91568 REPUBLIC OF CONGO ECONOMIC UPDATE First edition| September 2014 The Road to Economic Development Investing Efficiently in Congo’s Infrastructure Table of Contents AbbreviaƟons and Acronyms ....................................................................................................................... iv Acknowledgment ......................................................................................................................................... vi Foreword ..................................................................................................................................................... vii ExecuƟve Summary .................................................................................................................................... viii I. State of the Economy: Recent Developments and Outlook ................................................................. 1 1.1. Recent economic developments................................................................................................... 2 1.1.1. Congo's current growth trend may hamper its development goal ...................................... 2 1.1.2. EffecƟve monetary policy is leading to low inflaƟon ............................................................ 4 1.1.3. A new fiscal rule in order to “immunize” oil revenues from volaƟlity in a context of difficult budget execuƟon in line ministries.......................................................................................... 6 1.1.4. Helped by high oil prices, the external account has performed strongly ............................. 8 1.2. Congo’s economic outlook.......................................................................................................... 10 1.2.1. Driven by the non-extracƟve sectors, Congo’s economy is expected to grow strongly in the next three years ............................................................................................................................ 10 1.2.2. Congolese economy remains vulnerable to internal as well as external shocks ................ 11 1.3. Toward beƩer investment in infrastructure ............................................................................... 13 II. Leveraging Economic Infrastructure for Sustained Growth................................................................ 14 2.1. Poor state of economic infrastructure leading to excepƟonally high input costs ...................... 15 2.1.1. Coverage and access to infrastructure services in Congo................................................... 15 2.1.2. Infrastructure boƩleneck leading to excepƟonally high input costs .................................. 16 2.2. Planned and ongoing government investments in infrastructure .............................................. 17 2.2.1. Encouraging improvement in transport infrastructure ...................................................... 18 2.2.2. A major increase in water and electricity producƟon ........................................................ 19 2.2.3. SubstanƟal upgrade of telecommunicaƟons infrastructure ............................................... 20 2.2.4. Major infrastructure projects are planned for the coming years ....................................... 20 2.3. PotenƟal impact of ongoing and planned infrastructure projects on economic diversificaƟon and growth .............................................................................................................................................. 21 2.4. Impact of improved efficiency of public investment on economic diversificaƟon and growth . 24 2.5. A policy agenda to improve the efficiency of government spending ......................................... 26 References .................................................................................................................................................. 28 Appendix ..................................................................................................................................................... 30 Table 1Republic of Congo: Real GDP growth rates – 2010-2016 ................................................................ 31 Table 2 Republic of Congo: Sectoral contribuƟon to nominal output – 2010-2016 (percent of GDP) ....... 32 Table 3 Republic of Congo: Supply and use at current prices – 2010-2016 (percent of GDP) ................... 33 Table 4 Republic of Congo: Central Government OperaƟons – 2010-2016 (percent of GDP) ................... 34 Table 5 Republic of Congo: Central Government OperaƟons – 2010-2016 (percent of non-oil GDP) ....... 35 Table 6 . Republic of Congo: Executed budget – 2008-2013 (percent of the total budget) ....................... 36 Table 7 Republic of Congo: Oil forecasts and realizaƟons – 2005-2018 (millions of barrels) .................... 37 Table 8 Republic of Congo: Selected macroeconomic indicators – 2010-2016.......................................... 38 Table 9 Chinese financing of infrastructure in the Republic of Congo ....................................................... 39 List of Figures Figure 1: Congo’s neighbors: GDP annual growth rate .................................................................................2 Figure 2: Average annual GDP growth rate, 2001-2013 ...............................................................................2 Figure 3: West and Central African countries oil producƟon in 2013 (mln barrels) .....................................2 Figure 4: Annual growth of non-oil sectors ...................................................................................................3 Figure 5: GDP share of key non-oil sectors ...................................................................................................3 Figure 6: Annual growth rate of GDP components .......................................................................................4 Figure 7: GDP shares of key components......................................................................................................4 Figure 8: CPI, inflaƟon, 2003-2013 ................................................................................................................4 Figure 9: Selected countries, average annual inflaƟon, 2002-2013 ..............................................................5 Figure 10: InflaƟon by group of products......................................................................................................5 Figure 11: Selected SSA countries – Private sector credit to GDP raƟo ........................................................5 Figure 12: BRICS – Private sector credit to GDP raƟo ...................................................................................5 Figure 13: Annual change in government revenues, 2003-2013 ..................................................................6 Figure 14: Share of total government revenue, 2011-2013 ..........................................................................7 Figure 15: Share of total government budget by sector, 2011-2013 ............................................................7 Figure 16: Total expenditure execuƟon rate, 2009-2012 .............................................................................7 Figure 17: Current and capital expenditures execuƟon rates, 2009-2012....................................................7 Figure 18: Fiscal surplus to GDP raƟo, 2003-2013 ........................................................................................8 Figure 19: West, Eastern and Central African oil producƟon – External debt to GDP raƟo .........................8 Figure 20: Price index of Congo’s exports, 2005=100 ...................................................................................8 Figure 21: Sector shares of exports, 2007-2013............................................................................................9 Figure 22: Nominal annual change in exports, 2011-2013 ...........................................................................9 Figure 23: Nominal annual change in imports, 2007-2010 ...........................................................................9 Figure 24: GDP annual change ....................................................................................................................10 Figure 25: Oil, mining and non-extracƟve GDP shares, 2011-2013 ............................................................10 Figure 26: Annual change in government revenues, 2011-2016 ................................................................11 Figure 27: VolaƟlity of oil and mining (annual growth rates), 2000-2013 ..................................................11 Figure 28: Infrastructure sources of funding...............................................................................................12 Figure 29: Selected countries – Infrastructure development index, 2010..................................................15 Figure 30: Selected countries — Electricity Index (Kwh per capita), 2010 .................................................15 Figure 31: Selected countries— Total Paved Roads (Km per 10,000 inhabitants), 2010 ............................16 Figure 32: TransportaƟon in the Republic of Congo ...................................................................................21 Figure 33: Cost of producƟon infrastructures…………………………………………………………………………………………………………22 Figure 34: Impact of infrastructure on average GDP growth, 2010-2025................................................. ................22 Figure 35: Impact of infrastructure on average sectorial growth, 2010-2025………………………………………………………….23 Figure 36: Public Investment Management index (PIMI)………………………………………………………………………………………..24 Figure 37: Public investment in 100 million of US$.....................................................................................................24 Figure 38: Impact of infrastructure on average growth, 2010-2025………………………………………………………………………..25 Figure 39 : Selected countries-Governance indicators…………………………………………………………………………………………….26 3 Abbreviations and Acronyms AIDI The Africa Infrastructure Development Index BEAC Banque des Etats d’Afrique Centrale / Central Bank of Central African States BRICS Brazil-Russia-India-China-South-Africa CAR Central African Republic CEMAC Communauté Economique et Monétaire de l’Afrique Centrale/ Central African Economic and Mo- netary Community CFCO Chemin de Fer Congo Océan / Congo-Ocean Railway COBAC Commission Bancaire de l'Afrique Centrale / Central African Banking Commission CPI Consumer Price Index CSCE Congo China State ConstrucƟon Engineering DRC DemocraƟc Republic of Congo DSA Debt sustainability analysis EESIC Enquête sur l’Emploi et le Secteur Informel au Congo/ Employment and Informal Sector Survey ENI Ente Nazionale Idrocarburi / NaƟonal Hydrocarbons Authority of Italy EU European Union XAF Franc CFA / CFA franc GDP Gross domesƟc product GEM Global Economic Monitor HIPC Heavily Indebted Poor Countries IFC InternaƟonal Financial CorporaƟon ICT InformaƟon and communicaƟon technologies IMF InternaƟonal Monetary Fund IRR Investment return rate ITU InternaƟonal TelecommunicaƟon Union kWh kilowaƩ hour LMICs Low-middle income countries MAMS MaqueƩe for MDG SimulaƟon MDG Millennium Development Goals MF Ministère du Finance / Ministry of Finance MW megawaƩ MWh megawaƩ hour NDP NaƟonal Development Plan NEPAD New Partnership for Africa's Development PAPN Port Autonome de Pointe Noire / Autonomous Port of Pointe-Noire PDCT-AC Plan Directeur Consensuel des Transports en Afrique Centrale / Central African Consensual Trans- port Master Plan PEEDU Projet Eau, Electricité et Développement Urbain / Water, Electricity and Urban Development Pro- ject PIMI Public Investment Management Index pp Percentage points REER Real effecƟve exchange rate Abbreviations and Acronyms (suite) RMSM Revised Minimum Standard Model RN1 Route NaƟonale No. 1/ State Highway No. 1 RN2 Route NaƟonale No. 2/ State Highway No. 2 SME Small and medium enterprises SNDE Société NaƟonale de DistribuƟon d’Eau SNE Société NaƟonale d'Énergie SSA Sub-Saharan Africa TAH3 Tripoli-Windhoek-Cape Town Trans-African Highway TEU Twenty-foot equivalent units (container shipping) US$ United States dollar WACS West Africa Cable System WDI World Development Indicators WEO World Economic Outlook 5 Acknowledgment This first edition of the Republic of Congo Economic Update was prepared by a team including Fulbert Tchana Tchana (task team leader), Emmanuel Pinto Moreira, Mahine Diop, Etaki Wa Dzon, and Ephraim Kebede. The report benefited from the insights of several peer reviewers, including Jacques Morisset, Cecilia M. Briceno -Garmendia, and Hannah S. Nielsen, as well as from comments shared by Jean-Pascal Nganou, Anand Rajaram, Coulibaly Souleymane, Franck Adoho and Dalia S. Hakura (IMF). The team received guidance from Emmanuel Pinto Moreira, Albert G. Zeufack, Sylvie Dossou, Yisgedullish, Made, and Eustache Ouayorou. Lillian Foo, Clementine Maoungou, and Tessa Mayouya provided editorial support, while Josiane Maloueki Louzoulo and Karima Laouali Ladjo provided invaluable assistance during its preparation. Foreword The office of the World Bank in the Republic of Congo is pleased to launch this publication “the Republic of Congo Economic Update”, which reviews the main recent economic developments. It will be an annual publica- tion and a very important aspect of the program of the World Bank in the Republic of Congo, a country with substantial monetary reserves from nearly a decade of oil revenue boom, engaged in an ambitious program of rehabilitation and construction of economic infrastructure, but where social indicators is slowed to improve. This publication aims to stimulate a constructive dialogue on public policy with the country's authorities, aca- demics, the private sector and civil society. This first edition covers the year 2013 and the first half of 2014. Beyond the review of recent economic develop- ments, the report highlights the main results of some analytical work of the World Bank in the Republic of Con- go, with the aim to establish the consistency of economic policies in the medium and long-term. This edition covers a variety of macroeconomic topics, from policies and economic indicators of the real sector to fiscal, monetary, and external sectors. It shows that Congo's economy is growing at a weaker pace than a pace likely to enable a faster medium-term economic and social development. However, the government could signif- icantly reverse this trend by investing efficiently in its existing infrastructure and future projects. While welcoming the efforts of the Congolese authorities for investment in infrastructure, we hope that this edi- tion will provide a useful contribution to the debate on economic policies in support of the transformation of the Republic of Congo from a low-middle income country to a high-middle income country in a medium-term hori- zon. Eustache Ouayoro Country Director of the World Bank For the Republic of Congo 7 Executive Summary 6. There are some endogenous and exogenous factors Congo’s economy is growing but not fast enough to that could affect the country’s projected growth path. speed up its race toward development For example, Congo relies heavily on China to finance its 1. Congo's current growth trend is lower than the pro- main infrastructure projects. Internal pressures on rent jected rate of growth in the 2012-2016 National Develop- seeking and an unbalanced allocation of resources between ment Plan (NDP). In the past decade, the average annual infrastructure and social sectors could expose the economy economic growth rate of Congo was lower than that of lower to fiscal and financial risks. Difficulties in budget execu- middle income countries (LMICs). From 2011 to 2013, Con- go’s annual growth rate has averaged 3.5 percent, which is tion and weak absorption capacity in regard to the high vol- lower than 8.5 percent target set in the recent National De- ume of public investment have the potential to affect the velopment Plan over the period 2012-2016 to achieve the efficiency of government spending. The weak payment and country’s ambitions over that timeframe. disbursement systems could lead to a domestic debt 2. Congo’s unsatisfactory GDP growth is largely due to buildup, which could weigh heavily on the prospect of non- the poor performance of the extractive sectors. During extractive sectors. Finally, the organization of the 2015 the last three years, the oil sector declined by an average All-African Games in Brazzaville could lead to a non- annual rate of 8.2 percent essentially due to interruptions of sustainable fiscal position. Oil price as well as production oil production in some offshore wells. Likewise, mining ex- volatility constitutes major exogenous factors . ports, which were expected to begin in 2012, have been de- layed due to infrastructural and regulatory constraints. 