Public Information Notice No. 02/16

Public Information Notice: IMF Concludes 2001 Article IV Consultation with the Republic of Congo

February 25, 2002

On February 6, 2002, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Republic of Congo.¹

Background

After recurrent civil strife during the 1990s, peaceful conditions have been restored in the Congo. Following the ceasefire agreement of December 1999, the authorities launched a vast program of reconstruction and rehabilitation of basic infrastructure. A democratization process is under way with a constitutional referendum scheduled in January 2002, with presidential and legislative elections to follow in March and May.

Economic activity recovered strongly in 2000–01, while prices remained broadly stable. Real non-oil GDP growth was 16 percent in 2000 (albeit from a low base), and was estimated at 9 percent in 2001. Overall GDP growth was significantly lower, reflecting declining oil output. The pickup in activity reflected mainly a surge in construction, but also strong expansion in forestry, transportation, and trade. Thanks to the rehabilitation of the port of Pointe Noire and the railway link with Brazzaville, the supply of goods improved markedly and consumer prices declined slightly, on average, in 2001.

The budget balance turned into a surplus in 2000–01. Government revenue exceeded program projections in 2000 and during the first nine months of 2001, as shortfalls in non-oil revenue collection (notably at customs) were more than offset by higher-than-projected receipts from the oil sector. Expenditure outstripped budget allocations, reflecting higher-than-planned outlays for security purposes, the recruitment of civil servants, the large cost of organizing the national dialogue, and overruns in public investment outlays. As a result, the primary surplus was short of target by 2.1 percent of GDP in 2000 and 0.8 percent in 2001. The lower-than-projected budget surplus translated into a buildup of arrears. Despite recourse to domestic bank financing and the postponement of a domestic arrears clearance operation, the treasury cash position remained tight through September 2001 and arrears accumulated, including on civil service wages.

The resources available for external debt service were also less than projected. With the bulk of external debt-service payments earmarked for the oil-collaterized debt (83 percent in 2000, and an estimated 57 percent in 2001), the authorities could not sustain their commitment to meet nonreschedulable debt service obligations from mid-2000 onward, and external arrears built up further, including on multilateral and post-cutoff-date bilateral debt. The external debt stock was estimated at 186 percent of GDP at end-2001, with about half of the total in arrears (including nearly US$300 million in nonreschedulable arrears).

The Congo's net foreign asset position fell sharply in 2001 (by US$200 million during January-September). This reflected both an increase in net government credit and the drawdown of deposits by the national oil company (SNPC) that had built up in the last few months of 2000.

Estimates of the external trade and current account of the balance of payments point to a substantial improvement in 2000, but a deterioration in 2001. These estimates are highly uncertain, however, not only because of incomplete data on oil sector transactions but also reflecting doubts over the nature of data reported by oil companies.

Progress in the implementation of structural reforms has been limited. The signing of a framework agreement between the government and the SNPC, in June 2001, opened the way for a financial audit of the company. In other areas, one commercial bank was privatized in February 2001, but the sale of two other commercial banks was delayed. The public enterprise privatization program is also behind schedule, in part reflecting a lack of interest from potential investors. In the case of retail petroleum distribution, effective privatization was subject to finalizing a revised law (issued in October) and adjusting retail prices. In the area of civil service reforms, efforts at controlling staffing levels and the wage bill were hindered by the recruitment of former militia members into the army and various public administrations.

The 2002 draft budget is broadly consistent with the priorities set under the authorities' post-conflict program drawn up in late 2000. The projected primary budget surplus would allow the full servicing of nonreschedulable debt. However, budget projections are based on a relatively optimistic assumption for average oil prices; lower-than-expected international oil prices could complicate achievement of fiscal objectives for 2002.

The Republic of Congo joined the IMF on July 10, 1963 and its quota is SDR 84.6 million (about US$108.1 million). As of end-November 2001, the Republic of Congo's outstanding use of IMF financing was SDR 20.8 million (about US$26.6 million).

