departments of the country have been affected by the pandemic with Brazzaville and Pointe-Noire having the highest confirmed cases of COVID-19 (Panel IV).

Vaccine deployment began in March 2021 with the aim of vaccinating the adult population (equivalent to 60 percent of the total population) by end-2022. The 3 percent of people most exposed to the disease (e.g., health care and social workers, teachers, border professionals) were vaccinated first. The next 17 percent (e.g., students, retail and office personnel) are currently being vaccinated. The authorities plan to pursue vaccination of the remaining 40 percent of the population but vaccine hesitancy could impede these efforts.

As of April 24, 2022, 14 percent of the population was fully vaccinated—9 percent with single doses of Sputnik Light or Johnson and Johnson and 5 percent with double doses of Sinopharm, Sputnik V, or Pfizer. Another 1 percent of the population is partially vaccinated, having received one dose of Sinopharm, Sputnik V, or Pfizer.

To support businesses, since May 2021, the government has deferred certain tax and duty payments, cut the corporate tax rate (from 30 to 28 percent), and reduced the turnover tax for small businesses (from 7 to 5 percent for turnovers below CFAF 100 million). BEAC also implemented monetary easing— including lowering the policy rate by 25 bps to 3.25 percent in March 2020, injecting liquidity to banks, and implementing temporary purchases of government securities. These temporary monetary measures are being rolled back.

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Sources: Congolese Authorities; WHO; John Hopkins Coronavirus Resource Center; Oxford COVID-19 Government Response Tracker
1 Figures as of May 2, 2022 except COVID-19 statistics by department which are as of April 24, 2022. 2 Government Response Stringency Index is a composite measure based on nine government response indicators, including school closures, workplace closures, stay-at-home requirements, and travel bans.

Recent Economic Developments

3. Overall economic growth in 2021, estimated at -0.6 percent, was held back by weak oil production. Insufficient investment by large producers and maturing oil fields led to oil production contracting 11.0 percent. Non-oil real GDP growth, estimated at 3.6 percent, was fueled by agricultural and mining expansion, substitution toward locally-sourced inputs (versus imported inputs), social spending, and domestic arrears payments. Inflation remained subdued, averaging 2.0 percent, although food inflation was on the rise (Figure 1).

4. The pandemic’s impact widened the 2021 non-oil primary deficit to 17.3 percent of non-oil GDP. The projected 2 percent of non-oil GDP increase in the non-oil primary deficit, relative to 2020, was driven by higher goods and services spending (vaccines, healthcare), stepped up social transfers, and grant shortfalls. Non-oil revenues and oil-related transfers remained broadly similar to 2020 (as a percent of non-oil GDP)—where higher oil prices counteracted savings from continued reforms in the state-owned (SOE) electricity company and oil refinery. The overall balance benefited from increased oil revenues—high oil prices offset weak oil production—which helped finance the non-oil deficit, build deposits, service debt, and repay domestic arrears. Liquidity pressures were also alleviated through use of the remaining 2009 SDR allocation and the extension of the G-20 DSSI through end-2021.

5. In 2021, a substantial improvement in the current account balance was broadly offset by increased financial outflows. Improved oil exports and lackluster imports—with weak import demand following the pandemic—raised the current account balance to 12.6 percent of GDP (relative to -0.1 percent of GDP in 2020). The benefit of these inflows to the balance of payments were broadly eroded by outflows from public sector debt service to external private and official creditors as well as public and private sector debt service to regional commercial banks.

6. Banking sector vulnerabilities were gradually reduced. Non-performing loans (NPLs) remained around 17 percent in 2021 after a large decline in 2020 owing to domestic arrears’ payments outweighing the effects of economic contraction and temporary prudential relaxation measures by COBAC. Banks’ improved liquidity and gradual deposit growth contributed to raising private sector credit growth from 4 to 10 percent between end-2020 and end-2021. The capital adequacy ratio increased from 19 to 22 percent between end-2020 and end-August 2021, reflecting improved risk-weighted assets and positive credit and deposit trends. Restructuring plans are being considered for two weak banks.

Macroeconomic Outlook and Risks

7. Economic recovery is underway, driven by improved oil production, while non-oil activity faces headwinds from high inflation.

  • Real GDP growth is expected to gain momentum in 2022, rising to 4.3 percent. Oil production is anticipated to expand by 6.1 percent with the largest producers resuming investment. Spillovers from high oil revenues, agricultural activity, mining investments (potash and iron ore), and continued vaccine rollout are expected to support 3.3 percent non-oil growth. The composition of fiscal consolidation (¶12) will limit its growth impact— with increased capital and social assistance spending and reduced SOE transfers and goods and services spending. More vigorous non-oil economic activity is mainly held back by high inflation and related monetary tightening constraining spending and investment by households and businesses.

  • Average inflation is expected to rise to 3.5 percent driven by the effects of the Ukraine war— food price pressures and generally higher import prices (¶1). To help contain inflation expectations, BEAC raised its policy rate by 50 basis points in March.

  • The current account balance is projected at 17.2 percent of GDP in 2022. Increased oil receipts (¶1) combined with financial support from the IMF and development partners will support financing needs from increased import costs, especially for food, and a buildup of international reserves. Large oil revenues will also finance debt service—with G20 DSSI payments due from June 2022 and payments to the two largest external commercial creditors tied to oil prices. Given global uncertainties, improvements in foreign direct investment and other financial inflows are expected to be limited.

8. The medium-term outlook will depend on reform implementation aimed at reducing fragility through job creation and higher incomes, especially for the poor. Real GDP growth averaging 3.5 percent during 2023-27 is anticipated to be driven by non-oil growth reaching 5 percent by 2026-27, based on prudent policies and structural reforms underlying economic diversification. These include increased social and development spending (health care, education, infrastructure) and reforms in governance, the financial sector, and the business environment. Oil production growth is expected to average 1.5 percent, with production peaking in 2024. Non-oil export growth is likely to be gradual. Strong import growth associated with oil (up to 2024) and non- oil investment will shift the current account into a 2 percent of GDP deficit by 2027. Net external inflows will improve relatively quickly during 2023-25 as external debt service (public and private) declines and development partners’ project support and FDI improves. Current inflationary pressures are expected to subside to 3 percent (consistent with CEMAC inflation targets) over the medium term, including owing to expanded weather-resilient domestic food production. Pressures from increased consumption and investment will be offset by broad supply-side expansion of the non-oil economy.

9. Risks are tilted to the downside (Annex II).

  • Spillovers from an intensification of global geopolitical tensions and deglobalization could be manifold—a proliferation of conflicts across the globe, volatile commodity prices, increased transport and import costs, and global food shortages—affecting investment, exports, imports, remittances, and inflation.

  • Oil revenues could suffer from a decline in oil prices as well as production risks (partly dependent on the government’s success in phasing out historical tax concessions to oil producers).

  • Slow vaccine rollout and outbreaks of highly contagious variants could require strict lockdowns and increased health and social assistance spending (largely offset by reduced capital and non-essential goods and services spending).

  • Non-oil growth and the authorities’ ability to implement fiscal policies will depend on successful reform implementation, domestic arrears payments, oil sector developments, quelling of the pandemic, and continued socio-political stability.

  • Adverse weather conditions could weigh on agricultural production raising food insecurity and inflationary pressures.

  • On the upside, accelerated reform implementation—supported by development partners— could boost private investment, higher metals and phosphate prices could increase mining investments, and there may be new low-cost oil and gas field discoveries. Oil prices could rise even further, benefiting exports and oil field investment.

Program Performance

10. All end-February 2022 performance criteria (PCs) were met (Text Table 1, Table 12). All indicative targets (ITs) were also met except that on social spending due to delayed project implementation associated with the start of the budget cycle, which is not expected to impact the end-2022 target.

11. Program-supported reforms are advancing. The end-March 2022 structural benchmark (SB) on preparing a new public financial management (PFM) strategy and associated action plan was met. The other end-March 2022 SB was not met, although its most significant element in advancing governance reforms has been implemented. Namely, the new anti-corruption law was approved by Parliament in February and ratified in March—the law incorporates all key IMF recommendations. However, due to larger than expected capacity devoted to supporting approval of the law, publication of the accompanying decree on conflicts of interest was delayed and is proposed as a new end-July 2022 SB. IMF TA will be supporting its development.

Text Table 1.

Republic of Congo: Summary of Program Performance

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11. Program-supported reforms are advancing. The end-March 2022 structural benchmark (SB) on preparing a new public financial management (PFM) strategy and associated action plan was met. The other end-March 2022 SB was not met, although its most significant element in advancing governance reforms has been implemented. Namely, the new anti-corruption law was approved by Parliament in February and ratified in March—the law incorporates all key IMF recommendations. However, due to larger than expected capacity devoted to supporting approval of the law, publication of the accompanying decree on conflicts of interest was delayed and is proposed as a new end-July 2022 SB. IMF TA will be supporting its development.

Policy Discussions

Policies continue to be anchored in maintaining macroeconomic stability, reducing fragilities, and placing Congo onto a path of higher, more resilient, and inclusive growth—centered around economic diversification and resilience to climate change. Discussions focused on managing oil windfalls and the large uncertainties surrounding future oil prices and windfall projections.1 Part of the projected oil windfalls in 2022, which have only just started to materialize, will finance social assistance and tax deferrals to help households and businesses cope with rising inflation. During 2023-27, the scope will be expanded with part of the windfall financing broader social spending and domestic arrears payments. Remaining windfalls across all years will be saved to build buffers. With a view to maintaining debt sustainability, the non-oil fiscal balance will continue to be consolidated—with an emphasis on mobilizing non-oil revenues and reducing transfers to state-owned enterprises—and timely payment of external debt and domestic arrears will be critical. Strengthened management of debt, public investment, and public finances as well as stepped up reforms in the energy sector, governance, and supply-side structural reforms will be key to promoting medium-term non-oil growth. In all of these areas, strong development partners support will be important. The arrangement continues to (i) be supported by regional CEMAC efforts to maintain an appropriate monetary policy stance and promote financial sector stability; and (ii) contribute to the CEMAC’s regional stability efforts by accumulating a material portion of the region’s projected NFA during 2022–24.

A. Fiscal Policy

12. Implementation of the 2022 budget prioritizes social and development spending while pursuing fiscal consolidation, facilitated by revenue mobilization and rationalization of non- priority spending (MEFP ¶10-12, 25). The 2022 non-oil primary deficit is projected at 15.3 percent of non-oil GDP (2 percent of non-oil GDP narrower than in 2021). Key fiscal measures in 2022 include:

  • Improved non-oil revenues, supported by recovering non-oil economic activity, revenue- enhancing measures adopted over the past three years (e.g., electronic payments and broadening of the tax base), increased collection of tax arrears, expansion of the land tax base (e.g., land deeds are being reinforced and cadasters updated), reduced customs exemptions, and prohibiting tax incentives in forestry. Revenue gains from these measures will more than compensate revenue losses from retaining the 2021 reduction in the turnover tax (from 7 to 5 percent for small businesses with turnover under CFAF 100 million) and corporate tax rate (from 30 to 28 percent). Additional revenue gains (not incorporated in the projections) are expected from concluding negotiations with oil producers in 2022H2 on tax concessions.

  • Oil windfalls will be saved as deposits at BEAC, except for financing the following measures to mitigate adverse effects of the Ukraine war (Box 1): (i) expanded reach of the targeted cash transfer program to help households cope with rising inflation (0.5 percent of non-oil GDP); and (ii) continuation of deferrals on certain tax and duty payments deferrals initiated during the pandemic to support businesses facing eroding profit margins (0.1 percent of non-oil GDP). In addition, previous years’ low import taxes and customs duties on food will be maintained. Increased transfers to energy SOEs (the electricity company and oil refinery) due to higher fuel import bills will be offset by dividend advances from the SOE managing oil sector development, which is benefitting from higher export revenues. Consequently, net oil- related transfers will decline in line with savings from multi-year energy SOE reforms initiated in 2019.

  • Social and development spending has been stepped up in line with the National Development Plan (NDP) 2022-26. Key areas include health care and sanitation, education, agriculture, and social assistance—all with a focus on improving quality and better targeting those most in need. Much of this spending is being supported by development partners, the ECF arrangement, and the 2021 SDR allocation. Already, about half of the 2021 SDR allocation was spent in 2022H1, spread across social and development projects and repayment of domestic social arrears (Text Table 2). More broadly, 75 percent of the budgeted 2022 domestic arrears payments will be allocated to paying pension funds (Table 7); and the remaining 25 percent will be applied to commercial arrears.

Text Table 2.

Republic of Congo: Application of 2021 SDR Allocation,

(Percent of CFAF 56 billion spent during January–May 2022)1

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The total 2021 SDR allocation is CFAF 120 billion.

