Republic of Congo and the IMF
Press Release: IMF Executive Board Approves US$84.4 Million PRGF Arrangement for the Republic of Congo
December 7, 2004
Country's Policy Intentions Documents
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Republic of CongoLetter of Intent, Memorandum of Policies, Agreement, Memorandum of Economic Policies, Memorandum of Economic and Financial Policies
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Brazzaville, November 17, 2004
Mr. Rodrigo de Rato
International Monetary Fund
Washington, D.C. 20431
Dear Mr. de Rato:
1. On behalf of the government of the Republic of Congo, I am pleased to submit herewith the memorandum on economic and financial policies covering the three-year program beginning October 1, 2004, and ending September 30, 2007, for which the Republic of Congo requests an arrangement with the International Monetary Fund (IMF) under the Poverty Reduction and Growth Facility (PRGF). The objectives of this program and the measures envisaged to achieve them are described in the attached memorandum. The main pillars of this program are, (i) improved transparency and good governance in the oil sector, (ii) enhanced discipline in the area of fiscal management, and (iii) promotion of the private sector with a view to stimulating the sustained economic growth necessary for poverty reduction.
2. The Republic of Congo, a post-conflict country, is emerging from a decade of political instability marked by three civil wars in the 1990s. Since the end of the transition to and the establishment of democratic institutions in 2002, and as a result of the peace accords of 1999 and 2003, political stability has returned, and security has been restored. With peace has come renewed economic growth.
3. Following the restoration of democracy and peace in 2002, the government began implementing its "Nouvelle Espérance" (New Hope) economic and social recovery program. In this context, it adopted and carried out a staff-monitored program (SMP) in 2003. Despite setbacks in the implementation of this program, results were encouraging, particularly in the area of oil sector transparency. Continuing its efforts to strengthen the medium-term framework for poverty reduction and growth, the government adopted a new SMP covering the period January-June 2004. The successful implementation of this program led to greater transparency and good governance in the oil sector, as well as fiscal consolidation.
4. The government also adopted an interim poverty reduction strategy, which it forwarded on September 14, 2004, to its development partners, including the IMF and the World Bank. Because it was developed with the active participation of representatives of the various segments of the population, this strategy reflects the aspirations of most of the Congolese people.
5. The government wishes to thank the IMF and the World Bank for their support, which was instrumental in garnering assistance from the international community for the Congo's development efforts. The government would also like to thank the other development partners that have already granted new financing to the Congo. It also requests from its development partners debt relief, including special treatment of its post cut-off-date debt. Nonetheless, as the country's needs are still considerable, the government hopes that the Congo will be able to obtain debt relief under the enhanced HIPC Initiative with the shortest possible delay.
6. In support of the implementation of its program, the government requests a new three-year arrangement under the PRGF in an amount equivalent to SDR 54.99 million (or 65 percent of the quota) and, for the first year under this facility, an amount equivalent to SDR 15.72.
7. The government believes that the policies set forth in the attached Memorandum of Economic and Financial Policies (MEFP) are adequate to achieve the objectives of the program, but it will take any other measures that may become appropriate for this purpose. The government of the Republic of Congo will consult with the Fund on the adoption of these measures, and in advance of revisions to the policies contained in the MEFP, in accordance with the Fund's policies on such consultation. Reviews will be conducted throughout the period of the arrangement to evaluate the macroeconomic and structural reform policies and implementation of the government's program and to reach new understandings, as necessary. The first review is expected to take place before end-July 2005 and the second review before end-January 2006.
8. The government is committed to disseminating its Memorandum of Economic and Financial Policies as well as the Technical Memorandum of Understanding and authorizes the IMF to publish its staff report, which will be examined by the Executive Board.
Rigobert Roger Andély
Minister of Economy, Finance, and Budget
1. The Republic of Congo, a post-conflict country, is making major efforts to strengthen its medium-term economic and financial framework with a view to achieving sustained growth and taking steps toward lasting poverty reduction. The three civil wars that took place in the Congo during the 1990s destroyed much of the country's economic fabric and caused deterioration in the living conditions of its population. However, security was restored with the signing of peace accords with rebel groups in 1999 and 2003 and the establishment of democratic institutions in 2002 after a period of political transition. Since end-2002, the government has been focusing its efforts on the country's economic and social recovery within the framework of its "Nouvelle Espérance" (New Hope) program.
2. To strengthen the framework of macroeconomic management and accelerate the reforms necessary for economic recovery and poverty reduction, the government implemented a staff-monitored program (SMP) covering the period from January to June 2004. The successful implementation of the SMP led to understandings between the government and IMF staff on a program likely to be supported by the Poverty Reduction and Growth Facility (PRGF). This memorandum describes the objectives of that program and the policy measures envisaged for achieving them.
3. Poverty reduction is at the core of the government's development strategy, as indicated in the Interim Poverty Reduction Strategy Paper (I-PRSP). The objectives of the strategy are twofold, namely, to stimulate growth and to promote pro-poor development. The government intends to encourage growth that can generate employment and income for the maximum number of people. In addition to promoting sustainable growth of per capita income, the government will aim to improve living conditions, in particular by facilitating access to basic public services and developing the private sector. The participatory process adopted for the drafting of the I-PRSP enabled the government to involve a broad representation of the various segments of the population, including civil society, thus ensuring ownership of the poverty reduction strategy by the nation as a whole. The government is seeking the support of the international community to achieve success in its fight against poverty.
II. Peace, Democracy, and Improved Security
4. The Congo is emerging from a decade of political instability marked by three civil wars that have led to enormous human losses, the exodus of a portion of the population, and the destruction of entire villages, buildings, infrastructures, and units of production. These wars have exacerbated the shortcomings in public administration that were already evident, particularly in managing public finances and oil revenues. In the social sectors, many facilities and much equipment were destroyed or looted. With the erosion of much of the socio-economic fabric of the country, the proportion of the population living below the poverty line has risen markedly.
