## 1. Non-Oil Revenues

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### A. Context
- Non-oil revenue mobilization is identified as a key strategic priority to support fiscal consolidation, restore debt sustainability, and rebuild buffers.
- Non-oil revenues doubled from 1995 to 2014, reaching 30 percent of non-oil GDP.
- The positive trend reversed in 2014 with the decline in oil prices; non-oil revenues declined thereafter.
- Non-oil revenues in the Republic of Congo are relatively high compared to other oil producing countries in sub-Saharan Africa, with caution advised because non-oil GDP could be underestimated.

### B. Reforms over the last decade — implementation and limits
- Reform focus areas recommended since 2009: rationalize the tax code, broaden the tax base, increase administrative efficiency.
- Key policy changes implemented:
  - Corporate Income Tax (CIT) rate reduced from 38 to 30 percent.
  - Personal Income Tax (PIT) rates reduced, but tax structure not simplified.
  - Introduced a reduced VAT rate and new customs duties.
  - Since the 2017 budget: increased excise rates, new tax on car imports, taxes on real estate transactions.
- Undermining factors:
  - Introduction of many new ad hoc taxes (parafiscalité) and excessive use of exemptions.
  - Tax incentives for special economic zones and proliferation of conventions with generous tax exemptions.
  - Fragmented institutional responsibilities for tax policy across: (i) tax departments of the Budget Ministry, (ii) National Commission on Investments, and (iii) agency administering special economic zones.

### C. Short-term measures proposed by the authorities (2019–20) — actions and fiscal impact
- Authorities identify three key reforms for short-term success:
  - Strict implementation of recent budget law measures (elimination of reduced VAT rate for imports, reductions in VAT threshold, new excise provisions including beverages and tobacco).
  - Administrative measures to strengthen tax compliance, collect tax arrears, tax refined oil imports.
  - Other legislative measures, including telecommunication taxes.
- Tax arrears challenge:
  - Tax arrears represented more than 29 percent of non-oil GDP in 2018.
  - Two main arrears sources:
    - Large and medium private companies’ arrears: 374 CFA billion (14.7 percent of non-oil GDP).
    - Public enterprise arrears and associated penalties: 330 CFA billion (13 percent of non-oil GDP).
  - Authorities plan by February 2020 to prepare an inventory of tax arrears and administrative agreements and to define a medium-term strategy to collect them.
- Tax Directorate projection of non-oil revenues for 2020 (Billions of CFA francs):
  - Evolution of the Tax Base: 509
  - New Legislative and Administrative Measures: 208.2, including:
    - 2020 Budget Law: 27.2
    - Interconnexion of the various tax administrations: 20
    - Recovery of tax arrears for large companies in 2020: 80
    - Recovery of tax arrears for small and medium companies: 60
    - Recovery of other tax arrears: 13
    - Tax increase on telecommunications: 8
  - Total projected (with measures): 717.2
- Customs administration revenue estimates for 2020 (Billions of CFA francs):
  - Evolution of trade flows and non-oil GDP: 110
  - Improvement of information systems and interconnections: 6
  - Revenue mobilization measures: 17
  - Other measures to combat corruption and strengthening good governance: 1.5
  - Total: 134.5
- Customs Directorate proposed measures (estimated 2020 impact: 17 CFA billion, 0.6 percent of GDP):
  - Elimination of exemptions related to the export of natural resources and raw materials.
  - Application of the provisions of the Hydrocarbons Code to petroleum sector imports.
  - Taxation of imports of refined petroleum products.
- Progress to date on arrears recovery up to September 2019 was insignificant; actual recoverable amounts may be lower than current estimates.

### D. Exemptions, compliance, and fiscal costs
- Authorities estimate tax exemptions to the oil sector accounted for 18 percent of non-oil GDP in 2018; investment-specific exemptions contributed 6 percent of non-oil GDP.
- A Commission study suggests fiscal costs associated with investment-specific exemptions could be 325 CFA billion, 12 percent of GDP.
- Types of tax exemptions (Billions of CFA francs) — selected entries from 2016–2019*:
  - Oil sector exemptions: 2016: 742; 2017: 216; 2018: 454; 2019*: 474
  - State contribution to investment: 2016: 151; 2017: 0; 2018: 152; 2019*: 114
  - Conventional exemptions: 2017: 128.4; 2018: 245.9; 2019*: 25.3
  - IS (Corporate Tax): 2017: 10.5; 2018: 126.9; 2019*: 8.2
  - TSS (Special Corporate Tax): 2017: 22.1; 2018: 87.5; 2019*: 0.7
  - TVA (Value Added Tax): 2017: 95.3; 2018: 21.5; 2019*: 16.4
  - Administrative exemptions: 2017: 3.6; 2018: 8.5; 2019*: 9.7
  - Note: 2019 only includes data until September.
- Compliance problems:
  - Over one third of companies were not compliant with the investment code and bilateral agreements.
  - Many incentives granted to investment companies do not comply with existing laws and regulations; exemptions cover taxes and customs duties on imports, profits, special payroll tax, tax on funds denominated in foreign exchange, PIT on non-resident board members, registration fees, and social security taxes on retirement pensions.
- Fiscal cost estimates should also include losses from:
  - Private sector non-compliance with social security contributions.
  - Environmental and social costs of private investment projects not audited.
  - Non-compliance with foreign exchange regulations.