  • Pandemic-related goods and services spending has been reduced (relative to 2021) given low new case numbers (Box 2); and the wage bill contained. Spending overruns or revenue shortfalls will be compensated by delaying non-priority spending.

13. Medium-term fiscal policy will aim to continue supporting spending necessary for higher, more resilient, and inclusive growth (as outlined in the NDP 2022–26) while safeguarding debt sustainability. The non-oil primary deficit will be reduced from 17 to 13 percent of non-oil GDP during 2021–27, largely based on a continuation of the strategy applied in 2022 (MEFP ¶12–13, 25–26):

  • Increase collection of tax arrears by taking their inventory and assessing their probability of recovery (end-2022 SB). A newly established committee is preparing to initiate the collection process in mid-2022. On-going digitalization and automation of revenue administration will be instrumental in implementing effective procedures to monitor and systematically collect tax arrears.

  • Broaden the tax base by applying the business census and customs reforms (supported by the World Bank), removing significant VAT exemptions, and streamlining other tax exemptions—based on a medium-term strategy and action plan, targeted for end- September 2022 that covers the analysis, publication, and budgetary implications of all tax exemptions. An analysis of corporate tax exemptions under current investment conventions will also be undertaken by end-2022, with a view to gradually phasing them out from 2023.

  • Raise excise duties in line with CEMAC guidelines and gradually phase out pandemic-related deferrals of tax and customs duties.

  • Accounting for capacity constraints, medium-term oil windfalls will finance 2.3 percent of non-oil GDP per year in social spending and domestic arrears payments; and the rest of the windfalls will be saved as deposits at BEAC. More broadly, a new domestic arrears repayment scheme is being formulated and will be implemented from 2023 with the aim of clearing all of these arrears by 2031 (and not accumulating any new arrears in the interim).

  • Continued implementation of energy SOE reforms will further reduce transfers to these SOEs and improve transparency. Additionally, analysis of the financial status of all public enterprises is being undertaken to better understand fiscal risks and vulnerabilities.

14. Debt is assessed as “sustainable” though it is classified as “in distress” pending clearance of external commercial arrears (¶27 and DSA) owing to medium-term fiscal consolidation, steady debt and arrears payments, and recently concluded debt restructuring.

  • This restructuring (spanning external commercial and official creditors) began in 2019 and ended with agreement with the remaining large external commercial creditor being finalized at end-January 2022.

  • Overall, public debt is projected to decline from 104 to 67 percent of GDP between 2021 and 2027. In efforts to repay current arrears and avoid new arrears, the authorities have reached out to creditors to reconcile what is owed. In March 2022, as a result of this process, 2021 external debt (and overall public debt) was revised upward by 9 percent of GDP (DSA)— including official debt to Belgium, Brazil, China, and Saudi Arabia, and commercial debt to Chinese companies, a supplier, and as part of the January 2022 debt restructuring agreement (mentioned above).2

  • Risks from negative oil price shocks are largely mitigated by repayments to the largest external commercial creditors being tied to oil prices and the availability of financing from Congolese financial markets.

  • Any refinancing of the principal of outstanding external public debt prior to maturity dates must result in an improvement of the paths of debt and debt service indicators applied in the DSA in order to be consistent with the ECF arrangement (TMU ¶10). For example, refinancing that results in the present value of debt-to-GDP consistently exceeding the relevant DSA threshold over the next 5-7 years would likely raise questions about the assessment of Congo’s debt being sustainable and would not be consistent with the ECF arrangement.

B. Public Investment and Debt Management

15. Improved public investment management will be critical to implementing the NDP 2022–26 and advancing governance and debt management (MEFP ¶14–17). Accommodating large infrastructure needs requires better planning and spending efficiency. To this end, the authorities will develop (i) a medium-term public investment plan prioritizing projects based on cost-benefit analysis, the NDP, and international commitments (e.g., SDGs, CEMAC’s regional economic program)—supported by IMF TA and training; and (ii) an action plan based on an on- going World Bank survey of efficiency in public investment. In parallel, a procurement template is being developed that will map to future budgets (end-June and end-December 2022 SBs). This will be critical to ending procurement outside the budget, fundamental to avoiding new arrears’ accumulation and improving governance.

16. Efforts are underway to address systemic debt management challenges (MEFP ¶18–23). A comprehensive debt management strategy is being developed (end-July 2022 SB), supported by IMF TA. To ensure successful implementation of the new strategy (i) capacity and information sharing and coordination across relevant agencies must be enhanced; (ii) the organizational structure of the Caisse Congolaise d’Amortissement (CCA) reviewed; (iii) the single debt database must extend to all public debt; and (iv) a published borrowing plan should accompany every budget. To improve transparency, an annual debt report (including coverage of the 10 largest SOEs) will be published, beginning with the 2021 report (proposed end-March 2023 SB). All new external financing will be concessional (on a contracted basis) and debt will not be guaranteed with future natural resource deliveries. Staff urged the authorities not to draw on four non-concessional loans, totaling about $280 million, contracted prior to the initiation of the ECF arrangement. However, as the authorities indicated that they may draw on these loans, any drawings that take place should be consistent with program parameters.

17. Stepping up energy sector reforms will create fiscal space and reduce contingent liabilities (MEFP ¶24–27). An international audit firm is preparing a report reconciling realized government oil revenues during 2021 against provisions under production-sharing agreements— which will be published along with a table of mining, forestry, and oil concession holders (end-June 2022 SB). Oil revenues will be enhanced with a comprehensive review of the oil sector fiscal regime and action plan targeting implementation from 2023—supported by IMF TA. Measures will span the elimination of implicit oil sector VAT subsidies, improved VAT implementation, broadening of the VAT base, and full remittance of all VAT to the budget. Full payment of dividends by the SOE managing oil sector development will also be enforced. Over the medium term, oil-related budget transfers will be reduced, primarily by ensuring energy production costs (fuel, electricity) are reflected in their prices while protecting the most vulnerable with increased social assistance. Audits of all oil-related SOEs will continue to be regularly published.

C. Governance, Transparency, and Broader Structural Reforms

18. Public financial management (PFM) reforms are progressing (MEFP ¶28–29). A new medium-term PFM strategy is in place (¶11); budget execution is improving with the new committee monitoring and coordinating the cash flow plan against the commitment and treasury plan; and two modules of the new financial management information system (SIGFIP) are operational, with the remaining modules targeted for end-2022 (SB) to ensure adequate infrastructure, training, and linking of IT systems. The new organization of the Ministry of Finance will become fully functional in July 2022. The independence and capacity of the Court of Accounts and Budgetary Discipline will be strengthened with a new law expected in September 2022. Reforms to the Treasury Single Account (TSA) architecture are also advancing, with automatic transfer of natural resource sales revenue from public entities to the TSA expected by end-2022 and continued closure of central government and public entity accounts in commercial banks. A legal and regulatory framework for public private partnerships (PPPs) consistent with international best practice will be developed in 2023.

19. Maintaining momentum in other governance and transparency reforms will be critical to cementing recent gains (MEFP ¶30–35), including from the new anti-corruption law (¶11). An audit of pandemic-related procurement and expenditure during 2020–21 is underway (end-June 2022 SB); and the government is committed to publishing pandemic-related procurement contracts (with names and nationalities of beneficial owners of awarded legal persons) and ex-post reports on the delivery of pandemic-related procurement. The Commissions on Transparency and Anti- Corruption are operational but require more financing (from the budget and development partners) to carry out their mandates—including publication on the government website of all reports and statistics under their purview. The asset disclosure law will be enhanced, in consultation with the IMF, to further align with international best practices. A public register or cadaster system in the mining and forestry sectors (proposed end-March 2023 SB) will be established to improve natural resource management and support investigation of environmental crimes and associated money laundering. The AML/CFT regime will be strengthened, including by addressing recommendations from the Mutual Action Report adopted at the Spring 2022 GABAC (Groupe d’Action contre le blanchiment d’Argent en Afrique Centrale) Plenary. To inform future reform efforts, with support from IMF TA, the authorities will assess progress in implementation of the recommendations from the 2018 governance diagnostic report on governance and corruption.

20. Financial sector resilience and access to finance are gradually being strengthened (MEFP ¶37). Domestic arrears’ clearance is contributing to NPL reductions and supporting financial stability. A recently adopted law regulating factoring and leasing is anticipated to help raise access to finance and a road map to raise financial inclusion (developed in collaboration with BEAC and COBAC) is expected to be finalized in June. Complementing these reforms, the legal and judicial systems’ ability to address financial litigation needs to be further strengthened.

Program Modalities and Other Issues

21. Program financing. The program is fully financed for the next 12 months and good financing prospects for the duration of the program are in place, given substantial net financing needs through 2024 (Text Table 3)—including budget support from the World Bank, the AfDB, and France.

Text Table 3.

Republic of Congo: Financing Needs and Sources, 2022–27

(Millions of U.S. dollars unless otherwise indicated)

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Sources: BEAC; and IMF staff estimates and projections.

Excludes project loans; and presents a minimum commitment.

This financing gap matches that in Tables 2a and 4.

22. Modifications to the program and monitoring. Modification of the end-June 2022 QPCs on the government’s non-oil primary balance and net domestic financing are proposed, reflecting, respectively, (i) part of the oil windfall will finance new measures mitigating adverse effects of the Ukraine war; and (ii) the rest of the oil windfall will be deposited at BEAC (¶12). Program performance will continue to be monitored through semi-annual program reviews based on periodic and continuous quantitative performance criteria (Table 12) and structural benchmarks (Table 13). Congo’s large debt vulnerabilities continue to be addressed through setting conditionality on debt— including contracting of concessional and non-concessional debt, external debt, and accumulation of new external arrears. This conditionality is on a nominal basis owing to lack of capacity to record, monitor and report debt related statistics and complement fiscal conditionality, which, also due to data constraints, is limited to the central government.

23. Congo’s capacity to repay the Fund is assessed to be adequate but subject to significant risks (Figure 2, Table 10). Under the baseline, total Fund credit outstanding (based on existing and prospective drawings) peaks at 220 percent of quota (SDR 356.4 million) and 3.1 percent of GDP in 2024. Debt service to the Fund peaks at 0.4 percent of GDP and 1.7 percent of revenues (excluding grants) in 2029 and 22.2 percent of total external debt service in 2030. The IMF’s share of total external debt remains below 10 percent (Text Table 4). The most significant downside risk, among key risks in ¶9, is a substantial decline in oil prices that could trigger debt sustainability challenges. The most serious implementation risk is faltering commitment to governance reforms. Risks are mitigated by the authorities’ strong track record of repaying the Fund, past implementation of nine Fund-supported programs, and policy measures envisaged in the program (including proposed SBs on debt management). The authorities’ implementation capacity is good as demonstrated by recent fiscal discipline (including during the pandemic) and implementation of structural reforms even when the previous ECF arrangement went off-track. The post-Presidential election reform mandate will support continued progress in implementation capacity.

24. Statistical issues and capacity development (CD). Data provision is broadly adequate for program monitoring. CD is aligned with program objectives, prioritizing tax policy and administration, PFM reforms, and debt management; statistics—where further progress is needed in national accounts, monetary, fiscal, external sector, debt and high-frequency statistics; and the anti- corruption framework and its operationalization. Congo is a medium-intensity user of Fund TA with a mixed implementation record.

25. An update safeguards assessment of BEAC was completed in 2022. Findings indicate that the BEAC has maintained strong governance arrangements following legal reforms in 2017. BEAC also completed its multi-year initiative in 2019 to transition to International Financial Reporting Standards, strengthening its financial reporting practices. The external audit arrangements continue to be robust. Nonetheless, the internal audit mechanism faces capacity constraints and is not yet fully aligned to international practices. BEAC also needs to strengthen its risk management, and develop a business continuity plan and cyber resilience.

Text Table 4.

Republic of Congo: External Debt, 2022–32

(Millions of U.S. dollars unless otherwise indicated)

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Sources: Congolese authorities; and IMF staff estimates.

26. Regional assurances. BEAC has provided updated policy assurances in support of CEMAC countries’ Fund-supported programs. While the end-December 2021 regional policy assurance on NFA was not implemented, the deviation was temporary and the relevant target was reached in early January 2022. In its follow-up letter of policy support of June 2022, BEAC reiterated its commitment to maintaining an appropriate monetary policy stance, together with member states implementing fiscal adjustment agreed in the context of IMF-supported programs, to support external reserves build-up. As part of measures to support the reserve position, it has (i) raised the policy rate (TIAO) and marginal lending facility by 50 basis points in March 2022 to help contain higher inflationary pressures; (ii) increased the interest rate on the liquidity absorption window by 25 basis points in February 2022 to reduce the excess liquidity, stimulate the interbank market, and improve monetary policy transmission; and (iii) reduced weekly liquidity injections to 180 billion in March 2022. BEAC will also continue to work towards effective application of the foreign exchange regulation, including by implementing the recently agreed adaptations for the extractive sector from 2022. The regional assurances on regional NFA are critical for the success of Congo’s Fund-supported program and will help bolster the region’s external sustainability.

