## 1cogea2024003-print-pdf ## Source details **Canonical URL:** [1cogea2024003-print-pdf](https://www.imf.org/-/media/files/publications/cr/2024/english/1cogea2024003-print-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2024/english/1cogea2024003-print-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2024/english/1cogea2024003-print-pdf.pdf.json) --- ### Major findings on government domestic arrears - Public domestic arrears in Congo account for a fifth of GDP in 2023. - Average stock of domestic arrears was 15 percent of GDP over 2018–22. - Composition of arrears: 2/3 are commercial arrears (mainly unpaid supplier bills) and 1/3 are social arrears. - Domestic arrears repayment accounted for about a fifth of revenues in 2023, 4 percentage points above its level in 2022. - Domestic arrears identified between 2020 and 2023 amounted to 18 percent of 2023 GDP. - Authorities paid 14 percent of 2023 GDP between 2020 and 2023 through repayments (including securitizations such as Club de Brazzaville). - The stock of domestic arrears decreased only roughly by -0.4 percentage point of GDP between 2020 and 2023 due to the inclusion of newly recognized arrears after audits. - Repayment in 2022: domestic arrears repayment alone amounted 5 percent of GDP; this was about 1.3 percentage point GDP higher than government domestic investment that year. - Audits for arrears from 2021 to 2023 have a preliminary estimate of 2 percent of GDP still being audited. - Recent additions to the recognized debt include CFAF 269 billion related to the pension fund and CFAF 360 billion of litigated debt. ### Channels through which arrears impact the economy - Reduced aggregate demand: - Delayed payments create revenue shortfalls for creditors (businesses and individuals), reducing their demand for goods and services. - Deterioration of financial stability: - Creditors unable to recoup dues can strain banks’ asset quality and lead to financial instability. - Erosion of trust and higher financing costs: - Repeated payment delays increase risk perception, raise borrowing costs, and reduce access to external financing. - Higher government debt burden and liquidity constraint: - Public debt is high relative to peers and increasing stock of domestic arrears is a major driver. - Liquidity constraints rise because debt service includes considerable arrears repayments in addition to T-bills and bond obligations. - More difficult financing conditions: - Arrears accumulation signals weak repayment capacity and/or unwillingness to pay, contributing to negative credit risk perception and higher funding costs. - Congo’s domestic funding mix has been shifting towards short-term funding in recent years. - Impaired creditor balance sheets: - Creditors have suffered loss of revenues and difficulties repaying their own debts, contributing to deterioration in banks’ asset quality. - Lower economic performance: - Public demand (consumer spending and government expenditure) is a major driver of the Congolese economy, and payment delays dampen economic activity, constrain consumption and investment, and reduce transformational public investment. ### Progress to date and quantitative outcomes - Public debt moved from 102.5 percent of GDP in 2020 to 99 percent of GDP in 2023 despite multiple additions to the stock of arrears. - The overall balance improved from -1.1 percent of GDP to 5.8 percent of GDP over 2020–2023. - Non-hydrocarbon revenues expanded from 8.6 percent to 10.2 percent of GDP over the same period. - Completed actions include: recognition and verification of longstanding arrears (audit of commercial arrears up to 2020 completed) and resolution of issues regarding litigated arrears. - Authorities unveiled a repayment strategy extending until the early 2030s; credibility and effectiveness are challenged by non-exhaustivity of the arrears included (timewise omissions for 2021–2023 and limited coverage outside central government). ### Constraints, remaining risks, and implementation gaps - Large backlog of arrears awaiting audit and contingent liabilities with limited visibility on debts contracted by non-central government public entities. - Contingent liabilities and newly discovered debts have undermined progress (examples include CFAF 269 billion and CFAF 360 billion additions). - Prevention measures have not been fully implemented: weaknesses remain in PFM, budgeting, commitment controls, cash, debt, and financial management. - Congo lacks a track record of implementing sustainable arrears clearance plans; previous clearance strategies have not yielded success and initial program inclusion went back to 2003. ### Policy priorities and recommendations on arrears and PFM - Maintain and accelerate ongoing reform momentum; priorities include: - Strengthen fiscal buffers to ensure timely repayment. - Enhance debt coverage and transparency reforms to allow a holistic view of public debt. - Accelerate debt and public financial management (PFM) reforms to allow better management and control. - Improve prevention measures (budgeting, commitment controls, cash management, debt reporting) to reduce future arrears accumulation. - Complete audits and expand coverage beyond central government to quantify contingent liabilities and non-central government debts. - Establish credible, implementable, and comprehensive arrears clearance plans with full coverage (timewise and institutional) to restore confidence. - Public financial management specific actions: - Continue PFM reforms on budget formulation and execution, controls, TSA implementation, active cash management, and improvement of the financial management system. - Implement a new Financial Management Information System (SIGFIP) to promote transparent expenditure commitments and better control of public revenues. - Use SIGFIP to: - accelerate TSA-related reforms as envisioned in the ECF program; - enhance cash forecasting and planning; - interface banking communication tools (Sygma/Systac) with customs and tax applications for cash reconciliation. - Fiscal buffers: - Consolidate fiscal position to create space for arrears repayment and prevent financial difficulties. - Allocate part of fiscal space automatically to arrears repayment. - Example target: to clean the existing stock by early 2030 (as envisioned in the current clearance strategy), authorities should allocate at least 2 percent of GDP of their budget to the repayment of arrears. - Footnotes: using 2023 GDP as a base, the stock of domestic arrears has increased by about 4 percentage points of GDP between 2020 and 2023; arrears contracted by public entities such as hospitals or universities are not included in audit and not reported. - Fiscal and debt reporting: - Stocktaking should comprise all arrears of the entire public sector. - Publish comprehensive debt report including arrears comprising the central government and the 10 largest SOEs (as recommended under the program). - Implement infra-annual monitoring of arrears at the central government level before extending to the overall public sector. - Raise awareness among Ministry of Finance officials about urgency of promptly recognizing arrears. - Debt management: - Implement restructuring of the debt management office: hire and train staff and operate a new procedure manual (Structural benchmark under the ECF arrangement). - Create a committee dedicated to repayment of domestic arrears involving Budget directorate, Treasury, Debt management office and representatives of state entities. ### Tax revenue performance, gaps, and reform priorities - Context and recent performance: - Tax-to-GDP ratio increased by about 4.4 ppts to 9.2 percent in 2023. - Peer averages: CEMAC 11.3 percent and SSA 11.0 percent. - Volatility: standard deviation of 2 ppts around its mean over 2000-23. - Peak non-oil tax ratio: 12.7 percent in 2015; fell to 7.3 percent in 2019. - Pandemic measures included a 2ppts CIT rate cut (not removed since end of the pandemic). - Removal of customs duty exemptions under the Resilience Plan was effective in Q4 2023. - Revenue composition (shares of tax revenue): - Personal income tax: 30 percent. - Corporate income tax: 25 percent. - Value-added tax: 21 percent. - Tax expenditures and potential gains: - Forgone revenue estimated: 3.8 percent of GDP (VAT) and 2.7 percent of GDP (CIT). - Removal of all VAT and customs duty exemptions under the Resilience Plan can generate 3.4 ppts of GDP in additional tax revenue. - Removal of customs duty exemptions under the Resilience Plan in Q4 2023 expected to boost custom revenue by 1.3 ppts of GDP between 2023–24. - Tax gap and efficiency findings: - Tax gap estimated at 69 percent (stated in the summary). - DEA shows efficiency score of 0.36, suggesting a tax gap of about 67 percent and room to raise 4.8 ppts of GDP in additional tax revenue given current structures and policies. - SFA estimates additional tax revenue in the range of 3.7-6.1 ppts of GDP under current policies. - Subcomponent efficiency (SFA): - Total tax revenue (% of GDP): 0.31 - Personal Income Tax (% of GDP): 0.36 - Corporate Income Tax (% of GDP): 0.39 - Excises (% of GDP): 0.21 - Domestic VAT (% of GDP): 0.32 - VAT on imports ((% of GDP): 0.27 - CIT has the highest efficiency score, followed by PIT, domestic VAT, VAT on imports and excises. - Cross-country determinants: improving institutional quality can raise tax revenue (examples: ICRG, WGI measures cited with ppts gains). - Priority tax-policy recommendations: - Scale back ad hoc tax exemptions and broaden the tax base. - Scale back all VAT exemptions under the Resilience Plan. - Replace exemptions on imported basic foods and some inputs with reduced rates where appropriate. - Streamline customs duty exemptions by applying CEMAC’s CET. - Replace many tax exemptions with well-targeted transfers to the poor using the Unique Social Register (RSU). - Establish Medium-Term Revenue Strategy (MTRS), operationalize Tax Policy Units (TPUs), modernize and digitize tax administration (complete E-TAX and digital invoicing), and strengthen tax-customs cooperation. ### Excise taxes, fuel sector, and pricing reforms - Key diagnostic findings: - Excise taxes are among the least efficient tax items in Congo. - Diesel accounted for 60 percent of fuel consumption in 2023, up from 50 percent in 2003. - Fuel consumption grew by an average of 11½ percent a year between 2003 and 2013, then contracted sharply with consumption in 2020 back to the 2008 level. - CORAF supplies ⅔ of domestic demand in refined fuel products; CORAF does not operate at full capacity (60 percent on average). - From audited accounts (2021), average cost per liter of refined product was FCFA 610, which is 2 percent above the retail price for gasoline and 28 percent above