Executive Board Assessment

Executive Directors commended the progress made by the Republic of Congo in laying the foundations for lasting peace and stable political institutions, and they were encouraged by the homegrown nature of this post-war renewal. Directors also welcomed the strong recovery of the non-oil sector, as well as the authorities' efforts to rebuild the country's physical and institutional infrastructure. The challenge now is to consolidate these gains, implement market reforms quickly, and strengthen public economic and financial management, notably by improving transparency in the oil sector, so as to create conditions for strong, broad-based growth, and sustained poverty reduction.

While recognizing the very difficult circumstances in which the authorities had embarked, with limited external assistance and under severe capacity constraints, on an economic and financial program, Directors noted that performance in 2001 has been disappointing. They expressed concern about the deterioration in the country's external and financial position, the shortfalls in non-oil revenue collection despite a stronger-than-projected economic recovery, the continued build up of arrears on domestic and external debt, and delays in the implementation of structural reforms. While the overruns in budget expenditure reflected in part unforeseen factors, weak expenditure control had also played an important role. Against this backdrop, Directors urged the authorities to take all necessary steps to strengthen program implementation, and, in particular, to intensify their efforts to improve fiscal management, strengthen the transparency and accountability of the oil-sector, and develop the non-oil sectors of the economy.

Directors found the 2002 budget to be broadly consistent with the priorities established under the post-conflict program. However, the authorities should stand ready to cut or postpone less priority expenditures to ensure the attainment of the primary balance target, in case oil prices would fall short of the level assumed in the budget. Directors underlined the importance of sustained efforts to raise non-oil revenue collection and tighten expenditure control, and, in this connection, they looked forward to an early review of public expenditure with assistance from the World Bank. Civil service reform was also considered important to increase efficiency and productivity in the public sector and to help control the wage bill. Directors noted that the primary surplus projected for 2002 should allow the full servicing of nonreschedulable debt, and urged the authorities to speed up the normalization of relations with external creditors.

Directors emphasized the central role that an effective management of Congo's oil resources should play in contributing to poverty reduction efforts. They noted in particular the importance of ensuring full transparency of the operations of the national oil company (SNPC). The signing of a framework agreement between the SNPC and the state was an important first step toward greater transparency, but the authorities should now move ahead with its implementation and launch expeditiously an external financial audit of the SNPC in line with international standards. Directors urged the authorities to exert greater oversight over the SNPC, including by narrowing the scope of its activities to the upstream oil sector, curtailing any off-budget management of oil revenue, and ensuring regular transfers to the budget of profits from oil field partnerships. They also cautioned against concluding new oil-collateralized debt restructuring operations.

Directors emphasized the importance of accelerating structural reforms aimed at creating an environment conducive to private sector development and diversification of the economy. They welcomed the progress achieved to date in commercial bank restructuring, and looked forward to an early completion of bank restructuring and privatization plans, which would allow the restoration of a fully functioning payments system. They also encouraged the authorities to step up their efforts to divest public enterprises as a means to improve efficiency, particularly in the utility sector. The authorities were also urged to take legal steps enabling the freezing of terrorist assets.

Directors noted that the Republic of Congo will need substantial financial and technical assistance to build administrative capacity and to help meet the country's reform and poverty reduction challenges. In this context, several Directors expressed the hope that discussions on a new Fund-supported program could begin as soon as the time is appropriate. It was emphasized, however, that consideration of an arrangement under the PRGF and, at a subsequent stage, debt relief under the enhanced HIPC Initiative, will depend critically upon sustained progress in implementation of the authorities' economic and financial program, including sound fiscal and cash management, and improvements in public sector accounting and governance, especially by establishing transparency and accountability in the oil sector. Technical assistance in these areas also will be essential.

Directors noted with concern that serious shortcomings in Congo's statistical base hamper a timely assessment of economic conditions and the design of appropriate policies. They urged the authorities to attach a high priority to improving the quality of macroeconomic data and to make maximum use of technical assistance, including from the Fund.