Document o f The World Bank FOR OFFICIAL USE ONLY Report No: 52507-CG MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON ASSISTANCE TO THE REPUBLIC OF CONGO UNDER THE ENHANCED HEAVILY INDEBTED POOR COUNTRIES INITIATIVE AND THE MULTILATERAL DEBT RELIEF INITIATIVE January 6,2010 This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Currency Unit - - U S $ l .oo - 456.7 WEIGHTS AND MEASURES Metric System FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS AfDF African Development Fund APR Annual Progress Report DRA Debt Relief Analysis HIPC Heavily Indebted Poor Countries IDA International Development Association IMF International Monetary Fund MDRI Multilateral Debt Relief Initiative NPV N e t Present Value PRGF Poverty Reduction and Growth Facility PRSP Poverty Reduction Strategy Paper SDR Special Drawing Right US$ United States Dollar Vice President, AFR Obiageli Katryn Ezekwesili Vice President, PRM Otaviano Canuto Country Director Marie Francoise Marie-Nelly Director, AFTPM Sudhir Shetty Director, PRMED Carlos Braga Manager, AFTP3 Jan Walliser Manager, PRMED Sudarshan Gooptu Task Team Leaders Tony Verheijen, Henry Mooney Peter Siegenthaler, Luca Bandiera, Monthe Staff Members Bienvenu Biyoudi, Eric Bell FOR OFFICIAL USE ONLY ASSISTANCE TO THE REPUBLIC OF CONGO UNDER THE ENHANCED HEAVILY INDEBTED POOR COUNTRIES DEBT INITIATIVE (HIPC) AND THE MULTILATERAL DEBT RELIEF INITIATIVE (MDRI) Table o f Contents I. BACKGROUND................................................................................................................ -4 1 1. FULFILLMENT OF COMPLETION POINT CONDITIONS........................................... 5 1. 11 COMPLETION POINT CONSIDERATIONS .................................................................. -5 IV. IDA'S DELIVERY OF ASSISTANCE UNDER THE ENHANCED HIPC INITIATIVE ....................................................................................................................... .9 V. IDA'S DELIVERY OF ASSISTANCE UNDER THE MDRI ........................................... 9 VI. PROSPECTS FOR LONG-TERMDEBT SUSTAINABILITY AFTER DEBT RELIEF UNDER THE ENHANCED HIPC INITIATIVE AND MDRI.......................... 10 VII. SATISFACTORY FINANCING ASSURANCES FROM THE REPUBLIC OF CONGO 'S CREDITORS.................................................................................................. 10 VIII. RECOMMENDATION.................................................................................................... - 11 Figures Figure 1: Debt Service to IDA after HIPC Relief and the MDRI ................................................. 10 Annexes Annex 1: The Republic o f Congo-IDA Credits Subject to Debt Service Reductionunder the Enhanced Heavily Indebted Poor Countries Initiative........................................... .12 Annex 2: The Republic o f Congo-Schedule o f Debt Service Reduction under the Enhanced Heavily Indebted Poor Countries Initiative as Estimated at the Decision Point............................................................................................................... 1 3 Annex 3 : The Republic o f Congo-Schedule o f Debt Service Reduction under the Enhanced Heavily Indebted Poor Countries Initiative ................................................ .13 This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not be otherwise disclosed without W o r l d Bank authorization. MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS O N ASSISTANCE TO THE REPUBLIC OF CONGO UNDER THE ENHANCED HIPC DEBT INITIATIVE AND THE MULTILATERAL DEBT RELIEF INITIATIVE 1. Isubmit for your approval the following memorandum and recommendation on the assistance to be provided to The Republic o f Congo ("Congo") under the Enhanced Heavily Indebted Poor Countries (HIPC) Debt Relief Initiative, with respect to the debt owed by this country to the International Development Association (IDA). This report and its recommendations address the criteria for Congo reaching the completion point under the Enhanced HIPC Initiative as agreed by the Boards o f Executive Directors o f IDA and the International Monetary Fund (IMF) in March 2006l, and for the debt relief to be provided irrevocably with respect