7. Congo should continue investing intensively but more 3. However, the relatively strong performance of non-oil efficiently in infrastructure, an urgent need. Ample evi- sectors has counterbalanced the disappointing results of dence shows that investment efficiency in infrastructure is the oil and mining sectors. In fact, although oil remained critical for economic development. Given the importance the country’s major source of revenue, the contribution of of this issue for the future growth trajectory of the country, the non-oil sector to growth has been steadily. In the past the second part of the update focuses on efficient invest- three years, Congo’s non-oil sectors grew by an average an- ment in infrastructure. nual rate of about 8 percent. Investing efficiently in economic infrastructure 4. The strong performance of non-oil sectors is mainly will help the Congolese economy to catch up in its due to the investment boom in public infrastructure. race toward development. During the past three years, public investments have in- creased threefold as a share of GDP. Public investments ap- 8. Access to and cost of infrastructure are the major pear to have created favorable conditions and positive exter- constraints to private sector development in Congo. The nalities for private investment, which grew steadily from poor state of the country’s infrastructure leads to excep- 15.7 percent of GDP during 2000-2004 to 25.4 percent of tionally high input costs. For example, more than 70 per- GDP during 2005-2013. This is indicative of the role that the cent of private firms in the World Bank’s 2009 Enterprise Brazzaville-Beijing strategic partnership has played in re- Indicator Survey consider the lack of electricity as the main shaping the GDP breakdown. obstacle for private sector development in Congo. Also, the poor state of transportation infrastructure as well as 5. The Congolese economy is projected to grow at an an- transport services remains a major bottleneck to investment nual rate of about 7.6 percent over the next three years. and trade. This projection is based on a set of assumptions. Firstly, non -extractive sectors are anticipated to grow at a strong pace as 9. The ongoing and planned government infrastructure the government has secured new funding from China that investments have the potential to enhance economic di- will keep infrastructure investments growing and, at the versification by significantly reducing input costs for same time, the government is expected to continue strength- the country’s productive sectors. Simulation results from ening its economic diversification policies. Secondly, Con- our macro model show that the ongoing and planned in- go’s oil production is expected to gradually stabilize in the vestment in energy could add as much as 1.6 percentage coming years, mainly due to the discovery of the new fields. points (pp) to the average growth rate of the manufacturing Thirdly, the country is likely to witness the beginning of sector in 2014-2025. Since the lack of affordable energy is mining production. one of the main factors hampering the development of the manufacturing sector in Congo, greater electricity supply capacity and affordability could aid the country’s diversifi- cation agenda. Also, improving the quality of roads across ——————— 1 Projection from World Bank staff 2 Hulten (1996) shows that those low and middle income countries that use infrastructure inefficiently pay a growth penalty in the form of a much smaller benefit from infrastructure investments. Executive Summary 10. Managing public investments efficiently is critical to 11. By focusing on improving government efficiency, the maximize the opportunities afforded by depleting Con- Republic of Congo would be well positioned to achieve go’s resource wealth, and to increase investment out- sustained and diversified growth, rather than continuing on comes. Ongoing infrastructure investments alone will surely the current path that is largely driven by higher levels of have a positive immediate impact on national economic public investment. The Congolese government can achieve growth. However, in the absence of effective planning, de- better public investment outcomes by implementing sound sign and management, these investments could strain the public financial management policies in these areas. These country’s limited absorptive capacity and lead to small or include better preparation and planning of investment pro- negative productivity gains. By investing more efficiently, jects, introduction of systems-based commitment of reform the government can ensure that it gets a better “bang for the in the procurement and disbursement system to speed up buck” from these investments. the processes and make them more transparent. Congo Power Plant - Pointe-Noire 9 PART ONE: State of the Economy: Recent Developments and Outlook Main Points ♦ Congo needs faster economic growth than the current growth trend, which is lower than the growth rate projected in the 2012-2016 National Development Plan (NDP). This unsatisfactory GDP growth is largely due to the poor performance of the extractive sector. However, the public investment boom appears to have contributed to the rela- tively strong performance of the non-oil sectors, which has counterbalanced the disappointing performance of the extractive sector. ♦ The Congolese economy is projected to grow at the annual rate of about 7.6 percent over the next three years in a context of low inflation, but the potential adverse impact of oil price and production volatility cannot be ignored. Moreover, the projected rate of growth is still shy of meeting the 8.5 percent average growth rate targeted by the National Development Plan. ♦ In 2013, the government improved the sustainability of its fiscal policy by adopting a fiscal rule. In addition, the government improved non-oil tax revenues by broadening the tax base and improving tax administration. Overall, the country enjoyed a sustained budget surplus. ♦ Government policies directed at advancing production transformation have boosted manufacturing exports in the last three years. However, its share of total exports remains low. ♦ The financial sector in Congo remains significantly undeveloped. In addition, banks have abundant liquidity as demonstrated by their large excessive reserves held in the central bank--about 25 percent of total deposits in end- 2012, but they are having difficulties to provide credit to the private sector. 1.1 Recent economic developments 12. Macroeconomic performance of the Republic of Con- Slowdown in oil production in a context of a pos- go has been fairly good, with a high fiscal surplus, a low- sible takeoff of the non-oil sector inflation environment, and a favorable trade balance. However, the economy is not growing fast enough to meet 14. Despite a sharp production decline, the oil sec- the country’s development goals. At the same time, the so- tor still dominates Congo’s economy. The oil sector cial indicators remain low. has declined at an average rate of (-8.2) percent during the last three years. This was mainly due to Congo's current growth trend may 1.1.1 accidental disturbances in offshore oil production. Nonetheless, in nominal terms, the share of the oil sec- hamper its development goal tor in GDP has remained above 60 percent over the last 13. Congo’s performance over the last three years has ϐive years. The lowest was recorded in 2009, at 62 per- been far behind the growth rate needed to achieve its cent of GDP, while the highest was in 2011 (mainly due development goal by 2025. In fact, in the past three years, to price increases) in which the sector accounted for 70 the country’s economic growth has averaged about 3.5 per- percent of GDP. Since then, as the oil price has stabi- cent, while the average growth rate required (to reach the lized, its size has slightly declined and it is estimated at country’s development goal) is 8.5 percent over 2012-2016, 63 percent of GDP in 2013.4 Finally, Congo is still one of according to the NDP (Book 3, Page 21). In addition, over the major oil producing countries in Sub-Saharan Afri- the same period the average growth rate of real GDP per ca, with an annual oil production higher than that of capita was 2.2 percent, while GDP per capita must grow by Gabon, South Sudan, Chad and Cameroon. an estimated 4.5 percent and 6.5 percent over this period to achieve the goals.3 This weak growth is largely due to poor Figure 3: West and Central African countries oil produc- performance of the oil sector. tion in 2013 (mln barrels) Figure 1: Congo’s neighbors: GDP annual growth rate Percent Source: International Monetary Fund Source: World Development Indicators, 2013 Figure 2: Average annual GDP growth rate, 2001- 15. The Congolese economy is highly exposed to the 2013 ϐluctuations in production and the price of oil. The oil dependency and the volatility of oil production and prices in international markets can lead to signiϐicant ϐiscal planning issues and to a reduction in the quality of public spending. Supply shortage or oil production can result from an unexpected reϐinery outage, pipeline Percent damage or any other mechanical failure. The Congolese government needs to bear in mind that the lack of eco- nomic diversiϐication to date makes the country’s econ- omy is too sensitive to ϐluctuations of production and international oil prices. Source: World Development Indicators, 2013 ——————— 3 See the 2012-2016 National Development Plan projection. 4 In real terms, nonetheless, the story is a little bit different. The share of the oil sector in GDP has been falling since 2000, with an annual average growth of (-2.2) percent, dropping from 43.6 percent in 2000 to 23 percent in 2013. 11 16. In recent years, however, GDP growth has been in- three years, each of these sectors grew at an average rate of creasingly driven by the non-oil sector, which experi- at least 8.5 percent. Also, the share of these sectors in- enced nearly double-digit average growth or more dur- creased from 19.4 percent in 2010 to 23.6 percent in 2013. ing the last three years. During 2010-13, the non-oil sec- tor grew at an average rate of 9 percent, a sharp increase 19. The impressive growth in the non-oil sector can be from 5.4 percent in 2005-2009. attributed to the diversification policies in the sectors such as agriculture and manufacturing and the positive Figure 4: Annual growth of non-oil sectors externalities emanating from public investments in in- frastructure. Since 1999, the government has implemented 12 policies or programs aimed at boosting agricultural produc- tion. As part of these programs, the government has been 10 working with national and international experts to increase 8 food and cash crop production. The government adopted a 6 new law that focuses on developing the forestry industry. Percent Furthermore, massive government investments in infra- 4 structure have boosted the construction sector and are re- 2 sulting in lower production costs for manufacturing. Going 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Ag riculture, livestock, hunting and fishing forward, the prospect of building more and more well tar- Manufacturing geted economic infrastructure is likely to maintain the Buildings and Public Works growth of the non-oil sector at a higher pace than otherwise. Sources: World Bank, IMF and Congolese authorities Boom in investments as well as in imports 17. In recent years, all non-oil sectors experienced posi- tive rate of growth. From 2011 to 2013, the slowest grow- ing non-oil sector, forestry and logging, grew at an average growth rate of 2.2 percent, while the highest growth sector, manufacturing, buildings and public works, grew by an av- erage of 9.4 percent. In 2013, the most booming sectors were electricity, gas and water; buildings and public works; and agriculture and livestock, each of which enjoyed nearly double-digit growth or more. In 2011 and 2012, agriculture and livestock, manufacturing, and buildings and public works were the top performers, with almost double-digit growth rates. Figure 5: GDP share of key non-oil sectors Ponds at Dzoumouna staƟon 20. Public investment has skyrocketed in the last three Trade, restaurants and hotels years, a threefold increase as a share of GDP. From 2011 Transport and to 2013, public investment grew at an average rate of 34.8 telecommunications percent. However, this growth has been decelerating. In the Buildings and Public Works same period, the slowdown in public investment is mainly due to implementation impediments within the government Percent Manufacturing functional activities, such as procurement and disbursement Agriculture, livestock, hunting processes. The country's weak absorptive capacity to sus- and fishing tain massive public investment is also another factor that 0 2 4 6 8 contributes to the slowdown of public investment. 2013 2012 2011 21. The strength of public investments had some posi- Sources: World Bank, IMF and Congolese authorities tive externalities on private investments, which grew steadily during the same period and increased its share 18. The five sectors that are more likely to help Congo significantly from 2005-2009 to 2010-2013. Private in- achieve a diversified economy have performed strongly. vestment grew at an average growth rate of 6.4 percent be- Five sectors have demonstrated high potential to contribute tween 2011 and 2013. This growth has been driven by mas- to economic diversification: agriculture and livestock; man- sive investments in the non-oil sector. In contrast, invest- ufacturing; buildings and public works; transport and tele- ments in the oil sector have been modest, confirming once communications; and trade, restaurants and hotels. These more the positive externality effect of public investments in sectors are already grounded in the economy, employ a fair infrastructure. share of the labor force, and are in a good position to bene- fit from public investments in infrastructure. Over the last 20. 