the retail price for diesel. - CORAF refinery yield: 57 percent in 2011 declining to 46 percent in 2021. - Fuel price levels and cost-recovery gaps: - Gasoline price "somewhat close to the SSA average"; diesel price in the lowest quintile of SSA distribution despite "30 percent" hike in gasoline and diesel prices in 2023. - At end-2023 gasoline price was "15 percent below cost-recovery". - At end-2023 diesel price was "47 percent below cost-recovery". - Historical extrema: gasoline price gap reached "-102 percent in June 2022"; diesel price gap reached "158 percent in June 2022" before receding to "47 percent at end-2023". - Since 2015 diesel price in Congo "has never been above the cost-recovery level". - CIF acquisition markups high: CIF gasoline and diesel prices for Congo were "57 percent" and "33 percent" higher in December 2023 compared to US Gulf Coast benchmark versus a typical markup of "5 to 15 percent". - Average Jan 2015–Dec 2023 markup: Congo gasoline "46 percent" and diesel "42 percent"; Cameroon gasoline "8.6 percent" and diesel "6.2 percent". - Fiscal burden of fuel subsidies: - Direct budgetary transfer to CORAF: - "2 percent of non-oil GDP in 2015". - Increased to "4-5 percent of non-oil GDP in 2018-19". - Fell "below 1 percent of non-oil GDP" during the pandemic slump. - When adding unrecovered cargos and missed "royalty of 15 percent" that CORAF should have paid, total oil-related transfers peaked at "10.3 percent of non-oil GDP in 2018" over 2015–23. - Total subsidies in 2023: "3.6 percent of non-oil GDP": - "67 percent" accrued to diesel. - "19 percent" to gasoline. - Key line items (CFAF per Liter) — November 2023 (selected): - Entry Distribution Price, excluding VAT: - Gasoline: 488 - Diesel: 360 - Kerosene: 184 - Jet (Aviation): 205 - Fuel Oil: 203 - Regulated retail price: - Gasoline: 775 - Diesel: 625 - Kerosene: 320 - Jet (Aviation): 350 - Fuel Oil: 350 - Contribution to stabilization: - Gasoline: 49.02 - Diesel: 55.55 - Kerosene: 51.00 - Jet (Aviation): 10.00 - Fuel Oil: 10.00 - Other line items preserved as in source: VAT on EDP92.17 68.09 0.00 0.00 0.00; Storage fees and margins: 13.00 (all fuels); Transport costs: 40.00 (all fuels); Transport losses: 2.70 2.07 0.45 0.50 0.00; Retailer margin: 12.00 10.00 10.00 10.00 10.00. - Reform scenarios and estimated fiscal gains: - Removing gasoline and diesel subsidies could generate, on average, a yearly fiscal gain of "1.6 percent of non-oil GDP over 2024-2029". - Closing identified price gaps would involve an "18 percent" increase in gasoline in 2024 and a "45 percent" increase in diesel in 2024 from current levels. - Fiscal gain could reach "2.2 percent of non-oil GDP in 2024 (annualized)" and decline to "1.3 percent of non-oil GDP by 2029". - Alternative phased scenario: gradual phasing out of diesel subsidies over "3 years". - Caveat: if ex-refinery price remains below CORAF production cost, fiscal gain could be "a lot smaller, or even turn to negative". - Burden sharing and alternative design: - If Congo can import fuels efficiently (CIF markup contained at "15 percent") and restructured CORAF breaks even at ex-refinery price: - Eliminating producer subsidies would imply gasoline price "9 percent below full cost-recovery at end-2023". - Diesel price "31 percent below full cost-recovery at end-2023". - Lessons from the 2023 subsidy reform: - Authorities implemented a cumulative "30 percent increase in gasoline and diesel prices in 2003" (contextual timing in source indicates 2023 price reforms described). - Sequencing/phasing in 2023 included: - "5 percent" increase in gasoline and diesel in January 2023. - "24 percent" increase in gasoline in July 2023. - Planned "25 percent" increase in diesel postponed to November 2023. - Mitigating measures: abolition of road tolls, partial business tax relief for transporters, urban road development, Universal Medical Insurance Fund operationalization, and tax exemptions to address rising living costs. - Shortcomings: reporting gaps on subsidies, limited SOE efficiency gains, persistent under-execution of social spending and a missed structural benchmark on increasing resources for the main cash transfer program. - Work ongoing to set up an automatic pricing mechanism with IMF technical assistance. - Policy recommendations for fuel sector: - Strengthen governance, transparency, and efficiency of CORAF: audit operating/administrative costs; enforce payments of government-supplied crude to the budget and multi-year repayment plan; subject new investments to cost-benefit analysis; eliminate cross obligations between SNPC and CORAF; allow CORAF to sell directly to distribution companies; reflect full explicit transfers to CORAF in the budget. - Establish cost-effective procurement for imported fuels: better plan imports, ensure transparent competitive procurement, expand storage capacities. - Increase gasoline and diesel prices to eliminate explicit and implicit consumer subsidies while coupling increases with mitigating measures and prioritizing social expenditure execution. - Introduce an automatic pricing mechanism with smoothing and appropriate institutional arrangements; deregulate downstream fuel sector in medium to long run. ### Financial inclusion: structure, access, and policy priorities - Financial sector structure and access: - In 2021, banks accounted for 84 percent of the financial sector’s balance sheet. - As of end-2023, the banking sector consisted of 10 banks, including two state-owned banks. - The three largest banks hold around 49 percent of total assets. - Credit to private sector as a share of GDP increased from 6 percent of GDP in 2011 to 15 percent in 2023. - In 2021, only 18 percent of adults have a formal account; this declined by 5 percentage points since 2017. - Mobile money accounts increased from 2 percent to 37 percent between 2014 and 2021, but only 1 in 4 registered mobile money accounts are actively used. - 24 percent of adults rely on friends and family for borrowing; 10 percent borrow from formal institutions or use mobile money. - 19 percent of adults use informal savings versus 20 percent using formal financial institutions or mobile money. - Access and demographic disparities: - Income, wealth, education, financial literacy, and digital awareness drive exclusion. - Women are disproportionately affected by financial exclusion. - Urban/rural, age, and education differentials shape account ownership and product usage. - Infrastructure and SME access: - Bank branches and ATMs per adult improved but remain low. - SMEs face higher obstacles to bank access than many SSA peers; most recent enterprise survey data for Congo date to 2009. - Two laws enacted recently: one on factoring and another on leasing. - Policy recommendations for financial inclusion: - Align with CEMAC sub-regional strategy (2022–27) to increase financial inclusion from 32 percent in 2021 to 60 percent by 2027 and 75 percent by 2030 across six strategic axes: consumer education and protection; innovation and interoperability; regulatory enhancement; access to affordable services; access to reliable data; stakeholder capacity-building. - Develop a comprehensive national financial inclusion strategy (ongoing with UNDP under Microfinance and Financial Inclusion Capacity Building Project initiated in 2022). - Promote competition, strengthen consumer protection for digital finance, streamline account opening procedures, expand microfinance institutions, strengthen property rights for collateralization, and promote financial literacy and targeted measures to improve women’s access. ### Climate change, natural disasters, and adaptation investment - Modelling and key quantitative scenarios: - DIGNAD model used; adverse climate shocks simulated to produce a loss in real growth of two percent of GDP (roughly equivalent to annual GDP loss of 2.4 percent associated with floods and measles outbreaks in 2019–2020). - Facing a natural disaster in 2029, five prior years of consecutive investments of 2 percent of GDP in public adaptation infrastructure, if debt-financed, can reduce 2039 total public debt by up to 8 percent of GDP compared to investing half the volume into non-resilient infrastructure. - If adaptation investments yield efficiency gains (example: 40 percent increase in efficiency), higher total factor productivity can allow medium-term gains in private consumption. - Domestic debt financing and mixed domestic/external financing imply permanently higher debt levels; budget-financing contains debt but imposes significantly higher consumption losses. - Recommended policy approach: - Prioritize moderately sized, budget-financed adaptation investments given fiscal consolidation and public debt reduction objectives. - Preserve adaptation investments while pursuing fiscal consolidation. - Prioritize sanitation, health, and basic infrastructure; low-cost measures include enhanced disease surveillance and emergency planning. - Combine adaptation with diversification (sustainable forestry, climate-smart agriculture, renewable energy). - Target social mitigation to protect rural populations, women, and the poorest. - Distributional impacts and costs: - Climate shocks can exacerbate inequality (MIMMI model results). - FAO figures: share of population severely affected by food insecurity rose from 43 percent in 2016 to 59 percent in 2022 (averages over previous three years). - To neutralize combined damage of a 15 percent loss in agricultural TFP and 19 percent loss in labor productivity, Congo needs a perpetual annual additional investment of 0.322 percent of GDP. - To approximately mitigate the rise in the poverty rate from the same shock, Congo would need to perpetually invest around 3.8 percent of GDP per year. - Flood events 2023–2024 and response needs: - EM-DAT (2000-based): Congo experiences a flooding event approx. once every two and a half years and a pandemic once every other year. - Floods affect on average approx. 92.000 people. - December 2023 heavy rains: 336,560 individuals affected (initial government estimates as of January 2024); 23 reported deaths; more than a hundred villages submerged. - Government declared a state of humanitarian emergency on December 29, 2023. - Government response plan budget ≈ 15.8 bn CFA francs to assist 500,000 people; 60% of response cost targeted to food security; shelter and essential household items 13% of total. - Mobilizing 15.8bn CFA francs equals 0.22% percent of non-oil GDP for immediate response. - Funding challenges and operational recommendations: - Debt service needs may consume fiscal space from hydrocarbon revenues over next 4 years. - Adaptation funding should seek additional grants and/or concessional external debt; domestic funding remains costly. - Consider access to IMF RSF facility; expected real yield on Congolese 3-year treasuries stands higher than 6 percent. - Draft and adopt a National Disaster Risk Finance (DRF) Strategy; implement C-PIMA recommendations to integrate climate into public investment planning; strengthen National Committee on Climate Change and coordination with development partners. - Strengthen fiscal buffers (contingency reserve, contingent credit lines/insurance) and improve public expenditure execution for social mitigation. *International Monetary Fund — Republic of Congo report (excerpt).