Introduction

The visit to the IMF Managing Director of the President of Republic of Congo, H.E. Denis Sassou Nguesso on December 12, 2022, at the IMF Headquarters in the margins of the Second USA-Africa Leaders Summit was an opportunity to reaffirm Congo’s economic policy and reform commitments albeit challenging times. These commitments include enhancing domestic macroeconomic stability through steadfast fiscal consolidation and PFM measures with particular attention given to protecting the most vulnerable populations; continue advancing governance, anti-corruption, and transparency reforms; and promote economic diversification while adapting to climate change including by preserving the rainforest and rivers in the Congo Basin.

The program implementation in the period under review has been marked by challenges stemming from a volatile international environment, the war in Ukraine and their mixed spillovers. Congo is an oil-exporting country but also a net importer of food and refined petroleum products. Rising costs of living, food insecurity, the growing impact of climate change and the ensuing need for social protection have in part negatively affected the performance under the Fund-supported program. The Congolese authorities have however taken the needed actions to keep it on track. Moreover, further strides were made in the implementation of the vast structural reform agenda, including on governance and anti-corruption frameworks.

Going forward, the authorities remain committed to pursue a higher, inclusive, and green growth. These objectives are at the center of the recently adopted national development plan (NDP) for 2022–26. Congo is also determined to play its role in the regional strategy, notably by contributing to strengthening the external position of CEMAC in the context of the ECF arrangement and paving the way for stronger and sustainable growth through implementation of measures under the regional economic and financial reform program (PREF-CEMAC).

Recent Developments and Outlook

Economic activity strengthened in 2022. Real GDP growth is projected to increase to 2.8 percent from 1.5 percent in 2021, driven by a recovery in oil production and sustained activity in the non-oil sector. The latter reflects scaled-up spending in social assistance and public investments, especially in agriculture and infrastructure, which consequently helped to reduce reliance on food imports and increase its resilience to climate change. End-year inflation shot up from 1.5 percent in 2021 to 3.5 percent in 2022 owing to soaring prices of imported food and fuel. Despite a larger import bill due also to the depreciation of the CFA franc vis-a-vis the US dollar and higher transport costs, the current account surplus grew by almost 50 percent to 21.6 percent of GDP thanks to robust oil exports.

Fiscal policy stance, notably in respect to the non-oil fiscal indicators, was relaxed to accommodate greater social and investment spending as well as subsidies. Regarding the latter, the high costs of fuel imports led to the introduction of a new subsidy to the national oil company, SNPC, in the July 2022 revision of the budget. The authorities had also to provide subsidies for electricity and cooking fuels to help households weather the cost-of-living crisis. Despite the rising expenditures and increase in the non-oil primary deficit-to-nonoil GDP ratio—an indicator that the authorities consider as a key anchor for debt sustainability—the fiscal primary and overall surpluses more than doubled on the back of higher oil revenue. A recent agreement with oil producers on their tax concessions also benefitted the overall fiscal position. In addition to social and investment spending, the oil windfalls were used for debt reduction and reserve accumulation at BEAC, the regional central bank.

The banking system broadly has remained sound. Stable non-performing loans (NPLs) reflect the positive impact of domestic arrears repayments, while the reduced domestic bank financing of the budget has supported private sector credit growth.

Economic recovery is expected to further strengthen in 2023 and over the medium term, while inflation will gradually recede, and the external position reinforce. Economic expansion this year will be supported by higher oil production and growth in the non-oil sector amid further improvements in the epidemiological situation and sustained domestic demand. Inflation should decelerate in 2023 and over the medium-term towards the CEMAC convergence threshold of 3 percent as global inflation abates. The current account balance will remain in surplus and contribute to regional reserve accumulation. This outlook is however subject to elevated downside risks including an intensification of spillovers from the war in Ukraine and adverse weather conditions that would further increase food insecurity and inflationary pressures. To protect this outlook, the authorities are determined to accelerate reform implementation. Timely support from donors is also critical, which would help support investment and hence, boost economic growth.

