Republic of Congo: First Review Under the Three-Year Extended Credit Facility Arrangement, Requests for Modification of Performance Criteria, and Financing Assurances Review—Debt Sustainability Analysis
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International Monetary Fund. African Dept.
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Publication Date:
18 Jul 2022
eISBN:
9798400213922
ISBN:
9798400213922
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English
Keywords:
restructuring agreement; debt carrying capacity; debt vulnerability; burden indicator; dynamics equation; Arrears; Oil prices; Debt sustainability analysis; Global; debt information; service-to-revenue ratio
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REPUBLIC OF CONGO

Abstract

REPUBLIC OF CONGO

Title page

REPUBLIC OF CONGO

FIRST REVIEW UNDER THE THREE-YEAR EXTENDED CREDIT FACILITY ARRANGEMENT, REQUESTS FOR MODIFICATION OF PERFORMANCE CRITERIA, AND FINANCING ASSURANCES REVIEW—DEBT SUSTAINABILITY ANALYSIS

June 9, 2022

Republic of Congo: Joint Bank-Fund Debt Sustainability Analysis

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Approved By

Vitaly Kramarenko and Gavin Gray (IMF) and Marcello Estevão and Abebe Adugna (IDA)

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

The overall and external debt6 of the Republic of Congo are classified as “in distress", pending arrears payments to India’s Exim Bank, Chinese commercial creditors, and ten suppliers (totaling US$157 million) but debt is assessed as “sustainable". As of end- January 2022, debt restructuring discussions initiated in 2019 with the largest external commercial creditors have all been concluded. Agreements in principle have been reached on arrears to Brazil and Russia.

Restructured debt, fiscal discipline, higher oil prices, and improved debt management— including restricting new external financing to concessional terms—are projected to help all external liquidity and solvency indicators fall below their thresholds by 2026 under the baseline scenario.7 Oil price assumptions (based on the April 2022 WEO assumptions) and projections of growth in the non-oil economy, coupled with increased debt amortization (tied to high oil prices), are expected to reduce the public debt-to-GDP ratio and support no new accumulation of domestic arrears. Nevertheless, there are major external and overall debt-related risks, as signaled by the PV of public debt to GDP indicator exceeding its benchmark until 2030 and the external debt-service-to-revenue ratio breaching its threshold until 2025 under the baseline scenario. Even though the PV of overall public debt to GDP ratio breaches its benchmark extensively, it is assessed as sustainable given that the liquidity risks are mitigated by i) the steady and significant declines in the relevant ratios going forward, and ii) availability of financing from Congolese financial markets.

There are several risks to debt sustainability. The debt sustainability assessment is highly vulnerable to negative oil price shocks. Tighter conditions in regional markets (CEMAC banking systems) could be a downside risk if the government’s financing needs exceed the current baseline projections.

Going forward, the authorities are encouraged to continue pursuing fiscal consolidation, enact policies for diversification to reduce risks and prepare for reduced long-term oil production and demand, clear domestic arrears, and continue enhancing debt management.

Public Debt Coverage

1. The coverage of public debt in this DSA is limited to central government debt and oil- backed debt contracted by the national oil company (SNPC), the largest state-owned enterprise. State and local governments in Congo are not allowed to borrow and depend on local taxes and transfers from the central government. Debt from oil-backed pre-financing arrangements contracted with oil traders through SNPC and guaranteed by the central government is included in the analysis. The debt of other state-owned enterprises (SOEs) and non-guaranteed debt of SNPC are included as contingent liabilities.1 Efforts are underway to compile information on SOEs with a view to expanding the DSA coverage to general government debt, which would include the majority of SOEs. This will require detailed data on revenues, spending, debt, and debt service of these SOEs. Supported by the Extended Credit Facility Arrangement (ECF) arrangement and the FY 2021 performance and policy actions (PPA) under the World Bank’s Sustainable Development Finance Policy (SDFP), the authorities are making on-going efforts to address the limited coverage on SOE debt and financial performance. A ministerial order was recently issued instructing the 10 largest SOEs to regularly share with the central government data on all their debt (a first round of this unaudited information has been published). As a next step, the ECF arrangement includes a March 2023 structural benchmark where the government intends to publish a comprehensive annual debt report that will include detailed elaboration on guaranteed and unguaranteed debt of the 10 largest SOEs. Efforts are also underway to centralize SOE debt information in a single debt database managed by the Congolese debt office and to include this information in all annual debt reports. IMF and the WB technical assistance are supporting these efforts, and preparation of a comprehensive debt management strategy is also a structural benchmark under the ECF. In terms of the social security system, there are two entities: (i) a more autonomous CNSS that collects contributions to pay retirees from both the private sector and public enterprises; and (ii) the Caisse de Retraite des Fonctionnaires (CRF) for public administration employees. Both are under the wardship of the Ministry of Labor. In the past, some public enterprises did not make their contributions to the CNSS and the government “borrowed” from both pension funds, where CNSS has been repaid and debt to CRF remains. Domestic debt includes these “social arrears".