* ### References _____________________________________________________________________________ 11 ### 1cogea2024003-print-pdf - References ### Major findings on government domestic arrears - Public domestic arrears in Congo account for a fifth of GDP in 2023. - Average stock of domestic arrears was 15 percent of GDP over 2018–22. - Composition of arrears: 2/3 are commercial arrears (mainly unpaid supplier bills) and 1/3 are social arrears. - Domestic arrears repayment accounted for about a fifth of revenues in 2023, 4 percentage points above its level in 2022. - Domestic arrears identified between 2020 and 2023 amounted to 18 percent of 2023 GDP. - Authorities paid 14 percent of 2023 GDP between 2020 and 2023 through repayments (including securitizations such as Club de Brazzaville). - The stock of domestic arrears decreased only roughly by -0.4 percentage point of GDP between 2020 and 2023 due to the inclusion of newly recognized arrears after audits. - Repayment in 2022: domestic arrears repayment alone amounted 5 percent of GDP; this was about 1.3 percentage point GDP higher than government domestic investment that year. - Audits for arrears from 2021 to 2023 have a preliminary estimate of 2 percent of GDP still being audited. - Recent additions to the recognized debt include CFAF 269 billion related to the pension fund and CFAF 360 billion of litigated debt. ### Channels through which arrears impact the economy - Reduced aggregate demand: delayed payments create revenue shortfalls for creditors (businesses and individuals), reducing their demand for goods and services. - Deterioration of financial stability: creditors unable to recoup dues can strain banks’ asset quality and lead to financial instability. - Erosion of trust and higher financing costs: repeated payment delays increase risk perception, raise borrowing costs, and reduce access to external financing. - Higher government debt burden and liquidity constraint: - Public debt is high relative to peers and increasing stock of domestic arrears is a major driver. - Liquidity constraints rise because debt service includes considerable arrears repayments in addition to T-bills and bond obligations. - More difficult financing conditions: - Arrears accumulation signals weak repayment capacity and/or unwillingness to pay, contributing to negative credit risk perception and higher funding costs. - Congo’s domestic funding mix has been shifting towards short-term funding in recent years. - Impaired creditor balance sheets: - Creditors have suffered loss of revenues and difficulties repaying their own debts, contributing to deterioration in banks’ asset quality. - Lower economic performance: - Public demand (consumer spending and government expenditure) is a major driver of the Congolese economy, and payment delays dampen economic activity, constrain consumption and investment, and reduce transformational public investment. ### Progress to date and quantitative outcomes - Public debt moved from 102.5 percent of GDP in 2020 to 99 percent of GDP in 2023 despite multiple additions to the stock of arrears. - The overall balance improved from -1.1 percent of GDP to 5.8 percent of GDP over 2020–2023. - Non-hydrocarbon revenues expanded from 8.6 percent to 10.2 percent of GDP over the same period. - Completed actions include: recognition and verification of longstanding arrears (audit of commercial arrears up to 2020 completed) and resolution of issues regarding litigated arrears. - Authorities unveiled a repayment strategy extending until the early 2030s, but credibility and effectiveness are challenged by non-exhaustivity of the arrears included (timewise omissions for 2021–2023 and limited coverage outside central government). ### Constraints, remaining risks, and implementation gaps - Large backlog of arrears awaiting audit and contingent liabilities with limited visibility on debts contracted by non-central government public entities. - Contingent liabilities and newly discovered debts have undermined progress (examples include CFAF 269 billion and CFAF 360 billion additions). - Prevention measures have not been fully implemented: weaknesses remain in PFM, budgeting, commitment controls, cash, debt, and financial management. - Congo lacks a track record of implementing sustainable arrears clearance plans; previous clearance strategies have not yielded success and initial program inclusion went back to 2003. ### Policy priorities and recommendations (as identified) - Maintain and accelerate ongoing reform momentum; priorities include: - Strengthen fiscal buffers to ensure timely repayment. - Enhance debt coverage and transparency reforms to allow a holistic view of public debt. - Accelerate debt and public financial management (PFM) reforms to allow better management and control. - Improve prevention measures (budgeting, commitment controls, cash management, debt reporting) to reduce future arrears accumulation. - Complete audits and expand coverage beyond central government to quantify contingent liabilities and non-central government debts. - Establish credible, implementable, and comprehensive arrears clearance plans with full coverage (timewise and institutional) to restore confidence. *Source: 1cogea2024003-print-pdf - References* ### 9. Priorities Are as Follows: ### 9. Priorities Are as Follows: ### Public financial management - PFM reforms must continue especially on matters of budget formulation and execution, controls, TSA’s implementation and active cash management, and improvement of the financial management system. - Implementation of a new Financial Management Information System (SIGFIP) is supposed to act as a game changer by promoting more transparent application of public expenditure commitment and better control of public revenues. - SIGFIP would be key to: - accelerate TSA’s related reforms as envisioned in the ECF program; - enhance the reliability of tools for better anticipating the evolution of cash balance (cash forecasting and plan); - build an interface between banking communication tools (Sygma/Systac) and customs, tax applications (as well as SIGFIP) to best reconcile operations (cash reconciliation). ### Fiscal buffers - Efforts to consolidate the fiscal position should be maintained to create space for arrears repayment and prevent financial difficulties leading to arrears. - Part of this fiscal space could then be automatically allocated to the repayment of arrears. - Example: in order to clean the existing stock by early 2030—as envisioned in the current clearance strategy—the authorities should allocate at least 2 percent of GDP of their budget to the repayment of arrears. - Footnotes in the source note: - Using 2023 GDP as a base, the stock of domestic arrears has increased by about 4 percentage points of GDP between 2020 and 2023. - Arrears contracted by public entities such as hospitals or universities are not included in audit and not reported. ### Fiscal and debt reporting - The stocktaking of arrears should comprise all arrears of the entire public sector to have full understanding of public sector liabilities. - Enhanced reporting mechanisms are needed to provide regular updates and avoid continued uncertainty about the size of arrears. - Publication of a comprehensive debt report including arrears comprising the central government and the 10 largest SOEs as recommended under the program is a first step. - Other critical actions: - implementation of infra-annual monitoring of arrears at the central government level, before extending it to the overall public sector, to obtain a timely view of the arrears situation; - raising awareness among the officials of the Ministry of Finance about the urgency of promptly recognizing arrears. ### Debt management - Effective implementation of the restructuring of the debt management office and related reforms—especially hiring of staff and their training and the operation of a new procedure manual—will be crucial to enhance the effectiveness of the debt management office (Structural benchmark under the ECF arrangement). - Expected benefits: help avoid arrears through improving reporting and ensuring timely repayment. - Further coordination for debt management would be critical, including creation of a committee dedicated to the repayment of domestic arrears involving all relevant departments in the ministry of finance (Budget directorate, Treasury, Debt management office) and representatives of state entities (public companies, government agencies). ### Boosting tax revenue — Context and recent performance - Non-oil revenue has historically been highly volatile in the Republic of Congo, giving rise to increased fiscal uncertainty. - Tax-to-GDP ratio: - increased by about 4.4 ppts to 9.2 percent in 2023. - below peer averages: CEMAC 11.3 percent and SSA 11.0 percent. - Volatility: - standard deviation of 2 ppts around its mean over 2000-23. - peak non-oil tax ratio reached 12.7 percent in 2015 and fell to 7.3 percent in 2019. - Policy responses and shocks: - pandemic measures included a 2ppts CIT rate cut (not well targeted nor temporary and not removed since the end of the pandemic). - exemptions under the Resilience Plan and other policies contributed to underperformance in tax collection. - removal of customs duty exemptions under the Resilience Plan was effective in the fourth quarter of 2023. - Revenue composition (shares of tax revenue): - Personal income tax: 30 percent. - Corporate income tax: 25 percent. - Value-added tax: 21 percent. - Tax expenditures and forgone revenue: - VAT and CIT account for the bulk of tax exemptions. - Forgone revenue estimated at 3.8 percent of GDP (VAT) and 2.7 percent of GDP (CIT). - Removal of all VAT and customs duty exemptions under the Resilience Plan can generate 3.4 ppts of GDP in additional tax revenue. - Removal of customs duty exemptions under the Resilience Plan in the fourth quarter of 2023 was expected to boost custom revenue by 1.3 ppts of GDP between 2023–24. - Reform actions since 2021: - partial removal of exemptions from customs duties on certain food products under the resilience plan in October 2023; - introduction of excise duties in accordance with CEMAC guidelines; - application