to the debt owed to IDA. Upon reaching the completion point, Congo will also become eligible for debt relief under the Multilateral Debt Relief Initiative (MDRI) from IDA. 2. This document complements the joint IDA-IMF paper entitled "The Republic o f Congo: Enhanced Heavily Indebted Poor Countries (HIPC) Initiative Completion Point Document and Multilateral Debt Relief Initiative (MDRI)", concurrently submitted with this document. The completion point document presents: (i)Congo's progress in filfilling the triggers for the completion point under the Enhanced HIPC Initiative; (ii)an update o f Congo's reconciled public external debt and o f the debt relief committed at the the decision point under the Enhanced HIPC Initiative; (iii) status o f creditor participation since the decision point; (iv) the provision o f MDRI relief by IDA, the IMF, and the African Development Fund (AfDF); and, (v) prospects for the country's long term-debt sustainability . I. BACKGROUND 3. Congo reached the decision point under the Enhanced HIPC Initiative in March 2006. Based o n the HIPC debt relief analysis (DRA) presented in the decision point document, debt relief under the Enhanced HIPC Initiative amounted to US$1,679 million in net present value (NPV) terms as o f end-2004, corresponding to a common reduction factor o f 32.4 percent on the NPV o f debt outstanding as o f end-2004 for all creditors. Debt relief attributed to multilateral creditors was estimated at the decision point at US$118 million in N P V terms. 4. Debt relief from IDA under the Enhanced HIPC Initiative approved at the decision point amounted to US$49 million in N P V terms, to be delivered through debt relief on IDA credits disbursed and outstanding as o f end-2004 (see Annex 2 for the schedule o f debt relief for IDA approved at the decision point). "The Republic o f Congo: EnhancedHeavily Indebted Poor Countries (HIPC) Initiative-Decision Point Document" (March 2,2006), Report No. 34759-CG. 4 5. Through February 1, 2010, IDA will have provided interim period debt relief equal to US$13.1 million in NPV terms (US$14.4 million in nominal terms). At the completion point under the Enhanced HIPC Initiative, and provided that the Executive Directors agree that satisfactory assurances o f debt relief have been received from Congo's other creditors, the provision o f the remaining assistance would become irrevocable. 11. FULFILLMENT OF COMPLETION POINT CONDITIONS 6. In accordance with the decision o f the Executive Directors o f IDA and the IMF at the decision point, the conditions for reaching the completion point require that Congo have: (i) prepared a full poverty reduction strategy paper (PRSP) and satisfactorily i) implemented it for at least one year; ( i maintained a stable macroeconomic framework as evidenced by satisfactory performance under IMF-supported programs, and (iii) implemented the remaining floating completion point triggers indicated in the decision point document. 7. As outlined in Box 1 (below), all o f the HIPC completion point triggers have been met by the authorities, who have moved decisively to implement reforms in public ' investment management, procurement, governance and oil sector management. In this context, the staffs o f IDA and the IMF consider that the main elements o f the HIPC reform program have been satisfactorily implemented. 111. COMPLETION POINT CONSIDERATIONS 8. The updated D M uses revised values as o f end-2004 for the N P V o f external debt. Based on additional information, the N P V o f external debt as o f end-2004 has been revised downward from US$9.3 billion to US$9.2 billion, and the NPV o f debt after the delivery o f traditional debt relief has decreased by US$l05 million to US$5.1 billion. Central government revenue at end-2004 used to evaluate HIPC assistance at the decision point has not been revised at the completion point. 