Press Release No. 15/350

Press Release: IMF Executive Board Concludes 2015 Article IV Consultation with the Republic of Congo

July 22, 2015

On July 17, 2015, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Republic of Congo on a lapse-of-time basis, and considered and endorsed the staff appraisal without a meeting.^{1 2}

Growth was strong and inflation moderated in 2014 but the Republic of Congo has been hit hard by the oil price shock. Growth rose to 6.8 percent in 2014, driven by a rebound in oil production. Inflation eased to 0.5 percent at end–2014 (y/y), driven mainly by lower global food prices. The fiscal deficit amounted to 8.5 percent of GDP in 2014, a near doubling from 2013, owing mostly to increased spending and the lower oil revenues. The fiscal deficit was mainly financed by borrowing from the regional central bank and by drawing on government deposits held abroad. The current account deficit widened by one percent of GDP to 5½ percent of GDP in 2014. However, official reserves held at the BEAC increased by CFAF 189 billion to CFAF 2,698 billion at end-2014, owing to the repatriation of commercial banks’ deposits and government deposits held abroad. As a consequence, the Republic of Congo’s international reserves and government deposits at the regional central bank remain at about 9½ months of prospective imports and 20 percent of GDP, respectively, both the highest among members of the Central African Economic and Monetary Community (CEMAC). Public debt now amounts to about 36½ percent of GDP, up from 32 percent of GDP in 2013 and from 20 percent of GDP in 2010, following the HIPC Completion Point. The authorities are taking corrective fiscal measures by reining in investment expenditure in a supplementary 2015 budget.

Robust growth in recent years has not resulted in a broad-based improvement in living standards. Growth averaged 5 percent over the last 5 years as government spending was ramped up, financed mostly by rising oil revenues. This translated into increased activity in the agriculture, industry and services sectors. Nevertheless, the Republic of Congo continues to suffer from high rates of poverty and inequality, large infrastructure gaps, and important development challenges.

The near- and medium-term outlook will be shaped by developments in the oil sector and the path and quality of fiscal adjustment. Oil production is expected to decline in 2015 mainly due to the delay in the coming on stream of a new oil field. GDP growth in 2015 is projected at 1 percent and to average about 3 percent per annum during 2015–20. The lower international oil price is projected to lead to deterioration in the current account and continued pressure on the budget. Over the period to 2018, the expected increase in oil production from the coming on stream of new oil fields should improve fiscal and external balances. From 2018, this trend is likely to reverse as oil production declines. Non-oil growth is projected to slow to about 3 percent in 2015–16, as public investment spending contracts and mining projects are delayed due to the uncertain global outlook for iron ore. Inflation is projected at 2½ percent over the medium term, underpinned by the pegged exchange rate regime. Risks to the outlook relate to oil price volatility, persistently low oil prices, accumulation of domestic payment arrears, and domestic instability.

Executive Board Assessment

Growth was strong and inflation moderated in 2014. Growth rose to 6.8 percent in 2014, driven by a rebound in oil production. Inflation eased to 0.5 percent at end–2014 (year-on-year), driven mainly by lower global food prices.

But Congo has been hit hard by the oil price shock. The fiscal deficit amounted to 8.5 percent of GDP in 2014, a near doubling from 2013, owing mostly to increased spending and the lower oil receipts. The current account balance also deteriorated.

The economy is projected to expand by about 3 percent per annum during 2015–20 as new oil fields come on stream. Though necessary, the fiscal consolidation implied by the supplementary budget is expected to result in growth slowing to 1 percent in 2015. Risks to the outlook relate to oil price volatility, persistently low oil prices, accumulation of domestic payment arrears, and domestic instability. While Congo’s real effective exchange rate is broadly in line with macroeconomic fundamentals, the performance of non-oil exports is weak and points to competitiveness concerns.

The 2015 supplementary budget should be passed swiftly and its implementation monitored closely. The authorities should weigh carefully their response to revenue shortfalls and expenditure overruns. Maintaining deposits at the regional central bank would provide a buffer in the event of additional adverse shocks. Contingency plans should be prepared to address downside risks.

Safeguarding fiscal and debt sustainability will require a coherent medium-term fiscal adjustment strategy. In view of the limited remaining lifetime of oil reserves, and continued low prices, fiscal policy should be anchored on a gradual multi-year reduction in the non-oil primary deficit. The rise in government debt since the 2010 HIPC/MDRI relief in addition to the drawdown of oil reserves, underscores the importance of continued adherence to a prudent borrowing policy that keeps the NPV of net debt below indicative DSA thresholds. This should also be coordinated within the context of a revised CEMAC macroeconomic surveillance framework (See CEMAC Staff Report).

Public expenditure should increasingly be oriented towards policies to support inclusive growth and pro-poor programs. The link between the actions in the NDP and the annual budgets should be clearly established during budget preparation, with a stronger focus on economic diversification. The selection, evaluation, and monitoring of investment projects, as well as the budgeting of their operating and maintenance costs, need to be strengthened. More broadly, the authorities are encouraged to follow up on the recommendations from the PEFA and PEMFAR to strengthen budget execution, procurement and disbursement processes and improve the efficiency and quality of spending.

Fiscal adjustment should be underpinned by improved revenue policies and PFM reforms. There is scope to boost non-oil revenues by limiting the use of reduced VAT rates and tax exemptions whilst reinforcing tax and customs administration. PFM reforms should focus on improving the quality of investment, resolving the accumulation of arrears, and ensuring comprehensive fiscal reporting that consolidates off-budget spending, possibly with IMF technical assistance.

Financial sector reforms are essential to underpin growth, diversification and reduce inequality. The financial sector should benefit from the authorities’ plans to revise its strategy in this sector with a view to covering recent innovations and consistency with regional objectives. Key priorities remain the improvement of the credit registry, establishing a property registry and a unique window to register land titles, and strengthening the judicial framework. Promoting broader usage of microfinance and mobile banking should also enhance financial access.

External sustainability should aim at maintaining a level of reserves above five months of imports to support the exchange rate peg. The decline in oil prices, and its impact on foreign exchange reserves, reinforces the importance of compliance with CEMAC reserves pooling requirements to underpin the pegged exchange rate arrangement. In this regard, staff welcomes the repatriation of part of Congo’s overseas deposits and recommends a continuation of this policy.

The quality and timeliness of macroeconomic statistics needs urgent strengthening, to help improve macroeconomic analysis and policymaking and ensure compliance with obligations under Article VIII. Progress needs to be made in improving capacity and operationalizing the NSSD. In particular, macroeconomic statistics should be unified across government agencies and the national statistics agency should have adequate funding.

It is recommended that the next Article IV consultation take place on the standard 12–month cycle.