Program Performance

Quantitative performance has been mixed in the difficult circumstances. One of the five quantitative performance criteria (QPCs) and four of the five indicative targets (ITs) underlying this review have been met at end-June 2022. However, the increased oil-related transfers and subsidies sparked by the higher costs of fuel imports have led to the non-observance of the QPCs on non-oil primary balance and on net domestic financing of the central government. It is worth stressing that, as noted earlier, the overall primary balance remained largely in surplus, which demonstrates the authorities’ prudent use of oil windfalls. Nevertheless, the authorities took corrective actions in the forms of transfers of backlogged dividends from SNPC to the budget and the elimination of VAT and customs duty exemptions received by SNPC. In addition, the regulated fuel prices have been adjusted upward and the Parliament has passed a budget that will fully phase out the new fuel subsidy during 2023–24. The continuous QPC on new non-concessional external debt was also missed due to a recent World Bank loan whose concessionality was below 35 percent and the conversion into dollars of a domestic currency-denominated external debt. The conversion has been since reversed. Temporary arrears accrued recently have also been paid and no additional arrears have been accrued. In light of the corrective actions taken, the authorities are requesting waivers of the non-observance of the missed QPCs. Also, in view of the fiscal relaxation during 2022, the authorities are requesting a modification of the end-December 2022 QPCs on the non-oil primary balance and the net domestic financing.

As regards to the public debt, Congo has remained in large part current on its service since the start of the arrangement albeit two recent short-lived arrears. The authorities have used part of the oil windfalls to gradually reduce external arrears They have begun to service the debt rescheduled under the Debt Service Suspension Initiative (DSSI) in mid-2022. Additionally, agreements on the resolution of debt arrears with several domestic and external creditors have been concluded while others are under negotiations. To ensure timely debt service, following the recent occurrence of small -and resolved- external arrears to Belgium and France, capacity constraints in debt management are being addressed with the support of on-going IMF technical assistance.

The implementation of the structural conditionality has advanced well. All structural benchmarks programmed for end-June 2022 and end-July 2022 were met with the exception of the publication of the decree on conflict-of-interest rules and procedures. The asset declaration requirements which did not fully meet international standards in the decree have been since addressed in a ministerial order adopted and published in January 2023. The ministerial order establishes a formal model for asset disclosure by public officials, providing notably the beneficial ownership of assets and information on family members, and mandatory disclosure of interests at regular periods and whenever warranted by a substantial change in assets and interest.

Policies for 2023 and Beyond

The Congolese authorities remain committed to their reform program embedded in the national development plan. The NDP 2022–26 aims to reduce the country’s fragility through economic diversification, job creation, and higher incomes. The authorities will take the opportunity of high oil prices to further address pressing social and investment needs, reduce debt, gradually deregulate fuel prices while protecting the vulnerable. Their policy strategy will contribute to accumulating international reserves at the regional central bank. They will sustain the reform momentum with a special emphasis on further improving the anti-corruption and governance frameworks.

Pursuing Fiscal and Debt Sustainability

The authorities’ fiscal policy in 2023 onward will adopt a growth-friendly stance while strengthening fiscal and debt sustainability. Fiscal consolidation will be pursued through revenue mobilization and spending reprioritization over the medium term to create more room for social and investment spending. To this end, the 2023 budget maintains the revenue-enhancing measures adopted over the past three years while keeping low VAT rates and customs duties on essential food imports to help the population cope with high inflation. Elimination of unproductive exemptions will continue, including those accorded to SNPC The latter is expected to finalize payment of past years’ dividends for which the equivalent of 0.2 percent of non-oil GDP was already paid to the 2022 budget. The fiscal position will also benefit from the gradual phasing out of untargeted fuel subsidies.