### E. Recommendations — tax policy and institutional reforms
- Tax Policy recommendations:
  - Prioritize expansion of the tax base to enable potential rate reductions and tax simplification.
  - Address proliferation of tax exemptions eroding the tax base without further delay.
  - Raise additional revenue from property taxes.
  - Improve capacity of audit office to enhance tax compliance in extractive industries.
  - Review international tax rules affecting natural resources, including double taxation treaties and transfer pricing issues.
  - Consider expansion of excises and simplification of VAT by eliminating exemptions and reduced rates.
  - Avoid creating new taxes in an already congested tax system.
- Institutional reforms:
  - Utilize the recently created Tax Policy Unit (UPF) in the Ministry of Finance to develop medium-term tax mobilization plans, provide strategic orientation, and coordinate tax policy initiatives.
    - The Tax Policy Unit was created by the Minister of Finance in October 2019 by note num. 0242/MFB-CAB.
  - Publish a medium-term strategy to reform customs and tax administrations and improve service delivery.
    - Focus areas: modernize human resource management, implement results-based management, increase transparency, and reduce corruption.
  - Formalize a framework for consultation and collaboration with private sector, civil society, and international development partners to build broader ownership of tax reforms.
  - Conduct a proper assessment and evaluation of tax expenditures to highlight trade-offs and the dangers of excessive exemptions (approach used in Senegal and Morocco).

### F. Conclusion
- Reversing recent declines in non-oil revenue mobilization requires implementation of tax-policy measures, administrative actions to recover arrears, a strong medium-term strategy, and institutional reforms to reduce fragmentation and increase transparency and compliance.

*Source: Republic of Congo — IMF Selected Issues Paper “Non-Oil Revenue Mobilization: Key Challenges and Reforms” (January 3, 2020).*

### Medium-term fiscal strategy and institutional reforms
- The medium-term revenue strategy should include three key elements:
  - The newly created Tax Policy Unit in the Ministry of Finance should reduce institutional fragmentation and facilitate the design, coordination and implementation of a medium-term revenue strategy.
  - The government should urgently address the erosion of the tax base generated by an excessive and discretionary use of tax exemptions that do not comply with existing laws and regulations.
  - The government should continue to focus on rationalizing the tax code, and increasing administrative efficiency to recover tax arrears, including through the modernization of existing IT systems.

### Fuel price subsidies in the Republic of Congo — Overview
- A 2005 regulatory framework set a pricing formula to adjust retail petroleum product prices to reflect import and domestic production costs, including margins and taxes, to avoid fiscal subsidies; however the framework has not been applied and retail prices have been administratively set by ministerial decree and remained unchanged since 2008 below average cost recovery.
- The analysis indicates refinery prices are structurally higher than international import prices by about 13–15 percent due to production and administrative inefficiencies.
- As a result of the non-application of the pricing rule and other structural inefficiencies, the government incurred large budgetary transfers toward its refinery of over 2 percent of GDP per year, on average, during 2005–19.

### Downstream sector structure and price formula
- Congo’s downstream oil sector is dominated by SNPC and its refinery CORAF, which together provide about 75-80 percent of domestic demand for oil products.
- The 2005 framework established one retail price for each petroleum product based on a formula that adjusts retail prices to reflect import and ex-refinery prices, including a monopolistic markup or “economic adjustment” factor.
- The Entry Distribution Price (EDP) is computed as a weighted average of import prices and ex-refinery prices; the ex-refinery price (PSR) is based on import parity prices with one-month lag and is augmented by the economic adjustment factor.
- The markup was administratively set initially in 2005 at 25 percent above the import parity price and then set to decline gradually over time, assuming CORAF gains efficiency and achieves refinery costs close to import parity prices.
- An estimated CORAF markup of 15 percent is used in calculations with authority-reported data for 2016–17.

### Trends and fiscal implications
- Retail prices were increased only once (in 2008) despite widening gaps between regulated and formula-based retail prices.
  - At peaks in 2008 and 2012–13, price gaps for diesel and kerosene were estimated in excess of CFA 240 and CFA 300 per liter, respectively.
  - The price gap for Gasoline was around CFA 120 per liter.
- The total amount of the subsidy in 2012 is estimated at CFAF 164 billion (USD 84 million), or 7.3 percent of non-oil GDP.
- During 2015–17, when international oil prices fell and the economy contracted, the authorities did not revise retail prices downward and the price-gap became negative for diesel and gasoline.
- Since 2005, budgetary transfers from the central government to CORAF have exceeded estimated subsidies.
  - During 2005–19, the central government transferred over 6 percent of non-oil GDP per year, on average, to CORAF.
  - The difference between the implicit subsidy and the transfer to CORAF is on average 50 percent of the subsidy since 2005, suggesting half of transfers are claimed by CORAF or SNPC to cover other operational or capital expenses.
- A “hidden subsidy” arises because the importers’ price includes a tax component (import duties and VAT) amounting to about 20 percent of the retail price; over 2013–17 the state could have collected about CFA 36 billion per year for imputed taxes on imports of gasoline and diesel (excluding VAT on CORAF production).