22. During the last three years, imports of goods and Fruits of the strategic partnership Brazzaville/Beijing services grew at a higher pace than exports. Congo’s imports increased with an annual average growth rate of 14.3 percent. This growth was fueled by imports of transportation and construction materials in order to build new infrastructure. In contrast, exports decreased by an av- erage of (-4.5) percent over the period. This poor perfor- mance of exports is due to difficulties in the oil sector. Dur- ing the same period, exports of goods from other sectors grew at an annual rate of 5.9 percent, highlighting the in- creasing strength of the non-oil sector in the Congolese economy over the period. Figure 6: Annual growth rate of GDP components Maya-Maya Airport - Brazzaville Percent Sources: World Bank, IMF and Congolese authorities Figure 7: GDP shares of key components Big University’s Library of Brazzaville 1.1.2 Effective monetary policy is leading to low inϐlation 24. The central bank interest rate applied to financial insti- tutions is historically very stable, but has declined by 50 basis points in 2013. The CFA franc of the region is pegged to the euro. In order to keep stability of the official ex- Percent change rate, the central bank (BEAC) sets external reserves in line with the guidelines of the French Treasury. It fol- lows monetary policy that creates a stable inflation in the region. In 2013, the central bank declined its interest rate by 50 basis points. The main objective of this change was to boost credit availability in the economy, whereby com- mercial banks failed to finance small and medium size en- terprises. Sources: World Bank, IMF and Congolese authorities Figure 8: CPI, inϐlation, 2003-2013 23. The Brazzaville-Beijing strategic partnership has 15 reshaped the GDP breakdown, with a sharp increase in public investment share of GDP. This sharp increase is 12 the result of the public investment program that was 9 launched by the government in 2002 with the creation of an 6 Percent entity (La Délégation Générale des Grands Travaux) and 3 intended to fill the country’s economic infrastructure gap. 0 This investment program has picked up steam since 2006 -3 with the implementation of the Brazzaville-Beijing strate- 2003 2005 2007 2009 2011 2013 gic partnership. End of year Year average Sources: World Bank, IMF and Congolese authorities 13 Figure 9: Selected countries, average annual inϐlation, The ϔinancial sector faces difϔiculties in granting 2002-2013 credits to the private sector. Figure 11: Selected SSA countries – Private sector credit to GDP ratio Percent Percent Source: World Development Indicators 25. Historically, inflation in Congo hasn’t been a great challenge. In fact, since 2000, inflation has been below 12 percent, whether we consider the annual average or Source: The World Development Indicators, 2013 year-end inflation. The annual average rate of CPI infla- tion, which is the most smooth inflation indicator, shows that over the last decade consumers have experienced a Figure 12: BRICS – Private sector credit to GDP ratio steady 4 percent annual increase in the price of their bas- ket of good. Therefore, CPI inflation in Congo has been very low by developing country standards. This is also true for the entire CEMAC region. Inflation in Congo and in the entire CEMAC region is lower than the world aver- age. Figure 10: Inϐlation by group of products Source: The World Development Indicators, 2013 Percent 27. Despite the recent favorable trends, the financial sector in Congo remains significantly undeveloped. Be- tween 2003 and 2012, credit to the private sector increased almost nine fold in nominal terms with annual growth rates exceeding 40 percent in each of the last three years. During the same period, deposits of firms and households rose by a factor of twelve, bringing the ratio of deposits to GDP up Source: Congolese authorities to 24.0 percent at end-2012 (compared to 6.8 percent in 2003). However, standard indicators of financial depth and breadth suggest that the country lags behind its neighbors 26. In 2013, inflationary pressures slowed down after a and the BRICS. Cross-country comparisons of some com- peak in 2012 mainly due to the massive government monly used measures, such as private credit to GDP ratio, spending following Mpila’s events. Inflation stood at 2.1 number of bank branches, depositors and borrowers percent in 2013, down from 7.5 percent in 2012. The end (scaled by population) reveal that the respective values for of massive spending by the government has removed de- Congo are well below the median for a group of countries mand pressures, thereby cooling down the price increase with broadly comparable per capita GDP. of goods. In 2012, inflation was driven by sharp increases in food prices (12.3 percent on average) as well as in bev- 28. In addition, banks have abundant liquidity as erages and tobacco (13.3 percent). The slowdown in 2013 demonstrated by their large excessive reserves held in was also driven by improvement of local supply in food the central bank – about 25 percent of total deposits in products and lower transportation costs. In addition, in end-2012. A number of factors explain this situation. Ac- 2013 international food prices dropped significantly from cording to the IMF (2013), very high reserves result from an index level of 207 in December 2012 to 199 in June serious limitations in the array of investment instruments 2013, which is a decrease of 7.6 percent on an annual ba- available to banks due to the capital controls, while the sis. This decline is more pronounced in the last 12 months near non-existence of the domestic securities market does recorded. not make it easy for banks to effectively deploy resources. In addition, the lack of understanding of the risk associated with small and medium enterprises (SME) in Congo partial- Figure 13: Annual change in government reve- ly explains why banks are not lending to SMEs. Private sec- nues, 2003-2013 tor actors, for their part, complain about this rigid position of the banking sector with abundance of liquidity and enter- prises, which cannot secure loans to carry their business. Axis for non-oil revenue 1.1.3. A new ϐiscal rule in order to “immunize” oil revenues from volatility Percent in a context of difϐicult budget execution in line ministries Government has improved the sustainability of its ϔiscal policy 29. On January 2013, the government adopted a new fiscal rule in order to protect public finance from oil revenue volatility and to prevent fiscal policy pro- Sources: World Bank, IMF and Congolese authorities cyclicality. The rule calls for the allocation of XAF 500 billion of oil revenues to current expenditures and XAF 1000 billion to capital expenditures each year, and to save 30. The government is introducing some essential re- the remaining oil revenues in the government deposits (see forms to strengthen non-oil revenue collection. The list of IMF, 2013). In the coming years, this new rule would se- taxpayers is being updated, and the exchange of taxpayer cure gradual gains in fiscal consolidation, and facilitate in- data between the Tax and Treasury departments and Cus- vestment in key infrastructure areas as planned by the Na- toms has been stepped up. A withholding tax on government tional Development Plan. Specifically, from 2014 to 2020, contracts has been introduced; a one-stop window for cus- about 47 percent of projected total oil revenues would be toms clearance has been put into service. spent to scale up basic infrastructure, and about 30 percent saved. However, if oil revenue falls temporarily below Fiscal performance: Strong tax collection, but a de- 1,500 billion XAF, the authorities can draw on the saved cline in oil revenues funds to keep planned infrastructure projects in motion. 31. Government revenues growth slowed down recently. In 2013, government revenues increased by 6.7 percent and by 1.4 percent in 2012. This came as a result of the sharp Box 1. Fiscal rule: Deϔinition, functioning and decline in oil revenues to a drop in oil production, which outcomes was not compensated fully by the increase in non-oil reve- nues. In fact, oil revenues still account for three-quarters of The Congolese fiscal rule is an institutional mechanism, total revenues. A setback in oil production and stable inter- which aims at supporting fiscal credibility and discipline. national oil prices led to substantially reduced oil revenues It is defined as a permanent constraint on fiscal policy in each of the last two years. through simple numerical limits on budgetary aggregates (Kopits and Symansky, 1998). 32. Government revenues from taxes have increased In accordance to its commitment to improve the fiscal steadily in the last three years, driven by growth in the policy management, the Congolese government adopted non-oil sector and improvement in tax collection. There a fiscal rule based on oil revenues in 2013, with imple- has been a significant increase in non-oil revenues in 2013. mentation starting in 2014. Starting from the 2014 budg- In 2011 and 2012, non-oil revenues, which consist mainly of et, each year only XAF 1,500 billion (nearly US$ 3 bil- tax revenues, increased by 17.9 percent. The tax ratio has lion) of mobilized oil revenues will be used and allocat- averaged 21.7 percent over the same period, reflecting im- ed: one third to current expenditure and two-thirds to proved performance of tax administration, following the capital expenditures. implementation of reforms in tax policy. In 2013, the tax This initiative will consolidate the large amount of sav- administration is estimated to have collected about 96 per- ings (US$ 1.6 billion on average over 2008-2012) accu- cent of the forecasted non-oil revenue, which is a good rate mulated by the Congolese government in the Stabiliza- for that administration. During this period, tax collection tion Fund, located at the central bank (BEAC). This is experienced a slight increase, thanks to measures to expand due to the government decision to set a reduced projected the tax base and the fight against fraud and tax evasion. Sig- oil price in the budget law on which the budget calcula- nificant progress has been made in the management ac- tions are based. Any budget surplus and additional wind- counting system for revenues by improving the information fall are saved. The new fiscal rule will increase official system. national reserves and the amount of fiscal deposits will provide a buffer against the negative impact of oil price and production shocks on fiscal revenues. The fiscal rule will also lead to a good control of investment expendi- tures with regard to low absorption capacities in the country. 15 Figure 16: Total expenditure execution rate, 2009- Figure 14: Share of total government revenue, 2011- 2012 2013 Percent Percent Sources: World Bank, IMF and Congolese authorities Sources: World Bank, IMF and Congolese authorities Figure 17: Current and capital expenditures execu- Strong expenditure growth tion rates, 2009-2012 33. From 2011 to 2013 government spending has been steadily increasing. Total expenditures increased at an an- 120 nual average rate of 30.0 percent from 2011 to 2013, con- 110 sisting mainly of capital expenditure (56.0 percent on aver- 100 age). On average, these expenditures represented 35.3 per- 90 cent of GDP. Current expenditure increased on average by Percent 80 70 14.0 percent, due in part to the management of expenses 60 related to claims of Mpila events. Capital expenditures grew 50 at a higher pace, 47.1 percent on average, reflecting the gov- 2009 2010 2011 2012 ernment's commitment to provide relevant infrastructure in Current expenditure Total expenditure support of economic activities. Sources: World Bank, IMF and Congolese authorities Figure 15: Share of total government budget by sector, 35. This growth in spending may mask the low rate of execution of Congo’s budget in line ministries. From 2009 to 2012, the execution rate averaged 93.4 percent, with a low of 83.9 percent in 20125; and a higher than the approved current spending in the 2011 budget, mainly driv- Percent en by the ministry of defense, which doubled its spending in goods and services. Moreover, in 2009, 2010 and 2012, the execution rate was lower than 92.0 percent, i.e., since the adoption of the new procurement code. The execution rate has been lower for investment spending (90.6 percent) than for current spending (95.4 percent). This somewhat higher overall execution rate masks the very low execution rate in Sources: World Bank and Congolese authorities some line ministries. 36. The low execution rate of the budget is explained by difficulties in procurement and disbursement, which is 34. The general trend of contributory shares in produc- building up internal debt. Public procurement in Congo is tive and social sectors has recently risen . The share of not currently operating efficiently. Since, factors limiting social sectors has risen from 20.0 percent in 2011 to 22.5 adoption of the new code of public procurement include: percent in 2013 mainly because 2013 was the national An- lack of procurement specialists, resistance of some stake- née de l’éducation (Year of Education). The infrastructure holders involved in the procurement process and the adop- sector remained stable, with 39 percent of the total budget tion of a lengthy procedure to move from conceiving to sub- during this period. Also, the share of public finance and eco- mitting a tender for public contracts. On top of that, the cen- nomic affairs increased from 15.1 in 2011 percent to 18.7 tralization of the process by the cabinet of the minister in percent in 2013, mainly driven by the sharp increase of the charge of finance has resulted in escalating delays in grant- budget of the Ministry of Finance. The other sectors saw a ing public contracts. On average, it takes more than nine decrease of their share: sovereignty from 24.8 percent in months to complete such a process for a standard contract 2011 to 21.6 percent in 2013 and the production sector from done by a typical line ministry. The disbursement system is 7.6 percent to 5.1 percent in 2013. —–——————————-—————— 5 A peak of 102.0 percent in 2011 was driven by a higher than approved investments spending in the Ministry of Energy and Water, the Ministry of Infrastructure and Public Works, and in the Ministry of Interior and Decentralization. weak and lengthy, with many bottlenecks. This system is the low level of external debt and strengthening indica- not transparent enough and does not deter staff of the treas- tors of repayment capacity, the debt stock and debt ser- ury department from missing deadlines and picking who to vice ratios remain comfortably within the sustainable pay. Therefore, even in an environment with sufficiently debt domain throughout the projections period under the baseline. In addition, Congo’s domestic public and pub- abundant funds, the government is accumulating domestic licly guaranteed debt is low. arrears. Sustained budget surplus in a context of 1.1.4 Helped by high oil prices, the ex- low external and domestic debts ternal account has performed strongly 37. Driven by higher oil prices and by prudent spend- 39. Congo’s external balance is dominated by devel- ing, Congo’s government has posted large budget sur- opments in the oil sector. Over the last decade, current pluses in the last decade. In 2013, fiscal surplus exceeded and financial accounts have been fairly volatile, reflect- 7 percent of GDP. This was the fourth time in the last six ing swings in international oil prices, production cycles years that the government achieved a fiscal surplus. In fact, in existing oil fields, and investment spurts to improve over the last decade, Congo has posted positive primary extractive capacity. Oil receipts have been generally fiscal balance each year. This has been the result of the strong, allowing the country to finance large and persis- boom in the oil sector and good policies of public spend- tent non-oil trade deficits, while generating significant ing, with the objective to build a budget buffer against profit repatriation outflows. Non-oil exports as a share of downward oil price shocks. Therefore, the government has total exports has risen somewhat from their very low enough resources to invest in the construction of infra- levels, but the increase has been lower than that of sub- structure such as roads, schools, hospital, water and sanita- Saharan African peers owing in part to a very poor busi- tion, and electricity. ness environment in Congo. Figure 18: Fiscal surplus to GDP ratio, 2003-2013 Figure 20: Price index of Congo’s exports, 2005=100 Percent Sources: World Bank, IMF and Congolese authorities 38. Congolese debt indicators are below the relevant Source: GEM, 2013 country-specific debt burden thresholds. In 2013, the World Bank and the International Monetary Fund per- 40. Government policies directed at advancing pro- formed a debt sustainability analysis (DSA) and classified duction transformation have boosted the export of Congo as a “weak” performer. This is reflected in lower manufactured goods in the last three years. From debt sustainability thresholds compared to countries oper- 2011 to 2013, the exports of these product groups grew ating in a strong policy environment. Nevertheless, given in nominal terms at an annual average rate of 13.4 per- cent for petroleum and 14.6 percent for manufactures. In contrast, raw products saw exports decline sharply. In Figure 19: West, Eastern and Central African oil pro- duction – External debt to GDP ratio real terms, the decline in raw materials production out- weighed the increasing price trend during this period. However, non-oil sector exports are still weak because of a number of structural factors. These constraints in- clude the lack of infrastructure, a poor business environ- ment, weak human capital, limited access and poor qual- Percent ity of technological services, and a weak financial sec- tor. According to the 2014 Doing Business Report, Con- go ranks 185th out of 189 countries in the category of ‘trading across borders’. In addition, Congo is among the bottom ten in the World Bank’s Logistics Perfor- mance Indicator in 2014, 157th out of 160 with a score of Sources: IMF and World Bank, 2012 17 Figure 21: Sector shares of exports, 2007-2013 43. Congo’s major import partners remained the same in the past two decades, although China has become one of the top major import partners. The larger share of the Congo’s imports (44 percent) comes from the EU, followed by China (12 percent). However, in the past dec- Percent ade, the share of EU exports to the Republic of Congo dropped from 62 percent to 44 percent. Imports from the United States accounts for 7 percent in the 2000s, a slight drop from 8 percent in 1990s. Similar to the story for ex- ports, import partnerships are shifting considerably from advanced economies to emerging and developing coun- Sources: Congolese authoriƟes and WDI, 2013 tries. While imports from advanced economies have dropped from 76 to 58 percent of imports, the share of imports from emerging and developing countries has in- 2.08 over 5. In the category of customs, Congo ranks last creased threefold (from 14 to 41 percent). The share of (160th out of 160 countries), with a score of just 1.50. SSA imports to Congo over the 2000s is 6 percent, largely 41. Congo’s exports market has changed significantly composed of foodstuffs. over the last decade with China moving from a junior exporter to one of the main trading partners, displac- ing trade with the European Union (EU). During the Figure 23: Nominal annual change in imports, 2007- last decade, the share of exports to the EU declined dra- 2010 matically, from about 39 percent to only about 9 percent recently. Over the same decade, the United States im- proved its share by growing from 27 percent to 38 per- cent. The EU has been replaced by China as a major ex- ports destination. China increased its imports from the Percent Congo six fold during the same period and now accounts for almost one-third of all exports from this country. Fi- nally, given that Congo mainly exports crude oil and raw timber, it is not surprising that only about 3 percent of its exports stay in Sub-Saharan Africa. 