9. The HIPC assistance calculated at decision point has been revised downwards owing to a decline in the common reduction factor (CRF). The downward revision to the end-December 2004 NPV o f debt after traditional debt relief from US$5.2 billion to US$5.1 billion results in a common reduction factor o f 3 1.1 percent, compared with the 32.4 percent committed by creditors at decision point. The recalculation o f assistance i s in line with existing policy rules and i s above the minimum threshold (a change in the U S dollar amount o f HIPC relief o f 1 percent o f the targeted NPV o f debt after HIPC relief) for adjusting the common reduction factor in response to new information.2 Consequently, the staffs recommend that debt r e l i e f under the HIPC Initiative estimated at US$1,679 million in NPV terms at the decision point be reduced to US$1,575 million. See "Information Reporting in the Context o f HIPC Initiative Assistance", approved by the members o f the Executive Boards o f the IMF (EBS/02/36) and IDA (IDA/Sech42002-013 l), March 4,2002. 5 Box 1: Status of Floating Completion Point Triggers Trigger Statuskomments 1. PRSP: Preparation of a full PRSP through a participatory process and satisfactory Observed. APR submitted to implementation of its recommended actions for at least one year, as evidenced by an Boards jointly with the Annual Progress Report (APR) submitted by the government to the staffs of IDA and Completion Point document. IMF. 2. Macroeconomic Stability: Maintenance of macroeconomic stability as evidenced Observed. 2naPRGF review by satisfactory performance under the PRGF-supported program as well as any IMF completed on November 30, successor program. 2009 and stars assessment is that the 3' review could be completed as envisaged in May 2010. 3. Public Expenditure Priorities: Alignment of public spending priorities in Observed. Relative spending on accordance with the priorities identified in the I-PRSP, and, when completed, the pro-poor sectors has increased. PRSP, reflecting emphasis on pro-poor growth. 4. Public Finance Management: (i) Establishment of a functional classification system for government expenditures, Observed. Budget 2009 including poverty related expenditures, consistent with the IMF's Government prepared and executed with the Finance Statistics manual, and preparation of government budgets using this new new classification system. classification; (ii) Implementation of a new public investment management system to provide Observed. Public investment rigorous selection, and efficient execution and monitoring of the projects; submission management action plan and of draft public investment programs to IDA for review; selected key measures implemented. Draft 2010 investment program submitted to IDA. (iii) Adoption and satisfactory implementation by the government of a new Observed. New code adopted procurement code (that promotes transparency and competition), in line with with application texts. New international best practice; and institutions established. The code has been satisfactorily implemented since October 2009. (iv) Adoption by the government of a medium-term expenditure framework (MTEF) Observed. Main elements of for sustainable management of government expenditures and revenues, with MTEF prepared and used as technical assistance from IDA and IMF. basis for preparation of draft budget 2010. An MTEF committee was formally created, and the government adopted an oil revenue model as basis for the MTEF projection. 5. Governance and Natural Resource Management: Governance: Completion of a diagnostic governance and corruption study by an independent Observed. Institutions group of internationally reputed experts, assisted by a national anti-corruption established and diagnostic study committee, based on terms of reference prepared in consultation with IDA and IMF completed. Anti-corruption law staffs. The terms of reference and composition of the national anti-corruption and the anti-corruption action committee will be satisfactory to IDA and IMF staffs. Adoption by the government of plan adopted and disseminated; an action plan, prepared in consultation with IDA and IMF staffs, to improve agreed implementation steps governance and reduce corruption, and sustained implementation of such action taken. plan during the completion of the audits referenced in subsections 5(i) and 5(ii). Assessment of the implementation of the action plan by IDA and IMF staffs on the basis of an independent