Public Information Notice: IMF Concludes 2003 Article IV Consultation with the Republic of Congo
June 30, 2003
|Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2003 Article IV consultation with Republic of Congo is also available.|
On June 13, 2003, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Republic of Congo.1
The four-year transition period was brought to completion in 2002, following a series of elections—presidential, legislative, and local—that saw overwhelming victories by President Sassou Nguesso's party. Subsequently, a new government was appointed in August 2002 to implement the President's economic program—Nouvelle espérance—covering the period 2003-10. This program mainly focuses on reconstruction, restoration of financial soundness, promotion of good governance and transparency, sustainable growth, and poverty reduction. Recent developments also point to progress on the security front, with the signing of a new peace accord recommitting the government and the rebel groups to the 1999 cease-fire agreement.
Over the last three years, the Congolese economy resumed growth, helped by favorable oil market conditions and domestic political stabilization. Non-oil real GDP growth, fueled by public sector investment and an expansion in the forestry sector, was an estimated 6.7 percent, down from 16.6 percent in 2000 and 12.1 percent 2001. Overall real GDP growth, while strong at 3.5 percent, was nevertheless moderated by declines in oil output. Consumer price inflation, maintained at 3.3 percent for 2002, was quite volatile, with prices of transportation and food items fluctuating widely as a result of supply disruptions from the rebels' attacks on the train service between Pointe-Noire and Brazzaville. While there seem to be some progress on the economic front, social indicators point to widespread poverty.
Fiscal performance deteriorated markedly in 2002, despite strong oil revenue inflows. The overall deficit widened from 1 percent of GDP to 8 percent, mainly financed through government domestic bank borrowing and collateralized loans, and the accumulation of external payments arrears. Thanks to expenditure-reducing measures implemented during the last quarter of 2002, the fiscal primary balance was in surplus, albeit a modest 0.1 percent of GDP—against 6.6 percent of GDP in 2001. Non-oil revenue fell short of the target, as a result of administrative weaknesses at the customs. Primary expenditure exceeded budget allocations by a wide margin, reflecting domestic spending pressures, unplanned security-related outlays, and a lack of effective expenditure control. However, a freeze on new project spending in the fourth quarter helped contain capital expenditure within the budget allocation.
Monetary and credit aggregates reflected the government financial needs, the banking sector restructuring operations, and developments in the external sector. Money demand grew by 13 percent on a 12-month basis, partly in response to growing public confidence, and credit to the economy resumed growth following a precipitous drop, owing to the banking sector restructuring operations. A new law entrusted the regional banking supervision agency (COBAC) with the control of microfinance institutions in 2002. The strategy consists of strengthening the financial soundness of the microfinance firms, which have experienced rapid development over the past ten years. Anti-money-laundering legislation is being prepared under the aegis of the Central African Economic and Monetary Community (CEMAC), with the setup of a regional institution—Groupe d'action contre le blanchiment d'argent en Afrique centrale (GABAC).
The external current account of the balance of payments was estimated to have improved markedly in 2002, reflecting strong international oil prices and non-oil sector export growth.
Progress in implementing structural reforms was uneven. Public enterprise reforms were delayed because of logistical problems and inadequate preparation. The financial audit of the national oil company (SNPC) was finally launched in March, eight months later than planned.
Executive Board Assessment
Executive Directors commended the Republic of Congo for its progress in consolidating security and peace and establishing democratic institutions. The completion of the postwar political transition—culminating with the series of elections in 2002 and the inauguration of the new government—and the signing of a peace accord in March 2003 now provide the Congo with an opportunity to focus its full attention on sound economic management. Directors underlined that the continued strong economic expansion provides a favorable environment to undertake much-needed reforms to put the economy on a broad-based sustainable growth path, while reducing widespread poverty. The main challenges will be to: consolidate the government's fiscal position; improve transparency in oil sector transactions; ensure good governance and accountability in the use of public resources; create favorable conditions for private sector development and improve the overall business climate; and, in collaboration with external creditors, find a resolution to its large debt and arrears problem. Directors emphasized that strong ownership of the reform program will be critical to its success.
