The World Bank 1818 H Street, NW REPUBLIC OF CONGO Washington, DC 20433 Second Edition Phone: (202) 473-1000 Fax: (202) 477-6391 ECONOMIC UPDATE September 2015 The Road to Economic Development Fiscal Buffer in a Context of Volatile Oil Prices GMFDR AFRICA Report No.: AUS11355 REPUBLIC OF CONGO ECONOMIC UPDATE Second Edition | September 2015 The Road to Economic Development Fiscal Buffer in a Context of Volatile Oil Prices GMFDR AFRICA TABLE OF CONTENTS ABBREVIATIONS AND ACRONYMS............................................................................................................. vii ACKNOWLEDGMENTS................................................................................................................................... ix FOREWORD....................................................................................................................................................... xi EXECUTIVE SUMMARY................................................................................................................................. xiii PART ONE............................................................................................................................................................ 1 I.  THE CONGOLESE ECONOMY: RECENT DEVELOPMENTS AND OUTLOOK.................................. 3 Key messages ............................................................................................................................................................3 1.1  Recent economic developments..........................................................................................................................4 1.1.1  A solid real sector macro-economic framework in 2014 ...........................................................................4 1.1.2  Low inflation in a context of uncertainty regarding the strength of the euro.............................................7 1.1.3  Worsening current account deficit............................................................................................................8 1.1.4  First fiscal deficit in over a decade.............................................................................................................9 1.2  Congo’s economic outlook for 2015–2017.........................................................................................................9 1.2.1  Moderate real sector growth expected.......................................................................................................9 1.2.2  Low inflation outlook.............................................................................................................................12 1.2.3  Significant fiscal and current account deficits expected ..........................................................................13 1.2.4  The Congolese economy remains vulnerable to various internal and external risks..................................14 1.3  Major economic policy issues...........................................................................................................................15 1.3.1  Weak fiscal planning that leads to repeated budget revisions...................................................................15 1.3.2  Operation on undocumented immigrants has led to lower economic growth.........................................16 1.3.3  Fiscal surpluses vs the apparent incapacity of the Treasury to pay its invoices on time ............................16 1.3.4  Gradual increase in wages in a context of reduced revenues is a source of cash flow problems.................17 1.3.5  Continued deterioration in the quality of government financial data......................................................18 iii PART TWO......................................................................................................................................................... 19 II. MACROECONOMIC AND FINANCIAL MANAGEMENT OF THE VOLATILITY AND UNCERTAINTY OF CONGO’S OIL RESOURCES...................................................................... 21 Key messages ..........................................................................................................................................................21 2.1  Recent developments and outlook for the oil sector: production and price.......................................................22 2.1.1  Highly volatile production and price......................................................................................................22 2.1.2  Favorable production outlook in a context of very low prices.................................................................23 2.2  Fiscal context in Congo....................................................................................................................................23 2.3  Toward better management of oil revenues.......................................................................................................24 2.3.1  The NOPB should be the key budget tracking indicator .......................................................................25 2.3.2  Fiscal tracking rules................................................................................................................................26 2.3.3  Financial sustainability criteria...............................................................................................................29 2.3.4  Level of savings required in “good years”................................................................................................30 2.3.5  Fiscal institutions...................................................................................................................................32 2.4  Implications of current oil prices for fiscal management...................................................................................33 BIBLIOGRAPHY............................................................................................................................................... 35 ANNEXES .......................................................................................................................................................... 37 LIST OF FIGURES Figure 1.1:  African Oil Exporting Countries – Annual Real GDP Growth, 2014.......................................................4 Figure 1.2:  Annual Growth of the Production Sectors in Congo, 2005–2014............................................................5 Figure 1.3:  Annual Growth of the GDP Components in Congo, 2012–2014............................................................6 Figure 1.4:  Demand Components of GDP in Congo, as a percentage of GDP, 2012–2014.......................................6 Figure 1.5:  Inflation in 2014: World, Sub-Saharan Africa, CAEMC and Congo........................................................7 Figure 1.6:  Components of Inflation in Congo in 2014.............................................................................................7 Figure 1.7: US$/CFAF Exchange Rate in 2014..........................................................................................................8 Figure 1.8:  BEAC Policy Rate (TIAO) in 2013 and 2014..........................................................................................8 Figure 1.9:  Global Growth Projections, 2015–2017.................................................................................................10 Figure 1.10: Growth Projections for Sub-Saharan Africa, Nigeria, Angola and Congo, 2012–2017............................10 Figure 1.11: Oil and Non-Oil Growth Projections, 2015–2017.................................................................................11 Figure 1.12: Oil and Timber Price Projections, 2008–2017........................................................................................11 Figure 1.13: Inflation of the Components of GDP in Congo (right axis shows exports and imports), 2011–2017.....12 Figure 1.14: Congo – Exchange Rate (right axis shows the nominal exchange rate)....................................................12 Figure 1.15: GDP Deflator and Terms of Trade, 2011–2017......................................................................................12 Figure 1.16: Congolese Government revenues and deficit in 2015, as a ratio to GDP................................................13 Figure 1.17: Fiscal Surpluses and Payment of Arrears in Congo, 2003–2014..............................................................17 Figure 1.18: Congolese Government Expenditure, 2009–2016..................................................................................18 Figure 2.1:  Oil Production in Congo, 2005–2014...................................................................................................22 Figure 2.2:  Crude Prices – WTI (West Texas Intermediate) and Brent, 2000–2012..................................................22 Figure 2.3:  Global Oil Price Scenarios, 2013–2020 .................................................................................................23 iv REPUBLIC OF CONGO – ECONOMIC UPDATE Figure 2.4:  Congolese Government Expenditures, 2005–2014, as a ratio to GDP....................................................24 Figure 2.5:  Congo’s NOPB, 2000–2014, as a percentage of GDP............................................................................26 Figure 2.6:  NOPB and the Overall Fiscal Balance in Congo, 2000–2014, as a percentage of GDP..........................26 Figure 2.7:  Potential Annual Savings based on NOPB rules in Congo, 2000–2024, in CFAF billion.......................26 Figure 2.8:  Oil Price Trends by Projection Method, 2001–2018...............................................................................28 Figure 2.9:  NOPB, Financial Assets and Wealth, 2013–2034, as a percentage of NOGDP......................................30 Figure 2.10: Appropriate Size of the Congolese Stabilization Fund, 2011–2015, in CFAF billion..............................30 Figure 2.11: Congolese Equity Fund Principal in 2035, in CFAF billion...................................................................31 Figure 2.12: Impact of the Zero Deficit Policy on the Congolese Economy in 2015 and 2016...................................34 Figure 2.13: Potential Impact of Unrestrained Public Spending on the Congolese Economy in 2015.........................34 LIST OF BOXES Box 1.1: Entry into Operation of the Maloukou Industries...........................................................................................5 Box 1.2: Strategic Policy of Extractive Industry Companies in Congo.........................................................................11 Box 1.3: Public Finance Reforms Under Way..............................................................................................................17 Box 2.1: Decline in the Price of Oil and the 2015 Budget..........................................................................................25 Box 2.2: Examples of Price Smoothing in Other Countries.........................................................................................27 LIST OF TABLES Table 1.1: Key Congolese Macroeconomic and Poverty Indicators, 2012–2017........................................................14 Table 2.1: Congolese Oil Price Trends, 2001–2014...................................................................................................32 Table A.1: Republic of Congo – Selected macroeconomic indicators, 2010–2017.....................................................37 Table A.2: Republic of Congo – Real GDP growth rates, 2011–2017.......................................................................39 Table A.3: Republic of Congo – Sectoral contribution of real output, 2011–2017, percent of GDP..........................40 Table A.4: Republic of Congo – Use of resources at current prices, 2010–2016, percent of GDP..............................41 Table A.5: Republic of Congo – Central Government Operations, 2011–2017, percent of GDP..............................42 Table A.6: Republic of Congo – Central Government Operations, 2011–2017, percent of non oil GDP..................43 Table A.7: Republic of Congo – Executed Budget, 2008–2014. Percent of total budget............................................44 Table of Contents v ABBREVIATIONS AND ACRONYMS BEAC Bank of Central African States PEFA Public Expenditure and Financial BRICS Brazil-Russia-India-China-South Accountability Africa PEMFAR Public Expenditure Management BTP Construction and Public Works and Financial Accountability Review CCDB Audit and Budget Discipline Office PIH Permanent Income Hypothesis CAEMC Central African Economic and PND National Development Plan Monetary Community PPP Purchasing Power Parity CFA African Financial Community PVC Polyvinyl chloride DRC Democratic Republic of the Congo RGCP General Public Accounting DSA Debt Sustainability Analysis Regulations EIU Economist Intelligence Unit SIDERE Integrated Government Revenue and GDP Gross Domestic Product Expenditure System IMF International Monetary Fund SSA Sub-Saharan Africa INS National Statistics Institute TIAO Auction Rate MPIH Modified Permanent Income TOFE Fiscal Reporting Table Hypothesis Mb Millions of Barrels US$ U.S. dollar NOGDP Non-Oil GDP US$/b Dollars/Barrel NOPB Non-Oil Primary Balance WTI West Texas Intermediate OPPA Advance Payment Order vii ACKNOWLEDGMENTS T his second edition of the Republic of Congo Republic of the Congo), Albert G. Zeufack (Practice Economic Update was prepared by a team Manager, Global Practice for Macroeconomics and consisting of Fulbert Tchana Tchana (Task Fiscal Management, MFM-AFR2), Sylvie Dossou Team Leader) and Etaki Wa Dzon. (Resident Representative in the Republic of Congo The report was prepared in close cooperation with until April 2015) and Djibrilla Adamou Issa (Resident a government team coordinated by Michel Niama, Representative in the Republic of Congo since April Director-General of the Economy and including Jean- 2015), Yisgedullish Amde (Program Coordinator for Christophe Okandza, Director-General of Planning the Republic of Congo and the Democratic Republic and Development, Atta Mwandza M’Akangalema, of the Congo), Jan Walliser (Country Manager for Economic and Statistics Advisor to the Minister the Republic of Congo and the Democratic Republic of State, and Ted Galouo Sou, Director of Natural of the Congo from July to December 2014) and Resources in the Ministry of Finance. Ahmadou Moustapha Ndiaye (Country Manager for It benefited from the insights of several peer the Republic of Congo and the Democratic Republic reviewers including Ndiame Diop, Andrew Burns of the Congo since January 2014). and Geneviève F. Boyreau, as well as from com- Clémentine Maoungou and Tessa Mayouya ments and recommendations shared by Emmanuel provided editorial support, while Josiane Maloueki Pinto Moreira (Lead Economist and Program Leader Louzolo and Karima Laouali Ladjo provided invalu- for the Republic of Congo and the Democratic able assistance during the report’s preparation. ix FOREWORD T he office of the World Bank in the Republic of real sector to public finance, the monetary position Congo is pleased to present the second edition and the external sector. It shows that Congo’s economy of its publication entitled “Republic of Congo grew strongly in 2014 despite the significant decline in Economic Update,” which reviews the main recent the price of oil. The lower oil prices will have an even economic developments. This is an annual publica- greater impact in 2015 as they bring down domestic tion and a very important aspect of the World Bank’s demand. Moreover, this edition looks in particular program in the Republic of Congo. It aims to stimu- at the impact of volatile oil prices on the country’s late a constructive dialogue on public policy with the economy, emphasizing the most appropriate fiscal country’s authorities, academics, the private sector policies in this context. and civil society. While we recognize the efforts of the Congolese This second edition covers the year 2014 and authorities in the management of oil revenues, we the first quarter of 2015 and presents the economic hope that this edition will provide a useful contribu- outlook for 2015–2017. Beyond the review of recent tion to the debate on economic policies in support of economic developments, the report highlights the the transformation of the Republic of Congo into an main results of the World Bank’s analytical work in upper-middle-income country in the medium term. the Republic of Congo with the aim to promote the consistency of the country’s economic policies in the medium and long term. Ahmadou Moustapha Ndiaye, This edition covers a variety of macroeconomic World Bank Country Director topics, from policies and economic indicators for the For the Republic of Congo xi EXECUTIVE SUMMARY Strong real sector performance in 2014 since the second half of 2014, the price per barrel of after three years of weak growth oil has fallen by almost half and is expected to remain at record low prices for the coming three years. This After three years of weak economic growth, Congo decline in the price of oil could mean that oil revenues recorded strong growth in 2014. The Congolese may fall by almost 40 percent in 2015.1 Second, in economy grew 6.4 percent in 2014, a significant 2014 Congo recorded a fiscal deficit of 5.6 percent— improvement over the annual average growth rate of the first since 2003—and the decline in oil prices is 3.5 percent achieved between 2011 and 2013. This expected to lead to a worsening of that deficit over growth was driven by the recovery of oil produc- the next three years. Third, the current account deficit tion, which rose 3.1 percent in 2014 after a sharp is expected to deteriorate from 5 percent to 6 per- three-year downturn (−8 percent on average between cent in 2014 and to 12 percent in 2015 and is not 2011 and 2013) and by continued public investment expected to improve significantly over the following in infrastructure. Public infrastructure investment two years. Finally, domestic demand is expected to increased 10 percent on average over the past four decline substantially as a result of lower oil revenues years to around 25 percent of GDP (gross domestic and Operation on undocumented immigrants, under product) in 2014. which almost 4 percent of the population (illegal resi- Despite this improvement, growth remains dents from the Democratic Republic of the Congo below the level needed to achieve Congo’s develop- (DRC) and other countries) was expelled from the ment objectives. Between 2011 and 2014 economic country. This decline in domestic demand could slow growth was significantly below the projections in the Congo’s economic recovery in 2016 and 2017. 