5. In recent years, the political and security situation has stabilized. The transition that began with the end of the war in 1997 ended in August 2002 after presidential, legislative, and communal elections. With the objective of consolidating the peace process, the government and representatives of the remaining rebel groups signed a peace accord on March 17, 2003, in accordance with which demilitarization, demobilization, and reintegration operations are continuing with the support of the international community. The rate at which the country is being rebuilt and has established democratic institutions prescribed by the Constitution-with its own resources-inspires much hope.
III. Economic Developments in 2003
6. The advent of peace has stimulated economic activity in the non-oil sectors, particularly in agriculture, forestry, trade, and transportation. Non-oil GDP rebounded by 5.3 percent in 2003. Inflation, as measured by the consumer price index, slowed to 1.2 percent in 2003 compared to 3.1 percent in 2002, especially as a result of the resumption of food production and the steady inflow of consumer goods following the restoration of rail traffic between Pointe-Noire and Brazzaville. Credit to the economy grew in 2003, for the first time in three years, at a faster pace than that of non-oil GDP, reflecting confidence in the economic recovery.
7. Congo's fiscal position was better in 2003 than in 2002, although it improved less than had been expected. Indeed, the surplus in the primary fiscal balance rose from 1.2 percent of GDP in 2002 to 6.7 percent of GDP in 2003. The improvement in the fiscal balance in 2003 is attributable to tighter control of total expenditure and unexpectedly high oil revenues. Nevertheless, the execution of the 2003 budget was marred by, among other weaknesses: (i) lower-than-expected non-oil revenue receipts, (ii) higher-than-expected transfer and subsidy expenditures, (iii) unprogrammed payments of domestic arrears due to reconstruction investments, (iv) the sale of government oil through the national oil company (SNPC) at prices below reference prices, and (v) inefficient cash flow management.
8. Exceptional oil revenue of US$145 million was received in 2003 in settlement of a dispute with an oil company. This amount breaks down into: (i) a cash payment of US$35 million; (ii) a onetime increase in the government's oil revenue, equivalent to US$25 million; and (iii) a payment of US$80 million for the transfer by the government of 65 percent of the participation in the Likouala oilfield. With the approval of the Parliament, the Likouala oilfield was transferred to a private company operating under Congolese law, Likouala S.A., that had obtained a loan from a private foreign bank to pay the state an initial tranche of US$80 million in 2003. Based on the valuation of the residual oil reserves, the payment of a second tranche of up to US$80 million is planned for 2010.
9. The government began in 2003 to normalize relations with external creditors; indeed, it has paid on time its debt service obligations to all multilateral and Paris Club creditors (except for two bilateral creditors) for debt incurred after the cut-off date, and settled arrears (of about US$12 million) owed to a number of multilateral creditors (whose claims on Congo are relatively small). Still, the Congo remains a heavily indebted country.
10. The implementation of structural reform measures under the 2003 staff-monitored program (SMP) was uneven. On the one hand, considerable progress was made in improving transparency in the oil sector following: (i) the completion of the audit of the 1999-2001 SNPC accounts; (ii) the completion of the certification of government oil revenues for the period January to September 2003 by an internationally recognized independent firm of auditors; (iii) the absence of further contracting of oil-collateralized debt; and (iv) the publication of oil sector data on the websites www.congo-site.cg and www.mefb-cg.org. On the fiscal side, noteworthy developments were (i) the centralization of a large portion of fiscal revenues and expenditures in the budget; and (ii) the appointment of new senior officials in the General Directorates of the Budget, Customs, and Taxes, as well as in the Office of the Inspector-General of Finance, to revamp the revenue administration agencies and strengthen control. On the other hand, privatization of the one remaining public bank was not completed, and a number of other measures planned for end-September 2003 to increase oil sector transparency were not achieved, including publication of production-sharing contracts, the 2003 SNPC budget, and the SNPC audit report for FY1999-01.
IV. Implementation of the Staff-monitored program in 2004
11. The 2004 SMP, which covered the period January-June, contained two pillars: increased transparency in fiscal management, especially in the oil sector; and improved fiscal discipline (Tables 1 and 2). The program was well implemented, and all quantitative and structural benchmarks were met.
12. Budget execution during the first half of 2004 was better than expected, and all quantitative indicators at end-June 2004 were observed (Table 1). Because of higher oil and non-oil revenues and better control of primary expenditures, the actual primary fiscal surplus was higher than the program target (adjusted to reflect the actual international oil price) by about CFAF 18 billion. In addition, the government's net credit position vis-à-vis the banking system improved considerably. Moreover, no guaranteed or nonconcessional debt was contracted, and the government met its debt service obligations on nonreschedulable external debt. Also, domestic arrears were settled within the limits of the ceiling set in the context of the program.
13. The implementation of structural measures during January-September 2004 was generally in keeping with the program (Table 2):
V. Poverty Reduction Framework and Medium-term Strategy
14. The government is determined to place poverty reduction at the center of its development strategy. The principal objectives of this policy are described in the Interim Poverty Reduction Strategy Paper (I-PRSP). The improvement of the political climate in the Congo and of macroeconomic management augur well for growth and poverty reduction. The government is seeking assistance from the international community to support its three-year program covering the period from October 1, 2004, to September 30, 2007, which is likely to be supported with PRGF resources.
15. The government is aware of the numerous obstacles to the achievement of sustained economic growth. Those obstacles include heavy dependence on the oil sector, inadequate infrastructures, an onerous debt burden, high production costs, and a weak financial sector. In addition, the implementation of previous programs was generally unsatisfactory because of (i) the inertia inherited from the planned economy, which had long penalized the private sector; (ii) the civil wars of the 1990s that disrupted the economy and weakened institutions and the rule of law; (iii) poor economic management during the transition that followed the end of the war; (iv) an institutional, legal, and judicial framework not conducive to private sector development; and (v) insufficient ownership of the program of reforms by the authorities.