42. Congo's imports are dominated by manufactured Sources: Congolese authoriƟes and WDI, 2013 goods and have grown strongly in recent years. In fact, the share of manufactured goods in total imports is very stable, fluctuating between 85 and 90 percent in the last Figure 22: Nominal annual change in exports, 2011- 2013 Percent Sources: Congolese authoriƟes and WDI, 2013 decade. Other imported products in recent years are basi- cally non-transformed food (roughly 7 percent) and fuel (about 4 percent). In nominal terms, imports of goods and services grew at a rate of 4.1 percent in 2011, 37.2 per- cent in 2012 and 8.4 percent in 2013. This growth has been volatile mainly as a result of imports destined to build economic infrastructure; the timing of construction projects is therefore the main determinant of this dynam- ic. For example in 2012, the increase of imports of con- struction and transportation materials was substantial. 1.2. Congo’s economic outlook, 2014-2016 44. The Congolese economy is expected to expand at an 47. Congo’s oil production will gradually stabilize in the annual rate of approximately 7.6 percent over the next three upcoming years, in part because of new wells discovery. years. This growth will be driven by non-extractives sectors Congo’s oil production has declined continuously during in a context of low inflation. However, the Congolese econ- the last three years, however according to data on the first omy remains vulnerable to exogenous shocks such as vola- six month of 2014, the trend has reversed. The production tile oil prices, drops in oil production and delays in mining could grow by 4.1 percent this year. Also, the oil produc- production, as well as internal risks embedded in strategic tion would slightly grow at a 2.5 percent annual rate in choices of its economic authorities. 2015. In 2016, the new offshore oil wells discovered (in 2013 by ENI, an Italian company) will gradually enter into 1.2.1. Driven by the non-extractive sec- production and will increase Congo’s total oil production, tors, Congo’s economy is expected to forecast to grow by 3.1 percent in that year. grow strongly in the next three years 48. The prospect of iron ore production coming online could strengthen growth prospects. The country is en- 45. Non-extractive sectors will continue to build on the dowed with large mineral reserves. Iron ore reserves are strength of public investments and on diversification pol- estimated to exceed 10 billion tons (always metric tons in icies to keep growing at a strong pace.6 This sector will this report), while potassium reserves are assessed at about grow by 8.6 percent in 2014, 7.2 percent in 2015 and 7.9 1 billion tons and phosphate reserves at about 500 million percent in 2016. The main drivers of this growth will be: i) tons. Until recently, mining activities were confined to arti- services, at 8.4 percent average growth during the period, ii) sanal diamond and gold production, but mining activities agriculture (7.7 percent average), and iii) manufacturing have experienced a new dynamism in recent years follow- (7.7 percent). This strong growth in the non-extractive sec- ing the adoption of a more attractive mining code. Some tor will expand the share of non-extractive sector in the projects are expected to advance to the production phase Congolese’s economy. starting in 2015. This could lead the extractive sector (oil 46. In fact, the government secured a new funding chan- and mining) to grow at 9.9 percent in 2016. nel with China that will keep infrastructure investments growing at a stronger pace. The new funding will provide Figure 25: Oil, mining and non-extractive GDP shares, enough room for the government to plan and execute its 2011-2013 main infrastructure investments. It is assumed that public investments will increase on average at an annual rate of 4.8 percent from 2014 to 2016. This will lead to an average in- crease of 6.8 percent in the sector of electricity, gas and wa- ter and of 12.0 percent in construction and public works. Percent Figure 24: GDP annual change 12 8 4 Source: World Bank staff forecast, August 2014 0 Percent -4 -8 -12 2011 2012 2013 2014 2015 2016 PIB PIB non extractif PIB pétrolier PIB extractif Source: World Bank staff forecast, August 2014 ———————————————————— 6 All figures in this section are computed by World Bank Staff using Mac-Congo Model and based on data provided by Congolese authorities, international databases on commodities prices as well as IMF data. 19 duction has been in question in recent years. In 2013, oil Fiscal prospects production dropped by (-10.2) percent instead of the fore- 49. Lower oil prices and stabilization of oil revenues casted (-2.5) percent expected at the beginning of the year. would effectively reduce funds available for spending over Besides, in 2007 the production dropped by (-17.2) percent, this timeframe. In the meantime, the newly adopted gradu- due to an accident in offshore oil wells. Finally, according al salary increase of civil servants will keep current spend- to the National Development Plan, mining production was ing growing at a strong pace. In addition, the securitization supposed to start in 2012. But this has not been the case. of external funding from China will stabilize a higher level The present framework assumes the beginning of produc- of investment despite the fiscal rule. tion in 2015, but there is a risk that this may not be the case or that mining production could be lower than expected. Figure 26: Annual change in government revenues, 2011-2016 53. Congo’s macroeconomic framework is also vulnera- ble to endogenous risks embedded in strategic choices of its economic authorities. This include: i) excessive use of 35 30 Chinese financing for investment projects; ii) internal pres- 25 20 Figure 27: Volatility of oil and mining (annual 15 growth rates), 2000-2013 Percent 10 5 0 -5 -10 2011 2012 2013 2014 2015 2016 Total spending Current spending Capital spending Oil production Source: World Bank staff forecast, August 2014 Price 50. Oil production stabilization, the launch of mining production, and expanded non-oil production would contribute to a slight grow of government revenues. Government revenues will increase on average by 2.6 per- cent each year over the period 2014-2016. In fact, oil reve- nues would decrease at an annual growth rate of (-0.9) percent during the period, while non-oil revenues would Sources: Congolese authoriƟes and WEO grow by 19.2 percent in 2014, 3.2 percent in 2015, and 10.5 percent in 2016. sures on rent seeking and unbalanced allocation of re- 51. The Congolese government may slow down the sources between infrastructure and social sectors; iii) issues growth pace of public spending in order to follow its in the disbursement system; iv) low budget execution rates new fiscal rule. Public spending may increase at an annu- in line ministries; and v) overspending related to hosting the al growth rate of 7.2 percent over the period 2014-2016, 11th All-Africa Games. compared to an average of 33.5 percent over the period 54. Congo relies heavily on China to finance its main 2011-2013. The slowdown will be significant in public infrastructure projects. In recent years, China became the investment with an average annual growth rate of 4.8 per- principal source of funding for Congolese infrastructure. cent during the period, compared to 52.5 percent from Chinese funding has accounted for more than 50 percent of 2011 to 2013. In contrast, the slowdown will be less im- external funding each year since 2010. On average, it ac- portant for current expenditures, which will increase on counted for 75.8 percent from 2010 to 2013. During the average by 11.4 percent over the period, in part to meet same period the share of external funding in infrastructure the progressive salary increases recently obtained by civil has increased sharply, from 35 percent in 2010 to 64 per- servants. These trends will rebalance public spending with cent in 2013. In fact, Chinese financing funded almost all the share of current spending, moving from 35.5 percent in major infrastructure constructed over 2003-2013. In the 2013 to 43.1 percent in 2016. medium term, China is predicted to do the same by funding infrastructure that could amount to XAF 1,500 billion 1.2.2. Congolese economy remains vul- thanks to an extension of the Brazzaville-Beijing Strategic nerable to internal as well as external partnership signed in 2013. These infrastructure invest- shocks ments so far have kept non-oil GDP booming at an impres- sive growth rate close to double-digit annual growth. Any 52. Congolese economy remains vulnerable to exoge- disruption in the flow of this fund, regardless of the cause, nous shocks such as volatile oil prices, drops in oil pro- would significantly reduce growth prospects in non-oil sec- duction and delays in mining production. Its vulnerabil- ity to oil price volatility is the most likely risk given his- tor and therefore total GDP growth. torical trends. Although no substantial reduction in oil price is expected, an important slowdown in China and other BRICS countries could plausibly contribute to a sharp fall in oil prices. Also, the predictability of oil pro- 55. Internal pressures on rent seeking and unbalanced 57. Difficulties in budget execution and inadequacy of allocation of resources between infrastructure and social the absorption capacity with the volume of public in- sectors may derail the government’s fiscal and financial vestment have the potential to increase the inefficiency path. The December 2013 events are a reminder of the fact of government spending. Some issues in the implementa- that Congo is still a fragile country7. In this context, rent tion of the new procurement procedure have led to a reduc- seeking behavior may exacerbate social tension. Currently, tion of the execution rate of public investments as well as the fiscal framework is biased in favor of economic infra- current spending. Also, the very high pace with which gov- structure. In fact, over the last three years, one-third of the ernment spending is increasing raises the issue of the ab- budget was allocated and spent on infrastructure while only sorptive capacity of the Congolese economy. Very high about 20 percent was devoted to social sectors. Recently, fiscal space for government spending that surpasses the the government started to experiment with the World Bank absorptive capacity of the country could result in higher (in the health sector) in a result-based program to improve inflation and wastage of public funds, reducing the effi- its health indicators. If successful, the government can ciency of public spending. A decrease of the current effi- launch more of these programs in order to please the popula- ciency of public spending will reduce its impact on current tion and diffuse tensions. All these would upsurge sharply macroeconomic prospects. the already high level of public spending and would break the newly adopted fiscal rule. 58. Finally, the organization of the 11th All-African Games may derail the fiscal rule and lead to an unsus- tainable fiscal path. The Republic of Congo will host the Figure 28: Infrastructure sources of funding All-African Games in 2015. In order to make this event a success, the government plans to build new infrastructure 100 90 in Brazzaville. Pressure to deliver infrastructure on time Chinese funding percent of external 80 80 could drive the government to break procurement rules and Percent of total funding other public financial management rules. This could also 60 70 lead to breaking the fiscal rule and could lead to a non- 40 60 sustainable fiscal policy. 20 50 0 40 2010 2011 2012 2013 2014 Internal External China Sources: Congolese authoriƟes and World Bank staff esƟmate 56. Difficulties in the disbursement system may cause domestic debt arrears to build up, which will weigh heavily on prospects in the non-oil sector. In recent years, the government disbursement system has been under pres- sure with an important number of SMEs experiencing diffi- culties obtaining funds to launch activities of public con- tracts or to receive payment upon satisfactory execution of the contract. The accumulation of internal debt by SMEs could hamper their development and render them ineffec- tive. Consequently, this could cloud the takeoff of the non- oil private sector in Congo. ——————— 7 In December 16, 2013 fighƟng erupted in Brazzaville between official armed forced and the armed guard of colonel Tsourou. The fighƟng disrupted economic acƟviƟes for an enƟre week and brought back memories of the 1997 civil war among the pop- ulaƟon of Brazzaville. 21 1.3. Toward better investment in infrastructure 61. In Congo, increasing government efficiency will 59. The country’s underperformance toward the devel- significantly improve investment outcomes. According opment can be addressed by a number of economic poli- to Nielsen and Lofgren (2011), the type and extent of im- cies aimed at improving short- to long-run determinants provement depend on which areas of government spending of economic growth. As a short-run measure, the govern- and services are scaled up in response to increased efficien- ment can improve the investment environment by introduc- cy. These findings are in line with other studies, such as ing business friendly laws and regulations. In the medium- Hulten (1996), which shows that low and middle income run, the government can focus on its spending efficiency and countries that use infrastructures inefficiently pay a growth policies that can boost intra-regional trade. As a long-run penalty in the form of a much smaller benefit from infra- measure, the government can consider investing in human structure investments. Moreover, the magnitude of this capital as well as continuing its investments in sorely needed penalty is apparent when the growth experience of Africa infrastructure (recall the 155th of 155 ranking in this area). is compared with that of East Asia. In fact, over one- The government can enhance human capital by strengthen- quarter of the differential growth rate between these two ing vocational education and invest more at all levels of edu- regions can be attributed to the difference in effective use cation. of infrastructure resources. At the same time, the difference 60. Investing efficiently is essential for economic suc- due to new public capital formation is negligible. An even cess. It has been proven that investment efficiency in infra- stronger impression is conveyed when comparing high and structure matters greatly in achieving economic development low growth rate economies. Here, more than 40 percent of (e.g., Calderón and Servén (2004) and Fedderke, Perkins and the growth differential is due to the efficiency effect, mak- Luiz (2006). Availability and quality of economic infrastruc- ing it the single most important explanatory factor of dif- ture can help to minimize production and transportation ferential growth performance. costs, with positive impacts across all sectors of the econo- my. ——————— 8 In Calderón and Servén (2004) use panel data on about 100 countries, and show that infrastructure posiƟvely impacts growth. Also, Fedderke, Perkins and Luiz (2006) show with South Africa data that producƟve public expenditure in infrastruc- ture (such as roads, transportaƟon and housing) can play an important role in promoƟng economic growth and encouraging private investment. 