2. The distinction between domestic and external debt is mostly determined on a currency basis, as opposed to a residency basis. This is because large amounts of the country’s debt is subscribed by banks within the regional CEMAC market (i.e., within the currency union), where BEAC is not yet able to accurately monitor the holder of these instruments within CEMAC. For creditors whose residency can be tracked, including the regional development bank (BDEAC), debt is defined on a residency basis. Though nearly half of the treasury auctions are subscribed by non- resident banks, the lack of data on post-subscription treasury bond trade makes it difficult to infer the actual holdings of Congolese debt by the non-resident banks.

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Subscription of Congolese Treasury Securities

Citation: IMF Staff Country Reports 2022, 226; 10.5089/9798400213922.002.A002

3. Contingent liabilities are elevated and pose a risk. The contingent liability stress test is customized to account for vulnerabilities associated with legally disputed claims of domestic arrears, non-guaranteed SOE debt, and litigated debt (Text Table 1). Non-guaranteed debt of the 10 largest SOEs is estimated at 28 percent of GDP, and under the stress test, it is assumed that one third of this amount could end up on the central government balance sheet (9 percent), while the rest can be paid through the liquidation of SOE assets. In addition, Congo’s total PPP capital stock is estimated at 5 percent of GDP, with 35 percent of this stock assumed to end up on the government balance sheet under the stress test. To account for a financial sector crisis, the default value of 5 percent is applied to the government balance sheet given the limited size of the banking system. Debt vulnerabilities are also affected by claims of domestic arrears that were rejected by an audit but are being legally contested (about 7 percent of GDP), newly rejected domestic arrears claims under the current audit (about 121/4 percent of GDP) that could be legally contested, and an external arrears claim of 21/4 percent of GDP which is currently being litigated (and not included in the debt stock), adding up to 211/2 percent of GDP for other elements of government debt.2 The contingent liability test is also calibrated to account for these potential risks to the public sector balance sheet.

Text Table 1.

Republic of Congo: Coverage of Public-Sector Debt and Design Stress Tests of Contingent Liability1

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1 The public debt coverage chart is updated to explicitly exclude subnational governments from the coverage.

Background

A. Evolution and Composition of Public Debt

4. Public debt in the Republic of Congo is expected to decline from 104 percent of GDP at end-2021 to 84 percent of GDP at end-2022. The decrease in the debt-to-GDP ratio primarily reflects efforts by the authorities to remain current on scheduled debt service payments—where debt service to two largest external commercial creditors is tied to oil prices and sizeable when oil prices are high. Lower than forecast project loans and disbursements of budget support only after completion of the first review under the ECF arrangement limit new external financing.

  • External debt decreased from 66 percent of GDP at end-2020 to 59 percent of GDP at end- December 2021. The 9 percent of GDP increase in the external debt stock relative to IMF Country Report No. 22/49 is due to reconciliation of debt numbers with creditors: (i) 0.1 percent and 0.4 and of GDP on debt to Belgium and Brazil, respectively, in the context of the DSSI (see below); (ii) 0.7 percent of GDP on debt to Saudi Arabia; (iii) 2.9 percent of GDP on official debt to China and 1.4 percent of GDP on debt to Chinese companies, in the context of discussions to eventually further restructure debt to China; (iv) 0.9 percent of GDP resulting from the debt restructuring agreement reached in January 2022 with a large external commercial creditor (see second last below); and (v) 2.4 percent of GDP with a commercial supplier.

  • A large share of external debt is owed to China and Chinese companies (151/2 percent of GDP) and oil traders (10 percent of GDP, see Tables 1a and 1b in the annex). Under the Fund-supported ECF program, the contracting of new external debt is restricted to be on concessional terms.

  • Much-needed liquidity support during 2020–21 was received through Congo’s participation in all the phases of the DSSI; and any arrears from DSSI creditors that were not covered under the DSSI have been resolved. The authorities are committed to service the debt rescheduled under phase 1 of DSSI, starting in mid-2022. Notably, DSSI debt service for all phases of the DSSI will continue through end-2027.

  • Agreements with Abu Dhabi and Libya were recently concluded on treatment of pre-HIPC arrears, including substantial haircuts; and agreements in principle have been reached on arrears to Brazil and pre-HIPC arrears to Russia. The authorities are in the process of resolving arrears to India’s Exim Bank ($31 million).