2012–2016 National Development Plan (PND). The average rate of growth of 4.2 percent achieved An economic slowdown expected in 2015 between 2011 and 2014 is below the target of 8.5 percent set in the 2012–2016 PND as a guide- In 2015, the rate of growth of the Congolese econ- line for achieving Congo’s development objectives omy is expected to slow significantly. The sharp and moving it into the ranks of the upper-middle- decline in oil prices is expected to bring oil revenues income countries. down by over 40 percent, for a decline in total rev- More worrisome, in 2014 key issues emerge enues of over 20 percent. Given the statements made that could be a drag on growth in the coming years, including: (i) lower oil prices; (ii) an incipi- ent budget deficit; (iii) a worsening current account 1 This decline amounts to 60 percent if we assume, like the IMF, that oil deficit and (iv) a decline in domestic demand. First, revenues in 2014 were approximately CFAF 1,900 billion. xiii and actions already taken by the Government, public The Congolese Government would spending is expected to be cut by over 25 percent. This benefit from adopting and applying an reduction in public spending is expected to exacerbate aggressive fiscal rule the softening of domestic demand resulting from lower oil sector revenues and to lead to a slower rate The strong dependence of the Congolese economic of growth of the non-oil economy, which should grow cycle on revenues from the oil sector shows its need at a rate close to 2.8 percent, a decline of 5 percent- to have a sound policy for managing these revenues. age points from the average level over the past five The recent decline in oil prices has created a cash flow years. If, as the authorities predict, oil production falls crisis within the space of six months. The Government 4.0 percent in 2015, the result will be a GDP growth is currently looking for solutions to this problem, rate close to 1.3 percent in 2015. but it is clear that no mechanisms for managing such Boosted by a strong recovery of the oil sector, abrupt changes in fiscal trends have been planned by the Congolese economy should rebound in 2016 the authorities. Given that the country has a stabiliza- and 2017. The price of oil is expected to improve tion fund and has accumulated surpluses over the past slightly in 2016 and 2017 and production should 10 years, an operational mechanism for the commit- increase even more strongly, by 8.5 percent, owing ment of its resources in periods of need would have to the start-up of new wells in the Marine 12 and enabled it to avoid the problems related to the fiscal Moho Nord zones. The resulting increase in the adjustment currently under way. incomes of households and in government revenues To achieve sound management of its oil will stimulate the non-oil sectors, which should resources, the Congolese Government would ben- grow 3.5 percent during the period. The economy is efit from adopting a fiscal rule based on the non-oil expected to then achieve a rate of growth of approxi- primary balance (NOPB). This rule should include mately 3.5 percent during the period 2015–2017, (i) smoothing using an 8-year moving average for the lower than the rate of growth between 2011 and oil price to be used in the budget; and (ii) a current 2014. The result could be less progress with poverty and capital expenditure growth rule aimed at achieving reduction over the period. It is important to note an NOPB/NOGDP (non-oil GDP) ratio exceeding a that this recovery will not bring nominal GDP back given value. A price rule would enable the authorities up to its 2013 level through 2017. to each year identify the sustainable price for sound This economic recovery will not enable public finance management. This ratio suggests that Congo to resolve its cash flow problems, however. an 8-year moving average with 6 historical years would This solid rate of growth will not provide the be best suited to this target. The rule for the growth of Government with revenue levels comparable to those expenditures should be based on a maximum spending in 2013 while recurrent expenditures, such as the increase compatible with the NOPB/NOGDP ratio government wage bill, are expected to rise sharply and the budgeted oil price. This ratio should be cali- to meet the Government’s strategic commitments. brated once and for all with the aim of allowing the Government revenues, which are projected at Government to accumulate sufficient savings to stabi- approximately CFAF 2,130 billion in 2017, lize the economy and achieve intergenerational equity. should total just 68 percent of the Government’s In Congo, this ratio should be calibrated at 2013 revenues, while current spending in 2017 is −30 percent or less in absolute terms. According to expected to total CFAF 1,220 billion, compared the data available on oil production and the buoy- to CFAF 950 billion in 2013. Capital spending is ancy of the non-oil sectors, an anchor to an NOPB/ expected to total CFAF 1,120 billion in 2017, as NOGDP ratio of between −25 percent and −35 per- against CFAF 1,600 billion in 2013. cent would enable the Government to accumulate xiv REPUBLIC OF CONGO – ECONOMIC UPDATE savings for precautionary and intergenerational equity in case of need should therefore be adopted. As well, purposes. With this kind of anchor and with the a mechanism for the accumulation of savings in the proposed price and expenditure rules, the Congolese equity fund (for future generations) should be adopted Government could accumulate savings for precau- and strictly applied. An investment management tionary (stabilization)2 and equity reasons. Given the policy for the fund should also be adopted. The key projected oil price level and assuming that oil produc- aspects to be taken into account in the management tion will end in 2034, the Government would be in of these funds are the profitability of the investments a position to save the amounts needed to enable it, and the associated risk level. If some of the funds are based on the permanent income hypothesis (HRP), invested in Congo’s economy, the Government should to finance its current expenditures even after the end create an independent committee to assess the eco- of oil production. This ratio should be adjusted down- nomic and social profitability of projects before their ward regularly as oil production declines. inclusion in the budget. In general, a medium-term The Government would benefit from establish- expenditure framework is needed to manage such ing transparent institutions and mechanisms to resources. improve the management of its revenues. Rules for the accumulation of savings in the stabilization fund should be adopted and consistently applied. The funds currently available at the Bank of Central African 2 Using a VaR-type technique, we can each year determine the lowest States (BEAC) seem insufficient for the country’s stabi- level of oil revenues for the following three years with a 95 percent confidence interval, the financing gap over those three years vis-à-vis the lization needs. A stringent and transparent mechanism expenditure growth rule compatible with the NOPB/NOGDP ratio and for the transfer of these funds to the Public Treasury the price smoothing rule. Executive summary xv PART ONE 1 1 THE CONGOLESE ECONOMY: RECENT DEVELOPMENTS AND OUTLOOK KEY MESSAGES • The Congolese economy posted strong growth of 6.4 percent in 2014 in a context of declining inflation owing to lower oil prices, the deterioration of domestic demand, and the depreciation of the CFA franc in the second half of the year. • The declining oil prices resulted in a fiscal deficita in 2014, for the first time since 2003, measuring around 5.6 percent of GDP as compared to a surplus of 7.8 percent in 2013. • The Congolese economy could have grown more strongly had it not been for Operation on undocumented immigrants, which significantly reduced domestic demand and caused an upheaval in commercial transactions between Congo and the DRC. • Another year of weak economic growth of about 1.3 percent is expected in 2015. This situation is likely to result in a deterioration of some of the social indicators. • The Government could cushion this slowdown by using its savings effectively for stabilization purposes in order to maintain an adequate level of current and capital expenditure. a According to preliminary figures that have not as yet been confirmed, the 2014 fiscal deficit is expected to be even higher, at around 7 percent to 8 percent of GDP. 3 1.1  Recent economic developments This rate of growth places Congo among the leading sub-Saharan African oil-exporting countries In 2014, the Republic of Congo’s macroeconomic in 2014. With growth of 6.4 percent, Congo is ranked performance was solid, with a growth rate of third, after South Sudan (8 percent) and Nigeria 6.4 percent, a sizable fiscal deficit, low inflation, (6.7 percent) (see Figure 1.1). Apart from Equatorial and a substantial current account deficit. Guinea, all of the oil countries averaged growth of Congo posted strong growth of 6.4 percent in around 5 percent. Given the scope of the decline in oil 2014, in large part owing to the resumption of pro- prices (from US$111/b at end-June 2014 to US$62/b duction in the oil sector. Growth recovered, increas- at end-December 2014) and its negative impact on ing from 3.4 percent in 2013 to 6.4 percent in 2014 anticipated production in the exporting countries, a despite a regional and global environment character- stronger decline in growth might have been expected ized by risks owing to the slowdown in the growth of in these countries. However, the spectacular slide in the emerging markets, epidemics and other persistent prices should not cause us to lose sight of the fact that forms of insecurity and the decline in oil prices in the on average this decline was just −7.6 percent in 2014, second half of 2014. This robust growth was based with the annual average price per barrel dropping from essentially on strong oil production in 2014. In 2012 US$104.2 in 2013 to US$96.8 in 2014. In Congo, the and 2013, the oil sector declined at an average rate of strong performance of the non-oil sector and the sizable −10 percent owing to accident-related upheavals in off- investments already made by oil companies prevented shore production and oil well maintenance works that a stoppage or strategic slowdown in the established took longer than anticipated. Following the comple- program of works for the entry into production of tion of the planned maintenance work and the start-up new fields. Moreover, given the World Bank’s price of the new Marine 12 field by Eni3 in the fourth quar- forecasts for 2015 through 2017, the profitability of ter of 2014, production rose by 3.1 percent in 2014. these projects should not really be threatened in the short and medium term, despite current prices. African Oil Exporting Countries – FIGURE 1.1:  1.1.1  A solid real sector macro-economic Annual Real GDP Growth, 2014 framework in 2014 8.0 6.7 5.9 6.3 Economic growth in 2014, which was stronger than 5.2 4.9 in the previous three years, could have contributed Annual change, in % 3.6 to the achievement of the objectives laid out in the 2012–2016 PND. Between 2012 and 2014, growth rates averaged 4.5 percent. This was above the aver- age performance at the international level (2.4 per- cent) and at the level of the Central African Economic –4.3 and Monetary Community (CAEMC) at 4.4 percent, but below the average for middle-income countries Angola Cameroun Chad Republic of Congo Equatorial Guinea Gabon Nigeria South Sudan (5.4 percent) and sub-Saharan Africa (5.1 percent). However, while this performance could help to achieve 3 Eni S.p.A. is an Italian oil and gas company headquartered in Rome. Sources: Congolese authorities and World Economic Outlook, June It operates in 79 countries and is currently Italy’s largest industrial 2015. enterprise. 4 REPUBLIC OF CONGO – ECONOMIC UPDATE the 8.5 percent per year target set in the 2012–2016 Annual Growth of the Production FIGURE 1.2:  PND, a significant effort will need to be made, given the Sectors in Congo, 2005–2014 3.8 percent and 3.4 percent recorded in 2012 and 2013. 20 With the oil sector in the midst of a turn- 12 around, the non-oil sector continued to support growth in 2014, helping to reduce poverty. The Percentage economic growth recorded in Congo can be attrib- 0 uted first of all to the recovery of oil activities, pri- 7 marily the upturn in oil production (3.1 percent in 2014 as against −10 percent in 2013; see Figure 1.2). This recovery is explained by the completion of the 2 –20 maintenance work in the oil fields and the entry into 2011 2014 2012 2013 2010 2007 2005 2006 2008 2009 production of a new field operated by Eni. Growth of the non-oil sector remained almost stable at 7 per- Crude oil (right axis) Agriculture, livestock, hunting and fishing cent. Agriculture and forestry grew 8.2 percent and Manufacturing 6.0 percent, respectively, accounting for the solid Construction and public works Transportation and telecommunications performance of the primary sector,4 which helped to Commerce, Restaurants and Hotels reduce poverty in rural areas. The secondary sector Source: Congolese authorities. continued to grow strongly at 7.6 percent, driven by the “electricity, gas and water” and “manufacturing” branches. Continued industrialization, with invest- and telecommunications” branches as the engines ments in energy and water, combined with the output of growth. The solid performance of the non-oil of 4 of the 16 industries located in the Maloukou sector certainly helped to bring down poverty from special economic zone (see Box 1.1) were vectors of growth. Finally, the tertiary sector grew 7.3 percent in 4 This was aided by the actions taken by the Government and the private 2014 as against 7.9 percent in 2013, with the “com- sector to improve and increase agricultural and forestry production (sugar merce, restaurants and hotels” and “transportation cane, timber, farming villages, palm groves, etc.) BOX 1.1: Entry into Operation of the Maloukou Industries In application of the economic diversification approach put forward in the 2012–2016 PND, which is the implementation document for the President’s social program entitled the Future Path, the Government launched the creation of a commercial and industrial zone in Maloukou in August 2012. This is an integrative project, which in its first phase involves the construction of 16 factories, a cooling plant, and four warehouses for the distribution of the industrial output. At an estimated cost of CFAF 290 billion in government financing, Maloukou is intended to attract foreign investment. This zone is specialized in the production of construction materials. An integral part of the Brazzaville special economic zone, its aim is to make the products needed in the construction and public works sector and to establish the industrial production of (i) tiles and metalwork; (ii) rotomolding of galvanized sheeting (500 metric tons per month) and PVC (polyvinyl chloride) tubes and pipes (1,000 metric tons per month); and (iii) ceramic cladding. In 2014, the construction works were completed and 5 factories (metal tiles, sheeting, pipes, ceramic tiles, and bricks) entered into production. Factories for the manufacture of electric wiring and prefabricated concrete are expected to follow shortly. In the end, the Maloukou industrial zone will include factories for the manufacture of galvanized sheeting, bricks, ceramic tiles, PVC tubes and pipes, electrical cables, metal tiles, plastic tanks and other containers, sanitation equipment, mortar, cement beams and metal towers. The 200,000 hectare area is projected to create 15,000 jobs by 2020. The impact on NOGDP will be about US$700 million and, from a population standpoint, the special economic zone is expected to growing into city of some 30,000 inhabitants by 2025. THE CONGOLESE ECONOMY: RECENT DEVELOPMENTS AND OUTLOOK 5 infrastructure continued and the implementation of these works led to an upward adjustment in the Government’s capital budget by 25.7 percent, from the CFAF 1,997.9 billion initially projected at end- 2013 to CFAF 2,494.8 billion in the June 2014 supplementary budget. Moreover, with the continu- ation of the oil company investments (Marine 12 by Eni, Moho Nord by Total E&P Congo, Lianzi by Chevron), economic activity was supported by private sector consumption and investment, reflect- ing the substantial investments in the oil sector. In a context in which private investments rivaled 46.5 percent in 2011 to around 42.2 percent in 2014, public investments in gross fixed capital formation, as estimated by World Bank experts. the gross investment rate as a percentage of GDP Demand continued to underpin Congo’s solid rose sharply to around 42 percent in 2014 (see economic performance in 2014. By cushioning the Figure 1.3). effects of the slowdown in gross investments, the The share of net exports in GDP declined, buoyancy of domestic consumption (5.8 percent in from 13.8 percent in 2013 to 8.2 percent in 2014. 