review by international experts acceptable to IDA and the IMF. 6 Box 1 (cont.): Status of Floating Completion Point Triggers ~ Trigger Statuslcomments Oil Sector: (i) Assessment by IDA and IMF staffs, based on successive annual audit opinions by Observed. Remaining technical an independent firm of international reputation, and certified by the national anti- reservations of audits of 2006 corruption committee, that SNPC's internal controls and accounting system are in and 2007 have been removed, in line with internationalstandards and best practices; particular through the introduction of a new analytical accounting system meeting international standards, which was successfully used to produce the 2008 accounts. (ii) Preparation, by an independent firm of international reputation, of a diagnostic Observed. A diagnostic study study of the practices for the commercialization of oil by SNPC, based on terms of was completed in 2007, and an reference prepared in consultationwith IDA and IMF staffs. Assessment by IDA and action plan adopted in 2009. In IMF staffs, based on successive audit opinions by an independent firm of the interim, oil commercialization international reputation, that the commercialization of oil by SNPC has been brought practices were improved by into line with international best practice on the basis of the recommendations of the increasing the number of clients, diagnostic study, and results in competitive and fair market values to Congo for the ending prepayment of cargos, oil sold; and and transferring receipts to the treasury within 15 days. A new set of procedures meeting international standards was adopted, an oil commercialization database was established, and COTRADE was integrated into SNPC. Current data provide evidence that prices received by Congo on oil sales are broadly in line with those of international oil companies selling similar oil on their own behalf. (iii) Adoption and application by the government, certified by the national anti- Observed. Statements for 2007, corruption committee, during the completion of the audits referenced in 5(i) and 5(ii), 2008 and 2009 were verified by of a legal text stipulating: Cour de Comptes and the report evaluated by the national anti- compulsory declaration, to the National Auditing Office (Cour des Comptes), by corruption committee. the members of the Executive Board of SNPC and those having a management mandate within SNPC and its subsidiaries, at the moment of their nomination and annually thereafter, of their participation or other interests in companies having business relations with SNPC or its subsidiaries as well as the verification and annual publication of the aforementioned declarations by the National Auditing Office (Cour des Comptes). divestiture by the members of the Executive Board of SNPC and by those having management responsibilitieswithin SNPC or any of its subsidiaries of such participations andlor other interests, within a time period of 6 months after their nomination and prohibition of the taking of any interest in companies having business relations with SNPC during the period of their mandate. 7 Forestry Sector: Review of forestry sector management and legislation with IDA assistance; adoption Observed. The review was by the government of measures recommended by the review to promote completed, the forestry code's competition, transparency, and sustainable development in this sector. fiscal provisions were amended, and decrees were adopted on i) transparent competitive concession award, ii) environmental and social impact assessment iii) resolution of conflicting usage of forest lands; and iv) forest land gazetting procedures. The fiscal reform package was submitted to parliament. Box 1 (cont.): Status of Floating Completion Point Triggers Trigger Statuslcomments 6. Structural reform: Review and adoption of a regulatory framework for the Observed. Decree adopted on telecommunications sector establishing competition at the level of international ensuring competition at the level gateways and the wireless local loop. of internationalgateways, new legislation on the Post and Telecommunications and law on telecom regulation adopted. 