## _cr0972 - 1.     Transfers to CORAF, 2007–08

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---

### A. Introduction and key findings
- Objective: increase priority spending on pro-poor and growth-enhancing programs; scope to reduce low-priority outlays such as fuel subsidies.
- Main findings:
  - "Until more recently, fuel subsidies have weighed heavily on the budget. The total fiscal cost of these subsidies rose to as high as 8.3 percent of non-oil GDP last year, compared with total current expenditures of 56.3 percent of non-oil GDP."
  - "Higher income households benefit most from the fuel subsidies, contrary to the pro-poor objective of the government’s fuel pricing policy. The top 20 percent of the population received about 40 percent of the subsidies for gasoline and diesel. For kerosene (consumed disproportionately by lower income households), however, the top two quintiles receive 42 percent of the benefits while the bottom two quintiles receive 35 percent of the subsidies. Consequently, fuel price subsidies do not adequately protect the real incomes of the poor."
  - "The authorities’ policies to mitigate the adverse impact of rising fuel prices earlier this year were well intended, but were not sufficiently targeted to benefit the poor. The various public expenditures that were made probably did not alter the pattern of the welfare distribution. We judge that the lowest quintiles of the welfare distribution only receive about one third of the benefits from these measures."

### B. Current petroleum pricing policy and fiscal costs
- Pricing mechanism:
  - Domestic pump prices administratively set below import parity; formula established by Presidential Decree 2005-699.
  - Ex-refinery price computed by adding customs duties, VAT, and an “economic adjustment” factor to the c.i.f. world market price; pump price adds transport, distribution margins, financing and inventory costs, an environmental audit tax.
- By end-2007:
  - Price subsidies represented an estimated "3.2 percent of non-oil GDP (45 percent of overall subsidy)."
  - "End-2007 pump prices of diesel, kerosene and jet oil were at 40-70 percent of an estimated free market reference price."
  - "Super gasoline also had a small subsidy of about CFAF 27 per liter."
  - "Subsidies to offset the operating and technical losses of CORAF (20 percent of overall subsidy) and to clear payments arrears accumulated vis-à-vis crude oil suppliers (“the guarantee provision”) by CORAF reached the equivalent of 5.1 percent of non-oil GDP."
  - "Total subsidies for 2007 reached CFAF 115 billion (equivalent to 8.3 percent of non-oil GDP)."
- 2008 projection:
  - "Overall subsidies for 2008 are projected to come down to CFAF 75 billion or 4.8 percent of non-oil GDP."
- Fiscal context:
  - "Non-oil revenue in 2007 was about 20 percent of non-oil GDP, compared with overall fuel subsidies of about 8.3 percent of non-oil GDP."

### C. Incidence and distributional analysis (ECOM 2005)
- Poverty and welfare:
  - "More than 70 percent of the population lives below the poverty line of US$ 2 per day, including all households in quintiles one to three."
  - "The mean welfare of the top quintile is 11.4 times higher than that of the bottom quintile; the second quintile is 1.8 times higher; and the third 2.7 times higher."
  - "All but 30 percent of households are living in poverty. The bottom top quintile lives in extreme poverty."
- Household budget shares for energy (national averages, in percent):
  - Electricity: 0.77
  - Natural gas: 0.09
  - Kerosene: 1.81
  - Diesel: 0.01
  - Super Gasoline: 0.16
  - All energy products: 2.85
- Distribution of total household energy consumption (percent shares):
  - Electricity expenditure shares: Bottom 1.86, Second 6.67, Third 12.95, Fourth 28.96, Top 49.56
  - Natural gas expenditure shares: Bottom 0.85, Second 1.15, Third 6.63, Fourth 20.49, Top 70.88
  - Kerosene expenditure shares: Bottom 15.31, Second 19.62, Third 22.75, Fourth 21.06, Top 21.26
  - Diesel expenditure shares: Bottom 0.00, Second 0.00, Third 0.00, Fourth 1.08, Top 98.92
  - Gasoline expenditure shares: Bottom 0.45, Second 0.63, Third 4.08, Fourth 8.94, Top 85.91
- Incidence conclusions:
  - "Most of the subsidies benefit higher-income households. Hence, fuel subsidies are not a cost-effective way to protect the real incomes of poor households."
  - "A high proportion (40 percent) of total fuel subsidies benefits the richest 20 percent of the population who consume the highest share of gasoline and diesel. In contrast, a kerosene subsidy would largely benefit the poorer quintiles."
  - "Although all income groups experience a substantial decrease in real incomes, the poor feel the largest effect, as a percent of their total budget. Table 7 indicates that the top-income quintile bears about 40 percent of the total burden and the poorest quintile 8 percent."

### D. Price adjustments required to eliminate subsidies (based on 2007 average oil prices)
- Price increases to eliminate subsidy (Percent):
  - Gasoline: 5.5
  - Kerosene: 125.0
  - Jet fuel (avg.): 68.0
  - Diesel: 59.8
  - Bunker fuel: 66.7
  - Maritime diesel (int.): 31.9
  - Maritime diesel (dom.): 112.3
- Aggregate implications of subsidy removal:
  - "The oil sector was shocked with a 55 percent price increase in 2007 and all indirect effects are calculated from that shock. On average, it is estimated that an increase of 55 percent is necessary for all products."
  - Estimated average total impact on household real per capita income: "5.9 percent"
  - Impacts on household budgets (percent of household budget; All households):
    - "Total direct impact": 2.28
    - "Total indirect impact": 3.58
    - "Total": 5.65
  - Quintile breakdown (total change in real income, percent):
    - First quintile (Bottom): 5.92
    - Second quintile: 6.03
    - Third quintile: 3.07
    - Fourth quintile: 5.57
    - Top quintile: 4.76
  - "On average, household real incomes decrease by 5.86 percent, ranging from 6.1 percent for the second and third quintiles to 4.76 percent for the top."