27. External arrears.

  • Agreements have been concluded on arrears payments to Abu Dhabi, Belgium (not covered under the DSSI), Libya, and Switzerland. Agreements in principle have been reached on arrears payments (not covered by the DSSI) to Brazil3 and Russia. The authorities are resolving arrears owed to India’s Exim Bank ($31 million, not covered by the DSSI).

  • The authorities are engaged in the resolution of external commercial arrears owed to Chinese companies ($107 million) and across 10 suppliers ($19 million); and have requested HIPC treatment for a separate set of pre-HIPC arrears ($96 million).

  • A financing assurances review has been undertaken and will continue to be conducted at each review of the ECF-supported program until external commercial arrears are cleared.

  • The authorities contest $275 million of arrears owed to a supplier as part of a broader litigation case.4

Staff Appraisal

28. The outlook is positive but remains fragile amid the on-going pandemic, the Ukraine war’s ripple effects, and substantial risks of oil price declines. High oil prices and production are supporting this year’s economic rebound. However, high inflation brought on by the Ukraine war is weighing on households and businesses, who are still struggling with the pandemic’s human and economic toll over the past two years. Consequently, food insecurity and poverty are rising, against a backdrop of climate change challenges and prospects of shrinking global oil demand following the expected global transition to low-carbon economies. Under these conditions, ensuring strong medium-term growth and exiting fragility will require accelerated economic diversification targeting job-creation, inclusiveness, and resilience.

29. Revenue mobilization and rationalization of non-priority spending will allow for substantial increases in social and development spending, including related infrastructure, while preserving debt sustainability. Continued reforms resulting in reduced transfers to energy SOEs and revenue mobilization will be fundamental to the success of this strategy. Key revenue measures span both the non-oil and oil sectors, including streamlining tax exemptions, broadening the tax base, and increasing tax arrears collection. The strategy is also benefitting from oil windfalls, part of which will finance (i) targeted cash transfers and tax deferrals to help households and businesses cope with rising inflation in 2022 (ii) broader social spending and domestic arrears payments in 2023-27; and (iii) increased debt service to the two largest external commercial creditors as it is tied to oil prices. Saving remaining windfalls will build buffers against future shocks in a highly uncertain global environment. Progress in PFM reforms, including cash management and TSA reforms, will be critical to effective and transparent budget execution.

30. Strengthened public investment and debt management will enhance governance and implementation of social and development spending. Improved planning and spending efficiency can raise implementation quality and capacity, beginning with a medium-term public investment plan that systematically prioritizes projects based on cost-benefit analysis and development objectives. Complementing these reforms, procurement outside the budget must be stopped. This, along with a comprehensive debt management strategy and accompanying capacity and data reforms, are needed to ensure effective recording of debt, reduce debt costs, ensure timely debt service, and control arrears accumulation. Elimination of domestic arrears will also benefit financial sector stability, through reduced NPLs—the freed liquidity coupled with financial inclusion reforms will raise access to finance. Publication of the annual debt report (including SOE coverage) and continued energy sector reforms would advance management of fiscal risks, governance, and transparency. Staff strongly cautions against undertaking any debt refinancing that could jeopardize the assessment of Congo’s debt as being sustainable and that would not be in line with the goals and parameters of the ECF-supported program.

31. Cementing gains from recent anti-corruption and transparency reforms will be fundamental to improving the business environment. The new anti-corruption law is a significant milestone. Critical next steps will be ensuring sufficient financing for the Commissions on Anti- Corruption and Transparency, enhancing conflict of interest regulations, and the asset disclosure law, establishing a public register in mining and forestry to help address environmental crimes and associated money laundering, and assess progress against the 2018 governance diagnostic report in order to inform the way forward.

32. Based on the strength of the authorities’ program, the implementation, albeit with delay, of the end-December 2021 regional policy assurance and regional policy assurances established in the June 2022 union-wide paper, staff supports the completion of the first review under the ECF arrangement and the request for modification of end-June 2022 performance criteria for the government’s non-oil primary balance and net domestic financing. Staff proposes completion of the financing assurances review. Staff proposes that completion of the second review under the ECF arrangement be conditional on the implementation of critical policy assurances at the union level established in the June 2022 union-wide background paper.

Figure 1.
Figure 1.

Republic of Congo: Recent Economic Developments, 2012–22

Citation: IMF Staff Country Reports 2022, 226; 10.5089/9798400213922.002.A001

Sources: Congolese Authorities and IMF Staff Estimates and Projections

Figure 2.
Figure 2.

Republic of Congo: Fund Credit Outstanding and External Debt Service Compared to PRGT UCT-Quality Arrangements 1,2,3,4,5

Citation: IMF Staff Country Reports 2022, 226; 10.5089/9798400213922.002.A001

Sources: Staff reports, IMF Financial Data Query Tool; and FIN staff calculations.1 The interquartile ranges and median are based on all PRGT arrangements (including blends) for the control group between 2010 and 2020.2 Countries with multiple arrangements are entered as separate events in the database.3 Period T refers to the year in which the arrangement was approved (control group) or the year in which the arrangement was requested (country of interest).4 PPG refers to public and publicly guaranteed.5 For Congo Republic, gross international reserves are imputed official reserves.

Table 1.

Republic of Congo: Selected Economic and Financial Indicator, 2020–27

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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).

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

The 2020-21 stock of debt has been revised upward relative to IMF Country Report No. 22/49 to reflect debt reconciliation exercises with bilateral official and private external creditors.

Table 2a.

Republic of Congo: Central Government Operations, 2020–27

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

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.

Include resident and non-resident creditors from the CEMAC region.

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

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.

Table 2b.

Republic of Congo: Central Government Operations, 2020–27

(Percent of non-oil GDP)

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

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.

Include resident and non-resident creditors from the CEMAC region.

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

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.

Table 2c.

Republic of Congo: Central Government Operations, 2020–27

(Percent of GDP)

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

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.

Include resident and non-resident creditors from the CEMAC region.

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

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.

Table 3a.

Republic of Congo: Quarterly Central Government Operations, Flows, 2022–23

(Billions of CFA francs)

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

Includes net spending (i.e. spending minus revenues) associated with decentralized government entities and net of social security contributions.

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-related transfers.

Table 3b.

Republic of Congo: Quarterly Central Government Operations, Flows, 2022–23

(Billions of CFA francs; cumulative from the beginning of the fiscal year)

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

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-related transfers.

Table 4.

Republic of Congo: Medium-Term Balance of Payments, 2020–27

(Billions of CFA francs)

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Sources: Bank of Central African States (BEAC) and IMF staff estimates and projections.

Includes stock debt relief of the HIPC completion point and the repayment of the G20 loan moratorium.

Includes flow debt relief from Paris Club and London Club, G20 loan moratorium, and payments to litigating creditors.

Table 5.

Republic of Congo: Monetary Survey, 2020–27

(Billions of CFA francs, unless otherwise specified)

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Sources: BEAC; and IMF staff estimates and projections.

Private sector and public enterprises.

Table 6.

Republic of Congo: Financial Soundness Indicators for the Banking Sector, 2015–21

(Percent, unless otherwise indicated)

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Sources: IMF Financial Soundness Indicators.

Current year profits are excluded from the definition of regulatory capital, following the Basel I capital accord guidelines. General provisions are included in Tier 2 capital up to an amount equal to 1.25% of risk-weighted assets. Regulatory capital is the sum of Tier 1 capital, and the minimum of Tier 1 and Tier 2 capital.

The risk-weighted assets are estimated using the following risk weights: 0% - cash reserves in domestic and foreign currency and claims on the central bank; 100% - all other assets.

Table 7.

Republic of Congo: Gross Fiscal Financing Needs, 2022–27

(Billions of CFA francs)

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

Table 8.

Republic of Congo: Public Debt by Creditor, 2021–23 1

(Year-end; billions of CFAF, unless otherwise indicated)

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Sources: Congolese authorities and IMF staff estimates.

As reported by Country authorities according to their classification of creditors, including by official and commercial. Debt coverage is the same as the DSA.

A breakdown of commercial creditors, including debt owed to oil traders, is not shown in the table due to capacity constraints/confidentiality clauses.

Multilateral creditors” are simply institutions with more than one official shareholder and may not necessarily align with creditor classification under other IMF policies (e.g. Lending Into Arrears).

Debt is collateralized when the creditor has rights over an asset or revenue stream that would allow it, if the borrower defaults on its payment obligations, to rely on the asset or revenue stream to secure repayment of the debt. Collateralization entails a borrower granting liens over specific existing assets or future receivables to a lender as security against repayment of the loan. Collateral is “unrelated” when it has no relationship to a project financed by the loan. An example would be borrowing to finance the budget deficit, collateralized by oil revenue receipts. See the joint IMF-World Bank note for the G20 “Collateralized Transactions: Key Considerations for Public Lenders and Borrowers” for a discussion of issues raised by collateral.

Includes other-one off guarantees not included in publicly guaranteed debt (e.g. credit lines) and other explicit contingent liabilities not elsewhere classified (e.g. potential legal claims, payments resulting from PPP arrangements).

Data on T-Bills and bonds are collected together.

Calculated with debt stock and GDP in local currency units.

T-Bills and T-Bonds are grouped together.

Table 9.

Republic of Congo: External Arrears, 2021–22

(Year-end; billions of CFAF, unless otherwise indicated)

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Sources: Congolese authorities and IMF staff estimates.

This set of columns excludes pre-HIPC debts that are under dispute (as they are considered a subset of unrestructured pre-HIPC arrears).

An agreement in principle has been reached for resolution of these arrears and the corresponding debt service is included in the DSA.

China Machinery Engineering Corporation, previously classified as official bilateral debt.

Includes disputed debts and pre-HIPC claims.

Table 10.

Republic of Congo: Indicators of Capacity to Repay the IMF

(Millions of SDRs, unless otherwise stated)

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Sources: IMF staff estimates and projections.

Total external debt service includes IMF repurchases and repayments.

Table 11.

Republic of Congo: Schedule of Disbursements and Timing of Reviews Under ECF Arrangement, 2022–24

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Source: IMF Staff estimates.

Table 12.

Republic of Congo: Proposed Quantitative Performance Criteria and Indicative Targets (IT), 2022–23

(Billions of CFA francs; cumulative from the beginning of the year, except where otherwise indicated)1

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Quantitative Performance Criteria and Indicative Targets are defined in the TMU. During the first review of the ECF arrangement, Quantitative Performance Criteria are being set for end-February 2022 and end-June 2022; end-March 2022 and end-September 2022 figures are Indicative Targets. Date specific performance criteria are still considered continuous.

Defined as non-oil domestic revenue minus total expenditures excluding interest payments, transfers paid with crude oil, and foreign-financed investment.

These ceilings are set to zero and to be respected continuously from the date of program approval.

Excluding all sources of budgetary support identified in the program.

Excluding all types of financing mentioned in paragragh 10 of the TMU.

Subject to the exception allowed in paragraph 11 of the TMU.

Cumulative from the date of program approval and is on a contractual basis in accordance with the IMF's debt limits policy: https://www.imf.org/-/media/Files/Publications/PP/2021/English/PPEA2021037.ashx.

Excluding oil barter transactions for the payment of transfers.

As defined in paragraphs 18 and 22 of the TMU.

Table 13a.

Republic of Congo: Structural Benchmarks (January—March 2022)

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Table 13b.

Republic of Congo: Proposed Structural Benchmarks, 2022–23

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Annex I. Drivers of Congo’s Fragility

A fragile state (FS) can be defined in many ways. These countries are often characterized by low levels of administrative capacity, limited provision of rule of law and basic services to the population, and high levels of social polarization. As a result, these countries are unable to effectively manage or mitigate risks such as those related to social, economic, political, governance, security, or environmental and climatic factors. Against this backdrop, the IMF has in recent years defined FS as countries having either weak institutional capacity as measured by the World Bank’s Country Policy and Institutional Assessment (CPIA) score—with an average of 3.2 or lower (out of a maximum of 6)—and/or having recently experienced conflict (signaled by presence of a United Nations (UN) peacekeeping or peacebuilding operation in the most recent three-year period.)1, 2

The Republic of Congo is considered a FS due to challenges in social inclusion and equity, economic and public sector management, and structural policies. Congo’s average CPIA score has been around 2.7 since 2017 (well-below the 3.2 threshold) as these challenges, elaborated below, have made it difficult for the country to sustain progress.

