Republic of Congo: Second Review under the Three-year Extended Credit Facility Arrangement, Requests for Modification and Waivers of Nonobservance of Performance Criteria, and Financing Assurances Review-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Congo
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International Monetary Fund. African Dept.
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Publication Date:
15 Feb 2023
eISBN:
9798400231926
ISBN:
9798400231926
Language:
English
Keywords:
arrears payment; oil GDP; arrears repayment; oil revenue; financial support; Arrears
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1. Following the March 2021 re-election of the President, the ruling party maintained a majority in the July 2022 parliamentary elections. The ensuing Cabinet reshuffle resulted in the Ministry of Finance being split into the Ministry of Finance and Economy, and the Ministry of Budget, with two new Ministers at the helm of each (replacing the former Minister of Finance). The election process was peaceful but social tensions are growing amid growing food insecurity (Annex I)—in part, due to high food prices resulting from Russia’s war in Ukraine (Country Report 22/226)—rising poverty, a lack of economic opportunities, poor quality of public services, and weak governance.

Abstract

1. Following the March 2021 re-election of the President, the ruling party maintained a majority in the July 2022 parliamentary elections. The ensuing Cabinet reshuffle resulted in the Ministry of Finance being split into the Ministry of Finance and Economy, and the Ministry of Budget, with two new Ministers at the helm of each (replacing the former Minister of Finance). The election process was peaceful but social tensions are growing amid growing food insecurity (Annex I)—in part, due to high food prices resulting from Russia’s war in Ukraine (Country Report 22/226)—rising poverty, a lack of economic opportunities, poor quality of public services, and weak governance.

Context

1. Following the March 2021 re-election of the President, the ruling party maintained a majority in the July 2022 parliamentary elections. The ensuing Cabinet reshuffle resulted in the Ministry of Finance being split into the Ministry of Finance and Economy, and the Ministry of Budget, with two new Ministers at the helm of each (replacing the former Minister of Finance). The election process was peaceful but social tensions are growing amid growing food insecurity (Annex I)—in part, due to high food prices resulting from Russia’s war in Ukraine (Country Report 22/226)—rising poverty, a lack of economic opportunities, poor quality of public services, and weak governance.

2. The government’s immediate policy priorities are to manage the fallout from increased import costs, particularly for food and fuel, and the COVID-19 pandemic, which are aggravating the Republic of Congo’s fragilities (Annex II). In 2022, regulated prices of essential foods and fuel were kept low to protect consumers (Annex III). The margins of companies importing and distributing these goods were initially absorbing the higher import costs. To protect the margins of SNPC (the national oil company), CORAF (the oil refinery and subsidiary of SNPC), and private fuel marketers, Parliament passed a revised 2022 budget (in July, just after the elections) introducing new subsidies for fuel imports. Notably, the Republic of Congo exports crude oil but the domestic supply of refined fuel is a combination of imports and CORAF’s domestic production. Social assistance continues to be essential for the most vulnerable to cope with inflation and the pandemic’s impact. Since the pandemic started there have been 25,375 recorded cases and 386 deaths (as of November 2022). Progress in vaccinating the population has been slow due to vaccine hesitancy.

Recent Economic Developments, Outlook, and Risks

3. Economic activity is gaining momentum, with real GDP projected to grow by 2.8 percent in 2022. With resumed investment by the largest oil producers, some fields more than doubled production in 2022 while others produced less than last year due to equipment issues. On balance, oil production is expected to expand by 0.5 percent for the full year. Non-oil economic activity, expected to grow 3.3 percent in 2022, benefitting from solid activity in agriculture, mining (potash and iron ore), and manufacturing and services, as well as from domestic arrears payments, and government spending on infrastructure and social assistance. Greater momentum in non-oil growth was held back by food inflation and the monetary tightening that constrains spending and investment by households and businesses.

4. Inflation is expected to be contained though pressures are high (Figure 1). Inflated transport costs—related to Russia’s war in Ukraine and high global oil prices—and the CFA franc depreciation against the U.S. dollar raised import costs, which were either passed through to consumers or eroded companies’ margins. The impact was greatest on food inflation with these pressures partly offset by subdued non-food inflation—which reflects import substitution and the impact of monetary tightening (113). Overall, inflation is expected to average 3.5 percent in 2022.

Figure 1.
Figure 1.

Republic of Congo: Recent Economic Developments, 2012–22

Citation: IMF Staff Country Reports 2023, 089; 10.5089/9798400231926.002.A001

Sources: Congolese Authorities and IMF Staff Estimates and Projections.

5. The authorities have loosened the 2022 fiscal position relative to the first review under the ECF arrangement (CR 22/226). Based on the July 2022 revised budget, the non-oil primary deficit is projected to widen by 3.1 percent of non-oil GDP relative to CR 22/226 (Text Table 1). This reflects stepped up agricultural investment (Annex I), increased subsidies to CORAF, and a new subsidy to SNPC for importing fuel and selling to distributors for retail sales (112). Only a fraction of these oil-related subsidies was offset by increased SNPC dividend payments and additional revenues from the conclusion of negotiations with oil producers on tax concessions (classified as non-oil revenues). The primary balance is also set to deteriorate, despite improved oil revenues (relative to CR 22/226) stemming from the exchange rate depreciation.

Text Table 1.

Republic of Congo: Fiscal Performance, 2022

(Billions of CFAF)

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

The basic non-oil primary balance, excluding oil related transfers, is a quantitative performance criterion (QPQ for end-2022 (CR 22/226). The TMU requires the floor for this QPC should be adjusted upward for increases in oil-related transfers exceeding CFAF 30 billion and downward for increases in net external assistance (relative to that projected in CR22/226).

6. The current account balance continues to benefit from high oil prices, notwithstanding a larger import bill. Recent declines in wheat prices and improvements in its supply—cereals are one quarter of the food import bill—are helping contain the food import bill, more than offsetting growing fertilizer import costs. Oil export revenues are not only driving a projected 21.6 percent of GDP current account surplus in 2022 but they are also financing substantial debt service due this year—to regional commercial banks, G20 DSSI creditors (which began in June), and the two largest external commercial creditors.

7. The banking system remains stable. Non-performing loans (NPLs) have been around 17 percent over the past year as the impact of the economic contraction brought on by the pandemic in 2020 were outweighed by the benefits from domestic arrears’ payments. These payments along with reduced government borrowing from the banking system (due to large oil revenues) has freed liquidity, supporting private sector credit growth (5 percent in August 2022). The capital adequacy ratio reached 24 percent at end-April 2022, reflecting improved risk-weighted assets and positive credit and deposit trends. Restructuring plans are still being considered for two small weak banks. Banking system developments will need to be closely monitored as the pandemic-related relaxation of prudential measures are unwound.

8. The outlook hinges on progress in deep structural and governance reforms necessary for economic diversification away from oil.

  • Real GDP growth is expected to rise to 4.1 percent in 2023 and then average 4.0 percent during 2024–27. During this time, the composition of growth is anticipated to shift away from oil production, which is projected to expand by 4.4 percent in 2023, peak in 2024, and then contract with major oil fields maturing. Non-oil sector growth is anticipated to steadily rise from 4.0 percent in 2023 to 5.0 percent by 2026–27. Stepped up social spending (health care, education, infrastructure), domestic arrears payments, and reforms in governance, the financial sector, and the business environment will support consumption and investment—creating jobs and raising incomes across the population. In line with these reforms, food production is set to improve over the medium term with improved storage, irrigation, and transport infrastructure.

  • Inflation is expected to subside to 3.3 percent in 2023. Staples food prices will continue to be regulated and a decline in international staples prices will support distributors’ margins while import and transport costs will decline with lower oil prices—outweighing the impact of higher retail fuel prices resulting from gradual deregulation (1114). Medium-term inflation is projected to remain within 3 percent, consistent with the CEMAC inflation target, where supply-side expansion of the non-oil economy will balance buoyant consumption and investment growth.

  • The current account balance is expected to progressively shrink during 2023–27 from 8.5 to 0.3 percent of GDP in line with reduced oil export receipts and increased imports supporting non-oil investment. Net external inflows will improve relatively quickly during 2023–25 as external debt service (public and private) progresses and development partners’ project support and FDI improves.

9. Risks are tilted to the downside (Annex IV). Intensification of spillovers from Russia’s war in Ukraine could adversely impact inflation, investment, trade flows, and remittances—weighing on economic growth and external balances. A reduction in oil prices and the rapidly evolving global transition to low-carbon economies could weigh on oil production and revenues, adversely impacting external and fiscal balances. Investment, including that supporting economic diversification, could slow with higher-than-projected interest rate hikes or weaker than expected reform implementation. Adverse weather conditions could weigh on agricultural production, raising food insecurity and inflationary pressures. On the upside, reform momentum could accelerate with development partner support. Higher fertilizer and metal prices could increase mining investments (Congo has a globally significant potash basin), and there may be new low-cost oil and gas field discoveries.

Program Performance

10. Two end-June 2022 and one continuous performance criteria (PCs) were missed (Table 12). The surge in 2022H1 international oil prices raised oil-related subsidies (relative to CR 22/226, Text Table 1). As this spending was not offset by SNPC dividend advances—despite the authorities’ commitment to the contrary (MEFP 1125, CR 22/226)—the non-oil primary balance and net domestic financing PCs were missed.1 The zero ceiling PC on contracting new non-concessional external debt was missed (by 9.0 percent of GDP) due to (i) the regularization of arrears with two Chinese commercial companies which involved converting the original CFA franc debt into U.S. dollars; and (ii) a recently contracted $100 million digital acceleration World Bank (WB) project loan —the impact on debt sustainability indicators is negligible as the loan disbursement was included on IDA terms in the DSA accompanying CR 22/226 and is now on less concessional terms with a grant element of 18 percent (35 percent grant element is required for classification as concessional). The indicative target (IT) ceiling on disbursements of external loans for investment projects was missed due to faster than expected execution of investment projects and front-loaded loan disbursements. All other PCs and ITs were met.