### E. Policy implications and assessment of mitigation measures
- Main policy concern:
  - Price subsidies encourage consumption and misallocate scarce budgetary resources; subsidies are large relative to non-oil revenue and compete with priority spending.
  - "Non-oil revenue in 2007 was about 20 percent of non-oil GDP, compared with overall fuel subsidies of about 8.3 percent of non-oil GDP."
- Assessment of measures implemented by authorities:
  - Mitigating measures in early 2008 "were well intended, but were not sufficiently targeted to benefit the poor."
  - "The various public expenditures that were made probably did not alter the pattern of the welfare distribution. We judge that the lowest quintiles of the welfare distribution only receive about one third of the benefits from these measures."
- Targeting recommendation:
  - Eliminate or reduce broad fuel subsidies (which predominantly benefit higher-income groups) and replace with better-targeted measures to protect poor households, given kerosene subsidies disproportionately benefit poorer quintiles while gasoline and diesel subsidies largely benefit the top quintiles.

### Distributional burden of fuel subsidies (selected exact figures from Table 7)
- Share of burden by quintile (In percent):
  - Kerosene: First Quintile 15.3, Second 19.6, Third 22.8, Fourth 21.1, Top Quintile 21.3, Households 100.0
  - Diesel: First 0, Second 0, Third 0, Fourth 1.1, Top 98.9, Households 100.0
  - Indirect (Diesel grouping): First 6.5, Second 9.7, Third 14.8, Fourth 21, Top 48, Households 100.0
  - Gasoline: First 0.5, Second 0.7, Third 3.7, Fourth 9.9, Top 85.2, Households 100.0
  - Indirect (Gasoline grouping): First 4.4, Second 8.6, Third 16.8, Fourth 24.7, Top 45.4, Households 100.0
  - Diesel (fishing) (indirect): First 3.8, Second 8.6, Third 16.8, Fourth 24.7, Top 45.4, Households 100.0
  - Bunker fuel (indirect): First 1.9, Second 6.7, Third 13, Fourth 29, Top 49.6, Households 100.0
  - Total direct impact: First 14.6, Second 18.8, Third 21.9, Fourth 20.4, Top 24.3, Households 100.0
  - Total indirect impact: First 5.4, Second 10.1, Third 15.5, Fourth 23, Top 46.1, Households 100.0
  - Total: First 8.2, Second 12.7, Third 17.4, Fourth 22.2, Top 39.6, Households 100.0
- Absolute impact (CFA francs) by quintile:
  - Overall total: 2293.5 per month.
  - Bottom (First) quintile total: 3,551.8
  - Quintile 3: 4,864.9
  - Quintile 4: 6,218.1
  - Top quintile: 10,825.6
  - Households (aggregate): 25,602
- Direct vs Indirect (absolute, CFA francs):
  - Direct total: 1,226.6 (Bottom), 1,575.3 (Quintile 2), 1,829.6 (Quintile 3), 1,704.4 (Quintile 4), 2,037.1 (Top), Aggregate 6,674.6
  - Indirect total: 1,066.9 (Bottom), 1,976.5 (Quintile 2), 3,035.3 (Quintile 3), 4,513.6 (Quintile 4), 6,904.4 (Top), Aggregate 9,327.4
- Source data: ECOM 2005, SNPC, Congolese authorities, and staff estimates.

### Impact of the January 2008 policy changes
- Policy actions:
  - Domestic petroleum prices adjusted in January 2008 (and again in October 2008) to reduce fuel subsidies.
  - Mitigating measures accompanied the price adjustments.
- Projected fiscal savings from January price adjustments:
  - Estimated reduction in fuel subsides: CFAF 21.1 billion.
  - Reduction in margins for transportation and distribution operators: CFAF 7.1 billion.
  - Combined net annualized savings: CFAF 30.1 billion.
- Rationale for price increase design:
  - Authorities targeted a price increase on all products to spread the burden across market participants and avoid substitution effects.

### Compensatory measures and fiscal cost (Table 8)
- Total fiscal cost of mitigating measures: CFAF 20.0 billion (about 1.5 percent of non-oil GDP).
- Breakdown (Billions of CFA Francs):
  - Increase civil servant base wage: 6.0
  - Tax exoneration on transport: 3.0
  - Eliminate public school fees: 1.6
  - Provide free school supplies: 4.8
  - Health, water, and electricity (residual): 4.6
  - Total: 20.0
- Note: Health, water, and electricity residual includes expenditure on HIV/AIDS and malaria treatment, free diesel for rural generators, solar energy incentives, and increased access to water. These measures have not been individually costed.

