Public Information Notice No. 00/105

Public Information Notice: IMF Concludes Article IV Consultation with the Republic of Congo

December 7, 2000

On November 17, 2000, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Republic of Congo.¹

Background

After a turbulent first half of the past decade, which culminated in civil unrest in 1993-94, political turmoil intensified after 1996 and led to two ravaging civil wars in 1997 and late 1998. The conflicts inflicted large losses of human life, displaced almost one third of the population, and caused damage to infrastructure and productive capacity estimated at CFAF 1,600 billion, well exceeding the size of the estimated 1999 GDP.

Economic losses in terms of foregone output have also been serious, and real GDP in 1999 was about the same as it was in 1996. However, since the oil sector's operations (in 1999 the country became the fourth largest oil producer of sub-Saharan Africa, after Nigeria, Angola, and Gabon) are mainly offshore and not affected by war conditions, the 20 percent contraction in non-oil output during that period is more indicative of the impact of the conflicts on the economy.

Consumer prices exhibited large swings between 1996 and 1999, largely reflecting supply disruptions. Inflation reached 16 percent at end-1997 before subsiding to about 4 percent at end-1999.

The conflicts have disrupted fiscal management, as established budgetary procedures were abandoned and spending priorities shifted toward the areas of security and humanitarian assistance. The overall fiscal deficit (including grants) reached 20 percent of GDP in 1998 before narrowing to close to 6 percent of GDP in 1999. Without access to regular domestic and external financing, budget deficits were financed largely through the accumulation of arrears.

Large fiscal deficits spilled over into the balance of payments, virtually depleting the country's foreign exchange reserves and increasing the stock of payments arrears to CFAF 1,279 billion (94 percent of GDP) by end-1999. Movements in the external current account depend largely on oil exports receipts, which, in line with oil price movements, fluctuated markedly between 1997 and 1999. The external current account balance deteriorated from 20 percent of GDP in 1997 to 39 percent of GDP in 1998 and subsequently improved to 18 percent in 1999. Total external debt amounted to CFAF 3,357 billion, or 246 percent of GDP at end-1999.

The political and security situation has improved significantly since the signing of cease-fire agreements between the government and major rebel groups in late 1999. A committee comprising representatives of all parties involved in the conflict has been put in charge of implementing the provisions of the agreements, including the collection of arms and ammunition, and the reintegration into society of former militia members. This has been formalized in the Demobilization, Disarmament, and Reintegration (DDR) program. Progress to date in this area has been significant and will be consolidated with the return to democracy, in particular with the adoption of a new constitution and presidential, legislative, and local elections scheduled for the second quarter of 2001.

In 2000-01 the authorities will strengthen the country's administrative capacity and improve the macroeconomic framework in order for growth in the non-oil sector to resume. Real GDP growth, after dropping by 3 percent in 1999, is projected to grow by 3.8 percent in 2000, and accelerate to 4.2 percent in 2001, for the greater part on account of a strong rebound of the non-oil sector, which is projected to recover rapidly at rates of 7 and nearly 6 percent in 2000 and 2001. The focus of fiscal policy is on the financing of emergency expenditures while spurring the normalization of relations with the Congo's creditors, essential for reviving financial and technical cooperation with the country's development partners. Thus, the primary fiscal surplus is targeted to more than double to 11.8 percent of GDP in 2000 and to decline slightly in 2001, as oil prices are projected to decline. Economic efficiency will be enhanced through the restructuring/privatization of the country's three commercial banks and the privatization of the five largest public enterprises (in the water, electricity, telecommunications, transport, and petroleum sectors). Improving transparency through effective expenditure control and significant improvement in managing the State's oil proceeds, constitutes an additional important objective of the program.

The Republic of Congo joined the IMF on July 10, 1963 and its quota is SDR 84.6 million (about US$110.0 million. The Republic of Congo's outstanding use of IMF financing is SDR 21.14 million (about US$27.5 million).

Executive Board Assessment

Executive Directors welcomed the prospect of peace and economic renewal offered by the cease-fire agreements of late 1999 following devastating civil wars in 1997-1999.

Directors commended the authorities for the rapid progress to date in implementing measures necessary for political normalization and economic recovery. They noted that the peace process is mainly homegrown and has the broad support of society. Nevertheless, formidable challenges remain as the government faces the daunting task of consolidating the peace agreement, completing the process of demobilization, disarmament, and resettlement of former militia members and displaced persons, rehabilitating war-torn infrastructure, and rebuilding institutional, administrative, and statistical capacity. Success in these areas will help to lay the foundation for strong, sustainable economic growth that will reverse the steep decline in living conditions and solidify the gains in the peace process.

The current oil revenue windfall is particularly propitious, facilitating the financing of peace-related outlays. Directors urged the authorities to take advantage of the favorable prospects for oil revenues to normalize relations with the country's external creditors so as to allow the resumption of much-needed financial and technical assistance. They also urged the international community and multilateral development banks to be forthcoming in their assistance to the Congo.

Directors considered that the authorities' fiscal policies for 2000 and 2001 strike an appropriate balance between the requirements of emergency needs and reconstruction on the one hand, and the objective of reducing internal and external macroeconomic imbalances on the other. They welcomed the objective of increasing the primary fiscal balance. Directors emphasized that the attainment of the program's fiscal objectives will require that the fiscal stance be maintained, especially in the run-up to the anticipated 2001 elections.

Directors noted that medium-term fiscal viability will require greater reliance on non-oil revenues. They therefore urged the authorities to explore ways to diversify the economic base of the country in order to reduce dependence on the oil sector and promote sustainable growth in the medium term. Directors welcomed the projected increase in 2001 in non-oil revenues, mainly by improving the effectiveness of collection procedures and the strengthening of tax and customs administration, in particular through the elimination of ad hoc tax exemptions and the strengthening of procedures to monitor imports and petroleum production.

Directors emphasized the need for strengthening the mechanisms for expenditure control and monitoring, which are essential for effective budget execution. They noted the progress achieved to date, and urged the authorities to improve further the coverage, quality, and timeliness of expenditure data. Directors hoped that the Congo could benefit from external technical assistance in the course of implementing these measures.

Directors emphasized that good governance and increased transparency are critical for promoting the rule of law and investor confidence. In that context, they noted that the proposed agreement defining the financial relationship between the state and the national petroleum company is a good start, and urged the authorities to implement it without delay. Directors also suggested that the authorities undertake regular audits of the oil sector and strengthen accounting procedures as well as administrative capacity to better account for oil receipts from private sector partners.

Directors welcomed the authorities' determination to move ahead with their ambitious structural reform agenda, which offers the prospect of increased investment and efficiency gains in key sectors of the economy. The restructuring and privatization of the commercial banks represent an essential first step toward the creation of a well-functioning financial system. Dismantling of the inefficient public enterprises through privatization should alleviate the burden on the budget, while providing the impetus for much-needed restructuring and reorganization of these enterprises. Some Directors cautioned that the authorities should proceed with care in undertaking structural reforms so as not to overburden their implementation capacity.

Directors noted the serious disruptions to the collection of financial and economic statistics by years of armed conflict, and expressed concern that the deficiencies in the quality of national income, price, and balance of payments statistics impede a timely assessment of economic policies. They therefore urged the authorities to continue their efforts to improve the quality of basic macroeconomic data, with Fund technical assistance as necessary.

Directors welcomed the Congo's participation in regional economic institutions, and noted that membership in these organizations will help the authorities in their efforts to rebuild the economy.