IMF Executive Board Concludes 2010 Article IV Consultation with the Republic of CongoPublic Information Notice (PIN) No. 11/13
February 1, 2011
Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.
On January 19, 2011, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Republic of Congo.1
Economic performance remained robust throughout the global downturn and shows signs of further strengthening. Despite the massive terms of trade shock experienced in 2009, real economic activity expanded by 7½ percent supported by rising oil production and sustained non-oil activity in construction, telecommunications and transportation. Inflation fell below the Communauté Economique et Monétaire des Etats d’Afrique Centrale (CEMAC) convergence criteria of 3 percent, reflecting falling food and fuel prices over the course of 2009 and the strength of the euro to which the CFA franc is pegged. Indicators point to an acceleration of activity in 2010, accompanied by a tick up in inflation as transportation bottlenecks tighten.
In 2010, the external position improved significantly, as fiscal surpluses raised official foreign assets and Highly Indebted Poor Countries (HIPC) debt relief significantly reduced external liabilities. With the recovery in oil prices and rising oil production, the current account turned toward surplus, while the real effective exchange rate rebounded in the second half of year as the euro strengthened vis-à-vis the US dollar.
Fiscal consolidation from end-2008 through June 2010 progressed somewhat faster than envisioned at the time of the last Article IV consultation, owing to stepped up efforts to raise non-oil revenue and reduce current expenditure. As a result, the basic non-oil primary deficit declined by 8½ percentage points of non-oil GDP in 2009. Consolidation continued in the first half of 2010, with revenue over performance and under execution of capital projects more than offsetting a pick up in current expenditure.
The underdeveloped financial system was unscathed by the global financial turmoil, and appears generally sound. While liquidity in the domestic market remains ample, credit to the economy remains low at around 4 percent of GDP.
Looking ahead, with oil expected to peak in 2011, non-oil activity is expected to accelerate over the medium term to double digits from a low base as public investment in basic infrastructure eases transportation and energy bottlenecks. Inflation would remain elevated over the near term, as rising domestic demand strains limited railway capacity, but fall as transport infrastructure is completed. The current account would remain in surplus, but decline over time as oil exports wane, while the net external debt ratio would decline appreciably as gross foreign assets accumulate. Downside risks include oil price volatility and uncertainties regarding the efficiency of public investment in raising future growth, while new oil discoveries represent an upside risk.
Executive Board Assessment
Executive Directors commended the Congolese authorities for the continued satisfactory implementation of their program supported by an Extended Credit Facility (ECF). As a result of the sustained implementation of prudent policies, macroeconomic stability is now well established and the external position has improved markedly, while structural reforms have moved ahead. Directors noted that Congo’s medium-term economic outlook is favorable, provided that public investment and measures to improve the business climate are successful in raising non-oil growth. Significant challenges remain and strong efforts will continue to be needed to increase private sector participation in the economy and accelerate poverty reduction.
Directors praised the authorities for the significant fiscal consolidation achieved since the program’s approval in December 2008, which provides space for much needed infrastructure spending. At the same time, they cautioned against mounting current spending pressures and called on the authorities to strike an appropriate balance between scaling up capital spending, long-term fiscal sustainability, and enhancing the level and effectiveness of priority social spending. Directors underscored that fiscal sustainability requires continued consolidation efforts, including measures to collect additional non-oil revenue, reining in non-priority spending, improving expenditure efficiency with stronger quality controls, and further strengthening oil wealth management, including by accelerating progress toward full compliance with the Extractive Industries Transparency Initiative.
Directors emphasized the importance of strong public financial management for the successful implementation of the authorities’ 2011 fiscal program. They saw significant scope for improving budget control and strengthening the treasury and accounting of fiscal operations. They encouraged the authorities to work closely with development partners to implement the mechanisms put in place during the HIPC process for strengthening the management of public investment, in particular project prioritization, appraisal, and monitoring.
Directors concurred that promoting private sector development is key to reducing oil dependence and assuring sustained poverty-reducing growth. As a complement to scaling up public investment, they encouraged the authorities to take prompt action to improve the business climate by frontloading the implementation of key measures of the recently-adopted Action Plan. These efforts should be supported by policies to increase the private sector’s access to credit, deepen financial intermediation, and raise the operating and financial performance of state-owned enterprises.