Spending prioritization is at the forefront of the fiscal consolidation strategy. Expenditures on health, education, social assistance, and resilient infrastructure will increase while maintaining determined efforts to contain the wage bill and reduce fiscal risks from state-owned enterprises (SOEs) and public private partnerships (PPPs). In this regard, a legal and regulatory framework for PPPs that is consistent with international best practices is being developed and will be implemented by end-September 2023. Social programs anchored to the Single Social Registry will expand while improving their targeting and their impact. The repayment of domestic arrears (for an amount equivalent to 3.3 percent of non-oil GDP) and of social sector arrears, including pension arrears, will continue in 2023.

The achievement of medium-term fiscal objectives will be supported by sustained implementation of the vast reforms. In particular, the administration of hydrocarbon-related VAT will be strengthened while eliminating related exemptions. As regard public financial management, a special focus is placed on enhancing public investment management to avoid accumulation of new arrears and obtain more value for money spent in large public investment projects. The authorities appreciate the C-PIMA mission that is currently underway. Transparency in the utilization of the emergency funds during the pandemic will continue through publications of related procurement contracts and audit reports. Public debt management will continue to be strengthened in line with the comprehensive debt management strategy for 2023–25 that was developed with Fund technical assistance (TA) and adopted in July 2022.

Advancing reforms of the energy sector is also a central element of the authorities’ medium-term program. Efforts underway to increase governance and performance of the energy SOEs will be sustained with a view to increasing revenue, reducing transfers and subsidies as well as ensuring greater contribution to the budget through dividends specifically from SNPC. Control and transparency in resource revenue management will continue through publication of audit and activity reports. The publication of the Extractive Industries Transparency Initiative (EITI) report for 2021 is expected soon.

Enhancing Financial Stability and Inclusion

Efforts to strengthen financial stability and broaden access to finance will continue through continued cooperation with the regional supervisory body COBAC. As indicated above, the continuation of domestic arrears payments is critical to further reduce financial stability risks. COBAC is monitoring closely developments in the banking sector following the removal in July 2022 of prudential relaxation measures introduced to cope with the effects of the pandemic. Relatedly, the resolution of the weak public banks remains critical to preserve financial stability. On a separate note, the authorities will pursue the implementation of the 2022–27 regional financial inclusion strategy. In this vein, a roadmap has been elaborated.

Bolstering Economic Diversification and Adaptation to Climate Change

The authorities are keen to foster economic diversification as envisaged in the NDP 2022–26. To sustain diversification notably towards the agriculture, manufacturing, and tourism sectors, the authorities plan to expand basic infrastructure for transport, irrigation, water and sanitation, as well as telecommunications while increasing accessibility and affordability of energy. The authorities share the view that the structural transformation of this economy would benefit significatively from digitalization—which is a key pillar of the NDP 2022–26. In this regard, they will also be guided by the recommendations of the PREF-CEMAC.

Advancing adaptation to climate change is becoming more and more critical. Congo is one of the world’s most vulnerable countries to climate change, based on Notre Dame Global Adaptation Index. Recently, Congo has been hit by weather-related shocks, notably floods, destroying infrastructure and affecting a significant segment of the population in the northern part of the country. The Congolese authorities continue to promote the preservation of rainforest and the efficient exploitation of water resources in the Congo Basin, which is a major global public good but lack financing. In this regard, they are reflecting on carbon credits, among other solutions. The authorities have also started to inquire about Congo’s possible access to the IMF’s Resilience and Sustainability Trust (RST).

Conclusion

While macroeconomic program implementation during the period under review has suffered from multiple shocks, the authorities have kept the program on track thanks to remedial measures to maintain the fiscal path on target. The Congolese authorities have provided protection to the most vulnerable against higher food and fuel prices while pursuing development investment and addressing domestic and external debt arrears through repayments and good faith negotiations with creditors. Going forward, the authorities remain committed to the program objectives and continue to value IMF’s advice and technical support. They are requesting the completion of the second review under the ECF-supported program and approval of related decisions. Executive Directors’ favorable consideration of these requests will be appreciated.