Republic of Congo and the IMF
Country's Policy Intentions Documents
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Republic of Congo—Letter
Mr. Horst Köhler
Dear Mr. Köhler:
1. In November 2000, the Republic of Congo received financial assistance from the IMF under its emergency post-conflict assistance policy. In that context, the IMF staff has been monitoring economic and financial developments, with a view to putting in place a three-year program supported by the IMF's Poverty Reduction and Growth Facility (PRGF). Such a program would permit the Republic of Congo to benefit from relief on its external debt under the Initiative for the Heavily Indebted Poor Countries (HIPC Initiative). However, the evaluation in July 2001 of the implementation of the post-conflict program pointed to significant slippages in performance. At the time, the government adopted corrective measures and set itself revised targets for September and December 2001, which were contained in a letter of intent dated July 27, 2001. The government of the Republic of Congo is grateful for the visit by the IMF staff team in March 2002, which evaluated progress in the second half of 2001 and discussed measures for strengthening implementation of the program.
2. In recent months, significant advances have been made in normalizing the political situation. A referendum in January 2002 adopted a new constitution, and presidential elections were held in March in peaceful circumstances. After congressional, local, and senatorial elections in May and June 2002, the transition period will end in August with the inauguration of the new institutions.
3. In the economic domain, performance in the course of the second half of 2001 was disappointing. It was not possible to meet most of the quantitative objectives, and progress with structural measures was limited, owing to the priority assigned to normalizing the political situation and reconstructing the country (Tables 1 and 2). This was against the background of a stronger economy in 2001 than projected, with overall GDP growth of 2.9 percent—as robust growth in non-oil GDP compensated for the decline in oil GDP. Thanks to high oil prices, oil revenue exceeded the projection, as did non-oil revenue, as a result of better enforcement. Nevertheless, greater expenditure than originally budgeted, especially on infrastructure investments, translated into a smaller-than-projected fiscal balance. As the political normalization nears completion, the government will redouble its efforts to satisfy the conditions necessary for starting negotiations on a program supported by the Fund.
4. In order to be able to establish a track record of adequate policy performance, the government agreed with the IMF mission on a set of performance indicators, as well as a number of priority economic reform measures, covering the year 2002 (Tables 3 and 4). The quantitative indicators are based on the macroeconomic and financial framework of the 2002 budget law (Tables 5 to 9). This framework provides for a strengthening of the government's financial position, allows room for a resumption of external debt service and a reduction in indebtedness with the banking system, and lends support to the rebuilding of the Congo's net foreign asset position following its sharp contraction in 2001. Despite recent developments on the world oil market, fiscal projections retain the conservative assumption of US$21 per barrel of Brent reference, on which the initial revenue forecasts for 2002 were based. This gives us confidence that we will be able to meet our fiscal targets in 2002, including the projected debt service payments. The government is aware that achievement of the agreed quantitative targets and structural measures is necessary for launching and subsequently completing discussions on a program that could be supported by the Fund under its PRGF.
5. Greater oil sector transparency remains a key component of our economic policy program. The IMF Executive Board emphasized this point during the Article IV consultation discussions on February 6, 2002. The government recognizes that progress in promoting good governance, by establishing greater transparency in the oil sector, is a condition for mobilizing external assistance. Indeed, support from the international community for development and poverty reduction presupposes that the Republic of Congo demonstrate that oil sector revenues are transferred in their entirety to the budget and spent in accordance with established budget priorities. The government is grateful for the support of the World Bank through its Transparency and Governance Capacity-Building Project. The first step under this project will be the launching of an external financial audit of the state oil company (Société nationale des pétroles du Congo—SNPC) by a reputable international firm and in conformity with international standards. The preparatory work for this audit is complete, and the results should be available by October 2002. Another step of this project with the World Bank will be an operational review of the oil sector; the review will cover all companies active in the sector, in order to clarify and strengthen the relations among the government, the private oil companies, and the SNPC, and will help us maximize the government's share in oil sector revenues. In parallel with this project, the government is intent on enforcing diligently the convention it signed with the SNPC on June 29, 2001. Accordingly, the government will also prepare detailed fiscal accounts that comprise and explain all transactions between the government and the SNPC.
6. Given the extent to which expenditure in 2001 exceeded budget allocations, the government will immediately restore effective control over expenditures. In particular, it will make sure that every payment made by the Congolese Treasury has been previously approved by the Budget Director, including in emergency cases. Moreover, the government is determined not to authorize any new extrabudgetary expenditures, so as to restore gradually the principle of a single treasury account. Finally, a work program will be drawn up to improve budget monitoring by the Budget Department and the Congolese Treasury and to strengthen the implementation of budget procedures. Furthermore, the revenue agencies are going to redouble their efforts to raise non-oil revenue collection. For instance, the adoption of a single import declaration form will enhance the effectiveness of the pre-shipment certification process and should help boost customs revenue.
7. Regularizing relations with creditors will be a high priority for the government. Contrary to its commitments under the staff-monitored program, spending priorities in 2000 and 2001—which focused on political normalization and reconstruction—did not allow for the payment of nonreschedulable debt service nor, a fortiori, for the reduction of arrears. The government reaffirms its intention to settle in its entirety the service on its nonreschedulable debt and to reduce gradually the amount of arrears, especially vis-à-vis the African Development Bank (AfDB), the French Development Agency (Agence Française de Développement—AFD), and the European Investment Bank (EIB). Furthermore, for reasons of sound debt management and taking into account its particularly onerous nature, the government will not contract any new oil-collateralized debt, and it will repay the existing debt on the original schedule.
8. We consider it very important to continue to make progress with the ambitious privatization agenda (summarized in Table 2), and will do so in close collaboration with the World Bank. We are going to use the suggestions received from World Bank and IMF staff to revise our interim-PRSP in the coming months.
9. The government will do all that is necessary for the effective monitoring of the program and will send the IMF staff regularly all information and documents required under the technical memorandum agreed in November 2000.
10. The government will implement all measures necessary to reach the objectives of the program outlined in this letter and the attached tables, and it hopes that this will permit, in the short run, the laying of a foundation for discussions on a program supported by the PRGF.