Document of The World Bank FOROFFICIALUSEONLY ReportNo. 34759-CG MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVEDIRECTORS ONASSISTANCE TO THE REPUBLIC OF CONGO UNDER THE ENHANCED HIPC DEBT INITIATIVE MARCH 2,2006 This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Currency Unit US$1.oo = CFA Franc (CFAF) = 542.7 (as ofJanuary 19,2006) WEIGHTS AND MEASURES Metric System FISCALYEAR January 1-December 3 1 ABBREVIATIONS AND ACRONYMS CIRR Commercial interest reference rate DSA Debt sustainability analysis ERCP Economic RehabilitationCredit Project HIPC Heavily IndebtedPoor Country IDA International Development Association IMF International Monetary Fund NPV Net present value PRGF Poverty Reduction and Growth Facility PRSP Poverty Reduction Strategy Paper SDR Special drawing rights TSS Transitional Support Strategy USD UnitedStates dollar Vice President Gobind Nankani Country Director Pedro Alba Director, PRMED Vikram Nehru Task Team Leaders Bruno Boccara, Brendan Horton Staff Members Danielle Dukowicz, Mark Thomas and Francis Rowe I I ASSISTANCE TO THE REPUBLIC OF CONGO UNDERTHE ENHANCEDHEAVILY INDEBTED POORCOUNTRIES DEBT INITIATIVE TABLE OF CONTENTS I. INTRODUCTION ................................................................................................................ 1 11. PROPOSEDIDA DEBT RELIEF ...................................................................................... 1 111. IDA ASSISTANCE STRATEGY ....................................................................................... 3 . IV. PROPOSEDCOMPLETIONPOINT TRIGGERS ......................................................... 3 V. RECOMMENDATION ....................................................................................................... 5 CHARTS Chart 1. Assistance to Republic o f Congo: BurdenSharing for Proposed Enhanced HIPC Debt Relief Chart 2. IDA Service Before and After HIPC Assistance, 2005-2020 ANNEXES Annex 1. Republicof Congo: IDA Credits Subject to Debt Service Reductionunderthe Enhanced HIPC Initiative Annex 2. Republic o f Congo: Scheduleof Debt Service Reductionunder the Enhanced HIPC Initiative MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ONASSISTANCE TO THE REPUBLIC OF CONGO UNDER THE ENHANCED HIPC DEBT INITIATIVE I. INTRODUCTION 1, IsubmitforyourapprovalthefollowingMemorandumandRecommendationonthe I assistance to be provided to the Republic of Congo (Congo) under the Enhanced Heavily IndebtedPoor Countries (HIPC) Debt Initiativeby the International Development Association (IDA).This report and recommendation addresses: (a) IDA'Sproposedassistanceto be provided inthe interimperiodbetweenthe decision point and completionpoint ;(b) the relief that i s proposed to be provided at the completion point; and (c) the triggers that Congo must satisfy to reach the completion under the Enhanced HIPC Initiative. 2. This document complements the attachedjoint IDA-IMFpaper entitled"Republic o f Congo: Decision Point Document for the Enhanced Heavily IndebtedPoor Countries Initiative". The DecisionPoint document contains an updated debt sustainability analysis (DSA) which was circulated to the Board on August 5, 2005 (IDN33252). The updated DSA, usingend-December 2004 data, has beenpreparedjointly by IDA and IMF staff, andthe Congolese authorities. It reflects updated information concerning the underlying debt data, including transactions which took place during 2004. The Decision Point document also contains recommendations on: (a) the envisageddebt relief from bothmultilateralandbilateral creditors under the EnhancedHIPC Initiative; and (b) conditions upon which a floating completion point would bepredicated. 11. PROPOSEDIDA DEBT RELIEF 3. Congo's external debt and possible assistance under the Enhanced HIPC Initiative was estimated using end-2003 external debt data inAugust 2005. On the basis o f the results of the preliminary DSA,the Executive Directors agreed that Congo could reach the decision point by end-2005. An Interim Poverty ReductionStrategy Paper and Joint IDA-IMFStaffAdvisory Note of the InterimPRSP were circulated inDecember 20042.The Executive Directors broadly agreedthat Congo's interimPRSP provided a sound basis for the development o f a fully participatory PRSP, and for reaching the decision point underthe Enhanced HIPC Initiative. 4. The updated DSA, whichreflects the findings and discussions duringajoint Bank-Fund missionundertaken in September, 2005 confirms that Congo, with aNet Present Value (NPV) o f debt-to-fiscal revenues ratio at end-2004 o f 370 percent after traditional debt relief, qualifies for debt reliefunder the Enhanced HIPC Initiative. To bring Congo's NPV o f debt-to-revenues ratio to the HIPC threshold of 250 percent as o f end-December 2004, the total assistanceunder IRepublic of Congo - EnhancedHeavily IndebtedPoor CountriesInitiative:PreliminaryDocument(IDA/33252). Republic of Congo Interim PovertyReduction Strategy PaperandJoint IDA-IMF StaffAssessment ofthe - InterimPRSP:summing up (IDAi30709). 