2014 as against 3.7 percent in 2013) was a catalyst In a context of a recovery of oil production and for growth. Despite the decline in oil prices, public declining oil prices (see Figure 1.4), the volume of investment in basic infrastructure and the infra- exports (4.1 percent) increased moderately com- structure needed for the 2015 All Africa Games con- pared to imports (6.6 percent). Slackening demand tinued. Moreover, at a rate of 7.0 percent in 2014, in China and in the euro zone (the main importing compared to 6.7 percent in the previous year, robust partners) narrowed the country’s trade balance even domestic demand supported GDP growth. The further. The appreciation of the dollar vis-à-vis the government policy to provide Congo with modern euro resulted in a substantial rebalancing, boosting FIGURE 1.3:  Annual Growth of the GDP Demand Components of GDP in FIGURE 1.4:  Components in Congo, 2012–2014 Congo, as a percentage of GDP, 2012–2014 Imports of goods and services 100 Exports of goods and services 80 Percentage of GDP Private investment 60 Public investment 40 Private consumption 20 Public consumption 0 2012 2013 2014 –20 0 20 40 60 80 100 Net exports Private investments Percentage Public investments Private consumption 2014 2013 2012 Public consumption Source: Congolese authorities. Sources: World Bank and Congolese authorities. 6 REPUBLIC OF CONGO – ECONOMIC UPDATE below 3 percent). Data from the National Statistics Institute (INS) show that the main price increases were observed in the items “education,” “health,” “com- munications” and “housing, water, gas, electricity and other fuels,” while the main declines were observed in the items “food products and beverages,” “alcohol and tobacco,” “leisure and culture” and “transportation” (see Figure 1.6). This decline in domestic prices is a reflection of some of the shocks to the economy during the year. In 2014, Congo suffered significant supply shocks, including the expulsion of illegal DRC citizens and exports in value terms (oil sales take place in U.S. the decline in oil prices. This expulsion removed some dollars) and compensating for the decline in global 200,000 individuals, or 4.4 percent of the popula- prices for the main export products (including crude tion, from Congo resulted in a significant decline in oil and timber). demand for goods and services, housing, food etc. At the same time, the decline in the prices of oil and other 1.1.2  Low inflation in a context of commodities led to a substantial decline in exports in uncertainty regarding the strength of the the second half of the year. euro Despite the deterioration in the net external position, monetary assets increased significantly. The inflationary pressures observed before 2013 The monetary position was further consolidated owing stabilized in 2014. On average, annual inflation stood to a sustained increase in credit to the economy of at 3.0 percent in 2013, stabilizing at 3.2 percent in 32 percent per year between 2010 and 2014. Private December of that year. In 2014, inflation declined sharply to 0.9 percent (see Figure 1.5), a level in line with the CAEMC community objectives (inflation Components of Inflation in FIGURE 1.6:  Congo in 2014 Food products and beverages Inflation in 2014: World, Sub- FIGURE 1.5:  Alcohol and tobacco Saharan Africa, CAEMC and Congo Clothing and footwear Housing, water, gas, Furniture, household articles Health Transportation Percentage 7.3 Communications Leisure and culture Education 2.7 Restaurants and hotels 1.4 Goods and services 0.9 World Sub-Saharan CAEMC Republic –5% 0% 5% 10% 15% 20% Africa of Congo Percentage Sources: IMF, INS. Source: INS. THE CONGOLESE ECONOMY: RECENT DEVELOPMENTS AND OUTLOOK 7 FIGURE 1.7: US$/CFAF Exchange Rate in 2014 BEAC Policy Rate (TIAO) in 2013 FIGURE 1.8:  533 and 2014 526 519 4.5 508 4.0 CFA francs Percentage 493 3.5 482 480 483 485 478 475 475 3.0 2.5 31/12/2012 28/02/2013 30/04/2013 30/06/2013 31/08/2013 31/10/2013 31/12/2013 28/02/2014 30/04/2014 30/06/2014 31/08/2014 31/10/2014 31/12/2014 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Source: World Bank. Source: BEAC. sector lending grew sharply during this period, from have produced the expected results. Although the 17 percent of NOGDP in 2010 to almost 32 percent BEAC hopes that a more flexible monetary policy will of NOGDP in 2014. This resulted in an increase strengthen credit to the private sector and stimulate of almost 11.6 percent in monetary assets in 2014, growth, the decline in the policy interest rate is not despite the steady contraction of net foreign assets expected to have a significant impact on economic since 2011. The net external position deteriorated, performance since the monetary policy transmission as net foreign assets declined by over 16.6 percent in channels seem to be affected by challenges specific to 2014 and are not expected to increase given weak oil the Congolese banking system. prices and global demand. The depreciation of the CFA franc vis-à-vis the dollar in 2014 is the result of 1.1.3  Worsening current account deficit its peg to the euro, which was affected by the strong American monetary policy (see Figure 1.7). Foreign trade resulted in a narrowing of the trade To stimulate the economies of the CAEMC balance. During the past three years, exports gradually zone, the BEAC made adjustments to its main declined while imports consolidated. Private invest- monetary policy instrument. The year 2013 ments in the oil and construction and public works was exceptional in terms of the BEAC’s monetary sectors were the engines of the growth of imports, policy management. To support the monetary balances relating to the peg to the euro and inflation management, the BEAC adjusted its policy rate (the auction rate or TIAO) in line with the downward adjustments of the European Central Bank policy rate. In the face of the euro zone problems and the strength of the U.S. dollar, the BEAC adjusted the TIAO downward twice in 2013: (i) on July 22 from 4 percent to 3.5 percent; and (ii) on November 1 from 3.5 percent to 3.2 percent. It adjusted it again on July 7, 2014 from 3.25 percent to 2.95 percent (see Figure 1.8). The successive adjustments may not 8 REPUBLIC OF CONGO – ECONOMIC UPDATE leading to a worsening of the current account deficit, in the amount of about CFAF 500 billion. This has to −6.2 percent of GDP as compared to −5.3 percent resulted in an increase in the debt ratio, which has in 2013. As the income balance also trended down- almost doubled from 20 percent of GDP in 2010, ward, it is likely that the current account deficit will when the completion point of the HIPC initiative was deteriorate further in the short and medium term reached, to 36.4 percent in 2014. The negotiation of owing primarily to low commodity prices. loans at concessional rates under these agreements has ensured that Congo’s debt levels remain sustainable, 1.1.4  First fiscal deficit in over a decade according to the debt sustainability analysis (DSA) pre- pared jointly by the International Monetary Fund Strong public spending in 2014 combined with a (IMF) and the World Bank in 2014. The analyses done decline in oil revenues has resulted in a fiscal deficit. in the context of the 2015 DSA show that the risk of In 2014, for the first time since 2003, Congo recorded debt levels beginning to spiral is currently moderate, as a fiscal deficit of close to CFAF 681 billion, leading the Government can finance its fiscal deficit from accu- to a negative fiscal balance of 5.6 percent of GDP as mulated reserves. The development of a realistic short- compared to a surplus of 7.8 percent in 2013. Already and medium-term borrowing strategy would be a good reduced by the infrastructure investment needed for the opportunity to strengthen operational instruments. 2015 All Africa Games and the continued implementa- tion of the increase in wages in the civil service, the fiscal 1.2  Congo’s economic outlook for surplus was further undermined by declining revenues 2015–2017 owing to lower oil prices. The size of the fiscal surpluses accumulated over the past decade should provide some Congo’s macroeconomic outlook for 2015–2017 is latitude, both to continue the infrastructure works and mixed in a fragile environment. The global economy to maintain the supply of good-quality social services. is expected to grow 3.2 percent on average during the However, public revenues declined in 2014 period 2015–2017 as against 2.5 percent in the period owing to the combined effect of lower oil prices and 2012–2014. The slowdown in China and other emerg- weak external demand. After growing 12 percent on ing markets that are commodity importers will con- average annually between 2010 and 2013, revenues tinue to slow demand for commodities and keep their fell 8.3 percent in 2014 as a result of the decline in prices depressed. Thanks in part to these low prices, the oil revenues, which remain the main source of public developed countries will maintain significant growth revenues in Congo (70 percent of the total in 2014 levels and the commodity-importing countries could as against an average of 77 percent between 2010 boost their economies, while the exporting emerg- and 2013). The impact of the decline in oil revenues ing and developing countries will suffer the impact. (11.6 percent) in the wake of lower oil prices was offset In general, sub-Saharan Africa could post real GDP by the continued rise in tax revenues (7.1 percent). growth of 4.6 percent in 2015, 4.9 percent in 2016 Moreover, Congo’s borrowing has continued and 5.1 percent in 2017 (see Figures 1.9 and 1.10). to rise, as the country’s infrastructure development program has been financed in part by external loans. 1.2.1  Moderate real sector growth expected To continue implementation of the third pillar of the 2012–2016 PND, which focuses on infrastructure In 2015, the rate of growth of the Congolese development, significant use has been made of stra- economy is expected to slow significantly. In tegic agreements with China. The financing of the 2015, the Congolese economy is expected to grow major highway between Pointe-Noire and Brazzaville at 1.3 percent. Oil production is expected to decline, is dependent on these strategic partnership agreements primarily as no new wells will be brought on stream THE CONGOLESE ECONOMY: RECENT DEVELOPMENTS AND OUTLOOK 9 Global Growth Projections, FIGURE 1.9:  government revenues, lower prices will lower 2015–2017 the profitability of oil-producing and exporting 10 companies, resulting in a decline in the incomes of workers in the sector. Weak domestic demand for 8 goods and services will also follow. The indirect effect of lower oil prices will be weaker demand in the non- Percentage 6 oil sector. It is estimated that the non-oil sector may 4 grow only at 2.8 percent, a significant deceleration 2 compared with the 8 percent achieved in recent years. 0 In contrast, annual economic growth may be World Developing China SSA stronger in 2016 and 2017. Growth could rebound countries to 3.5 percent in 2016 and 5.7 percent in 2017 (see 2015 2016 2017 Table 1.1). It will be buoyed by the recovery in oil pro- Source: World Economic Outlook, June 2015. duction that will result from ongoing oil investments (Box 1.2), which should grow on average by 8 percent in 2016–2017.5 Moreover, the gradual upturn in oil by the oil companies. The non-oil sectors will grow prices and the rebalancing of the global economy that more slowly than in recent years for three main rea- will follow is expected to stimulate the non-oil sectors, sons: (i) the decline in public spending on goods and which will continue to develop. services and on public investment; (ii) the slowdown Congo is expected to lose at least 1 percent- in private investment; (iii) the negative impact of age point of growth on average annually for a unpaid invoices on small and medium-sized compa- growth rate of 3.5 percent in 2015–2017, as against nies in the construction and public works sector; and 4.5 percent between 2012 and 2014. The reasons are (iv) labor shortage in some segments of small busi- lower domestic demand as a result of the reduction in nesses following. government spending, the decline in private invest- Specifically, lower oil prices will have a significant ment, and the shrinking of the domestic market. The impact on GDP growth in 2015 and on other key recovery of oil production in 2014 and continued oil macroeconomic variables. In addition, to reducing investments by Total E&P Congo and Chevron (at the Moho Nord and Lianzi sites) will offset this decline. Growth Projections for Sub- FIGURE 1.10:  Growth in non-oil sectors is expected to be led Saharan Africa, Nigeria, Angola primarily by the development of the transportation and Congo, 2012–2017 sector (5.6 percent in 2015–2017). This sector will 8.4 benefit directly from the new built infrastructure, the 6.8 7.2 non-food industries (5.2 percent of growth during 6.4 the period) supported by the Government’s industrial Percentage 5.5 5.8 6.2 5.4 6.3 policy at Maloukou (where at least five companies out 5.0 5.2 4.5 4.2 5.3 4.9 5.1 of the 15 or so industries are already in operation), and 4.3 4.8 4.4 4.6 agricultural activities (5.0 percent growth on average 4.0 3.8 2.3 3.3 2012 2013 2014 2015 2016 2017 SSA Nigeria Angola Congo 5 The World Bank projects a slower rate of growth of oil production than the Government, as lower oil prices may lead some companies to reduce Source: World Economic Outlook, January 2015. or postpone production. 