16. Since the 1990s, the Congo has opted for a market economy. The government is determined to make all necessary efforts to remove the constraints on private sector development, but requires the assistance of external partners.
17. A significant improvement in oil sector governance will be the key element of the new program that is likely to be supported by the PRGF. Over the next five years, the Congo must, among other challenges,
A. Establishment of the Medium-term Macroeconomic Framework
18. The main objectives of the 2004-07 program are (i) an annual average growth rate of 5.5 percent, supported by non-oil GDP growth projected at an annual average rate of about 5.2 percent; (ii) an annual inflation rate of about 2 percent, based on sound fiscal policy and the pursuit of prudent monetary policy by the BEAC; and (iii) a current account surplus amounting to, on average, about 1.5 percent of GDP.
19. Projections of non-oil real GDP growth include an annual "catch-up factor" of about 0.5-1 percentage point. The government believes that infrastructure investment will be key to development in the agricultural sector and to reducing poverty, in particular, through improved market accessibility. The government recognizes that the growth rate projected for the next three years is below the estimate of about 8 percent deemed necessary to achieve the Millennium Development Goals. However, it believes the program growth rate is realistic and plans to carry out an in-depth study on the sources of growth, with a view to raising it further.
20. Prudent fiscal policy will be essential to ensure macroeconomic stability and promote economic growth, especially given record-high oil prices and expected hikes in production over the medium term. In this context, the fiscal policy adopted by the government involves attaining a primary surplus equivalent to 10.1 percent of GDP in 2004, 13.2 percent of GDP in 2005, and 8.2 percent of GDP, on average, during 2006-07, as a result of improved revenue mobilization and expenditure control.
21. Drawing on the lessons of the past, the government has decided to adopt a prudent fiscal stance with respect to future oil revenues, so as to avoid the adverse effects of the pro-cyclical expenditure driven by oil revenue receipts. Accordingly, starting with the 2005 Budget Law, the international oil price to be used in oil revenue forecasts will be the price forecast by IMF staff ("World Economic Outlook"-WEO) minus US$4 a barrel. In applying this fiscal rule, and assuming an average annual increase in production of 6.1 percent, oil revenues will amount to 21.9 percent of GDP on average during the period 2004-07.
22. The government will implement measures to strengthen mobilization of both oil and non-oil revenues. Oil revenues, for their part, will be augmented as a result of the strengthening of collection through quarterly certifications, audits of cost oil, and improvement of the commercial performance of the SNPC. Non-oil revenues, for their part, will be increased as a result of the strengthening of measures to combat fraud and tax evasion (through, among other steps, the computerization of the revenue departments), controlling and limiting discretionary tax exemptions, expanding the tax base, and improving tax administration. In light of the Congo's membership in the Central African Economic and Monetary Community (CEMAC), however, the government has little room for changing tax rates or introducing new fees.
23. A prudent expenditure policy will be implemented with a view to freeing up resources that will help boost poverty reduction expenditures and the country's capacity to meet its external debt service obligations. To this end, the government intends to take the following actions:
24. In the next few years, the public investment program financed with domestic resources will have the following priority objectives to: (i) ensure a regular supply of electricity in the country (Imboulou dam, upgrading of the Mokoukoulou dam, Brazzaville thermal power plant, and construction and strengthening of the distribution network); (ii) improve public infrastructures and open up the hinterland (road networks and Ollombo airport); (iii) beef up basic social services; and (iv) strengthen the infrastructure in local communities (safe water, schools, dispensaries), in particular, within the framework of the "accelerated municipalization" operation started in 2004. The management of the capital budget will be improved through better physical and financial monitoring of projects. In addition, through transparent and proper procedures for public procurement, the government will ensure that project costs are competitive. The World Bank has carried out an in-depth review of the investment management arrangements and plans to assist the government in improving its assessment of project profitability and its monitoring of the implementation of physical and financial projects.
25. Monetary policy will continue to be carried out within the regional framework of the Bank of Central African States (BEAC). The objectives of this policy are to ensure low inflation and keep the foreign exchange reserves of the zone at a comfortable level. The government of the Congo will contribute to the achievement of these objectives by implementing a fiscal policy aimed at increased public savings, with a view to improving its net credit position vis-à-vis the banking system and facilitating a noninflationary increase in credit to the economy.
26. Conscious of the risks of inflation stemming from the considerable inflow of financial resources, given that international oil prices are expected to be buoyant over the next few years, the government is committed to sterilizing these resources, in accordance with current CEMAC and BEAC rules. It will do this by (i) strengthening its net credit position vis-à-vis the central bank to allow the Congo to raise its foreign exchange coverage position and enable the BEAC to eliminate the measure requiring prior approval of payment transfers; (ii) formulating a public expenditure program that is noninflationary and avoids procyclicality, in line with the economy's absorptive capacity; and (iii) creating a mechanism for the cyclical regulation of oil revenues or of a savings fund for future generations.
27. As regards the external sector, an improvement in the current account is expected during the period 2004-07. For the external financing of the program, only grants and loans on concessional terms will be used. Successful implementation of the program will depend on a quick settlement of domestic and external arrears, the resumption of external assistance, and the promotion of a climate conducive to private sector development. The government will update its medium-term macroeconomic framework to take account of any external debt relief obtained under the enhanced HIPC Initiative. This revision will allow an increase in expenditures on poverty reduction, supplementing the government's own efforts.