### Reform options and policy recommendations (fuel sector)
- Implement the 2005 regulatory formula to limit fiscal exposure and improve transparency; pass-through of international prices to domestic prices is necessary to provide adequate price signals.
  - Under current conditions, with international prices close to the regulated retail price, the application of the price formula would not imply significant price increases.
  - As of 2019, the application of the formula for retail prices would imply a reduction in gasoline prices by 13 percent and an increase in diesel prices by about 14 percent.
- Consider a smoothing mechanism to moderate short-term price changes and a system to compensate vulnerable groups.
  - The reform strategy could include an automatic fuel pricing mechanism with a smoothing component, in line with experiences in other countries.
- Use savings from reduced fiscal transfers to CORAF for more efficient, poverty-focused programs.
  - The estimated fiscal cost of fuel subsidies in 2019 (CFA 68 bn or 2.6 percent of non-oil GDP) amounted to almost four times the budget commitment for the social cash transfer program “Lisungi”.
  - Mitigation measures should include conditional cash transfers and subsidies for public transportation, with priority to expand a well-targeted social safety net; the Lisungi cash transfer system is cited as a good option.
- Make CORAF accountable for performance and pursue restructuring and cost-cutting.
  - The current approach of covering CORAF inefficiencies through the economic adjustment factor should be gradually eliminated.
  - A recent cap on budgetary transfers to CORAF for the 2019 budget by Parliament is a positive step; a comprehensive cost-cutting exercise and an audit of CORAF operations are expected to follow (closure of the bidding process for the audit service was expected to be finalized at end November).

### Conclusions and strategic considerations (fuel sector)
- Four considerations for the government’s reform strategy:
  - The pricing mechanism needs to become functional; the freeze of fuel prices since 2008 is problematic and the new system should be transparent, easily understood, predictable, and include a smoothing component.
  - The government needs to develop a clear communication strategy explaining how the regulatory framework and price mechanism operate.
  - Mitigation measures to protect vulnerable groups should be in place before the automatic pricing mechanism is implemented; priority to expand a well-targeted social safety net such as Lisungi.
  - Reforming the CORAF refinery is key; CORAF has been receiving excessively large subsidies and the government should evaluate whether maintaining a domestic refinery is justified given its operational inefficiency and fiscal cost.

*International Monetary Fund: Republic of Congo — Selected issues and analysis as presented in the supplied content.*

### 1. The Congolese authorities correctly recognize the importance of governance reform

### Overview and economic impact
- Authorities have adopted a policy of “rupture” and committed, in the context of a diagnostic study prepared in consultation with Fund staff (the “Governance Diagnostic”), to a bold reform agenda.
- Governance reforms are necessary to deliver sustained and inclusive growth and to support diversification away from dependence on oil revenues.
- Fund research highlights a positive correlation between improvements in governance and stronger and more inclusive economic growth.
- In the specific context of Congo, research estimates that depending on the reforms taken by the authorities, increased growth of between 0.8 and 1.8 percent per year over the next 10 years could be attained through governance improvements.

### A. Reforms to Increase Transparency
- Identified cross-cutting weakness: lack of transparency across government functions, including absence of basic data and issues relating to accounting of the government’s oil revenues.
- 2017 law designed to give domestic effect to CEMAC community regulations on transparency of public finances provides for broad public access to information in relation to the financial affairs of the state; the law has not yet been implemented.
  - Implementation delay: a separate law was needed to establish the committee responsible for administration of the 2017 Transparency Law; that second law was adopted in February 2019, but a decree establishing the committee remains outstanding.
- Recommended transparency actions:
  - Ensure the committee required to implement the 2017 Transparency Law is formed and the law is correctly and fully implemented.
  - Maintain publication practices initiated under the ECF-supported program, such as regular publication by the Ministry of Finance of basic economic statistics beyond the Fund-supported program.
  - Publish court decisions, including those related to corruption.
  - Maintain a government website including laws in force and secondary regulations to improve the business environment and reduce corruption vulnerabilities.

