Press Release No. 98/30

The International Monetary Fund (IMF) approved a loan for the Republic of Congo equivalent to SDR 7.24 million (about US$10 million), under the IMF’s emergency post-conflict assistance¹, to support the government’s economic program for 1998.

Background

The civil war of June-October 1997 resulted in several thousands of casualties and inflicted massive destruction in Brazzaville, causing severe damage to the economy and the administrative, financial, and social infrastructure, and adversely affecting macroeconomic stability. With financial policies driven by the civil war, and despite a substantial increase in revenues from the oil sector, public finances deteriorated, and in 1997 the budget deficit widened to 7 ½ percent of GDP, leading to a large accumulation of domestic and external arrears.

Upon assuming power, in November 1997, the new government implemented a three-month emergency program, with support from United Nations agencies, the European Union, France, and non-governmental organizations to restore basic living conditions in terms of security, health, food, and shelter, and to begin rebuilding the country’s institutional, administrative, and statistical capacity.

Medium-Term Strategy and the 1998 Program

The Congolese authorities envisage a two-stage approach to address both the severe economic and developmental challenges exacerbated by the civil war, and the near-term emergency reconstruction needs. The first priority is to consolidate the security of persons and property, reconstruct the central administration and institutional capacity, restore conditions conducive to macroeconomic stability, and rebuild the infrastructure in Brazzaville. The second priority is to move, by early 1999, to a comprehensive multi year economic reform program that could be supported by an Enhance Structural Adjustment Facility (ESAF)².

The main macroeconomic objectives of the 1998 program are to resume non-oil economic growth, lower inflation, reduce the external current account deficit as a ratio of GDP, and regularize external arrears. Real non-oil GDP is projected to increase by 2.5 percent in 1998, while the 12-month consumer price inflation rate is targeted to decline to 1.1 percent in 1998 from 13.1 percent in 1997 (on an end-year basis). The external current account deficit, excluding grants, is programmed to fall to 12.4 percent of GDP in 1998, from 13.2 percent in 1997.

To support the program objectives, the primary fiscal balance is projected at 11.9 percent of GDP in 1998, from 6.4 percent in 1997. This calls for stepped up efforts to collect the government’s revenue from the oil companies under existing oil production-sharing arrangements and improve non-oil revenue collection through, inter alia, the effective implementation of the tax measures included in the 1998 budget, in particular the extension of VAT and the early strengthening of tax and customs administration and collection. On the spending side, a prudent wage policy stance and a strict adherence to expenditure priorities and control procedures will further support the overall fiscal objectives.

The program is also expected to help mobilize timely and adequate technical and financial assistance from the donor community, with the financing gap in 1998 to be covered by exceptional assistance from multilateral and bilateral official sources, as pledged at the June 1998 donors’ meeting.

Structural Reforms

Rapid progress in structural reforms is another critical part of the strategy to lay the basis for an open, market-based economic system, and to pave the way for increased foreign direct investment flows, notably in the non-oil sector. Longer-term structural reform aims at institution-building and rehabilitation of damaged infrastructure. In the near-term, the authorities’ priorities are to restructure the banking system, begin privatizing public enterprises, open key economic sectors to competition, and pursue civil service reform. Based on the assessment by the regional bank supervision agency (COBAC) of the solvency of financial institutions, the authorities will initiate a divestiture program which is expected to include the sale of shares in a number of state-owned banks. One of the two state-owned insurance companies is already being liquidated and the other, which is insolvent, will be restructured and privatized. The six major nonfinancial public sector enterprises are targeted for privatization, with the process to be initiated through placement on the market before end-1998. The civil service reform has been resumed, with the launching of a physical census of all civil servants.

Addressing Social Needs

Social safety net protection in the Congo, most of which has been provided directly by state-owned enterprises and family networks, has been severely eroded in recent years, particularly during the conflict. In the short term, the emergency program, which accords priority to the health and education sectors, should help alleviate the serious pressures on the most vulnerable segments of the population, while laying the basis for economic recovery and employment creation. The government also intends to undertake a comprehensive reform of the disorganized and insolvent social security systems, comprising the Civil Service Pension Fund and the National Social Security Fund. The first steps will be to update the census of pensioners and reconstitute the employer/employee roster.

The Challenge Ahead

The main factors that could affect program implementation include an improvement in the security situation of the country and a strengthening of the authorities, still limited, though improving, capacity to formulate and implement macroeconomic and structural measures in the context of uncertainties surrounding government oil revenue--the country’s main source of fiscal revenue. While the authorities’ domestic revenue mobilization efforts are bearing fruits, the tight government financial situation calls for a clear prioritization of expenditure programs to ensure that minimum basic needs in public health, education, and the social sectors are met. On the financing side, recovery of oil revenue owed to the country by the private oil companies will be essential to complement the sources of financing already identified.

The Republic of Congo joined the IMF on July 10, 1963, and its quota³ is SDR 57.90 million (about US$77 million). Its outstanding use of IMF financing currently totals SDR 20.15 million (about US$27 million).

Republic of Congo: Selected Economic Indicators 1996* 1997* 1998** (Percent change) GDP at constant prices Oil 13.2 14.7 15.5 Non-oil 2.8 -11.3 2.5 Consumer prices 1/ End-of-period 9.7 13.1 1.1 (Percent of GDP) External current account balance (deficit-) Excluding grants -52.5 -13.2 -12.4 Primary fiscal balance 2/ 10.8 6.4 11.9 Sources: Ministry of Finance and Budget; and IMF staff estimates and projections. *Estimate. **Program. 1/ Consumer price index for African households in Brazzaville. 2/ Defined as revenue excluding grants minus noninterest current expenditures, domestically financed capital expenditure, and net lending. 1 For a country to be eligible for IMF emergency post-conflict assistance, which was created in 1995, certain conditions must be met: disruption of institutional and administrative capacity; sufficient capacity for planning and policy implementation; demonstrated commitment; urgent balance of payments need; catalytic role of Fund support; concerted international effort; and intention by the member to move in a short time frame to an upper credit stand-by or extended arrangement. 2 The ESAF is a concessional IMF facility for assisting eligible members that are undertaking economic reform programs to strengthen their balance of payments and to improve their growth prospects. ESAF loans carry an interest rate of 0.5 percent a year and are repayable over 10 years, with a 5 ½-year grace period. 3 A member’s quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its share in the allocation of SDRs.