B. Macroeconomic Framework for the First Year of the Program
28. The first year of the program for which the government is requesting an arrangement under the PRGF will cover the period from October 1, 2004 to September 30, 2005. The principal macroeconomic objectives are expected to be as follows: (i) an annual growth rate in non-oil real GDP of about 5 percent, (ii) an inflation rate of about 2 percent, (iii) a primary surplus representing about 10.1 percent of GDP in 2004 and 13.2 percent of GDP in 2005, and (iv) a current account surplus equivalent to 1.6 percent of GDP a year. Budgetary and monetary variables, as well as those related to indebtedness, will be subject to performance criteria and quantitative benchmarks (Table 3).
29. Discipline in fiscal management will be strengthened during 2004 and 2005, so that the necessary resources can be made available to implement of the poverty reduction strategy and relations with external creditors can return to normal. The expenditure structure will, as a result, be reoriented toward pro-poor projects. To this end, it is essential to achieve better mobilization of oil and non-oil revenues, as well as greater control of other spending.
30. Fiscal policy will aim, among other things, at generating additional domestic revenues. For 2004 and 2005, non-oil revenues are expected to reach CFAF 202.2 billion (18.3 percent of non-oil GDP) and CFAF 219.3 billion (18.6 percent of non-oil GDP), respectively. Oil revenues are expected to total CFAF 515 billion in 2004, assuming a production volume of 83.3 million barrels, an international price of US$37.30 a barrel, and an exchange rate of CFAF 532.8 to the U.S. dollar. For 2005, oil revenues are projected at CFAF 632.4 billion, based on a production volume of 97.9 million barrels, an international price of US$37.30 dollars a barrel, and an exchange rate of CFAF 543.5 to the U.S. dollar.
31. Expenditure policy will be geared toward poverty reduction. The government undertakes to increase the share of resources allocated to the priority sectors identified on the basis of the I-PRSP, namely, (i) basic health care and action to combat HIV-AIDS; (ii) basic education; (iii) basic infrastructure; (iv) water, energy, and urban sanitation; (v) disarmament and reintegration of former combatants; and (vi) agriculture. These sectors' share of spending in total primary expenditure will thus increase from 23 percent in 2003 to 39 percent in 2007.
32. To meet pressing social needs and promote social peace, the authorities have signed a "social truce" with the unions, whereby they will gradually pay wage and pension arrears starting in 2004. To this end, the government plans to transfer a sum equivalent to about 1 percent of GDP in 2004 to clear these social arrears. The government has also budgeted an amount equivalent to 0.9 percent of GDP in 2004 for the payment of commercial domestic arrears to small and medium-sized enterprises, with a view to stimulating economic activity. For 2005, an amount equivalent to 2 percent of GDP has been identified to finance the settlement of domestic arrears that have already been audited and certified.
33. A prudent fiscal policy will be followed in the context of the 2005 Budget Law. It is based on a conservative oil price assumption (price estimated in the IMF's WEO, minus US$4 a barrel). To ensure the successful application of this rule, the government will discuss it with Parliament and solicit its support. To this end, the government will continue its current policy of regularly presenting budget outturns to Parliament and publishing them on its website. As described in the Technical Memorandum of Understanding, the program includes an adjustment factor to take account of the deviations (generated by changes in quantities and prices) between actual and programmed oil revenues. In this context, the primary fiscal balance will be adjusted upward if oil revenues are higher than forecast. The use of any additional resources will be in accordance with the agreement laid out in the Technical Memorandum of Understanding.
34. The government hopes that the large financing gap for the first year of the program will be covered, in particular through the rescheduling of bilateral debt, exceptional treatment of nonreschedulable arrears from multilateral and bilateral creditors, and budgetary assistance from Congo's major partners. As regards the external debt, the government intends to request relief from the Paris Club on favorable terms, and to obtain comparable relief from other bilateral and commercial creditors. Regarding the London Club, three meetings of the Coordinating Steering Committee have already been held, and the authorities will continue good-faith discussions with the creditors. Consistent with the HIPC Initiative, the government plans to settle arrears to all private creditors, including those with claims under litigation. The government is committed to paying its external financial obligations on a regular basis.
35. Broad money growth is expected to mirror that of nominal non-oil GDP during the period covered by the program. According to the projections, net credit to the government, excluding IMF resources, is expected to rise by 0.5 percent of GDP in 2004 before falling by 0.3 percent in 2005. Credit to the economy is expected to grow in line with nominal non-oil GDP, and the net foreign assets of the central bank are projected to increase.
VI. Structural Reforms
36. The program of structural reforms is aimed at ensuring robust growth and poverty reduction, promoting private sector development, improving transparency and governance in the oil sector, and increasing the effectiveness of the public sector.
A. Oil Sector
37. The government is convinced that transparency and better monitoring of oil sector operations are essential to the improvement of governance and fiscal management. Reforms in this sector include:
38. The government undertakes to carry out the reform of CORAF, the subsidies for which continue to be a drain on the government budget. For a clearer definition of the appropriate reform measures to be taken, a financial audit of CORAF operations in FY 2002 will be carried out in 2004. In addition, the government plans to conduct an economic and strategic assessment of CORAF by end-June 2005 with World Bank assistance and to draw up an action plan for reform of the company. The ceiling on budgetary subsidies to this company has now been set at CFAF 8.8 billion in the 2004 budget and CFAF 4.6 billion in the 2006 budget, before the elimination of such subsidies in 2007.
39. Finally, the subsidies on oil products will now be established objectively and managed efficiently. The aim is to eliminate the subsidies. To this end, the government will seek the assistance of the World Bank to assess the cost and efficiency of the current system of setting prices at the pump, including the subsidy granted, and will propose alternative mechanisms.