Social inclusion and equity are lacking. Access to critical services such as social assistance, banking, health care, and education is low amid high inequality. Congo’s ranks 90 out of 105 countries in the Gini Index. Poverty is pervasive, with almost 70 percent of the population living below the poverty line and half the population lacking access to electricity. Financial inclusion is well- below sub-Saharan Africa’s average. Maternal and infant mortality rates are high—5 percent of children will not reach their fifth birthday—and only 30 percent of primary school children attain minimum proficiency levels in math and 40 percent in French. More than one fifth of children are also malnourished and there were 700,000 urban food insecure people in 2021.

Heavy reliance on rain-fed agriculture and poor quality and coverage of infrastructure have raised Congo’s sensitivity to climate shocks and is raising the number of food insecure. Congo is among the world’s 20 most vulnerable countries to climate change (scoring 36 out of 100 in the Notre Dame Global Adaptation Index, 2019). Basic infrastructure to support food security and trade, especially irrigation, storage facilities, and roads are lacking. These factors also hold back broader economic development.

An oil-dependent economic structure leaves the economy vulnerable to fluctuations in both global oil prices and domestic oil production. The oil sector accounts for 80 percent of exports and almost two thirds of fiscal revenues. Over the next decade, oil production is set to decline due to maturing oil fields. Large-scale investment in new oil fields appears unlikely given expectations of reduced global oil demand following the global transition to low-carbon economies.

Institutional weaknesses have impeded more effective leveraging of oil and other resources into broader-based, higher, more resilient, and inclusive growth. Key challenges lie in the lack of transparency and accountability in the management of public revenues, expenditures, and debt. In recent years, this has resulted in high debt levels, debt service pressures (relative to revenues), and sizeable arrears. More broadly, there is a wide-spread perception of corruption across both the public and private sectors.

Political and security risks, though low, are rising. Public concerns are growing over a lack of social inclusion, rising poverty and food insecurity, poor quality public services, and weak governance. The likelihood of security risks spilling over from Congo’s neighbors (Central African Republic, Democratic Republic of Congo) are also rising. Nevertheless, Congo has been relatively conflict-free in recent years. There is currently no UN peacekeeping operation in the country. The 2017 ceasefire agreement between the government and the former civil war “Ninja” militia remains intact. The 2021 Presidential election was completed peacefully.

Annex II. Risk Assessment Matrix1

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Appendix I. Letter of Intent

June 3, 2022

Ms. Kristalina Georgieva

Managing Director

International Monetary Fund

700 19th Street, N.W.

Washington, D.C. 20431

U.S.A.

Madam Managing Director:

  • 1. To support the efforts aimed at enabling our country to meet its balance of payments needs, help rebuild the regional foreign exchange reserves, and restore the conditions for more vigorous growth, the Government of the Republic of Congo continues to implement its economic and financial program supported by a three-year arrangement under the International Monetary Fund’s Extended Credit Facility (ECF). This program is being implemented under the new National Development Plan (PND) for 2022–26, as the country continues to face serious health and economic challenges.

  • 2. Our country continues to be affected by the global Covid-19 pandemic at a time when our underlying fiscal position is weak, our debt levels are high, and food and fuel prices are rising in response to the war in Ukraine. Nevertheless, the economy is showing signs of recovery as some pandemic restrictions are lifted, the vaccine rollout continues, social assistance for the most impoverished is increasing, and domestic arrears are being repaid. This trend has been reinforced by the recent uptick in oil prices as a result of the war in Ukraine and the production increase projected for 2022. This recovery remains fragile, however, with the outlook surrounded by significant uncertainty and poverty rising as a result of the pandemic and higher prices for imports, particularly cereals and other food products.

  • 3. Our country’s macroeconomic performance under the three-year ECF arrangement has been satisfactory. We have met all the quantitative criteria for end-February 2022, and four of the five indicative targets have also been met. The indicative target on social spending was not met.

  • 4. We have also made progress with our structural reforms. The structural benchmark on the new medium-term strategy for public financial management reform was met by end-March 2022. The strategy had been finalized in December 2021 and the related three-year action plan was prepared by end-March 2022. The second structural benchmark for end-March 2022 was not met, but its most important element was implemented by the deadline. In February 2022, Parliament adopted a new anticorruption law, which was enacted in March 2022. Owing to the prolonged debate on the law, publication of the decree containing the rules and procedures regarding conflicts of interest was delayed. With the help of technical assistance from IMF staff, we will prepare and publish this decree by end- July 2022.

  • 5. The attached Memorandum of Economic and Financial Policies (MEFP), which supplements the memorandum signed on January 10, 2022, describes the recent economic and financial developments, presents the economic and financial policies that the government intends to implement during 2022–24 and defines the quantitative criteria, indicative targets and structural benchmarks through to end-March 2023. Disbursements under the arrangement will be subject to observance of the performance criteria and structural benchmarks shown in Tables 1 and 2 of the attached MEFP.

  • 6. These economic and financial policies continue to provide a robust macroeconomic framework that promotes the mobilization of financing from development partners, strengthen public institutions and good governance, combat corruption, and increase the resources allocated to protection of the most vulnerable segments of the population, including to better tackle the food and energy crisis.

  • 7. We are continuing our efforts to ensure better coordination of economic policies with the other CEMAC countries in the context of the regional reform program (PREF-CEMAC). These reforms aim to create job opportunities in the member countries and ultimately improve the standard of living of a fast-growing population through (i) deep structural reforms to radically transform and diversify the economy of the region; (ii) continued support for the regional institutions and reduced dependence of the CEMAC countries on commodities; (iii) reforms aimed at improving transparency in public finances and the oil and gas sector; (iv) policies to promote domestic revenue mobilization; (v) measures to strengthen governance; and (vi) reforms that promote development of the private sector.

  • 8. Since implementing the program supported by the ECF arrangement, we have shared documentation for monitoring purposes and the appropriate reports on COVID-19-related spending with the IMF. We also provide the IMF with data on use of the recent increase in our SDR allocation for social and priority spending (particularly in the areas of education and health) in accordance with the framework adopted at the CEMAC subregional level.

  • 9. The government continues to implement policies compatible with regional external stability, which requires the rebuilding of BEAC’s foreign exchange reserves, specifically by respecting the requirement to repatriate oil export proceeds. To this end, the government supports the efforts of BEAC and COBAC on the strict application of the new foreign exchange regulations.

  • 10. We believe that the economic and financial policies set out in the MEFP will enable us to achieve the objectives that we have set under the program. However, we stand ready to take any further measures that may prove necessary to that end. The government will consult with the IMF when adopting such measures and before revising any policies contained in the MEFP, in accordance with the policies on such consultations.

  • 11. Bearing in mind the program achievements to date and the commitments set out in the MEFP, we are requesting (i) amendment of the quantitative criteria on the basic non-oil primary fiscal balance and net domestic financing of the central government for end-June 2022; and (ii) a disbursement equivalent to SDR 64.8 million (or 40 percent of our quota). This disbursement will enable us to continue to respond to our immediate and future balance of payments needs and will support our reform program. It will also support our efforts to achieve more resilient and sustainable economic growth and sustainably reduce poverty, while strengthening governance, transparency, and anti-corruption measures.

  • 12. The government commits to providing the IMF with information on implementation of the agreed measures and execution of the program, as provided in the attached Technical Memorandum of Understanding (TMU). In addition, the government authorizes the IMF to publish this letter and its attachments, as well as the staff report and debt sustainability analysis, once the program has been approved by the IMF Executive Board.

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Attachments:

- Memorandum of Economic and Financial Policies (MEFP)

- Technical Memorandum of Understanding (TMU)

Attachment I. Memorandum of Economic and Financial Policies, 2022–24

This memorandum describes recent economic developments, the outlook for 2022 and the medium term, and program objectives and the policies and measures to achieve them.

I. Background, Recent Economic Developments, and Outlook

1. In 2021, the Congolese economy continued to feel the strong impact of the COVID-19 pandemic. Economic growth remained negative in 2021 (-0.6 percent) as insufficient investment by large oil producers during the pandemic translated into lower production. Non-oil real GDP recovered (with 3.6 percent growth), supported by agricultural and mining expansion, improved services activity, increased social spending, and domestic arrears payments (though a significant stock of arrears remains to be repaid in future years). The non-oil primary deficit increased to 17.3 percent of non-oil GDP due to an increase in pandemic-related spending and a shortfall in external financing (such as grants). External accounts showed a mixed performance as the improved current account balance was compensated by large public sector debt service to external private and official creditors, as well as public and private sector debt service to regional commercial banks. Inflation remained subdued at 2 percent although food inflation rose. Banking sector vulnerabilities continued to decline owing to the repayment of domestic arrears. Non-performing loans remained around 17 percent in 2021 after a large decline in 2020.

2. In 2022, the macroeconomic performance is expected to improve. Congo’s economy is expected to benefit from a recovery of non-oil activity and higher oil prices. Real GDP growth is projected to gain momentum (4.3 percent) as: (i) the resumption of oil-related investment leads to an increase of production, (ii) positive spillovers from high oil revenues, improved agriculture activity, on-streaming of potash and iron ore mines, and continued vaccine rollout translate into higher non- oil growth activity. Average inflation is projected to accelerate, driven by higher demand for goods and services and increased food price pressures. Both fiscal and external positions are expected to improve thanks to higher oil revenues. Greater oil revenues will help service the large amount of debt due in 2022 and, combined with financial support from the IMF and development partners will finance: (i) the rise of the food import bill, (ii) the rise of imports related to economic growth recovery, and (iii) building of buffers through an increase of FX reserves.

3. In the medium term, the implementation of structural reforms envisaged in our National Development Plan will be critical to reducing our economy’s fragility through job creation and higher incomes, especially for the poor. Real GDP growth would average 3.5 percent during 2023–27, driven by healthy expansion of the non-oil sector (reaching 5 percent by 2026–27). Economic diversification is expected to accelerate on the back of higher social spending (in healthcare and education) and reforms in governance, the financial sector, and the business environment. Oil production is projected to decrease after peaking in 2024 due to maturing of the main oil fields. The fiscal situation is anticipated to improve owing to improved domestic revenue mobilization, prudent spending, and the repayment of domestic arrears. The external sector may experience some pressures as reduced oil exports and increased imports (linked to higher non-oil growth performance) result in a current account deficit by 2027. These pressures will likely be mitigated by a gradual rise in non-oil exports and foreign direct investment as we progress in implementing our economic diversification strategy. Average medium-term inflation is expected to remain within 3 percent (consistent with CEMAC inflation targets).

4. Risks to the outlook remain elevated. Key risks could stem from: (i) the intensification of the war in Ukraine which would add to commodity price volatility, transportation and import costs, trade flows, remittances, foreign investment, and inflation; (ii) lower oil prices and disruption in oil production; (iii) renewed pandemic related risks due to slow vaccine rollout and new variants; (iv) adverse weather shocks raising food insecurity and inflationary pressures; and (v) weak implementation of reforms. On the upside, accelerated reform implementation supported by development partners and higher metal prices are expected to have a positive impact on investment and economic growth. Higher oil prices would benefit exports and could result in an increase of oil field investment.

II. Economic and Financial Program for 2022–24

5. As part of our National Development Plan, we are committed to implementing a strong and ambitious economic program that will facilitate Congo’s exit from fragility. The past seven consecutive years of recession have weighed heavily on incomes and increased poverty. We are also facing further challenges from the immediate consequences of the war in Ukraine, more frequent and intense climate change shocks, and reduced long-term global oil demand stemming from the global transition to low-carbon economies. Tackling these challenges and exiting fragility will require a structural economic transformation, centered around economic diversification and resilience to climate change. This transformation should result in more jobs and higher, more resilient, and inclusive growth.

6. To this end, Congo’s ECF-supported program continues to be built on: (i) reinforcing the economy’s resilience to adverse shocks through increased infrastructure and social spending, in line with the National Development Plan 2022–26, while undertaking fiscal consolidation through revenue mobilization and spending reprioritization; (ii) resolution of external arrears; (iii) strengthened public investment and debt management, which combined with fiscal consolidation and arrears payments, will reduce debt vulnerabilities; and (iv) effective implementation of governance, transparency, and supply-side structural reforms promoting green non-oil economic growth. The program continues to be supported by the regional monetary policy and by our technical and financial partners.

A. Fiscal Policy

7. Fiscal policy will carefully balance safeguarding debt sustainability while increasing spending that is critical to reducing poverty and boosting economic diversification, resilience, and growth.

8. The medium-term fiscal stance will be anchored on gradual consolidation of the non- oil primary balance by 4 percent of non-oil GDP (or 2 percent of GDP) between 2021 and 2027. High oil revenues are anticipated to result in positive overall primary balance surpluses that will enable repayment of both external debt and domestic arrears. Overall public debt-to-GDP is expected to gradually decline from 104 percent in 2021 to 68 percent by 2027. Risks, including from negative oil price shocks, are largely mitigated by restructured payments to the two largest external commercial creditors being tied to oil prices (supporting the robustness of debt sustainability); and the availability of financing from the Congolese financial markets.

