Introduction and Overview

On behalf of our Congolese authorities, we would like to thank staff for the constructive policy discussions held in the context of the first review under the ECF- supported program.

In 2021, the effects of the Covid-19 pandemic and the drop in oil prices, combined with the absence of financial support by the international community, have led to a difficult year in the Republic of Congo, marked by another economic recession. While the country’s outlook has improved since with the rise in oil prices, the resumption in investments in the oil sector, and the continued recovery in the non-oil sector, the Congolese economy, overall, remains fragile and continues to face significant challenges. Congo’s financing needs are significant and while debt sustainability has been restored, debt service remains very high and continues to weigh heavily on the budget and external accounts.

The authorities are also aware of the need to accelerate the transition to a more diversified economy away from oil, as global oil demand declines in response to the effects of climate change. Continued efforts are also necessary to create more fiscal space to help both preserve debt sustainability and finance the transition to a more diversified growth while reassuring partners to help mobilize much-needed external financing. Next to these major medium-term challenges, more immediate concerns have emerged, including as a result of the repercussions of the war in Ukraine on global food prices and their impact on the poor whose situation had already weakened due to the pandemic.

The ECF arrangement remains appropriately in line with the authorities’ National Development Plan which seeks to address Congo’s key growth and development challenges. The ongoing implementation of the Fund-support program is progressing satisfactorily and the ECF continues to benefit from CEMAC policy assurances.

In particular, the fiscal situation is improving thanks to the implementation of measures to strengthen domestic revenue mobilization and expenditure and debt management while domestic arrears continue to be repaid steadily. The diversification of the economy is promoted through reforms aimed at strengthening the business environment and governance and increasing the efficiency of the financial sector.

Recent Economic Developments, Outlook, and Risks

The economic recovery is gaining momentum, but prospects remain uncertain.

The oil sector has improved substantially in recent months with the increase in oil prices, following the 2021 contraction due to a decline in investments in the sector. The improvement in the non-oil sector, which began in 2021, continues in 2022, supported by a strengthening of the agricultural sector and mining, as well as the acceleration in the repayment of domestic arrears. The non-oil primary fiscal deficit, which increased from 15.2 percent of non-oil GDP in 2020 to 17.3 percent in 2021 due to the pandemic, is expected to narrow to 15.3 percent in 2022. The current account surplus is forecast to strengthen to 17.2 percent of GDP in 2022 from 12.6 percent in 2021. Inflation which remained relatively low and stable in 2021, at 2 percent on average, will rise to 3.5 percent in 2022 driven by higher import prices. The banking sector’s vulnerabilities have diminished, and, in particular, non- performing loans (NPLs) have declined, as the economy continues to recover, and domestic arrears are being repaid.

In the medium term, real GDP growth is expected to strengthen to an average of 3.5 percent over the period 2023-2027, benefiting from both favorable oil prospects and a continued expansion of the non-oil sector. The latter is projected to grow by 5 percent in 2026 and 2027. However, the country faces numerous risks and considerable uncertainty. In addition to the lingering effects of the pandemic, the Congolese economy is also subject to extremely volatile oil prices, as well as an acceleration of inflation resulting from the spillovers of the war in Ukraine, and the need to cope with the impact of climate change.

Program Implementation

The authorities are making satisfactory progress in the implementation of the ECF arrangement.

All quantitative performance criteria under the first review were met, as well as all the indicative targets, except the one on poverty-reducing expenditures as some related projects had to be delayed. In addition, among the two structural benchmarks for the first review, the one on PFM reforms has been implemented. The second benchmark, however, was only partially implemented: while Parliament approved the new anti-corruption law, the decree on the rules and procedures pertaining to conflicts of interest was delayed due to longer-than- expected discussions in Parliament. The authorities will finalize and publish the decree related to conflicts of interest rules and procedures included in the anti-corruption law before the end of July 2022.

The authorities request a modification of quantitative criteria on the non-oil primary fiscal balance and net domestic financing to enable them to use the additional oil revenues resulting from the current elevated oil prices and mitigate the impact of the rapid rise in inflation on the population.

Pursuing Prudent Fiscal Policy

The authorities’ fiscal policy seeks to balance the preservation of debt sustainability with the scaling up of poverty reduction expenditures and the promotion of economic diversification.