10 REPUBLIC OF CONGO – ECONOMIC UPDATE BOX 1.2: Strategic Policy of Extractive Industry Companies in Congo No cancellations of investments in the oil sector have been officially announced by oil-producing companies in Congo (Eni, Chevron, Total, etc.). Recent information received from these companies shows that they are delaying their investment commitments. If the price of oil remains low in the medium term, some may reduce their involvement.2 The drop in oil prices and the decline in the prices of major minerals, such as iron, that followed will have a greater negative impact on mineral exploration. Low mineral prices reduce their attractiveness, which makes companies less inclined to make the investments for producing or operating new sites. Moreover, lower oil prices reduce the Government’s fiscal space, preventing it from continuing the infrastructure investment needed for the operation of certain mining sites. For example, the start-up difficulties at the Mayoko site are attributable to the failure of the Government and the mining company to come to an agreement on the construction of a railroad connecting the site to the mineral port. The Government’s fiscal difficulties will not help. Source: World Bank a For example, Schlumberger, a major oil exploration company present in the Gulf of Guinea, recently announced a reduction in its staff around the world. According to the Energy Information Administration, onshore oil production in the United States should decline by around 15 percent by 2016. annually—new farming villages, sugarcane, maize, Gross investments will increase by less than 5 percent palm oil, etc.) (see Figure 1.11). during the period 2015–2017, as against an average The impact of lower prices for commodities of 15 percent between 2012 and 2014. Public con- on non-oil sectors will be reflected in weak over- sumption should stand at 4 percent between 2015 and all demand. Overall demand may decelerate, with a 2017, compared to 11 percent during the 2012–2014 rate of growth of 3.1 percent between 2015 and 2017 period. Exports will benefit from the recovery of oil as against 6.3 percent between 2012 and 2014. The production and are expected to grow more slowly, by enthusiasm for public investments could slow, with the 6 percent between 2015 and 2017, as compared to the focus placed on priority projects, and consumption is −2 percent between 2012 and 2014. Import volumes expected to be controlled in the context of a plan to in the oil sector should tend to soften, while remaining reduce government spending begun in October 2014 very high owing to the start of production at the new with the adoption of the 2014 supplementary budget Moho Nord and Lianzi fields in 2017 (see Figure 1.12). (reduction of current expenditures by 24 percent). As a result, the appreciation of the dollar vis-à-vis the Oil and Timber Price FIGURE 1.12:  Oil and Non-Oil Growth FIGURE 1.11:  Projections, 2008–2017 Projections, 2015–2017 120 550 15 10 100 500 5 Percentage 80 0 450 60 –5 –10 40 400 –15 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2012 2013 2014 2015 2016 2017 Crude oil, average (US$/b) GDP Non-oil GDP Oil GDP Logs (US$/cubic meter, right axis) Sources: Congolese authorities and World Bank. Source: World Economic Outlook, January 2015. THE CONGOLESE ECONOMY: RECENT DEVELOPMENTS AND OUTLOOK 11 euro (and thus vis-à-vis the CFA franc), combined with Congo – Exchange Rate FIGURE 1.14:  the expected increase in commodity prices, should lead (right axis shows the nominal to an improvement in the external accounts as net exchange rate) exports grow more than 10 percent in comparison to 105 550 the decline in the years 2012–2014. 525 100 1.2.2  Low inflation outlook 500 Lower oil prices will lead to a decline in inflation and 475 95 in the GDP deflator. Lower oil prices should lead to 450 a decline in household incomes and government rev- enues, which will lead to lower domestic demand and, 90 425 2011 2012 2013 2014 2015 2016 2017 all other things being equal, lower prices. A downturn Nominal effective exchange rate (2005=100) in the prices of imports should also follow, owing to Real effective exchange rate (2005=100) lower transportation costs. The same will be true for Nominal exchange rate (XAF/$, right axis) investment prices. With the decline in its revenues, it is Sources: World Bank staff. highly likely that the Government will reduce its share of investments, which will lead to a decline in inflation in the sector and in the GDP deflator (see Figure 1.13). trends for oil prices and international manufacturing. The terms of trade will deteriorate in the coming Lower oil prices, while reducing the prices of Congolese years. The terms of trade are expected to decline by exports, also reduce the price of imports through the almost 15 percent in 2015 and to recover modestly to cost of inputs for manufacturing and transportation. 3 percent and 2 percent in 2016 and 2017 (see Figures The latter will help to mitigate the significant impact 1.14 and 1.15). As Congolese exports are dominated by of lower oil prices on the terms of trade. The terms of oil, and imports are largely made up of transportation and trade and GDP deflator have moved in tandem in recent construction materials, the terms of trade tend to follow years, and the same will be true over the next three years. However, these two indicators will diverge in the future as the net share of exports in GDP decreases. Inflation of the Components of FIGURE 1.13:  GDP in Congo (right axis shows GDP Deflator and Terms of FIGURE 1.15:  exports and imports), 2011–2017 Trade, 2011–2017 9 25 20 15 6 12 10 Percentage 5 Percentage 3 0 0 0 –12 –5 –10 –3 –25 –15 2011 2012 2013 2014 2015 2016 2017 –20 Exports Imports Private consumption 2011 2012 2013 2014 2015 2016 2017 Public consumption Investment Term of trade GDP deflator Sources: Congolese authorities and World Bank. Source: Congolese authorities. 12 REPUBLIC OF CONGO – ECONOMIC UPDATE The substantial decline in oil prices will bring Congolese Government FIGURE 1.16:  down the real effective exchange rate. As the CFA revenues and deficit in 2015, as franc is linked to the euro by a fixed exchange rate a ratio to GDP and a significant share of Congo’s foreign trade 20 (approximately 45 percent) takes place with the euro 15 zone, the nominal exchange rate will not change 10 significantly, in contrast to the real effective exchange Percentage rate. The price differential with the euro zone and 5 Congo’s other economic partners (euro zone, United 0 States, China, etc.) will play a role. Domestic prices will –5 either decline or grow more slowly (see Figure 1.14). –10 Overall, the real effective exchange rate index will fall –15 Ratio of oil Fiscal deficit Total fiscal from 102.7 in 2013 to 95.9 in 2017. revenues to GDP excluding deficit externally financed expenditures 1.2.3  Significant fiscal and current account deficits expected Sources: Congolese authorities and World Bank. In 2015, the (expected) very low price levels will result fiscal deficit will increase from 5.6 percent in 2014 in a spectacular decline in government revenues. to 13.5 percent in 2015. The decline in prices for oil and timber will negatively The situation should improve slightly in 2016 affect public finances by sharply reducing government and 2017 as oil prices and oil production recover. revenues (see Figure 1.16). Oil revenues are expected The fiscal deficit could improve to −11.1 percent in to drop 35 percent. This decline will be particularly felt 2016 and −6.2 percent in 2017 owing to increased in revenues from the sale of oil shipments, the main oil revenues and the gradual reduction in certain component of oil revenues. Based on production-sharing government spending commitments. agreements, which vary depending on the oil field, the Depending on the Government’s ability to Government on average receives proportionally higher manage its stabilization fund operations, cash revenues from shipments when prices are high. Moreover, flow pressures are likely to occur. The substantial with the improvement in tax collection capacity, the fiscal deficit in 2015 should be financed by previously introduction of the new property tax and the anticipated accumulated reserves (between 2010 and 2014, growth in the non-oil sector in 2015, non-oil revenues Congo’s reserves represented on average 46 percent should rise about 10 percent. Overall, total government of government deposits at the BEAC). However, revenues will decline by about 21 percent. this depends on the Government, which will need to If the Government maintains spending as draw down its reserves by about CFAF 1,000 billion projected in the new 2015 budget, the fiscal or decrease its expenditures. Everything appears to deficit will be sizable. In the 2015 budget, the indicate at present that the Government will reduce Government proposes to maintain the increase in capital spending to limit the amount to be withdrawn civil service wages, the major infrastructure works from the reserves. It seems also likely to be tempted already under way, and the expenditures for the All by foreign borrowing from multilateral lenders. It is Africa Games, to be held in Brazzaville in September important that the Government conduct a genuine 2015. With these commitments, government cost-benefit analysis before making its decision. In spending will decline by around 15 percent. With a general, and this is also true for Congo, the interest decline in revenues of 20 percent to 25 percent, the rate on borrowing is higher than the lending rate. THE CONGOLESE ECONOMY: RECENT DEVELOPMENTS AND OUTLOOK 13 Finally, Congo will record a sizable current progressing very slowly and may not produce the account deficit during the next three years. In expected results if the Government does not redouble 2015, this deficit is expected to reach 12 percent, as its efforts to accelerate their implementation. The against 6.4 percent in 2014. This is explained by the delay in the implementation of financial reforms could deterioration in the terms of trade since July 2014. prevent the country from benefiting from the efficiency This deficit should gradually decline to 8.9 percent in of its public spending in reducing its unemployment, 2016 and 6.9 percent in 2017 as the terms of trade poverty, and inequality. The same is true for the and oil production recover. governance reforms and capacity building, such as the modernization and automation of the Government’s 1.2.4  The Congolese economy remains revenue and expenditure procedures. Finally, the 2016 vulnerable to various internal and external presidential elections could lead to slippages, tensions risks and even unrest, given the current discussion on their preparations and their end-of-cycle nature. Internal risks include the threat to Congolese growth External risks include a deeper and more of the slow pace of reform and the risk of slippages sustainable decline in the prices for Congo’s main during the 2016 presidential elections. Reforms to export products, such as oil and timber, which improve the business climate initiated in 2011 are could undermine the development process currently TABLE 1.1: Key Congolese Macroeconomic and Poverty Indicators, 2012–2017 2012 2013 2014e 2015f 2016f 2017f GDP at market prices 3.8 3.4 6.4 1.3 3.5 5.6 Private consumption 6.9 8.7 4.4 2.5 4.6 4.6 Public consumption 17.4 10.4 5.0 – 2.5 2.0 4.9 Gross fixed capital formation 7.3 3.2 10.3 -4.1 2.3 1.3 Change in inventories (% contrib.) 0.4 0.3 0.3 0.3 0.4 0.4 Exports of goods and services – 3.4 – 5.7 4.1 – 4.5 7.0 10.0 Imports of goods and services 26.3 5.2 6.6 -6.0 4.0 3.0 GDP. at factor cost 3.6 3.4 6.3 1.3 3.6 5.6 Agriculture 7.8 8.5 8.2 5.0 4.0 4.0 Oil – 9.6 – 10.2 3.1 – 4.0 7.0 10.0 Manufacturing 8.7 8.9 7.6 4.3 3.4 5.1 Services 10.1 8.0 7.3 1.8 2.4 4.3 Inflation (household consumption deflator) 4.4 -2.1 -4.2 -25.7 3.4 4.9 Inflation (consumer price index) 3.9 6.0 0.9 0.9 1.7 2.5 Current account balance (% of GDP) – 1.2 – 5.2 – 6.4 – 16.2 – 14.1 – 10.7 Fiscal surplus/deficit (% of GDP) 6.5 5.8 – 6.1 – 12.3 – 8.9 – 7.2 Poverty rate (US$1.25 per day PPP) 46.5 42.2   38.5 Poverty rate (US$2.50 per day. PPP) 32.8 32.5 31.9 30.6 29.3 28.6 Poverty rate (US$5.00 per day. PPP) 0.38 0.38 Sources: Congolese authorities and the World Bank. 14 REPUBLIC OF CONGO – ECONOMIC UPDATE underway. The volatility of commodity and oil prices is also a risk that could affect the fiscal indicators between 2015 and 2017. Although the share of oil revenues in total public revenues has declined over the past three years, it still represented three-quarters of revenues in 2013. Moreover, a price below US$40/b could lead some oil companies to reduce or even stop production, which would further decrease government revenues and would threaten the jobs of a portion of their personnel. The same analysis applies to the forestry sector if log prices fall below the profitability threshold for companies. 1.3  Major economic policy issues 1.3.1  Weak fiscal planning that leads to prices were already falling and most experts projected repeated budget revisions a price of around US$50/b for 2015. These budget revisions negatively impact the In June 2015, the Government prepared a revised quality of budget execution and generally lead to the budget to account for the decline in oil prices. In its use of exceptional procedures to execute the budget. 2015 budget, which was adopted in December 2014, The 2012 supplementary budget underscored the fact the projected oil price was US$70/b. Today experts are that the Government’s revenue and expenditure system expecting a price of around US$53/b for 2015, or a is ill-equipped to manage revised budgets, as shown by 32 percent decline. Since oil represents three-quarters the poor execution rates (83.9 percent for revenues and of government revenues, it follows that the revenues 86.7 percent for expenditures). The 2014 revision was projected in the 2015 budget are expected to decline even more difficult to execute than the 2012 revision by more than 25 percent. A supplementary budget (68.1 percent for revenues and 74.3 percent for expendi- was therefore necessary, the third since 2012. The tures). These supplementary budgets are often adopted Government in fact made revisions to its adopted bud- after July and, given that the General Directorate of the gets in 2012 and 2014. The 2012 revision was justified Budget finalizes budgetary commitments at end-Octo- by the need to deal with the Mpila6 disaster and the ber, there is little time for appropriations managers to 2014 revision aimed to record the additional spend- initiate and obtain approval for most new projects (or ing related to the September 2015 All Africa Games. even projects blocked owing to a lack of funds) before The budget revisions required in 2014 and 2015 end-September. In 2014, the situation was very prob- reflect weaknesses in the fiscal planning process. lematic, with a supplementary budget enacted in While the 2012 revision followed a disaster, this was October. Budget execution after a supplementary bud- not the case for the 2014 and 2015 revisions. When get involves recourse to an exceptional procedure (the the 2014 budget was adopted, the expenditures advance payment order or OPPA). The Government needed to organize the All Africa Games could have had adopted a regulation to regularize the use of OPPAs, been known; similarly, the Government could have i.e., Decree 2009–230 of July 30, 2009, Articles 59–63, been more realistic in its projections of oil prices. The budget sent to Parliament in November was prepared 6 Brazzaville neighborhood where an accidental explosion in a heavy with an even higher price (US$95/b) when in fact weapons munitions depot occurred on March 4, 2012. THE CONGOLESE ECONOMY: RECENT DEVELOPMENTS AND OUTLOOK 15 but the recent European Union Public Expenditure and operation could thus jeopardize the stated intention of Financial Accountability (PEFA) Report (2014) noted the Government to make the port of Pointe-Noire the that it was not being applied. major port in the sub region. The Government should take account of the 1.3.2  Operation on undocumented impact of its decisions on its medium- and long-term immigrants has led to lower economic economic outlook and on its strategic objectives. growth The 2012–2016 PND clearly opted for economic diversification based on increased openness to the The expulsion of almost 200,000 undocumented international markets, at both the sub regional and individuals has led to labor and skills shortages in regional levels. Becoming a hub for interregional trade some sectors of the Congolese economy. In April is thus a strategic objective for Congo and facilitating 2014, following incidents attributed in the media to the free circulation of goods and persons should be illegal immigrants from the DRC, the Government a priority for the Government. Policies to combat launched an operation for the forced repatriation of clandestine emigration should take this account. these undocumented individuals, some of whom had lived in Congo for decades. This operation, which is 1.3.3  Fiscal surpluses vs the apparent still under way, has already affected more than 200,000 incapacity of the Treasury to pay its individuals, leading to labor shortages in sectors such invoices on time as construction, retail and miscellaneous commercial services (joiners, hairdressers, drivers, taxi drivers, Congo has been recording fiscal surpluses for more scrap merchants, carpenters, etc.) and a slowdown in than a decade, and yet the Public Treasury seems to some industries, such as construction. be incapable of paying its invoices on time. Data in This operation has also affected domestic reports of the CCDB (Audit and Budget Discipline demand, leading to a significant decline in the Office) and the TOFEs (fiscal reporting tables) show growth of the non-oil sector. The expulsion of 200,000 that Congo recorded fiscal surpluses from 2003 to residents was equivalent to a 4.5 percent drop in the 2013 and accumulated arrears between 2004 and population. Even though this population was poor, and 2014 (see Figure 1.17). Private sector arrears create thus consumed less than the average, it is estimated that constraints for productivity and the survival of local domestic demand declined at least 2.5 percent. This small and medium-sized enterprises and industries, contributed to a decline in the growth of the non-oil and some construction and public works companies sector of 8.2 percent in 2013 and 7.3 percent in 2014. have been forced to close as a result. An audit of Public This operation has had a negative impact on Treasury arrears would appear to be in order. trade integration. It has given greater weight to groups The payments arrears vary in nature, which in the DRC fighting against future projects, such as the complicates their understanding. Some may construction of a road-rail bridge over the river north result from normal budget management, involving of Brazzaville and Kinshasa, and has paralyzed trade payments in a period that do not correspond exactly relations between the two countries. Trade between to commitments during the same period. Others the ports of Brazzaville and Kinshasa has been halted. involve amounts committed during a period for which As a result, the port of Brazzaville recorded a disastrous the completion time and normal validation process year in terms of its revenues, to the point that the may take months. In a context of budget surpluses, it Government will have to subsidize it substantially. The can therefore happen that, for management reasons, profitability of the Pointe-Noire-Brazzaville highway payments will exceed commitments in a given period. and the port of Pointe-Noire could also be affected. This The difficulties in the public procurement and 16 REPUBLIC OF CONGO – ECONOMIC UPDATE disbursement process explain these problems. The Fiscal Surpluses and Payment of FIGURE 1.17:  reforms under way or planned in the area of public Arrears in Congo, 2003–2014 finances (see Box 1.3) should begin to address this issue. 