9. Recently, we concluded several bilateral agreements on arrears payments. Agreements have been reached with Belgium (for arrears not covered under the DSSI), Libya, and Switzerland. Agreements in principle have been reached on repayments to Brazil (for arrears not covered by the DSSI) and Russia. We are engaged in discussions with China and India’s Exim Bank on resolution of arrears owed to them. The government is committed to the non-accumulation of domestic or external arrears. To this end, we will (i) set up a dedicated sub-account within the single treasury account at BEAC and discuss with development partners (AfDB, France, and World Bank) ways to ensure their disbursements are timely; and (ii) ensure that spending is undertaken in accordance with the rules governing sound public financial management, with a view to stopping the practice of procuring outside the budget (¶15). We will continue our efforts, including in court, to find solutions that put an end to disputes relating to certain external debts with the aim of eliminating all uncertainties concerning the level of our public debt.

10. Our 2022 budget envisages fiscal consolidation while increasing social and capital spending. After accounting for measures to mitigate the consequences of high inflation, the non-oil primary balance target is -15.3 percent of non-oil GDP, which translates into a primary balance target of 10.2 percent of GDP. The 2022 budget rests on the principle of mobilizing revenues and rationalizing non-priority spending by:

  • Using part of the oil revenue windfalls1 in 2022 to finance the following measures to mitigate the consequences of high inflation: (i) increase targeted social assistance under the emergency cash transfer program, where the program will be expanded to serve 300,000 beneficiaries; (ii) continue tax deferrals initiated in 2021 to mitigate the effects of the pandemic (but certain tax deferrals applied in 2021 and already ended in 2022 will not be renewed); (iii) maintain low VAT rates and customs duties on essential food imports. The rest of the oil revenue windfalls will be fully saved as government deposits at BEAC.

  • Continuing to firmly apply tax policies and revenue administration reforms adopted over the past three years. These include more efficient tax collection owing to e-tax and other customs and revenue administration measures; the implementation of a one-stop-shop for customs clearance of goods at the port of Pointe-Noire; continuing to phase out CIT exemptions for violating investment conventions; and continuing to apply the 2 percent export tax on certain non-petroleum exports (e.g., diamonds, other precious metals and logs (up to 9–10 percent)).

  • Increasing tax arrears collection to at least CFAF 5 billion in 2022. This would be implemented through a “tax amnesty” program that forgives part of a taxpayer’s existing tax arrears in exchange for payment of the rest during 2022–24.

  • Expanding the tax base for land tax through the use a more comprehensive land survey (yielding CFAF 2 billion in 2022).

  • Reducing customs exemptions rates for certain beneficiaries and eliminating exemptions for others (yielding CFAF 4 billion).

  • Continuing to actively pursue negotiations with oil producers on new conventions for tax concessions, which we aim to finalize in 2022. We are seeking to maintain import duties at 8.65 percent on certain imports associated with the petroleum sector and to introduce the single payroll tax at 2.5 percent for the petroleum sector. In addition, we will increase electronic transfer taxes and turnover taxes.

  • Improving collection of non-tax revenues by reallocating existing staff to allow for more collection agents in the Ministries (CFAF 2 billion).

  • The positive effects of the above on non-oil revenues will more than offset the likely reduction in non-oil revenues from retaining the reduction in the turnover tax (reduced in 2021 from 7 to 5 percent for turnover under CFAF 100 million) and the cut in the corporate tax rate from 30 to 28 percent in 2021.

  • Continuing to implement reforms adopted in 2019 that reduce transfers and subsidies to inefficient SOEs, especially CORAF and CEC.

  • Containing the wage bill by ceasing automatic replacement of retired staff (except those in the health, education and social affairs ministries) and controlling public sector hiring.

  • Promoting transparency in use of the 2021 SDR allocation through regular monitoring and reporting.

  • Prohibiting tax incentives in forestry.

11. Our government is committed to increasing spending on health, education, social assistance, and resilient infrastructure. Part of this critical development spending is being financed by the 2021 SDR allocation. The 2022 budget continues to emphasize improving the quality and coverage of this spending while encouraging innovation.

  • In terms of health, we are prioritizing (i) direct pandemic-related health spending, including treatment (creating new facilities and purchasing more equipment such as ventilators) and vaccination—where we plan to vaccinate 3,600,000 people during 2022 but this target may be difficult to fulfill, despite our outreach efforts, due to vaccine hesitancy especially in the context of declining numbers of new cases; (ii) completing the construction of new hospitals; (iii) acquiring drugs against AIDS; (iv) distributing treatments preventing tuberculosis and malaria; and (v) providing prenatal, maternal and childcare. Total health spending is expected at around 4 percent of non-oil GDP in 2022 (a slight improvement compared to 2021).

  • In education, we continue to focus on all levels of schooling but we are providing free school supplies, textbooks, and school meals only for primary school. We are continuing to rebuild educational facilities heavily damaged by extreme storms and floods in 2021. Education spending is expected to remain around 1 percent of non-oil GDP in 2022 (a slight improvement compared to 2021).

  • In terms of social protection, we are disbursing up to CFAF 183 billion (3.8 percent of non-oil GDP), including the emergency cash transfer program linked to the pandemic. This program will also be used to support households facing food insecurity due to rapidly rising food prices (¶10). The program’s coverage will be increased from 230,000 beneficiaries to 300,000 by the end of 2022; and we will continue to expand the Single Social Register (SSR), which has already reached 800,000 beneficiaries. The anchoring of social programs and other social assistance structures to SSR has become mandatory in order to improve targeting and the impact of these programs. The piloting of mobile payments has so far been successful, and we plan to expand the pilot. We will also prioritize early repayment of social sector arrears (in particular pensions).

  • Capital spending is expected to increase to 7.2 percent of non-oil GDP in 2022 and to 8.6 percent of non-oil GDP in 2023, partly financed by development partners. Priority development projects will be aligned with the new National Development Plan 2022–26. The sectors of agriculture (including agroforestry), roads, electricity, health care, education, and urban water, sanitation, and transport will be prioritized. In addition, efforts to build a solid foundation for the structural transformation of our economy will lead to the pursuit of programs to promote tourism, industry, the digital economy and special economic zones.

12. We will continue to steadily repay domestic arrears, aiming to complete all repayments by end-2031. Over the past decade, the government accumulated 23 percent of GDP in domestic arrears to the private sector (mainly suppliers). On-going audits (by an international firm) of the government’s domestic debt associated with Treasury obligations for 2019–20 will add to this stock. The government has published (on the government website) the audit report for 2017–18; and the audit report for 2019–20 will be published by end-2022. So far, 6 percent of GDP in past domestic arrears have been repaid through the Club de Brazzaville, where the private sector received a nominal haircut of 15–30 percent and there was no haircut on social arrears. In 2022, we are no longer using the Club de Brazzaville. The government has already settled CFAF 201 billion of social arrears (CNSS pension fund) financed by issuing government securities on the regional financial market; and the government expects to settle another CFAF 201 billion of domestic arrears during 2022, of which CFAF 100 billion will be settled with the other major pension fund (CRF), CFAF 1 billion to resolve any remaining arrears to small suppliers, and the rest to pay a part of other commercial arrears. These domestic arrears payments will depend on the availability of finances, where the bulk of these arrears are planned to be paid in 2022H2. From 2023, a new domestic arrears repayment scheme will be implemented. It is likely to involve (i) prioritizing the payment of social arrears, allocating 50 percent of domestic arrears payments each year for this; and (ii) applying the remaining 50 percent of domestic arrears payments each year towards paying commercial (non-social sector) arrears with a menu of repayment options ranging from a 50–70 percent haircut and immediate cash payment to a 25–35 percent haircut with payment in 2–4 years. Implementation of this new repayment scheme will depend on availability of financing.

13. Over the medium term, we plan to continue pursuing the fiscal strategy outlined above. Specifically, we will aim to reduce the non-oil primary fiscal deficit from 17 to 13 percent of non-oil GDP during 2021–27. In support of this objective while also increasing social and capital spending, during 2022–24, we will undertake the following measures to enhance revenues and reduce non-priority spending (in addition to continuing the measures applied in the 2022 budget):

  • Actively continue to pursue collection of tax arrears. To this end, we are committed to undertaking an inventory of all tax arrears to identify with precision the probable amounts of recovery by end-2022 (structural benchmark). As a first step, a committee has been established to undertake this task and has begun its operations, including preparing a proposal for recovery strategies and planning for initiating the collection process in mid- May 2022. For the future, we are committed to putting in place effective procedures for monitoring tax arrears and for their systematic collection. By capitalizing on the benefits of digitalization on revenue administration, we expect to reduce delays in tax payments.

  • Broaden the tax base by applying the enterprise census (expected to be concluded by end- 2022), remove VAT exemptions worth at least 1 percent of non-oil GDP, and streamline other tax exemptions worth at least 3 percent of non-oil GDP. As an initial step, we will develop a medium-term strategy and action plan that covers the analysis, publication, and budget implications of all tax exemptions (end-September 2022). We will also undertake an analysis of CIT exemptions under the investment conventions by end-December 2022, with a view to phasing them out beginning in 2023.

  • Ensure full functioning of the new department in charge of collecting service and portfolio revenue by end-June 2023, at the latest. With assistance from the World Bank, we will implement customs reform resulting in a one-stop customs window at Pointe Noire by end- June 2023.

  • In line with CEMAC guidelines, increase excise duties on tobacco (from 16.5 to 30 percent, after the recent increase from 12.5 to 16.5 percent) and alcohol (from 12.5 to 25 percent after the recent increase from 10 to 12.5 percent), vehicles (12.5 percent) and luxury items (25 percent).

  • Gradually phase out pandemic-related deferral of tax and duty payments (yielding CFAF 2 billion in 2023).

  • Transfers and subsidies to SOEs will continue to be reduced and we will continue to augment the transparency of SOE operations.

  • By end-September 2022, complete an expanded analysis of the financial status of decentralized government units and public enterprises—including all SOEs, PPPs, and public banks—to better understand medium-term fiscal risks, identify vulnerabilities, and facilitate monitoring.

  • During 2023–27, 2.3 percent of non-oil GDP per year in oil windfalls or net external assistance that exceed expectations will be applied toward social spending, domestic arrears payments, and compensating for shortfalls or delays of external financing. The remaining oil windfall or net external assistance exceeding expectations, will be used to strengthen government deposits at the BEAC—building buffers against future shocks. Should revenues (including from oil) fall short or other fiscal risks be realized, we will slow arrears repayments.

B. Public Investment and Debt Management

14. The government is committed to improving public investment management, which is fundamental to avoiding accumulation of new arrears and improving the efficiency and effectiveness of public spending.

15. We will only procure projects that are in the budget. To this end, we will develop a comprehensive template for consolidated and sectoral public procurement plans by end-June 2022 (structural benchmark)—where we are working closely with IMF and World Bank experts to ensure proper coordination across departments (including IT) in both the development and implementation of the template. The template will be rolled out to ministries and agencies in the third quarter of 2022 and the filled-in template will be mapped to the 2023 budget by end-2022 (structural benchmark). The budget law for 2023 will explicitly state that procurement cannot take place outside the template, with the exception of emergency items that are approved by the Minister of Finance before the procurement is initiated.

16. Current project planning methods will be upgraded and systematized. With the support of IMF technical assistance during 2022, we will develop a medium-term public investment plan that prioritizes projects based on considerations such as the National Development Plan 2022–26 and the need for economic diversification, international commitments—such as the SDGs, the 2023 African Union Agenda, and the CEMAC’s regional economic program—and cost-benefit analysis. Training will also be provided to our staff to develop their capacity to prepare and implement the medium- term investment plan.

17. We will improve the efficiency of public investment implementation, especially given large infrastructure spending needs. Here, among other efforts, we will review the survey on the efficiency of past investment projects (those launched since 2014), which is being supported by the World Bank. Once the survey is finalized (by end-2022), we will create an action plan to improve the effectiveness of public investment, including facilitating project implementation early in the fiscal year (e.g., opening of accounts, allocations of spending credits).

18. We will advance prudent debt management and the level of debt transparency to help enhance debt sustainability. The government will exclusively use concessional external loans for the duration of the program—except the low-interest and extended maturity loans from the World Bank (IDA) and all budget support loans identified under the program (including from the World Bank)—and the government will seek refinancing in regional and national markets for previously issued securities and to cover short-term liquidity needs. Neither the central government nor parties acting on behalf of the central government will contract any new external debt guaranteed with future natural resource deliveries—including any new oil-for-infrastructure pre-financing agreements. We also pledge to continue fiscal consolidation efforts should further debt or contingent liabilities materialize. The government has concluded and is implementing debt restructuring agreements with all the main oil traders. Repayment of arrears to oil traders, which were accumulated as part of the negotiation process, are now part of the restructured debt payments.