of the Unique Identification Number (NIU) to all commercial and financial transactions; - digitalization of tax procedures (E-TAX: e-filing, e-payment and e-invoicing) and interconnection of the tax administration. ### Estimating the tax gap and efficiency findings - Tax gap estimates and efficiency scores: - The tax gap is estimated at 69 percent (stated in the summary). - Data Envelopment Analysis (DEA) shows the Republic of Congo has an efficiency score of 0.36, suggesting a tax gap of about 67 percent and room to raise 4.8 ppts of GDP in additional tax revenue given current economic and institutional structures and under the current policy mix. - Stochastic Frontier Analysis (SFA) estimates that additional tax revenue in the range of 3.7-6.1 ppts of GDP can be raised under current policies. - Subcomponent efficiency (for Congo): - CIT has the highest efficiency score, followed by PIT, domestic VAT, VAT on imports and excises. - Cross-country determinants and potential gains from reforms: - Better macroeconomic management and stronger structural and institutional reforms can help boost tax revenue further by 5.8-7.2 ppts of GDP. - Bringing Congo’s ICRG institutional quality index to the average level of Emerging Markets Economies (EMEs) could raise 1.7-2.2 ppts of GDP in additional tax revenue. - Bringing WGI government effectiveness and Rule of Law scores to the average EME level could boost the tax-to-GDP ratio by 3.1-3.6 ppts of GDP. - Presence of an IMF program, a revenue-based fiscal rule, an MTRS and independent fiscal councils are associated with higher efficiency scores. - Institutional quality, government effectiveness and the rule of law are positively and statistically correlated with efficiency scores. ### Conclusion and policy recommendations — Tax policies to close compliance and policy gaps - Scaling back ad hoc tax exemptions and broadening the tax base would help close the compliance gap. - Priority actions: - Scale back all VAT exemptions under the Resilience Plan—this is highlighted as one of the most important steps. - Replace exemptions on imported basic foods and some inputs with reduced rates of custom duties and VAT where appropriate. - Streamline customs duty exemptions by applying CEMAC’s CET. - Replace many tax exemptions with well-targeted transfers to the poor using the Unique Social Register (RSU). - Rationale: many tax exemptions are typically regressive and do not benefit the most vulnerable groups of the population. *Source: 9. Priorities Are as Follows: (1cogea2024003-print-pdf).* ### 13. The results show that excise taxes are among the least efficient tax items in Congo. ### 1cogea2024003-print-pdf - 13. The results show that excise taxes are among the least efficient tax items in Congo. ### Tax-efficiency findings - Excise taxes are among the least efficient tax items in Congo. - SFA-based tax-efficiency scores (Table 2): - Total tax revenue (% of GDP): 0.31 - Personal Income Tax (% of GDP): 0.36 - Corporate Income Tax (% of GDP): 0.39 - Excises (% of GDP): 0.21 - Domestic VAT (% of GDP): 0.32 - VAT on imports ((% of GDP): 0.27 - Income-based taxes are among the most efficient, but design can be improved to enhance progressivity and close the tax gap. - Income inequality is found to be detrimental to tax efficiency. - Firm structure and taxation: - Small firms dominate the Congolese economy: 98.2 percent of firms. - A large share of firms are untaxed: 46.9 percent. - Diesel and fuel consumption: - Diesel accounted for 60 percent of fuel consumption in 2023, up from 50 percent in 2003. - Gasoline’s share fluctuated around 30 percent between 2003 and 2023. - Fuel consumption grew by an average of 11½ percent a year between 2003 and 2013, then contracted sharply, with consumption in 2020 back to the 2008 level. - The 2014 shock involved a 32 percent decline in crude oil prices, which precipitated the recession and reduced fuel consumption. - CORAF supplies ⅔ of domestic demand in refined fuel products, but frequent supply disruptions produce volatile imports; during shortages black market fuel prices can be as high as 3 times regulated prices. ### Policy recommendations and reform options - Tax policy and administration: - Adopt tax provisions to comply with CEMAC directives on excises as first-best options to improve excise tax collection; such reforms also change consumer behavior in a socially efficient way (particularly for alcoholic beverages, tobacco products, and other unhealthy foods). - Improve PIT and CIT design to increase progressivity and reduce the tax gap. - Reconsider costly and potentially ineffective investment incentives for domestic investment and FDI. - Implement simplified tax regimes for Small and Medium-Sized Enterprises (SMEs) to improve compliance and efficiency. - Improve real property taxes progressively once appropriate cadaster and property valuation systems are in place. - Structural and institutional reforms to boost tax capacity: - Adopt a Medium-Term Revenue Strategy (MTRS) as a comprehensive statement of revenue-mobilization objectives, instruments, and reforms to meet medium-term targets; MTRS design and implementation should involve taxpayers, civil society, and technical and development partners. - Establish or operationalize tax policy units (TPUs) with mandates to conduct evidence-based, data-driven tax policy analysis, advise the Minister of Finance, produce tax revenue forecasts, set and monitor revenue targets, and regularly publish tax expenditures reports assessing fiscal costs of exemptions and options to streamline them. - Further modernize and digitize tax administration; complete effective implementation of E-Tax and digital invoicing systems. - Strengthen cooperation and information sharing between tax and customs administrations to reduce tax fraud and evasion. - Fuel sector reforms: - Operationalize and enforce the 2005 decree pricing formula to set fuel pump prices based on market forces and cost recovery (Entry Distribution Price, EDP), including annual review provisions. - Ensure the EDP is calculated as a weighted average of CIF import costs and ex-refinery price, reflecting CORAF’s ~⅔ share of domestic consumption, rather than a simple average which underestimates EDP. - Reassess the historical exemptions that led to tax expenditures (until 2022 SNPC was exempt from customs duties and VAT on fuel imports, and the EDP was not subject to VAT). - Implement an automatic pricing mechanism to shield the budget from recurrent fuel subsidy shocks and protect fiscal sustainability and social spending. - Pursue concurrent reforms of energy state-owned enterprises (SOEs) to avoid shifting inefficiency costs to final consumers. - Design adequate mitigating measures to protect the most vulnerable and ensure that savings from reform finance broader social expenditure, reduce the non-oil primary deficit, and lower debt vulnerability. ### SFA methodology and determinants of tax efficiency - Approach: - Tax efficiency scores estimated using Stochastic Frontier Analysis (SFA), a parametric approach allowing a random error term and a one-sided inefficiency term. - Conceptual tax production function specified with tax revenue as a function of a proxy tax base and an effective tax rate; the composite error term εi captures a symmetric disturbance vi and a one-sided inefficiency ui (assumed half-normal). - Efficiency scores derived as effscore = exp(−û) where û = E(u|ε̂). - Empirical specifics: - Net total tax revenue decomposed into net PIT, net CIT, net excises, domestic VAT, VAT on imports, and VAT refund; each item taken as ratio to nominal GDP. - Two-stage estimation: (i) estimate efficiency scores via the SFA equation, (ii) identify economic, policy, and institutional determinants of cross-country variation in efficiency scores. - Determinants considered (used to explain cross-country variation in efficiency scores): - Log of GDP per capita; real GDP growth; share of agricultural value added; public-spending-to-GDP ratio; social-spending-to-GDP ratio; primary-balance-to-GDP ratio; gross-debt-to-GDP ratio; trade openness ((X+M)-to-GDP); financial openness (FDI-to-GDP); Gini Index; ODA (% of GDP); IMF program dummy; revenue-based fiscal rule dummy; Independent Fiscal Councils dummy; MTRS dummy. - Institutional and governance indicators: ICRG institutional quality index; WGI Government Effectiveness; WGI Control of Corruption; WGI Rule of Law. - Policy-relevant empirical implication: - Improving institutional quality and governance can help close the tax gap by boosting efficiency. - Establishing TPUs and adopting MTRS are highlighted as critical reforms to close tax policy gaps. ### Fuel pricing, cost structure, and institutional context - Pricing framework and practice: - The 2005 decree (2005-699) prescribes setting fuel prices based on market forces via the EDP formula: weighted average of CIF import prices and ex-refinery price (PSR), plus cost elements, margins, and taxes for storage, transport, and distribution. - The economic adjustment (protection) coefficient to account for refinery inefficiency was set at 25 percent in 2008, then reduced to 15 percent, then to 10 percent by end-2017, and recently to 8% in 2024; the reductions do not necessarily reflect actual efficiency gains. - In practice the 2005 decree has not been operationalized: the government has fixed pump prices by setting the EDP below market levels; the EDP has been calculated as a simple average (underestimating true EDP because the refinery accounts for ⅔ of consumption). - Many cost elements of the pricing formula have not been updated in the last 6 to 8 years despite the decree’s requirement for annual review and cost recovery. - Until 2022 SNPC was exempt from customs duties and VAT on fuel imports, and the EDP was not subject to VAT, creating sizeable tax expenditures. - Market structure and SOE dominance: - The downstream petroleum sector is highly concentrated and dominated by state-owned enterprises. - Three state-owned companies play major roles in refining, distribution, and marketing; the Congolaise de Raffinage (100 percent owned subsidiary of SNPC) refines crude supplied by SNPC; SNPC Distribution sells refined products to final consumers. - SNPC has monopoly over importing refined fuel products; private marketers may import only upon special authorization from the Ministry of Finance and Ministry of Hydrocarbons. - SNPC acts as intermediary between CORAF and distribution, enabling tight government control of pump prices and creating sizeable, opaque subsidies through quasi-fiscal operations. - Operational issues: - Aging infrastructure and limited investment have left CORAF unable to maintain steady supply, leading to frequent shortages and recurrent, high-cost import spikes. *Source: 1cogea2024003-print-pdf - 13. The results show that excise taxes are among the least efficient tax items in Congo.