High levels of public spending and the depletion of oil reserves call for a fiscal adjustment in Republic of Congo over the medium to long term, the International Monetary Fund (IMF) has cautioned in its latest review of the country’s economic performance this year.
In the report, released late Thursday, IMF said that “estimates of proven oil reserves suggest that oil revenues will decline decisively after 15 years,” adding that given the current very large non-oil fiscal deficit, “this will have a major impact on fiscal aggregates.”
The Fund’s staff who visited Congo in July have proposed a fiscal adjustment path that aims at halving the non-oil primary deficit to around 30 percent of non–oil GDP by 2019, with a further reduction in the medium to long term.
“This reduction in the non-oil deficit should be achieved first and foremost by a rationalization of spending. In addition, effort should be made to raise non-oil revenues in an equitable way,” said the report, proposing a strategy that could mitigate the adverse effect of fiscal consolidation on inequality and poverty in the country.
According to the IMF, Congo’s growth has been strong, inflation low, and fiscal buffers and international reserves adequate.
However, the Fund observed that poverty and unemployment remain high, despite large government spending financed from oil revenue.
“The business climate is among the most challenging and the private credit-to-GDP ratio among the lowest in sub-Saharan Africa (SSA),” the IMF report said.
It projected Congo’s economy to expand by about 6 percent per annum between 2014 and 2019, as new oil fields come on stream and an ambitious public investment programme is implemented to diversify the economy and make growth more inclusive, while oil production is expected to peak in 2017.
“The medium-term outlook for non-oil growth and poverty reduction hinges on progress addressing deep-seated structural weaknesses and fiscal adjustment. Risks to the outlook relate to oil price volatility and political instability,” the report said.
On macroeconomic policies, it suggested that they should focus on meeting the economy’s social and development needs while mitigating risks to macroeconomic stability in the longer term.
“The growth of government spending should be arrested and the 2014 budget should not be exceeded,” the Fund advised.
Amid spending pressures related to the 2015 All Africa Games and the 2016 presidential elections, IMF said new fiscal developments should be reflected in a supplementary budget in 2014 to enhance transparency.
Under the constitution of Congo, President Sassou N’guesso cannot be re-elected for a third seven-year term. Opposition parties in the country are pressing for electoral reforms, including to establish an independent electoral commission and to verify the voter register.
In the political context, IMF observed that recent turmoil in neighbouring countries has so far not had material spillovers.
“In view of the limited remaining lifetime of oil reserves, a gradual fiscal consolidation should be targeted over the medium-term to safeguard fiscal and debt sustainability,” it emphasised.
According to the report, Congo’s ongoing efforts to address implementation and absorptive capacity constraints need to be stepped up to maximise the benefits from public investments, and consideration should be given to adopt the non-oil primary balance as the fiscal anchor.
It further recommended that the private sector’s supply response to public infrastructure spending should be maximised through implementation of reforms to improve the business climate, support private investment, and develop the financial sector.
“The pilot project for cash transfers should be well-targeted and monitored to reduce poverty.
“Compliance with reserves pooling requirements would insure the continued smooth operation of the BEAC (Bank of Central African States) and the exchange rate peg, which both continue to serve the Republic of Congo well,” the report concluded.