Table 1.

Republic of Congo: Selected Economic and Financial Indicators, 2021–271

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

In line with continued improvements in compilation of statistics, supported technical assistance from the IMF and other development partners, historical GDP and BoP statistics have been revised. Overall nominal GDP and nominal oil GDP have been revised up and nominal non-oil GDP has been revised down, relative to CR 22/226.

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, 2021–271

(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.

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.

In line with continued improvements in compilation of statistics, supported technical assistance from the IMF and other development partners, historical GDP and BoP statistics have been revised. Overall nominal GDP and nominal oil GDP have been revised up and nominal non-oil GDP has been revised down, relative to CR 22/226.

Table 2b.

Republic of Congo: Central Government Operations, 2021–271

(Percent of non-oil GDP)

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

In line with continued improvements in compilation of statistics, supported technical assistance from the IMF and other development partners, historical GDP and BoP statistics have been revised. Overall nominal GDP and nominal oil GDP have been revised up and nominal non-oil GDP has been revised down, relative to CR 22/226.

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, 2021–271

(Percent of GDP)

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

In line with continued improvements in compilation of statistics, supported technical assistance from the IMF and other development partners, historical GDP and BoP statistics have been revised. Overall nominal GDPand nominal oil GDP have been revised up and nominal non-oil GDP has been revised down, relative to CR 22/226.

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 Congolaised’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 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 4.

Republic of Congo: Medium-Term Balance of Payments, 2021–271

(Billions of CFA francs)

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

In line with continued improvements in compilation of statistics, supported technical assistance from the IMF and other development partners, historical GDP and BoP statistics have been revised.

Includes stock debt relief of the HI PC 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, 2021–27

(Billions of CFA francs, unless otherwise specified)

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Sources: BEAC; and IMF staff estimates and projections.

Private sector and public enterprises.

In line with continued improvements in compilation of statistics, supported technical assistance from the IMF and other development partners, historical GDP and BoP statistics have been revised.

Table 6.

Republic of Congo: Financial Soundness Indicators for the Banking Sector, 2015–22

(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 CFAfrancs)

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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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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).

Domestic debt service includes arrears repayment.

T-Bills and T-Bonds are grouped together.

Calculated with debt stock and GDP in local currency units.

Table 9.

Republic of Congo: External Arrears, 2022

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

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Source: Congolese authorities and IMF staff estimates.

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: Quantitative Performance Criteria and Indicative Targets, 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. "Program" columns represent the PCs and ITs set at the time of the first review of the ECF arrangement; and "Modified Program" represent the modifications to these PCs and ITs proposed during the current second review of the ECF arrangement.

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.

11. Corrective measures have been agreed for the missed PCs and the authorities request waivers of nonobservance on this basis.

  • Strong fiscal consolidation measures during 2023 will correct for the fiscal slippage in 2022. These measures include a budget passed by Parliament (prior action, PA) that includes (i) a full phase-out of the new fuel subsidy and gradual fuel price deregulation during 2023–24 accompanied by stepped up social assistance (H13–15, Text Table 2); (ii) revenue measures to compensate for past shortfalls in SNPC’s dividend transfers to the budget, such as elimination of VAT and customs duty exemptions received by SNPC and VAT charged by CORAF (a subsidiary of SNPC) on its sales. In 2022H2, backlogged SNPC dividends (0.2 percent of non-oil GDP, 115) have been transferred to the budget (PA). Stronger measures to improve the 2022 fiscal position are not feasible in the remainder of 2022.

  • The breaches of the zero ceiling on contracting new non-concessional external debt and the consultation clause under the program on signing of new external debt arrangements (as defined in the TMU) have exposed serious debt management challenges. The authorities have taken corrective actions to reverse the negative impact of the breach by converting the debt back into CFA francs2, agreeing with Fund staff on reformulation of the TMU consultation clause to spell out its perimeter, and requesting Fund TA to identify weaknesses in the legal, institutional, and operational framework of debt management that may have led to this breach.

Text Table 2.

Republic of Congo: 2023–25 Impact of Key Fiscal Measures Introduced in 2023

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Source: IMF staff estimates and projections. Notes: 1. Yields from fiscal measures are relative to non-oil revenues in 2022 (prior to the introduction of these measures). 2. Non-oil revenue reforms initiated during 2019–20 continue to be applied and are expected to yield 1.2 percent of non-oil GDP during 2023–25, relative to 2020. These measures include (i) recovery of tax arrears periodically assessed by the authorities, averaging an annual yield of 0.05 percent of non-oil GDP; (ii)e-tax declaration and payment, higher excises in line with CEMAC guidelines, gradual phasing out of CIT exemptions for violating investment conventions, and increased taxes on certain non-petroleum exports, averaging an annual yield of 0.3 percent of non-oil GDP; (iii) expanded tax base for land tax, with an expected annual yield of 0.05 percent of non-oil GDP.

12. All but one structural benchmark (SB) have been met (Table 13). The decree on conflict-of-interest rules and procedures was published with a one-month delay and its declaration requirements fell short of international standards. Publication of a ministerial order to accompany the decree will address these shortcomings (PA, Table 14, MEFPH30). The SBs related to the procurement template, the medium-term debt strategy, and publication of pandemic-related spending, oil reconciliation reports, and natural resource concession holders have all been met.

Table 13a.

Republic of Congo: Structural Benchmarks 2022

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Table 13b.

Republic of Congo: Structural Benchmarks, 2022–23

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Table 14.

Republic of Congo: Prior Actions

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Policy Discussions

Policies continue to be anchored in maintaining macroeconomic stability and supporting economic transformation—based on the authorities’ National Development Plan (NDP) 2022–26, which is centered on economic diversification and resilience to climate change—needed to reduce fragilities and place Congo onto a path of higher, more resilient, and inclusive growth. In line with consultations with development partners, the NDP (circulated to the Board in mid-December 2022) rightly elaborates on sectoral development strategies in social sectors (health, education, and social protection) and governance as cross-cutting areas of focus on improving the business environment, critical for economic diversification and increased private investment.

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.

Discussions focused on the appropriate policy mix to maintain macroeconomic stability, reduce fragilities, and support the pursuit of higher, more resilient, and inclusive growth amid high oil prices and increased inflation. To maintain debt sustainability the non-oil fiscal position will be significantly tightened in 2023—compensating for its loosening in 2022—based on tax reforms and oil-related subsidy reforms coupled with stepped up social assistance to protect the most vulnerable. Development spending will continue to be prioritized. Oil windfalls3 will support some of this spending but will mostly help build buffers. Strengthened management of public finances (including public investment and debt), governance, transparency, and financial sector reforms will be essential to stimulating economic diversification, jobs, poverty reduction, and resilience to climate change. Development partner support in all of these areas will be critical.

A. Fiscal Policy

13. Fiscal policy will support higher, more resilient, and inclusive growth while safeguarding debt sustainability.

  • Debt is assessed as “sustainable” though it is classified as “in distress” pending clearance of external commercial arrears and reflecting remaining uncertainty about the magnitude of valid domestic arrears as audits of unaudited arrears progress (H26 and Debt Sustainability Analysis). The upward revision in the overall debt-to-GDP ratio over the medium term, largelydriven bythe impact of historical GDP revisions on nominal GDP projections, but also due to new social debt and revised projections of domestic borrowing and acceptance rates of unaudited arrears, has increased debt-related risks. Considerable medium-term fiscal consolidation combined with significant oil revenues is needed to repay external debt and domestic arrears—permitting public debt to decline from 99 to 71 percent of GDP between 2022 and 2027.4 Risks from negative oil price shocks are mitigated by debt service to the largest external commercial creditors being tied to oil prices.

  • Achieving the necessary medium-term fiscal consolidation while supporting economic growth and development will rely on domestic revenue mobilization and reprioritizing spending. Gradual growth of non-oil revenues—supported by non-oil economic growth and revenue-enhancing measures (1114–15)—will drive improvements in the non-oil primaryfiscal balance. The share of spending on social assistance, health care, education, and other development needs will be increased, while leaving the spending envelope broadly unchanged (relative to 2021 outcomes) owing to the fiscal space created by reducing oil-related transfers.

14. Against this backdrop, the 2023 budget envisages substantial fiscal consolidation while increasing social and capital spending (MEFP U10–12). The non-oil primary deficit will be reduced from 15.7 percent of non-oil GDP in 2022 to 13.3 percent of non-oil GDP in 2023, while continuing to save oil windfalls. The budget, expected to be passed by Parliament before end-2022, rests on the following key measures (PA):

  • Maintaining revenue-enhancing measures adopted over the past three years (Text Table 2) such as electronic payments, broadening of the tax base, and increased collection of tax arrears—an inventory of tax arrears and probability of recovery (end-2022 SB) and recovery strategies are being prepared.

  • In light of food inflation, maintaining lower import taxes and customs duties on food (protecting consumers) and the 2021 reductions in turnover tax and corporate tax rates (protecting all distributors’ margins)—which can be reassessed once high food prices and the pandemic subside.