### Distributional simulation of mitigating measures (selected figures from Table 9)
- Targeting outcomes:
  - Better-targeted: elimination of public school fees and provision of free school supplies.
  - Poorly targeted: civil service pay increase and reduction in transportation taxes—each estimated to allocate about two-thirds of benefits to households in the top two quintiles.
- Share of benefits by quintile (aggregate shares):
  - Bottom two quintiles receive an estimated 35 percent of benefits.
  - Top two quintiles receive an estimated 46 percent of benefits.
- Estimated budgetary impact by quintile (CFA Francs; Average Impact columns preserved):
  - Impact of mitigating measures (Overall Average = 1,547.0):
    - Total mitigating measures: Bottom 1,444.4, Quintile 2 1,237.8, Quintile 3 1,468.4, Quintile 4 1,228.0, Top 2,356.6, Overall Average 1,547.0
  - Impact of price increases (Overall Average = 2,210.0):
    - Total price increases: Bottom 580.2, Quintile 2 954.7, Quintile 3 1,525.8, Quintile 4 2,254.5, Top 5,735.0, Overall Average 2,210.0
  - Net loss (Mitigating measures minus Price increases):
    - Bottom -864.2, Quintile 2 -283.1, Quintile 3 57.4, Quintile 4 1,026.5, Top 3,378.4, Overall Average 663.0
  - Net loss as a share of total consumption:
    - Bottom -2.3, Quintile 2 -0.4, Quintile 3 0.1, Quintile 4 0.7, Top 1.4, Overall Average 0.9
- Memorandum items (shares, In percent):
  - Share of total mitigating measures: Bottom 18.7, Quintile 2 16.0, Quintile 3 19.0, Quintile 4 15.9, Top 30.5, Total 100.0
  - Share of total price increases: Bottom 5.3, Quintile 2 8.6, Quintile 3 13.8, Quintile 4 20.4, Top 51.9, Total 100.0
  - Share of net loss: Bottom -26.1, Quintile 2 -8.5, Quintile 3 1.7, Quintile 4 31.0, Top 101.9, Total 100.0
  - Additional subsidies for selected fuels (absolute, per quintile, Overall total 4,190.8): Bottom 1,325.2, Quintile 2 2,176.6, Quintile 3 3,171.5, Quintile 4 4,440.6, Top 8,839.8, Overall total 4,190.8
- Interpretation:
  - Mitigating measures partially offset price increases for lower quintiles but do not fully compensate lower income households for resources lost to higher petroleum prices.
  - Distribution of net loss indicates substantial burden concentration in higher quintiles in absolute terms, while as a share of consumption the poorest bear negative impacts.

### Conclusion on subsidy targeting
- Key finding: Compensatory measures are costly to the budget and not well targeted.
- Distributional estimate: Top 20 percent of the income distribution benefit from more than 40 percent of the total subsidy.
- Policy note: Government intention to establish a new fuel pricing policy is characterized as welcome.

### Export performance, REER developments, and competitiveness
- Export performance:
  - Overall export expansion averaged 12 percent a year for 2000–07—twice the CEMAC average and four times the SSA average.
  - Oil accounts for 80 percent of total exports and about two-thirds of GDP.
  - Non-oil exports have stagnated; some traditional exports (cocoa, coffee, timber) have disappeared or become marginal.
  - Real export growth fell from about 5 percent in the 1990s to below 2 percent since 2000.
  - 2007 oil-platform accident caused a considerable drop in oil exports.
  - Ratio of exports and imports to GDP rose above 200 percent as oil production and world oil prices increased.
- REER developments:
  - REER based on CPI appreciated steadily since 2000; by end-2007 REER was higher by 20 percent.
  - REER based on import unit values appreciated by 50 percent; based on export unit values appreciated by 48 percent.
  - Unit labor costs (ULC) have not increased relative to trading partners due to a freeze in public sector wages in 1993.
  - Real GDP per capita rose sharply (mainly due to oil); productivity in the non-oil sector has plunged.
  - Apart from the ULC indicator and related relative profits, all other indices show at least 20 percent appreciation between 2000 and 2007.
  - A large part of the REER increase was caused by nominal effective appreciation of the CFAF versus trading partner currencies.
- BEER estimation (1969–2007, Johansen cointegration):
  - Estimated long-run relationship (log-linear): ln(REER) = 0.13 ln(TOT) + 0.14 ln(OPEN) + 0.27 ln(GCE) + 0.22 ln(PROD) – 0.39 ln(BM) + εt
  - Interpretation: REER appreciates when terms of trade improve, openness increases, government spending increases, and relative productivity rises; broad money coefficient bears an unexpected negative sign.
  - Equilibrium REER derived from permanent components of fundamentals; deviation defined as actual minus equilibrium.
- REER valuation and projection:
  - The REER has fluctuated around the equilibrium with periods of over- and under-valuation.
  - In 2007 the REER is found to be overvalued by about 7 percent.
  - Alternative panel estimate: "overvalued in 2007 by 14 percent" (Chudik and Mongardini (2007) panel).
  - Forward-looking estimate suggests equilibrium real exchange rate will decline over the medium term because of fiscal consolidation and projected terms of trade deterioration; implies need for low and stable inflation to keep REER competitive.

### Structural factors and policy recommendations to improve competitiveness
- Structural constraints:
  - Weak transport infrastructure: only 5 percent of the road network is paved.
  - Human capital: HDI rank "139th of 177 countries"; adult literacy "84 percent"; life expectancy "less than 50 years".
  - Information and technology: high internet and fixed telephone costs; example international call cost "CFAF 150 per minute".
  - Institutions and governance: Corruption Perception Index 2007 rank "150th out of 179 countries"; Doing Business 2008 rank "175th out of 178 countries".
  - Financial sector limitations: Number of Commercial Banks "4"; M2/GDP "14.6"; Bank Assets/GDP "8.9"; Private Sector Credit/GDP "2.1"; Population with Formal Bank Account "2.7".
- Policy actions envisaged:
  - Improve transparency and governance in the oil sector and public investment management.
  - Comprehensive financial sector reforms to improve intermediation, increase access to and lower the cost of credit.
  - Fiscal consolidation to ensure macro stability and generate savings for the future.
  - Regular fuel price adjustments to rationalize subsidies and improve targeting to enhance human capital.
  - Government investment in basic infrastructure to increase productivity and lower economy-wide costs.
- Specific actions in authorities’ Poverty Reduction Strategy Paper:
  - Simplify administrative procedures; apply OHADA business laws; create a “one-stop” window for establishing a business; enhance governance and combat corruption.
  - Reduce the maximum common external tariff from "30 to 20 percent" and harmonize rules of origin; bring the customs code into line with international standards; fully implement ASYCUDA; remove nuisance taxes and surcharges.
  - Adopt the financial sector strategy; expand public access to banking services and lower the cost of credit; improve information on the cost of credit and credit histories.
  - Target interventions in agriculture, manufacturing, mining, and forestry; encourage exploration and investment in minerals; lay foundations for manufacturing.