2,000 1,500 1.3.4  Gradual increase in wages in a context of reduced revenues is a source of CFAF billion 1,000 cash flow problems 500 Rising wages have seriously affected public finances. 0 Driven by wages and goods and services spending, public recurrent spending increased 7 percent in –500 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2014, as against 2.2 percent in 2013. At end-2013, the Government undertook to double the general civil service Fiscal surplus Payment of arrears salary scale within four years. Since 2014 and through Source: CCDB reports and TOFEs, 2003–2014. to 2017, the basic salary scale is to increase 25 percent each year. This policy has had a significant impact on the Government’s financial position. While in 2013, the wages in the civil service could produce social results wage bill increased 10.6 percent (with the adjustment by improving the standard of living of the population of the salaries of doctors), it increased 16.9 percent in and access to high-quality social services. Wages have a 2014 (see Figure 1.18). The current decline in oil prices significant distributional effect, particularly in a society jeopardizes the sustainability of this policy, although in which most workers in the formal sector are govern- the Government has stated on a number of occasions ment employees and where social connections consti- that it intends to abide by the commitments under- tute an important factor in economic life. According to taken in the context of labor-management negotiations. the last urban employment survey (2012), the depen- This policy could, however, potentially improve dency ratio is higher among civil servants, at 317.4 the social indicators. The almost general increase in inactive persons to 100 heads of household, than in BOX 1.3: Public Finance Reforms Under Way Congo is currently preparing and implementing reforms that should result in its compliance with all of the CAEMC 2011 directives on public finances by 2020. The Ministry of Economy, Finance, Planning, the Public Portfolio and Integration set up two entities in 2012 and 2014 to guide these complex reforms: a Steering Committee for the Integrated Government Revenue and Expenditure System (SIDERE) and a Steering Committee for the Government’s program budgets and appropriations. The first committee aims to improve the program budget process. The reform of revenue procedures was launched to supplement the current expenditure procedures (SIDERE), which do not yet produce all the expected accounting documentation and do not include all cash flow operations and all services of the revenue agencies (tax, customs, etc.). The second is responsible for aligning the general public accounting regulations (RGCP), the government chart of accounts, the budget nomenclature and the TOFE with the principles set out in the CAEMC’s 2011 Code for Transparency and Good Governance in the Management of Public Finances. To date, of all the implementing regulations for the 2011 CAEMC directives to be transposed into national law, only the organic law on the financial regime of the Government has been so transposed, in September 201—although some information and provisions remain to be improved. The provisional RGCP documents and budget nomenclature are being reviewed by expert technical and financial partners before final adoption. The transposition of the government chart of accounts and the TOFE is still to be completed.  However, the significant progress recorded by Congo since 2013 in improving the Trésorerie centrale des dépôts (Treasury banking agency) should be noted. THE CONGOLESE ECONOMY: RECENT DEVELOPMENTS AND OUTLOOK 17 Congolese Government FIGURE 1.18:  operations without producing the required accounting Expenditure, 2009–2016 documents and in part to the increasingly common 60 (rarely regularized) exceptional procedures, which are almost becoming the rule rather than the exception. 40 These data quality issues raise the issue of the reliability of the TOFE and other government Percentage 20 financial data. The adjustments made to some statis- 0 tics are occasionally incomprehensible. For example, in December 2014, oil revenues declared for 2014 –20 in the TOFE totaled CFAF 2,001 billion, including –40 CFAF 1,926 billion from the sale of shipments. In 2009 2010 2011 2012 2013 2014 2015 2016 April 2014, the new TOFE for the year 2014 indicated Wages and salaries Current expenditures Capital expenditures a substantial decline in oil revenues, with a total of CFAF 1,487 billion, including CFAF 1,377 billion Sources: Final Budget Accounting Laws (lois de règlement) and TOFEs, 2009–2014. from the sale of shipments. This is a reduction of more than 25 percent, representing over CFAF 500 billion other groups (private sector, informal private sector, in revenues. Any hypothesis of a decline in oil revenues unemployed or inactive), which in urban areas aver- in 2014 should take account of macroeconomic devel- age 274.7 inactive persons to 100 heads of household. opments in the sector, i.e. (i) a 3.1 percent increase in production; (ii) a 6 percent decline in annual prices 1.3.5  Continued deterioration in the per barrel of oil in dollars; (iii) the appreciation of the quality of government financial data CFA franc vis-à-vis the dollar; and (iv) the stability of the oil contracts in effect. Such a situation, combined The quality of fiscal data in Congo has tended to with the fact that the Government reported budget deteriorate. The main table of data on public finances surpluses from 2011 to 2013 while accumulating is prepared off the books (PEFA, 2014, and World domestic payments arrears, raises questions regard- Bank, 2015). As the Ministry of Economy, Finance, ing the integrity of the Government’s financial data. Planning, the Public Portfolio and Integration no The Government should take appropriate longer has a website, public finance data are no longer measures to ensure the quality of its budget published with the frequency requirements set out in planning process and the reliability and appropriate the financial management standards. As a result, very frequency of publication of its fiscal data. To this significant revisions are included in the various versions end, it could follow the example of some of its peers of the public statistics. This may be due in part to the in the sub region, which regularly publish high- fact that the Public Treasury carries out a number of its quality fiscal data. 18 REPUBLIC OF CONGO – ECONOMIC UPDATE PART TWO PART TWO 19 MACROECONOMIC AND FINANCIAL 2 MANAGEMENT OF THE VOLATILITY AND UNCERTAINTY OF CONGO’S OIL RESOURCES KEY MESSAGES • Over the coming three years, Congo can expect a sharp increase in its oil production in a context of record low oil prices. • With public finances characterized by the absence of a general fiscal rule for the management of public revenues and expenditures, a zero deficit fiscal policy in 2015 would be procyclical and likely to amplify the harmful effects of the decline in oil prices. • The Congolese Government would benefit from adopting a fiscal rule based on the non-oil fiscal balance and including smoothing by means of the 8-year moving average for the price of oil to be budgeted and a rule for adequate growth of public spending. • Congo should implement this rule so as to accumulate sufficient reserves to play both a precautionary and an intergenerational equity role. Anchoring to an NOPB/NOGDP ratio of −30 percent seems the most appropriate. • The introduction of appropriate institutional mechanisms seems necessary to ensure transparency, efficiency, and the strict implementation of the fiscal rules adopted. 21 2.1  Recent developments and outlook Crude Prices – WTI (West Texas FIGURE 2.2:  for the oil sector: production and price7 Intermediate) and Brent, 2000–2012 2.1.1  Highly volatile production and price 150 Oil production has been volatile over the past 10 years 100 Oil production in Congo has been very volatile over the past 10 years. It fell from around 93 mil- 50 lion barrels (Mb) in 2005 to 91 Mb in 2014, with intermittent peaks and troughs. Production topped out at 114 Mb in 2010 and reached its lowest level at 0 Jan-2000 Jan-2003 Jan-2006 Jan-2009 Jan-2012 82 Mb in 2007 (see Figure 2.1). WTI Brent The failure to control the machinery of produc- tion and the randomness of discoveries explain a Source: Bloomberg. large part of this volatility. The low in 2007 resulted from a fire on the Nkossa offshore platform, an acci- The price of oil has historically been volatile dent that led to the cessation of production at the site. Since the first oil shock in 1973, oil prices have The high in 2010 is explained by the gradual resump- fluctuated wildly. Before the current crisis, the most tion of production on this platform. Subsequently, recent volatility dates back to 2008 when the price of maintenance activities on other platforms (Congo Brent crude oil dropped from US$130/b in July 2008 Rép’s Émeraude, Total E&P Congo’s Nkossa and to US$39/b in February 2009 (see Figure 2.2). Two Moho Bilondo, Eni’s Ex. Madingou and Murphy’s years later, in April 2, 2011, the price had rebounded Azurite) resulted in significant unexpected declines to US$123/b. There have also been periods of rela- in production between 2012 and 2013, as these tive price stability, such as from 1990 to 2003 when operations had been underestimated by the compa- prices remained steady at between US$15/b and nies concerned. US$30/b (low price equilibrium) and from 2011 to 2014, when they fluctuated between US$100/b and US$120/b (high price equilibrium). There have Oil Production in Congo, FIGURE 2.1:  also been sharp accelerations, such as from 2004 to 2005–2014 2008 when the price increased from US$30/b to 20 120 US$130/b, and sharp declines, such as between July 15 110 2008 and February 2009, when the price fell from 10 US$130/b to US$40/b or between July 2014 and Production (Mb) 5 Growth (%) 100 January 2015, when the price fell from US$110/b 0 90 to US$50/b. –5 –10 80 –15 –20 70 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 7 This section analyzes the potential impact of various declining oil price scenarios on the economy in the medium term. The analysis covers the Growth Production period 2015–2020. All channels of transmission for the drop in oil prices to the economy are included (government financing, current account Source: Congolese Authorities. balance, real exchange rate, inflation, etc.). 22 REPUBLIC OF CONGO – ECONOMIC UPDATE 2.1.2  Favorable production outlook in a Global Oil Price Scenarios, FIGURE 2.3:  context of very low prices 2013–2020 105 The outlook is for high production levels < 96 90 over the next five years 85 In 2014, Congo’s oil production grew 3.1 percent, 70 72 73 74.1 for the first time since 2011, owing to the completion 69 of the major maintenance works on offshore sites. 55 73 64 69 65 No major maintenance operations are planned in the 61 57 next few years and production at existing sites should 53 be maintained, decreasing only slightly owing to the 2013 2014 2015 2016 2017 2018 2019 2020 aging of the wells. Production stood at 91 Mb in World Bank IMF EIU 2014 and should remain at around the 90 Mb mark Sources: World Bank, IMF, EIU, January 2015. until 2020. However, new deposits were discovered in 2013 at the Marine 12 site. Reserves are estimated US$74/b in 2020. The World Bank does not expect at 3.5 million barrels. Eni has received the conces- a price above $70/b before 2020. Prices will increase sion for part of the site and, according to its projec- slowly as certain high-cost producers exit the mar- tions, production, which started modestly in 2015 at ket, which will gradually reduce the supply, and as 2 Mb, should plateau in 2018, at which point annual the demand in the emerging countries increases (see production should total 120 Mb, for an increase in Figure 2.3). This forecast is quite similar to that made Congolese production of approximately 32 percent by the IMF, which sees a more rapid recovery with the over the 2010–2014 period.8 price stabilizing at around US$70/b from 2017. The EIU (Economist Intelligence Unit) has issued more Oil prices are expected to remain low optimistic forecasts, with a price above US$80/b in Prices are expected to remain low over the next 2017 and at US$90/b in 2018. three years. According to World Bank forecasts in January 2015, prices are expected to remain below 2.2  Fiscal context in Congo US$70/b for the next three years. This forecast is based on two key factors: (i) the saturation of supply, par- Public spending in Congo has increased substan- ticularly from the United States, owing to new frack- tially since 2006, largely driven by public invest- ing technologies; and (ii) the contraction of demand ments. With the aim of improving the weak basic from China and the other major emerging countries, infrastructure, particularly in the transportation sec- particularly those in the Brazil-Russia-India-China- tor, the Congolese Government undertook ambitious South Africa (BRICS) group.9 The outlook for the normalization of relations between the superpowers 8 Government projections indicate a peak of 138 Mb in 2018, followed and Iran following the April 2, 2015 nuclear agree- by a gradual decline starting in 2019. 9 Ammar et al. (2013) use a structural forecasting model based on error ment support this forecast. correction models to show that the main determinants of the price of The recovery of prices will be slow and the next oil are: (i) the supply of oil; (ii) the demand for oil; (iii) the rationing of the supply of oil; (iv) speculative demand for oil; (v) the substitution peak will probably be lower than the last. Following effect; and (vi) the exchange rate effect. More specifically, in the long the trough in 2015, at around US$53/b, prices should term, global production of oil and the U.S. dollar drive the price down while global GDP growth drives it upward. In contrast, in the short term, begin to rise again to US$57/b in 2016, US$61/b global GDP growth and the S&P500 index drive the price upward while in 2017, US$65/b in 2018, US$69/b in 2019 and a strong dollar drives it downward. MACROECONOMIC AND FINANCIAL MANAGEMENT OF THE VOLATILITY AND UNCERTAINTY OF CONGO’S OIL RESOURCES 23 was reflected in a 7.8 percent decline in current spending. However, this lower expenditure rule was not consistently applied. Although the share of oil resources in government revenues has declined over the past four years, they still represented three-quarters of revenues in 2014. In 2012, they represented 78.0 percent. From 2012 to 2014, the decline in production and the almost stable price per barrel of oil led to a substantial reduction in revenues from oil. In 2014, oil represented 72 percent of total government resources. The Congolese Government should draw down its savings significantly to deal with the current investment projects in 2006. Since that time, the rate situation and reduce its reserves by about 9 percent of investment has accelerated appreciably. In 2006, per year. Each year from 2003 to 2013, the Congolese the Government doubled its capital budget. Over the Government recorded substantial fiscal surpluses and period 2006–2012, public investments increased at an saved a significant amount. More specifically, the average annual rate of 32.8 percent and over the past fiscal surplus exceeded 10 percent of GDP for four two years, they increased at an average annual rate of consecutive years. According to the CCDB report 10.4 percent (see Figure 2.4). and the budget accounting laws (lois de règlement), the The Congolese Government has slowed its rate Government had accumulated savings estimated at of expenditure since 2013 in an effort to comply around CFAF 5,500 billion by end-2013. If an average with its new fiscal rule. Public expenditures increased price of US$53.2/b in 2014 proves to be accurate, it 2.2 percent in 2013 and 7.0 percent in 2014. The will need to reduce its savings.10 Indeed, as indicated low rate of growth in 2013 is largely the result of the in the previous section and in Box 2.1, based on the normalization following the Mpila disaster, which Government’s current accounting, this price will result in a primary deficit of 6 percent. If the Government chooses to finance this deficit by reducing its savings, Congolese Government FIGURE 2.4:  the latter could decline to around CFAF 5,000 billion Expenditures, 2005–2014, at end-2015. as a ratio to GDP 50 2.3  Toward better management of oil 40 revenues11 Percentage 30 The management of oil resource revenues is tricky 20 and presents a number of pitfalls. The Government must handle both volatile prices and the issue of the 10 0 10 Even if the Government makes greater use of borrowing, this will 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 constitute a reduction in its net savings. Current expenditures Capital expenditures 11 This section is based on various IMF documents (particularly IMF Expenditures and net lending 2012a and 2012b) and research by World Bank experts on the man- agement of natural resource revenues in countries such as Nigeria and Source: Congolese Authorities. Indonesia. 