* ### 7. Reflecting the failure to adjust fuel prices, the latter are among the lowest in Sub- ### 7. Reflecting the failure to adjust fuel prices, the latter are among the lowest in Sub- ### Fuel price levels and regional comparison - Gasoline price in Congo is "somewhat close to the SSA average", while diesel price falls "below in the lowest quintile of the fuel price distribution in SSA", notwithstanding the "30 percent" hike in gasoline and diesel prices in 2023. - Compared to neighboring CEMAC countries (Gabon, Cameroon, Central African Republic-CAR): - Congo has the second lowest gasoline and diesel prices after Gabon. - Price gaps are "large enough to encourage fuel smuggling". - Diesel price in Congo is lower than in Congo DRC. - Data note: Figure 2 uses data "as of April 2024". ### Retail prices versus cost-recovery (price gaps) - Using actual import cost (CIF) benchmark and applying taxes, margins, and fees per the 2005 decree: - At end-2023 gasoline price was "15 percent below cost-recovery". - At end-2023 diesel price was "47 percent below cost-recovery". - Historical extrema: - Gasoline price gap reached "-102 percent in June 2022" (price frozen at CFAF 595 per liter between 2008 and 2022). - Diesel price gap reached "158 percent in June 2022" before receding to "47 percent at end-2023". - Since 2015 at least, diesel price in Congo "has never been above the cost-recovery level". - Kerosene and JET fuel also show "sizeable under recovery", though quantities are limited. ### Fuel price structure and regional contrasts - Congo exhibits the highest acquisition price for both gasoline and diesel among CEMAC peers, except versus CAR (landlocked, higher transport cost). - Consequence: High acquisition price combined with lower retail prices has "squeezed margins and transport costs" to unprofitable levels absent adequate investment in the supply chain. - Fuel taxes and net fuel tax position: - Fuel taxes in Congo are "the lowest in the region". - Diesel subsidy is "the largest after Equatorial Guinea". - Using "net fuel taxes (fuel tax-subsidy)" as proxy of fiscal burden: - Cameroon and CAR have net positive fuel taxes. - Congo and Equatorial Guinea have net negative fuel taxes. - Data note: Figure 4 data "as of December 2023". Data on fuel price structure for Gabon is not available. ### The challenge of an excessively high fuel supply cost - Benchmarking to US Gulf Coast prices: - CIF gasoline and diesel prices for Congo were "57 percent" and "33 percent" higher in December 2023, respectively, compared to a typical markup of "5 to 15 percent". - For comparison, Cameroon had a "13 percent" markup in December 2023. - Average over January 2015-December 2023: - Congo markup: "46 percent" for gasoline and "42 percent" for diesel. - Cameroon markup: "8.6 percent" for gasoline and "6.2 percent" for diesel. - Identified drivers of high import markups: - Unreliable refinery supply and limited storage → forced spot purchases. - Limited port infrastructure → longer unloading time and steep demurrage costs. - Higher sovereign risk → elevated insurance and financing costs (partly mitigated by lower exchange rate risk). - Small domestic fuel market size explains a "small fraction" of the markup gap. - On refinery (CORAF) inefficiencies: - Small refineries are "structurally unprofitable" given capital intensity and large fixed costs. - CORAF "does not operate at full capacity" — footnote indicates "60 percent on average". - From audited accounts (2021), average cost per liter of refined product was "FCFA 610", which is "2 percent" above the retail price for gasoline and "28 percent" above the retail price for diesel. - CORAF refinery yield: "57 percent in 2011" declining to "46 percent in 2021". - For context: US refineries yield "above 90 percent", Europe "80 percent". - KPMG study references (2005-06): CORAF cost about "$8 USD per barrel", versus "$2.2 USD per barrel" for comparable refineries worldwide, and "$5 USD per barrel" for low-performing regional refineries. If operating at full capacity, CORAF production cost could decline to "$5.1 USD per barrel". - Opportunity cost: - Low CORAF yield implies crude could have been sold at higher international price and refined imports bought more cheaply. ### Fiscal burden and size of fuel subsidies - Cash-flow perspective and accounting: - Direct budgetary transfer to CORAF: - "2 percent of non-oil GDP in 2015". - Increased to "4-5 percent of non-oil GDP in 2018-19". - Subsidy transfers fell "below 1 percent of non-oil GDP" during the pandemic slump in oil prices. - When adding unrecovered value of cargos delivered and the missed "royalty of 15 percent" that CORAF should have paid, total budgeted oil-related transfers nearly doubled, peaking at "10.3 percent of non-oil GDP in 2018" over 2015–23. - That "10.3 percent" subsidy level is "27 percent higher than the combined public spending on education and health in 2018". - Product breakdown (2023): - Total subsidies in 2023: "3.6 percent of non-oil GDP". - "67 percent" accrued to diesel. - "19 percent" to gasoline. - Remaining to kerosene and Jet fuel (fuel oil negligible and not included). - Explicit vs implicit subsidies: - Subsidies are "mostly explicit in nature", especially for diesel—driven by selling below cost-recovery rather than forgoing consumption taxes. - Estimation methodology notes: - Subsidy estimates computed against strict application of the fuel pricing formula using actual import cost. - Opportunity-cost approach differs from cash-flow approach; it multiplies price gaps by fuel consumption quantities and incorporates VAT and customs tax expenditures accruing to consumers. ### Reform scenarios and estimated fiscal gains - Removing gasoline and diesel subsidies could generate, on average, a yearly fiscal gain of "1.6 percent of non-oil GDP over 2024-2029". - Closing the identified price gaps in section B would involve: - An "18 percent" increase in gasoline in 2024 from current levels. - A "45 percent" increase in diesel in 2024 from current levels. - Fiscal gain dynamics: - Fiscal gain could reach "2.2 percent of non-oil GDP in 2024 (annualized)" and decline gradually to "1.3 percent of non-oil GDP by 2029". - Alternative phased scenario: - Gradual phasing out of diesel subsidies over "3 years" is proposed given social and political economy implications. - The fiscal cost relative to the immediate removal scenario is "modest" while allowing adjustment time for households and firms. - Mitigating measures should be implemented to protect the most vulnerable households and redirect savings to priority sectors: "health, education, and infrastructure". - Caveats and sensitivity: - Slightly larger retail price increases would be needed if storage cost, distribution margins and fees are revised upward. - Estimates are "subject to changes and can vary substantially depending underlying assumptions and oil price dynamics". - If the ex-refinery price in the formula remains below CORAF production cost, fiscal gain could be "a lot smaller, or even turn to negative". ### Burden sharing and alternative reform design - A politically appealing reform can share burden between supply chain actors and consumers: - If Congo can import fuels efficiently (CIF markup contained at "15 percent") and restructured CORAF breaks even at ex-refinery price: - Eliminating producer subsidies would imply gasoline price would have been "9 percent below full cost-recovery at end-2023". - Diesel price would have been "31 percent below full cost-recovery at end-2023". - Figure 9 presents the breakdown between consumer and producer subsidies under this scenario. ### Lessons from the 2023 subsidy reform - Reform description: - Authorities implemented an ambitious fuel subsidy reform with a cumulative "30 percent increase in gasoline and diesel prices in 2003" (text notes fuel prices were unchanged since September 2018 in footnote; context indicates reforms in 2023). - This reform was a key commitment under the IMF-ECF supported program and accompanied by governance reforms to increase transparency in the oil sector. - Authorities committed to further price increases to fully eliminate subsidies and to set up an automatic pricing mechanism afterwards. - Factors contributing to the 2023 reform's success: - Phased approach, mitigating measures, stakeholder consultations, and authorities’ strong commitment. - Sequencing and phasing detail: - "5 percent" increase in gasoline and diesel in January 2023. - "24 percent" increase in gasoline in July 2023 (delayed two weeks for consultations). - Planned "25 percent" increase in diesel postponed to November 2023 due to concerns for the poor and public transport fares. - Subsidy on kerosene and cooking gas maintained. - Mitigating measures introduced: abolition of road tolls, partial business tax relief for transporters, urban road development, Universal Medical Insurance Fund operationalization, and tax exemptions to address rising living costs. - Shortcomings and governance issues: - Reporting of subsidies has "gaps", notably unrecovered amounts from the refinery. - Little progress in improving efficiencies of state-owned enterprises (SOEs) in the energy sector; persistent under-execution of social spending and a missed structural benchmark on increasing resources for the main cash transfer program. - Work ongoing to set up an automatic pricing mechanism with IMF technical assistance. - Mapping to Clement et al. (2013) lessons: - The 2023 reform aligns with multiple elements identified as key to successful subsidy reform: comprehensive planning and diagnostics, communication, phased sequencing, SOE efficiency improvements (partial), targeted mitigating measures (partial), and moves toward depoliticized automatic pricing. *Source: Excerpts from the Republic of Congo IMF staff report chapter on fuel prices, subsidies, and reform (figures and data as cited in the original text).