9 As in the above footnote. Part II : Leveraging Economic Infrastructure for Sustained Growth Main points • The poor state of Congo’s economic infrastructure has led to exceptionally high input costs, which in turn has held back economic growth and the country’s development. In the past few years, substantial efforts have been made to rehabilitate the infrastructures that were severely damaged during the civil war, but their quality remains low. • The Congolese government is implementing an ambitious investment program to improve access to and delivery of basic services, and these ongoing and planned infrastructure investments have the potential to enhance Congo’s eco- nomic diversification by significantly reducing input costs for the country’s productive sector, and by helping to re- shape the economy. • It is essential to manage public investments efficiently to maximize the impact of using Congo’s resource wealth and to increase investment outcomes. Congo currently ranks 70th out of 71 surveyed countries in the Public Investment Index, which indicates that it needs to improve all aspects of the public investment management project cycle in order to maximize its return on investment. • The ongoing infrastructure investments alone would positively impact the country’s economic growth. However, if not managed well, these investments could pose a challenge to the country’s limited absorptive capacity and drive up building and maintenance costs. At the same time, inefficient public management of infrastructure resources can also reduce growth by up to 40 percent loss compared to the case in which such resources were efficiently used. • By focusing on improving government efficiency, Congo would be well positioned to achieve sustained and diversified growth. Focusing on increasing the productivity of economic infrastructure would significantly improve the growth outcome of these investments by providing less steam to domestic markets and therefore to infrastructure building costs. • Congo’s government can achieve better outcomes of public investments by implementing sound PFM policies. For example, the government could: (i) better prepare and plan investment projects before they are included in the budg- et; (ii) put in place systems-based commitment controls in budget execution to track public spending; (iii) speed up procurement procedures; and (iv) make the disbursement system more transparent. 23 Poor state of economic infrastructure leading to exceptionally high input costs 2.1. 62. This chapter discusses the government’s ambitious with 135.4 kWh per capita (compared to 222.7 for Sene- investment program in infrastructure and assess its impact gal, 705.4 for Mozambique, and 855.1 for Zambia). In wa- on the Congolese economy. The success of this program ter and sanitation, Congo was ranked 36th with an index of will depend on how it handles the issue of the country’s 40.8 (compared to 55.3 for Burundi, 58.3 for Senegal, and low absorptive capacity and in particular the poor efficien- 78.5 for Gambia).13 cy of public investment management. Growth remains con- 64. Congo’s poor transport and energy infrastructure strained by the underdeveloped physical infrastructures. need particular attention. With regard to road infrastruc- However, the contribution of infrastructure to Congo’s ture, only 7.1 percent of the road network is paved, com- growth is weak. In fact, a cross-country statistical analysis pared to 18.3 percent for Sub-Saharan Africa. A well conducted by the World Bank (2010) shows that the contri- maintained road network is a must for sustainable eco- bution of the infrastructure sector to Congo’s per capita nomic development. Due to lack of rehabilitation and growth over the past decade was 0.5 pp. This contribution maintenance, Congo’s railway network is one of the least was considerably lower than in other countries in the re- developed in the continent. The number of accidents per gion: 0.87 pp for Nigeria, 0.91 pp for DRC, 0.89 pp for km traveled is 0.05 percent against 0.001 percent and 0.03 CAR, and 0.99 for the entire SSA region.10 percent in Cameroon and DRC, respectively. Despite an estimated 14,000 MWh of hydroelectric potential, access to energy infrastructure in Congo is low. Only 30 percent 2.1.1. Coverage and access to infrastruc- of the population has access to electricity, well below the ture services in Congo low income country average (41 percent). Access to elec- 63. Substantial efforts have been made to rehabilitate tricity in rural areas remains very low, at about 5 percent. infrastructure which was severely damaged during the 65. Telecommunications development indicators of civil war, but infrastructure quality remains low. Ac- Congo are broadly comparable to those of other Afri- cording to the index of infrastructure development in Afri- can countries. Significant efforts have been made by ca (AIDI)11, established by the African Development Bank, Congo to expand access to mobile phones. The results are Congo was ranked 36th out of 53 in the standings in 2010.12 good. In 2009, the number of mobile phone subscriptions With an index of 13.1, it ranked behind countries with a per per 100 people was 58.9 compared to 37.3 for the rest of capita income two to seven times lower such as Gambia Sub-Saharan Africa. (15th with 24.7), Senegal (18th with 21.7), and Uganda (24th Figure 30: Selected countries — Electricity Index (Kwh per with 17.9). Congo underperformed in transport, in electrici- capita), 2010 ty, and in water and sanitation. In transport infrastructure, the country ranked 43th with a composite index of 2.3 (compared to 6.7 for Côte d’Ivoire, 9.0 for Uganda, and 9.5 for Burundi). In electricity, it was ranked 31st out of 53 Figure 29: Selected countries – Infrastructure development index, 2010 Source: African Development Bank, 2013 Source: African Development Bank (2013) ——————— 10 Infrastructures have the potenƟal to contribute for more than 3 pp a to the annual growth rate of per capita GDP in the future, if access to and quality of infrastruc- ture services were improved to the level seen in MauriƟus, the leading African country in infrastructure quanƟty and quality (World Bank 2010b). This compares with an average of 2.3 percentage points for the whole African conƟnent. Upgrading Congo’s infrastructure, in parƟcular in the power sector, is a prerequisite for economic development and the provision of social services. 11 The AIDI is based on four major components: (i) transport; (ii) electricity, (iii) ICT, and (iv) water and sanitaƟon. These components are disaggregated into nine indicators that have a direct or indirect impact on producƟvity and economic growth. 12 Banque Africaine de Développement (2013). 13 Companies in charge of the sectors of water and electricity are having difficult financial situaƟons that do not allow them to invest much to maintain their infra- structure. Figure 31: Selected countries— Total Paved Roads (Km per 10,000 inhabitants), 2010 Infrastructure bottleneck leading 2.1.2. to exceptionally high input costs 67. Access to and cost of infrastructures both represent a major constraint to private sector development. In fact, according to the Enterprise Indicator Survey carried out in 2009, more than 70 percent of private firms consider the lack of electricity as the main obstacle for private sec- tor development in Congo (World Bank, 2009). Power cuts are estimated to have reduced firm turnover by 19 percent and 82 percent of firms must rely on a generator. The quality of the fixed line telecommunications network is poor, and international/regional connectivity is underde- Source: African Development Bank, 2013 veloped. The overall poor state of infrastructure leads to exceptionally high input costs in all areas. 66. Access to clean water remains inadequate, despite favorable hydrological conditions. In 2012, only 75.3 per- cent of the total population had access to clean water, com- pared to 64.4 percent for Sub-Saharan Africa and 87.6 per- cent for low-income countries. The condition in the rural areas is much worse, with only 38.8 percent of the rural population having access to clean water against 52.5 percent for the rest of the continent. This poor performance is likely to hamper the chances of the country achieving the MDG of providing clean water to 85 percent of the total population by 2015. 68. Poor transport infrastructure and transport ser- vices remain major bottlenecks to investment and trade. As reported in the 2014 Doing Business report (World Bank, 2013), it takes 54 days to import goods and 50 days to export goods. The railway between Pointe- Noire and Brazzaville is inefficient with high freight tar- iffs, and the road between the two cities is still under con- struction. The rail network is among the worst in Africa in terms of service quality and safety, and tariffs are also among the highest. Rail traffic fell by two-thirds during the conflict and has not yet returned to pre-conflict levels. Tariffs, at US$ 0.16 per ton/km, are up to three times as high as in Southern Africa. This is due to insufficient reha- bilitation and maintenance of tracks, outdated and insuffi- cient rolling stock, weak internal supervision, management deficits and human resource limitations. Surface transpor- tation costs are more than double the Southern Africa av- erage (Briceño-Garmendia and Foster, 2009). 69. The poor state of the country’s infrastructures leads to exceptionally high input costs. According to Briceño-Garmendia and Foster (2009), surface transporta- tion costs around US$0.11 per ton-km versus US$0.05 per ton-km in Southern Africa. Not only is the availability of power unreliable, power costs around US$0.23 per kWh in the south and US$0.62 per kWh in the north, compared with the country’s long run potential to produce power at around US$0.08 per kWh, and to import power at US$0.06 per kWh from neighboring Cameroon. These high service costs are compounded by inefficient admin- istration at ports and borders. 25 Planned and ongoing government investments in infrastructures 2.2. 70. In response to challenges faced by the country, the Congolese government has embarked on an ambitious investment program to improve access to and delivery of Box 2: Brazzaville-Beijing strategic partner- basic services. Indeed, since 2006, the authorities have ship scaled up investment spending substantially to improve the The foundation for the economic and technical cooperation infrastructures, particularly in the power and transport sec- between China and the Republic of Congo includes the tors. For example, the investment budget is set at XAF agreement signed on October 2, 1964 in Beijing and the 1991.8 billion (approximately US$ 4.0 billion) or 28.8 per- establishment of the Joint Commission for Cooperation, cent of GDP in 2014, representing an increase of almost 10.9 signed on May 27, 1982 in Beijing. The strategic partner- ship agreement signed on June 19, 2006 in Brazzaville is percent compared to XAF 1796.4 billion (approximately considered as one of the main supports of the cooperation US$ 3.3 billion) or 25.8 percent of GDP in 2013. Moreover, between China and Congo. since 2006, public investment grew annually at an average Under the strategic partnership between China and Con- rate of 32.8 percent in real terms, while the entire private go, several agreements were signed. In June 2006, the two sector grew at an average rate of 9.8 percent per year. countries signed a framework agreement to finance new basic infrastructure projects such as the construction of the second Djiri plant, modernization and redevelopment of terminal facilities at Maya-Maya international airport, and the construction of roads and housing. The official visit of the President of China to Congo in March 2013 was marked by the signing with the Congolese of ten cooperation agreements in various fields. These agreements include: the construction of the Oyo port; the construction of the Ouesso hydroelectric plant; the con- struction of an ore port at Pointe Noire, which the funding will be discussed between the two parties; the construction of social housing (preferential loan of 370 million yuan); the construction of the Mpila high school (preferential loan of 400 million yuan), and the construction of 200 social housing units. A financing agreement in the amount of three hundred million euros for SMEs was signed in Octo- ber 2013 in Beijing. China is heavily involved in almost any major infrastruc- 71. In 2004, the authorities launched the Municipalisa- ture project in Congo, the hydraulic power plant of Imbou- tion Accélérée (Accelerated Reconstruction of Munici- lou (US$280 million), the headquarters of the Ministry of palities) program, an infrastructure investment program Foreign Affairs and Cooperation, the home of the national radio and television, the University Library of Brazzaville, aimed at equipping and modernizing the country's De- two hospitals and five modern markets are the result of this partments to stimulate their economies and improve the cooperation. living conditions of populations. This program has already In exchange, China is increasingly involved in the exploita- been implemented in nine Departments, chosen alternately tion of the vast resources of raw materials present on Con- in the Northern and Southern parts of the country. For 2012, golese soil. Cooperation agreements were signed in the more than XAF 500 billion of the investment budget was forestry, mining and oil fields. The country also keeps a devoted to the financing of large-scale infrastructure in the cities to restore basic and social services. fair amount of its foreign reserves in China. 72. The Congolese government invested in almost every type of public infrastructure. It invested to build or reha- bilitate roads and airports. It also invested to build dams for electricity production, to build infrastructure for electricity distribution, and water plants. In addition, the government invested in transport and telecommunications infrastructure. 2.2.1. Encouraging improvement in transport infrastructure Development of the Pointe-Noire Port 73. From 2006 to 2013, about 1,000 km of national, sub- regional and urban roads have been built, paved or re- habilitated. The highways program concentrated on im- proving the south-north truck road from Pointe-Noire to Ouesso by asphalting the Route Nationale No. 1 (RN1) be- tween Pointe-Noire and Dolisie and the Route Nationale no. 2 (RN2) between Owando and the river Mambili, and on linking Congo with Gabon via the Cuvette-Ouest depart- ment. The bridge over the river Mambili and the Owando- Makoua-mambili section (126 km) were built by the China Road and Bridge Corporation. In March 2008, Socafran started work on the Ngo-Djambala road, widening it by seven meters, adding a 10-cm sand and bitumen layer and a four-centimeter surface. Extension of the Autonomous Port of Pointe-Noire 76. The Congo-Ocean Railway (CFCO) has been given a makeover. The Congolese railway network has 795 km, from Pointe Noire to Brazzaville and from Mont Mbelo to the Gabonese border and it includes 32 functional stations. It is undergoing repairs and replacements of its track and National road II (Bridge on Mambili River) rolling stock, which has badly deteriorated following the social and political conflicts and from lack of maintenance. 74. The main road projects under way are the continu- The CFCO currently has 25 locomotives, down from the 48 ation of works on the Pointe-Noire-Brazzaville-Ouesso in 1986, but well above five at the end of the war. Due to truck road, the asphalting of additional cross-country these efforts, the traffic of goods increased by 2.2 percent routes, and the creation of road links with Cameroon. between 2012 and 2013 amounting to 982,859 tons, due to The Dolisie-Brazzaville section, which is 376 km long, is the recovery of the traffic of logs along the river, cement being built in five stages by China State Construction Engi- and wheat flour. The passenger traffic increased by 10 per- neering (CSCE-Congo). By the end of the ongoing road cent over the same period, with 574,000 passengers at end projects, it will be possible to drive all the way from north- December 2013. The entry into service of the train ern to southern Congo. The rehabilitation and widening of “gazelle” and the increase in passenger cars constitute the the RN2 is progressing well, despite delays due to bad main factors behind this improvement. weather. The Djiri-Ingha section (86 km), handled by Es- com, is completed at 66 percent and the Etsouali-Ngo sec- tion (60 km) executed by Socofran is completed at 90 per- cent. 75. The government has launched a program to rehabil- itate, modernize and extend the Autonomous Port of Pointe-Noire (PAPN). Furthermore, the container terminal has begun to cope with the increased volume of shipping. According to the authorities, between 2010 and 2011 alone, traffic increased by 19.5 percent. One year after, traffic has also continued its increase by 11.1 percent reaching 7,652 million tons in 2012 as opposed to 6,889 million tons in 2011. Container traffic has increased by 15 percent, up from 442,802 TEU in 2011 to 509,037 TEU in 2012. Ship- ping is set to grow with the expansion of the PAPN, now able to accommodate large vessels with a draft of up to 16 meters. 