24 REPUBLIC OF CONGO – ECONOMIC UPDATE BOX 2.1: Decline in the Price of Oil and the 2015 Budget The current period of low oil prices and the uncertainty regarding the average price in 2015 have led the authorities to revise the budget submitted to Parliament in December 2014 downward. In the first version of the budget sent to Parliament in October 2014, the Government worked with a price of US$95 per barrel in 2015. However, the sharp decline in prices led the Government to revise the price downward and to consider a price of US$50 per barrel for 2015. In the budget finally adopted, revenues and expenditures were 11 percent lower than in the October version. Compared with the 2014 budget, this represents a 2.9 percent decline, or around 6 percent in real terms.a Government oil revenues fell almost 25 percent and account for 60 percent of its total revenues. In this budget, current expenditures declined sharply, by 8.9 percent, from 2014 to 2015. Although the wage bill and personnel spending continue to rise as the Government respects its commitments to civil servants, spending on goods and services was cut more than 15 percent. As well, the Government reduced its transfers by more than 25 percent. The capital budget also declined. The Government chose to slow its capital spending so as to complete some essential infrastructure and the infrastructure for the first phase of the “accelerated municipalization” program, which this year concerns two municipalities (Ouesso in Sangha Department and Madingou in Bouenza Department). The investments related to the organization of the All Africa Games in September 2015 have been maintained. All necessary investments to complete National Highway No. 1 from Dolisie to Brazzaville and the construction of the new university in Brazzaville (Sassou-Nguesso University at Kintelé) are also maintained. Source: 2015 budget. a This comparison was made with the initial budget for 2014 and not with the revised budget. The revised budget was not adopted un- til end-October 2014, rather late to be fully implemented. Moreover, the data currently available to us show that only the initial budget was effectively applied. sustainability of public spending as oil is a nonrenew- Congo should use the NOPB as a fiscal anchor, able resource. It must also ensure the quality of its for two reasons. First, if Congo were to smooth spending of the revenues collected. the overall balance rather than the NOPB, it would To take the best possible advantage of these need to adjust spending abruptly when oil revenues resources, the authorities must have a fiscal are exhausted, which would have disruptive effects framework comprising (i) budget tracking indicators; on economic activity and the provision of public (ii) fiscal rules that ensure sound management of the services. Second, if the NOPB were not used as the volatility of short-term prices; (iii) fiscal sustainability fiscal anchor, spending sustainability issues would criteria; and (iv) rules on the accumulation and arise. With forward-looking financial markets, strong management of reserves. pressure are exerted on countries with an excessively high NOPB to the point that abrupt cuts in public 2.3.1  The NOPB should be the key budget spending may be required well ahead of the time when tracking indicator resources are actually depleted (see IMF, 2012a). The Congolese Government has not tracked The NOPB is the key indicator to assess the fiscal the NOPB over the past 15 years. The NOPB has stance. It measures the macroeconomic and fiscal posi- fluctuated between −35 percent and −15 percent of tion and identifies the impact of government opera- GDP and between −68.4 percent and −28.2 percent tions on domestic demand, since oil revenues typically of NOGDP. However, this indicator has been more originate abroad. A high NOPB deficit would indicate stable than the overall balance, which has fluctuated an expansionary fiscal stance. Setting fiscal policy on between 25 percent and −10 percent of GDP (see the basis of this indicator can help to delink fiscal Figures 2.5 and 2.6). The Government should set policy from the volatility of oil revenues and facilitates a maximum ratio in absolute terms that should an explicit link to the development framework. not be exceeded. Based on historical data, a simple MACROECONOMIC AND FINANCIAL MANAGEMENT OF THE VOLATILITY AND UNCERTAINTY OF CONGO’S OIL RESOURCES 25 Congo’s NOPB, 2000–2014, FIGURE 2.5:  The “structural” primary balance is the most as a percentage of GDP appropriate indicator, assuming that Congo has oil 0 reserves for several decades. This balance is defined as –10 the primary balance excluding the cyclical component of oil revenues. If reserves remain exploitable for –20 several decades, the revenues from these resources –30 can be decomposed into a structural and a cyclical –40 component using various approaches, including a –50 price-based smoothing rule. The structural primary –60 balance is equal to the NOPB plus the structural –70 component of oil revenues. In this manner, the 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 structural primary balance target could be set to ensure Ratio of the non-oil primary balance to GDP a sustainable fiscal policy framework. A filter such as Ratio of the non-oil primary balance to non-oil GDP the Hodrick-Prescott filter can be used to set the target. Source: Congolese authorities. This indicator is complex to calculate, however, and can thus be difficult to track. rule establishing an NOPB deficit of −30 percent of NOGDP is easy to apply. With such a rule 2.3.2  Fiscal tracking rules the Government would have accumulated more There are two types of fiscal tracking rules: than CFAF 12,200 billion over the past fifteen revenue forecasting rules and expenditure growth years, or CFAF 6,700 billion more than it did rules. Revenue forecasting rules are generally price accumulate. If the rule had been set at −35 percent of forecasting rules. They are used in budget forecasting NOGDP, the Government would have accumulated to reduce the volatility of budgeted revenues. There CFAF 11,000 billion, or CFAF 5,500 billion more (see Figure 2.7). Potential Annual Savings based FIGURE 2.7:  NOPB and the Overall Fiscal FIGURE 2.6:  on NOPB rules in Congo, Balance in Congo, 2000–2014, 2000–2024, in CFAF billion as a percentage of GDP 1,434 1,500 1,318 30 1,202 20 1,032 962 1,100 892 10 % of GDP 0 700 523 –10 341 247 212 –20 300 165 161 118 –29 –18 –30 –40 –100 2000–2004 2005–2009 2010–2014 2015–2019 2020–2024 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Oil revenue savings with NOPB of – 25% NOGDP Non-oil primary balance Oil revenue savings with NOPB of – 30% NOGDP Overall balance (commitment basis, including grants) Oil revenue savings with NOPB of – 35% NOGDP Source: Congolese authorities. Source: World Bank. 26 REPUBLIC OF CONGO – ECONOMIC UPDATE BOX 2.2: Examples of Price Smoothing in Other Countries Mongolia uses a 16-year moving average of mineral prices (prices of the past 12 years and projected prices for the current and next 3 years). The formula attaches a higher weight to previous years, providing stability in the revenue forecast while allowing for a gradual incorporation of price expectations so that the revenue forecast adjusts gradually to new trends. Mexico uses a weighted-average of the 10-year historical average of oil prices (25 percent weight), the short-term price (50 percent weight but multiplied by a prudence factor of 0.84 determined on the basis of the standard deviation of oil prices), and medium-term prices (25 percent weight). This specification places a higher weight on forward-looking market- based prices, which should be more responsive to changes in price trends but less smooth for revenue forecasting. Trinidad and Tobago relies on a moving average of oil prices for the last 5 years, the current year, and the futures prices for the next 5 years. This formula represents an intermediate specification between full historical smoothing and capturing more forward-looking prices. Ghana projects revenues on the basis of a 7 year moving average of benchmark oil prices, including three projected years. Source: IMF, 2012a. are various kinds of growth rules depending on the and a need to adjust to changes in price trends. aims: stability of budgeted spending or achievement Budgets relying on price formulas with a short horizon of a development plan. will better track changes in prices, but may be associ- ated with more volatile spending envelopes. In con- An 8-year moving average of oil prices is the trast, budgets relying on price rules with long formulas appropriate rule for forecasting budgeted oil would have smoother expenditure paths but might revenues systematically under- or over-shoot actual revenues if A key decision is the reference price for oil to be price trends change. In practice, the price smoothing used in the budgeting of the Government’s oil rev- formula can take a number of different forms and may enues. Two approaches are possible: the reference or operate as either a fiscal rule or a budgeting procedure benchmark price can be set by using an automatic to forecast resource revenues. formula or by an independent committee of experts. An assessment of the impact of the various In practice, the former approach is more common methods for smoothing oil prices over the past (see Box 2.2). Chile, where an independent commit- 30 years shows that moving averages exceeding 8 tee of experts makes a judgment on the medium- to years are not responsive to short-term trend reversals long-term reference price, is an exception. In Congo, (see Figure 2.8). These rules project a systematically however, as in most developing countries,12 price- rising price over 2001–2018 period, when in fact there based rules should rely on automatic formulas. The have been significant trend reversals. For this reason, adoption of such a rule can bolster the credibility of Congo should not adopt a moving average exceeding the result and protect fiscal policy from the pressures 8 years. Moreover 4-year moving averages are very of the political cycle. A rule for setting the reference volatile with standard deviations close to those for price mitigates the transmission of oil price volatil- the distribution of the standard deviations for the oil ity to the budget cycle thus reducing its procyclical- price itself and a coefficient of correlation exceeding ity. Such a rule can help to support the solvency of 0.9 over the period 2001–2014, see Table 2.1. the Government through “prudent” forecasting of structural revenues by deliberately under-projecting the price of oil. 12 The limited institutional capacity and scarcity of independent experts The choice of price formula reflects a trade-off in Congo argue in favor of setting the price using an automatic rule between a preference for smoothing expenditures (see IMF 2012a). MACROECONOMIC AND FINANCIAL MANAGEMENT OF THE VOLATILITY AND UNCERTAINTY OF CONGO’S OIL RESOURCES 27 Oil Price Trends by Projection FIGURE 2.8:  are rising fast or will need to be absorbed by financial Method, 2001–2018 a buffers when prices decline unexpectedly. 120 100 Expenditure growth rules During the period 2001–2014, a public expenditure 80 growth rule would have helped to limit fiscal 60 procyclicality. Such a rule could have been formulated 40 to limit the growth of government spending in 20 nominal or real terms, or as a ratio to NOGDP. Such a rule could have guided the scaling up of public 0 investment and given the Government time to increase Oil price Hist 4-year MA Hist 8-year MA Hist 12-year MA Hist 16-year MA 4-year MA 8-year MA 12-year MA 16-year MA its absorptive capacity. Such a rule would have also helped to smooth out volatility if it had been used in combination with a price-based rule. A growth rule 2001 2002 2003 2004 2005 2006 sets floors and ceilings for expenditure growth that can 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 limit fiscal procyclicality. This rule is more effective if it complements an overall balance rule.14 Source: World Bank. a Hist N-year MA refers to an N-year moving average based on An example of such an expenditure rule is one historical data and N-year MA refers to a moving average with that stipulates that resource revenues are to be equal historical data and forward projections. used for public investment and recurrent spending on health and education. Another example is the The authorities should set an oil price rule permanent income hypothesis (PIH) approach. In using an 8-year moving average. This moving average this case, the concern to preserve wealth requires that would use 6 historical years and 2 years of forward the Government each year consume the implicit real projection.13 This formula gives greater weight to return on financial wealth already accumulated and historical values given the difficulty of predicting oil the implicit return on the net present value of future prices. Its application in Congo during the period resource revenues. In practice the NOPB rule in the 2001–2014 would have reduced the volatility of oil standard PIH approach can be set in two possible ways: revenues by more than one third. Moreover, with this (i) the NOPB can be set at a level that is equal to the price, the country would have been able to increase real rate of return on accumulated financial assets; and the contribution of oil revenues to the budget by an (ii) the NOPB can be set at a level that is consistent average of 7 percent over the period with a peak of with both accumulated and expected financial wealth, 14 percent in 2007 and a trough of −2 percent in basically treating resource wealth in the ground as 2014. “virtual” financial wealth and computing the present If the Government adopted such a rule, it would value by assuming an implicit rate of return. This need to evaluate it over time to ensure that it is implies calculation of the value of the resources in the generating an appropriate level of financial savings. A price formula based on a moving average may better smooth expenditure but at the cost of possibly large 13 IMF 2012a suggests an 8-year moving average with 5 historical years and 3 years of forward projection. discrepancies between projected and actual revenues. 14 In Peru, for example, the expenditure growth rule was critical in For a given public expenditure path, such forecast keeping fiscal policy prudent. Adjustments to this rule should ideally be informed by an analysis of absorptive capacity. These adjustments could errors will either generate excessive savings when prices encompass a wider category of growth-enhancing and priority spending (e.g., education and health). 