  • Arrears to Saudi Arabia and Kuwait that arose at the start of 2021 due to technical reasons were fully paid in the second half of 2021. Congo has not accumulated any new arrears since the start of the ECF arrangement.

  • The authorities are engaged in the resolution of external commercial arrears owed to Chinese companies ($107 million) and across 10 suppliers ($19 million).

  • The authorities contest $275 million of pre-HIPC arrears owed to a supplier as part of a broader litigation case8. The authorities have requested HIPC treatment for another $96 million of pre-HIPC arrears, which are included at face value in the DSA.

  • At end-January 2022, the authorities concluded a restructuring agreement with a large external commercial creditor to resolve $536 million in arrears—where the restructuring agreement is on comparable terms to that concluded last year with another large external commercial creditor (aforementioned).

  • Domestic public debt decreased slightly from 48 percent of GDP at end-2020 to 45 percent of GDP at end-December 2021. Domestic debt involved borrowing from commercial banks and non-bank commercial institutions (22 percent of GDP)—mainly in the form of bond issuances—commercial arrears (9 percent of GDP), statutory advances from the regional central bank (8 percent of GDP), and pension arrears and unpaid social benefits (5 percent of GDP).9

5. This debt sustainability analysis incorporates the impact of three restructuring agreements concluded with external private commercial creditors (oil traders). The restructuring agreement with the smallest of these three creditors was signed in 2020Q3 and includes a substantial nominal haircut on the stock of outstanding debt, a maturity extension, and resolution of US$61 million in external arrears. The restructuring agreement with the largest creditor was signed in 2021Q1 and that with the remaining large creditor was signed in 2022Q1—both of these agreements include debt service formulated as a function of oil prices, a nominal haircut, a maturity extension, and an interest rate reduction.

Text Table 2a.

Republic of Congo: Summary Table of Projected External Borrowing Program 2022–23

January 1, 2022–March 31, 2023

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Text Table 2b.

Republic of Congo: Type of New External Debt

(Millions of USD)

January 1, 2022–March 31, 2023

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Note: All loans are on contracting basis.

6. This debt sustainability analysis also incorporates the impact of the G20 Debt Service Suspension Initiative (DSSI). Under the DSSI, the authorities obtained relief of US$98 million of debt service due to bilateral creditors between May and December 2020 (equivalent to 1 percent of GDP), that was rescheduled under NPV-neutral terms. Under the second phase of DSSI, an additional US$105 million of debt service was rescheduled. Under the final DSSI extension, an additional US$56 million of debt service was rescheduled. The authorities devoted the resources freed by this initiative to increased spending in order to mitigate the health, economic, and social impact of the COVID-19 pandemic. The DSA includes the rescheduling—according to published terms—of all eligible debt, with the exception of debt under the Strategic Partnership loans from China, which the creditors have not agreed to reschedule and for which the authorities have continued making repayments.

7. Weaknesses in public debt management and reporting remain. While the authorities published the terms of the 2019 debt restructuring agreement with China, operationalization of the agreement implied lower short-term liquidity relief than initially assessed. Moreover, the authorities continued accumulating excess deposits in the escrow account in China during 2020—though these were eliminated in 2021. Significant data revisions have resulted in upward revisions to the 2021 external debt stock (see paragraph 4 above). The composition of domestic debt was also revised—largely due to delays in information sharing across relevant entities that collect debt information. The authorities are committed to resolving these issues with support from on-going IMF and World Bank technical assistance in the areas of debt management and reporting. The emergence of a contested claim has increased the stock of contingent liabilities; this claim has been included in the ongoing audit of domestic arrears.

Text Table 3.

Republic of Congo: External Arrears Situation

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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.

1. Macroeconomic Outlook

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

Overall real GDP growth is projected at 4.3 percent for 2022, reflecting 3.3 percent non-oil growth and a rebound of 6.1 percent of oil sector growth after an 11 percent contraction in 2021. As the recovery takes hold, growth is expected to peak at 7.1 percent of GDP in 2024, primarily on the back of increased oil production. Over the long-term, growth will average around 3 percent driven by strengthened non-oil growth as economic diversification gradually progresses, supported by the authorities’ structural reform agenda as elaborated in the National Development Plan and the ECF-supported program10. Concurrently, oil production levels will decline with the depletion of oil reserves.

The government is implementing a vaccination program, expecting to cover 60 percent of the population by end-2022. As of April 14, 2022, 14 percent of the population was fully vaccinated and another 1 percent of the population is partially vaccinated. However, vaccine hesitancy is likely to impede achievement of this objective.