B. Government Finance
40. The government plans to pursue fiscal consolidation through improved expenditure control and a strengthening of the revenue departments:
C. Financial Sector
41. The still-limited capacity of the Congolese financial system is one of the obstacles to growth. The principal actions to be undertaken to ensure orderly reform of the financial sector as a whole are the following:
D. Private Sector
42. The government is convinced that the private sector should play a decisive role in the economic development of the country, especially in light of the inherent institutional, technical, and financial limits on government action. With this in view, the authorities will work to remove the constraints on private initiative, in particular through the following actions:
E. Other Measures for Good Governance
43. To reintegrate the Congo into the Kimberley Process, on September 29, 2004 the government has adopted an action plan based on the findings of the mission of experts on the Kimberley Process in the Congo (May 31-June 4, 2004). The plan was submitted to the Kimberley Process on October 7, 2004 and will be implemented in close cooperation with that institution. It contains the following principal measures:
F. Statistical Data and Technical Assistance
44. The government undertakes to pursue its efforts aimed at improving the quality of the statistics necessary for properly monitoring implementation of the program of economic and financial reforms and the poverty reduction strategy. During the first year of the program, the following measures will be taken: (i) completion of the household consumption survey for the assessment of poverty (ECOM), (ii) conversion of the national accounts statistics using the 1993 United Nations methodology (SNA 93), and (iii) taking account, in the 2005 national budget, of the proposals for the first year of the Multiyear Plan for the Development of Statistics (PPDS).
45. In light of the lack of national institutional capacity, the government is seeking technical assistance from the international community. The government appreciates the technical assistance already provided by the international community, including by the IMF in the fields of government finance and statistics. In this regard, given the enormous progress already achieved and the magnitude of the work remaining to be done, the government wishes to continue receiving the assistance it is currently receiving from the IMF in the area of statistics. This will be used, in particular, for: (i) completing the legal and institutional reforms of the national statistics system, (ii) implementing the recommendations of the July 2004 seminar to bring into operation the PPDS, and (iii) facilitating the transition from the PPDS to the budget during the first year.
46. Given the scope of the fiscal reforms under way, the government needs long-term resident experts, especially in the areas of taxes, customs, and expenditure management. The other areas in which there are pressing needs include: (i) the formulation of a strategy for the settlement of domestic and external arrears, (ii) support for the program's Technical Monitoring Committee and the Hydrocarbons Unit in the Ministry of Finance, and (iii) the strengthening of control and inspection procedures and structures in the revenue departments.
VII. Prior Actions
47. The following measures are planned for implementation by the government prior to the consideration by the IMF's Executive Board of a new PRGF arrangement:
VIII. Performance Criteria and Benchmarks
48. Program implementation will be monitored on the basis of the quantitative and structural performance criteria and benchmarks described in detail in Tables 3 and 4 and in the attached Technical Memorandum of Understanding.
1. This technical memorandum of understanding (hereinafter the "TMU") sets out the modalities for monitoring the program covering the period from October 1, 2004 through September 30, 2005 of the government of the Republic of Congo.
I. Quantitative Performance Criteria
2. The quantitative performance criteria are:
a. a floor on the primary fiscal balance, cumulative starting from January 1 of each year,
b. a ceiling on the change in the net claims of the banking system on the government (excluding net IMF credit), cumulative starting from January 1 of each calendar year,
c. no new medium- or long-term nonconcessional external debt (including leasing) contracted or guaranteed by the government, starting from October 1, 2004 (a continuous criterion),
d. no new external debt (including leasing) with an initial maturity of less than one year incurred or guaranteed by the government, starting from October 1, 2004 (a continuous criterion),
e. no new oil-collateralized external debt by or on behalf of the central government, starting from October 1, 2004 (a continuous criterion),
f. a ceiling on new nonconcessional external debt contracted by the SNPC, starting from October 1, 2004 (a continuous criterion),
g. minimum external arrears payment, starting from October 1, 2004,
h. no new external payment arrears on nonreschedulable debt (see para. 17 below for the definition), starting from October 1, 2004 (a continuous criterion),
i. a ceiling on domestic arrears payments, starting from October 1, 2004; and
j. no new domestic payment arrears, starting from October 1, 2004 (a continuous criterion).
3. The quantitative indicators are:
a. a floor for non-oil revenues (cumulative amounts, starting from January 1 of each year), and
b. a ceiling on domestically-financed investment (cumulative, starting from January 1 of each year).
II. Definitions and Computation
4. Unless otherwise indicated, "government" is defined as the central government of the Republic of Congo and does not include local governments, the central bank, or any public entity with autonomous legal personality not covered by the government's consolidated financial operations table (tableau des opération financières de l'Etat-TOFE).
B. Basic Primary Fiscal Balance
5. The scope of the government's fiscal operations table (TOFE) includes the general budget and the special accounts of the Treasury (including the forestry and road funds) and the government debt management agency (Caisse Congolaise d'Amortissement, CCA).
6. The government's basic primary fiscal balance is equal to total revenue excluding grants, minus total expenditure (including net credit) excluding interest payments and capital expenditure financed with external resources. It is measured on the basis of the budget execution reported every month in the TOFE prepared by the Ministry of Finance. At end-June 2004, the basic primary fiscal balance was estimated at CFAF 112.2 billion, resulting from total revenue (excluding grants) of CFAF 323.2 billion and total expenditures (excluding interest on the debt and capital expenditure financed with external resources) of CFAF 211 billion.
7. The government's total revenue is measured on a cash basis. It includes all revenue (tax revenue and nontax revenue, including all forms of oil revenue whether the result of past, current or future obligations) collected by the Treasury. Total revenue also includes gross revenue in the special accounts. Oil revenue excludes all forms of prepayment and prefinancing (see definitions in paragraphs 18-19 below).
8. Starting in the second half of 2004, projected oil revenues are estimated using the authorities' forecasting model, which takes specific account of the schedule of oil pick-ups. Considering the exogenous risks posed by changes in the number of shipments (including the effect of the minimum volume required to make up a shipment), the quarterly revenue projections for 2004-05 are based on the following shipment schedule:
The tax revenue projections take account of the usual one-month lag between the date of shipment and the date of receipt of the sale proceeds by the Treasury. Consequently, the shipments projected for the third and fourth quarters of 2004 are those scheduled to take place between June and August 2004 and between September and November 2004, respectively. To ensure effective monitoring of oil revenues, the authorities will provide to IMF staff, in addition to other data, a detailed monthly table of actual shipments within 30 days of the end of the month in which the shipment was made. At a minimum, this table will contain, for each shipment, information on the type of product, the date of loading, the recipient, and the selling price.