* ### 20. In addition, growth recovery and fuel subsidy reform in neighboring countries ### 20. In addition, growth recovery and fuel subsidy reform in neighboring countries ### Context and immediate drivers - Continuous improvement in non-oil economic activities after a period of economic downturn likely facilitated the reform as firms and households might be able to better adjust to the higher fuel prices than in a recession period. - Regional context: fuel price increases in neighboring countries—including oil producing ones—reinforced the opinion among policy makers and the public that the reform is imperative. - Anecdotal evidence reported intensified fuel smuggling to neighboring countries as Congo delayed fuel price increases. - Headwinds: - Inflationary pressures stemming from high food and commodity prices associated with the war in Ukraine did not provide a conducive environment for the reform. - Deep concerns about elevated risks of social protests, with some stakeholders calling for a pause in the reform. ### Conclusions and policy recommendations (summary) - Progress and remaining challenges: - Congo has made inroads to address high, pervasive and untransparent fuel subsidies, but challenges remain ahead. - Despite the successful 2023 fuel subsidy reform, fuel prices in Congo remain among the lowest in Sub-Saharan Africa. - Fuel subsidies remain high, in part reflecting a very high import cost and an inefficient refinery. - Strategic objective: - Sustain and deepen reform momentum through a comprehensive strategy combining gradual retail fuel price increases with energy SOEs reforms. - Specific recommendations: - Strengthen governance, transparency, and efficiency of the CORAF: - Conduct an audit of the operating and administrative costs of the refinery and prepare a clear action plan to bring them in line with the performance contract. - Strictly enforce the payments of government-supplied crude oil to the budget, and set up a multi-year repayment plan for past obligations. - Subject any new investment or expansion plan of CORAF to a rigorous cost-benefit analysis to ensure the best return for public finances. - Eliminate cross obligations between the SNPC and CORAF, and allow CORAF to sell fuel products directly to the distribution companies. - Note: At the same time, the budget should reflect the full explicit transfers to CORAF. - Establish a cost-effective procurement process for imported fuels: - Better plan fuel imports. - Ensure procurement is subject to a transparent and competitive process. - Expand storage capacities to comply with regulatory requirements. - Increase gasoline and diesel prices to fully eliminate at least the explicit and implicit consumer subsidies: - Couple price increases with adequate mitigating measures to soften the impact on the most vulnerable. - Prioritize social expenditure to ensure adequate execution of allocated budget envelopes. - Report transparently the size of the subsidies and bolster public communication on the merit of the reform. - Introduce an automatic pricing mechanism, possibly with smoothing, to avoid reemergence of subsidies: - Shield the budget from recurrent fuel subsidy shocks that threaten fiscal sustainability and critical social and development spending. - Revisit the parameters of the pricing formula regularly to reflect actual storage and distribution costs. - Set up appropriate institutional arrangements to depoliticize fuel pricing. - Deregulate the downstream fuel sector in the medium to long-run, with the role of the state confined to ensuring competitive practices in the sector. ### Annex I — Mitigation measures amid fuel subsidies reform - Initial response to the first fuel price hikes (targeting public transportation): - Keeping public transport fares for goods and passengers unchanged. - Full government coverage of the road tolls. - 50% government payment of the business taxes. - Reduced toll crossing fees. - Expanded measures by the second diesel price increase (fiscal cost CFAF 22 billion or 0.3 percent of non-oil GDP): - Eliminate parent contributions and support for community education volunteers. - Provide school textbooks to all primary students. - Expedite processing and regular payment of student scholarships. - Establish public urban transport companies in Brazzaville and Pointe-Noire, in partnership with private companies. - Regulate bus routes to protect the urban private transport sector. - Permanently abolish the road tolls. - Extend the announced measures for transporters to include river transportation. - Remove parking fees imposed by certain cities. - Ensure free movement of people and goods at borders, in accordance with CEMAC regulations. - Reduce port processing time for container handling. - Operationalize the Universal Medical Insurance Fund to support treatment for serious diseases. - Increase the coverage of programs providing income-generating transfers. - Implement the national social safety net program. - Increase financial resources available to cash transfer programs. ### Key fuel price structure (CFAF per Liter) — November 2023 (selected items) - Entry Distribution Price, excluding VAT: - Gasoline: 488 - Diesel: 360 - Kerosene: 184 - Jet (Aviation): 205 - Fuel Oil: 203 - Contribution to stabilization: - Gasoline: 49.02 - Diesel: 55.55 - Kerosene: 51.00 - Jet (Aviation): 10.00 - Fuel Oil: 10.00 - Regulated retail price: - Gasoline: 775 - Diesel: 625 - Kerosene: 320 - Jet (Aviation): 350 - Fuel Oil: 350 - Other line items (examples preserved exactly as presented): - VAT on EDP92.17 68.09 0.00 0.00 0.00 - Storage fees and margins: 13.00 (all fuels) - Transport costs: 40.00 (all fuels) - Transport losses: 2.70 2.07 0.45 0.50 0.00 - Retailer margin: 12.00 10.00 10.00 10.00 10.00 ### Broader diversification context (selected findings) - Growth and dependence: - Over the last 30 years, real GDP economic growth has averaged 1.8 percent per year, implying a per capita GDP growth of about -1 percent per year. - Hydrocarbon sector provides about 60 percent of fiscal revenues and over 80 percent of export revenues. - Oil production outlook: - Oil production peaked in 2018–19 and is expected to decline gradually over the next few decades, only partly offset by new development of LNG exports. - Diversification priorities and constraints: - Export diversification is key for economic diversification for a small economy (population about 6 million). - Main obstacles: Dutch Disease dynamics, structural and institutional bottlenecks (infrastructure, human capital, R&D), late start of oil production relative to independence, and Congo’s current income levels being above the range where diversification gains are easy. - Specific bottlenecks: - Business environment: shortcomings in hard infrastructure and customs performance despite some logistic strengths. - Access to digital technologies: commitments under “Vision Congo Digital 2025” but bottlenecks in human capital, digital literacy, and ICT infrastructure in schools. - Access to electricity: relatively low, high costs for connections, unreliable supply, firm reliance on diesel generators. - Macroeconomic risks: high public debt, small but recurring external debt arrears, uncertainty about resolution of domestic debt arrears (including social arrears) that raise borrowing costs and deter FDI. - Trade barriers: simple average MFN tariffs are high compared to other SSA countries; issues with border procedures and clearance times; AfCFTA signed in 2018 but Economic Partnership Agreement with the EU not yet ratified by Congo. - Policy advice for diversification: - Address broad policy failures and sector-specific market failures. - Governance: implement anti-corruption reforms, increase transparency in natural resource management, strengthen public procurement and PFM oversight. - Trade facilitation: simplify procedures, develop automated risk management at Customs, reduce clearance times. - Trade policy: reduce tariffs and remove trade barriers; document existing non-tariff measures. - Digital transformation: enhance affordable broadband access by strengthening competition and infrastructure sharing, implement education sector ICT policy, develop regulations to strengthen trust in digital payments and financial services. *Source: IMF — Republic of Congo (excerpts from the provided chapter).* ### References ### References ### Bibliographic references - Cherif, R. and F. Hasanov, (2013). “Oil exporters’ dilemma: how much to save and how much to invest”. World Development 52:120-131. - Cherif, R. and F. Hasanov, (2019). “The return of the policy that shall not be named: Principles of industrial policy”. IMF Working Papers 19/74. - Cherif, R. and F. Hasanov, (2024). “When Tolstoy meets Leontief: luck, policies, and learning from miracles. Structural Change and Economic Dynamics” 68: 86-97. - Clark, D., L.R. Lima ad W. C. Sawyer, (2016). “Stages of diversification in Africa, Economics Letters” 144: 68-70. - Cust, J., S. Devarajan and P. Mandon, (2022). “Dutch disease and the public sector: How natural resources can undermine competitiveness in Africa, Journal of African Economies” 31, AERC Supplement 1, i10-i32. - Djimeu, E. and L.D. Omgba, (2019). “Oil windfalls and export diversification in oil-producing countries: Evidence from oil booms”, Energy Economics 78:494-507. - International Monetary Fund, (2014). “Sustaining long-run growth and macroeconomic stability in low-income countries: The role of structural transformation and diversification”. IMF Policy Paper March/2014. - International Monetary Fund, (2019). IMF Country Report No. 19/244. - International Monetary Fund, (2022). “Industrial policy for growth and diversification: a conceptual framework”, IMF African Department and Institute for Capacity Development DP/2022/017. - Lashitew, A. M. Ross and E. Werker, (2020). “What drives successful economic diversification in resource-rich countries?”, The World Bank Research Observer 36:164-196. - Omgba, L.D., (2014). “Institutional foundations of export diversification patterns in oil-producing countries, Journal of Comparative Economics 42: 1052-1064. - Karanfil, F. and L.D. Omgba, (2023). The energy transition and export diversification in oil-dependent countries: The role of structural factors”, Ecological Economics 204 (2023) 107681. - Ross, M., (2017). What do we know about economic diversification in oil-producing countries?, mimeo. - Salinas, G., (2021). “Proximity and Horizontal Policies”: IMF Working Paper 21/64. - World Bank, (2023). “Republic of Congo’s Road to Prosperity: Building foundations for economic diversification”. Republic of Congo Country Economic Memorandum, March 2023. --- ### Financial Inclusion in Congo: Stocktaking ### Key findings on financial sector structure and access - In 2021, banks accounted for 84 percent of the financial sector’s balance sheet. - As of end-2023, the banking sector consisted of 10 banks, including two state-owned banks. - The three largest banks hold around 49 percent of total assets in the banking system. - Credit to private sector as a share of GDP increased from 6 percent of GDP in 2011 to 15 percent in 2023. - In 2021, only 18 percent of adult population have access to a formal account at a bank or another type of financial institution; this proportion declined by 5 percentage points since 2017. - The proportion of adults with mobile money accounts increased from 2 percent to 37 percent between 2014 and 2021, while the share