The overall fiscal position has improved with the overall balance rising from -1 percent of non-oil GDP in 2020 to 2.7 percent of non-oil GDP in 2021, mainly owing to high oil prices boosting oil revenues. The non-oil primary deficit widened from -15.2 percent of non-oil GDP in 2020 to -17.3 percent of non-oil GDP in 2021— driven by higher goods and services spending on vaccine deployment and healthcare equipment and supplies, stepped up social transfers, and a shortfall in grants. After the pandemic subsides, the authorities are expected to continue implementing fiscal adjustment to restore long-term fiscal sustainability and support building of regional international reserves.

Balance of payments (BOP) and budget support, other than ECF disbursements, are not expected until the second half of 2022 (Text Table 4). In 2020 and 2021, disbursements were lower than previously anticipated because of delays in both budget support and project financing, the latter related to the pandemic. The decline in disbursements beyond 2026 is in line with the authorities’ commitment to pursue prudent external borrowing.

The DSA assumes that Congo continues to obtain the bulk of new external financing on concessional terms in the medium term; the grant element increases progressively and averages 43 percent over 2027–29.11 After 2029, new disbursements are assumed to become less concessional, bringing the grant element to about 27 percent over 2030–40.

Main Macroeconomic Assumptions

Non-oil sector: In 2022, assuming the pandemic subsides, recovery of the non-oil sector is projected to take hold, growing at 3.3 percent. Non-oil growth is projected to improve gradually to 5 percent by 2026 (averaging 4.5 percent during 2023–27), as investment recovers, the implementation of structural reforms bears fruit, (especially, to protect and develop human capital and infrastructure and improve the business environment) and the economy diversifies in line with the commitments of the CEMAC Heads of State in August 2021. The CEMAC Heads of State have committed to implement priority structural reforms to allow stronger, more inclusive and more sustainable growth with an emphasis on improving the management of public funds and governance (e.g., improving the preparation of public investment projects, strengthening the financial oversight of SOEs), business environment reforms and regional integration as well as human capital (e.g. greater focus on primary health care, social protection, or and relevant professional training). Emphasis will be place on improving infrastructure—for transport, irrigation, water and sanitation, telecommunications, and electricity—removing trade barriers, improving contract enforcement, insolvency procedures, and investor protection will all support increased productivity in agriculture, food processing, forestry and wood products, ICT, tourism, and financial services. Beyond 2027, non-oil growth is projected to average 5 percent—somewhat lower than the historical average of 5.3 percent over 2008–17 but higher than the non-oil GDP growth in the 2021 Article IV framework—on the back of structural reforms and diversification efforts. GDP is expected to slow down for a brief period between 2032 and 2036 due to reduced oil production and rebounds thereafter when non-oil growth spurred by diversification efforts starts to dominate the sharp decline in oil production.

Key risks to the outlook include (i) spillovers from an intensification of global geopolitical tensions and deglobalization resulting in social unrest, increased transport and import costs, and global food shortages; (ii) lower oil prices and production and (iii) adverse weather conditions weighing on agricultural production. In the near-term, downside risks are elevated given uncertainties related to the pandemic, low vaccination rates, and oil prices and production. Medium-term risks are largely mitigated as governance reforms and the implementation of efforts to diversify and build resilience to climate change are expected to support development of the non-oil sector, which will create jobs and raise incomes.

Vaccination: The government aims to vaccinate 60 percent of the population by end-2022—costing $88 million (0.7 percent of GDP, IMF Country Report 22/49, Text Table 1). As of April 14, 2022, 14 percent of the population was fully vaccinated and another 1 percent of the population is partially vaccinated. The World Bank and the African Union are coordinating to finance the EVAX scheme, covering one million people, with $12 million in World Bank financing. China and Russia are covering 1.1 million people.

Oil production and prices (applying April 2022 WEO projections): Oil production in 2021 remained subdued due to an unanticipated slowdown in production owing to the negative impact of the pandemic on oil production-related investments in 2020 that were necessary to maintain or increase production relative to 2020. Accordingly, oil production in 20211 was substantially less than in 2020 but is expected to gradually recover with a normalization of investment, resulting in higher production starting in 2022 and reaching 2020 levels in 2023. Production is projected to peak at 125 million barrels by 2024 (comparable to pre- pandemic levels) with new fields coming online and then to steadily decline to about 11 million barrels in 2041, barring new oil discoveries. There are large downside risks to oil prices. More broadly, high volatility of international oil prices and production uncertainties, including those related to the Ukraine war, are substantial near-term risks; however, the contribution of oil to overall GDP, as well as exports and revenue, is expected to decline over the next 20 years, reducing long-term risks related to oil price volatility.