19. By end-July 2022, we will develop a comprehensive medium-term debt management strategy, covering 2023-25. This strategy will aim to (i) finance the needs of the State at a lower cost while maintaining debt risks at acceptable levels; and (ii) contribute to the development of the domestic and regional market for government securities (structural benchmark). A first version of this strategy, covering 2022-24, is being updated to incorporate feedback from IMF technical assistance.

20. To strengthen the credibility of the debt management strategy and improve coordination between debt managers and the budget authorities, we will begin publishing the borrowing plan for the upcoming budget year as an annex to the budget presented to Parliament (as required by regional regulations). Specifically, the borrowing plan will be an annex to the 2023 budget (by end-December 2022) and, in addition to government securities, it will provide information for each category of debt instrument (or lender for external borrowing) and the nominal borrowing amount (on cash basis) for the fiscal year 2023.

21. We are also committed to creating a comprehensive single debt database that is regularly updated and spans domestic and external debt, guaranteed and unguaranteed debt, and the debt of all public enterprises, public institutions and local governments. This database will be the responsibility of the Caisse Congolaise d’Amortissement (CCA). By end-June 2022, we intend to have the CCA cover all central government debt (domestic, external, guaranteed and unguaranteed debt), all local government and public institution debt, and the debt of the 10 largest SOEs. In support of this effort, a ministerial order was issued at end-November 2021, instructing the 10 largest SOEs to provide data on their guaranteed and non-guaranteed debt to CCA in December and June of each year. While an initial round of data was received at end-2021, we are working with the SOEs to obtain more details on the composition of their debt.

22. By end-December 2022, we will also review the organizational structure of the CCA and adopt relevant decrees to improve its effectiveness, in line with the recommendations of the June 2019 IMF technical assistance report. This will include a review of CCA’s legal framework to ensure that it is the main structure for public debt management; a review of the organizational chart of the CCA to reflect best practices in the organization of a debt management office; and strengthen the functioning of the Committee National de la Dette Public and the structure underlying coordination between the Treasury and the CCA in the context of the issuance of public securities on the CEMAC regional market.

23. We will enhance the reliability and transparency of public debt information. This will be achieved by (i) better recording of debt data; (ii) quarterly publication of data on outstanding stock and composition of public debt by creditor (central government debt, contingent liabilities) including their currency denomination, maturity, interest rate structure, and debt service projection; (iii) annual publication on the government website of an annual debt report which, among other information, elaborates on guaranteed and unguaranteed debt of the 10 largest SOEs—beginning with publication of the 2021 report by end-March 2023 (structural benchmark); (iv) annual projections of domestic and external debt trends (guaranteed and unguaranteed) of public enterprises, public institutions and local authorities; (v) and better coordination and better information sharing between the agencies concerned, as recommended by IMF technical assistance.

C. Safeguarding and Improving Use of Energy Resources

24. We plan to continue substantive energy sector reforms that are critical for improving governance, reducing contingent liabilities of energy sector SOEs, mobilizing revenues, and rationalizing spending.

25. After carrying out a feasibility study, we will take measures aimed at the application of “true” oil prices in the “fuels” sector, with a view to reducing subsidies to CORAF and CEC. We will also publish the audit reports of these two companies for year n, before the end of year n+1. Payments to the oil sector, which include CORAF and CEC, will be limited to a net of CFAF 77 billion in 2022, which is less than CFAF 91 billion in 2021. In 2022, any amount of these transfers that exceed CFAF 77 billion will be financed by advances from Société Nationale des Pétroles du Congo (SNPC) on 2021 dividends. To this end, the government has:

  • Concluded a performance contract with CORAF focused on efforts to reduce operating costs and undertake only prudent investments, payment by CORAF of the crude made available to it by the State in the Single Treasury Account (TSA), sale by CORAF of petroleum products directly to distribution companies, recovery by CORAF from distribution companies of revenues from the sale of petroleum products, and a quarterly review by the ministries in charge of finance, trade and hydrocarbons of the parameters for controlling the pricing mechanism for finished petroleum products;

  • Conditioned the payment of the subsidy to the CEC on the basis of quarterly reporting of expenditures to justify the subsidy and CEC’s turnover, including claims from the energy sector.

26. We will develop an action plan for the next phase of reforms aimed at reducing transfers and subsidies. Key elements will include: (i) a study to determine production costs; (ii) improving the electricity billing process and coverage to reflect actual electricity consumption with a view to recovering production costs; (iii) implementing the 2005 price-based regulatory framework for fuel prices and ensuring sufficient social assistance to mitigate the impact on vulnerable groups; and (iv) enforcing full payment by CORAF for the oil it purchases from the government and full payment of dividends by large SOEs such as SNPC—where CORAF already began partial payments for its oil purchases in 2021 and SNPC is expected to pay dividends for 2020 by end-June 2022.

27. To improve transparency and revenues in the oil sector:

  • We have hired an internationally renowned audit company to produce reports reconciling oil flows that should be accrued to the State. Specifically, the reconciliation is between the amount of oil that the State should receive based on production sharing agreements and the value of oil revenues actually registered to the budget. The government will continue to publish a table listing all of the holders of natural resource concessions (including mining, forestry, and oil concessions) and will also publish the oil flow reconciliation report on the government website by end-June 2022 (structural benchmark).

  • Continue to have audits (conducted by internationally renowned audit companies) of the petroleum costs declared by petroleum companies under their respective production- sharing agreements. We will also take stock of the currently VAT levied on petroleum products and ensure its full remittance to the State.

  • Conduct a comprehensive review of the oil sector fiscal regime by end-October 2022. We will agree with the IMF on terms of reference for this review, which will be supported by IMF technical assistance. On the basis of the review’s results, we will develop an action plan to raise oil-related fiscal revenues, starting from the 2023. To this end, we will incorporate specific measures in the 2023 budget. The action plan referenced above will aim to: (i) reduce the deficit in the downstream oil sub-sector, including implicit VAT subsidies incorporated in regulated fuel prices that are not fully channeled to the State; (ii) develop a pricing policy for petroleum products while protecting the most vulnerable; (iii) improve the performance of CORAF with a view to reducing public subsidies in the downstream oil sub- sector; and (iv) estimate gains arising from the elimination of preferential VAT rates on imports under agreed investment conventions, improved implementation of VAT on domestic and imported refined petroleum products (where the legislation is only partially applied) and broadening the base to which VAT on refined petroleum products is applied (i.e., expanding it beyond the services portion of the production chain).

  • If needed, we may also request Fund technical assistance on best practices in natural resource management.

D. Public Financial Management and Governance Reforms

28. We will continue to implement reforms to improve public financial management and management of fiscal risks.

  • By end-September 2022, the law on allocation, organization and functioning of the Court of Accounts and Budgetary Discipline (CABD) as well as its implementing regulations will be adopted by Parliament. As a result, the CABD’s capacity and independence will be strengthened.

  • With the help of IMF technical assistance provided in November 2021, the government has developed a new medium-term strategy for PFM reforms (building off an existing draft strategy). A comprehensive 3-year action plan has also been developed and will be updated every 18 months. This will provide a roadmap for future reforms, including a comprehensive timetable of actions and reforms.

  • By end-September 2023, we will develop and implement a legal and regulatory framework for public private partnerships (PPPs) that is consistent with international best practices.

  • To improve budget execution, in line with CEMAC regulations, we have operationalized a committee that is monitoring, updating, and coordinating the application of the cash flow plan with the consolidated commitment plan based on the budget (and, from 2023, with the comprehensive procurement plan and template). This committee includes only representatives of the Ministry of Finance; and meets on a weekly basis to update the Treasury’s cash flow plans and monthly for all other matters. We will also ensure that the commitment plan and the cash flow plan are consistent and that all ministries, under the supervision of the General Budget Directorate, provide their procurement and commitment plans, thus improving reliability of the cash flow plan.

  • We are implementing the new organizational chart of the Ministry of Finance and it will become fully functional by July 2022. The general directorates of Treasury and public accounting have been combined. The associated regulatory and legal frameworks have been updated and we have created a modernization unit.

  • We are committed to improving the architecture of the Treasury Single Account (TSA) at the central bank. To this end, (i) by end-2022, we will prepare a complete list of all public accounts (central government and public entities) remaining in commercial banks with a view to closing them after transferring the associated deposits to the BEAC; and (ii) we will ensure the automatic transfer of revenues from sales of oil exports and of resources from public entities into the TSA—which will begin after the related convention between the BEAC and the Treasury is finalized (expected by end-September 2022). These actions should lead to improved Treasury services and facilitate proper payment execution. They will also be included in the PFM reform strategy. We will also ensure that the free resources in the government’s escrow account in China are regularly repatriated into the TSA.

  • To ensure better monitoring of payments and receipts, we will ensure the interconnection of information management systems used by customs offices (ASYCUDA), tax authorities (E-TAX), and Treasury before end-June 2022.

29. The government is transitioning to an improved version of the Financial Management Information System (SIGFIP) to support more transparent application of public expenditure commitments and better control of public revenues. The budget preparation and execution modules of SIGFIP (key elements of the transition of the expenditure chain to the new system) became operational from end-2021; and the remaining modules (accounting, cash management, fiscal reporting, treasury, procurement) are targeted to become operational by end-December 2022 (structural benchmark). The operationalization of SIGFIP combined with the interconnection of other information management systems (such as the systems used by the customs and tax administrations as well as the Treasury) will enable comprehensive monitoring of public revenue collection (oil and non-oil) and the execution of public spending (the full expenditure chain). To assist with the implementation of the new system, the IMF provided technical assistance in August and November 2021, which supported development of an action plan related to SIGFIP implementation. The government is committed to implementing this SIGFIP action plan. To ensure proper implementation of SIGFIP, the government is providing adequate infrastructure (electricity, internet) and is setting up processes for regular communications across relevant departments, providing training, and performing adequate testing of the new SIGFIP.

30. To ensure full transparency of emergency spending during the pandemic, the government continues to commit to the following measures. We will (i) post on the government website the full text of all procurement contracts related to COVID-19 spending (with names and nationalities of beneficial owners of awarded legal persons) within 60 days of their award for contracts awarded after December 31, 2021; and (ii) by end-June 2022 for all contracts awarded before December 31, 2021. We will undertake and post on the government website ex-post reports on the delivery of COVID-19 related contracts, within 90 days of completion dates (where completed after December 31, 2021) and by end-June 2022 (for all spending completed during 2021). We have hired a reputable third-party internationally renowned audit company to audit all COVID-19 related purchases and expenses contracted in fiscal years 2020 and 2021. The audit results for 2020 will be posted on the government website by end-June 2022 (structural benchmark); and those for 2021 will be posted by end-December 2022. The audits will focus not only on the financial aspects of procurement, but also on compliance with applicable procurement regulations.

31. We recognize that in order to produce sustainable and inclusive growth of our economy, it is essential for us to continue to improve governance and transparency while combatting corruption. The government has already taken bold and significant steps to address significant and substantial governance weaknesses and corruption vulnerabilities. These include the conclusion, in consultation with Fund staff, and publication of a comprehensive diagnostic report on governance and corruption in 2018, the reinforcement of our anti-corruption legal architecture, and steps to improve governance in the oil sector. We have also begun to comprehensively improve transparency and our commitment to transparency will help to address corruption vulnerabilities, which constitutes a necessary precondition to improving the business climate. For example, we have published the 2018 and 2019 reports of the Extractive Industries Transparency Initiative (EITI); and we are committed to publishing the 2020 EITI report by end-2022. We will further improve our natural resource management by establishing a public register or cadaster system in the mining and forestry sectors by end-March 2023 (structural benchmark), which will support our efforts to investigate environmental crimes (poaching, illegal logging, trafficking of wildlife and wood products) and related money laundering. To further improve governance, we will by end-June 2023 conduct analysis of the implementation of measures committed to in our 2018 diagnostic report on governance and identify areas for further improvement. This effort will be supported by IMF technical assistance on areas related to AML/CFT and build upon recommendations from Congo’s Mutual Evaluation Report which will be published in the coming months.

32. We have substantially improved our anti-corruption architecture. A new anti-corruption law was passed by Parliament in February 2022 and enacted in March 2022. This new law is integral to meeting our obligations under the United Nations Convention Against Corruption (UNCAC), particularly in relation to the criminalization of corruption offences, and other international obligations undertaken by Congo. With support from IMF technical assistance, by end-July 2022, we will finalize and publish the decree dealing with the conflict-of-interest rules and procedures envisaged in the anti-corruption law, where the decree will fully comply with the requirements of the UNCAC and best international practices (structural benchmark). Our new anti-corruption commission, the High Authority for the Fight against Corruption (HALC), is now operational. We are committed to ensuring its full independence, and to making sure that it receives the necessary budgetary allocations to perform its functions. We will publish all reports of the HALC on the government website within 5 days of their provision to the government. We will also ensure that full statistics in respect of the work of the HALC are published on a quarterly basis on the government website, and the Ministry of Justice will publish, on a quarterly basis, statistics of all indictments and convictions for corruption-related offences. To develop a comprehensive jurisprudence, the full text of all judgments in corruption related cases will be published within 30 days of the judgment.