7. Social Sectors: Education: Implementation during 2006 of a strategy to eliminate fictitious workers Observed. Census from the education budget and increase teacher staff by, at least, 1,000 each year in recommendations implemented basic education until 2007. and more than 2000 new teachers hired. Health: Increase to, at least, 60 percent the share of generic drugs in total Observed. Sufficient budget expenditures on drugs by the central purchasing agency. allocations were made in 2008 and 2009, although disbursements have not been timely. An audit to improve execution is planned. H/V/A/DS: Increase in the number of voluntary AIDS counseling and testing centers Observed. There are about 60 with associated measures (staff, equipment, and awareness campaign) from 4 at testing centers currently. present to, at least, 10 in 2006 and 15 in 2007. 8. External Debt Management: (i) Publication of the quarterly external debt data and projections on a government Observed. Quarterly data and website: and projections are available on the Ministry of Finance, Budget, and Public Portfolio web-site. (ii) Centralization of all information on debt, including collateralizeddebt, in the Observed. All information on government`s debt agency (CCA). debt centralized in the CCA. 10. The NPV o f Congo's external debt at end-2008, after full delivery o f the assistance committed under the HIPC Initiative, i s estimated at US$3.5 billion, or equal to about 63-percent o f fiscal revenues (excluding grants) and about 49 percent o f three- year average exports. 11. Congo does not qualify for exceptional topping-up under the Enhanced HIPC Initiative, as the N P V o f the debt-to-revenues ratio after full delivery o f HIPC assistance 8 and additional bilateral relief beyond HIPC is well below the indicative threshold o f 250 percent. IV. IDA'S DELIVERY OF ASSISTANCE UNDER THE ENHANCED HIPC INITIATIVE 12. If the Executive Directors o f IDA and the IMF determine that Congo meets the requirements for reaching the completion point, IDA would deliver a further US$33.9 million in debt relief in end-2004 N P V terms after the completion point. I t is proposed that this assistance be delivered via a 50-percent reduction o f debt service falling due from February 2010 through end-2020. (Annex 3) V. IDA'S DELIVERY OF ASSISTANCE UNDER THE MDFU 13. Upon approval o f the completion point under the Enhanced HIPC Initiative, Congo will qualify for additional debt relief from the AfDF, IDA, and the IMF. Under the MDRI, IDA, the IMF, and the AfDF would provide debt relief net o f HIPC. assistance resulting in a reduction in principal o f US$177.7 million in nominal terms, which would save Congo US$201.3 million in debt service through 2043. 14. IDA will provide MDRI debt forgiveness by irrevocably canceling the borrower's payment obligations for eligible IDA credits. Debt service savings under the MDRI would cover all remaining IDA credit balances through maturity on loan balances disbursed as o f end-2003 that remain outstanding, after accounting for debt service relief provided under the Enhanced HIPC I n i t i a t i ~ e IDA'SMDRI debt relief to Congo would .~ imply a reduction o f scheduled principal payments amounting to US$161.2 million in nominal terms at the completion point. This would correspond to annual average debt service savings (net o f HIPC assistance) o f US$5.4 million through 2043. Figure 1 illustrates the impact o f debt relief under the MDRI on projected debt service due to IDA as o f end-2008. See, International Development Association, "The Multilateral Debt Relief Initiative: Implementation Modalities for IDA", November 18,2005. 9 Figure 1: Debt Service to IDA after HIPC Relief and the MDRI (Millions of U S Dollars) -Debtservice before Enhanced 1 16.00 Assistance HlPC 14.00 - - - -Debtserviceafter Enhanced HlPC Assistance J Debtservice after Enhanced HlPC Arcirtance and MDRl 12.00 - t I I 10.00 - i I i 8.00 - I ----.# 6.00 - 4.00 - / ' - ' - * - ' 0 ' - 0 . 