Inflation: Inflation is projected to average 3.5 percent (y/y) in 2022 due to the Ukraine war raising global prices for cereals, fertilizers, and fuel on food and fuel imports, transit costs for all imports, and prices of import substitutes. After that inflation is expected to decline to 3 percent by 2023 and remain close to 3 percent over the long term, consistent with the CEMAC’s convergence criteria of a 3 percent ceiling.

Current account balance: A current account surplus of 17.2 percent of GDP is anticipated for 2022, marginally higher than the current account balance of 12.6 percent of GDP in 2021. The surplus is primarily linked to high global oil prices in 2022. The current account is projected to remain in surplus over 2021–24 given high oil prices, oil production increases, and gradual recovery in the non-oil sector. After 2024, with the decline in oil production, the current account is expected to shift to a deficit. The current account deficit is projected to average 2.4 percent of GDP over 2028–42, reflecting a long- term decline in oil production. Continued investment efforts as part of the diversification strategy will keep imports elevated, only partly offset by increased exports. Economic diversification continues to support projected GDP growth.

Fiscal policy aims to reduce the debt burden and support growth. In 2021 (relative to 2020), oil revenues bolstered the primary balance while the non-oil primary balance deteriorated under pressure from higher pandemic-related spending on goods and services, social transfers, and grant shortfalls. Non-oil revenues remained stable, supported by gradual increases in non-oil economic activity and revenue-enhancing measures adopted over the past two years. Oil-related transfers also 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 shortfall in grants was mirrored in suppressed externally financed capital spending.

Contingent on the pandemic subsiding, the authorities plan a gradual adjustment of 4 percent of non-oil GDP (1 percent of GDP) in the non-oil primary balance during 2021–27 to restore long-term fiscal sustainability and support building of regional international reserves. This adjustment is founded in measures supported by the ECF arrangement and technical assistance from the IMF, World Bank, and other development partners—including measures to improve collection of tax arrears, broadening the tax base (applying a medium-term strategy to streamline exemptions including in VAT), customs reforms, raising excise duties in line with CEMAC guidelines, and continued implementation of energy SOE reforms to reduce transfers and improve SOE transparency (see IMF Country Report No. 22/49 for details), The concerted efforts the government is already making to take these measures forward, in addition to the recently completed debt restructuring, and efforts to settle remaining arrears and timely payments of all remaining debt demonstrates strong ownership towards budget and debt reforms and the ECF arrangement.

The projected primary balance surpluses are supported by the gradual adjustment in the non-oil primary balance as well as substantial oil revenues, driven by oil price assumptions in the April 2022 WEO. Downside risks to oil prices, their impact on the primary balance, and in turn on the DSA, are substantially mitigated by debt service to the largest external commercial creditors being tied to oil prices and access to Congo’s financial market.

The authorities are also committed to use the oil windfall gains to substantially reduce the stock of external and domestic arrears in the medium-term. The gradual clearance of domestic arrears should provide more liquidity to the private sector and banks, stimulating private investment and non-oil sector growth. The authorities also plan to expand the tax base by gradually reducing tax expenditures (estimated at over 10 percent of GDP) and improving tax administration (through the operationalization of the one-stop shop for tax payments and of the digital platforms for tax declarations). Greater fiscal revenue mobilization together with external borrowing on concessional terms will reduce the debt service burden and allow the financing of critical infrastructure projects, which in turn will support the government’s diversification strategy as outlined in the new development plan (2022–26).

  • Domestic arrears payments: The authorities’ medium-term fiscal strategy prioritizes domestic arrears repayments—critical for economic and political confidence—while safeguarding social and domestically- financed capital spending and reflecting commitments to enhance debt sustainability. The authorities are developing a new domestic arrears repayments scheme which will begin in 2023. Should revenues fall short, domestic arrears repayments will be slowed. Clearance of domestic arrears is also helping alleviate macro-financial risks by reducing liquidity pressures and NPLs.

  • Loan disbursements: The authorities’ reforms agenda, supported by the ECF arrangement, will catalyze concessional budget financing, which will help reduce debt vulnerabilities while supporting critical public investment to support economic diversification efforts as well as social spending to protect the most vulnerable—all of which will facilitate higher, more inclusive, resilient, and sustainable growth (Text Table 4).

1 GDP contracted by 0.6 percent in 2021, with a 3.6 percent growth in the non-oil sector unable to offset an 11 percent decline in the oil production in 2021.
Text Table 4.

Republic of Congo: Projected Loan Disbursements

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Sources: IMF and WB staff calculations and projections.