33. We have operationalized the requirement that high-level members of the government disclose their assets to the Supreme Court. We enacted a law in 2018 that gives effect to the constitutional requirement that high-level officials declare their assets. We will work with Fund staff to revise this law to align it with international good practice to ensure that our asset declaration regime can contribute to the fight against corruption. We will, in the meantime, rigorously ensure that all officials covered by the existing law fully comply with their obligations.

34. The government is making strides in advancing transparency.

  • We have enshrined in the law on transparency the creation of a committee responsible for its implementation. We will ensure that the committee, which includes civil society representatives, is equipped with the necessary resources to perform its functions. We will also ensure that all parts of our administration cooperate fully with the committee and that the transparency law is fully implemented. All information which is required to be made public under the transparency law will be published on the government website.

  • We have published on the government website: all final reports of the Inspection General of Finance (IGF) for the period 2011-2020; all final 2020 reports of the National Accounts Commission (CNC); a list of companies and public institutions that have not provided appropriate access for carrying out audits, as well as those that are slow in meeting their financial obligations to the CNC; and the list of companies and public entities that are not under the purview of the CNC.

  • All reports finalized by the Cours des Comptes will be published on the government website within 30 days of being finalized.

35. The government supports the widespread dissemination of information on court proceedings and the functioning of law enforcement institutions. To this end, we are publishing on the official website (i) for each court (magistracy), the number of sitting judges, the staff in office and the number of vacant positions, and for each service (prosecution), the number of prosecutors and staff, as well as the number of vacant posts; (ii) the number of cases relating to corruption, AML/CFT, insolvency, foreclosures and land for 2015–20; and (iii) all decisions of the Supreme Court.

E. Broader Structural Reforms

36. Improving economic diversification and adaptation to climate change will be key to achieving higher, more inclusive, job-creating, and resilient growth. To this end, the new National Development Plan 2022–26 identifies priority sectors for development—including agriculture, manufacturing, tourism, and digitalization. Our new strategy is aligned with the Sustainable Development Goals (SDGs), the objectives of the Agenda 2063 for the development of Africa, and the recommendations of the CEMAC economic and financial reform program (PREF- CEMAC) relating to the structural transformation of national economies within CEMAC. To sustain our diversification efforts, we plan to reinforce and expand basic infrastructure and improve the business environment. Key measures include:

  • Improving and expanding infrastructure for transport, irrigation, water and sanitation, and telecommunications—aiming to raise productivity and job creation in our areas of strategic advantage (agriculture, food processing, forestry, wood products, ICT) and manufacturing and services (tourism, financial services). This will also help build resilience to climate change for small businesses and farmers.

  • Raising access and affordability of energy, through the reforms in ¶24-27 and the development of new energy sources (especially for rural electrification) such as solar and wind power.

  • Improving the business environment and external competitiveness by removing trade barriers and improving contract enforcement, insolvency procedures, and investor protection. For example, by end-June 2023, we will (i) computerize and publish the company register; and (ii) publish a complete inventory of fiscal charges (and parafiscal charges) applied to businesses, formal and informal. The government (i) will create a national real estate registry; (ii) simplify procedures and reduce business creation costs; and (iii) reform administrative costs in order to facilitate cross-border trade. We are also committed to not applying import restrictions for balance of payments purposes, in line with the standard practice in all Fund arrangements.

37. We will also strengthen financial sector resilience and broaden access to finance, which will support macroeconomic stability, economic diversification, and resilience-building. By end-June 2022, the government will work with BEAC and COBAC to build a roadmap to raise financial inclusion based on the recent BEAC and COBAC initiative. To support these efforts, the government has adopted a law regulating factoring and leasing in compliance with local and regional regulations guided by BEAC and COBAC. The government will also continue to strengthen the legal and judicial systems’ ability to address financial litigation. Financial stability will benefit from the reduction in non-performing loans as domestic arrears clearance progresses (¶12). We will also continue to closely monitor the solvency and liquidity indicators of the banking system and develop restructuring plans for two fragile banks.

F. Strengthening Statistical Capacities

38. The government will prioritize improvement of public statistical databases. The Ministry of Economy and Planning is implementing a plan to improve data collection capacities and ensure the regular publication of useful and high-quality statistics for the development of public policies. Considerable improvements have been made to the quality of annual national accounts statistics with the assistance of the IMF. Recently, the consumer price index was rebased and quarterly national accounts are expected to be released and published by end-December 2022. On demographics, we have made progress on a general population and housing census, which will be completed shortly. A 1-2-3 survey on household living conditions and a demographic and health survey was launched with funding from the World Bank.

39. The government is committed to pursuing its efforts on the publication of basic economic indicators. Data on monthly inflation rates can be accessed through the ministry of finance website. Quarterly results of public finances (TOFE), debt service and outstanding debt will be published on the website of the Ministry of Finance within 90 days of the reporting date of the concerned statistics.

G. Funding of the Program

40. Our program is fully funded over the medium term. We have obtained firm financing commitments from our external partners—including firm assurances for the next 12 months and good prospects for the duration of the program—to complement the financing guaranteed by the restructuring of external debt and the financing expected from the restructuring of domestic debt. Over the medium term, we will continue to work with our partners to ensure we receive financing that will fully cover the financing gap for the remainder of the program.

H. Program Monitoring

41. The program is subject to semi-annual monitoring by the IMF’s Executive Board on the basis of quantitative criteria and indicators, structural benchmarks, and prior actions as indicated in Tables 1 and 2 attached. These criteria and indicators are described in the attached Technical Memorandum of Understanding (TMU), which sets out quantitative performance criteria and reporting requirements under the ECF arrangement. The second semi-annual review will be based on data and performance criteria at end-June 2022 and is expected to take place after October 15, 2022. The third semi-annual review will be based on data and performance criteria at end-December 2022 and is expected to take place after April 15, 2023.

42. We will strengthen internal monitoring mechanisms to ensure strong program implementation. A program monitoring committee (Program Monitoring Committee, DSP) has been established by the government and is responsible for collecting information from the entities responsible for implementing program measures and regularly evaluating their performance. We will keep civil society regularly informed of our performance during the implementation of the program. To this end, we will relaunch the publication of tables containing information on program monitoring and implementation, drawn up in consultation with the IMF staff, on government websites, in particular the Ministry of Finance website. These include quarterly budget results and forecasts, monthly inflation rates, and the quarterly public debt stock and debt service.

Table 1.

Republic of Congo: Proposed Quantitative Performance Criteria and Indicative Targets (IT), 2022–23

(Billions of CFA francs; cumulative from the beginning of the year, except where otherwise indicated)1

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Quantitative Performance Criteria and Indicative Targets are defined in the TMU. During the first review of the ECF arrangement, Quantitative Performance Criteria are being set for end-February 2022 and end-June 2022; end-March 2022 and end-September 2022 figures are Indicative Targets. Date specific performance criteria are still considered continuous.

Defined as non-oil domestic revenue minus total expenditures excluding interest payments, transfers paid with crude oil, and foreign-financed investment.

These ceilings are set to zero and to be respected continuously from the date of program approval.

Excluding all sources of budgetary support identified in the program.

Excluding all types of financing mentioned in paragragh 10 of the TMU.

Subject to the exception allowed in paragraph 11 of the TMU.

Cumulative from the date of program approval and is on a contractual basis in accordance with the IMF's debt limits policy: https://www.imf.org/-/media/Files/Publications/PP/2021/English/PPEA2021037.ashx.

Excluding oil barter transactions for the payment of transfers.

As defined in paragraphs 18 and 22 of the TMU.

Table 2.

Republic of Congo: Structural Benchmarks

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Attachment II. Technical Memorandum of Understanding

Introduction

1. This Technical Memorandum of Understanding (TMU) defines the quantitative performance criteria and indicative targets established by the Congo authorities and staff of the International Monetary Fund (IMF) for the monitoring of the program supported by the Extended Credit Facility (ECF) arrangement. It also determines the type of data and information to be provided to the IMF for program monitoring purposes, and the periodicity and deadlines for the transmission of these data.

2. The quantitative performance criteria, indicative targets, and cutoff dates are provided in Table 1 of the Memorandum on Economic and Financial Policies (MEFP).

II. KEY DEFINITIONS

3. Government. Unless otherwise indicated, the state or “government” is defined as the central government of the Republic of Congo, which includes all implementing bodies, institutions, and any units receiving special public funds, the powers of which are included in the definition of the central government under the Government Finance Statistics Manual 2001 (GFSM 2001; paragraphs 2.48–50). This definition does not include local units of government, the central bank, or any agencies or entities of the central government having autonomous legal status and whose operations are not reflected in the table of government financial operations (TOFE).

4. Unless otherwise indicated, public entities are defined in this Technical Memorandum of Understanding as companies in which the public sector owns majority stakes.

5. Performance criteria (PC) and indicative targets (IT) are established in connection with program monitoring.

A. The performance criteria (PC) include:

  • A floor on the basic non-oil primary balance;

  • A ceiling on central government net domestic financing;

  • A ceiling on accumulation of new arrears on external debt contracted or guaranteed by the central government;

  • A ceiling on the nominal value of new non-concessional external debt contracted or guaranteed by the central government;

  • A ceiling on the nominal value of new external debt contracted by or on behalf of the central government and guaranteed with future natural resource (including oil) deliveries.

B. The indicative targets (IT) include:

  • A floor on social and poverty reducing expenditure;

  • A ceiling on disbursements of external loans for investment projects.

  • A ceiling on the nominal value of new concessional external debt contracted or guaranteed by the central government.

  • A floor on non-oil revenue

  • A floor on repayment of domestic arrears accumulated by the central government.

6. Performance criteria (PC), indicative targets (IT), and adjusters are calculated as (i) during 2022, the cumulative change from January 1, 2022 for the 2022 criteria and targets except those in ¶5A(c), 5A(d), 5A(e) and ¶5B(c) which will be from approval of the ECF arrangement (Table 1 of the MEFP); and (ii) for 2023, the cumulative change from January 1, 2023.

A. Performance Criteria

7. The basic non-oil primary balance, excluding oil-related transfers, is calculated as the difference between government revenue, excluding oil revenue and grants, and total government expenditure excluding interest payments on domestic and external debt, oil-related transfers, and externally-financed capital expenditure. Government expenditure includes net loans and is defined on a payment order basis.

8. Net domestic financing to government is defined as the issue of any instruments denominated in CFA francs to domestic creditors or on the financial markets of the Economic Community of Central African States (CEMAC), borrowing from the Bank of Central African States (BEAC) (including support from the IMF and use of SDR allocations) and CEMAC member countries (except the Development Bank of the Central African States, BDEAC), debt contracted as part of clearance of arrears through the Club de Brazzaville or any other debt contracted arranged with these creditors.

Net domestic financing is broken down into net bank financing and net nonbank financing.

  • Net bank financing or domestic credit of the government with banks is defined as the change in the net government position vis-à-vis the banking system (BEAC and commercial banks) including reimbursement of the IMF. Net bank financing to government is calculated using the data provided by the BEAC. These data should be reconciled monthly between the treasury and the BEAC.

  • Net government nonbank financing includes: (i) the change in the outstanding balance of government securities (treasury bills and bonds) issued in CFA francs on the regional financial market not held by the Congo banking system; (ii) amortization of nonbank domestic public debt; and (iii) revenue from privatizations. The treasury calculates government net nonbank financing on a monthly basis.

9. The government’s external payment arrears include all external debt service obligations (principal and interest) matured and unpaid deriving from loans arranged or guaranteed by the central government, penalties, and interest charges deriving from these loans not paid at maturity. For performance criteria requirements, external debt service obligations matured and unpaid after 30 days will be considered “program” arrears. The performance criterion applies to any debt corresponding to the criteria defined in paragraphs 19-21. Arrears not considered “arrears” for performance criteria, or “non-program” arrears, include: (i) arrears accumulated on external debt service obligations for which the authorities have publicly announced that they seek a debt restructuring and for which they have approached the creditors; and/or (ii) disputed external debt service obligations.

