On July 21, 2014, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Republic of Congo.1
Recent economic developments in the Republic of Congo have been favorable. Growth in the last 5 years has averaged about 5 percent per year, higher than in regional peers. Gross oil revenue averaged more than US$8 billion per year in 2012 and 2013, equivalent to about 60 percent of Gross Domestic Product (GDP). Substantial fiscal savings have been set aside by virtue of the ongoing run of high international oil prices. However, poverty remains comparatively high, despite robust economic growth and large government spending. The poverty rate amounted to 46.5 percent in 2011 compared with 50.7 percent in 2005.
The overall fiscal surplus in 2013 remained sizable at 5.8 percent of GDP (13.9 percent of non-oil GDP) reflecting sizable oil revenues from high oil prices and increases in non-oil revenues. Public investment spending and arrears payments for social benefits and payments to suppliers pushed total cash government spending to about CFAF 2,735 billion in 2013, about 5 percent above the 2012 level when spending was raised in the aftermath of the Mpila ammunitions explosion, and up from CFAF 1,865 billion in 2011. External public debt has continued to trend upward, reaching 32 percent of GDP in 2013, up from 20 percent of GDP in 2010, when the Republic of Congo obtained debt relief through the Highly Indebted Poor Countries Initiative (HIPC) and the Multilateral Debt Relief Initiative (MDRI). Most of Congo’s borrowing is on concessional terms from China and is targeted at financing key infrastructure projects. Despite declining for the second year in a row, the Republic of Congo’s reserves at the Banque des Etats de l’Afrique Centrale (BEAC) continue to cover about 7 months of prospective imports of goods and services.
The country’s medium-term prospects are promising provided that progress is made with structural reforms and fiscal adjustment. The economy is projected to expand by about 6 percent per annum between 2014 and 2019, as a result of increases in oil production and the start of iron ore production. Inflation is easing, aided by lower food prices and real appreciation of the CFA franc. The government budget relies heavily on oil revenue. Therefore, oil price volatility and the exhaustibility of oil reserves could pose risks to macroeconomic stability and the authorities’ objective of attaining sustained high inclusive non-oil growth over the medium term. Other key risks to the economic outlook relate to a decline in oil prices associated with slower growth in advanced economies and major emerging markets, as well as social tensions arising from inequality and poor job opportunities.
Executive Board Assessment2
Directors commended the authorities for the overall good economic performance, including strong growth and low inflation. Directors noted that the medium-term economic outlook is favorable, underpinned by new mining production and the government’s ambitious investment program. They emphasized, however, that prudent policies and rigorous implementation of reforms will be critical to meet the country’s social and development needs, reduce poverty and unemployment, and boost non-oil growth, while ensuring macroeconomic stability.
Directors emphasized the need to contain the growth of government spending and recommended fiscal consolidation over the medium term to safeguard fiscal sustainability. They encouraged the authorities to strengthen the fiscal framework by adopting the non-oil primary balance as a fiscal anchor to insulate spending from the volatile and exhaustible nature of oil revenues. Directors agreed that broadening the tax base and reducing exemptions will also strengthen the fiscal position.
Directors supported the public investment program, aimed at improving infrastructure, diversifying the economy, and boosting employment. They stressed that increasing the efficiency of government investment will be key to achieving this goal. Directors underscored the need to strengthen public financial management to improve accountability, governance, and the quality of public spending. In this context, they called for expeditious enactment of the Fiscal Responsibility and Transparency law.
Directors noted the Republic of Congo’s low risk of debt distress. To preserve debt sustainability, they advised the authorities to continue to strengthen public debt management, particularly by developing a medium-term debt strategy and enhancing transparency.
To further promote the non-oil sector, Directors stressed the importance of structural reforms to strengthen the business climate, enhance financial development and increase access to finance by strengthening legal and informational systems. They recommended a careful analysis of the implications of recently introduced fiscal incentives for special economic zones. Directors also highlighted that programs designed to strengthen the education system and implement social spending to the poor should be well-targeted, evaluated and monitored to ensure their effectiveness.
Directors encouraged the authorities to fully comply with the regional CEMAC (Economic and Monetary Community of Central Africa) obligations. They welcomed the authorities’ support for the ongoing review of the CEMAC’s reserves pooling framework and stressed that the planned establishment of a sovereign wealth fund, investing in higher yielding assets, should be consistent with the regional reserves pooling architecture.