  • Recovering the remainder of pastyears’ unpaid SNPC dividends.

  • Eliminating VAT and customs duty exemptions for SNPC and requiring CORAF to charge VAT on its sales (these measures impact non-oil revenues).

  • Phasing out fuel subsidies (including those introduced in 2022) and gradually deregulating fuel prices. To protect low- and middle-income households from any adverse effects, cooking fuels will be exempted, and public transport subsidies and targeted social assistance will be expanded (in coverage and the amount provided to households)—covering increased costs for the small minority of these households that drive cars, second round fuel price effects, and on-going food inflation. The cost of electricity, powered by natural gas, will remain unaffected.

    • Gradual fuel price deregulation will encompass retail prices and EDP during 2023–24 —accompanied by a clear communication strategy—and updating of the EDP pricing formula to account for improvements in CORAF’s operating efficiency since 2016 (end-2022 SB).5 Deregulation will begin with 5 and 7 percent increases in retail and EDP prices by end-January 2023, followed by quarterly increases leading to full reflection of international fuel prices in retail prices and EDP by end-2024—equivalent to a 30 percent retail price increase byend-2023 and another 45 percent increase by end-2024 (on current WEO oil price projections). After that, an automatic fuel pricing mechanism with a smoothing element to prevent sharp adjustments will be applied.

  • Implementing the next steps of reforms adopted in 2019 that reduce transfers to SOEs, especially CORAF and CEC (the electricity company).

  • Stepping up social and development spending, especially in health care and sanitation (new hospitals, treatments to prevent tuberculosis and malaria, and increasing prenatal and maternal care), education (new schools and vocational training), and agriculture (supporting domestic production of food and other goods and services) while containing the wage bill.

  • Announcing a multi-year domestic arrears payment plan.

  • Actively monitoring fiscal risks (e.g., spending overruns, revenue shortfalls, or underproduction of oil) and implementing contingency plans as needed—including streamlining non-essential spending, slowing capital spending and arrears payments (which have been back-loaded in the 2023 budget for this purpose), and raising additional revenues from increasing the withholding tax on service payments from oil producers.

15. Over the medium term, pursuit of the fiscal strategy outlined above will require steadfast policy implementation (MEFPH12–13, 23–25). The following measures to enhance revenues and reduce non-priority spending, in addition to continuing the measures applied in 2023, will support a reduction in the non-oil primary deficit from 13.3 to 8.8 percent of non-oil GDP during 2023–27:

  • Upgrading the hydrocarbon-related VAT administration and eliminating hydrocarbon-related VAT exemptions. To this end, a comprehensive stocktaking and associated revision and simplification of tax laws (into a single legislation) will be completed by end-June 2023 and end-December 2023, respectively (both SBs). This process will include assessing the currently levied VAT on petroleum products and ensuring its full remittance to the State. Efficiency of administering VAT on fuels will also be improved, including through application of the standard credit-invoice method (based on the revision of relevant decrees by 2025).

  • Streamlining non-hydrocarbon tax exemptions, beginning with an action plan that covers their analysis, publication, and budget implications.

  • Strengthening the control and monitoring of exemptions through annual risk-based audits, continuing to upgrade customs procedures, and implementing a tailored digital transformation plan.

  • Raising excise duties in line with CEMAC guidelines.

  • Advancing the next phase of SOE reforms, especially for CORAF and CEC, that would further reduce subsidies to them and raise transparency of SOE operations. Both companies’ production costs will be studied and an action plan put in place for raising their efficiency and ensuring the electricity billing process and coverage reflect actual electricity consumption.

  • Completing the on-going 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.

B. Public Investment and Debt Management

16. Strengthened public investment management will be fundamental to efficiently meeting Congo’s sizeable infrastructure needs, avoiding accumulation of new arrears, and improving governance (MEFP 1114–17). Preparing for the adoption of program-based budgeting in 2024, budgeting of commitment authorization and payment credit across all ministries will begin in 2023. Pilot ministries (including the Ministries of Education and Health) are mapping the new public procurement template to the 2023 budget (end-2022 SB) and will not be allowed to procure outside the template (except emergency items approved by the Minister of Finance). An action plan to improve the effectiveness of public investment will be developed based on a recent World Bank-supported survey of past investment. Project planning will be upgraded, including development of 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 (Climate-Public Investment Management Assessment, C-PIMA) and training.

17. Sustained momentum in debt management reforms will support transparency and debt sustainability. (M EFP U18–22).

  • To help reduce borrowing costs, contain debt risks, and develop the domestic and regional securities markets, the new medium-term debt management strategy 2023–25 has been translated into the 2023 budget—including loan projections for pilot ministries aligned with the new procurement template and an annual borrowing plan annex in the budget law. Good progress is being made toward enhancing debt monitoring and capacity with upcoming publications of more comprehensive annual debt reports, including SOE coverage, for 2021 (end-March 2023 SB) and 2022 and quarterly detailed debt stock publication.

  • To improve its accountability and overcome capacity bottlenecks, the Caisse Congolaise d’Amortissement (CCA) is being restructured—covering adoption of a new structure, appointment and training of staff, and creation of a new procedures’ manual.

  • All new external financing will be concessional (on a contracted basis), existing local currency debt will not be converted into non-concessional foreign currency debt, and debt will not be guaranteed with future natural resource deliveries.

  • 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 1110). 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.

C. Governance, Transparency, and Broader Structural Reforms

18. Public financial management (PFM) reforms remain critical for budget transparency and credibility (M EFP H26–27). New organizational structures are being put in place for the new Ministries of Finance and Budget (111). Consistency across the plans for cash flow, commitment, and procurement are improving under the supervision of a dedicated committee. Systems for comprehensive monitoring of public revenue collection and spending are being gradually operationalized. Capacity and financial challenges that have delayed transition to a new financial management information system (SIGFIP) are being addressed, including through more systematic communication across relevant departments and adequate training. Interconnection of information systems across SIGFIP, customs, and tax are progressing but the Treasury still needs to be integrated. Key advances in the Treasury Single Account (TSA) architecture are expected in 2023, including continued bank account closures and the automatic transfer of natural resource sales revenue from public entities to the TSA—which is awaiting finalization of a convention between the BEAC and the Treasury. A legal and regulatory framework for public private partnerships (PPPs) consistent with international best practice is being developed.

19. Concerted efforts are being made to advance the next phase of governance reforms (MEFP U28–33). The authorities intend to:

  • Enhance the functionality of the Commissions on Transparency and Anti-Corruption with increased financing (included in the 2023 budget). Publication requirements under the Transparency Law are expected to be fulfilled in2023Q1.

  • Address gaps in the asset declaration law during 2023–24 and take stock of progress against recommendations from the 2018 diagnostic report on governance and corruption with a view to developing an action plan for further reforms during 2023—supported by IMF TA in the areas of anti-corruption, rule of law, and AML/CFT. Building on Congo’s recently published AML/CFT Mutual Evaluation Report, an AML/CFT action plan is being developed as is a public register in the mining and forestry sectors (end-March 2023 SB), which is expected to improve natural resource management and support investigation of environmental crimes and associated money laundering.

  • Pursue recommendations from the audit of COVID-19 related spending to make further progress in the transparency of public procurement, including by publishing names and nationalities of beneficial owners for companies being awarded contracts and by continuing ex-post contract delivery reports.

  • Publish the 2021 EITI report. Notably, the oil sector-related 2023 fiscal measures (1114) advance recent EITI recommendations.

20. Greater financial inclusion will complement governance reforms in support of economic diversification and inclusive growth (MEFP 1135). The new roadmap for financial inclusion (developed in collaboration with BEAC and COBAC) is being implemented. The authorities are strengthening the legal and judicial systems’ability to address financial litigation, including through decrees set to improve registration processes for real estate securities and for credit and microfinance companies. Financial stability will benefit from the reduction in NPLs as domestic arrears clearance continues.

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. This support, combined with financing under the ECF arrangement, are critical for building buffers, given large uncertainties surrounding oil windfalls and the global economic environment, and for efforts to ensure regional stability through accumulation of CEMAC’s NFA

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.

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

Excludes project loans; and presents a minimum commitment.

22. Modifications to the program and monitoring. Modifications of the end-December 2022 QPCs on the government’s non-oil primary balance and net domestic financing are proposed due to loosening of the 2022 non-oil fiscal position which will be corrected in 2023—as it is not feasible to implement the required measures in the remainder of 2022 (H5, 10–11, 13). The SB on transitioning to SIGFIP is proposed to be reset from end-2022 to end-2023 (elaborated in 1118). The SB on procurement is proposed to be refocused on pilot ministries (H16) to ensure appropriate implementation. Program performance will continue to be monitored through semi-annual program reviews based on periodic and continuous quantitative performance criteria (Table 12), structural benchmarks (Table 13), and prior actions (Table 14).

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 3.5 percent of GDP in 2024. Debt service to the Fund peaks at 0.5 percent of GDP and 1.9 percent of revenues (excluding grants) in 2029 and 23 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 119, is a substantial decline in oil prices that could trigger debt sustainability challenges. The most serious implementation risk is a possible faltering commitment to fiscal and 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. The authorities’ implementation capacity is good as demonstrated by fiscal discipline 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.

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 2023, 089; 10.5089/9798400231926.002.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 multi pie 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 a re imputed official reserves.
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.

24. An updated safeguards assessment of BEAC was completed in April 2022. Findings indicate that BEAC maintained strong governance arrangements and transitioned to international financial reporting standards (IFRS). Nonetheless, staff recommended that BEAC strengthen its internal audit mechanisms and risk management, as well as its cyber resilience and business continuity framework.