### B. Reforms to Improve Governance of the Oil Sector
- Congo’s high dependence on oil revenues makes proper governance of the oil sector critical; opacity gives rise to corruption vulnerabilities.
- Role of SNPC (Société Nationale des Pétroles du Congo) as a state-owned enterprise is central to prudent and transparent management of oil resources.
- Steps taken and outstanding issues:
  - 2017 Parliament adoption of new statutes for SNPC: places SNPC under supervision of the Ministry of Hydrocarbons and requires SNPC’s annual financial accounts be subject to external audit.
  - Publication of SNPC’s financial accounts is welcome, but future publications should include further information about operations of its subsidiaries, including CORAF.
  - The agreement between SNPC and the government required under the 2017 statutes, setting out operations performed by SNPC on behalf of the government, should be made public.
  - Resumption of regular reports, prepared by external auditors, reconciling the state’s share of oil revenues with amounts paid into the budget should be maintained.
- EITI and reporting:
  - EITI assessed Congo’s implementation of the 2016 EITI standard in 2018: Congo was assessed to have made meaningful progress, but corrective actions were requested.
  - Full implementation of corrective actions, including reporting on SOEs, is important.
  - Authorities reported to Parliament in May 2019 on historic transactions involving financing of infrastructure projects with oil revenues and use of oil pre-purchase transactions to raise financing; going forward these reports should be made public to ensure transparency over government oil revenues.

### C. Reforms to Combat Corruption
- Authorities are reworking the formal anti-corruption architecture; commitments under the Governance Diagnostic and the ECF-supported program focus on strengthening the anti-corruption regime.
- High Authority for combatting corruption:
  - Established by law in February 2019 as an independent High Authority with broad investigative powers; is in the process of becoming operational.
  - The High Authority contains innovations relative to the previous National Commission, notably scope of powers and independence.
- Financial disclosure regime:
  - Both the 2002 and 2015 Constitutions required that every citizen elected or appointed to high public function declare assets; until early 2019 no law existed to give effect to this provision.
  - Passage of a new law in February 2019 requires such citizens to declare assets upon assuming their functions.
  - An implementing decree is required to address modalities around the financial disclosure regime and is expected to be adopted shortly.
  - Further work needed to align with international good practices: expand scope of assets to be declared; enable public access to core content of declarations; routinely verify veracity and completeness of declarations; establish proportional and dissuasive sanctions for non- or false declaration.
- Anti-corruption law amendments:
  - Congo ratified the United Nations Convention against Corruption (“UNCAC”) in 2006; implementation under the UNCAC review mechanism has not yet been assessed.
  - Authorities are revising their anti-corruption law to give effect to UNCAC requirements; room exists to improve criminalization of corruption under domestic law.
- Implementation emphasis:
  - Architectural reforms are necessary but insufficient without full implementation.
  - Ensure the High Authority is provided adequate human and material resources and space to conduct its work.
  - Ensure corruption-related offences are systemically investigated and prosecuted.
  - Strengthen financial disclosure framework to accompany enforcement efforts.

### D. Public Financial Management Reforms
- Need to finalize a medium-term strategy for PFM reforms with a three-year rolling action plan.
  - Key elements should include: credible budgeting; better commitments and expenditures controls; proper liquidity management; enforcement of noncompliance by line ministries to minimize accumulation of arrears.
  - Create and operationalize an organizational structure within the Ministry of Finance and Budget to facilitate implementation of PFM reforms across: expenditure cycle; accounting system; cash management; fiscal risks from SOEs; public investment management; transparency of oil revenues.
- Domestic arrears management:
  - Treasury uses opaque mechanisms to settle payment orders issued in previous budget years but unbudgeted within the budget year in which expenditures were made, meaning such payment orders were never classified as domestic arrears or sent to the debt management unit and audited prior to payment.
  - Causes of arrears accumulation include weaknesses at various stages of the expenditure cycle, poor commitment controls, poor cash management, delays in processing payments, deliberate deferral of payments, and inadequate sanctions for noncompliance by line ministries.
- External controls and audit institution:
  - Adopt a law on the organization and functions of the supreme audit institution (Cour des Comptes et Discipline Budgétaire, CCDB) and its implementing regulations; CCDB currently functions with significant backlogs but lacks an organic law and implementing regulations.
  - Authorities are preparing draft legislation to address this issue and are encouraged to act expeditiously.
  - Ensure CCDB is adequately staffed and that it plays a role in assessing fiscal risks from state-owned enterprises.
- State-owned enterprises and public enterprise audit:
  - Government conducting detailed analysis of public enterprise portfolio to assess strategic position and viability of 32 public companies and propose privatization strategy for each; 18 companies have been analyzed so far.
  - Several public enterprises show absence of structural profitability, unfavorable financial situations, and require ongoing operations financed by public guarantees.
  - Some enterprises hold assets and liabilities not in line with their purposes.
  - Authorities are urged to establish and maintain a database of guaranteed and unguaranteed debt, both domestic and internal, held by state-owned enterprises.
- Public investment framework:
  - Authorities plan to implement the Public Expenditure Tracking Survey (PETS) to identify losses in the investment process.
  - Develop a pipeline of projects ranked by priority based on adequate feasibility studies and cost-benefit analysis (with assistance from the African Development Bank).
  - End supplier-lender procurement practices by disassociating negotiation and signing of loan agreements from awarding of contracts to ensure a more competitive tendering process.