*Prepared by Abdelrahmi Bessaha, with assistance from Dale Manning; based on IMF staff analysis and ECOM 2005 data as presented in the content unit.*

### 1.     Transfers to CORAF, 2007–08 .....................................................................................

### _cr0972 - 1.     Transfers to CORAF, 2007–08

### A. Introduction and key findings
- Objective: increase priority spending on pro-poor and growth-enhancing programs; scope to reduce low-priority outlays such as fuel subsidies.
- Main findings (verbatim from source):
  - "Until more recently, fuel subsidies have weighed heavily on the budget. The total fiscal cost of these subsidies rose to as high as 8.3 percent of non-oil GDP last year, compared with total current expenditures of 56.3 percent of non-oil GDP."
  - "Higher income households benefit most from the fuel subsidies, contrary to the pro-poor objective of the government’s fuel pricing policy. The top 20 percent of the population received about 40 percent of the subsidies for gasoline and diesel. For kerosene (consumed disproportionately by lower income households), however, the top two quintiles receive 42 percent of the benefits while the bottom two quintiles receive 35 percent of the subsidies. Consequently, fuel price subsidies do not adequately protect the real incomes of the poor."
  - "The authorities’ policies to mitigate the adverse impact of rising fuel prices earlier this year were well intended, but were not sufficiently targeted to benefit the poor. The various public expenditures that were made probably did not alter the pattern of the welfare distribution. We judge that the lowest quintiles of the welfare distribution only receive about one third of the benefits from these measures."

### B. Current petroleum pricing policy and fiscal costs
- Pricing mechanism: domestic pump prices administratively set below import parity; formula established by Presidential Decree 2005-699; ex-refinery price computed by adding customs duties, VAT, and an “economic adjustment” factor to the c.i.f. world market price; pump price adds transport, distribution margins, financing and inventory costs, an environmental audit tax.
- By end-2007:
  - Price subsidies represented an estimated "3.2 percent of non-oil GDP (45 percent of overall subsidy)."
  - "End-2007 pump prices of diesel, kerosene and jet oil were at 40-70 percent of an estimated free market reference price."
  - "Super gasoline also had a small subsidy of about CFAF 27 per liter."
  - "Subsidies to offset the operating and technical losses of CORAF (20 percent of overall subsidy) and to clear payments arrears accumulated vis-à-vis crude oil suppliers (“the guarantee provision”) by CORAF reached the equivalent of 5.1 percent of non-oil GDP."
  - "Total subsidies for 2007 reached CFAF 115 billion (equivalent to 8.3 percent of non-oil GDP)."
- 2008 projection:
  - "Overall subsidies for 2008 are projected to come down to CFAF 75 billion or 4.8 percent of non-oil GDP."
- Fiscal context:
  - "Non-oil revenue in 2007 was about 20 percent of non-oil GDP, compared with overall fuel subsidies of about 8.3 percent of non-oil GDP."

### C. Incidence and distributional analysis (ECOM 2005)
- Poverty and welfare (ECOM 2005):
  - "More than 70 percent of the population lives below the poverty line of US$ 2 per day, including all households in quintiles one to three."
  - "The mean welfare of the top quintile is 11.4 times higher than that of the bottom quintile; the second quintile is 1.8 times higher; and the third 2.7 times higher."
  - "All but 30 percent of households are living in poverty. The bottom top quintile lives in extreme poverty." (textual phrasing retained)
- Household budget shares for energy (national averages, in percent):
  - Electricity: 0.77
  - Natural gas: 0.09
  - Kerosene: 1.81
  - Diesel: 0.01
  - Super Gasoline: 0.16
  - All energy products: 2.85
- Distribution of total household energy consumption (percent shares):
  - Share of electricity expenditure: Bottom quintile 1.86, Second 6.67, Third 12.95, Fourth 28.96, Top 49.56
  - Share of natural gas expenditure: Bottom quintile 0.85, Second 1.15, Third 6.63, Fourth 20.49, Top 70.88
  - Share of kerosene expenditure: Bottom quintile 15.31, Second 19.62, Third 22.75, Fourth 21.06, Top 21.26
  - Share of diesel expenditure: Bottom quintile 0.00, Second 0.00, Third 0.00, Fourth 1.08, Top 98.92
  - Share of gasoline expenditure: Bottom quintile 0.45, Second 0.63, Third 4.08, Fourth 8.94, Top 85.91
- Incidence conclusions (explicit):
  - "Most of the subsidies benefit higher-income households. Hence, fuel subsidies are not a cost-effective way to protect the real incomes of poor households."
  - "A high proportion (40 percent) of total fuel subsidies benefits the richest 20 percent of the population who consume the highest share of gasoline and diesel. In contrast, a kerosene subsidy would largely benefit the poorer quintiles."
  - "Although all income groups experience a substantial decrease in real incomes, the poor feel the largest effect, as a percent of their total budget. Table 7 indicates that the top-income quintile bears about 40 percent of the total burden and the poorest quintile 8 percent."