25. Regional assurances. The BEAC met its end-June 2022 NFA target and has provided updated policy assurances in support of CEMAC countries’ Fund-supported programs. The loosening of Congo’s 2022 fiscal position is projected to reduce Congo’s contribution to regional reserves by CFAF 60 billion (relative to CR 22/226) but this is expected to be substantially more than offset in 2023 as a result of policies, including corrective actions. BEAC remains committed 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 inflationary pressures; (ii) increased the interest rate on the liquidity absorption window by 25 basis points in February 2022 to reduce excess liquidity, stimulate the interbank market, and improve monetary policy transmission; and (iii) reduced weekly liquidity injections to CFAF 140 billion in July 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.

26. External arrears. Congo has external arrears to both official bilateral and commercial creditors:

  • With respect to official bilateral arrears, agreements in principle with Brazil and Russia (not covered by DSSI) to regularize these arrears are pending finalization.6’7The authorities are also engaged in the resolution of external arrears owed to India’s Exim Bank ($23 million, not covered by DSSI).

  • Congo continues to have external commercial arrears, although arrears to one supplier were repaid and agreements concluded on arrears payments to two Chinese commercial companies. The authorities are also engaged in good faith efforts to resolve arrears owed to another Chinese commercial company ($25 million), and 9 more suppliers ($17 million). As required under the Lending into Arrears (LIA) policy, Congo continues to maintain good faith efforts to resolve arrears owed to external commercial creditors. As prompt Fund financial support is considered essential for the successful implementation of Congo’s program and Congo is pursuing appropriate policies, the Fund may provide financing to Congo notwithstanding its external arrears to commercial creditors.

  • The authorities contest $245 million of arrears owed to a supplier as part of a broader litigation case8; and have requested HIPC treatment for another $203 million of pre-HIPC arrears.

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

27. Statistical issues and capacity development (CD). Data provision is broadly adequate for program monitoring. Aligned with program objectives and the Capacity Development Strategy (CR 21/225), CD prioritizes tax policy and administration, PFM reforms, debt management, statistics—where shortcomings in national accounts, monetary, fiscal, external sector, debt, and high-frequency statistics need to be addressed—and the anti-corruption framework and its operationalization. Congo is a medium-intensity user of Fund TA with a mixed implementation record.

Staff Appraisal

28. Deep structural and governance reforms will be necessary to maintain a positive economic outlook and exit fragility. Economic activity is gaining momentum owing to improved oil production, mining, and government spending. However, increased food inflation brought on by the ripple effects of Russia’s war in Ukraine worsened Congo’s already high food insecurity— resulting from limited agricultural production and high reliance on food imports. Supporting sustainable development and food security requires markedly scaling up public infrastructure, healthcare, education, and social assistance spending combined with enabling private investment in agriculture and other non-oil sectors through improved governance and business environments. The NDP 2022–26 supports these reforms and, more broadly meets the requirements of a Poverty Reduction and Growth Strategy as it was developed in close consultation with the World Bank and other development partners.

29. Implementing these much-needed reforms amid high debt levels will rely on the authorities’ commitment to creating fiscal space through rationalization of non-priority spending and domestic revenue mobilization. The substantial fiscal space created by reducing oil-related subsidies and transfers—net of transfers to protect the most vulnerable such as subsidies for cooking oil and public transport, and social assistance—will be key to this process. The freed finances combined with more comprehensive taxation of large SOEs (especially in the oil sector), broadening of the tax base, and steady collection of tax arrears will facilitate accelerated development spending and payment of domestic arrears while maintaining debt sustainability. Accompanying energy sector SOE reforms will reduce fiscal risks and, in the case of CEC, electricity costs. Oil revenues will continue to finance high external debt service, non-oil primary fiscal deficits, and building of buffers against future shocks in a highly uncertain global environment.

30. Greater momentum in reforms spanning public investment, debt management, and broader public financial management is needed to support effective implementation of the strategy outlined above. As more resources become available for public investment, it is even more imperative to upgrade project planning—emphasizing implementation within the context of a medium-term investment plan and systematic project prioritization based on cost-benefit analysis and development objectives—procurement, and spending efficiency. Debt management should focus on keeping borrowing costs low and avoiding further arrears accumulation. Risk premiums could be lowered through measures underway to improve debt statistics and transparency of debt operations. In this regard, it will be critical for the authorities to develop capacity and continue to improve information sharing and coordination across the relevant agencies. Progress in PFM reforms, including cash management and TSA reforms, is essential to transparent budget execution and credibility. For example, establishing interconnection of information systems across all public financial management institutions, including the Treasury, is critical to comprehensive monitoring of public revenue collection and spending.

31. Efforts to advance implementation of the new anti-corruption and transparency architecture must be sustained, particularly to improve the business environment. Financing for the Commissions on Anti-Corruption and Transparency (from the budget and development partners) should continue to be increased—facilitating access to information that reduces corruption vulnerabilities. In the same vein, it would be important to swiftly address gaps in the asset declaration law and AML/CFT, beginning with action plans for further reforms based on progress against recommendations from the 2018 diagnostic report on governance and corruption and the AML/CFT Mutual Evaluation Report.

32. While good progress has been made in advancing structural reforms, quantitative program performance in 2022H2 was weak. This led to substantially missing three performance criteria but serious corrective measures have been taken to address these breaches. These measures, including strong prior actions (Table 14), reflect a renewed commitment to the program.

33. Based on the strength of the authorities’ program, the implementation of the end-December 2022 regional policy assurance and regional policy assurances established in the December 2022 union-wide paper, staff supports the completion of the second review under the ECF arrangement, the request for waivers of non-observance for not contracting new non-concessional external debt and the end-June 2022 PCs on the non-oil primary balance and net domestic financing, and the request for modification of the end-December 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 third review under the ECF arrangement be conditional on the implementation of critical policy assurances at the union level established in the December 2022 union-wide background paper.

Annex I. Food Insecurity

1. Food insecurity is prevalent and rising across the Republic of Congo. Already 80 percent of the population was moderately or severely food insecure during 2014–16 (FAOSTAT). This rose to 90 percent during 2019–21 and preliminary data suggest the numbers continue to rise in 2022, reflecting high food import costs and supply shortages brought on by the ripple effects of Russia’s war in Ukraine and the pandemic.

uA001fig01

Net Cereal Imports

(Percent of Total Cereal Supply, 2020)

Citation: IMF Staff Country Reports 2023, 089; 10.5089/9798400231926.002.A001

Sources: FAOSTAT; and IMF staff calculations.Note: The latest available data was applied when 2020 data was not available.

2. Limited agricultural production and the resulting reliance on food imports, along with low income levels, underlie Congo’s high food insecurity. Local food production falls far short of the country’s needs. Agriculture is largely limited to subsistence crops, leaving more than 90 percent of arable land uncultivated. Inadequate access to financing, low mechanization, and weak infrastructure are the main bottlenecks to agricultural development and to building the sector’s resilience to climate change (see CR 21/226 for details). Consequently, about 70 percent of food is imported. In 2020, some of the most imported products were wheat, rice, and meat—together one fifth of goods imports and coming mainly from Russia, India, and the United States.

3. In 2022, global developments drove up Congo’s food inflation, which was 6 percent in October 2022. Wheat shortages, coupled with high energy and fertilizer prices and the CFA franc depreciation against the U.S. dollar, inflated the food and agricultural input import bill and transport costs from source countries to Congo, especially for staples.

4. Against this backdrop, the Government adopted a national resilience plan in 2022. The plan helped contain food inflation and erosion of food distributors’ margins, through continued regulation of staples food prices (25 percent of the CPI basket) and exemptions on related customs and VAT items. Targeted social assistance was provided to support the most vulnerable. The plan also aims to raise agricultural production (and reduce food imports) in the near and medium term, in line with the National Development Plan 2022–26, through technology and equipment support for small-scale domestic agriculture and building infrastructure to facilitate food distribution.

Annex II. Drivers of Congo’s Fragility

1. 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 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 peace building operation in the most recent three-year period.1,2

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.

3. 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.

4. 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.

5. 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.

6. 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.

7. 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 III. Fuel Market

1. In Congo, fuel is either imported by the SNPC (the national oil company) and private fuel marketers or produced domestically by CORAF (a refinery and SNPC subsidiary) which purchases Congolese crude oil at international market prices.1 The fuel is then sold on the wholesale market—at a price called the “entry distribution price” (EDP)—to private fuel marketing and logistics companies, which operate the downstream supply chain from distribution to retail. Currently, the SNPC is the sole fuel importer, accounting for 40 percent of the fuel supply, and CORAF supplies the rest. From 2023, a Chinese oil refinery, with 2.5 times the capacity of CORAF, will begin operating in Congo.

2. Wholesale (EDP) and retail prices are regulated and are currently substantially below import prices. Retail prices (VAT included) have been unchanged since 2008 but average import prices during 2008–20 allowed fuel importers and distributors to breakeven.2,3 In a country with high income inequality, such as Congo, these regulated prices mainly benefit the wealthy as poorer households don’t drive cars, relying on public transport. Regulated fuel prices have averaged slightly below fuel import or CORAF production costs. As a result, CORAF received a subsidy from the budget and has undertaken a performance improvement plan. Past compensation to SNPC for its fuel imports has not been transparent—payment may have been made from crude oil sales by SNPC on behalf of the government. When oil import prices exceed the EDP, private oil marketers do not import.