2 the EnhancedHIPC Initiative would amount to US$1,679 million inNPV terms. This corresponds to a common reductionfactor o f 32.4 percent. Based on proportional burden- sharing, the multilateral creditors' share of assistancewould amount to US$118 million inNPV terms, of which US$48.9 million would be attributable to IDA, while the bilateraland commercial creditors' share would amount to US$914 million inNPV terms (Chart 1). Chart 1. Assistance to Congo: BurdenSharingfor ProposedEnhnacedHIPC Debt Releif of US$1,679 (2004 NPV terms) IDA IMF - AfDB Group Commercial Non-Paris Club 3% 33YO 5. It is proposed that the Enhanced HIPC assistance from IDA-US$48.9 million inend- 2004 NPV terms-be delivered through debt relief on IDA credits disbursedand outstanding as of December 31,2004. We seek the Executive Directors' approval o fIDA 's EnhancedHIPC debt relief on amounts owed by Congo to IDA on the following terms: (a) interimassistance would be providedstarting inMarch 2006, after approval of Congo's DecisionPoint document by the Executive Directors of IDA andthe IMF and continue untilthe country has reachedthe completion point, providingthat program performance remains ~atisfactory.~The delivery o f interim assistance will be subject to the one third limit of NPVof assistanceduring the interimperiod. The irrevocable delivery o f assistance at completion point will be subject to having the country's other creditors confirm their agreement to provide debt reliefunder the I Initiative; (b) a 36.9 percent reductionwould be applied to debt service falling due to IDA in2006 on disbursedand outstanding IDA credits of as end-December 2004, followed by a 50.5 percent reduction each year thereafter until2020. A 15.5 percent reduction would take place in2021. Annex 2 specifies the annual amount o f IDA's debt relief, and The 2004 Boardpaper on this topic states that interimrelief can be suspendedif "progress inreformefforts...is unsatisfactory" as assessedby Bank staff independently of PRGFreviews by the IMF. Suchan optionrequiresa formal notification"specifyingremedialactions that would needto be taken within a one-year period." See "Enhanced HIPC Initiative: Provisionof InterimHIPCDebt Reliefon IBRDLoans andIDA Credits" discussed September 9,2004: IDAiSecM2004-0604. (c) debt relieffrom IDA i s expected to be deliveredover approximately 15 years, ending in2021. With this delivery mechanism, Congo would receive and estimated cumulative debt service reduction from IDA o f approximately US$70.7 million in nominal terms. 6. The total relief on debt service due to IDA innominal terms is shown inAnnex 2 and Chart 2 shows debt service owed to IDA before and after assistanceunder the EnhancedHIPC Initiative. From February 2021 onward, full debt service payments would resume, averaging US$7.0 million annually for 2022-2043. 111. IDA'SASSISTANCESTRATEGY 7. Following the democratically-held elections in2002 and the relative stability that has ensued, Congo has made good progress inbuilding a track recordo f macroeconomic stability and structural policy implementation, prepared an interimPoverty Reduction Strategy Paper (I-PRSP), and has made significant progress innormalizingrelations with creditors. 8. The government's recovery programhas beensupported by the Bank througha Transitional Support Strategy (TSS) in2001, and an updated TSS in2003. The most recent TSS aims to support the Government's efforts to liftthe country out o f the conflict trap by outlining a new program o f continuedBank support, building on achievements made over the pasttwo years towards peace, political reconciliation and economic recovery. The TSS intendsto consolidate and deepenthese reforms, within the context of the PRSP process, with a view to moving to a formal CAS as soon as conditions allow. Financial assistance underthe updated TSS is inthe form of an Economic Recovery Credit (ERC), an HIV/AIDS project, an Education project, and an infrastructure rehabilitationproject. The ERC focuses on transparency inthe oil sector, improvedmanagement of domestic debt and more efficient public investment, while the infrastructure project aims to address priority needs inurbanwater and electricity. The goal o f the HIV/AIDS and HealthProject is to mitigatethe negative impact ofthe HIV/AIDSepidemic on socio-economic development, while the education project aims at assisting Congo inthe mitigation o f the current crisis o f the education sector, and at establishing the grounds for a solid development of a mediumand long-term sector program. 