27 77. Since 2006, the government has built or rehabili- mobile water production units (2,400 m3/h). The first tated eight airports. The government invested to reshape plant (Djiri 1) is undergoing renovation of the building, and upgrade its two main international airport of Brazzaville pumping station, patte d’Oie water tower and Ngama- and Pointe-Noire. The first terminal module and second kosso dam. Rehabilitation of the waterworks will start runway of Maya Maya, Brazzaville’s international airport once Djiri 2 is operational.14 were opened in 2011. The terminal and runway of the 79. Since 2002, various programs have been imple- Pointe-Noire’s Antonio Agostinho Neto Airport have been mented to boost electricity production, transport and modernized, refurbished and extended. In addition to the distribution capacity. Recently built or rehabilitated Brazzaville and Pointe-Noire airports, a new airport has hydroelectric dams (e.g. Imboulou and Moukoukoulou) been built at Ollombo and secondary airports such as Doli- and power stations (Djiri) have increased the available sie, Ouesso, Impfondo and Owando have been rehabilitated power supply to 600 MW. In addition to hydroelectricity to comply with international standards. Given the geograph- power, Congo produces electricity from thermal and gas- ic and economic size of the country, this number is quite fired power stations, which have increased in numbers in high and suggests that the country is using the very expen- recent years. The network of extra-high, high, medium sive air transport services to overcome the still evident and low voltage power lines grew from 800 to 1,500 km shortcomings of the surface network. The rationale of this and extends across the country, transmitting electricity strategic choice of investment is still not fully understood. produced recently. 15 2.2.2. A major increase in water and electricity production A power plant in Congo—Pointe-Noire Djiri 2 Water plant 78. In the water sector, about 10 water plants, mobile water production units and dams providing running wa- ter to Brazzaville households have been built. From these 10 plants, Djiri is the most important one. The con- struction of a second drinking water production plant in Dji- ri (Djiri 2) is nearing completion. Djiri 2 will expand Braz- zaville’s drinking water distribution network, which cur- rently consists of the Djoué plant (1,500 m3/h), public water utility (SNDE) boreholes (300 m3/h), and two Potabloc ————————————- 14 Within the framework of PEEDU, investments are made to sustainably increase access to safe drinking water in Brazzaville and Pointe-Noire and to improve management in the urban water subsector. This will be achieved through investments in Brazzaville and Pointe-Noire as well as the provision of support to the Government and to SNDE towards technical, commercial, and financial recovery of the SNDE. The main results ex- pected are to: (i) expand access to basic services by supplying safe drinking water mainly through household connecƟons and standpipes; (ii) re- duce losses and boost producƟvity; and (iii) stabilize the financial situaƟon of the SNDE by establishing a partnership with the private sector. A private operator (PO) has been hired under a services contract for a 4-year period. The specific objecƟves of hiring the private water operator will be to (i) improve the knowledge of the current condiƟon of the SNDE’s physical assets and of water supply services in Brazzaville and Pointe-Noire; (ii) support the SNDE in operaƟng the investments under the proposed project; and (iii) contribute to the company’s recovery through an increase of its performance, which will be sought by developing its capacity on technical, commercial and financial maƩers. 15 The government is commiƩed to the reform of the electricity sector with the support of the Bank under the PEEDU. The objecƟve in restructur- ing the electricity sector is to rearrange the main funcƟons of the sector: producƟon, transport, distribuƟon, markeƟng and rural electrificaƟon. As for the restructuring of the SNDE, its purpose is improving its economic and financial viability so as to create favorable condiƟons for the private sector. Three opƟons for restructuring were analyzed: (i) maintaining SNDE as verƟcally integrated undertaking; (ii) cuƫng the SNDE into separate companies by funcƟon; (iii) cuƫng the SNDE in companies with combinaƟons of funcƟons. The Government has signed a services contract with EDF whose purpose is to provide technical assistance to the Republic of Congo to sustainably contribute to the structuring and development of the electricity sector and improve the performance of the SNDE. 2.2.3. Substantial upgrade of telecommu- 82. A high scale project: the construction of a road nications infrastructure and rail bridge linking Brazzaville and Kinshasa is planned . Once built, the bridge will give Congo access to 80. Congo already has broadband internet access and an immense hinterland, and a direct link to the DRC. Ac- the optic fibre network is being expanded. This broad- cording to Congolese authorities, the conclusions of the band access is due to the Matombi West Africa Cable Sys- feasibility studies of the Brazzaville-Kinshasa road-rail tem (WACS) stationed near Pointe-Noire, which connects bridge and the extension of the Kinshasa-Ilebo railway line the country to the submarine WACS cable, and the optic will be available soon. In a conference in 2013, it was ap- fibre backbone between Pointe-Noire, Brazzaville and proved that the bridge will be built 60 km north of both cit- Owando. Congo has 1,000 km of fiber optic cable already ies. In addition, the main planning, financing and operation installed and the Matombi terminal station at Pointe-Noire principles were adopted and the socio-environmental im- will soon be operational. pacts studied. The design of the Kinshasa-Ilebo railroad was approved. This bridge would ensure the continuity of the Tripoli-Windhoek-Cape Town Corridor. The Bridge over the Congo River will support regional integration in the Economic Community of Central African States, given the low level of trade between its member states and the low integration of its transport infrastructure. The DRC committed to implementing transport projects in the sub- region, which is an essential condition for its development. The road-rail bridge is also an essential link in the Tripoli- Windhoek-Cape Town Trans-African Highway (TAH3), one of NEPAD’s 14 priority projects and among the 55 pri- ority projects of the Central African Consensual Transport Master Plan (PDCT-AC). 2.2.4. Major infrastructure projects are planned for the coming years 81. In the next five years, projects currently under way will be completed. For example, asphalting of major roads, renewal of the track and rolling stock of the CFCO, and ex- tensions to Congo’s two main airports will be completed. New transport investments will be allocated to river transport: the river ports of Brazzaville and Ouesso, which are key links in Congo’s multimodal transport system and offer suitable modes of transport for heavy goods, will be rehabilitated and reinforced. In addition, high priority in- vestments scheduled at the PAPN will be allocated to, amongst others, reinforcing port installations and building new headquarters Finally, Congo will launch the construc- tion of the Sounda hydroelectric dam (1200MW) in the de- partment of Kouilou, which will be by far the biggest hy- droelectric plant in the country. 29 2.3. Potential impact of ongoing and planned infrastructure projects on economic diversiϐication and growth 83. By reducing production costs in non-oil sectors, ongo- Figure 32: Cost of merchandise transportation ing infrastructure investments will boost Congolese econom- U ic diversification, which in turn will provide a broader base S for economic growth. For example, the Commission on D Growth and Development’s Growth Report (2008) high- / t lighted infrastructure investments as crucial to both structur- o al transformation and export diversification. Also, OECD n (2010) confirms that infrastructures, especially transport in- n e frastructure, are a key factor that supports economic diversi- - fication in all the selected countries. k m 84. The ongoing infrastructure investments have the po- tential to enhance Congo’s economic diversification by significantly reducing input costs for the country’s pro- ductive sector. According to Briceño-Garmendia and Foster Source : Briceno-Garmendia et Foster. 2009. (2009), when all these projects are completed, it is likely that the costs of transport and energy inputs may decrease sub- stantially. This production cost reduction may render Con- 86. In the case of ports, investments and institu- go’s non-extractive sectors more competitive, resulting in an tional reforms will substantially reduce handling and expansion of these sectors and ultimately to a more diversi- administration costs associated with imports and ex- fied economy. Transportation services, agriculture and man- ports. The cost of moving imports through the port is ufacturing are likely to gain directly from these infrastruc- about three times as high as exports: US$97 versus ture investments. US$33 per ton. This is due to the greater delays and stor- age costs associated with imports, as well as the customs New roads, railways and airports will help reduce duties that apply. It is estimated that both costs can be transportation costs, thereby increasing the size of the reduced by around 30 percent by a combination of tar- transportation industry geted investments addressing key bottlenecks within the port, plus extensive institutional reforms to improve the 85. According to Briceño-Garmendia and Foster (2009), efficiency of handling and customs processes. The up- ongoing/planned infrastructure interventions on roads, grade of ports can reduce costs of cargo handling by 30 railways and ports are expected to reduce the cost of in- percent. frastructure services (by at least 30 percent), which are 87. The improvement of the quality of transporta- key inputs for the production process. More precisely, the tion infrastructures may lead to an expansion of improvement of truck roads will gradually reduce vehicle transportation services. Reducing import as well as operating cost and increase productivity of these vehicles, export costs will boost international trade. The improve- resulting in lower road user costs. Indeed, road user costs ment of railways will further reduce transportation costs could fall by one-third under these interventions. The bene- and many goods will therefore be transported between fits of the rehabilitation of railways are savings associated Brazzaville and Pointe-Noire. As a result, transportation with being able to divert a greater volume of traffic from the services for goods will see a major restructuring. Moreo- road to the rail network. Transporting freight by rail (rather ver, the availability of the road network will expand the than by road) brings certain efficiency advantages. These transportation demand of people and goods. According include lower consumption of fuel, reduced carbon emission to a simulation from Mac-Congo, the transportation sec- costs, reduced road maintenance costs, and savings in travel tor will grow by 12 percent over the 2014-2025 period, time. These savings are estimated to amount to US$0.03 per which is an improvement of 8.8 percent recorded over ton-km. Road rehabilitation and upgrades could reduce costs 2001-2013. As a result, the transportation sector, which of road transport by 45 percent. Rail rehabilitation could accounted for 5.5 percent of GDP in 2010, will increase reduce costs of surface transport by 30 percent. to a 7.6 percent share of GDP by 2025. The impact of these transport infrastructures to the entire GDP growth will reach 0.8 pp over the entire period. 88. If markets are not adequately regulated, these infrastructure projects may not result in the antici- pated expansion of transportation services. In fact, most of the services considered (railways, port) are mo- nopolistic or oligopolistic, implying that tariffs can di- verge substantially from costs. Therefore, the benefits of improved infrastructure could translate entirely into profits for infrastructure service providers. However, if Electricity capacity and surge in manufacturing markets are adequately regulated and greater competitive 91. The main weakness that hampered the development pressures introduced, the cost improvements may be of a fair number of manufacturing projects in the Re- passed on to the users of the infrastructure and the transport services sector will expand as predicted and public of Congo is the lack of affordable and reliable en- could generate externalities for other sectors. ergy. Briceno-Garmendia and Foster (2009) show that im- proving power supply could reduce energy costs to firms by Improving the quality and quantity of feeder as much as 25 percent. Therefore, with the development of roads will enhance food and cash crops sectors roads and the availability of affordable energy, some manu- 89. The improvement of road quality all over the facturing projects such as food processing could be econom- country will provide incentive for Congolese to invest ically viable in cities such as Pointe-Noire and Brazzaville. in food crop agriculture because they can access key markets. According to Briceno-Garmendia and Foster 92. The impact comes from making grid electricity more (2009), providing feeder roads would reduce costs of broadly available and allowing the import of lower cost moving agricultural produce by 90 percent. This sharp power from Cameroon. All northern forest concession- reduction of costs will render agricultural products more aires, as well as some of those in the south, are located too competitive. It would therefore boost both food and cash remotely to be able to benefit from grid electricity. As a re- crop production in Congo. sult, much of the timber processing is done using onsite en- 90. More importantly, the benefit of creating feeder ergy generation. Due to the much lower cost of diesel in the roads is to allow people to switch from carrying loads on southwest of the country in the proximity of Pointe Noire, Figure 33: Costs of production infrastructure the cost of power generation is estimated at US$0.23 per kWh for the southern concessionaires and US$0.62 per kWh for the northern concessionaires. This can be compared with long-run marginal costs of US$0.08 for grid electricity, fall- ing to US$0.06 per kWh if power could be imported from USD/tonne-km Cameroon. Figure 34: Impact of infrastructure on average GDP growth, 2010-2025 Source : Briceno-Garmendia, C., et V. Foster. 2009. foot to the use of animals or small scale motorized vehi- cles. Based on the assumption that one person can carry a 20 -kg load walking at one km per hour for 8 hours per day, the cost of moving agricultural goods in the absence of any for- Percent mal rural feeder road network is as high as US$5.0 per ton- km. By allowing these loads to be switched to animals, small carts, motor bikes or pickup trucks, a basic engineered earthen road about three meter wide, plus drainage, would reduce the costs of transporting agricultural goods to US$0.6 per ton-km, a substantial improvement if still well above the cost of freight movement on the truck road network, due to the lower speeds and smaller vehicles associated with rural Source: SimulaƟons with Mac-Congo, 2014 transportation. 