*Prepared Jonathan Swanepoel (LEG) and Concha Verdugo Yepes (FAD).*

### 1. Non-Oil Revenues _____________________________________________________________________ 3

### 1. Non-Oil Revenues

### A. Context
- Non-oil revenue mobilization is a key strategic priority to support fiscal consolidation, restore debt sustainability, and rebuild buffers.
- Non-oil revenues doubled from 1995 to 2014, reaching 30 percent of non-oil GDP.
- The positive trend reversed in 2014 with the decline in oil prices; non-oil revenues declined thereafter.
- Non-oil revenues in the Republic of Congo are relatively high compared to other oil producing countries in sub-Saharan Africa, though comparisons require caution because non-oil GDP could be underestimated.

### B. Reforms over the last decade — implementation and limits
- Reform focus areas recommended since 2009: rationalize the tax code, broaden the tax base, increase administrative efficiency.
- Key policy changes implemented:
  - Corporate Income Tax (CIT) rate reduced from 38 to 30 percent.
  - Personal Income Tax (PIT) rates reduced, but tax structure not simplified.
  - Introduced a reduced VAT rate and new customs duties.
  - Since the 2017 budget: increased excise rates, new tax on car imports, taxes on real estate transactions.
- Undermining factors:
  - Introduction of many new ad hoc taxes (parafiscalité) and excessive use of exemptions.
  - Tax incentives for special economic zones and proliferation of conventions with generous tax exemptions.
  - Fragmented institutional responsibilities for tax policy across: (i) tax departments of the Budget Ministry, (ii) National Commission on Investments, and (iii) agency administering special economic zones.

### C. Short-term measures proposed by the authorities (2019–20) — actions and fiscal impact
- Authorities identify three key reforms for short-term success:
  - Strict implementation of recent budget law measures (elimination of reduced VAT rate for imports, reductions in VAT threshold, new excise provisions including beverages and tobacco).
  - Administrative measures to strengthen tax compliance, collect tax arrears, tax refined oil imports.
  - Other legislative measures, including telecommunication taxes.
- Tax arrears challenge:
  - Tax arrears represented more than 29 percent of non-oil GDP in 2018.
  - Two main arrears sources:
    - Large and medium private companies’ arrears: 374 CFA billion (14.7 percent of non-oil GDP).
    - Public enterprise arrears and associated penalties: 330 CFA billion (13 percent of non-oil GDP).
  - Authorities plan by February 2020 to prepare an inventory of tax arrears and administrative agreements and to define a medium-term strategy to collect them.
- Tax Directorate projection of non-oil revenues for 2020 (Billions of CFA francs):
  - Evolution of the Tax Base: 509
  - New Legislative and Administrative Measures: 208.2, including:
    - 2020 Budget Law: 27.2 (measures listed in text)
    - Interconnexion of the various tax administrations: 20
    - Recovery of tax arrears for large companies in 2020: 80
    - Recovery of tax arrears for small and medium companies: 60
    - Recovery of other tax arrears: 13
    - Tax increase on telecommunications: 8
  - Total projected (with measures): 717.2
- Customs administration revenue estimates for 2020 (Billions of CFA francs):
  - Evolution of trade flows and non-oil GDP: 110
  - Improvement of information systems and interconnections: 6
  - Revenue mobilization measures: 17
  - Other measures to combat corruption and strengthening good governance: 1.5
  - Total: 134.5
- Customs Directorate proposed measures (estimated 2020 impact: 17 CFA billion, 0.6 percent of GDP):
  - Elimination of exemptions related to the export of natural resources and raw materials.
  - Application of the provisions of the Hydrocarbons Code to petroleum sector imports.
  - Taxation of imports of refined petroleum products.
- Progress to date on arrears recovery up to September 2019 was insignificant; actual recoverable amounts may be lower than current estimates.

### D. Exemptions, compliance, and fiscal costs
- Authorities estimate tax exemptions to the oil sector accounted for 18 percent of non-oil GDP in 2018; investment-specific exemptions contributed 6 percent of non-oil GDP.
- A Commission study suggests fiscal costs associated with investment-specific exemptions could be 325 CFA billion, 12 percent of GDP.
- Types of tax exemptions (Billions of CFA francs) — selected entries from 2016–2019*:
  - Oil sector exemptions: 2016: 742; 2017: 216; 2018: 454; 2019*: 474
  - State contribution to investment: 2016: 151; 2017: 0; 2018: 152; 2019*: 114
  - Conventional exemptions: 2017: 128.4; 2018: 245.9; 2019*: 25.3
  - IS (Corporate Tax): 2017: 10.5; 2018: 126.9; 2019*: 8.2
  - TSS (Special Corporate Tax): 2017: 22.1; 2018: 87.5; 2019*: 0.7
  - TVA (Value Added Tax): 2017: 95.3; 2018: 21.5; 2019*: 16.4
  - Administrative exemptions: 2017: 3.6; 2018: 8.5; 2019*: 9.7
  - Note: 2019 only includes data until September.
- Compliance problems:
  - Over one third of companies were not compliant with the investment code and bilateral agreements.
  - Many incentives granted to investment companies do not comply with existing laws and regulations; exemptions cover taxes and customs duties on imports, profits, special payroll tax, tax on funds denominated in foreign exchange, PIT on non-resident board members, registration fees, and social security taxes on retirement pensions.
- Fiscal cost estimates should also include losses from:
  - Private sector non-compliance with social security contributions.
  - Environmental and social costs of private investment projects not audited.
  - Non-compliance with foreign exchange regulations.