9. Expenditure is measured on a payments order basis. It includes current expenditure, domestically financed capital expenditure, externally financed capital expenditure, and net lending. Current expenditure is defined as total expenditure minus capital expenditure minus net lending. Current expenditure is broken down into personnel expenditure, expenditure on goods and services, interest on the debt (domestic and external), transfers and subsidies, and other current expenditure.
C. Change in the Net Claims of the Banking System on the Central Government
10. The net government position vis-à-vis the banking system (excluding net IMF credit) is defined as the government's claims on domestic banking institutions minus the government's debts to domestic banking institutions. The claims of the government include the cash balances of the Treasury held in the banking system, government deposits at the Bank of Central African States (BEAC), government deposits at commercial banks, and government deposits at the Caisse Nationale d'Épargne (CNE) and the Centre des Chèques Postaux (CCP). Government debts to the banking system include BEAC lending (including statutory advances and consolidated advances), lending to the government by commercial banks (including government securities held by the commercial banks), and CNE/CCP deposits held by the government.
11. The end-of-period stock of net bank claims on the government, excluding the counterpart of the use of Fund resources, is valued in accordance with the accounting framework currently used by the BEAC. On December 31, 2003, these claims amounted to CFAF 167 billion.
D. Debt and External Arrears
12. The definition of government used for the various external debt performance criteria includes government, as defined in paragraph 4, public institutions of an administrative nature (Etablissements Publics Administratifs), public institutions of a scientific and/or technical nature, public institutions of a professional nature, public institutions of an industrial and/or commercial nature (Entreprises Publiques d'Intérêt Commercial), and local governments, with the sole exception of the national oil company (SNPC)-see paragraph 16 below.
13. For the purposes of this memorandum, "debt" and "concessional loans" are defined as follows:
a. As specified in the guidelines adopted by the Executive Board of the IMF,1 debt will be understood to mean a current, i.e., not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. Debts can take a number of forms, the primary ones being as follows: (i) loans, i.e., advances of money to the obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans and buyers' credits) and temporary exchanges of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements); (ii) suppliers' credits, i.e., contracts where the supplier permits the obligor to defer payments until some time after the date on which the goods are delivered or services are provided; and (iii) leases, i.e., arrangements under which property is provided which the lessee has the right to use for one or more specified period(s) of time that are usually shorter than the total expected service life of the property, while the lessor retains the title to the property. The debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement, excluding those payments that cover the operation, repair, or maintenance of the property. Under the definition of debt set out above, arrears, penalties, and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt are debt. Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.
b. Loan concessionality is assessed on the basis of the commercial interest reference rates (CIRRs) established by the OECD. A loan is said to be on concessional terms if, on the date of conclusion of the contract, the ratio of the net present value of the loan, calculated on the basis of the reference interest rates, to its nominal value is less than 50 percent (i.e., a grant element of at least 50 percent). For debts with a maturity exceeding 15 years, the ten-year reference interest rate published by the OECD is used to calculate the grant element. For shorter maturities, the six-month market reference rate is used.
14. The quantitative performance criteria with respect to external debt apply not only to debt as defined in the above-mentioned guidelines, but also to commitments incurred or guaranteed for which no value has yet been received or on which only partial drawings have been made. However, this does not apply to financing from the IMF or to Treasury bills and bonds issued by the Congolese Treasury in CFA francs on the CEMAC regional market.
15. For external debt with an initial maturity of less than one year, normal short-term import and export credit are excluded from the scope of the indicator, including the prepayments defined in paragraph 18 below.
16. The ceiling on any new nonconcessional external debt with a maturity of more than one year incurred or guaranteed by the SNPC, with or without government backing, will be monitored continuously. The SNPC may borrow only to finance investments related to its core activities which consist of research, exploration, production, refining, and distribution of oil; construction of a Brazzaville headquarters; and creation and strengthening of its database. In addition, these investments must be included in the investment program approved by the government. The ceiling on debt does not apply to changes in loan accounts with oilfield partners or to loans of less than one year for operating purposes.
17. The accumulation by the government of external payment arrears is the difference between (a) the gross amount of external debt service payments due (principal and interest, including penalty and/or late interest, as appropriate) and (b) the amount actually paid during the period under consideration. Under the program, the government commits itself to not accumulate external payment arrears on non-reschedulable debt (that is post-cutoff-date debt to Paris Club creditors and debt owed to multilateral creditors). Nonaccumulation of external payment arrears is a criterion to be continuously observed.
E. Oil-Collateralized External Debt
18. Oil-collateralized external debt is external debt which is contracted by giving an interest in oil. Prefinancing is defined as an oil-collateralized loan which is repaid by the sale of the oil in a different calendar year. New prefinancing by or on behalf of the government is strictly prohibited under the program. The refinancing and/or deferral of the existing stock and/or due dates are permitted but should not give rise to the augmentation of the existing stock of oil-collateralized debt.
19. A prepayment is defined as an advance payment by the purchaser of oil on a specific oil shipment. Prepayment-related operations must be repaid within 6 months but in any case within the calendar year in which they were contracted.
20. The government's commitment not to contract new oil-collateralized debt will be monitored using the list of oil-collateralized debt as of June 30, 2004 shown in Annex I.
F. Arrears and Domestic Debt
21. Domestic payment arrears of the government are equivalent to the difference over the relevant period between the amount of payments authorized and the actual payments made (within 90 days). A net reduction in arrears is reflected in the TOFE as a negative amount, and a net accumulation as a positive sum. Payments made by the government cover payments by the Treasury and the CCA, including through clearing operations.