31 93. Simulation estimation from Mac-Congo17 indicates Figure 35: Impact of infrastructure on average secto- rial growth, 2010-2025 that over 2010-2025, ongoing/planned projects are likely to add 1.5 pp to annual GDP growth over this period.18 In fact, energy and transportation infrastructures will each add 0.75 pp. Telecommunication infrastructure has consid- erably improved during the last decade, and therefore it will add relatively less in coming years. In terms of sectoral breakdown, agriculture will gain 1.1 pp, manufacturing 2.4 pp and services 1.8 pp. Manufacturing will benefit more Percent from energy infrastructure, which alone may add up to 1.6 pp to the growth rate in this sector during this period. Agri- culture will benefit equally from transportation and energy infrastructures. Transportation infrastructure will be more effective for services as it will reshape transportation ser- vices and expand the number of consumer of services by making services more accessible to a broader population. As Source: SimulaƟons with Mac-Congo, 2014 a result, the share of manufacturing in Congolese GDP will increase by 0.6 pp and the share of services will increase by 1.8 pp, but the share of agriculture will not increase signifi- cantly. ———————————————— 17 Mac-Congo is a macro modeling framework of the family of Financial programming. However, the Mac-Congo is driven by sectorial projecƟons. In fact, Mac-Congo is a macro-econometric model, which is mainly characterized by its capacity of esƟ- maƟng the growth rate of each sector by using specific producƟon funcƟon. This model assures coherence of the naƟonal ac- count, government financial staƟsƟcs, balance of payments, and the monetary situaƟon. 18 Calderón and Servén (2004) show, using panel data on about 100 countries, that infrastructure posiƟvely impacts growth. Also, Fedderke, Perkins and Luiz (2006) show with South African data that producƟve public expenditures in the area of infra- structure (such as roads, transportaƟon and housing) can play an important role in promoƟng economic growth and encourag- ing private investment. 2.4. Impact of improved efϐiciency of public investment on economic di- versiϐication and growth 94. The notion of public investment efficiency is associated 97. Based on this PIMI developed by the IMF, the Republic with the idea of creating or obtaining the maximum amount of Congo ranks 70th out of 71 surveyed countries. Congo of public capital for each dollar spent by the government. In ranks second to last, just ahead of Belize with an overall this view, a more efficient government in terms of public score of 0.50, while the median score for all countries is investment is a government that obtains or creates a higher 1.65. Congo fares particularly badly in the appraisal and level of public capital for a given amount of money invested. evaluation category with a score of 0 each. This situation has not significantly changed since then. In order to use the 95. The most relevant measure of efficiency is the invest- country's resources effectively and efficiently, public invest- ment rate of return (IRR), but no such figures are availa- ment management needs to be improved in all areas of the ble on completed investments in the Republic of Congo. Only Briceno-Garmendia and Foster (2009) provided some project cycle. The index is far from perfect and was comput- IRR figures on prospective public investment projects. How- ed a couple of years ago; however, change in the infrastruc- ever, some implicit indicators of IRR show that the level of ture management system has been slow, so even if there may efficiency in Congo is low. For example, large investments have been some improvement, the state of efficiency contin- in public infrastructure have not yet led to significant nar- ues to be low in Congo. rowing of the infrastructure gap. Congo’s average public 98. The efficiency of public investments is critical to max- investment budget during the last decade has been impres- imize the impact of using the resource wealth of the Re- sive, but power outages remain frequent and road infrastruc- public of Congo. Nielsen and Lofgren (2011) used MAMS ture is far from adequate. From 2000 to 2013, the country to assess the impact of increased investment efficiency on spent an average of about US$ 600 million per annum, rep- growth and employment. resenting about one-tenth of its GDP. More precisely, Congo invested more during the last fifteen years than DRC, Came- roon and Gabon, but the country is producing less electricity and has a lower percentage of paved roads than all these Figure 37: Public investment in 100 million of US$ countries. Therefore, all things being equal, public invest- ment in electricity and paved roads in Congo has been less efficient than in DRC, Cameroon and Gabon. 96. Given the absence of IRR figures, we will use the Electricity100 thousands of kWh Public Investment Management index (PIMI) of Dabla- Norris et al. (2011) as a proxy of public investment effi- ciency. In fact, the PIMI is a measure of how well the key steps of implementation of public investments are undertak- en. Its background rationale is that, if all steps of implemen- tation are done right, the investment rate of return will be higher. Figure 36: Public Investment Management index Percentage of paved road Source: Dabla-Norris et al., 2011 Sources: IMF and World Bank 33 Figure 38: Impact of infrastructure on average growth, A baseline scenario serves as benchmark to measure the effect of higher productivity and efficiency of investment as well as the timing of the investment program. They find that ongoing infrastructure investments will lead to im- provements in growth, private consumption and invest- ment, trade indicators, poverty rates and Millennium De- velopment Goal (MDG) indicators regardless of the coun- Percent try’s environment. Moreover, delaying investments and improving their efficiency will pay off. In fact, higher growth rates and lower unemployment rates can be achieved when slightly delaying investment and simultane- ously improving efficiency compared to frontloading in- vestment with low efficiency. The brief delay in large in- vestment projects could be used to improve government systems, especially in project appraisal, selection and im- Source: Nielsen and Lofgren, 2011 plementation, which could significantly increase the 101. Moreover, simulations from Mac-Congo show that productivity of the investment in selected projects. The if the efficiency of public investments was to be increased highest average annual growth rate is achieved by gradually continuously to reach a 60 percent of improvement from scaling up investment and ensuring high productivity gains, its current state by 2020, the impact of ongoing infrastruc- i.e. 4.5 percent increase of productivity over 2010-2025 ture projects could be larger. In fact, it could add an aver- (which corresponds to an increase of 400 percent of the age of 0.7 pp to annual GDP growth over the period 2014- investment return rate (IRR) by the end on the period). This 2025. More specifically, agriculture could increase by implies an additional 1.2 pp of real GDP growth per year about 0.4 pp, manufacturing by 0.6 pp and services by 0.8 over the next 15 years. pp, driven by transportation and telecommunication ser- 99. In addition to increased productivity, another rea- vices, which could increase by 0.9 pp on average over the son for a better outcome with a scenario of delayed ex- entire period. A 60 percent improvement in investment pansion of investment spending is the lower pressure on efficiency in Congo means that the country will be as effi- domestic markets and the resulting lower price increase cient as Senegal or Gabon according to the PIMI. This lev- for relevant investment commodities, including con- el of efficiency is achievable and the country can do more struction services. This adds to the effectiveness of the because Gabon and Senegal are also at the bottom of the spending in terms of generating new capital. The timing of index. investments for infrastructure improvement therefore needs to be considered carefully and measures taken to ensure that the country’s resources are used as productively as possible. 100. Ensuring higher efficiency while slightly delaying investments seems to be more effective in achieving higher results. Nielsen and Lofgren (2011) find that signif- icantly improving efficiency alone (an increase of the in- vestment return rate by 400 percent by end 2025) could increase average annual growth by 1.3 pp over 2010-2025. In fact, improved efficiency implies that less capital and labor is needed per unit produced. For example t the same amount of recurrent spending could produce 1 percent more services, applying to all inputs (labor, capital and interme- diate), thereby reducing investment needs. Starting from a low level, efficiency gains in the short- and medium-term can be expected and could result from improved processes for investment management (project selection and imple- mentation in particular), but also through better cost recov- ery for the provision of public services (Estache, 2005). 2.5. A policy agenda to improve the efϐiciency of government spending 102. Congo’s stance on efficiency of public spending is This new planning has the potential to reduce delays in the very low, and the government can achieve a better out- procurement phase and will also increase the efficiency of come by implementing sound policies to deal with this government spending since only well-planned and profita- issue. Dabla-Norris et al. (2011) identify that this inefficien- ble projects will be included in the budget and implement- cy was due to poor selection, evaluation and monitoring of ed. investment projects as well as to previously non-regulated 105. To strengthen this, Congo can follow the exam- public procurement systems. The government could build ple of Ghana, which put in place systems-based com- on the experience of some of its peers in improving their mitment control in budget execution to track public stance on the PIMI to draft and implement a successful re- spending across government ministries, departments form. and agencies. In fact, Ghana ranks 27th of 71 countries 103. How can the government improve its project selec- in the PIMI ranking and recently has made good pro- tion and evaluation? The government could follow the gress in strengthening the effectiveness of its Public Fi- example of Rwanda and create Public Investment Commit- nancial Management systems with the progressive im- tees in line ministries. These committees will select only plementation of Ghana Integrated Financial Management projects with an investment project proposal that is accom- Information System (GIFMIS). Notably, Ghana now has panied by project profile documents, multiple year invest- in place a systems-based commitment control in budget ment plans, investment rate of return analyses and feasibil- execution to track public spending across government ity studies ministries, departments and agencies, from the point of requisition through final payment. This ensures that ex- Figure 39 : Selected countries-Governance indicators penditures and upcoming payment obligations and ex- penditure arrears can be both documented and con- trolled. Voice and Accountability 106. The government could improve its spending effi- ciency by speeding up procurement procedures. Con- go’s stakeholders involved in planning and executing investment budgets indicate that there are bottlenecks in the Ministry of Finance (MF) that affect the efficiency of the execution of investment budgets. More specifically, (i) the process is lengthy with many round trips from line ministries to the MF, (ii) the clearance process in the MF generally exceed by far the approved deadline set by the government. The government could take appropriate measures to address the delay. Specifically, the cabinet of the MF could strengthen its human resources capacity Government Effectiveness to deal with the high number of public contracts that it should approve. 107. The Congolese government can improve its gov- ernance credential and the efficiency as well as effec- tiveness of public spending by making the disburse- ment system more transparent. Disbursement proce- dures are lengthy and have many bottlenecks. Even in an Sources: World Bank, Worldwide Governance Indicators, 201 environment with abundant funding, the government is still accumulating arrears because its disbursement pro- cedure is not transparent, and it allows the staff of the 104. The government should better prepare and plan treasury administration to miss deadlines and to pick investment projects before they are included in the who to pay. The government could reform its disburse- budget. A number of projects are included in the budget ment system by training staff involved in it. The govern- without pre-appraisal studies or a road map for their imple- ment may consider using only civil servants and avoid mentation. Going forward with the adoption of a program- using ministerial staff in order to ease the disbursement based budget, the government could consider the introduc- system. The National Treasury could have well-trained tion of a multi-year framework to link investment and budg- staff capable of speeding up disbursement. et planning. The first year consists of pre-appraisal studies. If the project obtains the go ahead at this stage, then prepare a road map of the project implementation for the coming years, and allocate a budget to the investment project ac- cording to this road map. 35 108. Finally, the Congolese government can follow Rwanda and implement a rigorous national public in- vestment policy that covers all aspects of public invest- ment projects. In fact, Rwanda defined its policy on PIM in the National Public Investment Policy Document in 2009 and rigorously implemented PFM reforms in the spirit of the Paris Declaration on Aid Effectiveness (2005) and the Accra Agenda for Action (2008). During the implementation of the reform, the Government of Rwanda strengthened its own administrative capacities and actively solicited the use of its national systems and procedures. A Public Investment Com- mittee that has decision-making authority over the public investment program was created. The PFM system makes sure that future budget implications of public investments fully account for operations and maintenance costs. All these have helped Rwanda to improve significantly its efficiency in public investments. References Abhijit Banerjee, Esther Duflo, and Nancy Qian. 2012. “On the Road: Access to Transportation Infrastructure and Eco- nomic Growth in China.” NBER Working Paper No. 17897. Banque Africaine de Développement. November 2011. "Étude Économique et Sectorielle Développement des Infras- tructures au Congo : Contraintes et Priorités à Moyen Terme.” Département régional centre (orce). Banque Africaine de Développement. May 2013. "The Africa Infrastructure Development Index (AIDI).” Development Research Department (EDRE). Briceño-Garmendia, C. and V. Foster. 2009. “Republic of Congo: Prioritizing Infrastructure Investments—A Spatial Approach.” Report No.52430-CG, World Bank, Washington DC. Calderón, C. and L. Servén. 2004. “The Effects of Infrastructure Development on Growth and Income Distribution.” World Bank Policy Research Working paper,3400. Commission on Growth and Development’s Growth Report. 2008. “Strategies for Sustained Growth and Inclusive De- velopment.” Dabla-Norris, E., J. Brumby, A. Kyobe, Z. Mills and C. Papageorgiou. 2011. “Investing in Public Investment: An Index of Public Investment Efficiency.” IMF Working Paper, WP/11/37. Dessus, S. and R. Herrera. 2000. “Public Capital and Growth Revisited: A Panel Data Assessment.” Economic Devel- opment and Cultural Change, pp. 407-418. Estache, A. 2005. “What Do We Know About Sub-Saharan Africa’s Infrastructure and the Impact of its 1990s re- forms?” World Bank Draft Working Paper, version 4. Fedderke, J. W., P. Perkins and J. M. Luiz. 2006. “Infrastructural Investment in Long-run Economic Growth: South Af- rica 1875-2001.” World Development, Vol. 34, No. 6, pp. 1037-1059. Fedderke, J.W. and Z. Bogetic. 2009. “Infrastructure and Growth in South Africa: Direct and Indirect Productivity Im- pacts of 19 Infrastructure Measures.” World Development, Vol. 37, No. 9, pp. 1522-1539. Foster, V. and C. Briceño-Garmendia (eds). 