### D. Price adjustments required to eliminate subsidies (based on 2007 average oil prices)
- Price increases to eliminate subsidy (Percent):
  - Gasoline: 5.5
  - Kerosene: 125.0
  - Jet fuel (avg.): 68.0
  - Diesel: 59.8
  - Bunker fuel: 66.7
  - Maritime diesel (int.): 31.9
  - Maritime diesel (dom.): 112.3
- Aggregate implications of subsidy removal:
  - "The oil sector was shocked with a 55 percent price increase in 2007 and all indirect effects are calculated from that shock. On average, it is estimated that an increase of 55 percent is necessary for all products."
  - Estimated average total impact on household real per capita income: "5.9 percent" (textual summary)
  - Table 6 summarized impacts (percent of household budget; retained exact summarized figures where provided):
    - "Total direct impact" (All households): 2.28
    - "Total indirect impact" (All households): 3.58
    - "Total" (All households): 5.65
  - Quintile breakdown (total change in real income, percent):
    - First quintile (Bottom): 5.92
    - Second quintile: 6.03
    - Third quintile: 3.07
    - Fourth quintile: 5.57
    - Top quintile: 4.76
    - (Table text: "On average, household real incomes decrease by 5.86 percent, ranging from 6.1 percent for the second and third quintiles to 4.76 percent for the top." Exact quoted sentence preserved.)

### E. Policy implications and assessment of mitigation measures
- Main policy concern:
  - Price subsidies encourage consumption and misallocate scarce budgetary resources.
  - Subsidies are large relative to non-oil revenue and compete with priority spending: "Non-oil revenue in 2007 was about 20 percent of non-oil GDP, compared with overall fuel subsidies of about 8.3 percent of non-oil GDP."
- Assessment of measures implemented by authorities:
  - Mitigating measures in early 2008 "were well intended, but were not sufficiently targeted to benefit the poor."
  - "The various public expenditures that were made probably did not alter the pattern of the welfare distribution. We judge that the lowest quintiles of the welfare distribution only receive about one third of the benefits from these measures."
- Targeting recommendation (implicit from analysis):
  - Eliminate or reduce broad fuel subsidies (which predominantly benefit higher-income groups) and replace with better-targeted measures to protect poor households, given the finding that kerosene subsidies disproportionately benefit poorer quintiles while gasoline and diesel subsidies largely benefit the top quintiles.

*Prepared by Abdelrahmi Bessaha, with assistance from Dale Manning; based on IMF staff analysis and ECOM 2005 data as presented in the content unit.*

### 2293.5 per month.

### _cr0972 - 2293.5 per month.

### Distributional burden of fuel subsidies (Table 7)
- Share of burden by quintile (In percent):
  - Kerosene: First Quintile 15.3, Second 19.6, Third 22.8, Fourth 21.1, Top Quintile 21.3, Households 100.0
  - Diesel: First 0, Second 0, Third 0, Fourth 1.1, Top 98.9, Households 100.0
  - Indirect (Diesel row grouping): First 6.5, Second 9.7, Third 14.8, Fourth 21, Top 48, Households 100.0
  - Gasoline: First 0.5, Second 0.7, Third 3.7, Fourth 9.9, Top 85.2, Households 100.0
  - Indirect (Gasoline row grouping): First 4.4, Second 8.6, Third 16.8, Fourth 24.7, Top 45.4, Households 100.0
  - Diesel (fishing) (indirect): First 3.8, Second 8.6, Third 16.8, Fourth 24.7, Top 45.4, Households 100.0
  - Bunker fuel (indirect): First 1.9, Second 6.7, Third 13, Fourth 29, Top 49.6, Households 100.0
  - Total direct impact: First 14.6, Second 18.8, Third 21.9, Fourth 20.4, Top 24.3, Households 100.0
  - Total indirect impact: First 5.4, Second 10.1, Third 15.5, Fourth 23, Top 46.1, Households 100.0
  - Total: First 8.2, Second 12.7, Third 17.4, Fourth 22.2, Top 39.6, Households 100.0
- Absolute impact (CFA francs) by quintile:
  - Overall total: 2293.5 per month.
  - Bottom (First) quintile total: 3,551.8
  - Quintile 3: 4,864.9
  - Quintile 4: 6,218.1
  - Top quintile: 10,825.6
  - Households (aggregate): 25,602
- Direct vs Indirect (absolute, CFA francs):
  - Direct total: 1,226.6 (Bottom), 1,575.3 (Quintile 2), 1,829.6 (Quintile 3), 1,704.4 (Quintile 4), 2,037.1 (Top), Aggregate 6,674.6
  - Indirect total: 1,066.9 (Bottom), 1,976.5 (Quintile 2), 3,035.3 (Quintile 3), 4,513.6 (Quintile 4), 6,904.4 (Top), Aggregate 9,327.4
- Source data: ECOM 2005, SNPC, Congolese authorities, and staff estimates.

### Impact of the January 2008 policy changes (Section D)
- Policy actions:
  - Domestic petroleum prices adjusted in January 2008 (and again in October 2008) to reduce fuel subsidies.
  - Mitigating measures accompanied the price adjustments.
- Projected fiscal savings from January price adjustments:
  - Estimated reduction in fuel subsides: CFAF 21.1 billion.
  - Reduction in margins for transportation and distribution operators: CFAF 7.1 billion.
  - Combined net annualized savings: CFAF 30.1 billion.
- Rationale for price increase design:
  - Authorities targeted a price increase on all products to spread the burden across market participants and avoid substitution effects.

### Compensatory measures and fiscal cost (Table 8)
- Total fiscal cost of mitigating measures: CFAF 20.0 billion (about 1.5 percent of non-oil GDP).
- Breakdown (Billions of CFA Francs):
  - Increase civil servant base wage: 6.0
  - Tax exoneration on transport: 3.0
  - Eliminate public school fees: 1.6
  - Provide free school supplies: 4.8
  - Health, water, and electricity (residual): 4.6
  - Total: 20.0
- Note: Health, water, and electricity residual includes expenditure on HIV/AIDS and malaria treatment, free diesel for rural generators, solar energy incentives, and increased access to water. These measures have not been individually costed.