2.00 4 . - 0.00 r 7- I I ---T-----r----r---71 VI. PROSPECTS FOR LONG-TERM DEBT SUSTAINABILITY AFTER DEBT RELIEF UNDER THE ENHANCED HIPC INITIATIVE AND MDRI 15. Congo's N P V o f debt-to-revenues ratio i s beneath the relevant threshold after Enhanced HIPC assistance, additional bilateral assistance, and MDRI debt relief. The debt sensitivity analysis demonstrates that under the baseline and two alternative scenarios, the N P V o f the debt-to-revenues ratio i s projected to remain well below the 250 percent threshold over the projection period. Under the baseline scenario, the NPV o f the debt-to-revenues ratio i s 72 percent in 2009, falling to 9 percent in 2029.4 VII. SATISFACTORY FINANCING ASSURANCES FROM THE REPUBLIC OF CONGO 'S CREDITORS 16. Financing assurances for the provision o f debt relief to Congo under the Enhanced HIPC Initiative have been obtained from creditors representing about 80.6 percent o f These data are based on the sensitivity analysis included in the HIPC debt relief analysis (see Table 9) o f the completion point document. 10 total HIPC debt relief in N P V terms. The authorities, with the assistance o f IDA and IMF staff, will continue their efforts to secure the participation o f the remaining creditors. VIII. RECOMMENDATION 17. In view o f the above, I recommend that the Executive Directors endorse the staffs' assessment contained in the completion point document concerning Congo's fulfillment o f all floating completion point conditions under the Enhanced HIPC Initiative. In this context, Irecommend that debt relief on debt owed to IDA by Congo be provided unconditionally according to the modalities specified in Annex 3. Robert B. Zoellick President By: Ngozi N. Okonjo-Iweala Managing Director Graeme Wheeler Managing Director Washington, D C January 20 10 11 Annex 1: The Republic o f Congo-IDA Credits Subject to Debt Service Reduction under the Enhanced Heavily Indebted Poor Countries Initiative Balance at December 31,2004 Creda Project Name Currency I n Original Currency I n USD Equivalent 1\ 11790 RIVER TRANSPORT SDR 11,332,515.09 17,599,509.26 26350 ECONOMIC RECOVERY SDR 69,125,000.00 107,35 1,8 16.25 27750 PRIVATIZATION & CAPACITY BLDG SDR 2,068,834.72 3,212,921.01 35600 POST CONFLICT ECONOMIC REHAB SDR 30,000,000.00 46,590,300.00 35610 EMERGENCY DEMOBILIZATION SDR 3,830,949.09 5,949,502.25 36000 TRANS AND GOVERNANCE CAPACITY SDR 2,383,456.95 3,701,532.48 36380 EMERGENCY REHAB & IMPROVEMENT SDR 18,426,957.68 28,617,249.55 37980 EMERGENCY RECOVERY & SUPPORT SDR 12,093,195.93 18,780,854.21 10470 SECOND RAILWAY USD 22,532,843.37 22,532,843.37 1890 HIGHWAY IMPROVEMENT USD 778,040.12 778,040.12 2370 EDUCATION USD 1,682,163.63 1,682,163.63 2371 EDUCATION USD 240,000.00 240,000.00 2740 HIGHWAY MAINTENANCE USD 2,103,470.32 2,103,470.32 297 1 RAILWAY USD 3,355,843.45 3,355,843.45 2972 RAILWAY USD 214,966.86 2 14,966.86 4350 LIVESTOCK USD 3,108,000. 00 3,108,OOO.00 9710 PETROLEUM SECTOR TECH. ASSIST. USD 3,750,000.00 3,750,000.00 p8810 PETROLEUM SECTOR TECH. ASSIST. USD 475,407.83 475,407.83 p8811 POPULATION HEALTH & DEVELOPMENT USD 232,350.20 232,350.20 p9410 URBAN REHABILITATION USD 256,669.54 256,669.54 p9770 NAT. AGRICULTURE EXTENSION USD 23 1,825.20 23 1,825.20 1\ Convertedto U dollars using end-2004 exchange rate (1.55301 SDIUUSD). S Source: World Bank, Loan Accounting Department. 12 Annex 2: The Republic o f Congo-Schedule o f Debt Service Reduction under the Enhanced Heavily Indebted Poor Countries Initiative as Estimated at the Decision Point Amount to be Reduced Calendar Year (U.S. dollars) TOTAL 70,695,462 2006 2,654,535 2007 3,615,735 2008 3,595,953 ~ 2.009 3,576,192 201 0 3,545,782 201 I 3,771,707 2012 4,168,623 2013 4,401,329 2014 5,155,289 201 5 5,822,570 2016 5,800,982 201 7 5,763,111 2018 5,725,240 2019 5,687,369 2020 5,636,825 2021 1.774.223 Source: World Bank, Loan Accounting Department and Staff Estimates. 13 Annex 3: The Republic o f Congo-Schedule o f Debt Service Reduction under the Enhanced Heavily Indebted Poor Countries Initiative Amount to be Reduced Calendar Year (U.S. dollars) TOTAL 67,367,463 2006 2,654,535 2007 3,6 15,735 2008 3,595,953 2009 3,576,192 2010 3,472,682 201 I 3,664,410 2012 4,049,750 2013 4,275,820 2014 5,008,279 2015 5,656,532 2016 5,635,559 201 7 5,598,768 2018 5,56 1,977 201 9 5,525,186 2020 5,476,084 Source: World Bank, Loan Accounting Department and Staff Estimates. 14