### E. Recommendations — tax policy and institutional reforms
- Tax Policy recommendations:
  - Prioritize expansion of the tax base to enable potential rate reductions and tax simplification.
  - Address proliferation of tax exemptions eroding the tax base without further delay.
  - Raise additional revenue from property taxes.
  - Improve capacity of audit office to enhance tax compliance in extractive industries.
  - Review international tax rules affecting natural resources, including double taxation treaties and transfer pricing issues.
  - Consider expansion of excises and simplification of VAT by eliminating exemptions and reduced rates.
  - Avoid creating new taxes in an already congested tax system.
- Institutional reforms:
  - Utilize the recently created Tax Policy Unit (UPF) in the Ministry of Finance to develop medium-term tax mobilization plans, provide strategic orientation, and coordinate tax policy initiatives.
    - The Tax Policy Unit was created by the Minister of Finance in October 2019 by note num. 0242/MFB-CAB.
  - Publish a medium-term strategy to reform customs and tax administrations and improve service delivery.
    - Focus areas: modernize human resource management, implement results-based management, increase transparency, and reduce corruption.
  - Formalize a framework for consultation and collaboration with private sector, civil society, and international development partners to build broader ownership of tax reforms.
  - Conduct a proper assessment and evaluation of tax expenditures to highlight trade-offs and the dangers of excessive exemptions (approach used in Senegal and Morocco).

### F. Conclusion
- Reversing recent declines in non-oil revenue mobilization requires implementation of tax-policy measures, administrative actions to recover arrears, a strong medium-term strategy, and institutional reforms to reduce fragmentation and increase transparency and compliance.

*Source: Republic of Congo — IMF Selected Issues Paper “Non-Oil Revenue Mobilization: Key Challenges and Reforms” (January 3, 2020).*

### 18.      The authorities should step up revenue mobilization as a key component of their

### 18.      The authorities should step up revenue mobilization as a key component of their

### Medium-term fiscal strategy and institutional reforms
- The medium-term revenue strategy should include three key elements:
  - The newly created Tax Policy Unit in the Ministry of Finance should reduce institutional fragmentation and facilitate the design, coordination and implementation of a medium-term revenue strategy.
  - The government should urgently address the erosion of the tax base generated by an excessive and discretionary use of tax exemptions that do not comply with existing laws and regulations.
  - The government should continue to focus on rationalizing the tax code, and increasing administrative efficiency to recover tax arrears, including through the modernization of existing IT systems.

### Fuel price subsidies in the Republic of Congo — Overview
- A 2005 regulatory framework set a pricing formula to adjust retail petroleum product prices to reflect import and domestic production costs, including margins and taxes, to avoid fiscal subsidies; however the framework has not been applied and retail prices have been administratively set by ministerial decree and remained unchanged since 2008 below average cost recovery.
- The analysis indicates refinery prices are structurally higher than international import prices by about 13–15 percent due to production and administrative inefficiencies.
- As a result of the non-application of the pricing rule and other structural inefficiencies, the government incurred large budgetary transfers toward its refinery of over 2 percent of GDP per year, on average, during 2005–19.

### Downstream sector structure and price formula
- Congo’s downstream oil sector is dominated by SNPC and its refinery CORAF, which together provide about 75-80 percent of domestic demand for oil products.
- The 2005 framework established one retail price for each petroleum product based on a formula that adjusts retail prices to reflect import and ex-refinery prices, including a monopolistic markup or “economic adjustment” factor.
- The Entry Distribution Price (EDP) is computed as a weighted average of import prices and ex-refinery prices; the ex-refinery price (PSR) is based on import parity prices with one-month lag and is augmented by the economic adjustment factor.
- The markup was administratively set initially in 2005 at 25 percent above the import parity price and then set to decline gradually over time, assuming CORAF gains efficiency and achieves refinery costs close to import parity prices.
- An estimated CORAF markup of 15 percent is used in calculations with authority-reported data for 2016–17.

### Trends and fiscal implications
- Retail prices were increased only once (in 2008) despite widening gaps between regulated and formula-based retail prices.
  - At peaks in 2008 and 2012–13, price gaps for diesel and kerosene were estimated in excess of CFA 240 and CFA 300 per liter, respectively.
  - The price gap for Gasoline was around CFA 120 per liter.
- The total amount of the subsidy in 2012 is estimated at CFAF 164 billion (USD 84 million), or 7.3 percent of non-oil GDP.
- During 2015–17, when international oil prices fell and the economy contracted, the authorities did not revise retail prices downward and the price-gap became negative for diesel and gasoline.
- Since 2005, budgetary transfers from the central government to CORAF have exceeded estimated subsidies.
  - During 2005–19, the central government transferred over 6 percent of non-oil GDP per year, on average, to CORAF.
  - The difference between the implicit subsidy and the transfer to CORAF is on average 50 percent of the subsidy since 2005, suggesting half of transfers are claimed by CORAF or SNPC to cover other operational or capital expenses.
- A “hidden subsidy” arises because the importers’ price includes a tax component (import duties and VAT) amounting to about 20 percent of the retail price; over 2013–17 the state could have collected about CFA 36 billion per year for imputed taxes on imports of gasoline and diesel (excluding VAT on CORAF production).