10. For the purposes of the ceilings on the contracting or guaranteeing of new external debt (concessional and non-concessional), external debt is any debt contracted or guaranteed by the central government in foreign currency, with the following exceptions: (i) commercial debts in connection with import operations having maturities of less than one year; (ii) debt management operations (DMOs)—defined as the repayment or refinancing of the principal of outstanding external public debts prior to or at their maturity dates, where the present value savings from DMOs will be determined by a positive differential between the grant elements of the newly issued debt instrument (taking into account all costs associated with the operation) and of the debt instrument it replaces, using the IMF Concessionality Calculator (https://www.imf.org/external/np/pdr/conc/calculator/default.aspx)—that result in a reduction of the present value (present value savings) of the overall public external debt and/or an improvement of the overall public external debt service profile; and (iii) all sources of budgetary loans identified in the program. For program purposes, BDEAC loans are considered as external debt. External debt contracted or guaranteed by the government is considered to be concessional if, at the date on which it was contracted, it included a grant element of at least 35 percent, calculated as follows: the grant element of a debt is the difference between the nominal value and the present value (PV) of the debt, expressed as a percentage of the nominal value of the debt. The PV of debt at the time of its contracting is calculated by discounting the future stream of payments of debt service due on this debt.51 For debts with a grant element equal or below zero, the PV will be set equal to the nominal value of the debt. For the purposes of the program, all sources of budgetary loans contracted from the World Bank that have a grant element that is less than 35 percent will not be included in the calculations of the ceiling on contracting new non-concessional external debt. For program monitoring purposes, external debt is considered to be contracted or guaranteed when all of the conditions for it to enter into effect have been met, including approval of the arrangement by the government of the Republic of Congo (the Council of Ministers) or the legislative authorities, if required. Guaranteed debt refers to any explicit legal obligation incumbent on the government to reimburse that debt should the debtor default (whether the payments are in cash or in kind).

11. Natural resources-related external debt is external debt which is contracted by or on behalf of the government and which gives a creditor any interest in natural resources (including oil), including a collateral interest. Pre-financing is defined as natural resources-related debt which is repaid, in whole or in part, by the sale of natural resources in the future. Pre-financing does not include prepayment. A prepayment is defined as an advance payment by the purchaser in connection with a specifically-identified natural resource shipment. Prepayment operations must be repaid within six months, and in any case within the calendar year during which they were arranged. New pre-financing by or on behalf of the government is strictly prohibited under the program. The refinancing and /or deferral of the existing stock of pre-financing debt and/or due dates would not fall within the ceiling on the nominal value of new external debt contracted by or on behalf of the central government and guaranteed with future natural resource (including oil) deliveries, if: (i) the transaction is discussed in advance with IMF staff; and (ii) at a minimum, results in a reduction of the present value (present value savings) of the overall public external debt and/or an improvement of the overall public external debt service profile. The present value savings from such debt management operation will be determined by a positive differential between the grant elements of the newly issued debt instrument (taking into account all costs associated with the operation) and of the debt instrument it replaces, using the IMF Concessionality Calculator (https://www.imf.org/external/np/pdr/conc/calculator/default.aspx).

B. Indicative Targets

12. Social and poverty reduction expenditure is public expenditure in priority social sectors deemed to be conducive to poverty reduction. A detailed list of expenditure items is provided in Table 1 below. The quarterly indicative targets are provided in Table 1 of the MEFP. Should further expenditure cuts be required, priority social expenditure will be reduced proportionally less than other primary expenditure financed with domestic resources, so that its proportion of priority social expenditure in the revised budget will be greater than in the original budget.

13. Disbursements of external loans in connection with investment projects are an indicative target for the program, for which the ceilings are provided in Table 1 of the MEFP. This indicative target applies to new disbursements, including those in connection with liabilities arranged before the program approval date.

14. New concessional external debt contracted or guaranteed by the central government, for which the amounts are provided in Table 1 of the MEFP, constitute an indicative program target. This indicative target applies to new external borrowing as defined in paragraph 10.

15. Non-oil revenue includes all government’s (tax and nontax) revenue, with the exception of oil revenue as defined in paragraph 17 in the TMU. Value-added tax (VAT) is recorded net of VAT reimbursements.

16. The government’s domestic arrears payments include arrears on all domestic debt service obligations (principal and interest) matured and unpaid deriving from loans arranged or guaranteed by the central government, penalties, and interest charges deriving from these loans not paid at maturity and include arrears arising out of non-payments for goods and services procured by the government. For performance criteria requirements, payment obligations matured and unpaid after 30 days will be considered “program” arrears and excludes clearance of arrears through Club de Brazzaville.

C. Memorandum Item Indicators

17. Oil revenue is defined as the government’s net proceeds from the sale of oil, including the provision for diversified investments, royalties paid by oil companies, and the government’s share in produced crude oil. It excludes all forms of prepayment, pre-financing, and oil barter transactions under special agreements that give rights on government oil to oil companies. The oil revenue projections take account of the 45-day lag between the date of shipment and the date of receipt of the sale proceeds by the Treasury.

18. Net external assistance, as defined in paragraph 22 below, is a memorandum item indicator for the program. This budget assistance, which is also reflected in Table 1 of the MEFP, reflects the financing indications from the external partners of the Republic of Congo.

D. External Debt

19. The term “debt” corresponds to the definition in paragraph 8 (a) of the guidelines on public debt limits in programs supported by the Fund appended to Decision 15688-(14/107) of the Executive Board adopted on December 5, 2014, as well as liabilities undertaken or guaranteed for which the assets have not been received. Under these guidelines, “debt” will be understood to mean a direct, i.e., not contingent, liability created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract.

20. Debts can take a number of forms, the primary ones being as follows: (i) loans, i.e., advances of money to the obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans, and buyer’s credits) and temporary exchanges of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements); (ii) suppliers’ credits, i.e., contracts where the supplier permits the obligor to defer payments until sometime after the date on which the goods are delivered or services are provided; and (iii) lease agreements, i.e., agreements under which property is provided which the lessee has the right to use for periods of time that are usually shorter than the total expected service life of the property, while the lessor retains the title to the property. For the purposes of these guidelines, the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement, excluding those payments that cover the operation, repair, or maintenance of the property.

21. Under the definition of debt set out above, any penalties, judicially awarded damages and interest costs arising from the failure to make payment under a contractual obligation that constitutes debt shall be considered a debt. Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.

III. Adjustors

22. The quantitative objectives of the program are calculated based on the projected amounts of (1) net external assistance; (2) oil revenue; and (3) oil-related transfers. For purposes of the program, net external assistance is defined as the difference between (a) cumulative budget support (grants and loans), the impact of debt relief granted by external creditors, and the net change in “non-program” arrears; and (b) cumulative payments for current external debt service due after debt relief, in connection with loans for which debt relief arrangements have been executed. The net change in “non-program” arrears is the total of “non-program arrears” in connection with current debt service maturities less the total cash payments to clear these arrears.

23. The floor for the basic non-oil primary balance excluding oil-related transfers, and the ceiling for net government domestic financing will be adjusted should net external assistance, oil revenue, and/or oil-related transfers differ from the projected amounts.

24. Adjustments in connection with net external assistance, oil revenue, and oil-related transfers:

  • When total net external assistance exceeds program projections, the floor for the basic non-oil primary fiscal balance will be adjusted downward by an amount equal to half of the surplus (so that half of the surplus can be used for additional expenditure). The ceiling for net domestic financing to the government will be adjusted downward by half of the surplus. At least half of the additional resources available for expenditure must be used in the social sectors (for current and/or capital expenditure) and the rest to repay domestic arrears. The floor on social and poverty reduction expenditure will be adjusted upward by the amount of additional expenditure in social sectors. The floor on the reimbursement of domestic arrears accumulated by the central government will be adjusted upwards by the additional resources used to pay these arrears. The additional amount for net domestic financing will be used to strengthen government deposits at the BEAC. The only exception to the application of this adjustment is when grant financing for the government’s social cash transfer program in 2022 exceeds program projections. In this case, if social cash transfer spending increases by the same amount as the grant, the floor for the basic non-oil primary fiscal balance will be remain unchanged; and otherwise, it will be adjusted upward by the full amount of the surplus with a corresponding reduction in the ceiling for net domestic financing.

  • When oil revenues exceed program projections, they must be fully saved as government deposits at the BEAC, with a corresponding reduction in the ceiling for net domestic financing.

  • When oil-related transfers exceed program projections by more than CFAF 30bn, the floor for the basic non-oil primary balance excluding oil-related transfers will be adjusted upward by any amount in excess of the programmed oil-related transfers minus CFAF 30bn. The expenditure cuts must be applied as a priority outside of the social sectors. At a minimum, the ratio of social expenditure to total expenditure should improve as a result of such expenditure cuts. The floor on social and poverty reduction expenditure will be adjusted downward by cuts in expenditure in social sectors.

  • When total net external assistance is below program projections, the floor for the basic non- oil primary fiscal balance will be adjusted upward by an amount equal to half of the shortfall (requiring a budget adjustment equivalent to half of the shortfall). The ceiling for net domestic financing to government will be adjusted upward by half of the shortfall. If there are cuts in social and poverty reduction expenditure, the corresponding floor will be adjusted downward by cuts in expenditure in social sectors. If there are cuts in domestic arrears repayments, the floor on the repayment of domestic arrears accumulated by the central government will be adjusted downward.]

  • When oil revenues are below program projections, in 2022, the floor for the basic non-oil primary fiscal balance will be adjusted upward by an amount equal to half of the shortfall (requiring a budget adjustment equivalent to half of the shortfall). The ceiling for net domestic financing to government will be adjusted upward by half of the shortfall. The expenditure cuts corresponding to half of the shortfall must be applied as a priority outside of the social sectors and cannot be applied to social cash transfers. At a minimum, the ratio of social expenditure to total expenditure should improve as a result of such expenditure cuts. The floor on social and poverty reduction expenditure will be adjusted downward by cuts in expenditure in social sectors. If there are cuts in domestic arrears repayments, the floor on the repayment of domestic arrears accumulated by the central government will be adjusted downward.

IV. Program Monitoring and Reporting Requirements

25. The monitoring of performance criteria, indicative targets, and structural benchmarks will be the focus of a quarterly assessment report to be prepared by the authorities within a maximum of 45 days after the end of each quarter. The information on implementation and/or execution of structural benchmarks under the program will be reported to IMF staff within two weeks after their programmed implementation date. The status of implementation of other structural program measures will also be reported to IMF staff within the same time frame.

26. The government will report the information specified in Table 2 below according to the reporting periods indicated. More generally speaking, the authorities will provide IMF staff with all information required for effective follow-up on economic policy implementation.

27. The authorities undertake to consult IMF staff on any new external debt proposals. They will report to IMF staff on the signing of any new external debt arrangements and the conditions pertaining to such debt.

Table 1.

Republic of Congo: Social Spending in the 2022 Budget

(Billions of CFA francs)

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Table 2.

Republic of Congo: Data to be Reported for Program Monitoring

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1

Oil windfalls are defined as oil revenues exceeding their projected amounts (in IMF Country Report 22/49) net of additional external debt payments exceeding their projected amounts (in IMF Country Report 22/49).

2

External debt for 2019 and 2020 were also revised upwards by 3 and 4 percent of GDP, respectively. As reported in IMF Country Report 22/49, domestic debt for 2020 was revised upwards by about 10 percent of GDP (relative to IMF Country Report 21/225) owing to improved capacity.

3

The Brazilian authorities have provided consent for the provision of Fund financing notwithstanding official arrears.

4

The authorities continue to dispute this external claim to a foreign construction company (Commisimpex) as part of a series of litigation cases between the two parties. Claims that are disputed do not give rise to arrears for the purposes of the application of the Fund’s arrears policies or for performance criteria covering arrears.

1

The IMF Strategy for Fragile and Conflict-Affected States, March 2022.

2

This approach is similar to that used by the World Bank, differing only in using a three-year average CPIA instead of the most recent outturn.

1

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly. The conjunctural shocks and scenario highlight risks that may materialize over a shorter horizon (between 12 to 18 months) given current baseline. Structural risks are those that are likely to remain salient over a longer horizon

1

Oil revenue windfalls are defined as oil revenues exceeding their projected amounts (in IMF Country Report 22/49) net of additional external debt payments exceeding their projected amounts (in IMF Country Report 22/49).

1

The calculation of concessionality takes into account all aspects of the debt agreement, including maturity, grace period, payment schedule, upfront commissions, and management fees. The discount rate used for this purpose is the unified discount rate of 5 percent set forth in Executive Board Decision No. 15248-(13/97).

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Cover IMF Staff Country Reports
Republic of Congo: First Review under the Three-year Extended Credit Facility Arrangement, Requests for Modification of Performance Criteria, and Financing Assurances Review-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Congo
Author:
International Monetary Fund. African Dept.
Volume/Issue:
Volume 2022: Issue 226
Publisher:
International Monetary Fund
ISBN:
9798400213922
ISSN:
1934-7685
Pages:
108
DOI:
https://doi.org/10.5089/9798400213922.002
Figure 1.

Republic of Congo: Recent Economic Developments, 2012–22
Figure 2.

Republic of Congo: Fund Credit Outstanding and External Debt Service Compared to PRGT UCT-Quality Arrangements 1,2,3,4,5