9. Realism tools flag risks around the forecast, but there are mitigating factors. The fiscal adjustment-growth realism tool suggests that the projected overall real GDP growth path could be lower but staff assesses the projected growth and the fiscal path to be realistic. This is because overall real GDP growth is composed of two separate parts: oil and non-oil growth, where the impact of oil growth on overall real GDP dominates given the country’s oil dependence. Notably, only non-oil growth is impacted by fiscal adjustment policies and the path of non-oil growth is consistent with the realism tool. Concurrently, oil growth is driven by oil production, which is independent of fiscal adjustment policies. Risks, including from negative oil price shocks, are largely mitigated by repayments to the largest external commercial creditor being tied to oil prices, a gradual increase of government deposits at BEAC, and the availability of financing from Congolese financial markets—where banks having high liquidity, as corroborated by the high liquidity ratios for the domestic banks. The DSA also incorporates interest rates for domestic financing consistent with the historical trends and current market conditions. Further, in the long term, with structural and governance reforms and after exiting fragility, access to international capital markets can be a source of financing. Moreover, over the medium and long term, economic diversification efforts are supporting economic activity. Improvements in the primary surplus (owing to oil revenues in the near- and medium-terms and sustained consolidation efforts) is the main driver in reducing debt, with real GDP growth also contributing marginally (Figure 3). The realism tools show a history of large unexplained increases for external debt due to revisions to debt stock and debt service statistics.

Text Table 5.

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

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

2. Country Classification and Determination of Stress Test Scenarios

10. The composite index (CI) is assessed at 2.3 and is based on the April 2022 World Economic Outlook (WEO) and 2020 World Bank Country Policy and Institutional Assessment (CPIA) data, indicating a weak debt carrying capacity for Congo. The methodology relies on computing a composite indicator (CI) based on information from the CPIA score, external conditions as captured by world economic growth, and country-specific factors, including import coverage of reserves. The Republic of Congo’s low CI score indicates a weak debt carrying capacity, reflecting mainly a low CPIA score and a low level of foreign reserves (Text Table 6). The CI score is similar to that in the previous DSA, which is based on the October 2021 WEO data, and the debt carrying capacity is unchanged compared to the previous (2021 Article IV) DSA.

Text Table 6.

Republic of Congo: Composite Indicator Score

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

11. The DSA considers commodity price, natural disasters, and market financing shocks. Since oil exports represent more than 80 percent of Congo’s exports, the commodity price tailored stress test is triggered. Given susceptibility to natural disasters like floods, the natural disaster module is also triggered. Similarly, having issued a Eurobond (in the context HIPC debt restructuring), the market financing shock is also activated. This scenario assesses rollover risks resulting from a deterioration in global risk sentiment, temporary nominal depreciation, and shortening of maturities of new external commercial borrowing.

Debt Sustainability Analysis

A. External Debt Sustainability Analysis

12. Under the baseline, breaches of all the external debt indicators vis-à-vis Congo’s indicative thresholds are contained within 3 years (Figure 1). Under the current terms on the already restructured debt, all threshold breaches will be eliminated by 2026 under the baseline scenario. The PV of external debt-to-GDP ratio is 40 percent at end-2022 and is projected to decline to 28 percent in 2025, below the threshold. The debt service-to-revenues ratio, at 39 percent in 2022 is projected to decline to 12 percent in 2026 (below the 14 percent threshold), when most of the external commercial debt will have been repaid. In addition, the debt service-to-exports ratio is currently above its indicative threshold of 10 percent but is projected to decline below 10 percent by 2024 and remain below the threshold in subsequent years. The PV of debt-to-exports ratio is below its indicative threshold and projected to decline to an average of 36 percent over 2026–31.

13. All indicators of external public debt breach their indicative thresholds in stress test scenarios (Figure 1). Standard shock scenarios examine the implications of various shocks to the debt and debt-service paths based on the historical volatility of the country’s economic indicators, resulting in sharp increases in the debt burden and liquidity indicators in all cases. The exports shock stress test is the most extreme for all indicators, reflecting the Republic of Congo’s high dependence on oil exports. A decline in exports to a level equivalent to one standard deviation below their historical average in the second and third years of the projection period would cause the PV of debt- to-exports ratio to rise and remain elevated over the medium term, while the PV of debt-to-GDP would peak at 108 percent. For the debt service-to–revenue ratio, a one-time depreciation has the largest impact. The market financing risk module indicates a moderate risk of heightened liquidity pressures. However, a heightened market stress event would not have a substantial impact on debt burden indicators (Figure 5).12

14. Reflecting unresolved external arrears of US$157 million owed to India’s Exim Bank; Chinese companies, and ten small external commercial creditors, the Republic of Congo is classified to be “in debt distress”. DSSI treatment of all pre-HIPC arrears for which Congo requested treatment has been received. The clearance of remaining external arrears would be required to end the ongoing episode of debt distress. As all the debt ratios are below the debt thresholds in 5 years, the debt is assessed to be sustainable.