of adults with a traditional bank account remained almost unchanged. - Only 1 in 4 registered mobile money accounts are actively used (IMF Financial Access survey data). - A notable 24 percent of adults rely on friends and family for borrowing; 10 percent borrow from formal financial institutions or use mobile money accounts. - 19 percent of adults resort to informal savings methods versus 20 percent who save through formal financial institutions or mobile money accounts. ### Access and demographic disparities - Income, wealth, education, financial literacy, and digital technology awareness are primary drivers of financial exclusion. - Men exhibit higher rates of account ownership, especially regarding mobile money; financial exclusion affects a particularly high proportion of women. - Individuals with secondary education or higher are more likely to have access to financial services compared to those with primary education. - Older individuals typically have greater access to traditional financial services; younger individuals are more likely to use mobile money. - Financial exclusion in rural areas linked to inadequate infrastructure, lower income, and limited financial awareness. ### Infrastructure and usage patterns - Levels of bank branches and ATMs per adult have improved but remain very low compared to global average and SSA countries. - Mobile money registrations have surged (Number of Mobile Money Accounts per 1,000 adults increased), yet effective utilization remains low. - The share of adults that saved or borrowed using an account remains modest and aligns closely with averages observed across SSA countries. ### Barriers to account ownership - The top barrier cited by unbanked adults in Congo is the lack of money (2021 World Bank Global Findex Database). - Other top-cited reasons: challenges in providing required documents and costly financial services. ### SMEs and firm-level access - Limited presence of SME borrowers in Congo’s commercial banking sector compared to peers (IMF Financial Access Survey; data for the Republic of Congo is as of 2021). - SMEs face higher obstacles to access financial services than in many other SSA countries. - The most recent World Bank Survey of Enterprises data for the Republic of Congo date to 2009. --- ### Unlocking economic potential: benefits of financial inclusion ### Macroeconomic and welfare impacts - Financial inclusion can increase business opportunities, job creation, productivity, investment, and economic growth. - Evidence cited: - Adedokun and Ağa (2021): positive impact of financial inclusion on economic growth across multiple SSA countries. - Khera and al. (2021): robust positive correlation between digital financial inclusion and long-run growth across 52 emerging markets and developing economies. - Andrianaivo and Kpodar (2011): ICT critical in enhancing financial inclusion and contributing to economic growth. - In low-income countries finance can serve as a shock absorber for terms of trade shocks (Kpodar and al. (2019)). - Md Abdullah Omar and Kazuo Inaba (2020): financial inclusion significantly reduces poverty rates and income inequality in developing countries. - Beck, Demirgüç-Kunt, and Levine (2004): financial development associated with lower income inequality when controlling for reverse causality. ### Social and fiscal channels - Financial inclusion improves welfare outcomes through better ability to meet basic needs, expanded education opportunities, empowerment of women, and enhanced social cohesion. - Greater financial inclusion is generally associated with increased tax revenue via reduced shadow economy and better tracking of digital transactions. - Nnyanzi et al. (2018) and Chebochok and al. (2023) provide evidence linking financial sector depth and accessibility to improved domestic tax revenues in regional studies. - Maherali (2017): mobile phone technology can enhance financial inclusion and increase traceable digital transactions. --- ### Policy recommendations ### Strategic and regulatory priorities - CEMAC sub-regional financial inclusion strategy (2022–27) aims to increase financial inclusion from 32 percent in 2021 to 60 percent by 2027 and 75 percent by 2030 through six strategic axes: - consumer education and protection, - innovation and interoperability promotion, - regulatory framework enhancement, - access to affordable financial services, - access to reliable data on financial inclusion, - stakeholder capacity-building. ### National strategy and legal framework - The Republic of Congo currently lacks a comprehensive national strategy for financial inclusion. - Government and UNDP collaboration is underway to develop a national strategy under the Microfinance and Financial Inclusion Capacity Building Project initiated in 2022. - Two laws enacted: one on factoring and another on leasing, aimed at improving SMEs' access to financing. - Ongoing regulatory measures aim to strengthen the legal framework for businesses. ### Structural reforms and infrastructure - With poverty as the primary impediment to financial inclusion, authorities should: - advance governance reforms, - enhance fiscal discipline and fiscal management, - direct funds towards critical social sectors, - strengthen social safety nets, - empower marginalized groups and small-scale enterprises. - Prioritize improving infrastructure, particularly electricity and internet connectivity, to bridge the digital divide and enable access to digital financial services and online financial literacy resources. *Source: 1cogea2024003-print-pdf - References* ### 19. Enforcing robust regulatory frameworks is key to laying the foundation for broad ### 19. Enforcing robust regulatory frameworks is key to laying the foundation for broad financial inclusion ### Financial inclusion: regulatory and institutional measures - Findings and rationale: - Promoting competition within the financial sector and strengthening regulatory frameworks safeguard financial stability. - Enhancing consumer protection, including for digital financial services, addresses financial exclusion stemming from mistrust and mitigates risks from rapid technological innovation. - Streamlining account opening procedures at banks reduces barriers for the unbanked. - Transparent disclosure of requirements associated with financial products and services, and establishing dispute resolution mechanisms, increase trust and uptake. - Institutional support: - Expanding support for microfinance institutions as a fundamental strategy to reach low-income individuals and small businesses excluded by traditional banks. - Strengthening property rights to enable asset collateralization, facilitating access to credit and attracting domestic and foreign investment. - Capacity building and outreach: - Promoting financial literacy and raising consumer awareness, including online educational resources and financial education programs, to empower informed financial decisions. - Targeted efforts to improve women’s access to financial services, including financial literacy in digital finance, tailored financial products, and broader reforms to promote women’s workforce participation and decision making to reduce the gender gap in financial inclusion. *Italicized source attribution: International Monetary Fund — Republic of Congo report (excerpt).* ### CLIMATE CHANGE AND ADAPTATION NEEDS ### A. Climate change related natural disasters and adaptation investment — model-based findings - Context and model use: - IMF’s DIGNAD model calibrated to Congo’s characteristics is used to assess impacts of natural disasters and mitigation on growth, capital stocks, and welfare. - The Debt-Investment-Growth and Natural Disasters (DIGNAD) model features total factor productivity dependent on public infrastructure stock, distinguishing standard and resilient infrastructure accumulated via adaptation investments. - Historical impact benchmark: - Adverse climate shocks are simulated to produce a loss in real growth of two percent of GDP, roughly equivalent to an annual GDP loss of 2.4 percent associated with the floods and measle outbreaks in 2019 and 2020. - Debt and welfare implications of adaptation vs. alternative financing: - Facing a natural disaster in 2029, five prior years of consecutive investments of 2 percent of GDP in public adaptation infrastructure, if debt-financed, can reduce 2039 total public debt by up to 8 percent of GDP compared to a scenario where half the investment volume goes instead into non-resilient public infrastructure. - Budget financing of reconstruction (e.g., higher taxes on consumption, labor, and capital, or reduced transfers) contains fiscal deficits and limits debt increases but would more than double respective costs in terms of foregone private consumption growth for Congo, depressing welfare levels. - If adaptation infrastructure investments yield efficiency gains (example model used a 40 percent increase in efficiency relative to the baseline), higher total factor productivity can allow for medium-term gains in private consumption. - Financing modalities and trade-offs illustrated in model scenarios: - Domestic debt financing and mixed domestic/external debt financing imply permanently higher debt levels. - Budget-financing scenarios contain debt but impose significantly higher consumption losses. ### B. Policy options for developing climate change resilience through adaptation investments - Recommended first responses and priorities: - Moderately sized, budget-financed adaptation investments are an appropriate first policy response given Congo’s fiscal consolidation and public debt reduction objectives. - Preserve investments related to climate change adaptation to strengthen resilience while pursuing fiscal consolidation. - Prioritize investments in sanitation, the health sector, and access to basic infrastructures given epidemic diseases have been frequent and severe risk vectors. - Low-cost examples: enhanced disease surveillance, improved emergency planning and response for quick access to health services, and education promoting adaptation and crisis preparedness. - Sectoral and diversification synergies: - Sustainable forestry can combine adaptation with diversification (agriculture, forestry, mining, local manufacturing, digitalization) given Congo’s share of Congo Basin rain forests and peatlands. - Reform measures for sustainable forestry include: (i) digitalized and transparent forest documentation and management systems, (ii) climate resilient transportation, communication, sanitation, water, and health infrastructures, and (iii) administrative procedures to attract investors and workforce. - Renewable energy and climate-smart agriculture: close to 30 percent of Congo’s electricity is generated by hydroelectric