Press Release: Republic of Congo Reaches Decision Point Under the Enhanced HIPC Debt Relief Initiative
March 9, 2006Press Release No. 06/46
The World Bank's International Development Association (IDA) and the International Monetary Fund (IMF) have determined that the Republic of Congo qualifies for debt relief by reaching the decision point under the enhanced Heavily Indebted Poor Countries Initiative. These decisions are based on the country having put in place external arrears clearance operations, remained on track with an IMF-supported program and developed an interim Poverty Reduction Strategy. The Republic of Congo becomes the 29th country to reach its decision point under the Initiative.
The Government of the Republic of Congo will begin receiving interim debt relief from certain creditors1, but must address serious concerns about governance and financial transparency in order to qualify for irrevocable debt relief at the completion point. The reforms to which the Republic of Congo has committed include bringing the internal controls and accounting system of the state-owned oil company (SNPC) up to internationally recognized standards; preventing conflicts of interests in the marketing of oil; requiring officials of SNPC to publicly declare and divest any interests in companies having a business relationship with SNPC; and implementing an anti-corruption action plan with international support, monitored by IDA and the IMF.
"The objective of debt relief is to free up resources to improve the lot of the poor. But sustained improvements in governance are necessary for these resources not to be hijacked by vested interests and used effectively and efficiently to improve the delivery of education, health and other essential services," said Pedro Alba, the World Bank Country Director for the Republic of Congo, the Democratic Republic of Congo, Burundi and Rwanda.
Interim debt relief will increase the resources available to the Government to finance poverty reduction programs, fight corruption, and support on-going financial and structural reforms. The Government has agreed to undertake a broad array of measures to ensure that the resources freed from debt service obligations are used for poverty reduction under a reform program that will be closely monitored by IDA and IMF.
Specifics of the Debt Relief Operation
• Congo's external debt as of end-2004 was estimated at US$9.2 billion in nominal terms, equivalent to US$9.0 billion in 2004 net present value (NPV) terms, which makes it one of the world's most indebted developing countries on a per capita basis.2 Debt service in 2006 is estimated to represent 43 percent of fiscal revenues (before HIPC relief).
• In total, debt relief to Congo under the enhanced HIPC Initiative will be approximately US$1.7 billion in 2004 NPV terms, equivalent to a 32.4 percent NPV reduction of Congo's debt after traditional debt relief. Over time, this will lower the Republic of Congo's debt service payments by about US$2.9 billion in nominal terms.
• IDA's share of enhanced HIPC assistance to the Republic of Congo amounts to US$49 million in NPV terms (equivalent to US$71 million in nominal terms), which will be delivered through a 37.0 percent reduction in debt service on IDA creditors in 2006, a 50.5 percent reduction from 2007-20, and 15.5 percent in 2021. The IMF will provide assistance of US$8 million in NPV terms. Under the enhanced HIPC Initiative's burden sharing approach, other creditors of the Republic of Congo will provide the remainder, and indeed the bulk, of the Initiative's debt relief.
The HIPC Initiative
In 1996, the World Bank and IMF launched the HIPC Initiative to create a framework in which all creditors, including multilateral creditors, can provide debt relief to the world's poorest and most heavily indebted countries, and thereby reduce the constraints on economic growth and poverty reduction imposed by the debt-service burdens in these countries. The Initiative was modified in 1999 to provide three key enhancements:
Deeper and Broader Relief. External debt thresholds were lowered from the original framework. As a result, more countries have become eligible for debt relief and some countries have become eligible for greater relief;
Faster Relief. A number of creditors began to provide interim debt relief immediately at the "decision point." Also, the new framework permitted countries to reach the "completion point" faster; and
Stronger Link Between Debt Relief and Poverty Reduction. Freed resources were to be used to support poverty reduction strategies developed by national governments through a broad consultative process.
To date, 29 HIPC countries have reached their decision points, of which 18 have reached completion point.
The following statement was issued by Mr. Agustín Carstens, Deputy Managing Director and Acting Chair of the IMF Executive Board, after the Board's discussion of the Republic of Congo on March 8, 2006:
"The Republic of Congo has continued to make progress in securing macroeconomic stability and implementing structural reforms. This has enabled Congo to reach the decision point for debt relief under the enhanced HIPC Initiative. In addition, the government has taken important steps to consolidate further the peace process and to put in place the democratic institutions required by the 2002 constitution. Looking ahead, governance issues will need to be addressed decisively to enable Congo to reach the completion point under the enhanced HIPC Initiative, and to ensure that the debt relief is used effectively to reduce poverty and benefit the vast majority of the population.
"Congo's performance under the PRGF-supported program has been broadly satisfactory. Economic growth has accelerated in 2005, buoyed by Congo's oil exports, while inflation remains subdued. Fiscal performance has been somewhat below expectations, mainly due to the governments' efforts to protect oil revenues from litigating creditors, which delayed the transfer of some oil revenues to the public treasury.
"On the structural front, Congo has undertaken important reforms to tackle weaknesses in the banking, electricity, and refined petroleum products sectors. Recent steps include the adoption of action plans to further strengthen recovery of the banking system's nonperforming loans, and to introduce an automatic domestic price adjustment mechanism for refined petroleum products.
"The concrete steps to improve transparency in the oil sector have brought to light major weaknesses in oil sector governance and accountability, particularly relating to the national oil company (SNPC). Sustained good performance in public finance management and in oil sector transparency and governance will be required to ensure that debt relief is used effectively for poverty reduction and to allow Congo reach the completion point under the enhanced HIPC Initiative. SNPC's internal controls and accounting system, and its marketing of oil on behalf of the state, will need to be brought in line with international standards and best practices. To further improve transparency and governance in the oil sector, the authorities will set up an anti-corruption committee and forcefully address conflict of interest issues at SNPC.
"The authorities are undertaking broad consultations with civil society in the preparation of the full Poverty Reduction Strategy Paper (PRSP). An effective expenditure-tracking mechanism that includes solid costing of the main spending priorities in the PRGF-supported program will be essential to ensure that resources freed up under debt relief are spent efficiently.
"Despite the progress made to date, 70 percent of the population in Congo lives in extreme poverty, and the economy is highly vulnerable to external shocks. Notwithstanding the country's oil wealth, Congo is highly indebted, and debt relief and continued support by the donor community will be needed to release resources for tackling widespread poverty and meeting the Millennium Development Goals while ensuring a sustainable external debt situation over the medium-term," Mr. Carstens said.
1 As the necessary financing assurances from external creditors are not in place as of the decision point, no interim relief will be provided by the IMF at this time.
2 The Net Present Value (NPV) of debt is the discounted sum of all future debt service obligations (interest and principal). It is a measure that takes into account the borrowing terms of a country's debt stock. Whenever the interest rate on a loan is lower than the prevailing market rate, the resulting NPV of debt is smaller than its face value, with the difference reflecting the grant element. Nominal terms means the actual dollar value of debt service forgiven over a period of time.