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Republic of Congo- Concluding Statement of the 2012 Article IV Mission
May 23, 2012
Describes the preliminary findings of IMF staff at the conclusion of certain missions (official staff visits, in most cases to member countries). Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, and as part of other staff reviews of economic developments.
Good progress was made under the Three-year ECF program but tougher steps lie ahead. Macroeconomic stability is in place, a procurement code has been adopted and net external debt is negative. Yet, for development to reach the population, fundamental reforms are needed not only aimed at industrialization but also at making growth more inclusive. The time has come to consolidate the gains to date and take ownership of reforms which break vested interest and strengthen governance through steadfast implementation of the various action plans in place. Specifically, actions are needed to strengthen the policy making framework, raise the quality of public spending and improve the business climate. Efforts are also needed to mitigate the risks posed by the supplemental budget.
I. Outlook and Risks
1. The outlook is favorable, provided that policy intentions are followed through to implementation. Barring a massive and permanent negative oil price shock, the key issue is not the financing of development, rather how to use oil resources effectively in support of inclusive growth. Prospects for a takeoff in non-oil growth rest on two pillars—construction of a foundation of basic infrastructure and full implementation of the action plan to improve the business climate. Growth will be driven by public investment, natural resources (mining, forestry) and telecoms, with increasing contributions from agro-industry, transport and services. Prospects for new oil discoveries and mining activities are favorable, and comprise sizable upside risks.
2. External risks are mostly conjunctural and appear manageable, while domestic risks are of a longer term nature. As always, the volatility of oil prices warrants a cautious stance.
II. Near-term Policies—Mitigating Risks posed by the Supplemental Budget
3. Taken at face value, the supplemental budget adds nearly 25 percent of non-oil GDP to an already large spending envelope contained in the original budget and doubles the non-oil primary deficit relative to 2010. While the overall balance will remain in surplus, the envelope is too large to be spent effectively in the remaining months of the year given weak absorptive capacity and implementation constraints, as well as the time required to use quality control processes such as the procurement code. Higher imports will push the current account down to near balance, eliminating the previously large overall surplus. Moreover, part of the spending will exert inflation pressures given the limited supply response due to the possible emergence of strains in transport capacity.
4. We fully recognize the need to address the fallout of the catastrophe of March 4. We also realize that the supplemental budget was put together in order to quickly unlock budgetary resources and launch a swift reaction. However, now that initial payments to those affected have been made, actions should be well thought out and planned to ensure that the spending reaches the desired target and is not wasted. We welcome the work being carried out by the High Level Reconstruction Committee to identify priority projects and the medium term costing of the government’s response, and have the following recommendations.
III. Anchoring Fiscal Policy
5. While Congo is in the privileged position of having large natural resource wealth, this poses a key challenge of how to anchor fiscal policy in both the near as well as medium term. A key consideration for inclusive growth is macroeconomic stability. High oil price volatility calls for establishing a revenue stabilization buffer to avoid having to adjust or delay projects when oil prices fall (i.e., undesirable procyclical policy), while absorptive and implementation capacity limit the amount of spending which can be executed efficiently in each year. While a scaling up of investment is desirable, a fiscal anchor can be useful in guiding government in answering the question: in any given year, how much to spend and how much to save.
6. Given that traditional methods for anchoring fiscal policy (i.e., Permanent Income models, Debt Sustainability Analysis) are ill-suited to resource-rich countries with development needs, we recommend the following anchor:
IV. Strengthening fiscal policy—spending pressures and expenditure quality
7. One key tool for addressing rising current and capital spending pressures is to raise expenditure quality. Adoption of a results-based management framework for ministries, assignment of payment controllers to each ministry, placement of a dedicated procurement officer in each ministry and the work toward a functional classification of expenditure are all welcome steps in the right direction. In this context, devolution of public investment projects up to one billion CFA to line ministries should strengthen accountability and improve spending outcomes, albeit with some lag. We are cognizant of the challenges the government faces in the areas of onsite inspection and pervasive rent-seeking behavior by public officials, and agree with the need for all control measures to be used to their full potential in all ministries. While supporting the government’s efforts, we also have the following recommendations.
8. Efforts should also be made to increase non-oil revenue collection, notably in customs, and rationalize current expenditure. Non-wage current expenditure is rising rapidly, and pressures are expected to intensify over time as operations and maintenance costs start to kick in. At the same time, social spending outcomes have been poor, marked by an increase in maternal mortality, falling access to health services and low quality of education.
V. Reforms to Raise the Inclusiveness of Growth
By its nature, the oil sector is not inclusive—growth is often volatile, production is capital intensive and rents are not widely distributed.2 In order to make growth more inclusive the government must not only efficiently transform oil income into growth enhancing capital and social expenditure, but implement policies to improve the business climate, develop the financial sector and strengthen the labor market. This should be supported by gains in institution building, governance and transparency.
Business climate, financial sector and labor market
9. Raising the inclusiveness of growth requires a multidimensional approach. Improving the business environment without removing constraints to obtaining credit or addressing the labor skills mismatch will not be effective. Beyond the actual business environment lays the difficult challenge of improving governance and the rule of law which are key to strengthening the broader business climate. Given the broad-based nature of the reforms, strong collaboration among ministries is critical to success.
10. Progress in raising the inclusiveness of growth has been uneven. Public investment and reforms to the legal framework are moving forward, while SME issues and financial sector development have lagged. The reported fall in unemployment has been offset by rising underemployment and increasing participation in the informal sector. Apart from the infrastructure gap, one of the biggest stumbling blocks to overcoming jobless growth is governance. The lack of property rights, uncertainty regarding the upholding of contractual agreements, weak investor protection and challenges to starting a business hold back private sector development. Moreover, the weak demand side of the formal labor market is insufficient to address endemic youth unemployment, especially in light of the sizable labor skills mismatch. Our key recommendations comprise:
1 Prepared by IMF staff and presented to the government of the Republic of Congo at the conclusion of the 2012 Article IV Consultation discussions held May 15–25, 2012. The mission is grateful to the authorities for their warm hospitality and continued close cooperation.
2 Characteristics of inclusive growth include: high and sustained growth which is broad-based across sectors, inclusive of a large part of the country’s labor force, and promotes equality of access to markets and resources.
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