Directors noted that performance for 2002 as a whole was disappointing, despite favorable oil price market conditions. They expressed concern about the deterioration of the fiscal position caused by shortfalls in non-oil revenue collection, particularly in customs, and expenditure overruns due mainly to weak expenditure control, and they regretted the increase in external arrears and delays in the implementation of structural reforms. Directors pointed out that the heavy collateralized borrowing undertaken in 2002 breached the authorities' commitment under the previous staff-monitored program (SMP).
Against this background, Directors welcomed the new government's focus to put fiscal policy on a sound footing by restoring discipline in revenue collection and improving public expenditure management. They were encouraged by the fiscal results in the fourth quarter of 2002 and the first quarter of 2003.
Beyond the near term, Directors emphasized the need to stabilize fiscal policy and adopt a more comprehensive medium-term framework. They urged the authorities to widen the tax base by strengthening tax administration, reducing exemptions, increasing non-oil tax revenue, and drawing the large informal sector into the mainstream. In this context, Directors supported the authorities' decision to raise the tax rate on forest products, but emphasized the importance of balancing the objectives of achieving higher fiscal revenues, ensuring that businesses can operate in a predictable environment, and promoting sustainable forestry sector management. On the expenditure side, Directors encouraged the authorities to exercise firm control, including through the unified treasury system, while refocusing spending toward priority social sectors and reviewing the public sector wage bill. In this regard, Directors welcomed the public expenditure review, being carried out with the technical help of the World Bank, which should help better align public spending with priorities identified in the authorities' interim Poverty Reduction Strategy Paper and enhance its efficiency. Directors generally stressed that, based on a prudent fiscal approach, relations with creditors should be normalized and the high external debt level be addressed. In this context, concern was expressed that some creditors had resorted to litigation. Directors endorsed the strategy to use temporary oil excess revenue to pay down arrears and to stabilize other public spending, while refraining from new oil-collateralized and non-concessional loans.
Directors urged the authorities to improve transparency and accountability in the oil sector transactions and to move expeditiously to strengthen their oil revenue tracking and monitoring system to ensure that all revenues due were received by the budget, while reconciling the discrepancies indicated by the data. They recommended that the government undertake a comprehensive, in-depth evaluation of the role of the national oil company (SNPC) and its relations with the government, with the objective of strengthening the oversight of the SNPC and narrowing the scope of its activities to the upstream oil sector. Directors welcomed the audit of the financial accounts of the SNPC and expressed hope that the audit's findings would serve as a basis for reform and improvements in the SNPC's accounting and financial reporting practices.
Directors encouraged the authorities to press ahead with their structural reform agenda. They emphasized the importance of creating an environment favorable to private sector business and investment activity, as well as diversifying the economy. In this context, they stressed the need to strengthen governance and the rule of law, and noted the authorities' intentions under their anticorruption program. Directors recommended addressing issues of property rights, including a land title system. They also welcomed the country's participation in the New Partnership for Africa's Development peer review mechanism. They urged the authorities to redouble their efforts at restructuring the large public enterprises, particularly those expected to provide essential services. Directors encouraged the authorities to continue efforts to strengthen the financial sector, and welcomed the prospect of the restructuring of the remaining commercial bank, noting that its completion should contribute to a healthier banking system. For the commercial banks to play a more effective role in economic development, it was essential to address structural impediments to commercial bank lending to the private sector, in particular the weaknesses in the legal framework. The development of microfinance institutions can, in particular, help poorer segments of the population. The authorities were urged to adopt Anti-Money Laundering/Combating the Financing of Terrorism laws in cooperation with regional partners.
Directors noted that the fight against poverty was the key objective of the authorities' economic program. They welcomed progress in the preparation of the I-PRSP, and encouraged the authorities to solicit broad public participation. Directors considered that the Congo will need effective international support—both financial and technical—in order to accelerate its progress toward the achievement of the Millennium Development Goals. Directors expressed the hope that strong policy performance under the SMP would help to lay the foundation for discussions on a medium-term program that can be supported by the Fund, as well as subsequent debt relief by the international community.
Directors noted with concern that the Congo's statistical base is weak and constrains the effectiveness of economic policymaking and Fund surveillance. They urged the authorities to develop a plan to improve the quality of economic and social data and make full use of technical assistance from the Fund and other partners.
1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.