### Distributional simulation of mitigating measures (Table 9 and paragraph 17)
- Targeting outcomes:
  - Measures with better targeting: elimination of public school fees and provision of free school supplies.
  - Poorly targeted measures: civil service pay increase and reduction in transportation taxes—each estimated to allocate about two-thirds of benefits to households in the top two quintiles.
- Share of benefits by quintile (aggregate shares):
  - Bottom two quintiles receive an estimated 35 percent of benefits.
  - Top two quintiles receive an estimated 46 percent of benefits.
- Estimated budgetary impact by quintile (CFA Francs; Average Impact column preserved):
  - Impact of mitigating measures (per quintile, Average Impact final column = 1,547.0):
    - Increase in civil service base wage: Bottom 107.1, Quintile 2 233.1, Quintile 3 631.5, Quintile 4 480.8, Top 1,561.2, Overall Average 602.7
    - Reduction in transportation taxes: Bottom 78.5, Quintile 2 148.5, Quintile 3 267.8, Quintile 4 365.3, Top 646.7, Overall Average 301.4
    - Elimination of public school fees: Bottom 314.7, Quintile 2 214.0, Quintile 3 142.3, Quintile 4 95.5, Top 37.2, Overall Average 160.7
    - Provision of free school supplies: Bottom 944.1, Quintile 2 642.1, Quintile 3 426.8, Quintile 4 286.4, Top 111.5, Overall Average 482.2
    - Total mitigating measures: Bottom 1,444.4, Quintile 2 1,237.8, Quintile 3 1,468.4, Quintile 4 1,228.0, Top 2,356.6, Overall Average 1,547.0
  - Impact of price increases (by fuel and quintile; Overall Average Impact column = 2,210.0):
    - Diesel: Bottom 396.6, Quintile 2 588.6, Quintile 3 904.3, Quintile 4 1,285.2, Top 3,103.9, Overall Average 1,255.7
    - Kerosene: Bottom 61.4, Quintile 2 78.9, Quintile 3 91.4, Quintile 4 84.6, Top 85.4, Overall Average 80.4
    - Gasoline: Bottom 95.7, Quintile 2 180.5, Quintile 3 387.3, Quintile 4 636.0, Top 2,166.3, Overall Average 693.2
    - Diesel (fishing): Bottom 19.0, Quintile 2 79.9, Quintile 3 90.8, Quintile 4 132.4, Top 180.2, Overall Average 100.5
    - Bunker fuel: Bottom 7.5, Quintile 2 26.8, Quintile 3 52.1, Quintile 4 116.3, Top 199.1, Overall Average 80.4
    - Total price increases: Bottom 580.2, Quintile 2 954.7, Quintile 3 1,525.8, Quintile 4 2,254.5, Top 5,735.0, Overall Average 2,210.0
  - Net loss (Mitigating measures minus Price increases):
    - Bottom -864.2, Quintile 2 -283.1, Quintile 3 57.4, Quintile 4 1,026.5, Top 3,378.4, Overall Average 663.0
  - Net loss as a share of total consumption:
    - Bottom -2.3, Quintile 2 -0.4, Quintile 3 0.1, Quintile 4 0.7, Top 1.4, Overall Average 0.9
- Memorandum items (shares, In percent):
  - Share of total mitigating measures: Bottom 18.7, Quintile 2 16.0, Quintile 3 19.0, Quintile 4 15.9, Top 30.5, Total 100.0
  - Share of total price increases: Bottom 5.3, Quintile 2 8.6, Quintile 3 13.8, Quintile 4 20.4, Top 51.9, Total 100.0
  - Share of net loss: Bottom -26.1, Quintile 2 -8.5, Quintile 3 1.7, Quintile 4 31.0, Top 101.9, Total 100.0
  - Additional subsidies for selected fuels (absolute, per quintile, Overall total 4,190.8):
    - Bottom 1,325.2, Quintile 2 2,176.6, Quintile 3 3,171.5, Quintile 4 4,440.6, Top 8,839.8, Overall total 4,190.8
- Interpretation:
  - Mitigating measures partially offset price increases for lower quintiles but do not fully compensate lower income households for resources lost to higher petroleum prices.
  - The distribution of net loss indicates substantial burden concentration in higher quintiles in absolute terms, while as a share of consumption the poorest bear negative impacts.

### Conclusion on subsidy targeting (Section E)
- Key finding: Compensatory measures are costly to the budget and not well targeted.
- Distributional estimate: Top 20 percent of the income distribution benefit from more than 40 percent of the total subsidy.
- Policy note: Government intention to establish a new fuel pricing policy is characterized as welcome.

### Export performance (Section B)
- Growth characterization:
  - Overall export expansion averaged 12 percent a year for 2000–07—twice the CEMAC average and four times the SSA average.
  - Oil accounts for 80 percent of total exports and about two-thirds of GDP.
- Non-oil performance:
  - Non-oil exports have stagnated; Congo has lost export market share for many non-oil commodities; some traditional exports (cocoa, coffee, timber) have disappeared or become marginal.
  - Manufactured exports declined as a share of total exports due to concentration in oil.
- Export volume trends:
  - Real export growth fell from about 5 percent in the 1990s to below 2 percent since 2000.
  - 2007 oil-platform accident caused a considerable drop in oil exports.
- Openness:
  - Ratio of exports and imports to GDP rose above 200 percent as oil production and world oil prices increased.
  - By contrast, CEMAC trade reached 100 percent of GDP in 2007; SSA exports and imports slightly over 70 percent of GDP.