3. Within the fuel sector, several major taxpayers benefit from exemptions on VAT (on domestic and imported goods and services) and customs duties. For example, in 2022, SNPC did not pay customs duties or VAT on imports; and CORAF did not apply VAT on its sales.

Annex IV. Risk Assessment Matrix1

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Appendix I. Letter of Intent

December 14, 2022

Ms. Kristalina Georgieva

Managing Director

International Monetary Fund

700 19th Street, N.W.

Washington, D.C. 20431

U.SA

Madam Managing Director:

  • 1. 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) in order to support efforts to enable our country to meet its balance of payments needs, help rebuild the regional foreign exchange reserves, and restore conditions for more vigorous economic growth. Our economic and financial program continues to be implemented under the National Development Plan (NDP) 2022–26 as well as the regional economic and financial reform program (PREF-CEMAC) as our country continues to face significant economic and health challenges. The NDP was shared with the IMF Executive Board in mid-December 2022.

  • 2. As we continue to be affected by the global pandemic and high debt levels, our fiscal position has deteriorated, in part due to accelerating energy and food prices in a challenging global environment. Nevertheless, the nascent economic recovery appears to be reinforced by the lifting of all pandemic restrictions, repayment of domestic arrears, increased social assistance spending for the most vulnerable, and continued vaccination of the population. The oil sector is also growing owing to the recent increase in oil prices resulting from Russia’s invasion of Ukraine and improved oil production since last year. However, this recovery remains fragile, with large uncertainties weighing on these prospects and growing poverty that has been exacerbated by the pandemic and the rise in import prices, particularly those of cereals and other food items.

  • 3. Against this backdrop, our country’s performance under the three-year ECF arrangement has been mixed. Three of the five quantitative performance criteria were not met. Those on the basic non-oil primary balance and on net domestic financing of the central government were missed mainly due to increased oil-related transfers that were not offset with increased dividends transferred to the budget by the Societe Nationale des Petroles du Congo (SNPC) as agreed at the time of the first review of the ECF arrangement. Moreover, the introduction of a new subsidy in the July 2022 revised budget that was provided to SNPC for the purchase of fuel imports, again without offsetting measures such as increased dividends from SNPC, made it impossible to respect the end-2022 fiscal targets agreed under the arrangement. Strong corrective measures are being taken. Backlogged SNPC dividends (0.2 percent of non-oil GDP) have been transferred to the budget as a prior action; and, also as a prior action, the 2023 budget passed by Parliament will compensate for the 2022 budgetary easing, including through elimination of VAT and customs duty exemptions received by SNPC, requiring CORAF to charge VAT on its sales, and gradual phasing out of fuel subsidies consistent with the gradual deregulation of fuel prices during 202–24 accompanied by stepped up social assistance. The continuous performance criterion of the ceiling on new nonconcessional external debt contracted or guaranteed by the government was missed due to (i) the regularization of arrears with two Chinese commercial companies which involved converting the original CFA franc debt into U.S. dollars that has since been unwound—corrected by reconverting the debt back into CFA francs; and (ii) a World Bank project loan with concessionality below 35 percent but the impact on debt sustainability is negligible. We have met all indicative targets for end-June 2022 except the ceiling on disbursements of external loans for investment projects.

  • 4. We have nevertheless made progress in structural reforms: all those targeted for the end of June and July 2022 have been completed on time, except for the publication of the decree on conflict-of-interest rules and procedures. The decree lacked declaration requirements detailing the type of private interests to be listed, such as beneficial ownership of assets and information on family members, as well as mandatory declaration of interests. A ministerial order accompanying the decree will clarify rules and procedures.

  • 5. The attached Memorandum of Economic and Financial Policies (MEFP), which supplements the one signed on June 3, 2022, describes the recent economic and financial situation, presents the economic and financial policies that the government intends to implement during 2023–24 and defines the quantitative criteria, indicative targets and structural benchmarks through to end-December 2023. Disbursements under the arrangement will be subject to observance of the performance criteria, structural benchmarks, and prior actions shown in Tables 1, 2 and 3 of the attached MEFP.

  • 6. We are committed to closely coordinating our economic policies with those of the other CEMAC countries in the context of the regional economic and financial reform program (PREF-CEMAC). These reforms aim to create job opportunities and improve the living standards of a fast-growing population, including 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) improved transparency in public finances and in the oil and gas sectors, (iv) strengthened domestic revenue mobilization, (v) strengthened governance and (vi) reforms that promote development of the private sector.

  • 7. The government will continue to implement policies compatible with regional external stability, which requires the rebuilding of BEAC’s foreign exchange reserves. In this context, the government supports the efforts of BEAC and COBAC to strictly apply the new foreign exchange regulations. To achieve foreign exchange reserve objectives, the government will ensure compliance with the requirement to repatriate export proceeds, particularly for oil.

  • 8. We believe that the economic and financial policies set out in the attached MEFP will continue to enable us to achieve the objectives we have set under the program and to promote the mobilization of financing from development partners. However, we stand ready to take any further measures that may prove necessary to achieve these objectives. 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.

  • 9. Bearing in mind the program achievements to date and the commitments set out in the MEFP as well as the agreed prior actions, we are requesting (i) waivers of non-observance for the quantitative performance criteria on the basic non-oil primary fiscal balance and net domestic financing of the central government and on the continuous performance criterion of the ceiling on new nonconcessional external debt contracted or guaranteed by the government (ii) the modification of the quantitative criteria on the basic non-oil primary fiscal balance and net domestic central government financing for end-December 2022; and (iii) completion of the financing assurances review and the second review and 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 protracted balance of payments needs and support our reform agenda. This 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.

  • 10. 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.

/s/

Jean-Baptiste Ondaye

Minister of Finance and Economy

Brazzaville, Republic of Congo

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 2022–23 and the medium term, and program objectives and the policies and measures to achieve them.

I. Background, Recent Economic Developments, and Outlook

1. Economic recovery is underway despite a challenging external economic environment.

  • Economic growth is projected at 2.8 percent in 2022. This is supported by a resumption in investment by the largest oil producers resulting in a revival of oil production growth (expected at 0.5 percent) and solid performance of the non-oil sector (projected to grow 3.3 percent). Non-oil economic activity is gaining momentum, supported by solid activity in agriculture (in part owing to the government’s investment in protected agricultural zones), mining (investments potash and iron ore), manufacturing and services, low COVID-19 cases, domestic arrears payments, and government spending on infrastructure and social assistance.

  • Inflation is picking up driven by higher food prices. However, it is anticipated to be contained to 3.5 percent in 2022 owing to continued price regulation of critical food items and some reduction in the transport costs for all food.

  • The current account is in a large surplus (projected at 21.6 percent of GDP) due to high oil prices, notwithstanding a large import bill for all imports (including food). A substantial amount of these oil revenues are financing large debt service due this year. This includes debt service to regional commercial banks, G20 DSSI creditors (which began in June), bilateral creditors, and the two largest external commercial creditors.

  • The banking system remains stable. Non-performing loans (NPLs) have not grown over the past year. This reflects the positive impact of domestic arrears’payments and banks’ collection efforts outweighing the effects of the economic contraction brought on by the pandemic in 2020. The additional liquidity from domestic arrears’ payment combined with reduced government borrowing from the banking system has freed liquidity, supporting a rise in private sector credit growth.

  • The fiscal position has been loosened compared to our commitments for 2022 during the first review of the ECF arrangement (IMF Country Report 22/226). The non-oil primary deficit, whose projected path anchors debt sustainability under the IMF arrangement, was widened by 1.5 percent of non-oil GDP in 2022. This is mainly due to the high costs of fuel imports leading to the introduction of a new subsidy in the July 2022 revision of the budget. This new subsidy is being provided to Societe Nationale des Petroles du Congo (SNPC) for the purchase of fuel imports, which are resold to domestic fuel distributors and retailers. Subsidies for electricity and cooking fuels were also provided. As part of our commitment to fiscal consolidation, SNPC has transferred CFAF 12 billion (0.2 percent of non-oil GDP) of dividends to the 2022 budget—this includes CFAF 3 billion previously budgeted dividend transfers and another CFAF 9 billion in unpaid dividends from previous years (totaling CFAF 16 billion as of end-2021). The 2022 fiscal position has also benefitted from the recent agreement with oil producers on tax concessions, where CFAF 12 billion was paid to the government to compensate for shortfalls in tax payments during 2020–22 while negotiations were underway.

2. In 2023, the recovery is expected to strengthen. Real GDP growth is projected to gain momentum (growing at 4.1 percent) with a normalization of oil production (growing at 4.4 percent)—benefitting from resumed investment in 2022—and continued growth of the non-oil economy (4.0 percent). Non-oil growth reflects (i) low pandemic case numbers (ii) continued pick up in agriculture activity (supported by government investments during 2022) (iii) on-streaming of potash and iron ore mines (iv) increased government spending on social assistance and development projects and (v) continued arrears repayment supporting private consumption and investment. Average inflation is projected to decelerate to 3.3 percent in 2023, owing to the expected decline in international food and fuel prices. Lower oil prices will weigh on oil exports and increased public and private investment are expected to raise the import bill. Nevertheless, the current account balance will remain positive in 2023 (projected at 8.5 percent) and will help finance still high debt service (as G20 DSSI debt service picks up) and building of international reserves buffers.

