Republic of Congo—Letter of Intent
Brazzaville, April 11, 2003

Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. Köhler:

1. In November 2000, the Republic of Congo received financial support from the IMF under the post-conflict emergency assistance policy. In 2001, the Congolese government adopted an economic program for monitoring by IMF staff that was later revised and extended to end-2002. The staff-monitored programs (SMPs) were expected to pave the way for a three-year program that could be supported by IMF resources under the Poverty Reduction and Growth Facility (PRGF). However, performance under these programs was characterized by major slippages in the financial and structural areas, due mainly to the deterioration in fiscal discipline, accelerated implementation of the national reconstruction program of the country devastated by armed conflict, the organization of democratic elections, and the need to ensure the country's security.

2. During the first half of 2002, the Congo organized five successive national consultations (including a constitutional referendum in January, and presidential, legislative, local, and senatorial elections between March and June). The transition period has therefore ended and all the democratic institutions stipulated by the Constitution have been put in place. This return to peace and a normal democratic life has been welcomed by the international community and provides a good opportunity for the new government appointed on August 18, 2002 to implement the economic component of its comprehensive program entitled Nouvelle Espérance (New Hope), which covers the next seven years. The main objectives of the economic component are promotion of good governance, restoration of financial soundness, reconstruction of infrastructure, sustainable growth, and poverty reduction in line with the Millennium Development Goals. The new government will spare no effort to capitalize on this national democratic renewal in order to carry out its entire program with the support of donors and especially the Bretton Woods institutions.

3. In the financial area, based on the end-September 2002 results, the review conducted by Fund staff in October—November 2002 of the implementation of actions agreed in the May 3, 2002 letter of intent concluded that overall performance fell short by a wide margin. Major fiscal slippages were reported for both current and investment expenditure. Although there has been an acceleration of the public investment program, off-budget and advance payments practices, the organization of elections, and the lack of strict controls are at the root of these slippages. It is important to emphasize that the Congo has received practically no foreign financial assistance since 2001. As a result, pressure on domestic resources has been correspondingly stronger.

4. Regarding structural reforms, only two of the fourteen agreed indicators were observed by the expected target date. In particular, the main measure, pertaining to the audit of the 2001 consolidated accounts of the Société nationale des pétroles du Congo (SNPC), was not implemented because the contract with the international firm had not been signed and, more important, because the SNPC's 2001 consolidated accounts had not been finalized.

5. In light of this poor performance and the need to restore macroeconomic stability, the new government, with the support of the IMF mission in October—November 2002, identified adjustment measures to be applied during the remainder of 2002. Moreover, the government and the mission agreed on priority structural measures for implementation. Consequently, in the last quarter of 2002, fiscal performance, while still short of expectation, improved markedly and a more favorable trend emerged. In the structural area, five of the 12 indicators that had not been met by end-September were met by end-December 2002.

6. Fully aware of the need to normalize its relations with external creditors, the Congo has resumed current external debt service and has made partial payments on debt arrears to some multilateral donors (African Development Bank (AfDB), Arab Bank for Economic Development in Africa (BADEA), Central African States Development Bank (BDEAC), and the International Fund for Agricultural Development (IFAD)), despite its still fragile financial situation. Furthermore, there has been no recourse to oil-collateralized borrowing since October 2002.

7. These fiscal and structural measures, initiated in 2002 and strengthened under the 2003 Budget Law, were to constitute the framework for a new SMP in 2003. In order to consolidate these positive results and restore the country's credibility, particularly from the financial standpoint, the government's 2003 economic program, underpinned by the austerity budget approved by Parliament in January 2003, aims at (i) improving the health of public finances, (ii) strengthening transparency in petroleum sector transactions, (iii) freeing up the resources needed to reduce poverty, and (iv) normalizing relations with creditors and reducing government indebtedness to the banking system. The macroeconomic objectives are (i) real economic growth of 2.0 percent, despite a marked decline in petroleum production, (ii) a rate of inflation of 2 percent, and (iii) a primary budget surplus of 9.3 percent of GDP. The government has agreed with IMF staff on a series of quantitative indicators and structural benchmarks for monitoring progress in the context of the SMP covering the period January—June 2003 (Tables 1 and 2).

8. The focus of the government's priority actions in 2003 is on (i) mobilizing non-oil tax revenue, (ii) strictly adhering to budgetary procedures and controlling expenditures, and (iii) improving governance and transparency in the oil sector. The government is aware that observance of the indicators under the program is a prerequisite for initiating negotiations for a three-year program supported by the PRGF. Budgetary forecasts are based on a petroleum price of US$22 per barrel of Brent, or US$20 per barrel for Congolese crude oil. An oil price above this level will be used to fill the indicated financing gap and help the government in its efforts to normalize relations with external creditors through accelerated arrears payments and pay down the domestic social debt (pension and salary arrears).

