IMF Executive Board Concludes 2013 Article IV Consultation with the Republic of CongoPress Release No.13/332
September 10, 2013
On August 30, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Republic of Congo on a lapse-of-time basis, and considered and endorsed the staff appraisal without a meeting.1, 2
The Republic of Congo is endowed with abundant natural resources, notably oil and iron ore. Proven oil reserves are estimated at about 2 billion barrels; and the country has large iron ore deposits and a vast agricultural potential.
Supported by an improving political situation, macroeconomic performance strengthened markedly in the run up to and aftermath of the 2010 Highly Indebted Poor Countries (HIPC) Initiative completion point. Real Gross Domestic Product (GDP) growth averaged 6.5 percent during 2009–11, with robust activity in both the non-oil and oil sectors. Inflationary pressures were subdued, and the financial sector remained sound. Moreover, against the background of high oil prices, the government accumulated large fiscal savings. However, in contrast with the broadly satisfactory macroeconomic performance, the incidence of poverty stood at a high 46.5 percent in 2011. In 2012, economic developments were dominated by the authorities’ fiscal response to the explosion of an ammunitions depot in Brazzaville. The government’s swift response in attending to the needs of the victims and beginning reconstruction underpinned a brisk increase in public outlays, which pushed end-year inflation to 7.5 percent (year-on-year). Spending was nevertheless lower than budgeted owing to capacity and other administrative constraints; and the government’s financial situation remained broadly comfortable.
In 2013, the fiscal and external positions are expected to improve further. However, preliminary data points to somewhat weaker than-initially-anticipated economic activity, owing to a decline in oil production. Real GDP growth is nevertheless projected at 5.8 percent; and inflation is easing as the effects of the 2012 sharp increase in government spending dissipate. In the financial sector, credit to the private sector remains strong.
The medium-term prospects are generally favorable. While oil production is expected to fluctuate quite considerably, growth should remain robust in the non-oil sector, sustained by the Republic of Congo’s large oil revenues; and membership in the CFA franc zone should continue serving the country well as an anchor for macroeconomic stability. The main risks to the outlook are related to possible downward pressures on oil prices, stemming from uncertainties in the Euro area and emerging markets. On the domestic front, prospects hinge on ensuring that the next presidential elections in 2016 are run smoothly.
Executive Board Assessment
In concluding the 2013 Article IV consultation with the Republic of Congo, Executive Directors endorsed the staff appraisal, as follows:
The Republic of Congo remains on a path of strong growth, but significant gains in poverty reduction have yet to materialize. Congo ought to make growth more inclusive while preserving macroeconomic stability. To this end, the authorities’ medium-term policy agenda appropriately aims at seeking further gains in budget consolidation while scaling up investment to address large infrastructure and skills gaps; fostering economic diversification and private sector development; and improving governance and transparency. Invigorating growth and enhancing the effectiveness of the poverty reduction strategy in the period ahead will require the rigorous implementation of reforms underway in these critical areas.
Continued close adherence to stability-prone fiscal policies is key to consolidating the recent gains in macroeconomic stability. The ongoing efforts to strengthen non-oil revenue collection in the context of a new fiscal rule that protects spending against the volatility of oil receipts are commendable. The newly introduced fiscal rule ought to be expanded and cast in a framework that accounts for the exhaustibility of oil reserves as well. While supporting pro-growth and pro-poor outlays, the proposed rule-based fiscal framework should seek the achievement of significant fiscal savings over the long term, necessary to build up buffers and sustain reasonable levels of expenditures in the post-oil era. In this context, the Republic of Congo should continue adhering to a prudent borrowing policy to preserve long-term debt sustainability after HIPC/Multilateral; Debt Relief Initiative (MDRI). World Bank-supported measures to improve public investment management ought to be timely implemented.
The external stability assessment points to additional improvements in the last year, but competitiveness ought to be further strengthened. The real effective exchange rate is in line with macroeconomic fundamentals, but external competitiveness is being stifled by deeply-rooted structural impediments to private sector development. The reform measures agreed to with the International Finance Corporation (IFC) to improve the business environment ought to be promptly implemented, including by making the recently established Investment Promotion Agency fully operational and streamlining the administrative requirements for engaging in business activities.
Improving governance and business conditions is needed to support strong private sector-led growth and poverty reduction. The authorities have reached compliant status under the Extractive Industries Transparency Initiative; they now have to expedite adoption of the fiscal transparency law that is currently under review in Parliament. To diversify the economy and promote employment, the Government is developing Special Economic Zones (SEZs); strengthening technical and vocational education; and introducing special employment-supporting programs. In parallel, innovative social safety net arrangements are being set up to protect the most vulnerable groups. The timely availability of budgeted funds will be needed to ensure that these programs are well implemented. As regards the SEZs program, the government should avoid granting special fiscal incentives that create distortions and often give rise to abusive practices, focusing instead on revamping infrastructure and advancing administrative facilitation.
While the medium-term prospects are generally favorable, the authorities should be vigilant to risks related to downward pressures on world oil prices. Despite anticipated fluctuations in oil production over the next years, real GDP growth should remain robust and inflation would be contained around the CEMAC (Central African Economic and Monetary Community) target of 3 percent. However, uncertainties in the Euro area and a weakening of investment in the emerging markets, resulting in lower than-currently projected world oil prices, would cloud the country’s otherwise favorable outlook.
The Republic of Congo should fully comply with its CEMAC obligations. The authorities are supporting and closely monitoring the ongoing review of the regional central bank (BEAC)’s reserves management framework. Pending completion of the review, relevant CEMAC commitments should be fully observed to insure the continued smooth operation of the BEAC and the pegged exchange rate arrangement. The authorities are encouraged to step up the efforts to ensure the timely provision of information to the Fund on the standard macroeconomic data that is required for effective surveillance.