22. The amount of outstanding domestic payment arrears, usually referred to as the "float" in the budget execution tables, particularly the TOFE, will be capped at CFAF 18 billion at the end of each quarter, with the obligation of clearing the float at the end of the year.
23. The criterion on the basic primary fiscal balance (para. 2.a) will be adjusted upward if oil revenues are higher than projected. Oil revenues will be adjusted in two stages: the first adjustment will take account of the change in the number of shipments, while the second will reflect the change in international oil prices. First, expected oil revenues from the sale of government oil by the SNPC, estimated on the basis of the shipment schedule, will be adjusted by the ratio of the actual number of shipments to the projected number. The adjustment will be calculated separately for each component of government oil revenues generated by shipments sold by the SNPC, for each type of Congolese oil product, namely, the three crude oil blends (Djéno, Nkossa, and Yombo), as well as butane and propane. Second, expected oil revenue adjusted by quantity will be multiplied by the ratio of the international price to the expected price. In accordance with the fiscal rule on oil prices, government oil revenues will be projected on the basis of the oil price estimates in the IMF's WEO less a 'markdown' factor (US$2/barrel for the period August-December 2004 and US$4/barrel beginning in 2005); the price resulting from this calculation will be known as the "estimated adjusted international price." Consequently, the adjustment of revenues based on price will consist of multiplying total government revenues by the ratio of the international price received to the estimated adjusted international price, calculated in CFA francs. Both adjustments will be made quarterly.
24. During the first year of the program (October 1, 2004 to September 30, 2005), if the primary budget surplus exceeds the quantitative program indicator (2a) and/or if additional nonearmarked budgetary support,2 over and above the programmed amount, becomes available, the government intends to use one-third of these extra resources to further reduce external payment arrears on government debt not eligible for rescheduling. This will be implemented four weeks after the end of the quarter, in consultation with Fund staff. Any remaining additional resources will be deposited in the banking system, and their use will be discussed with IMF staff in the context of program execution reviews. Priority in the use of the additional resources will be given to:
25. The ceiling on the change in the banking system's net claims on the government will be adjusted if external budgetary support exceeds or falls short of program projections. The ceiling will be adjusted downward by the amount of budgetary support received in excess of the programmed amount. Conversely, the ceiling will be adjusted upward by the amount of the shortfall in budgetary support programmed for the period. This adjustment cannot exceed CFAF 5 billion, calculated on a cumulative basis, during the first year of the program.
26. The ceiling on domestic arrears payment will be increased up to CFAF 23 billion and 40 billion in the second and third quarters of 2005, respectively, if the additional resources amounting to CFAF 5.2 billion expected in the context of the settlement of the Congo's arrears to the African Development Bank are mobilized.
IV. Structural Measures
27. The structural measures are listed in Table 4 of the Memorandum on Economic and Financial Policies.
28. The external financial audit of the 2002 accounts of the Congolaise de raffinerie (CORAF) will be performed in accordance with international audit standards, by an audit firm selected through an international bidding process. The terms of reference and specifications for this audit were prepared in cooperation with the World Bank. The final audit report will be submitted to the Ministry of Finance no later than December 31, 2004.
29. External audits of cost oil, as defined in production-sharing contracts (PSCs), reported by oil companies will be carried out in accordance with international audit standards by firms of international reputation. For 2003, the audits will cover all PSCs, namely: for the operator Total E&P Congo, the PSCs of Haute Mer, Mer Très Profonde Sud, PEX, and PNGF; for the operator Likouala S.A., the Likouala and Likouala-Est concessions; for the operator CongoRep, the Émeraude concession; for the operator ENI Congo, the PSCs of Marine VI, Marine VII, Marine X, Madingo, and Mer Très Profond Nord; and for the operator Zetah M & P Congo, the PSCs of Kouilou and Kouakouala.
30. The table used to monitor the expenditure process will list the amount of commitments, payment orders, and payments, for both operating and capital expenditures.
31. Pending finalization of the functional classification of government expenditures, the government will prepare and submit to the IMF a quarterly table for monitoring poverty reduction expenditures, based on the pro-poor sectors selected for the first year of the program and in the context of the I-PRSP (basic health care and education; infrastructure and rural integration; water and electricity; disarmament, demobilization and reinsertion; social protection, and agriculture). The quarterly tables will be submitted before the end of the subsequent quarter.
32. The study on the cost and efficiency of the current system of setting the prices of oil products at the pump will analyze the modalities of establishing a mechanism for automatic price adjustments, depending on world prices, and will propose a more efficient system of subsidies for the most underprivileged segments of the population, which are expected to be the most affected by these adjustments.
33. The certification of forestry revenues for the calendar year 2004 will include cross analyses of statistical data as well as of the work of each forestry enterprise or subset of enterprises, covering at least 80 percent of national production. This certification will be carried out by a firm of international reputation selected through a competitive bidding process in accordance with international standards. The tasks entail (i) a general assessment of the quality of the tax returns of forestry companies; (ii) reconciliation of forest wood production, volumes hauled, volumes exported by water and by land (via the port of Douala in Cameroon), data on exports of wood and other forest products, and government revenue in the form of taxes on felling, land area, and clearing, special permits, taxes on accessory products, export duties and taxes; (iii) reconciliation of export data (product, volume, and value) provided by the enterprises concerned and the data recorded at the Cameroon border and in the port of Douala; and (iv) verification of the collection of each tax and duty mentioned in (ii) above, and assessment of the actual rates of collection vis-à-vis the theoretical values; verification of the receipt of these taxes and duties by government agencies and their transfer to the Treasury and to the account of the Fond Forestier (forestry fund).
