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The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Republic of Congo on Friday, September 24, 2021.
The COVID-19 pandemic and oil price shocks have taken a deep toll on the Congolese economy but there are signs of recovery. Positive non-oil economic growth is expected this year, buoyed by the easing of lockdowns, gradual vaccine rollout, social spending, domestic arrears repayments, and some expansion of agricultural and mining activities. The contraction of oil production has slowed as oil field access and investment normalize; and the value of oil revenues and exports are rising on the back of higher oil prices. Overall growth is projected to be around zero percent in 2021 with subdued inflation (2 percent) and a current account surplus (12 percent of GDP).
Fiscal policy continues to balance difficult trade-offs: the fight against the pandemic, essential support for a resilient economic recovery, and prudent debt management.
The non-oil primary deficit is expected to widen to 17 percent of non-oil GDP in 2021, driven by spending on social assistance, health care, education, and infrastructure. Grants from development partners are lower than last year but non-oil revenues are improving and reductions in transfers and subsidies to state-owned enterprises and cuts in goods and services spending are helping create fiscal space. The non-oil deficit is mainly financed by improved oil revenues.
Debt sustainability has been restored though significant debt vulnerabilities remain, with overall debt anticipated at 84 percent of GDP by end-2021. Substantial repayments of domestic arrears and external debt have been facilitated by restructuring of external commercial loans, improved debt management, fiscal discipline, and oil revenue windfalls. 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 elevated. Pending clearance of external arrears and conclusion of remaining restructuring negotiations, debt is classified as being in “distress”.
Over the medium and long terms, the main challenges will be exiting fragility while adapting to climate change and reduced oil revenues in response to the global transition to low-carbon economies. Non-oil economic growth is expected to gradually recover driven by economic diversification and resilience-building—which will benefit from continued governance and business environment reforms, increased social and infrastructure spending, and prudent debt management. The outlook is subject to high uncertainty amid risks of new waves of the pandemic, volatile oil revenue prospects, climate change shocks, and successful reform implementation. On the upside, investment in mining and oil and gas could rise with new field discoveries and accelerated reform implementation could catalyze more concessional financing.
Executive Board Assessment
“Executive Directors agreed with the thrust of the staff appraisal. They noted that the Republic of Congo has been hit hard by the COVID-19 pandemic and oil price shocks. The recovery is expected to take hold in 2022, while considerable uncertainty surrounds the outlook. Directors agreed that achieving the growth needed to exit fragility and sustain progress in poverty reduction will require strong efforts to address structural impediments, build climate resilience, and diversify the economy. Strengthened governance and transparency is critical to secure 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 engage in discussions with the Fund on a possible Extended Credit Facility arrangement.
“Directors welcomed the authorities’ fiscal prudence and debt restructuring efforts that have contributed to debt sustainability. They agreed that fiscal policy should continue to support the recovery in the near term, through increased spending on health and social assistance, as well as payment of domestic arrears. Noting that debt-related risks remain substantial, Directors stressed the importance of medium-term fiscal consolidation, enhanced debt management and transparency, and non-oil revenue mobilization. They recommended a comprehensive review of the fiscal regime of the oil sector, reduced transfers to state-owned enterprises (SOEs), and improved public investment efficiency. Directors highlighted that these measures would help to create space for much-needed social and infrastructure spending. Given financing constraints, they supported the authorities’ plan to use the newly allocated SDRs for critical social programs.
“Directors welcomed ongoing efforts to reduce financial sector vulnerabilities, including through domestic arrears clearance. Nonetheless, the still high non-performing loans call for continued close monitoring of the banking sector.
“Directors urged further efforts to improve governance and transparency. They welcomed the progress toward adopting a new anti-corruption law and encouraged strong focus on implementing the anti-corruption architecture, supported by measures to improve SOE governance and enhance public financial management more broadly.
“Directors emphasized the importance of advancing structural reforms to support economic diversification and adaptation to climate change. They encouraged the authorities to continue improving the business environment, facilitating private sector investment, and fostering competitiveness.”
Distributed by APO Group on behalf of International Monetary Fund (IMF).