The 2022 budget makes further progress towards fiscal consolidation while also introducing measures to mitigate the effects of the rapid rise in food prices on the poor. To that effect, the exceptional oil revenues expected in 2022 will be used to finance measures aimed at increasing social assistance under the emergency cash transfer program. These additional oil revenues will also enable the authorities to maintain reduced VAT rates and customs duties on imports of essential food products. All remaining exceptional oil revenues will be saved at the central bank, BEAC.

The authorities will also continue to implement the reforms initiated in 2019 which seek to reduce transfers and subsidies to public enterprises, particularly the refinery CORAF (Congolaise de Raffinage) and the electricity company CEC (Centrale Electrique du Congo). Transfers to those companies will be reduced and capped in 2022 compared to 2021.

The authorities will increase spending on health, education, social assistance, and basic infrastructure. Regarding social expenditures, in particular, as the authorities extend pandemic-related emergency cash transfers to households facing food insecurity following the rapid increase in food prices, coverage of the cash transfer program will increase from 230,000 beneficiaries to 300,000 by the end of 2022.

Capital expenditure will increase to 7.3 percent of non-oil GDP in 2022 and reach an estimated 7.6 percent of non-oil GDP in 2023. To strengthen project planning, the authorities will introduce medium-term public investment programming in 2022, with technical assistance from FAD, with the objective of selecting projects based on the priorities set forth in the 2022-2026 National Development Plan, as well the promotion of economic diversification and CEMAC regional economic development program.

Preserving Debt Sustainability

Along with fiscal consolidation, the authorities will implement prudent debt management and transparency policies in an effort to preserve debt sustainability and gradually reduce total public debt from 104 percent of GDP in 2021 to 85 percent in 2022 and 67 percent by 2027.

To that effect, in addition to refraining from external borrowing on non-concessional terms, neither the central government nor parties acting on behalf of the central government will incur new external debt secured by future deliveries of natural resources, including any new oil-for-infrastructure pre-financing arrangements.

The authorities are also determined not to accumulate any new domestic or external arrears. They will pursue their efforts to repay domestic arrears on a regular basis, with the goal of clearing all domestic arrears by 2031. These domestic arrears repayments —with a haircut applied to private sector claims and no haircut on social claims— will depend on the availability of resources.

A comprehensive medium-term debt management strategy, covering the period 2023-25 and aimed at reducing the public sector’s borrowing costs while also containing risks related to indebtedness is currently being developed with the technical assistance of the IMF.

Advancing Structural Reforms and Improving Governance

Promoting economic diversification and the adaptation of the Congolese economy to climate change while continuing to improve governance and transparency are high on the authorities’ reform agenda.

The National Development Plan for 2022-2026 has identified priority sectors for development, including agriculture, manufacturing, tourism, and digitalization. On governance and transparency, the authorities have taken substantial measures to address weaknesses in these areas. A new law on the fight against corruption was adopted by Parliament in February 2022 and enacted in March 2022. The law fully complies with the United Nations Convention against Corruption. The authorities remain committed to ensuring full transparency on the use of emergency spending during the pandemic. They have hired an international reputable audit firm to review all COVID-19 related expenditures incurred during 2020 and 2021. The results of the audit for the year 2020 will be published by end-June 2022, and the results for 2021, by end-December 2022.

The authorities will also pursue key reforms in the energy sector. To that effect, they have hired an internationally renowned firm to produce reconciliation reports on the oil sector’s financial flows. They will also publish on the website of the Ministry of Finance, the list of all the holders of oil concessions, as well as mining and forestry. The reconciliation reports on oil financial flows and the list of concessions holders will be published by the end of June 2022.

Conclusion

The ongoing economic recovery in the Republic of the Congo is expected to strengthen further throughout 2022. However, the country’s overall economic situation remains fragile, and the financial resources needed to address the daunting challenges that lie ahead are significant.

The authorities reiterate their strong determination to pursue sound policies to maintain macroeconomic stability while sustaining the recovery and assisting the poor. The structural reform agenda they have embarked on should help the country address existing vulnerabilities and pave the way for more sustained growth, with a view to meet its development objectives.

The authorities continue to view the IMF’s assistance as critical to meeting their goals, including by catalyzing other partners’ support. They seek Executive Directors’ approval of the completion of the first review under the ECF arrangement and request for modification of performance criteria.