### Reform options and policy recommendations
- Implement the 2005 regulatory formula to limit fiscal exposure and improve transparency; pass-through of international prices to domestic prices is necessary to provide adequate price signals.
  - Under current conditions, with international prices close to the regulated retail price, the application of the price formula would not imply significant price increases.
  - As of 2019, the application of the formula for retail prices would imply a reduction in gasoline prices by 13 percent and an increase in diesel prices by about 14 percent.
- Consider a smoothing mechanism to moderate short-term price changes and a system to compensate vulnerable groups.
  - The reform strategy could include an automatic fuel pricing mechanism with a smoothing component, in line with experiences in other countries.
- Use savings from reduced fiscal transfers to CORAF for more efficient, poverty-focused programs.
  - The estimated fiscal cost of fuel subsidies in 2019 (CFA 68 bn or 2.6 percent of non-oil GDP) amounted to almost four times the budget commitment for the social cash transfer program “Lisungi”.
  - Mitigation measures should include conditional cash transfers and subsidies for public transportation, with priority to expand a well-targeted social safety net; the Lisungi cash transfer system is cited as a good option.
- Make CORAF accountable for performance and pursue restructuring and cost-cutting.
  - The current approach of covering CORAF inefficiencies through the economic adjustment factor should be gradually eliminated.
  - A recent cap on budgetary transfers to CORAF for the 2019 budget by Parliament is a positive step; a comprehensive cost-cutting exercise and an audit of CORAF operations are expected to follow (closure of the bidding process for the audit service was expected to be finalized at end November).

### Conclusions and strategic considerations
- Four considerations for the government’s reform strategy:
  - The pricing mechanism needs to become functional; the freeze of fuel prices since 2008 is problematic and the new system should be transparent, easily understood, predictable, and include a smoothing component.
  - The government needs to develop a clear communication strategy explaining how the regulatory framework and price mechanism operate.
  - Mitigation measures to protect vulnerable groups should be in place before the automatic pricing mechanism is implemented; priority to expand a well-targeted social safety net such as Lisungi.
  - Reforming the CORAF refinery is key; CORAF has been receiving excessively large subsidies and the government should evaluate whether maintaining a domestic refinery is justified given its operational inefficiency and fiscal cost.

*International Monetary Fund: Republic of Congo — Selected issues and analysis as presented in the supplied content.*

### 1.      The Congolese authorities correctly recognize the importance of governance reform

### 1.      The Congolese authorities correctly recognize the importance of governance reform

### Overview and economic impact
- The authorities have adopted a policy of “rupture” and committed, in the context of a diagnostic study prepared in consultation with Fund staff (the “Governance Diagnostic”), to a bold reform agenda.
- Governance reforms are necessary to deliver sustained and inclusive growth and to support diversification away from dependence on oil revenues.
- Fund research highlights a positive correlation between improvements in governance and stronger and more inclusive economic growth, with particular benefits for countries starting from a weak base and high perceived corruption.
- In the specific context of Congo, research estimates that depending on the reforms taken by the authorities, increased growth of between 0.8 and 1.8 percent per year over the next 10 years could be attained through governance improvements.

### A. Reforms to Increase Transparency
- Identified cross-cutting weakness: lack of transparency across government functions, including absence of basic data and issues relating to accounting of the government’s oil revenues.
- 2017 law designed to give domestic effect to CEMAC community regulations on transparency of public finances provides for broad public access to information in relation to the financial affairs of the state; the law has not yet been implemented.
  - Implementation delay: a separate law was needed to establish the committee responsible for administration of the 2017 Transparency Law; that second law was adopted in February 2019, but a decree establishing the committee remains outstanding.
- Recommended transparency actions:
  - Ensure the committee required to implement the 2017 Transparency Law is formed and the law is correctly and fully implemented.
  - Maintain publication practices initiated under the ECF-supported program, such as regular publication by the Ministry of Finance of basic economic statistics beyond the Fund-supported program.
  - Publish court decisions, including those related to corruption.
  - Maintain a government website including laws in force and secondary regulations to improve the business environment and reduce corruption vulnerabilities.