3. Public Debt Sustainability Analysis

15. An analysis of the Republic of Congo’s overall public debt highlights heightened overall debt vulnerabilities (Figure 2). The projected evolution of debt burden indicators suggests heightened vulnerabilities arising from public debt. Under the baseline scenario, the present value of public and publicly guaranteed debt-to-GDP (including domestic arrears and past direct financing from BEAC prior to initiation of the ECF arrangement) remains significantly above the 35 percent benchmark level associated with heightened vulnerabilities for countries with a weak debt carrying capacity until 2030 and then remains below the threshold for the remainder of the horizon. Even though the PV of public debt breaches its benchmark until 2030, it is assessed as sustainable given that liquidity risks are mitigated by i) its downward path going forward, and ii) availability of financing from Congolese financial markets, where banks have high liquidity ratios. This assessment of debt vulnerabilities is further supported by stress-tests; the growth shock stress test is the most extreme for public debt burden indicators, highlighting downside risk related to an inability to clear arrears if the growth remains subdued. The implementation of priority structural reforms results in stronger, more inclusive, and more sustainable growth under the baseline. In contrast, Historical scenarios point towards perennially rising PV of debt-to-GDP and PV of debt-to-exports ratios (Figure 2), which reflect large historical residuals and low growth rates.

Text Table 7.

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

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

Risk Rating and Vulnerabilities

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

17. Risks of overall and external debt distress remain high given liquidity risks and vulnerability to negative oil price shocks. Liquidity risks, associated with an elevated public debt- to-GDP ratio (exceeding the threshold through 2030) and a large external debt service-to-revenue ratio (the indicator exceeds the threshold through 2023), are mitigated by the steady and significant declines in these ratios going forward, the availability of financing from Congolese financial markets, and diversification efforts that will bear dividends in the form of non-oil exports and higher contribution of non-oil sectors towards GDP growth. Going forward, the authorities are encouraged to continue pursuing fiscal consolidation, enact policies for diversification to reduce risks and prepare for reduced long-term oil production and demand, finalize the pending restructuring agreement, clear arrears, and enhance debt management.

Authorities’ Views

18. The authorities concurred with staff’s assessment that Congo is in debt distress and that debt is sustainable owing to favorable oil prices and the authorities’ reform and restructuring efforts. The authorities stressed their commitment to maintaining debt sustainability and enhancing debt transparency through prudent fiscal and debt management policies, improved debt management capacity, and better quality and more timely recording of debt statistics. The authorities were also confident of adhering to all the future scheduled debt service and not accumulating any new arrears. The authorities also indicated that macroeconomic assumptions underpinning the DSA analysis, including projections for oil production, should remain appropriately cautious while information on new oil discoveries is still being analyzed. The authorities agreed that while there are downside risks to the growth outlook, the Congolese economy has the potential to benefit from the development of new sectors, and from increased social spending and diversification efforts to cope with challenges facing oil sector in the context of climate change and the global transition to low carbon economies.

Figure 1.
Figure 1.

Republic of Congo: Indicators of Public and Publicly Guaranteed External Debt Under Alternatives Scenarios, 2022–32

Citation: IMF Staff Country Reports 2022, 226; 10.5089/9798400213922.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2032. Stress tests with one-off breaches are also presented (if any), while these one- off breaches are deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.2/ The magnitude of shocks used for the commodity price shock stress test are based on the commodity prices outlook prepared by the IMF research department.

Figure 2.
Figure 2.

Republic of Congo: Indicators of Public Debt Under Alternative Scenarios, 2022–32

Citation: IMF Staff Country Reports 2022, 226; 10.5089/9798400213922.002.A002

* Note: The public DSA allows for domestic financing to cover the additional financing needs generated by the shocks under the stress tests in the public DSA. Default terms of marginal debt are based on baseline 10-year projections.Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2032. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.

Figure 3.
Figure 3.

Republic of Congo: Drivers of Debt Dynamics–Baseline Scenario

Citation: IMF Staff Country Reports 2022, 226; 10.5089/9798400213922.002.A002

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

Figure 4.
Figure 4.

Republic of Congo: Realism Tools

Citation: IMF Staff Country Reports 2022, 226; 10.5089/9798400213922.002.A002

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

Figure 5.
Figure 5.

Republic of Congo: Market-Financing Risk Indicators

Citation: IMF Staff Country Reports 2022, 226; 10.5089/9798400213922.002.A002

Sources: Country authorities; and staff estimates and projections.Note: Data Stream, https://www.federalreserve.gov/releases/h15/EMBIG data for the Republic of Congo is not available. The bond, due to mature in 2029, was trading at a discount of 19 percent over par with a yield to maturity of 13.06 percent and a spread of 1084 bps over 7-year US treasury bond as on March 13, 2022

Table 1a.

