Public Information Notice No. 07/47

Public Information Notice: IMF Executive Board Concludes 2007 Article IV Consultation with the Republic of Congo

April 26, 2007

On April 25, 2007, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Republic of Congo.¹

Background

The implementation of the PRGF-supported program was broadly satisfactory in 2004-05; but expenditure overruns and delays in structural reforms pushed the program off track in 2006. Discussions are continuing on a staff-monitored program aimed at establishing a solid track record that could pave the way for resuming discussions on the PRGF-supported program.

Macroeconomic performance was mixed in 2006. Real GDP growth is estimated at 6.1 percent in 2006, reflecting higher oil prices and production as well as robust non oil GDP growth. However, inflation accelerated in 2006 to 8.2 percent (year-on-year), fueled by the expansionary fiscal policy and transportation disruptions. The external current account registered a large surplus on account of higher oil export receipts.

Fiscal performance was disappointing. Oil and non oil revenues were higher than programmed, but expenditure slippages are estimated at 5 percent of GDP at end-2006. As a result, the non oil primary deficit rose to an estimated 45 percent of non oil GDP in 2006, a large increase from 27 percent of non oil GDP in 2005. Moreover, the composition and quality of public spending deteriorated, raising concerns about budgetary execution and expenditure control.

Broad money expanded rapidly in 2006, reflecting the unsterilized increase in net foreign assets stemming from higher oil prices. Gross foreign assets soared to 29 percent of GDP in 2006. Credit to the private sector remained sluggish.

Debt relief has improved the external debt indicators, but accelerated new borrowing could undermine debt sustainability. Following debt relief granted by the Paris Club creditors and multilateral creditors, the debt stock declined to 86 percent of GDP in 2006 from 213 percent of GDP in 2004. However, recent new external borrowing commitments of $829 million as of end-2006 could jeopardize debt sustainability.

On the structural front, performance was mixed in 2006. While the certification report by the national audit office on conflict of interest in oil management was submitted to the government and published, most other structural measures were not met. The audit of the awarding of the Marine XI oil concession was completed and published with a delay. It revealed serious weaknesses in the decision-making process, which could lead to significant conflicts of interest. Progress in implementing the triggers for the Completion Point for the Heavily Indebted Poor Countries (HIPC) Initiative has been slow.

The outlook for 2007 and the medium term is uncertain. On the positive side, higher oil prices and the prospects for debt relief under the HIPC have created favorable conditions that could pave the way for higher sustainable growth and enable Congo to reach the Millennium Development Goals. On the negative side, the rapid increase in government spending, against the background of significant absorptive and administrative capacity constraints, could jeopardize macroeconomic stability, fiscal sustainability, and external competitiveness.

Executive Board Assessment

Directors welcomed the acceleration of economic growth in recent years, reflecting favorable oil market conditions as well as higher non-oil activity. Looking forward, Directors emphasized that containing inflation, strengthening public financial management, enhancing financial intermediation, and improving governance and the business climate are crucial for achieving the authorities' growth objectives and making progress toward the Millennium Development Goals.

Directors regretted the fiscal slippages in 2006 which contributed to the failure to complete the third review under the PRGF arrangement. They supported the authorities' intention to limit spending in 2007 as part of efforts to restore fiscal sustainability and reduce inflationary pressures—key priorities in the context of the Republic of Congo's membership in a currency union. Directors considered that the draft 2007 budget was broadly appropriate. They noted that it would help meet pressing investment needs without jeopardizing macroeconomic stability. Nevertheless, Directors stressed that further actions will be needed to achieve fiscal sustainability, and that these actions should be framed within a medium-term fiscal strategy, incorporating a trajectory to reduce the non-oil deficit.

Directors encouraged the authorities to make further progress in public financial management, including by prioritizing expenditure—with appropriate emphasis on health and education. Also, it will be important to introduce a functional classification of the budget and to eliminate exceptional spending procedures. Directors emphasized that these measures are essential to improve the quality of spending and to increase the growth potential of the economy. While recognizing the need for improved infrastructure, Directors emphasized that progress in this area would require greater transparency in procurement.

Most Directors expressed concern about the accumulation of non-concessional debt, and called on the authorities to adhere strictly to their commitment to control future borrowing and to work toward debt sustainability in the context of the HIPC and the MDRI—using the DSA as a guide for future borrowing. A few Directors cautioned, however, that borrowing limits should not unduly constrain growth opportunities.

Directors considered that recent steps to improve oil sector transparency are in the right direction. However, they called upon the authorities to strengthen the sector's finances and reduce oil subsidies. They looked forward to the audit of the national oil refinery (CORAF). More generally, Directors called for an acceleration of governance reforms, including through the setting up of an independent anticorruption committee and the passage of a comprehensive anticorruption law. Directors welcomed the authorities' intention to implement the recommendations of the audit of the Marine XI oil concession, and they called on the government to adhere to the provisions of the Extractive Industries Transparency Initiative.

Directors welcomed the authorities' intentions to develop the financial sector in support of their efforts to diversify the economy and increase financial intermediation. They expressed concern about the privatization of a troubled bank in 2006 in a nontransparent and costly way for the budget. Looking ahead, Directors called for a simplification of licensing procedures and improved access to financial services. It would also be useful to move away from interest rate controls, in consultation with the Banque des États de l'Afrique Centrale.

Directors observed that the exchange rate peg within the Communauté Économique et Monétaire de l'Afrique Centrale (CEMAC) continues to provide a credible anchor for economic policy. However, the real appreciation of the currency will need to be monitored carefully to maintain external competitiveness. Directors encouraged the authorities to spearhead trade reforms in the context of the CEMAC, adopt a transparent trade regime, minimize bureaucratic procedures for exports and imports, and gradually phase out exemptions. They noted that lowering the common external tariff would require the cooperation of the other CEMAC partners.

Directors underscored that achieving the medium-term growth objectives will require improving the business environment and lowering costs. They noted that liberalizing domestic energy and commodity prices will help foster greater private sector activity, and welcomed the recent decision to liberalize the price of cement.

Directors encouraged the authorities to reach understanding with staff on a

staff-monitored program that could bring the PRGF arrangement back on track. Most Directors also expressed concern about the limited progress toward implementing the triggers for the HIPC completion point. A few Directors suggested that the HIPC triggers should be

re-examined. Directors urged the authorities to implement corrective steps promptly, thereby moving forward quickly to unlock debt relief and pave the way for higher growth and poverty reduction.

Directors regretted that gaps in the provision of economic data continue to hamper effective surveillance and the monitoring of the program. They called upon the authorities to ensure a regular and timely provision of high quality data, including details on external financing.

¹ Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.