### B. Reforms to Improve Governance of the Oil Sector
- Congo’s high dependence on oil revenues makes proper governance of the oil sector critical; opacity gives rise to corruption vulnerabilities.
- Role of SNPC (Société Nationale des Pétroles du Congo) as a state-owned enterprise is central to prudent and transparent management of oil resources.
- Steps taken and outstanding issues:
  - 2017 Parliament adoption of new statutes for SNPC: places SNPC under supervision of the Ministry of Hydrocarbons and requires SNPC’s annual financial accounts be subject to external audit.
  - Publication of SNPC’s financial accounts is welcome, but future publications should include further information about operations of its subsidiaries, including CORAF.
  - The agreement between SNPC and the government required under the 2017 statutes, setting out operations performed by SNPC on behalf of the government, should be made public.
  - Resumption of regular reports, prepared by external auditors, reconciling the state’s share of oil revenues with amounts paid into the budget should be maintained.
- EITI and reporting:
  - EITI assessed Congo’s implementation of the 2016 EITI standard in 2018: Congo was assessed to have made meaningful progress, but corrective actions were requested.
  - Full implementation of corrective actions, including reporting on SOEs, is important.
  - Authorities reported to Parliament in May 2019 on historic transactions involving financing of infrastructure projects with oil revenues and use of oil pre-purchase transactions to raise financing; going forward these reports should be made public to ensure transparency over government oil revenues.

### C. Reforms to Combat Corruption
- Authorities are reworking the formal anti-corruption architecture; commitments under the Governance Diagnostic and the ECF-supported program focus on strengthening the anti-corruption regime.
- High Authority for combatting corruption:
  - Established by law in February 2019 as an independent High Authority with broad investigative powers; is in the process of becoming operational.
  - The High Authority contains innovations relative to the previous National Commission, notably scope of powers and independence.
- Financial disclosure regime:
  - Both the 2002 and 2015 Constitutions required that every citizen elected or appointed to high public function declare assets; until early 2019 no law existed to give effect to this provision.
  - Passage of a new law in February 2019 requires such citizens to declare assets upon assuming their functions.
  - An implementing decree is required to address modalities around the financial disclosure regime and is expected to be adopted shortly.
  - Further work needed to align with international good practices: expand scope of assets to be declared; enable public access to core content of declarations; routinely verify veracity and completeness of declarations; establish proportional and dissuasive sanctions for non- or false declaration.
- Anti-corruption law amendments:
  - Congo ratified the United Nations Convention against Corruption (“UNCAC”) in 2006; implementation under the UNCAC review mechanism has not yet been assessed.
  - Authorities are revising their anti-corruption law to give effect to UNCAC requirements; room exists to improve criminalization of corruption under domestic law.
- Implementation emphasis:
  - Architectural reforms are necessary but insufficient without full implementation.
  - Ensure the High Authority is provided adequate human and material resources and space to conduct its work.
  - Ensure corruption-related offences are systemically investigated and prosecuted.
  - Strengthen financial disclosure framework to accompany enforcement efforts.

### D. Public Financial Management Reforms
- Need to finalize a medium-term strategy for PFM reforms with a three-year rolling action plan.
  - Key elements should include: credible budgeting; better commitments and expenditures controls; proper liquidity management; enforcement of noncompliance by line ministries to minimize accumulation of arrears.
  - Create and operationalize an organizational structure within the Ministry of Finance and Budget to facilitate implementation of PFM reforms across: expenditure cycle; accounting system; cash management; fiscal risks from SOEs; public investment management; transparency of oil revenues.
- Domestic arrears management:
  - Treasury uses opaque mechanisms to settle payment orders issued in previous budget years but unbudgeted within the budget year in which expenditures were made, meaning such payment orders were never classified as domestic arrears or sent to the debt management unit and audited prior to payment.
  - Causes of arrears accumulation include weaknesses at various stages of the expenditure cycle, poor commitment controls, poor cash management, delays in processing payments, deliberate deferral of payments, and inadequate sanctions for noncompliance by line ministries.
- External controls and audit institution:
  - Adopt a law on the organization and functions of the supreme audit institution (Cour des Comptes et Discipline Budgétaire, CCDB) and its implementing regulations; CCDB currently functions with significant backlogs but lacks an organic law and implementing regulations.
  - Authorities are preparing draft legislation to address this issue and are encouraged to act expeditiously.
  - Ensure CCDB is adequately staffed and that it plays a role in assessing fiscal risks from state-owned enterprises.
- State-owned enterprises and public enterprise audit:
  - Government conducting detailed analysis of public enterprise portfolio to assess strategic position and viability of 32 public companies and propose privatization strategy for each; 18 companies have been analyzed so far.
  - Several public enterprises show absence of structural profitability, unfavorable financial situations, and require ongoing operations financed by public guarantees.
  - Some enterprises hold assets and liabilities not in line with their purposes.
  - Authorities are urged to establish and maintain a database of guaranteed and unguaranteed debt, both domestic and internal, held by state-owned enterprises.
- Public investment framework:
  - Authorities plan to implement the Public Expenditure Tracking Survey (PETS) to identify losses in the investment process.
  - Develop a pipeline of projects ranked by priority based on adequate feasibility studies and cost-benefit analysis (with assistance from the African Development Bank).
  - End supplier-lender procurement practices by disassociating negotiation and signing of loan agreements from awarding of contracts to ensure a more competitive tendering process.

*Prepared Jonathan Swanepoel (LEG) and Concha Verdugo Yepes (FAD).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1cogea2020002.pdf_