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 4.1 percent during 2024–27, driven by a healthy expansion of the non-oil sector (reaching 5 percent by 2026–27). Economic diversification is expected to accelerate on the back of improved food production, food storage, irrigation, and transport infrastructure as well as 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, updated dividend payments by SOEs (including SNPC), increased oil-related VAT and customs duties payments and collection, phasing out of fuel subsidies (supported by deregulation of fuel prices except public transport and cooking fuels) accompanied by increases in targeted social assistance, prudent spending, and continued 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 decline in external debt service and a gradual rise in non-oil exports, foreign direct investment, and development partners’ project 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 are tilted to the downside. They relate mainly to : (i) the intensification of spillovers from the war in Ukraine which could negatively affect investment, trade flows, remittances, and inflation; (ii) lower oil prices and disruption in oil production, including due to the evolving global transition to low-carbon economies; (iii) renewed pandemic related risks due to slow vaccine rollout and new variants; (iv) adverse weather shocks raising food insecurity and inflationary pressures; (v) reduced investment in line with further interest hikes and tightening external financing conditions; and (vi) 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 fertilizer, metal, and oil prices could raise exploration and 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. 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. Going forward, 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 continue to be anchored on gradual consolidation of the non-oil primary balance by 6.9 percent of non-oil GDP (or 2.4 percent of GDP) between 2022 and 2027. High oil revenues are anticipated to result in 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 99 percent in 2022 to 71 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. Steady progress continues on reducing external arrears. Since the conclusion of the first review of the ECF arrangement (IMF Country Report 22/226), arrears to one supplier were repaid and agreements were reached on arrears payments to Chinese companies (two agreements have been signed and one is being discussed). The authorities are engaged in the resolution of external arrears owed to the remaining suppliers and India’s Exim Bank (not covered by DSSI). The government is committed to the non-accumulation of domestic or external arrears. To this end, we will: (i) setup a dedicated sub-account within the Treasury Single Account (TSA) 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 (1115). 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 2023 budget, which will be approved by Parliament by end-2022, envisages strong fiscal consolidation while increasing social and capital spending. The 2022 fiscal loosening (111) will be compensated in 2023, after accounting for measures to mitigate the consequences of high inflation. The non-oil primary balance target is -13.3 percent of non-oil GDP, which translates into a primary balance target of 9.0 percent of GDP. The 2023 budget rests on the principle of mobilizing revenues and rationalizing non-priority spending by:

  • Maintaining revenue-enhancing measures adopted over the past three years such as electronic payments, broadened of the tax base (including application of the recently completed enterprise survey and expansion of the land tax base owing to the conclusion of the land survey in 2022), gradually phasing out CIT exemptions for violating investment conventions, reducing customs exemptions rates for certain beneficiaries and eliminating exemptions for others, increasing excises in line with CEMAC guidelines, prohibiting tax incentives in forestry, and increasing collection of tax arrears.

    • The collection of tax arrears will be achieved by actively applying the inventory of all tax arrears and the probability of recovery, which are underway and expected to be completed by end-2022 (structural benchmark). The committee undertaking this task is also preparing a proposal for recovery strategies. Part of this strategy is a “tax amnesty” program that is already being implemented. The program forgives part of a taxpayer’s existing tax arrears in exchange for payment of the rest during 2023–24. Since mid-May 2022, the program has been providing up to 30 percent relief on the principal amount and 80 percent relief of the penalties in exchange for payment within six months. In 2023, the recovery of tax arrears is anticipated to reach CFAF 5 billion.

    • 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.

  • Maintaining low VAT rates and customs duties on essential food imports to help the population cope with high food inflation. Similarly, the 2021 reductions in turnover tax and corporate tax rates will also be maintained to help businesses whose margins are being eroded by high import costs (notwithstanding some decline in international fuel prices and transport costs).

  • Recent conclusion of negotiations with oil producers on tax concessions are projected to yield additional revenue gains of CFAF 3 billion.

  • Recovering the remainder of past years’ unpaid SNPC dividends (CFAF 7 billion).

  • Eliminating VAT and customs duty exemptions for SNPC (projected to yield CFAF 11 billion) and requiring CORAF charge VAT on its sales (projected to yield CFAF 12 billion).

  • Phasing out the fuel subsidies introduced in 2022. Total oil-related transfers (including to SNPC, CORAF, CEC, and subsidies for public transportation and cooking fuels) will be limited to CFAF 125 billion in 2023; and those to SNPC will be fully eliminated by 2024. This phasing out of fuel subsidies will be in line with the deregulation of fuel prices (discussed in the next bullet) and reductions in fuel import costs.

  • Deregulating retail and entry distribution prices (EDP) for fuel during 2023–24—accompanied by a clear communication strategy—and updating the EDP pricing formula to account for improvements in CORAF’s operating efficiency since 2016 (structural benchmark for end-December 2022).1 The deregulation is beginning with an immediate 5 and 7 percent increase in retail and EDP prices, followed by quarterly increases leading to full reflection of international fuel prices in retail prices and EDP by end-2024—equivalent to a 30 percent retail price increase byend-2023 and another 45 percent increase by end-2024.

    • The impact on poorer households is expected to be contained as subsidies will continue for public transport and cooking fuels. Moreover, poorer households typically don’t drive cars. To counter any second round price effects and tackle on-going food price increases, targeted social assistance has been expanded (1111 elaborates).

  • Continuing to step up social and development spending, especially in health care and sanitation, education, and agriculture.

  • Implement the next steps of reforms adopted in 2019 that reduce transfers to 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. This will be done, taking into account the recent increase in the retirement age (varying by category of staff), which will place upward pressure on the wage bill.

  • Announcing a multi-year domestic arrears payment plan.

  • Part of the oil revenue windfalls2 in 2023 will finance the budget but the bulk will be used to retire debt and arrears as well as build buffers in the form of deposits at BEAC.

  • We will actively monitor fiscal risks, especially from spending overruns, revenue shortfalls, or underproduction of oil. Should these risks materialize, contingency measures include streamlining non-essential spending, slowing capital spending and arrears payments (which have been back-loaded in the 2023 budget for this purpose), and raising additional revenues from increasing the withholding tax on service payments from oil producers.

11. Our government is committed to increasing spending on health, education, social assistance, and resilient infrastructure. The 2023 budget continues to emphasize improving the quality and coverage of this spending while encouraging innovation.

  • In terms of health care, we are prioritizing (i) vaccination—where we plan to vaccinate 1.03 million people before the end of 2023 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 in 2023 is expected at around CFAF 223 billion (3.6 percent of non-oil GDP), a slight improvement compared to 2022.

  • 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 expand the number of educational facilities. Education spending of CFAF 292 billion (4.7 percent of non-oil GDP) is expected in 2023, an improvement compared to 2022.

  • In terms of social protection, we are expanding disbursement to CFAF 162 billion (2.6 percent of non-oil GDP) in 2023 relative to CFAF 127 billion (2.2 percent of non-oil GDP) in 2022. This includes the emergency cash transfer program linked to the pandemic, where the amount provided to each household is being increased to support households facing any second round effects from the deregulation of fuel prices as well as still high food prices. The program’s coverage will be increased from 280,000 beneficiaries at end-2022 to 400,000 by end-2023. We will also 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 the targeting and the impact of these programs. The successful piloting of mobile payments is being expanded. In 2023, we will aim to complete repayment of any remaining social sector arrears (especially pensions).

  • Capital spending is expected to increase to CFAF 475 billion (7.6 percent of non-oil GDP) in 2023, partly financed by development partners. Priority development projects are being 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 are being 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 have made good progress in repaying domestic arrears and we will continue with the objective of their full repayment by 2031. The stock of domestic arrears, which includes all audited arrears until 2018, was at CFAF 1014 billion (19 percent of non-oil GDP) at end-2021. We repaid CFAF 314 billion (6 percent of non-oil GDP) of these arrears in 2021 and CFAF 365 billion (6 percent of non-oil GDP) in 2022. Depending on the availability of financing our objective is to settle CFAF 211 billion (3.3 percent of non-oil GDP) of domestic arrears in 2023. In 2023, a new domestic arrears repayment scheme will be implemented. It will involve (i) prioritizing the payment of any remaining social arrears (without any haircut); and (ii) paying CFAF 100 billion (1.6 percent of non-oil GDP) in domestic commercial arrears, where a haircut of 30 percent will be applied. The strategy for repayment of the remaining arrears will be developed by mid-2023.

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 15.7 to 8.8 percent of non-oil GDP during 2022–27, which will more than compensate for the fiscal loosening in 2022. 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 2023 budget):

  • Upgrade the hydrocarbon-related VAT administration and eliminate hydrocarbon-related VAT exemptions. To this end, a comprehensive stock-tacking and associated revision and simplification of tax laws (into a single legislation) should be completed by end-June 2023 and end-December 2023, respectively (both are structural benchmarks). This process will also include stock-taking of the currently levied VAT on petroleum products and ensuring its full remittance to the State. Efficiency of administering VAT on fuels will also be improved, including through application of the standard credit-invoice method (based on the revision of relevant decrees by 2025).

  • Align domestic fuel prices with international prices byend-2024. Once that is done, we will apply an automatic pricing mechanism, where we will seek technical assistance from the IMF and World Bank to ensure the mechanism has a smoothing element to prevent sharp adjustments.

  • Develop an action plan for streamlining non-hydrocarbon tax exemptions. Past IMF TA has estimated that VAT exemptions cost the budget at least 1 percent of non-oil GDP and other tax exemptions cost at least 3 percent of non-oil GDP. The action plan should cover the analysis, publication, and budget implications of all tax exemptions (end-2023).