34. Centralization of government revenue and execution of all government payments by the Treasury. All government revenue must be transferred to the Treasury or, in the case of earmarked revenue (intended for various funds and other agencies), transferred to the special earmarked accounts of the Treasury, in accordance with fiscal procedures. By the same token, all government payments must be made through the Treasury. This provision, in addition to facilitating budget execution and control, is key to the preparation of the government accounts and the budget review laws.
35. The statement on hydrocarbons transactions (oil and gas) carried out in a given quarter will be published the following quarter. This statement will include, but not be limited to, a summary of:
36. The quarterly certification of oil revenues by an external auditor, based on the terms of reference used for the certification of 2003 revenues (dated September 5, 2003), will include, among other things: (i) verification of the tax returns of the oil companies, (including compliance with the terms of PSCs), (ii) reconciliation of the commercial transactions of the SNPC and the quantity of oil due to the government in settlement of the oil companies' tax liabilities (the SNPC included), and (iii) verification that the corresponding revenue has been transferred to the Treasury. The certification report will be available 16 weeks after the end of the quarter in question and will be published on the website.
37. The nine recommendations of the external auditor for strengthening oil revenue collection based on the certification of FY 2003 oil revenues are the following:3 (i) preparation of procedures manual; (ii) formal reviews of the issues raised by the declarations by the operators; (iii) inspection of tax letters (lettres de fiscalité); (iv) monitoring of current accounts between the government and the SNPC; (v) procedures to be followed when Ministry of Finance authorizes prepayments; (vi) monitoring of documentation required of operators on the Republic's oil income; (vii) uniform presentation of the financial declarations ("notes de calcul") required of the SNPC; (viii) synthesized report on all obligatory documentation by the operators submitted to the Republic; and (ix) development of a table permitting the monitoring of the financial declarations ("notes de calculs") submitted by the SNPC.
38. The tables on sources and uses of funds, to be prepared by the SNPC, will follow France's General Chart of Accounts (PCG, Article 532-9 s.) and cover the consolidated operations of the entire SNPC Group. The subsidiaries of the Group in July 2004 include: Congolaise de raffinerie (CORAF) (oil refinery); Financière et investissements du Congo (FININCO SA) (financial and investment services); SNPC Services (holding company, with, among others, Congolaise des Services Aériens (COSAIR) (airline) and Usine de Fabrications de Lubrifiants, Produits Agricoles et Chimiques (UFALU) (manufacturer of lubricants, agricultural products, and chemicals); Société congolaise de production électrique (SCPE) (electricity company); Société nationale de recherche et d'exploration pétrolière (SONAREP) (oil research and exploration); Congolaise de Trading (COTRADE); and SNPC Raffinage et Distribution (refining and distribution).
39. The final strategy for refocusing the SNPC on its core activities will include an assessment of the current status of SNPC activities compared to its charter. Based on this assessment, the government will propose an action plan for the withdrawal of the SNPC from activities not included in its charter.
40. The policy on the settlement of domestic arrears will include: (i) a clear definition of payment arrears, (ii) validation by the Office of the Inspector-General of Finance and the CCA of the end-2003 stock of arrears on social debts (wages, pensions, and the rights of workers in liquidated enterprises), (iii) the closing of retirement fund accounts and Treasury deposit accounts, (iv) the establishment of payment methods and schedules, (v) a system to ensure the integrity of ex post settlement of arrears, and (vi) the preparation by September 2005 of a preliminary table of cross debts at end-2003 (government, social security, public enterprises, and private sector). These cross debts will be audited by an independent firm to be recruited by end-December 2005, at the latest. While waiting for the results of the validation, no arrears will be paid to public enterprises. The audits of commercial debt at end-2002 will be validated by an internationally recognized firm recruited on a competitive basis. This policy will be published on the website. Domestic arrears settlement operations based on the arrears clearance plan prepared in cooperation with the World Bank will be channeled through a local bank. The arrears will be numbered by creditor and settled on the basis of those numbers, following publication on the website of the schedule and procedures for the settlement of domestic arrears.
41. The external audits of the SNPC will be based on the terms of reference and specifications used for the 1999-2001 audit. Accordingly, the tasks will be to audit the consolidated financial statements of the parent company and its subsidiaries and to review financial flows, the execution of the management contract, and internal control. For FY 2003, FY 2004, and FY 2005, the auditors will submit their final reports for each fiscal year within two months after the SNPC produces its consolidated accounts. To that end, the government will ensure that the SNPC meets the following deadlines for the production of its accounts: (i) for FY 2003, by end-December 2004; (ii) for FY 2004, by end-November 2005; and (iii) for FY 2005, by end-October 2006. The audit reports will be published on the website.
V. Information for Program Monitoring
A. Oil Sector
42. The government will submit the following information to the staff of the International Monetary Fund:
43. Oil prepayments (see paragraph 18 above) are recorded in the TOFE accounts as follows:
B. Government Finance
44. The government will submit the following information to the staff of the International Monetary Fund:
C. Monetary Sector
45. The government will submit on a monthly basis, within four weeks of the end of the month, the following preliminary information:
The final data on the integrated monetary survey will be provided within six weeks of the end of the month.
D. Balance of Payments
46. The government will submit the following to the staff of the International Monetary Fund:
47. The government will submit the following to the staff of the IMF within four weeks of the end of the month:
F. Real Sector
48. The government will submit the following to the staff of the IMF:
G. Structural Reforms and Other Information
49. The government will submit the following information:
1 See Executive Board Decision No. 6230-(79/140) as amended by Decisions Nos. 11096-(95/100) and 12274-(00/85).
2 Budgetary support is defined as the amount of nonproject grants and loans (excluding IMF resources).
3 The above measures are spelled out in the letter of recommendations sent by the audit firm KPMG to the Minister of Finance in conjunction with the certification of FY 2003 oil revenues.
4 Excluding arrears under litigation to one creditor.