power stations; solar power is attractive in remote areas. Additional hydroelectric and solar plants could help meet growing electricity demand. - Modest investments in efficient irrigation technology, monitoring, and farmer training could boost yields and reduce greenhouse gas emissions. - Resilient flooding risk management, including adequate early warning and response systems, supports resilience and may reduce crisis management costs (example: some 60 percent of the CFAF 16 billion emergency plan in reaction to the 2024 floods were allocated to food security). ### C. Climate change, natural disasters, adaptation investment, and inequality — distributional impacts and mitigation costs - Distributional risks: - Climate-change related losses in agricultural and labor productivity can sharply exacerbate preexisting inequality issues (assessed with the IMF’s MIMMI model — Multisector Macro-Inequality Incomplete-Markets Macro Inequality). - Elevated dependency on food imports can amplify spill-over channels of food inflation and intensify food insecurity and fragilities. - Congo displayed an elevated share of the population affected by severe food insecurity; FAO figures: the severely affected population rose from 43 percent in 2016 to 59 percent in 2022 (averages over the previous three years). - Targeted social mitigation: - Targeted social policies are powerful mitigators; execution of budget positions related to social expenditures needs attention (as noted in the fourth review for Congo’s ECF arrangement). - Prioritize social mitigation measures benefiting the most vulnerable groups: rural population, women, and the poorest. Efficiency favors spending items targeted at vulnerable groups that scale up social, human, or physical capital. - Climate-resistant agricultural development targeted at essential food items and well-targeted transfers to deprived groups are key given rising population affected by food insecurity. - Costs to offset productivity and distributional losses: - For Congo, a perpetual annual additional investment of 0.322 percent of GDP can neutralize the combined damage of a 15 percent loss of total factor productivity in agriculture and a 19 percent loss of labor productivity due to climate change. - To approximately mitigate the rise in the poverty rate from the same climate-induced productivity shock, Congo would need to perpetually invest around 3.8 percent of GDP per year. *Italicized source attribution: International Monetary Fund — Republic of Congo report (excerpt).* ### 10. Reaping the benefits offered by moderate adaptation investments, however, requires ### 10. Reaping the benefits offered by moderate adaptation investments, however, requires ### Funding challenges and assumptions - Debt service needs foreseen to almost completely consume over the next 4 years any fiscal space provided by the country’s hydrocarbon revenues. - Funding needed for any adaptation investment scenario would have to be obtained either through additional grants and/or concessional external debt, and further efficient gains in public spending. - Persistent uncertainties around Congo’s total public debt level (SIP 1) highlight the need for finding concessional funding sources, as access to non-concessional external funding is expected to remain scarce in foreseeable future, and domestic funding remains costly. - Significant adaptation investments are expected to generate prospective balance of payments and/or fiscal funding needs, which might motivate seeking access to the IMF’s RSF facility. - Potentially faster-than-expected declining hydrocarbon revenues due to shrinking oil exports in an accelerated or uneven transition scenario to a greener global economy would further intensify respective pressures. - This assumes that the current ECF arrangement will be followed up by a successor arrangement with similar conditionality that would be accompanied by a RSF arrangement. - The expected real yield on Congolese 3-year treasuries stands higher than 6 percent. ### Selected quantitative adaptation-investment scenarios (from figure text) - 15% productivity loss in agriculture & 19 percent loss in labor productivity & 3.8 percent of GDP adaptation investment - 15% productivity loss in agriculture & 19 percent loss in labor productivity & 0.322 percent of GDP adaptation investment - Funding sources assumed for 5 years of successive one or two percent of GDP investment into adaptation to climate change (Percent of GDP, stacked): Grants; Additional concessional debt needs for assumed higher adaptation investment; 75 percent of quota RSF arrangement. ### Flood events of 2023–2024: exposure and impact - The Republic of Congo is increasingly exposed to climate change, with severe flooding events becoming more frequent, particularly affecting the river corridor and urban centers of Brazzaville and Pointe-Noire. - Both the Congo River and the Oubangui River reached record water levels in the 2023−2024 rainy season due to historic heavy rainfall. - Based on EM-DAT data from 2000: - Congo experiences a flooding event approximately once every two and a half years, and a pandemic once every other year. - Floods affect on average approx. 92.000 people (including the recent 2023 floods). - Epidemics affect on average 24,000 people. - December 2023 heavy rains led to floods in nine departments: - 336,560 individuals were affected (initial government estimates as of January 2024). - 23 reported deaths. - More than a hundred villages along the river coast were submerged; homes, schools, and health centers were inaccessible; water points and sanitation facilities were rendered non-functional. - The Government declared a state of humanitarian emergency on December 29, 2023. - The government response plan has a budget totaling approx. 15.8 bn CFA francs and aims to assist 500,000 people. - Response plan focuses on seven critical areas: i) Food Security, Shelter and Non-Food Items; ii) Water, Hygiene and Sanitation; iii) Health; iv) Nutrition; v) Education; vi) Protection, Security, and Logistics, and vii) Coordination. - Majority of response cost targeted towards alleviating food insecurity (60% of total). - Shelter and essential household items account for 13% of total. - The initial implementation of the response plan was delayed until February 2024, three months after the heavy rains, primarily due to low budget execution capacity combined with insufficient fiscal space. - On Feb. 23rd, 2024, the government deployed a humanitarian convoy by boat to assist flood victims in the northern part of Congo, which consisted of several tons of food and other items. ### Fiscal implications - Mobilizing budgetary resources amounting to 15.8bn CFA francs (0.22% percent of non-oil GDP) is required for an effective immediate response. - The severe disruption to fisheries and agriculture—approx. 70% of employment in Congo—will have lasting effects via destruction of assets (e.g., farm equipment, fishing boats) and income (e.g., crops). - The extent of damage to public and private assets is yet to be quantified. - Studies show government expenditures increase due to reconstruction and clean-up efforts in the years following significant flood and storm events, which in Congo could undermine fiscal consolidation efforts moving forward. ### Policy recommendations and operational actions - Strengthen fiscal buffers for shock response. - Gradually build fiscal buffers over time to enable more rapid implementation of response plans for future shock events without placing excessive strain on fiscal space in initial years. - Fiscal buffers to develop/strengthen include expansion of the existing contingency reserve in an objective and transparent manner; right sizing the allocation of resources to the Ministry of Social Affairs, Humanitarian Action, and Solidarity; and establishing contingent lines of credit and/or insurance. - Draft and adopt a National Disaster Risk Finance (DRF) Strategy, based on sound diagnostics. - The DRF Strategy would support authorities to allocate and disburse scarce fiscal resources when responding to future disasters in alignment with strategic priorities. - Authorities could seek development partner support to conduct a disaster risk finance diagnostic and formulate the strategy based on the diagnostic’s recommendations. - National DRF strategies can be used to engage development partners to mobilize concessional finance. - Implement the C-PIMA recommendations (IMF, April 2023), including: - ensuring that climate change considerations are better taken into account in public investment planning; - strengthening institutional coordination mechanisms, namely operationalize the National Committee on Climate Change to establish a technical coordination mechanism responsible for promoting the integration of climate aspects into public investments; - integrating climate considerations into the project evaluation and selection process; - integrating climate change issues into budgeting and project portfolio management; and - identification of additional ex-ante financing instruments (in alignment with the first recommendation). - Improve coordination within the government and with development partners (cf. CCDR recommendations). - Establish the National Committee on Climate Change to act at the NDC coordination and operationalization mechanism (C-PIMA). - Formulate frameworks for fostering inclusive governance and stakeholder engagement as per recommendations from the Climate Change Institutional Assessment (budget screening, coordination, consultation, regulations, planning, and data disclosure). - Engage in effective communication and awareness campaigns to build public and donor support and raise awareness about the importance of integrating DRM into public planning and response. ### Illustrative international experience (Box 1: Malawi) - Malawi's National DRF Strategy (implemented in 2019) enabled mobilization of grant funds for disaster resilience, focusing on drought events affecting rural populations (70 percent of whom live below the poverty line). - Malawi mobilized a US $21 million grant from the Global Risk Financing Facility (GRiF). - Funds bolster Malawi's Social Cash Transfer Program (SCTP) and develop two new disaster risk financing instruments: to cover premiums for a risk transfer product tied to drought triggers and to provide contingency finance for flexible scale-ups. - During the 2021–22 agricultural season, the mechanism was triggered for the first time, resulting in USD 6.3 million in additional cash transfers reaching approximately 320,000 individuals. *Source: IMF staff analysis and projections, Republic of Congo chapter excerpt.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1cogea2024003-print-pdf.pdf_