9. Because of the downward trend in petroleum output, which will only be turned around in 2005, the mobilization of non-oil tax revenue assumes particular urgency. In this regard, the government intends to apply rigorously the new measures regarding forestry taxation (increase in the rate of the forestry royalty from 4 to 8.5 percent against an average of 17 percent in the Central African Economic and Monetary Community (CAEMC) area), the customs computer processing fee (1 percent of the import value), the renegotiation of special tax and customs agreements in order to reduce exemptions, and the computerization of revenue-collecting agencies. Moreover, the government will take the measures needed to significantly reduce exemptions for temporary imports. Treasury collection services will be revitalized and special emphasis will be placed on combating fraud through a reorganization of the profession of customs agents and the effective enforcement of disciplinary sanctions against those committing fraud. In addition, the government has taken steps to strengthen controls on government financial management and, in this connection, arrangements have been made to centralize all revenue in the Treasury.

10. Regarding expenditure, the government has taken steps to ensure strict adherence to budgetary procedures. To contain current expenditure, a system of monthly expenditure ceilings by ministry was introduced in January 2003. The computerization program also covers expenditure (civil service/payroll/pensions, investment, and expenditure chain). Computerization of the first module of the expenditure chain (civil service/payroll/pensions) will be launched by May 2003 and completed by end-2003. Investment spending will be kept below the ceiling thanks to close collaboration between the Commission des marchés de l'État (Government Procurement Commission) and the Délégation des Grands Travaux (Majors Works Unit) and full compliance with the principles of transparency and budgetary procedures. More specifically, budgetary allocations for investment expenditure financed from domestic resources will not be exceeded. Given the destabilizing effect on government finances of off-budget investment, commitments entered into in 2000—02 and not yet paid are being audited and the final results will be transmitted to the IMF by June 30, 2003. More generally, the government will carry out targeted value-for-money audits to ensure the efficacy and legality of government expenditures.

11. The government recognizes that sustained progress in good governance in the oil sector is needed to ensure public support for the reforms. The transfer in full to the Treasury of oil revenues and their allocation to financing budgetary priorities established by the government and voted by Parliament contributes to the establishment of transparency in the management of government resources. Completion and publication of the audit of the SNPC's 1999—2000 accounts and 2001 consolidated accounts by an independent, internationally recognized firm reflect the government's strong commitment to good governance. Furthermore, all the necessary arrangements will be made to produce and submit the company's 2002 consolidated accounts for examination by a firm of auditors. At the same time, the government is committed to carrying out an in-depth evaluation of the agreement signed by the government and the SNPC and to tighten, if needed, its control of this company by refocusing the SNPC's activities on the upstream petroleum operations. The review of operations in this sector will also be conducted by end-March 2004 through a comprehensive audit to improve the transparency of other petroleum companies, thereby covering the entire petroleum sector. More generally, the government will devote efforts to publishing, on a regular basis, information on the government's financial operations.

12. Recognizing the damaging effects of corruption and fraud on growth and development and in an effort to combat corruption, the government will submit to Parliament in November 2003 an anticorruption bill that will be drafted through a nationwide participatory process. By end-September at the latest, it will publish a decree regulating procurement contracts prepared with assistance from the World Bank, and make all procurement contracts without exception subject to this decree.

13. One of the government's priorities is to normalize its relations with all creditors. Consequently, taking advantage of the high oil prices and notwithstanding the liquidity constraints in the Treasury, the Congo has made payments both for current debt service and to reduce arrears. Creditors' reactions have been positive, as evidenced by the resumption by the AfDB of its institutional support project and the expected visit by a BADEA delegation in Brazzaville to discuss new financing. The government's intention is to pursue and intensify this policy by broadening it to include Paris Club and Brazzaville Club creditors. In the case of the latter, a supplementary audit of domestic debt for 2000, 2001, and 2002 will be carried out and completed by September 30, 2003. To reduce the burden of debt commitment, the Congolese authorities will abide by the time lines for reimbursement provided in the budget and will refrain from collateralized borrowing.

14. The government intends to reinvigorate its structural reform program, in particular the privatization of public enterprises, to create a favorable environment for private sector development. In this context, by April 30, 2003 at the latest, the obligation to request transfer authorization from the Ministry of Finance for payments abroad will be eliminated in conformity with the CAEMC's harmonized regulations on foreign exchange. While seeking to implement this framework, the government will continue to make best use of the advice of all its partners in these areas, particularly the World Bank. In the context of the SMP, the government intends to conclude the privatization of the remaining commercial bank-CAIC-by June 30, 2003 at the latest, thereby completing the restructuring of the banking sector.

15. In light of the weak social indicators, the government will make every effort to reduce poverty. To this end, the government will endeavor to reallocate budgetary expenditure to priority social sectors in the context of the 2004—06 three-year investment program. The government will engage in participatory consultations to finalize the interim poverty reduction strategy paper (I-PRSP) by end-September 2003.

16. The government undertakes to communicate monthly to the Fund staff any information and documentation required for regular monitoring of the program (see attached list).

17. The government wishes to emphasize that the Congo is a post-conflict country. It nonetheless considers compliance with the commitments entered into in this letter of intent to be binding and essential to paving the way for negotiation of a program under the PRGF, in order to accelerate the country's reconstruction on sound foundations and effectively reduce poverty.

Sincerely yours,

/s/