2010. Africa’s Infrastructure: A Time for Transformation. Agence Fran- çaise de Développement and World Bank. Hulten R. 1996. “Infrastructure Capital and Economic growth: How Well You Use it May Be More Important than How Much You Have.” NBER Working Paper 5847. IMF. 2008. Burkina Faso: Selected Issues. IMF Country Report No. 08/169. IMF. 2013. Republic of Congo Article IV Consultation, Report No. 13/282. Kempe, R. H. 2010. “Infrastructure Constraints and Development in Kenya: An Analytical Review.” Journal of Infra- structure Development, Vol. 37, No. 9, pp. 91-104. Kopits, G. and S. A. Symansky. July 1998. “Fiscal Policy Rules.” International Monetary Fund, Occasional Paper No. 162. Nielsen, H. and H. Lofgren. 2011. “How Important Is the Efficiency of Government Investment?: The Case of the Re- public of Congo.” World Bank Policy Research Working Paper 5901. OECD, United Nations and OSAA. 2010. Economic Diversification In Africa: A Review Of Selected Countries. 37 References Prud’homme, R. 2005. “Infrastructure and Development,” pp. 153-180 in F. Bourguignon and B. Pleskovic (eds.), Les- sons of Experience: Annual World Bank Conference on Development Economics. World Bank, Washington, D.C. Pushak, N. and C. M. Briceño-Garmendia. 2011. “The Republic of Congo’s Infrastructure: A Continental Perspective.” World Bank Policy Research Working Paper 5838. Ministry of Spatial Planning and Delegate General for Major Public Works. 2013. "L’Axe de Brazzaville-Pékin se Consolide." Magazine du Ministère du l’Aménagement du Territoire et de la Délégation Générale aux Grands Travaux – Reflet. No.15. Brazzaville, République du Congo. République du Congo. 2012. “Congo Délégation Générale aux Grands Travaux 2002-2012: Faire de l’Ambition de Moderniser une Réalité.” Les éditions du Jaguar/ Éditions Conseil-2012. République du Congo. June 2013. “Rapport de Programmation Budgétaire 2014-2016.” Comité Permanent de Cadrage Macroéconomique et Budgétaire, Ministère de l’Economie, des Finances, du Plan, du Portefeuille Public et de l’Intégration. UNDP. June 2012. “Étude sur la Vulnérabilité de l’Économie Congolaise et ses Perspectives de Diversification.” World Bank. 2007. “World Development Report 2008: Agriculture for Development.” Washington, DC. World Bank. March 2010. “The Republic of Congo’s Infrastructure: A Continental Perspective.” Africa Infrastructure Country Diagnostic – Country Report. Washington, DC. World Bank. 2010c. “Republic of Congo Public Expenditure Review – Using Oil Wealth Effectively to Accelerate and Diversify Growth.” Report No. 54734-CG. Washington, DC. World Bank. 2011. Republic of Congo Employment and Growth Study: From Jobless to Inclusive Growth. Report No. 61999-CG. World Bank. 2011. “Doing Business 2012 - Economy Profile: Congo, Rep.” Washington, DC. 38 Appendix 39 Table 1. Republic of Congo: Real GDP growth rates – 2010-2016 2010 2011 2012 2013 2014 2015 2016 Est. Proj. Primary sector 11.8 -1.9 -5.2 -4.7 5.4 3.9 9.2 Agric., livestock, hunt, fishery 6.4 7.9 7.8 8.5 8.2 6.8 8.3 Agric., livestock, 7 8 8.3 9 8.6 7 8.5 Hunt 3.5 6.5 5.2 5.8 4.8 4.7 6.2 Fishery 4 8 6.1 6.7 7.4 6.3 8 Forestry 5 1.6 3 3.1 5.6 5.9 2.7 ExtracƟve Industries 13.7 -4.8 -9.6 -10 4.1 2.5 9.9 Petroleum sector 13.7 -4.8 -9.6 -10 4.1 2.5 3.1 Other extracƟve industries 0 0 0 0 0 0 0 Secondary sector 6.3 8.7 8.7 8.9 9.2 8.8 7.3 Manufacturing industries 5.9 8.6 8.6 9 8.8 8.4 6.2 Food industries 4.5 8 8.4 9 9.5 8.2 6.9 Other manufacturing industries 8.2 9.6 8.8 9 7.8 8.8 5 Electricity, gas and water 5.5 7.4 7.5 7 7.4 7.3 5.1 ConstrucƟons.& public works 8.8 10.5 10.5 10.2 12 11.5 13.3 TerƟary sector 5.7 7.2 10.8 8 7.9 7.9 9.7 Transports and CommunicaƟons 6.9 9.2 9.1 9.1 7.3 7.8 10.8 Transports 5.9 8.5 8.6 8.5 7 7.6 10.6 CommunicaƟons 8.6 10.4 9.8 10 7.7 8.2 11.2 Commerce, restaurants, hotels 7.4 9.2 9.5 9.2 7.4 8.3 11.3 Public AdministraƟon 3.2 3.2 17.7 7.9 10.6 7.9 6.4 Other services 4.9 6.7 6 4.4 5.7 7.4 10.5 GDP at factor cost 8.5 3.3 3.7 3.2 7.2 6.6 9.1 Import taxes 16 6.6 8.1 8.1 5.5 5.5 7.9 GDP at constant prices 8.7 3.4 3.8 3.4 7.1 6.6 9.1 Non-oil 6.4 7.5 9.7 8.2 8 7.8 8.8 Mining 0 0 0 0 0 0 0 Oil 13.7 -4.8 -9.6 -10 4.1 2.5 3.1 Sources: Congolese authoriƟes and World Bank staff esƟmates. 40 Table 2. Republic of Congo: Sectoral contribution to nominal output – 2010-2016 (percent of GDP) 2010 2011 2012 2013 2014 2015 2016 Est. Proj. Primary sector 73.4 73.9 70.9 67.6 66.4 64.5 63.3 Agric., livestock, hunt, fishery 3.3 3.3 3.6 4.1 4.3 4.4 4.3 Agric., livestock, 2.8 2.7 3 3.4 3.6 3.7 3.7 Hunt 0.2 0.2 0.2 0.3 0.3 0.3 0.3 Fishery 0.3 0.3 0.4 0.4 0.4 0.4 0.4 Forestry 0.3 0.3 0.3 0.3 0.3 0.3 0.2 ExtracƟve Industries 69.8 70.3 67 63.3 61.9 59.8 58.7 Petroleum sector 69.8 70.3 67 63.3 61.9 59.8 55.5 Other extracƟve industries 0 0 0 0 0 0 3.2 Secondary sector 7.1 7 7.8 8.8 9.2 9.9 10.2 Manufacturing industries 3.6 3.5 3.8 4.3 4.5 4.7 4.6 Food industries 2.6 2.6 2.8 3.1 3.3 3.5 3.4 Other manufacturing indus- 0.9 0.9 1 1.2 1.2 1.3 1.2 tries Electricity, gas and water 0.6 0.6 0.6 0.7 0.7 0.7 0.7 ConstrucƟons.& public works 2.9 2.9 3.3 3.8 4 4.4 4.9 TerƟary sector 17.9 17.4 19.4 21.6 22.2 23.4 24.3 Transports and CommunicaƟons 4.1 4 4.4 5 5.1 5.4 5.7 Transports 2.9 2.9 3.2 3.6 3.7 3.9 4.2 CommunicaƟons 1.1 1.1 1.2 1.3 1.4 1.5 1.6 Commerce, restaurants, hotels 5.5 5.5 6 6.8 7 7.4 7.9 Public AdministraƟon 3.7 3.4 4.1 4.5 4.9 5.1 5 Other services 4.7 4.6 4.9 5.3 5.3 5.5 5.5 GDP at factor cost 98.3 98.3 98.1 97.9 97.9 97.8 97.7 Import taxes 1.7 1.7 1.9 2.1 2.1 2.2 2.3 GDP at market prices 100 100 100 100 100 100 100 Non-oil 30.2 29.7 33 36.7 38.1 40.2 41.3 Mining 0 0 0 0 0 0 3.2 Oil 69.8 70.3 67 63.3 61.9 59.8 55.5 Sources: Congolese authoriƟes and World Bank staff esƟmates. 41 Table 3. Republic of Congo: Supply and use at current prices – 2010-2016 2010 2011 2012 2013 2014 2015 2016 Est. Proj. Gross domestic product (GDP) 100 100 100 100 100 100 100 Domestic demand 61.8 64 76.9 87.6 90.9 94.4 96.7 Consumption 32.1 29.6 33.7 41.2 42.5 44.2 46.3 Public (Government) 8 7.3 8.9 9.9 10.6 11.2 11 Private 24.1 22.2 24.8 31.3 31.8 33 35.3 Domestic investment 29.7 34.5 43.2 46.4 48.5 50.2 50.4 Fixed expenditure 29.7 34.5 43.2 46.4 48.5 50.2 50.4 Public (Government) 7.9 11.7 18.8 25.8 27.4 28.6 29.3 Private (Enterprises et households) 21.8 22.8 24.4 20.6 21.1 21.6 21.1 Petroleum sector 18.4 19 19.9 15 14.8 14.5 13.7 Mining sector 0 0 0 0 0 0 0 others secotrs (Non oil and mining) 3.5 3.8 4.5 5.6 6.3 7 7.4 Variation of stocks 0 0 0 0 0 0 0 Net exports 38.2 36 25.9 12.4 9.1 5.6 3.3 Exports of G and NFS (BOP) 92.2 84.9 93.2 84.3 82.7 80.5 75.1 Goods 89.1 81.6 90 80.8 79.1 76.8 71.3 Oil exports 85 77.3 85.6 76.5 74.8 72.4 67.1 Others exports (Non oil) 4.1 4.3 4.3 4.2 4.3 4.4 4.2 Non factor services 3.1 3.3 3.2 3.5 3.6 3.7 3.8 Imports of G and NFS (BOP) -54 -49 -67.3 -71.9 -73.6 -74.8 -71.8 Goods -26.7 -24.5 -36.9 -40.6 -42.4 -43.7 -41.9 Oil imports -7.7 -7.2 -7.3 -6.7 -6.6 -6.5 -6.1 Others imports (Non oil) -19 -17.3 -29.6 -34 -35.8 -37.2 -35.8 Non factors services -27.3 -24.4 -30.4 -31.2 -31.2 -31.1 -29.9 Sources: Congolese authoriƟes and World Bank staff esƟmates. 42 Table 4. Republic of Congo: Central Government Operations – 2010-2016 (percent of GDP) 2010 2011 2012 2013 2014 2015 2016 Est. Proj. 1. Revenue and grants 36.6 41.3 42 48.4 49.3 47.3 43.6 Revenue 36.6 40.9 41.8 48.4 49.3 47.3 43.6 Oil and mining revenue 28.9 32.7 32.6 37.3 36.6 34.8 31.1 Oil revenue 28.9 32.7 32.6 37.3 36.6 34.8 30.4 Mining revenue 0 0 0 0 0 0 0.7 Non oil revenue 7.7 8.2 9.2 11.1 12.7 12.5 12.5 Fiscal taxes 7.3 7.9 8.9 10.2 11.6 12 12.1 Non tax revenue 0.4 0.4 0.3 0.9 1 0.5 0.4 Grants 0 0.4 0.1 0 0 0 0 2.Expenditure and net lending 20.1 24.7 35.9 40.5 42.6 41.1 39.2 Current expenditure 11.2 9.9 14.7 14.6 15.2 16.6 16.7 Wage bill 3 3 3.6 3.9 4.5 4.7 4.7 Other current expenditure (primary) 7.3 6.8 10.9 10.5 10.5 10.7 10.7 Material and supplies 2.9 2.6 4 3.7 4.5 4.6 4.5 Common charges 0.8 1 1.6 1.5 1.4 1.3 1.2 Budget reserves 0 0 0 0 0 0 0 Transfers 2.8 2.6 4.8 4.8 3.9 4.1 4.3 Local authoriƟes 0.7 0.6 0.6 0.5 0.8 0.7 0.7 Interest on public debt 1 0.2 0.2 0.2 0.2 1.2 1.3 DomesƟc 0 0 0 0.2 0 0.3 0.2 External 0.9 0.2 0.2 0 0.2 1 1.1 Capital expenditure 9 14.8 21.2 25.8 27.4 24.5 22.5 DomesƟcally financed 8.5 11.8 17.3 15.9 18.5 17.1 16.4 Externally financed 0.5 3 3.9 7.9 8.9 7.4 6 Net lending 0 0 0 0 0 0 0 Primary balance, domesƟc resources basis 17.9 19.4 10 18.9 15.8 14.8 11.8 Non-oil primary balance -11 -13.3 -22.6 -18.4 -20.8 -20 -19.3 Balance, commitment basis, excluding 16.5 16.3 6 8 6.7 6.2 4.4 grants Balance, commitment basis, including grants 16.5 16.7 6.1 8 6.7 6.2 4.4 Change in arrears (- = decrease) -2.5 -1.3 -0.9 -0.4 -0.8 -0.7 -0.5 DomesƟc (principal and interest) -2.5 -1.3 -0.9 -0.4 -0.8 -0.7 -0.5 External (principal and interest) 0 0 0 0 0 0 0 Balance, cash basis 13.9 15.4 5.2 7.6 5.8 5.5 3.9 3. Financing -13.9 -15.4 -5.2 -7.6 -5.8 -5.5 -3.9 Foreign (net) 0.4 -1.1 2.7 8.8 4.2 2.9 0.5 DomesƟc (net) -14.3 -14.3 -7.9 -16.4 -10 -7.8 -6 Residual financing gap 0 0 0 0 0 0 0 Sources: Congolese authoriƟes and World Bank staff esƟmates 43 Table 5. Republic of Congo: Central Government Operations – 2010-2016 2010 2011 2012 2013 2014 2015 2016 Est. Proj. 1. Revenue and grants 121.1 139.3 127.2 131.8 129.2 117.9 105.7 Revenue 121.1 137.9 126.7 131.8 129.2 117.9 105.7 Oil and mining revenue 95.6 110.2 98.8 101.6 96 86.7 75.3 Oil revenue 95.6 110.2 98.8 101.6 96 86.7 73.6 Mining revenue 0 0 0 0 0 0 1.7 Non oil revenue 25.5 27.8 27.9 30.2 33.2 31.1 30.4 Fiscal taxes 24.2 26.5 26.9 27.8 30.5 30 29.3 Non tax revenue 1.3 1.3 1 2.4 2.7 1.2 1.1 Grants 0 1.4 0.4 0 0 0 0 2.Expenditure and net lending 66.6 83.1 108.6 110.1 111.7 102.5 94.9 Current expenditure 36.9 33.3 44.4 39.8 39.8 41.4 40.5 Wage bill 9.8 10 10.8 10.6 11.7 11.7 11.4 Other current expenditure (primary) 24 22.8 33.1 28.6 27.6 26.7 25.9 Material and supplies 9.7 8.8 12.1 10.2 11.7 11.4 10.8 Common charges 2.7 3.2 4.9 4.1 3.6 3.3 2.9 Transfers 9.3 8.7 14.5 12.9 10.3 10.2 10.5 Local authorities 2.3 2.1 1.7 1.4 2 1.8 1.6 Interest on public debt 3.2 0.5 0.6 0.6 0.5 3.1 3.2 Domestic 0.1 0 0 0.6 0 0.6 0.5 External 3.1 0.5 0.6 0 0.5 2.4 2.7 Capital expenditure 29.7 49.7 64.2 70.3 71.9 61 54.4 Domestically financed 28 39.6 52.4 43.1 48.5 42.7 39.9 Externally financed 1.7 10.1 11.8 21.5 23.4 18.3 14.6 Net lending 0 0 0 0 0 0 0 Primary balance, domestic resources 59.4 65.5 30.4 51.6 41.4 36.8 28.5 basis Non-oil primary balance -36.3 -44.7 -68.4 -50 -54.6 -49.9 -46.8 Balance, commitment basis, excluding 54.5 54.9 18.1 21.7 17.4 15.4 10.8 grants Balance, commitment basis, including 54.5 56.3 18.5 21.7 17.4 15.4 10.8 grants Change in arrears (- = decrease) -8.4 -4.4 -2.8 -1 -2.2 -1.6 -1.3 Domestic (principal and interest) -8.4 -4.4 -2.8 -1 -2.2 -1.6 -1.3 External (principal and interest) 0 0 0 0 0 0 0 Balance, cash basis 46 51.8 15.7 20.7 15.3 13.8 9.5 3. Financing -46 -51.8 -15.7 -20.7 -15.3 -13.8 -9.5 Foreign (net) 1.3 -3.8 8.3 23.9 10.9 7.2 1.2 Project financing 0.2 0 0 5.9 6.6 7.2 5.8 Drawings 1.5 8.7 11.3 23.4 12.5 -0.7 0.4 Amortization due (principal) -3.4 -4.1 -3 -5.4 -8.1 -0.9 -1.2 Debt rescheduling 0 0 0 0 0 0 0 Debt cancellation 3 0 0 0 0 0 0 External debt relief obtained 0 0 0 0 0 0 0 Net short terms secured debt and 0 0 0 0 0 0 0 other Domestic (net) -47.4 -48.1 -24.1 -44.6 -26.2 -19.3 -14.5 Bank system -15.7 -18.9 15.6 0 -2.7 2.4 2.6 Non bank system -31.7 -29.2 -39.7 -44.6 -23.5 -21.8 -17.1 Residual financing gap 0 0 0 0 0 -1.7 3.8 Sources: Congolese authorities and World Bank staff estimates 44 Table 6 . Republic of Congo: Executed budget –2008-2013 (percent of the total budget) 2008 2009 2010 2011 2012 2013 Est. 1. Revenue and grants 100 100 100 100 100 100 Revenue 100 98.9 100 99 99.7 100 Oil and mining revenue 86 69.8 79 79.1 77.7 77.1 Oil revenue 86 69.8 79 79.1 77.7 77.1 Mining revenue 0 0 0 0 0 0 Non oil revenue 14 29.1 21 19.9 21.9 22.9 Fiscal taxes 12.4 26.7 20 19 21.2 21.1 Non tax revenue 1.6 2.4 1.1 0.9 0.7 1.8 Grants 0 1.1 0 1 0.3 0 2. Expenditure and net lending 50.3 83.2 55 59.6 85.4 83.6 Current expenditure 31.8 46.9 30.5 23.9 34.9 30.2 Wage bill 6.7 13.1 8.1 7.2 8.5 8 Other current expenditure (primary) 19 28.3 19.8 16.4 26 21.7 Material and supplies 7.1 10.9 8 6.3 9.5 7.7 Common charges 1.7 2 2.2 2.3 3.8 3.1 Transfers 9.2 12.5 7.7 6.3 11.4 9.8 Local authoriƟes 0.9 1.8 1.9 1.5 1.3 1.1 Interest on public debt 6.1 5.5 2.6 0.4 0.4 0.5 DomesƟc 0.4 0.7 0.1 0 0 0.5 External 5.7 4.8 2.6 0.4 0.4 0 Capital expenditure 18.4 36.2 24.5 35.7 50.5 53.3 DomesƟcally financed 15.8 35.1 23.1 28.4 41.2 32.7 Externally financed 2.6 1.2 1.4 7.3 9.2 16.3 Net lending 0 0.1 0 0 0 0 3. Budget surplus 49.7 16.8 45 40.4 14.6 16.4 Budget surplus, percent of GDP 26.9 5.1 16.5 16.7 6.1 8 Sources: Congolese authoriƟes and World Bank staff esƟmates. 45 Table 7. Republic of Congo: Oil forecasts and realizations – 2005-2018 (millions of barrels) 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Est. Proj. Forecast 92.6 100 101.3 93.9 109.6 124.8 135.1 105.3 100 95.5 98.7 101.5 RealizaƟon 82.6 98.7 81.7 86.6 100.7 114.5 109 98.6 88.7 92.4 94.7 97.6 Sources: Congolese authoriƟes and World Bank staff esƟmates. 46 Table 8. Republic of Congo: Selected macroeconomic indicators – 2010-2016 2010 2011 2012 2013 2014 2015 2016 Est. Proj. GDP growth (constant prices, annual %) 8.7 3.4 3.8 3.4 7.1 6.6 9.1 GDP growth - oil (constant prices, annual %) 13.7 -4.8 -9.6 -10 4.1 2.5 3.1 GDP growth - non-oil (constant prices, annual %) 6.4 7.5 9.7 8.2 8 7.8 8.8 Private ConsumpƟon growth (current prices, annual %) 5.4 7.9 9.9 3.8 6.3 6.5 7.6 Gross Fixed Investment (current prices, % of GDP) 29.7 34.5 43.2 46.4 48.5 50.2 50.4 Gross Fixed Investment - Public (current prices, % of GDP) 7.9 11.7 18.8 25.8 27.4 28.6 29.3 Gross Fixed Investment - Private (current prices, % of GDP) 21.8 22.8 24.4 20.6 21.1 21.6 21.1 InflaƟon, consumer prices (annual %, end of year) 5.4 1.8 7.5 2.1 3.2 2.5 2.6 InflaƟon, consumer prices (annual %, period average) 5 1.8 5 4.6 3 2.9 2.9 GDP deflator (annual %, average) 26.9 11 -3.8 -3.4 -2.6 -2 0.5 Nominal Exchange Rate (CFAF/US$, period average) 494.4 471 510 494 500 500 500 Real EffecƟve Exchange Rate Index (2005=100) 108.7 107.9 106.4 112.3 Overall Fiscal Balance (commitment basis, incl. grants % of 16.5 16.7 6.1 8 6.7 6.2 4.4 GDP) Overall Fiscal Balance (commitment basis, excl. grants % of 16.5 16.3 6 8 6.7 6.2 4.4 GDP) Overall Fiscal Balance (commitment basis, incl. grants % of 54.5 56.3 18.5 21.7 17.4 15.4 10.8 non-oil GDP) Primary Fiscal Balance (% of GDP) 17.9 19.4 10 18.9 15.8 14.8 11.8 Non-oil Primary Fiscal Balance (% of non-oil GDP) -36.3 -44.7 -68.4 -50 -54.6 -49.9 -46.8 Total revenue (excl. grants, % of GDP) 36.6 40.9 41.8 48.4 49.3 47.3 43.6 Oil revenue (% of GDP) 28.9 32.7 32.6 37.3 36.6 34.8 30.4 Non-oil revenue (% of non-oil GDP) 25.5 27.8 27.9 30.2 33.2 31.1 30.4 Merchandise exports (fob, current US$ billions) 7.1 8.7 7.3 6.9 7 7 6.7 of which oil exports (current US$ billions) 6.4 7.9 6.5 6 6.1 6.1 5.8 Merchandise imports (fob, current US$ billions) 0 0 0 0 0 0 0 of which oil exports (current US$ billions) 0.9 1.1 1 0.9 1 1 1 Current account balance (incl. transfers, % of GDP) -0.1 -0.1 -0.3 -0.4 -0.4 -0.4 -0.5 Foreign Direct Investment (net, current US$ bilions) 3 3.3 2 4.6 5.1 5.5 3.7 of which oil sector (net, current US$ billions) 2.5 2.7 1.2 3.4 3.5 3.6 1.4 PopulaƟon, total (millions) 4 4.1 4.3 4.4 4.5 4.7 4.8 Unemployment Rate .. 6.9 .. .. .. .. .. Formal sector job creaƟon (%, yoy) .. .. .. .. .. .. .. Poverty headcount raƟo at naƟonal poverty line (% of popula- .. 46.5 .. .. .. .. .. Ɵon) Inequality - Income Gini .. 0.4 .. .. .. .. .. PopulaƟon Growh (annual %) 2 2.9 2.9 2.9 2.9 2.9 2.9 Life Expectancy .. 51.6 .. .. .. .. .. Infant mortality rate (per 1,000 live births) 64.3 63.8 62.2 .. .. .. .. Sources: Congolese authoriƟes and World Bank staff esƟmates. 47 Table 9. Republic of Congo: Chinese ϐinancing of infrastructure Disbursement in million Type of agreement Amounts to borrowing Project Name of US$ Road Obouya-Boundji-Okoyo 84 Oyo hospital 26 Maya-Maya Equipment 72 ConstrucƟon Maya-Maya 81 Road Pointe-Noire Malele 85 Road Malele-Les Saras 84 Road Lessara-MvouƟ 84 Road MvouƟ-Dolisie 74 Strategic Partnership I Bridge over the Mambili 69 signed June 9, 2006 Road Owando-Makoua 85 Road Makoua-Mambili 76 Airport Ollombo 53 AccommodaƟon camp on August 15 45 Extension Factory Djiri 84 ModernizaƟon Djiri 1 81 Building of networks Djiri 80 1600 Total 1163 Strategic Partnership II 1000 Road Dolisie-Brazzaville 1000 Road Mambili-Moyoye 84 Road Moyoye-Liouesso 77 Strategic Partnership III Road Liouesso-Ouesso 83 signed in March 29, 2013 Road Okoyo-Gabon Border 77 200 units Mpila 45 600 Total 366 Phase 1 of telecoms 70 Phase 2 of telecoms 63 Excluding strategic partner- Phase 3 telecom 76 ship agreements with the AircraŌ Air Congo 41 private sector ConstrucƟon of Dam Imboulou 238 Transports of Imboulou lines 551 Sources: Congolese authoriƟes 48