### Real Effective Exchange Rate (REER) developments (Section C)
- REER indices and interpretation:
  - REER based on CPI appreciated steadily since 2000; by end-2007 REER was higher by 20 percent.
  - REER based on import unit values appreciated by 50 percent; based on export unit values appreciated by 48 percent.
  - REER based on GDP deflator rose in 2003–06 and fell in 2007 with production contraction.
  - Internal price ratio mirrored CPI-based REER with larger within-year variations.
  - Unit labor costs (ULC) have not increased relative to trading partners due to a freeze in public sector wages in 1993.
  - Real GDP per capita rose sharply (mainly due to oil); productivity in the non-oil sector has plunged, especially recently.
  - Relative profits index decreases over time (associated with an increase in competitiveness) because labor cost share in value-added decreased relative to competitors.
- Aggregate REER change:
  - Apart from the ULC indicator and related relative profits, all other indices show at least 20 percent appreciation between 2000 and 2007.
  - A large part of the REER increase was caused by nominal effective appreciation of the CFAF versus trading partner currencies.

### Behavioral Equilibrium Exchange Rate (BEER) estimation (Section D)
- Model and data:
  - BEER estimated using Edwards (1989) dynamic model augmented with productivity (Balassa-Samuelson effect).
  - Data: annual observations for 1969–2007.
  - Estimation method: Johansen multivariate cointegration procedure; unit root tests indicate nonstationarity and one cointegrating vector (augmented Dickey-Fuller).
- Fundamental determinants included (expressed in natural logs):
  - Terms of trade (TOT): ratio of export to import deflator.
  - Relative productivity (PROD): real GDP per capita relative to main trading partners.
  - Government spending (GCE): government consumption expenditure as percent of GDP.
  - Money supply (BM): ratio of broad money to GDP.
  - Openness (OPEN): ratio of exports and imports of goods and services to GDP.
- Estimated long-run relationship (log-linear form):
  - ln(REER) = 0.13 ln(TOT) + 0.14 ln(OPEN) + 0.27 ln(GCE) + 0.22 ln(PROD) – 0.39 ln(BM) + εt
- Interpretation of coefficients:
  - REER appreciates when terms of trade improve, openness increases, government spending increases, and relative productivity rises.
  - Broad money coefficient bears an unexpected negative sign: money growth above economic growth is associated with REER depreciation in this specification.
- Equilibrium derivation:
  - Fundamentals decomposed into permanent and transitory components using the Hodrick-Prescott filter and out-of-sample estimation consistent with permanent income hypothesis.
  - Equilibrium REER obtained by inputting permanent components of fundamentals into estimated coefficients.
  - Deviation from equilibrium defined as actual REER minus equilibrium REER.

*Source: ECOM 2005, SNPC, Congolese authorities, and IMF staff estimates.*

### 32.      The REER has fluctuated around the equilibrium in the past, with periods of

### _cr0972 - 32.      The REER has fluctuated around the equilibrium in the past, with periods of

### REER history, estimation, and projection
- Past behavior:
  - The REER has fluctuated around the equilibrium with periods of over- and under-valuation.
  - Undervaluation was typical of the post-conflict period (the early 2000s) as productivity growth picked up.
  - Overvaluation was higher in 1998 and 2003–2007.
  - In 2007 the REER is found to be overvalued by about 7 percent.
- Alternative estimates and sensitivity:
  - The estimation is sensitive to the period studied and the choice of explanatory variables.
  - Chudik and Mongardini (2007) panel-based coefficients imply Congo’s REER was overvalued in 2007 by 14 percent, though the country-specific long-run elasticity of real oil price for Congo in that model is very small and may understate the equilibrium REER in recent years.
- Statistical evidence:
  - The error correction term is negative and significantly different from zero, indicating the REER follows a stable mean-reverting process.
  - Short-run effects are mostly insignificant; the term representing the devaluation is significant and bears the expected negative sign.
- Forward-looking estimate and policy implication:
  - A forward-looking estimate, based on fundamental variables from the permanent income hypothesis, suggests that over the medium term the equilibrium real exchange rate will decline because of fiscal consolidation and a projected terms of trade deterioration.
  - This implies Congo needs low and stable inflation to keep its REER internationally competitive.

### Structural factors influencing competitiveness
- Summary of channels:
  - Infrastructure and technology affect transportation, communication, and production costs, directly influencing competitiveness.
  - High-quality human capital enhances productivity and output quality.
  - Good institutions reduce transaction costs and uncertainty; poor governance links to low tax collections, distortionary taxation, low private investment, and low and more volatile capital flows.
- Infrastructure:
  - Transport infrastructure is particularly weak in Congo. Transportation between the two main cities suffers from frequent rail disruptions, and only 5 percent of the road network is paved (Table 5).
  - Under such conditions it is not possible to develop commodity-based exports which rely heavily on transport.
- Human capital:
  - Despite gains in real GDP per capita, most of the population remains below the poverty line.
  - The UN Human Development Index (HDI) ranks Congo 139th of 177 countries.
  - Congo scores 84 percent on adult literacy (compared with the SSA average noted in the source), but school enrollment is low and life expectancy is less than 50 years.
- Information and technology:
  - CEMAC region generally (except Gabon for some indicators) shows limited access to technology.
  - Internet costs are particularly high in CEMAC compared with the SSA region as a whole.
  - Fixed telephone costs are very high; mobile communication costs in Congo have fallen recently with increased competition from a third operator; an international call from Congo can be as low as CFAF 150 per minute.
  - High cost, limited access, and poor quality of technological services raise production costs and inhibit efficiency.
- Institutions and governance:
  - Congo’s institutional development lags comparators, including within CEMAC.
  - On the 2007 Worldwide Governance Indicators, Congo scores below other CEMAC countries, especially on regulatory quality, the rule of law, and government effectiveness; voice and accountability has improved significantly in recent years.
  - The Index of Economic Freedom shows Congo behind the rest of CEMAC and SSA; particularly unfavorable are property rights and financial freedom.
  - Corruption Perception Index: in 2007 Congo ranked 150th out of 179 countries, below Cameroon and Gabon and lower than in 2006.
  - Doing Business 2008: Congo worsened to 175th out of 178 countries; very low scores in procedures related to property registration, employment, trading, and taxation.
- Financial sector:
  - The financial sector is currently unable to provide adequate support to the private sector or investment outlets for the population.
  - Banks respect prudential norms but remain very susceptible to risk; concentration is high, intermediation limited, banking market integration insufficient, and competition low.
  - Scarce and costly bank lending increases the costs of capital for the non-oil economy; financial deepening and more intermediation are needed.