9. Inparallel, the Bank hasprepared aPublic ExpenditureManagement Reviewwhich addresses specific mechanisms expected to enhancepublic expenditure management, as well as helpto identify core priorities for spending onpoverty reduction inline withthe I-PRSP. IV. PROPOSEDCOMPLETIONPOINTTRIGGERS 10. The proposed IDA assistance under the Enhanced HIPC Initiative would provide support for the implementationo fthe government's poverty reduction strategy as outlined inthe Congo's Interim PRSP and to be further elaborated inthe fully participatory PRSP. 4 11. The delivery of HIPC assistanceat completion point would be contingent uponthe fulfillment of actions specified inthe accompanying DecisionPoint document. To reachthe completion point, the government will needto: (a) prepare a full PRSP through a participatory process and implement it for at least one year, as confirmed by Executive Board consideration of the authorities' Annual ProgressReport that has beenthe subject of analysis ina Joint Staff Advisory Note; (b) maintain macroeconomic stability as evidenced by satisfactory performance underthe PRGF-supported programas well as any successor IMFsupported program; and (c) implementkey governance andtransparency measures with particular attention to the oil sector, public finance management measures, and achieve priority poverty reductiongoals specified in Box 5 of the Decision Point document. 12, Completionpoint triggers inconjunction with ongoing support by the Bank andthe IMF will address weaknesses that remaininmanaging oil revenue andpublic finances. Recent actions and additional steps to be taken before the completion point inorder to improve accounting for oil revenue, management of oil sales, and avoid any conflict o f interest inthe oil sector will go a long a way to tackle weak practices that have also beenat the core o f recent public corruption allegations. Additional reforms to improvethe efficiency ofpublic expenditure management and public spending, particularly, inthe social sectors, furthermore give strong assurances that the proposed debt relief under the enhancedHIPC Initiative would contribute to a reduction inpoverty and improvements inliving conditions of the Congolese population. Bank and IMF staff will continue the dialogue with the authorities and the monitoring o f the government's reform programunder the PRSP process and their respective programs. Chart 2. Debt Service Due to IDA Before andAfter Assistance Underthe EnhancedHIPC Initiative, 2005-2025 (US%millions) 2 I L --- - . -- -- 0 1 I I I I I I I I I I I I I I I I I I I 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 -Debt - - service before HIPC assistance -Debt service afler HIPC assistance 5 V. RECOMMENDATION 13, IthereforerecommendthattheExecutiveDirectorsapprovetherecommendations presentedinthe Decision Point document concerning: (a) Congo's eligibility for assistance under the Enhanced HIPC Debt Initiative; (b) the decision point for Congo; (c) overall NPV debt reliefrequired to bring Congo's debt to the NPV debt-to-fiscal revenues ratio to the HIPC threshold o f 250 percent as o f end-2004; and (d) the conditions for reachingthe floating completion point. 14. IfurtherrecommendthattheExecutiveDirectorsapprovetheprovisionofreliefondebt owed by Congo to IDA inthe amount and manner proposed inthis paper. Paul Wolfowitz President by Graeme Wheeler Washington, D.C. 6 Annex 1 Republicof Congo IDA Credits Subiect to Debt ServiceReduction Under the EnhancedHeavilyIndebtedPoor CountriesInitiative Credit ProjectName Currency Balance at December 31,2004 Inoriginal currency InUSDequivalent 11790 RIVER TRANSPORT XDR 11,332,515.09 17,599,509.26 26350 ECONOMIC RECOVERY XDR 69,125,000.00 107,351,816.25 27750 PRIVATIZATION & CAPACITY BLDG XDR 2,068,834.72 3,212,921.01 35600 POST CONFLICT ECONOMIC REHAB XDR 30,000,000.00 46,590,300.00 35610 EMERGENCY DEMOBILIZATION XDR 3,830,949.09 5,949,502.25 36000 TRANS AND GOVERNANCE CAPACITY XDR 2,383,456.95 3,701,532.48 36380 EMERGENCY REHAB & IMPROVEMENT XDR 18,426,957.68 28,617,249.55 37980 EMERGENCY RECOVERY & SUPPORT XDR 12,093,195.93 18,780,854.21 10470 SECOND RAILWAY USD 22,532,843.37 22,532,843.37 1890 HIGHWAY IMPROVEMENT USD 778,040.12 778,040.12 2370 EDUCATION USD 1,682,163.63 1,682,163.63 2371 EDUCATION USD 240,000.00 240,000.00 2740 HIGHWAY MAINTENANCE USD 2,103,470.32 2,103,470.32 2971 RAILWAY USD 3,355,843.45 3,355,843.45 2972 RAILWAY USD 214,966.86 214,966.86 4350 LIVESTOCK USD 3,108,000.00 3,108,000.00 9710 PETROLEUM SECTOR TECH. ASSIST. USD 3,750,000.00 3,750,000.00 p8811 POPULATION HEALTH & DEVELOPMENT USD 232,350.20 232,350.20 p9770 NAT AGRICULTURE EXTENSION USD 231,825.20 231,825.20 Source: World Bank, Loan Accounting Department. 7 Annex 2 Republicof ConPo Schedule ofDebt Service Reduction Under the EnhancedHeavily IndebtedPoor CountriesInitiative Amount to be reduced Calendar Year (U.S. dollars) TOTAL 70,695,462 2006 2,654,535 2007 3,6 15,735 2008 3,595,953 2009 3,576,192 2010 3,545,782 2011 3,771,707 2012 4,168,623 2013 4,401,329 2014 5,155,289 2015 5,822,570 2016 5,800,982 2017 5,763,111 2018 5,725,240 2019 5,687,369 2020 5,636,825 Source: World Bank, LoanAccountingDepartmentand StaffEstimate!