28 REPUBLIC OF CONGO – ECONOMIC UPDATE ground and the associated resource revenues that will for the reserve horizon. In addition, maintaining a accrue to the Government in the future. smooth path of current expenditure to avoid the need During the recent oil price growth phase, the for a difficult public spending consolidation in future Government did not apply any expenditure rule. is an important aspect of the sustainability assessments. The only rule adopted was in 2013 and stipulated that Two approaches can be used to guide longer-term CFAF 1,000 billion should be taken from oil resources considerations: a modified PIH (MPIH) approach for capital spending and that CFAF 500 billion should and a fiscal sustainability approach. The MPIH be allocated to current spending. This rule could not be approach can accommodate the possibility of spending applied for various reasons, primarily the explosion of financed by loans, which cannot be accommodated domestic arrears, the high levels of expenditure on the All by a traditional PIH framework. Instead of preserving Africa Games, the impact of the decline in oil prices, etc. financial wealth over time, the MPIH allows financial In the Congolese context, expenditure rules assets to be drawn down for a few years during the should be based on the NOPB deficit. For example, scaling-up period. The drawdown would be offset by expenditure could grow so that the NOPB/NOGDP fiscal adjustment in the future to rebuild financial assets ratio is equal to −30 percent.15 This rate would allow to the same level as under the traditional PIH. for the accumulation of sufficient funds for stabiliza- The fiscal sustainability framework explicitly tion purposes. It should be adjusted downward (in takes into account the intertemporal budget absolute terms) as the share of oil in GDP declines. constraint and incorporates ex ante the expected To achieve this ratio, the Government could consider impact of higher investment on growth and non- four options: (i) maintain the rate of growth of the oil revenues. It can be consistent with an NOPB main expenditure items while satisfying the NOPB that allows a drawdown of government wealth (using constraint; (ii) allow current expenditure to increase those assets to build human and physical capital) and at the real GDP or inflation growth rate and set capi- eventually stabilizes it at a lower level than the PIH tal spending as a residual to respect the NOPB ratio; or the MPIH. Lower financial wealth will generate (iii) allow all expenditure items to change at the GDP a lower stream of income to the budget than in the or inflation growth rate and set spending on goods PIH-based framework, which will result in a higher and service as a residual; and (iv) allow all expendi- NOPB consistent with fiscal sustainability. ture items to adjust at the GDP or inflation growth According to the IMF (2014), the implementation rate and set personnel expenditures as a residual. The of a fiscal sustainability framework in Congo would rates establishing the constraints on current expen- imply a sustainable reduction in the non-oil primary diture produce a greater short-term impact than the deficit over the medium and long term. Analyses constraints on capital spending. indicate that this deficit should be reduced to around 31 percent of NOGDP by 2019. In the long term it 2.3.3  Financial sustainability criteria should be reduced even further to stabilize net financial assets at a level dependent on the average return on The fiscal framework should be guided by an investments. This constitution of financial assets will evaluation of fiscal sustainability, i.e., the capacity help to provide a buffer of assets for future generations of the Government to sustain its current spending, taxation and other policies over the long term without 15 Given the many uncertainties surrounding this type of exercise, this rate could be set between −21 percent and −35 percent. jeopardizing its solvency.16 Such assessments should 16 While all countries need to ensure the sustainability of their fiscal recognize that there is uncertainty about the amount of framework, this issue is particularly important for countries with a relatively short reserve horizon. In countries with long reserve horizons, the reserves as new discoveries are made constantly. The sustainability assessments are useful in focusing attention on the need best option would be to utilize ranges of probabilities for intertemporal fiscal savings decisions. MACROECONOMIC AND FINANCIAL MANAGEMENT OF THE VOLATILITY AND UNCERTAINTY OF CONGO’S OIL RESOURCES 29 NOPB, Financial Assets and FIGURE 2.9:  Appropriate Size of the FIGURE 2.10:  Wealth, 2013–2034, Congolese Stabilization Fund, as a percentage of NOGDP 2011–2015, in CFAF billion 80 800 1,546 1,423 1,225 1,284 60 600 907 % of NOGDP 40 400 20 200 2011 2012 2013 2014 2015 0 0 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 Source: World Bank. Non-oil primary deficit (leg axis) Total wealth (IR=6.5%) Net financial assets (IR = 6.5%) Figure 2.10). These amounts have been determined Net financial assets (IR = 5%) Net financial assets (IR = 3.5%) using the VaR (value at risk) method by simulating the potential volatility of oil prices.18 The stabilization Source: IMF, 2014. buffer must be large enough to ensure that, given a fiscal rule based on oil prices with a high degree of when oil revenues have dried up. The cumulative confidence (95 percent, for example), more than value of the net financial assets will depend on the three years is likely to be needed to fully deplete the average return on investment. It comprises two parts: buffer. The minimum size of the stabilization buffer the initial value and the discounted present value of is calculated on the basis of the oil production profile future oil revenues through to 2034. Assuming that and tax regime as well as stochastic simulations of long-term interest rates range between 3.5 percent future oil prices. The IMF (2012b) estimates the and 6.5 percent, the net financial value could range minimum size of a stabilization buffer for Congo at between 71 percent and 124 percent of NOGDP by around CFAF 1,005 billion in 2011. 2034 (see Figure 2.9). The stabilization buffer as it exists today seems inappropriate. The resources available in the 2.3.4  Level of savings required in “good stabilization fund at the BEAC currently total around years”17 CFAF 65 billion, or less than 5 percent of the amount needed. It is possible that funds available at Exim-Bank Saving for stabilization purposes varies from one year in China may remedy this situation in part, but we do to the next. Such savings totaled CFAF 906 billion in not have information on the share of funds available 2011 and CFAF 1,545 billion (22 percent of GDP) in in China for stabilization purposes. The Government 2015. Assuming that the Congolese Government would do well to ensure that it can correctly calculate had used an 8-year moving average rule since 2011 the appropriate size of the stabilization fund at any and that current spending had increased at a rate of time and obtain said funds as required. 10 percent and capital spending at a rate of 3 percent, the stabilization buffer would have had to total around 17 In periods of high oil prices, the Congolese Government should, for CFAF 905 billion in 2011, CFAF 1,225 billion in 2012, stabilization and intergenerational equity reasons, save in anticipation of the depletion of resources. CFAF 1,425 billion in 2013, CFAF 1,285 billion 18 This type of modeling is often considered more rigorous than simple in 2014 and CFAF 1,545 billion in 2015 (see benchmarking, which does not take volatility into account. 30 REPUBLIC OF CONGO – ECONOMIC UPDATE FIGURE 2.11: Congolese Equity Fund Principal in 2035, in CFAF billion 30,000 27,143 25,000 20,000 18,571 19,000 15,000 13,000 12,667 10,000 8,667 5,000 0 IRR = 3.5% IRR = 5% IRR = 7.5% With mining Without mining Source: World Bank. rate of growth of tax revenues at 7.5 percent and that In “good years,” the Government should mining will bring in CFAF 300 billion per year, a maintain fiscal balances in the stabilization fund financing gap of about CFAF 650 billion will result by to support a reasonably high confidence level in 2035. Using the PIH with a rate of return of 5 percent the availability of sufficient resources in the event gives the result indicated, i.e., a CFAF 12,000 billion of a negative oil price shock. It could also design fund. If the Government is not successful in launching and implement a trajectory for the accumulation mining, it would need an additional CFAF 950 billion of reserves to build a stabilization buffer and avoid and a principal of CFAF 19,000 billion. The principal an abrupt adjustment in government spending. of the fund will vary depending on the rate of return Finally, it could establish clear rules for drawdowns on investments (see Figure 2.11). The Government is of the stabilization fund and strictly eliminate ad hoc currently working with the World Bank on this issue. payments and withdrawals. The Congolese Government should therefore Congo should develop a buffer for equity adopt a savings plan at the end of the current “lean reasons of up to CFAF 27,000 billion (135 percent years.” It currently holds some CFAF 1,000 billion in of 2035 GDP) by 2035.19 Assuming that Congo does the future generations fund at the BEAC. Assuming that not discover new reserves, that oil will be depleted by the Government will not be able to add to it by before 2034, that the Government will maintain its current 2020, it will need to contribute CFAF 700 billion expenditure commitments at present levels and that on average per year to achieve this objective. With the return on investment will be 3.5 percent, the the currently projected oil prices and current and Government should set up a fund whose dividends capital spending commitments, the Government does will be sufficient to cover its current budget.20 Under not appear to be in a position to achieve that level these assumptions, the Government will need a fund of savings. For this reason, the other funds in China with a principal of around CFAF 12,000 billion must be considered. The total savings declared by the in 2035 (see Figure 2.11). Taking into account Government, as confirmed by the CCDB over the the Government’s current strategic plan and its expenditure commitments, current spending should 19 The size of the buffer depends on the resource horizon, the share of grow 5 percent annually through 2034, while capital oil resources in the government operating expenditure and the return on spending should fall by CFAF 1,000 billion by 2020 investments. 20 There is clearly complementarity between the size of this fund and and increase subsequently by 3 percent annually. the investments that the Government could approve to modernize its Assuming as well that the Government maintains its infrastructure and build its economic capacity and human resources. MACROECONOMIC AND FINANCIAL MANAGEMENT OF THE VOLATILITY AND UNCERTAINTY OF CONGO’S OIL RESOURCES 31 TABLE 2.1: Congolese Oil Price Trends, 2001–2014 8-year moving 8-year moving 8-year moving 8-year moving average with average with average with average with   Annual price 8 historical years 3 historical years 2 historical years 4 historica l years Standard deviation 918 781 645 527 452 Coefficient of 0.63 0.73 0.66 0.62 0.66 variation Coefficient of 1 0.89 0.82 0.73 0.63 correlation Source: World Bank. past ten years, stand at around CFAF 5,500 billion. denominated in freely convertible currencies with Subtracting from this amount the total loans made by very little correlation with oil prices (for example, China in the amount of CFAF 1,700 billion over the the U.S. dollar, the euro, etc.). This portfolio should period, the balance is CFAF 3,800 billion in savings, be diversified among various currencies to reduce the of which CFAF 1,300 billion are held at the BEAC. level of risk. For the intergenerational equity funds, After a drawdown of some CFAF 1,500 billion for which are long-term, the question of liquidity does stabilization purposes, the Government would have not arise. They should be diversified, i.e., include high- CFAF 2,300 billion in reserves. According to this yield assets from various countries and various sectors hypothesis, by saving around CFAF 450 billion and currencies. The composition should be changed (1 percent of NOGDP) at constant prices starting in regularly (perhaps annually) to take account of known 2020, it would be able to achieve its objectives. This changes in yields and risk levels of assets. reconfirms the importance of ensuring the transparency and sound management of the reserves in China. 2.3.5  Fiscal institutions Congo also needs to take into account the uncertainty in the return on investment. Policy- Congo should equip itself with well-designed makers rightly worry about the volatility and uncertainty fiscal institutions to develop and maintain sound of oil revenues, but the return on saving/investing is fiscal policies—particularly institutions guaranteeing risky too and could even be negative in some instances, transparency and special fiscal institutions, such as which adds an additional source of difficulty in the natural resource funds and independent forecasting management of oil resources. Consequently, it is bodies, to ensure prudent planning and utilization of important to calculate risk-adjusted returns before any resource revenues. The public finance management investments and to compare the result with the return system should be sufficiently robust (i) to provide on safer assets or a more rapid repayment of debt. This reasonable forecasts for natural resource prices, is why the Government should have a risk management production and fiscal revenues, and to analyze related strategy for current and future investments. risks; (ii) to carry out medium-term budget planning; A good risk management strategy for the (iii) to facilitate investment project appraisal, selection Congolese Government would consist first in the and implementation to ensure that resource revenues publication of its investment objectives and their are used to support long-term economic development; constraints and the performance of the funds (iv) to integrate cash management and minimize placed at the BEAC and in China. For stabilization financing costs to ensure a single route between the reasons, the funds should be composed, relatively budget and any natural resource fund; and (v) to conservatively, of short-term high-quality liquid assets ensure transparency in the collection and utilization 32 REPUBLIC OF CONGO – ECONOMIC UPDATE of natural resource revenues, and other available resources, through appropriate fiscal accounting, reporting, and auditing. Fiscal transparency and good governance should be given prominence when fiscal institutions are established. Congo does not yet have relatively inclusive political institutions, i.e., ensuring full participation of communities or populations in the choice of local investments. As a result, scaling up public investment might be counterproductive because the budget process does not necessarily reflect broader social preferences (see World Bank, 2015, with the example of airports). This involves several issues, including an assessment 2.4  Implications of current oil prices of the clarity of the roles and responsibilities of the for fiscal management various government entities; establishment of an open budget process; public availability of information; and The fiscal policy analytical framework shows that assurances of data integrity. The government could the anchor for Congo’s fiscal policy should consider design and establish an accountability mechanism in both the introduction of a fiscal rule to smooth line with best accounting practices covering internal revenues projected in the budget and capital controls and external audits. spending and be based on the assessment of an A single fund covering the stabilization and adequate capital spending envelope for periodic savings portfolios could be created for an integrated scaling up. Medium-term spending trends should approach to the management of the Government’s be calibrated each year to ensure fiscal sustainability financial assets. An explicit strategy for transfers and the quality of spending in line with the absorptive between these two portfolios could be planned, once and implementation capacity. The rate of growth a certain (relatively low) threshold is reached to avoid of expenditure should be compatible with the costly expenditure adjustments. The creation of separate improvement in public finance management. entities would require human resources capable of This analytical framework implies that, having guaranteeing better quality management of these funds. accumulated reserves in the period of high oil Congo should ensure a good return on the prices, the Government would do well to use them infrastructure investment resulting from oil to absorb the expenditure adjustments in the resources. Institutional and governance arrangements coming years. While the discussions are currently should ensure the socioeconomic profitability of the around a zero deficit policy, the Government should infrastructure selected and the effectiveness of the be wary of such an option during this crisis period. investments. The creation of the Congolese Investment Such a policy would be procyclical and would amplify Fund and the Caisse de dépôts et de consignations is very the harmful effects of lower oil prices on the economy. encouraging in this regard. It implies the existence of: Under some circumstances, it could even plunge the (i) a medium-term expenditure framework for the country into recession (see Figure 2.12). Any policy budgeting of investments; (ii) rigorous and transparent to drastically reduce spending on goods and services procedures for the assessment and approval of would have serious repercussions for growth because investments; (iii) public tendering for infrastructure it would very strongly affect small and medium- contracts; (iv) monitoring and auditing of projects; sized enterprises, which are the engines of growth and (v) well-equipped managerial resources. of services not related to the oil sector. A decline in MACROECONOMIC AND FINANCIAL MANAGEMENT OF THE VOLATILITY AND UNCERTAINTY OF CONGO’S OIL RESOURCES 33 Potential Impact of FIGURE 2.12:  Impact of the Zero Deficit FIGURE 2.13:  Unrestrained Public Spending on Policy on the Congolese the Congolese Economy in 2015 Economy in 2015 and 2016 7 4 6 3 5 2 4 1 3 0 2 –1 1 0 –2 Unrestrained Expenditures, Expenditures, 2015 2016 2015 2016 2015 2016 expenditures January 2015 June 2015 Closure with goods Closure with Baseline budget budget and services capital spending GDP growth NOGDP growth GDP growth NOGDP growth Source: World Bank. Source: World Bank. capital spending, while having medium and long-term CFAF 1,340 billion and it would have been possible repercussions, would affect the economy to a lesser to maintain the level of expenditures initially planned extent since most of the companies involved in large by using the funds saved in the stabilization fund. The infrastructure projects are foreign companies. Congolese economy would therefore have been able If the Congolese Government had followed to grow at a rate of 2.6 percent in 2015, stimulated by a fiscal rule similar to the one presented here, it the non-oil sector, which would have been able to grow would be in a position to apply a countercyclical by 4.5 percent, as against 7.3 percent in 2014. The policy and would have been able to reduce the country would have been able to gain 1.3 percentage impact of the oil price shock on the economy by points in real GDP growth and 1.7 percentage points more than 1 percentage point. If the Government in growth of the non-oil sector (see Figure 2.13). The had used an 8-year moving average to set its budgeted Congolese Government should consider the adoption prices, the price of oil in 2015 would have been set at of a fiscal rule anchored on the NOPB and comprising US$79 per barrel resulting in budget revenues totaling a price rule and a rule for adequate expenditure. 