### Key statistics and empirical test results (selected exact figures from the source)
- REER overvaluation: "about 7 percent" (2007).
- Alternative panel estimate: "overvalued in 2007 by 14 percent" (Chudik and Mongardini (2007) panel).
- HDI rank: "139th of 177 countries."
- Adult literacy: "84 percent."
- Life expectancy: "less than 50 years."
- International call cost example: "CFAF 150 per minute."
- Doing Business 2008 rank: "175th out of 178 countries."
- Corruption Perception Index 2007 rank: "150th out of 179 countries."
- Financial sector indicators (Table 5, 2006 data where noted):
  - Republic of Congo: Number of Comm. Banks "4"; M2/GDP (percent) "14.6"; Bank Assets/GDP (percent) "8.9"; Private Sector Credit/GDP (percent) "2.1"; Central Government Credit/GDP (percent) "-6.5"; Population with Formal Bank Account (percent) "2.7".
  - Sub-Saharan African countries (averages): M2/GDP "33.6"; Bank Assets/GDP "67.4"; Private Sector Credit/GDP "17.4"; Central Government Credit/GDP "3.8"; Population with Formal Bank Account (percent) "26.8".
  - Ratio of private credit to GDP in Congo: "2.1 percent" (SSA average: "17.4 percent").
  - Share of population with a formal bank account in Congo: "less than 3 percent" (regional average: "26.8 percent").
  - Loan/deposit ratio: "about 22 percent" in Congo, "80 percent" for WAEMU countries, and "48 percent" for the CEMAC.
- VECM and cointegration results (selected exact outputs from Table 4 and Appendix):
  - Cointegrating equation coefficients: LREER "1.000"; LGCE "0.275[-3.304]"; LPROD "0.218[-4.275]"; LTOT "0.129[-2.231]"; LOPEN "0.146[-2.227]"; LBM "-0.387[4.242]"; C "3.202[-6.479]".
  - Estimate of the speed of adjustment of the REER: CointEq1 "-0.400[-2.523]".
  - Estimate of the CFAF devaluation effect: DUM94 "-0.426[-6.927]".
  - R-squared: "0.804"; Sum sq. resids: "0.047"; S.E. equation: "0.047"; F-statistic: "5.465".
  - ADF statistics (unit root tests, selected): REER log levels "t-ADF -2.344 [ 0.164 ]"; REER first differences "REER -7.283[ 0.000 ]".
  - Cointegration rank trace and λmax tests reported with rejection at standard levels for several ranks (see Table 3 in the source for full test statistics).

### Assessment of competitiveness and conclusions
- Mixed record overall:
  - Areas of relative strength: oil exports, gains in oil market shares, substantial accumulation of reserves, and wage control keeping increases in labor costs aligned with productivity.
  - Areas of deterioration: unfavorable REER developments and pervasive structural deficiencies—particularly institutional and business environment indicators, human capital, and infrastructure—undermining non-oil exports, non-oil value-added, and attractiveness to FDI.
- Structural reforms envisaged:
  - Improve transparency and governance in the oil sector and public investment management to improve allocation of resources, efficiency, and reduce costs.
  - Financial sector: comprehensive reforms to improve intermediation, increase access to and lower the cost of credit to the private sector.
  - Fiscal policy: fiscal consolidation to ensure macro stability and generate savings for the future.
  - Price liberalization: regular fuel price adjustments to rationalize subsidies and improve targeting to enhance human capital.
  - Government investment in basic infrastructure to increase productivity and lower economy-wide costs.
- Importance of macro policy:
  - Economic policies should support competitiveness through fiscal consolidation; lower non-oil deficits should ensure higher savings, support the common exchange rate, and maintain and improve living standards of future generations.

### Specific policy actions envisaged in the authorities’ Poverty Reduction Strategy Paper (as listed)
- Business climate:
  - Simplify administrative procedures.
  - Apply the OHADA business laws.
  - Create a “one-stop” window for establishing a business.
  - Enhance governance and combat corruption.
- Trade liberalization:
  - Reduce the maximum common external tariff from "30 to 20 percent" and tariff rates; harmonize rules of origin.
  - Bring the customs code into line with international standards.
  - Fully implement the ASYCUDA system for customs clearance.
  - Remove nuisance taxes and surcharges.
- Financial intermediation:
  - Adopt the financial sector strategy drafted with Fund staff assistance.
  - Expand public access to banking services and lower the cost of credit.
  - Improve information on the cost of credit and credit histories.
- Key sectors and human capital:
  - Target interventions in agriculture, manufacturing, mining, and forestry through investment and technological transfer; encourage exploration and investment in minerals; lay foundations for manufacturing.
  - Regular adjustments of domestic fuel prices to decrease generalized subsidies, free space for more expenditure, and improve targeting of the poor to achieve MDGs faster and build human capital.

*Source: _cr0972 - 32.      The REER has fluctuated around the equilibrium in the past, with periods of (IMF Country Report PDF content).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr0972.pdf_