  • Strengthen the control and monitoring of exemptions, in particular by developing an annual risk-based audit, continuing to upgrade customs procedures and implementing a tailored digital transformation plan.

  • 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-December 2023.

  • Continue increasing excise duties on tobacco (from 16.5 to 30 percent) and alcohol (from 12.5 to 25 percent), vehicles (12.5 percent), and luxury items (25 percent) in line with CEMAC guidelines.

  • Reforms to SOEs will be prioritized, especially for CORAF and CEC, with a view to (i) substantially reducing the transfers and subsidies they receive and (ii) augmenting the transparency of SOE operations. We will study the production costs of CORAF and CEC and an action plan will be put in place for raising their efficiency and ensuring the electricity billing process and coverage reflect actual electricity consumption (1124).

  • By mid-2023, complete the on-going 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.

  • 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. To this end, the budgeting of public investments in commitment authorization and payment credit will be formally introduced and extended to all ministries—such that its full implementation will be aligned with implementation of program based budgeting, targeted to begin in 2024. In order to rationalize budget allocations, projects without completed feasibility studies at end-2022, will not be included in the 2023 budget.

15. We will only procure projects that are in the budget. To this end, we developed a comprehensive template for consolidated and sectoral public procurement plans—where we worked 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 has been rolled out to pilot ministries and agencies (including the Ministries of Education and Health) in the third quarter of 2022 and the filled -in template mapped to the 2023 budget (for the pilot ministries) by end-2022 (structural benchmark). The budget law for 2023 explicitly states that procurement cannot take place outside the template for the pilot ministries, except for emergency items that are approved by the Minister of Finance before the procurement is initiated. To further improve procurement practices we plan to operationalize the “cellule de gestion des marches publics” in each MDA, including the “secretariat permanent”, the “commission de passation des marches”, and the “sous-commission d’analyse”. With support from the World Bank, the relevant decree has been drafted and a workshop is being planned to help finalize the draft. The decree is expected to be adopted by mid-2023.

16. Current project planning methods will be upgraded and systematized. With the support of IMF technical assistance during 2023 (public investment management assessment), 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 2063 African Union Agenda, and the CEMACs regional economic program—and cost-benefit analysis. Training will continue to 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 World Bank-supported survey on the efficiency of past investment projects (those launched since 2014), finalized at end-2022. Based on this review, by end-September 2023, 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 extended maturity loans from the World Bank (IBRD) and all budget support loans identified under the program—and the government will seek refinancing in regional and national markets for previously issued securities and to cover short-term liquidity needs. The breaches of the zero ceiling on contracting new non-concessional external debt and the consultation clause under the program on signing of new external debt arrangements (as defined in the TMU) have exposed serious remaining debt management challenges. We have taken corrective action to reverse the negative impact of the breach, agreed with Fund staff on reformulation of the TMU consultation clause to spell out its perimeter, and have requested Fund TA to identify weaknesses in the legal, institutional, and operational framework of debt management that may have led to this breach. Prior to the next program review, we will implement any measures recommended by this TA as feasible within this timeline. 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.

19. In July 2022, we prepared a comprehensive debt management strategy for 2023–25. This strategy has been developed with the support of IMF TA and will be published and implemented once approved by the National Debt Committee. Its objective is to (i) finance the needs of the State at as low a cost as possible while maintaining debt risks at acceptable levels— including prioritizing euro-denominated and longer maturity loans; and (ii) contribute to the development of the domestic and regional market for government securities. To be effective, the new medium-term debt management strategy has been translated into the 2023 budget (e.g., loans projections aligned with the procurement template and detailed domestic borrowing plans).

20. To strengthen the credibility of the debt management strategy and improve coordination between debt managers and the budget authorities, the new medium-term debt management strategy will be translated every year into an annual borrowing plan as an annex to the budget law (as required by regional regulations), beginning with the 2023 budget law. The borrowing plan will include details (nominal borrowing amount on cash basis and maturities) on planned issuance of government securities, planned disbursement amount for each project-loan, and estimated amount of budget support.

21. To improve its accountability and effectiveness and to overcome capacity bottlenecks, the Caisse Congolaise d’Amortissement (CCA) is being restructured. The process (developed with support of IMF TA) should be complete by end-September 2023. Key steps include adoption of the draft decree relating to the mission of the office (organizational structure of the CCA clarification on coordination with the Treasury Department, end-March 2023), nomination of staff to each division (end-May 2023), and adoption of a new procedure manual (end-June 2023). Additionally, starting March 2023, we will begin implementing a training program with support of IMF and World Bank TAto strengthen staff capacity. These improvements will be crucial in strengthening debt management operations (including issuances of public securities), debt monitoring, transparency, and accountability. We are committed to ensuring better sharing of information across the CCA the Treasury, and BEAC.

22. We have made good progress in enhancing debt monitoring and transparency:

  • We are publishing monthly debt statistics on central government debt on the Ministry of Finance website. For SOEs, 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. A first round of information was published in March 2022 on the Ministry of Finance website, and we are currently working with IMF TA and the World Bank to refine this information and get more details on SOEs debt composition. This will require updating the ministerial order and the SOE reporting template to include more details on the information that should be provided by the SOEs to the CCA

  • Going forward, we plan to step up reliability and transparency of public debt information. By end-March 2023, we plan to publish a more comprehensive 2021 annual public debt report (structural benchmark) than what was published in May 2022. Among other information, this report will include further details on the guaranteed and non-guaranteed debt of the 10 largest SOEs. Following this structure, by end-December 2023, we plan to publish the 2022 annual public debt report. Separately, we will (i) improve recording of debt data (ii) publish, on a quarterly basis, data on the outstanding stock of public debt, that will include composition by creditor (current, in arrears, contingent debt), currency denomination, maturity, and interest rate structure and debt service projections. We will also publish annual projections of domestic and external debt, both guaranteed and nonguaranteed, of the central government, public enterprises, public institutions, and local authorities.

C. Safeguarding and Improving Use of Energy Resources

23. 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. This includes the fuel price deregulation during 2023–24 and accompanying measures elaborated in U10 and 13 that will (i) support increased revenues while protecting the vulnerable and (ii) improve governance of SOEs such as SNPC, CORAF, and CEC. We will also publish the audit reports of these two companies for year n, before the end of year n + 1. In this context, we will continue to enforce (i) implementation of the performance contract with CORAF focused on efforts to reduce operating costs and undertake only prudent investments (ii) payment by CORAF of the crude oil made available to it by the State in the Treasury Single Account (TSA) (iii) sale by CORAF of petroleum products directly to distribution companies, (iv) recovery by CORAF from distribution companies of revenues from the sale of petroleum products, and (v) 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 that is aligned with the schedule of fuel price deregulation. Along these lines, the payment of the subsidy to the CEC will continue to be based on quarterly reporting of expenditures to justify the subsidy and CEC’s turnover, including claims from the energy sector.

24. We are developing an action plan for the next phase of reforms aimed at reducing transfers and subsidies, especially to CORAF and CEC. Key elements will include: (i) a study to determine production costs (completed byend-2023); (ii) improving the electricity billing process and coverage to reflect actual electricity consumption with a view to recovering production costs (this portion of the plan completed by mid-2024); (iii) implementing an updated version of the 2005 price-based regulatory framework for fuel prices and ensuring sufficient social assistance to mitigate the impact on vulnerable groups (1110,13); and (iv) enforcing full payment by CORAF for the oil purchased from the government and full payment of dividends by SOEs, including SNPC.

25. We are also taking additional actions 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 the holders of natural resource concessions (including mining, forestry, and oil concessions) and publish the oil flow reconciliation report on the government website. We will continue to have audits (conducted by internationally renowned audit companies) of the petroleum costs declared by petroleum companies under their respective production-sharing agreements. If needed, we may also request Fund technical assistance on best practices in natural resource management.

D. Public Financial Management and Governance Reforms

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

  • 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 in 2023. As a result, the CABD’s capacity and independence will be strengthened.

  • We are implementing the new medium-term strategy for PFM reforms, which was developed with support from IMF TA The accompanying comprehensive 3-year action plan—which includes a roadmap for future reforms, including a comprehensive timetable of actions and reforms—will be updated every 18 months.

  • 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 cashflow plan with the consolidated commitment plan (and, from 2023, with the comprehensive procurement plan and template). This committee includes only representatives of the Ministries of Finance and Budget; 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 cashflow plan.

  • We will be implementing the new organizational chart of the Ministries of Finance and Budget.

  • We are committed to improving the architecture of the Treasury Single Account (TSA) at the central bank. To this end, (i) we will prepare a complete list of all public accounts (end-2022), spanning central government and public entities, remaining in commercial banks with a view to closing them (in line with an action plan) 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 (end-2022). These actions, which are part of the PFM strategy, should lead to improved Treasury services and facilitate proper payment execution. 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 receipts, we will ensure the full interconnection of information management systems used by customs offices (ASYCUDA), tax authorities (E-TAX), and Treasury. Regarding the interface between E-Tax and ASYCUDA, a data exchange protocol has been signed between the two administrations and a consultation platform is already operational. The specifications for the Treasury part have not yet been drawn up. The general platform will be operational byend-2023.

  • We are committed to prepare the transition toward accrual accounting (by end-2024), with the creation of an opening balance sheet committee (by end-February 2023). The committee will be in charge of establishing the opening balance sheet and define the main steps toward the implementation of the accrual accounting.