Republic of Congo: Gross Public Debt by Creditor, 2020–22

article image
Sources: Congolese authorities and IMF staff estimates.

Data updated until the end of September 2021.

Revisions from Article IV reflect enhanced debt coverage of T-Bills and revisions on domestic bonds data from 2020 onwards.

Domestic arrears do not include audited arrears for 2019-2020 as they are not completed yet.

CEMAC regional market financing is classified as domestic debt in the DSA but as external debt in the balance of payments’ financial account

Table 1b.

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

article image
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 2.

Republic of Congo: External Debt Sustainability Framework, Baseline Scenario, 2019–42

(Percent of GDP, unless otherwise indicated)

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

Table 3.

Republic of Congo: Public Sector Debt Sustainability Framework, Baseline Scenario, 2019–42

(Percent of GDP, unless otherwise indicated)

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

Table 4.

Republic of Congo: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2022–23

(Percent)

article image
Sources: Country authorities; and staff estimates and projections.

A bold value indicates a breach of the threshold.

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

Includes official and private transfers and FDI.

Table 5.

Republic of Congo: Sensitivity Analysis for Key Indicators of Public Debt, 2022–321/

(Percent)

article image
Sources: Country authorities; and staff estimates and projections.

A bold value indicates a breach of the benchmark.

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

Includes official and private transfers and FDI.

6

Most of the external debt is defined on a currency basis, except for the creditors whose residency can be tracked, that are defined on residency basis. An example is the Regional Development Bank, BDEAC.

7

The composite index (CI), estimated at 2.30 and based on the April 2022 World Economic Outlook (WEO) update and 2020 World Bank Country Policy and Institutional Assessment (CPIA) data, indicate a weak debt carrying capacity for Congo.

1

There are 31 SOEs in Congo, with government ownership ranging from 50 to 100 percent.

2

The authorities continue to dispute this external claim to a foreign construction company. Disputed claims are not included in the baseline, as they are included when calibrating the contingent liability stress test (Text Table 1).

8

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.

9

As audits of 2019–20 government financials will be finalized later in 2022, partially audited and not yet audited domestic arrears are not included in the 2021 debt stock but a projected amount of 6.4 percent of GDP is included in the 2022 debt stock projection.

10

For a list of structural benchmarks, please see IMF Country Report No. 22/49

11

China has historically provided the bulk of Congo’s external financing on fairly concessional terms. The increased grant element after the end of planned budget support disbursements from multilateral partners reflects an assumption that China would remain the main creditor in the long term.

12

EMBIG data for the Republic of Congo is not available. The bond, due to mature in 2029, was trading at a discount of 19 percent over par with a yield to maturity of 13.06 percent and a spread of 1084 bps over 7 year US treasury bond as on March 13, 2022 (Source: Data Stream, https://www.federalreserve.gov/releases/h15/).

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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
  • View in gallery

    Subscription of Congolese Treasury Securities

  • <sup><xref rid="RA002fig01" ref-type="table">Figure 1.</xref></sup>
    View in gallery
    Figure 1.

    Republic of Congo: Indicators of Public and Publicly Guaranteed External Debt Under Alternatives Scenarios, 2022–32

  • <sup><xref rid="RA002fig02" ref-type="table">Figure 2.</xref></sup>
    View in gallery
    Figure 2.

    Republic of Congo: Indicators of Public Debt Under Alternative Scenarios, 2022–32

  • <sup><xref rid="RA002fig03" ref-type="table">Figure 3.</xref></sup>
    View in gallery
    Figure 3.

    Republic of Congo: Drivers of Debt Dynamics–Baseline Scenario

  • <sup>Figure 4.</sup>
    View in gallery
    Figure 4.

    Republic of Congo: Realism Tools

  • <sup><xref rid="RA002fig05" ref-type="table">Figure 5.</xref></sup>
    View in gallery
    Figure 5.

    Republic of Congo: Market-Financing Risk Indicators

Subscription of Congolese Treasury Securities
Figure 1.

Republic of Congo: Indicators of Public and Publicly Guaranteed External Debt Under Alternatives Scenarios, 2022–32
Figure 2.

Republic of Congo: Indicators of Public Debt Under Alternative Scenarios, 2022–32
Figure 3.

Republic of Congo: Drivers of Debt Dynamics–Baseline Scenario
Figure 4.

Republic of Congo: Realism Tools
Figure 5.

Republic of Congo: Market-Financing Risk Indicators