Posted by: africanpressorganization | 27 August 2008

Republic of Congo / International Monetary Fund / Staff-Monitored Program: Letter of Intent and Technical Memorandum of Understanding

 


 

Republic of Congo / International Monetary Fund / Staff-Monitored Program: Letter of Intent and Technical Memorandum of Understanding

 

 

BRAZZAVILLE, Congo, August 27, 2008/African Press Organization (APO)/ — Letter of Intent and Technical Memorandum of Understanding

 

Brazzaville, July 18, 2008

The Minister of Economy, Finance

and Budget

Mr. Dominique Strauss-Kahn

Managing Director

International Monetary Fund

Washington D.C. 20431

USA

Dear Mr. Strauss-Kahn:

Since the beginning of this year, we have been implementing a Staff Monitored Program

(SMP) covering the period January 1-June 30, 2008, with a view to establishing a track

record of performance that could support a subsequent move to a Poverty Reduction and

Growth Facility (PRGF) arrangement. This letter supplements the Letter of Intent (dated

March 27, 2008) requesting this SMP and the attached Memorandum of Financial and

Economic Policies (MEFP).

Our macroeconomic management and implementation of structural policies has improved

recently, and we are requesting Fund management’s approval for completing the first review

of the SMP, based on the end-March 2008 quantitative and structural benchmarks. Indeed,

we met all of the program’s quantitative and implemented 5 of the 8 structural benchmarks

(Tables 1 and 2). The (continuous) benchmark on the quarterly certification of oil revenue

has not yet been observed because of technical difficulties on the part of the international

auditor, but should be completed shortly. Regarding the action plan to address institutional

and procedural deficiencies in the commercialization of oil, we intend to strengthen it further

to bring it fully in line with international best practice. This will require more time than we

envisaged earlier and technical assistance from the World Bank and our other development

partners.

We are deeply concerned about the sharp rise in world oil prices and fear the potential for

social unrest and instability of passing through recent increases at this time. In this regard, we

have been unable to implement the structural benchmark calling for quarterly adjustments in

these prices to ensure that oil subsidies remain within the budgeted amount (CFAF 35 billion

or about 2.3 percent of non-oil GDP). Instead, to address this difficult situation, we have

decided to allow these subsidies to rise to no more than CFAF 65 billion (about 4.2 percent

of non-oil GDP), which should still allow us to achieve the objective of reducing these

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subsidies, compared with last year. The program’s targets have been revised to reflect this

measure.

At current prices, this means that part of the oil subsidies will be borne by SNPC (amounting

to about 2.3 percent of non-oil GDP), which is the state-owned oil company responsible for

the commercialization of Congolese oil (and the parent company of CORAF). This offbudget

transaction is a short-term measure, as we remain committed to enhancing the

financial and operating performance of CORAF in the period ahead through fuel prices

increases, when the social situation stabilizes, and implementing the action plan to reform the

refinery’s operations (a structural benchmark for end-March 2008). To ensure close

monitoring of fuel subsidies, we will provide to Fund staff monthly information on the

structure of petroleum prices and CORAF’s cash flow (an additional continuous structural

benchmark).

We would like to stress that the increase in petroleum subsidies this year will not inhibit our

progress toward achieving long-term fiscal sustainability, since higher oil prices create

“fiscal space” for oil-exporting countries like Congo. Nonetheless, should oil prices rise

further, we are prepared to offset any further subsidies with equivalent cuts in non-priority

spending over the rest of this year.

Like other countries in the region, we are also facing mounting social pressures from

increasing food prices. Concerned about the social consequences of such increases, we are

taking short-term measures to reduce (temporarily) value-added taxes and tariffs on some

food imports (including wheat, rice, vegetable oil, and powdered milk) and some other items

consumed mainly by the poor (for example, charcoal, corrugated tin). We estimate the

revenue loss of such tax and tariff reductions to amount to about CFAF 5 billion (about

0.3 percent on non-oil GDP). However, stronger than expected tax collections earlier this

year should help offset these losses, leaving our projections for non-oil revenue unchanged

for the full year. These measures will be implemented through a supplementary budget,

which we expect to present to parliament in August.

In response to food price inflation, we have decided to move ahead with efforts to enhance

food security through critical investments aimed at boosting agricultural output. We have

identified investment projects amounting to CFAF 110 billion (about 7 percent of non-oil

GDP, including CFAF 25 billion from interim-HIPC relief), which go beyond the CFAF 372

billion (about 24 percent of non-oil GDP) included in this year’s budget. These projects will

be aimed at (i) directly supporting the agricultural sector (including provision of inputs, such

as seeds, fertilizers, and insecticides); (ii) facilitating the delivery of agricultural output to

consumers markets, through investment in the railway and rural roads; and (iii) measures to

improve the preservation of foodstuffs, through improvements to the power grid, especially

in Brazzaville.

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These additional investment projects will be included in the supplementary budget, but will

only be implemented once an action plan is adopted to improve public investment

management and audits of a representative sample of current and capital transfers (both

structural benchmarks for end-June 2008) are completed. Also, we intend to establish an

advisory body and trust fund to monitor, implement and manage this investment spending,

together with our development partners. We will continue to consult with Fund staff and our

development partners on the details of these additional investment projects; and any

disbursements for these investments will be offset by expenditure cuts elsewhere, to ensure

there is no further widening of the non-oil primary deficit this year.

More generally, the government intends to discuss with its development partners a mediumterm

program to strengthen the non-oil sector consistent with Congo’s Poverty Reduction

Strategy. This program will need to be based on a scaling up of public investment, once the

necessary conditions to ensure the effective and efficient use of these resources are in place.

The government intends to make the content of this letter and the staff report accompanying

our request to complete the first SMP review available to the public, and it authorizes the

IMF to post them (after Fund management approval and transmission to the Executive

Board) on its external website.

We expect the second and final review of the SMP will take place in August 2008, based on

end-June quantitative targets and structural benchmarks. With satisfactory performance, we

hope that this leads quickly to a move to a new PRGF arrangement.

Sincerely yours,

/s/

Pacifique Issoïbeka

Minister of Economy, Finance, and Budget

 

SOURCE : International Monetary Fund (IMF)


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