27. 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 but some weaknesses are still being addressed. Delays in SIGFIP implementation during 2022 were due to funding and capacity challenges which are being addressed. The modules on cash management, budget reporting, and procurement are targeted to become operational byend-2023 (structural benchmark); and the module on accounting, including accrual accounting as well as the transition to program budgeting, byend-2024. 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 has provided technical assistance, 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.

28. To ensure full transparency of emergency spending during the pandemic, the government continues to commit to the following measures. We have posted 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), where contracts signed during the last quarter of 2022 onwards will be posted within 60 days of their award. Continuing the practice of the first three quarters of 2022, we will undertake and post on the government website ex-post reports on the delivery of COVID-19 related contracts during the last quarter of 2022 onwards, within 90 days of completion dates. We have hired a reputable third-party internationally renowned audit company to audit all COVID-19 related purchases and expenses contracted in the fiscal years 2020 and 2021. The audit results for 2020 have been posted on the government website; and those for 2021 posted at end-December 2022. The audits focus not only on the financial aspects of procurement, but also on compliance with applicable procurement regulations.

29. 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 significant steps to address governance weaknesses and corruption vulnerabilities, including the 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. Progress in increasing access to information and transparency will contribute to confronting corruption vulnerabilities, which constitutes a necessary precondition to improving the business climate. For example, we have published the 2018, 2019, and 2020 reports of the Extractive Industries Transparency Initiative (EITI); and we are committed to publishing the 2021 report shortly. 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 a comprehensive analysis of the implementation of measures committed to in the 2018 diagnostic report on governance and identify areas for further improvement, including those related to rule of law and transparency. This effort will be supported by IMF technical assistance on areas related to anticorruption and rule of law, as well as AML/CFT. We will also develop an action plan for improving AML/CFT that builds upon recommendations from Congo’s recently published AML/CFT Mutual Evaluation Report.

30. 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. Effective implementation of the 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. The conflict of interest decree, issued and published in August 2022, establishes clear rules as to the behavior expected of public officials as well as an effective institutional framework. To remedy some procedural shortcomings, a ministerial order is being adopted (by January 2023) to establish mandatory disclosure of interests: (i) upon entering on duty; (ii) once every year regardless of substantial modification, and (iii) in case of substantial modification. This ministerial order will also establish a formal model for disclosure detailing the type of private interests to be listed, such as beneficial ownership of assets and information on family members. These changes will ensure compliance with the requirements of the UNCAC and international practices. Our anti-corruption commission, the High Authority for the Fight against Corruption (HALC), is fully operational. We are committed to ensuring its full independence, as required by law, and to making sure that it receives the necessary budget allocations to perform its functions. As of end-2022, we are publishing annual 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.

31. We have operationalized the requirement that high-level officials 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 IMF staff to revise the existing asset declaration law to address gaps on verification of assets, frequency of filing, online publication and information sharing and ensure the law is consistent with international good practices, particularly the G20 High Level Principles on Asset Disclosure by Public Officials. We will also work to harmonize our interest and asset disclosure systems so they can effectively contribute to the fight against corruption.

32. The government is making strides in advancing transparency.

  • We have established bylaw the commission designed to implement the law on transparency, which gives effect to Congo’s regional commitments on budget transparency. The commission, which is required by law to include civil society representation, is operational. We will ensure that the commission, which includes civil society representatives, is equipped with the necessary resources to perform its functions, primarily to make publicly available the information required under the law. 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 by end-February 2023.

  • 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 Cour des Comptes will be published on the government website within 30 days of being finalized.

33. The government supports the widespread dissemination of information on court proceedings and the functioning of law enforcement institutions as a step to better resource allocation and as committed to in the 2018 diagnostic. 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, AM L/CFT, insolvency, foreclosures, and land for 2015–20; and (iii) all decisions of the Supreme Court.

E. Broader Structural Reforms

34. 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 1110,13, 23–25 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 para fiscal 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

35. We will also strengthen financial sector resilience and broaden access to finance, which will support macroeconomic stability, economic diversification, and resilience-building. A roadmap for the implementation of the 2022–27 sub-regional financial inclusion strategy has been developed. 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 Other regulatory provisions have been implemented or are being drafted for a significant improvement of the legal framework for business, in particular the decree setting the terms and procedures relating to the registration of credit, microfinance and certified payment institutions practicing in the Republic of Congo; the law governing financial mediation in the Republic of Congo; and the decree on the procedures and conditions for the registration of real estate securities. Electronic money activities (mobile banking, mobile money, etc.) are governed by CEMAC regulatory texts, in particular Regulation No. 02/03/CEMAC/UMAC/CM relating to payment systems, means and incidents, Regulation n°01/11/CEMAC/UMAC/CM relating to the exercise of the activity of issuing electronic money and COBAC Regulation R-2005/02 relating to electronic money institutions. 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 (1112). 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

36. The government will prioritize improvement of public statistical databases. The Ministry of Planning and Statistics 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-June 2023. 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 is underway, supported by funding from the World Bank.

37. 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 websites of the Ministry of Finance and National Institute of Statistics. Foreign trade statistics are published on the website of the National Institute of Statistics. 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

38. 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

39. 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, 2 and 3 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 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. The fourth semi-annual review will be based on data and performance criteria at end-June 2023 and is expected to take place after October 15, 2023.

40. We will strengthen internal monitoring mechanisms to ensure strong program implementation. A program monitoring committee (Program Monitoring Committee, CSP) 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: Quantitative Performance Criteria (PC) 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. “Program” columns represent the PCs and ITs set at the time of the first review of the ECF arrangement; and “Modified Program” represent the modifications to these PCs and ITs proposed during the current second review of the ECF arrangement.

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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Table 3.

Republic of Congo: Prior Actions

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Attachment II. Technical Memorandum of Understanding

I. 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 200V, 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 H5A(c), 5A(d), 5A(e) and H5B(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-a-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; (iii) all sources of budgetary loans identified in the program; and (iv) debt to creditors whose residency can be tracked, in which case the definition of external debt is on a residency basis. 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.1 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 loans contracted from the World Bank (both IDA and IBRD) 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” external 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” external arrears is the total of “non-program external arrears” in connection with current external 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. Exceptions to the application of this adjustment is when (i) grant financing for the government’s social cash transfer program in 2022 or 2023 exceeds program projections for that year—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 remain unchanged for that year; 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; and (ii) World Bank budget financing in 2023 exceeds projections—in this case the 2023 floor for the basic non-oil primary balance will remain unchanged and the ceiling for 2023 net domestic financing to the government will be adjusted downward by the full amount of the excess World Bank budget 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. The exception to this adjuster is when the World Bank budget financing in 2022 is below projections—in this case the 2022 floor for the basic non-oil primary balance will remain unchanged and the 2022 ceiling for net domestic financing to the government will be adjusted upward by the full amount of the shortfall in World Bank budget financing.

  • When oil revenues are 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. 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 prior to entering into any new debt commitments that give rise to obligations in currency other than the CFA Franc or to FX-indexed obligations. 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 2022–23 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

The TMU requires the target for net domestic financing be adjusted downward for higher than expected net external assistance and oil revenues (relative to that projected in CR 22/226).

2

This corrective action addresses the cumulative breach of the PC.

3

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).

4

In line with continued improvements in the compilation of statistics, supported by technical assistance from the IMF and other development partners, historical GDP and balance of payments statistics have been revised. As a result, nominal GDP is lower than in CR 22/226 and all ratios in percent of GDP are higher. This effect explains over 11 percentage points of the 2022 increase in the debt-to-GDP ratio. The other 5 percentage point increase of this ratio in 2022 is due to new social debt and revised projections of domestic borrowing and acceptance rates of unaudited arrears.

5

Technically, the EDP would be adjusted,which would flow through to the retail price while the difference between the EDP and retail price would remain constant.

6

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

7

Arrears to Angola are deemed away based on Paris Club agreed minutes underpinning HIPC.

8

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

Source: Congolese authorities.

2

When unregulated,the EDP is calculated as a weighted average between the actual import prices (for imported fuel) and the import price grossed up through an adjustment factor (for fuel produced by CORAF, where the adjustment factor reflects cost inefficiencies of CORAF’s production).

3

When unregulated, the retail price is the EDP plus distribution and retail costs, markups, and VAT (from the whole sale to retail stages of the supply chain).

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 probabilitybetween30and 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

Technically, the EDP would be adjusted, which would flow through to the retail price while difference between the EDP and retail price would remain constant.

2

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). In 2023, up to 2.3 percent of non-oil GDP of these windfalls will be used to finance development spending and repayment of arrears (always based on a comparison with IMF Country Report22/49).

1

The calculation of concessionality takes into account all aspects of the debt agreement, including maturity, grace period, payment schedule, upfront com missions, 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: Second Review under the Three-year Extended Credit Facility Arrangement, Requests for Modification and Waivers of Nonobservance 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 2023: Issue 089
Publisher:
International Monetary Fund
ISBN:
9798400231926
ISSN:
1934-7685
Pages:
124
DOI:
https://doi.org/10.5089/9798400231926.002
  • <sup><xref rid="RA001fig01" ref-type="fig">Figure 1.</xref></sup>
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    Figure 1.

    Republic of Congo: Recent Economic Developments, 2012–22

  • <sup><xref rid="RA001fig02" ref-type="fig">Figure 2.</xref></sup>
    View in gallery
    Figure 2.

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

  • View in gallery

    Net Cereal Imports

    (Percent of Total Cereal Supply, 2020)

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

Net Cereal Imports

(Percent of Total Cereal Supply, 2020)