34 REPUBLIC OF CONGO – ECONOMIC UPDATE BIBLIOGRAPHY Ammar, N., J.P. Pare and F. Tchana, 2013, “Modèle IMF, 2014, “Republic of Congo: 2014 Article IV structurel de prévision mensuelle du prix du Consultation-Staff Report,” September 2014 pétrole à long terme [Structural model for World Bank, 2014, “The Road to Economic monthly forecasting of long-term oil prices]” Development: Investing Efficiently in Congo’s mimeograph, Ministry of Finance of Quebec. Infrastructure,” Republic of Congo Economic European Union, 2014, Public Expenditure and Update. Financial Accountability, June 2014. World Bank, 2015, “Implementing public financial IMF, 2012a, “Macroeconomic Policy Frameworks management reforms to stimulate growth and for Resource-Rich Developing Countries,” IMF achieve shared prosperity,” PEMFAR, April 2015. Policy Paper, August 24, 2012. IMF, 2012b, “Macroeconomic Policy Frameworks for Resource-Rich Developing Countries, Analytic Frameworks and Applications,” IMF Policy Paper, August 24, 2012. 35 ANNEXES TABLE A.1: Republic of Congo – Selected macroeconomic indicators, 2010–2017 2014 2015 2016 2017 2010 2011 2012 2013 Est. Proj. GDP growth (constant prices, annual %) 8.7 3.4 3.8 3.3 6.4 1.3 3.5 5.7 GDP growth – oil (constant prices, annual %) 13.7 –4.8 –9.6 –10.0 3.1 –4.0 7.0 10.0 GDP growth – non-oil (constant prices, annual %) 6.4 7.5 9.7 8.1 7.4 2.8 2.5 4.5 Private Consumption growth (current prices, annual %) 5.4 7.9 9.9 3.8 5.8 2.9 1.9 9.0 Gross Fixed Investment (current prices, % of GDP) 29.7 34.5 43.2 46.6 50.6 71.8 69.3 65.4 Gross Fixed Investment – Public (current prices, % of GDP) 7.9 11.7 18.8 25.8 28.5 40.4 38.1 35.1 Gross Fixed Investment – Private (current prices, % of GDP) 21.8 22.8 24.4 20.8 22.1 31.4 31.2 30.3 Inflation, consumer prices (annual %, end of year) 5.4 1.8 7.5 2.1 0.5 3.0 2.6 2.6 Inflation, consumer prices (annual %, period average) 5.0 1.8 5.0 4.6 0.9 3.0 2.9 2.8 GDP deflator (annual %, average) 26.9 11.0 –3.8 –3.4 –5.6 –27.3 6.2 6.6 Nominal Exchange Rate (CFAF/US$, period average) 494.4 471.0 510.0 494.2 494.6 582.8 494.6 494.6 Real Effective Exchange Rate Index (2005=100) 108.7 107.9 106.4 112.3 Overall Fiscal Balance 16.5 16.7 6.1 8.2 –4.9 –12.3 –8.9 –7.2 (commitment basis, incl. grants % of GDP) Overall Fiscal Balance 16.5 16.3 6.0 7.8 –5.1 –12.3 –8.9 –7.2 (commitment basis, excl. grants % of GDP) Overall Fiscal Balance (commitment basis, 54.5 56.3 18.5 22.2 –12.2 –18.8 –16.1 –8.6 incl. grants % of non-oil GDP) Primary Fiscal Balance (% of GDP) 17.9 19.4 10.0 15.6 –0.1 –1.9 –0.5 3.2 Non-oil Primary Fiscal Balance (% of non-oil GDP) –36.3 –44.7 –68.4 –47.5 –52.8 –34.0 –29.6 –25.1 Total revenue (excl. grants, % of GDP) 36.6 40.9 41.8 44.1 33.6 36.2 33.4 33.3 Oil revenue (% of GDP) 28.9 32.7 32.6 32.5 21.3 17.9 16.2 16.9 Non-oil revenue (% of non-oil GDP) 25.5 27.8 27.9 31.4 30.4 31.5 30.4 30.2 Merchandise exports (fob, current US$ billions) 7.1 8.7 7.3 6.7 7.2 4.8 5.7 6.6 of which oil exports (current US$ billions) 6.4 7.9 6.5 5.8 6.3 4.0 4.7 5.6 (continued on next page) 37 TABLE A.1: Republic of Congo – Selected macroeconomic indicators, 2010–2017 (continued) 2014 2015 2016 2017 2010 2011 2012 2013 Est. Proj. Merchandise imports (fob, current US$ billions) 5.7 6.7 8.6 9.1 5.9 5.0 6.0 6.3 of which oil exports (current US$ billions) 0.9 1.1 1.0 0.9 1.0 0.8 1.0 1.0 Current account balance (incl. transfers, % of GDP) –0.1 –0.1 –0.3 –5.2 –6.3 –13.0 –14.5 –10.4 Foreign Direct Investment (net, current US$ billions) 3.0 3.3 2.0 4.6 5.1 5.5 3.9 18.1 of which oil sector (net, current US$ billions) 2.5 2.7 1.2 3.4 3.5 3.8 1.5 15.5 Population, total (millions) 4.0 4.1 4.3 4.4 4.5 4.7 4.8 4.9 Unemployment Rate — 6.9 — Formal sector job creation (%, yoy) — — — Poverty headcount ratio at national poverty line (% of — 46.5 — population) Inequality – Income Gini — 0.38 — Population Growth (annual %) 2.0 2.9 2.9 2.9 0 2.9 2.9 2.9 Life Expectancy — 51.6 — Infant mortality rate (per 1,000 live births) 42.0 39.4 37.3 35.6 Sources : Congolese authorities, World Bank. 38 REPUBLIC OF CONGO – ECONOMIC UPDATE TABLE A.2: Republic of Congo – Real GDP growth rates, 2011–2017 2011 2012 2013 2014 2015 2016 2017 Est. Proj. Primary sector –1.9 –5.2 –4.7 4.7 –0.8 5.8 7.8 Agric., livestock, hunt, fishery 7.9 7.8 8.5 8.2 5.0 4.0 4.0 Agric., livestock, 8.0 8.3 9.0 8.7 5.0 4.0 4.0 Hunt 6.5 5.2 5.8 5.0 5.0 4.0 4.0 Fishery 8.0 6.1 6.7 6.5 5.0 4.0 4.0 Forestry 1.6 3.0 3.1 6.0 6.7 0.9 1.6 Extractive Industries –4.8 –9.6 –10.0 3.1 –4.0 7.0 10.0 Petroleum sector –4.8 –9.6 –10.0 3.1 –4.0 7.0 10.0 Other extractive industries 0.0 1.0 2.0 3.0 4.0 5.0 6.0 Secondary sector 8.7 8.7 8.9 7.6 4.5 3.3 5.1 Manufacturing industries 8.6 8.6 9.0 6.6 4.2 3.4 5.2 Food industries 8.0 8.4 9.0 9.4 4.1 2.9 5.1 Other manufacturing industries 9.6 8.8 9.0 2.3 4.4 4.2 5.5 Electricity, gas and water 7.4 7.5 7.0 7.2 4.9 1.5 5.0 Constructions.& public works 10.5 10.5 10.2 12.1 5.2 4.0 4.4 Tertiary sector 7.2 10.8 7.9 7.5 1.7 2.0 4.5 Transports and Communications 9.2 9.1 9.1 7.1 5.6 4.0 7.5 Transports 8.5 8.6 8.5 7.0 5.6 4.2 7.4 Communications 10.4 9.8 10.0 7.2 5.6 3.6 7.6 Commerce, restaurants, hotels 9.2 9.5 9.2 7.5 6.1 4.6 7.6 Public Administration 3.2 17.7 7.4 9.7 –8.0 –5.0 –5.0 Other services 6.7 6.0 4.4 4.5 3.6 4.0 6.6 GDP at factor cost 3.3 3.7 3.1 6.5 1.2 3.5 5.8 Import taxes 6.6 8.1 8.1 4.7 2.6 2.8 5.9 GDP at constant prices 3.4 3.8 3.3 6.4 1.3 3.5 5.8 Non-oil 7.5 9.7 8.1 7.4 2.8 2.5 4.6 Mining 0.0 1.0 2.0 3.0 4.0 5.0 6.0 Oil –4.8 –9.6 –10.0 3.1 –4.0 7.0 10.0 Sources : Congolese authorities, World Bank. Annexes 39 TABLE A.3: Republic of Congo – Sectoral contribution of real output, 2011–2017, percent of GDP 2011 2012 2013 2014 2015 2016 2017 Est.   Proj.   Primary sector 73.9 70.9 67.6 64.4 48.9 50.5 52.2 Agric., livestock, hunt, fishery 3.3 3.6 4.1 4.6 6.7 6.6 6.3 Agric., livestock 2.7 3.0 3.4 3.8 5.7 5.6 5.3 Hunt 0.2 0.2 0.3 0.3 0.4 0.4 0.4 Fishery 0.3 0.4 0.4 0.4 0.6 0.6 0.6 Forestry 0.3 0.3 0.3 0.3 0.4 0.4 0.3 Extractive Industries 70.3 67.0 63.3 59.6 41.8 43.5 45.6 Petroleum sector 70.3 67.0 63.3 59.6 41.8 43.5 45.6 Other extractive industries 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Secondary sector 7.0 7.8 8.8 9.8 14.3 13.8 13.3 Manufacturing industries 3.5 3.8 4.3 4.7 6.7 6.4 6.0 Food industries 2.6 2.8 3.1 3.5 5.0 4.7 4.4 Other manufacturing industries 0.9 1.0 1.2 1.2 1.7 1.7 1.6 Electricity, gas and water 0.6 0.6 0.7 0.8 1.1 1.0 1.0 Constructions.& public works 2.9 3.3 3.8 4.3 6.4 6.4 6.3 Tertiary sector 17.4 19.4 21.5 23.5 33.5 32.5 31.4 Transports and Communications 4.0 4.4 5.0 5.4 8.1 8.1 8.2 Transports 2.9 3.2 3.6 4.0 5.9 6.0 6.0 Communications 1.1 1.2 1.3 1.5 2.2 2.2 2.2 Commerce, restaurants, hotels 5.5 6.0 6.8 7.4 11.0 11.1 11.1 Public Administration 3.4 4.1 4.5 5.1 6.5 5.8 5.0 Other services 4.6 4.9 5.3 5.6 7.9 7.5 7.1 GDP at factor cost 98.3 98.1 97.9 97.7 96.7 96.8 96.9 Import taxes 1.7 1.9 2.1 2.3 3.3 3.2 3.1 GDP at constant prices 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Non-oil 29.7 33.0 36.7 40.4 58.2 56.5 54.4 Mining 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Oil 70.3 67.0 63.3 59.6 41.8 43.5 45.6 Sources : Congolese authorities, World Bank. 40 REPUBLIC OF CONGO – ECONOMIC UPDATE TABLE A.4: Republic of Congo – Use of resources at current prices, 2010–2016, percent of GDP 2011 2012 2013 2014 2015 2016 2017 Est.   Proj.   Gross domestic product (GDP) 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Domestic demand 64.0 76.9 87.6 95.9 144.1 135.2 129.4 Consumption 29.6 33.7 41.0 45.3 72.3 65.8 64.0 Public (Government) 7.3 8.9 8.3 9.6 11.9 13.0 12.4 Private 22.2 24.8 32.7 35.6 60.3 52.9 51.6 Domestic investment 34.5 43.2 46.6 50.6 71.8 69.4 65.4 Fixed expenditure 34.5 43.2 46.6 50.6 71.8 69.3 65.3 Public (Government) 11.7 18.8 25.8 28.5 40.4 38.1 35.1 Private (Enterprises et households) 22.8 24.4 20.8 22.1 31.4 31.2 30.3 Petroleum sector 19.0 19.9 15.0 15.4 20.5 19.8 19.0 Mining sector               Others sectors (Non-oil and mining) 3.8 4.5 5.7 6.8 11.0 11.5 11.3 Variation of stocks 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Net exports 36.0 25.9 12.4 4.1 –44.1 –35.2 –29.4 Exports of G and NFS (BOP) 84.9 93.2 84.3 80.3 62.2 63.7 65.6 Goods 81.6 90.0 80.8 76.5 56.8 58.5 60.5 Oil exports 77.3 85.6 76.5 72.1 50.6 52.7 55.1 Others exports (Non-oil) 4.3 4.3 4.2 4.4 6.3 5.8 5.4 Non-factor services 3.3 3.2 3.5 3.8 5.4 5.2 5.0 Imports of G and NFS (BOP) –49.0 –67.3 –71.8 –76.2 –106.3 –98.8 –95.0 Goods –24.5 –36.9 –40.6 –43.8 –62.1 –57.7 –55.1 Oil imports –7.2 –7.3 –6.7 –6.8 –8.9 –8.6 –8.4 Others imports (Non-oil) –17.3 –29.6 –33.9 –37.0 –53.1 –49.1 –46.8 Non-factor services –24.4 –30.4 –31.2 –32.3 –44.2 –41.1 –39.9 Sources : Congolese authorities, World Bank. Annexes 41 TABLE A.5: Republic of Congo – Central Government Operations, 2011–2017, percent of GDP 2015 2016 2017 2011 2012 2013 2014 Proj. 1. Revenue and grants 41.3 42.0 44.9 33.8 36.2 33.4 33.3 Revenue 40.9 41.8 44.1 33.6 36.2 33.4 33.3 Oil and mining revenue 32.7 32.6 32.5 21.3 17.9 16.2 16.9 Oil revenue 32.7 32.6 32.5 21.3 17.9 16.2 16.9 Mining revenue 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Non-oil revenue 8.2 9.2 11.5 12.3 18.3 17.2 16.4 Fiscal taxes 7.9 8.9 11.0 12.1 17.7 16.8 16.1 Non tax revenue 0.4 0.3 0.5 0.2 0.6 0.4 0.4 Grants 0.4 0.1 0.4 0.2 0.0 0.0 0.0 2. Expenditure and net lending 24.7 35.9 36.7 38.7 47.1 42.5 38.0 Current expenditure 9.9 14.7 13.6 15.7 20.0 21.5 20.5 Wage bill 3.0 3.6 3.9 4.6 7.1 7.4 7.3 Other current expenditure (primary) 6.8 10.9 9.3 10.9 12.5 11.5 10.3 Material and supplies 2.6 4.0 3.7 4.8 4.8 4.3 3.7 Common charges 1.0 1.6 1.4 1.5 3.3 1.9 1.7 Fiscal reserves 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Transfers 2.6 4.8 3.8 4.3 4.4 4.3 4.0 Local authorities 0.6 0.6 0.5 0.3 0.0 1.0 0.9 Interest on public debt 0.2 0.2 0.3 0.2 0.3 2.6 2.9 Domestic 0.0 0.0 0.0 0.0 0.0 0.3 0.0 External 0.2 0.2 0.2 0.2 0.3 2.3 2.9 Capital expenditure 14.8 21.2 23.2 23.0 27.2 21.0 17.5 Domestically financed 11.8 17.3 15.6 18.1 18.4 15.0 12.5 Externally financed 3.0 3.9 7.5 4.8 8.7 6.0 5.0 Net lending 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Primary balance, domestic resources basis 19.4 10.0 15.6 –0.1 –1.9 –0.5 3.2 Non-oil primary balance –13.3 –22.6 –17.4 –21.4 –19.8 –16.7 –13.6 Balance, commitment basis, excluding grants 16.3 6.0 7.8 –5.1 –10.9 –9.1 –4.7 Balance, commitment basis, including grants 16.7 6.1 8.2 –4.9 –10.9 –9.1 –4.7 Change in arrears (– = decrease) –1.3 –0.9 –2.6 –0.7 –2.3 –2.4 –1.9 Domestic (principal and interest) –1.3 –0.9 –2.6 –0.7 –2.3 –2.4 –1.9 External (principal and interest) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Balance, cash basis 15.4 5.2 5.6 –5.6 –13.2 –11.5 –6.6 3. Financing –15.4 –5.2 –5.6 5.6 13.2 11.5 6.6 Foreign (net) –1.1 2.7 5.4 16.0 25.6 18.0 14.4 Domestic (net) –14.3 –7.9 –11.0 –10.4 –11.4 –8.8 –7.7 Residual financing gap 0.0 0.0 0.0 0.0 –1.0 2.3 0.0 Sources : Congolese authorities, World Bank. 42 REPUBLIC OF CONGO – ECONOMIC UPDATE TABLE A.6: Republic of Congo – Central Government Operations, 2011–2017, percent of non oil GDP 2011 2012 2013 2014 2015 2016 2017 Est. Proj. 1. Revenue and grants 139.3 127.2 122.2 83.5 62.2 59.1 61.2 Revenue 137.9 126.7 120.0 83.0 62.2 59.1 61.2 Oil and mining revenue 110.2 98.8 88.6 52.6 30.8 28.7 31.0 Oil revenue 110.2 98.8 88.6 52.6 30.8 28.7 31.0 Mining revenue 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Non-oil revenue 27.8 27.9 31.4 30.4 31.5 30.4 30.2 Fiscal taxes 26.5 26.9 29.9 30.0 30.4 29.7 29.5 Non tax revenue 1.3 1.0 1.4 0.4 1.0 0.7 0.7 Grants 1.4 0.4 1.0 0.5 0.0 0.0 0.0 2. Expenditure and net lending 83.1 108.6 100.0 95.7 81.0 75.2 69.8 Current expenditure 33.3 44.4 36.9 38.9 34.3 38.1 37.6 Wage bill 10.0 10.8 10.8 11.4 12.2 13.1 13.4 Other current expenditure (primary) 22.8 33.1 25.4 27.0 21.5 20.3 18.8 Material and supplies 8.8 12.1 10.1 11.8 8.3 7.5 6.7 Common charges 3.2 4.9 3.8 3.6 5.6 3.4 3.2 Transfers 8.7 14.5 10.3 10.7 7.6 7.6 7.4 Local authorities 2.1 1.7 1.2 0.8 0.0 1.7 1.6 Interest on public debt 0.5 0.6 0.7 0.5 0.5 4.7 5.4 Domestic 0.0 0.0 0.1 0.0 0.0 0.5 0.0 External 0.5 0.6 0.6 0.5 0.5 4.1 5.4 Capital expenditure 49.7 64.2 63.1 56.9 46.7 37.2 32.2 Domestically financed 39.6 52.4 42.6 44.9 31.7 26.6 23.0 Externally financed 10.1 11.8 20.5 12.0 15.0 10.6 9.2 Net lending 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Primary balance, domestic resources basis 65.5 30.4 42.4 –0.2 –3.3 –0.8 5.9 Non-oil primary balance –44.7 –68.4 –47.5 –52.8 –34.0 –29.6 –25.1 Balance, commitment basis, excluding grants 54.9 18.1 21.2 –12.7 –18.8 –16.1 –8.6 Balance, commitment basis, including grants 56.3 18.5 22.2 –12.2 –18.8 –16.1 –8.6 Change in arrears (- = decrease) –4.4 –2.8 –7.1 –1.7 –4.0 –4.3 –3.5 Domestic (principal and interest) –4.4 –2.8 –7.1 –1.7 –4.0 –4.3 –3.5 External (principal and interest) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Balance, cash basis 51.8 15.7 15.2 –13.9 –22.7 –20.4 –12.1 3. Financing –51.8 –15.7 –15.2 13.9 22.7 20.4 12.1 Foreign (net) –3.8 8.3 14.7 39.6 44.1 31.9 26.4 Domestic (net) –48.0 –24.1 –29.8 –25.7 –19.6 –15.6 –14.2 Residual financing gap 0.0 0.0 0.0 0.0 –1.7 4.1 0.0 Sources : Congolese authorities, World Bank. Annexes 43 TABLE A.7: Republic of Congo – Executed Budget, 2008–2014, Percent of total Budget 2008 2009 2010 2011 2012 2013 2014 Est.   1. Revenue and grants 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Revenue 100.0 98.9 100.0 99.0 99.7 98.2 99.4 Oil and mining revenue 86.0 69.8 79.0 79.1 77.7 72.5 63.0 Oil revenue 86.0 69.8 79.0 79.1 77.7 72.5 63.0 Mining revenue 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Non-oil revenue 14.0 29.1 21.0 19.9 21.9 25.7 36.4 Fiscal taxes 12.4 26.7 20.0 19.0 21.2 24.5 35.9 Non tax revenue 1.6 2.4 1.1 0.9 0.7 1.2 0.5 Grants 0.0 1.1 0.0 1.0 0.3 0.8 0.6 2. Expenditure and net lending 50.3 82.9 55.0 59.6 85.4 81.8 114.6 Current expenditure 31.8 46.7 30.5 23.9 34.9 30.2 46.5 Wage bill 6.7 13.1 8.1 7.2 8.5 8.8 13.6 Other current expenditure (primary) 19.0 28.1 19.8 16.4 26.0 20.8 32.3 Material and supplies 7.1 10.9 8.0 6.3 9.5 8.2 14.1 Common charges 1.7 2.0 2.2 2.3 3.8 3.1 4.3 Transfers 9.2 12.3 7.7 6.3 11.4 8.5 12.8 Local authorities 0.9 1.8 1.9 1.5 1.3 1.0 0.9 Interest on public debt 6.1 5.5 2.6 0.4 0.4 0.6 0.6 Domestic 0.4 0.7 0.1 0.0 0.0 0.1 0.0 External 5.7 4.8 2.6 0.4 0.4 0.5 0.6 Capital expenditure 18.4 36.2 24.5 35.7 50.5 51.6 68.1 Domestically financed 15.8 35.1 23.1 28.4 41.2 34.9 53.8 Externally financed 2.6 1.2 1.4 7.3 9.2 16.8 14.3 Net lending 0.0 0.1 0.0 0.0 0.0 0.0 0.0 3. Budget surplus 49.7 16.8 45.0 40.4 14.6 17.7 0.0 Fiscal surplus, in percent of GDP 26.9 5.2 16.5 16.7 6.1 8.2 1.8 Sources : Congolese authorities, World Bank. 44 REPUBLIC OF CONGO – ECONOMIC UPDATE