IMF Executive Board concludes 2021 Article IV consultation with Republic of the Congo

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The Board of Directors of the International Monetary Fund (IMF) concluded the Article IV consultation with the Republic of the Congo on Friday, September 24, 2021.

The COVIDThe -19 pandemic and the oil shocks weighed heavily on the Congolese economy, but signs of recovery are appearing. Positive non-oil economic growth is expected this year, supported by the easing of lockdowns, the gradual roll-out of vaccines, social spending, domestic arrears repayments and some expansion of agricultural and mining activities. The contraction in oil production has slowed as access to oil fields and investment normalize; and the value of oil revenues and exports increases due to rising oil prices. Overall growth is expected to be around zero percent in 2021 with moderate inflation (2 percent) and a current account surplus (12 percent of GDP).

Fiscal policy continues to balance difficult trade-offs: tackling the pandemic, support essential for a resilient economic recovery, and prudent debt management.

The non-oil primary deficit is expected to widen to 17% of the non-oil deficit GDP in 2021, through spending on social assistance, health care, education and infrastructure. Development partner grants are lower than last year, but non-oil revenues are improving and cuts in transfers and subsidies to state-owned enterprises and cuts in spending on goods and services are helping to create fiscal space . The non-oil deficit is mainly financed by improving oil revenues.

Debt sustainability has been restored even though significant vulnerabilities remain, with overall debt forecast at 84% of GDP by the end of 2021. Substantial repayments of domestic arrears and external debt have been facilitated by the restructuring of external commercial loans, improved debt management, fiscal discipline and windfall oil revenues. The immediate liquidity needs are also supported by the G20 Debt Service Suspension Initiative (DSSI). However, liquidity risks and vulnerabilities to negative oil price shocks are high. Pending the clearance of external arrears and the conclusion of the remaining restructuring negotiations, the debt is classified as “distressed”.

In the medium and long terms, the main challenges will be to get out of fragility while adapting to climate change and to reduce oil revenues in response to the global transition to low carbon economies. Non-oil economic growth is expected to gradually recover through economic diversification and enhanced resilience, which will benefit from continued governance and business environment reforms, increased social and infrastructure spending. and prudent debt management. The outlook is subject to great uncertainty due to the risks of further pandemic waves, volatile prospects for oil revenues, climate change shocks and the successful implementation of reforms. On the positive side, investments in mining, oil and gas could increase with new discoveries on the ground, and accelerated reform implementation could catalyze more concessional finance.

Board assessment

“The executive directors agreed with the direction of the staff appraisal. They noted that the Republic of the Congo has been hit hard by the COVID-19 pandemic and oil shocks. The recovery is expected to take hold in 2022, as considerable uncertainty surrounds the outlook. Directors agreed that achieving the growth needed to move out of fragility and sustain progress in poverty reduction will require significant efforts to overcome structural barriers, build climate resilience and diversify the economy. Strengthening governance and transparency are essential to obtain much-needed financing from the Fund and development partners in support of the authorities’ adjustment efforts. In this context, Directors welcomed the authorities’ intention to enter into discussions with the IMF on a possible extended credit facility arrangement.

“Directors commended the authorities’ fiscal prudence and debt restructuring efforts that have contributed to debt sustainability. They agreed that fiscal policy should continue to support recovery in the short term, by increasing spending on health and social assistance, as well as the payment of domestic arrears. Noting that debt risks remain substantial, Directors stressed the importance of medium-term fiscal consolidation, increased debt management and transparency, and non-oil revenue mobilization. They recommended a complete overhaul of the petroleum sector tax regime, a reduction in transfers to public enterprises (SOE) and an improvement in the efficiency of public investments. Directors stressed that these measures would help create space for much needed social and infrastructure spending. Given the funding constraints, they supported the authorities’ plan to use the newly allocated SDRs for essential social programs.

“Directors commended on-going efforts to reduce vulnerabilities in the financial sector, including through domestic arrears clearance. Nevertheless, the persistently high bad debts require close and continuous monitoring of the banking sector.

“Directors called for further efforts to improve governance and transparency. They welcomed the progress made towards the adoption of a new anti-corruption law and encouraged a strong focus on the implementation of the anti-corruption architecture, supported by measures to improve state enterprise governance and more generally improve the management of public finances.

“Directors stressed the importance of advancing structural reforms to support economic diversification and adaptation to climate change. They encouraged the authorities to continue to improve the business environment, facilitate private sector investment and promote competitiveness.

Distributed by APO Group on behalf of the International Monetary Fund (IMF).

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