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HIGHLIGHTS
According to the latest edition of the Republic of Congo’s economic situation monitoring report, the recovery should be more sustained in 2023 and in the medium term, under the impetus of the oil and non-oil sectors, but there are significant downside risks. degradation. Fuel subsidies have risen sharply and weigh heavily on the country’s budget. In addition, they benefit the wealthiest sections of the population and divert these resources from other uses. The report recommends good practices for implementing fuel subsidy reform, as well as accompanying measures to mitigate its impact on affected groups and sectors.
BRAZAVILLE, Republic of Congo, June 29, 2023 -/African Media Agency(AMA)/- The World Bank today released the tenth edition of the Monitoring Report on the economic and financial situation of the Republic of Congo, entitled “Reforming fossil fuel subsidies”.Here are the main points to remember:
1. Broad economic recovery, but risks remain
After a growth rate of 1.5% in 2022, the Congolese economy should continue to gradually emerge from a period of prolonged recession and the country’s GDP will thus grow by 3.5% in 2023, then by 3.6% on average in 2024-2025. Growth in the oil sector will be mainly driven by the resumption of investments by oil companies. That of the non-oil sector will be stimulated by agriculture and services, by the implementation of structural reforms on the supply side and the continued clearance of government payment arrears, as well as, on the demand, by gradually increasing social spending and public investment. However, several risks weigh on the outlook, including volatile oil prices and production instability, the escalation of the war in Ukraine and its fallout, and a further tightening in global or regional financial conditions.
Main indicators of the Congolese economy
Sources: Estimates and projections by Congolese authorities, BEAC and World Bank teams. February 2023.
2. A contrasting budgetary situation
Although oil production has fallen in 2022, high prices have led to a significant increase in government revenue which, together with a more moderate increase in expenditure, has led to a budget surplus of 6.8% of GDP. Nevertheless, the non-oil primary balance deteriorated mainly due to energy subsidies which increased from 1.3% of GDP in 2021 to 3.4% in 2022.
Overall fiscal surplus improved, but non-oil primary deficit widened
Source: World Bank; Congolese authorities.
3. High inflation increases food insecurity
Due to disruptions in global supply chains and high international food prices, Congo is experiencing inflation that particularly affects food. The prices of these products increased by 6.2% in 2022 (year-on-year), bringing headline inflation to 3%. This price increase aggravates food insecurity in a country where 56% of the population is already in a situation of severe food insecurity and where the level of poverty is high. The poverty rate (based on the international poverty line of $2.15 a day) will reach 52.5% in 2022, compared to 33% in 2014.
Food prices are rising and exacerbating socio-economic problems
Source: World Bank; National Institute of Statistics.
4. Fossil fuel subsidies are a significant fiscal burden
Oil subsidies have risen sharply in 2022. They are estimated to reach 2.4 percent of GDP—about four times what was projected in the year’s initial budget law—from an average of 0.6 percent of GDP. % of GDP in 2020-21. Due to the sharp rise in international oil prices last year, regulated domestic prices have strongly deterred the private sector from importing fuels. This, combined with the limited capacity of the refinery sector, has led to fuel shortages across the country. In response, the authorities decided to cover the losses suffered by importers of refined oil.
Using public funds to freeze retail fuel prices diverts resources from other energy sources. According to the latest available data, public expenditure on oil subsidies as a percentage of GDP is higher than expenditure on social protection and close to total public funds allocated to health. In addition, Congo does not have sufficient fiscal space to improve and maintain its infrastructure, such as roads or reliable power supply: only 13% of the road network is paved, compared to 18% in sub-Saharan Africa. Fuel subsidies also introduce environmental and market distortions, preventing the efficient use of energy and the deployment of renewable energy sources or the adoption of low-carbon development solutions.
Public spending on oil subsidies has risen sharply
5. Fuel subsidies mostly benefit the wealthy
While fuel subsidies aim to support the purchasing power of consumers and more particularly that of the most vulnerable, they actually benefit the wealthiest segments of the population, notably city dwellers. The richest decile of the population consumes, respectively, 77 and 73% of diesel and gasoline, while the poorest consume less than 1%. In contrast, kerosene is much more evenly distributed across income groups, although the wealthiest still benefit more from kerosene subsidies than the poorest deciles.
Fuel subsidies mainly benefit wealthy male-headed households living in urban areas
Note: “Other fuels” include gasoline and diesel. | Source: World Bank calculations based on the 2011 Household Consumption Survey (ECOM 2011).
6. A pro-poor approach to fuel subsidy reform
International experience shows that it is difficult to remove fuel subsidies. In many countries with limited social safety nets, a generalized subsidy is seen as part of the social contract. And this may be especially true in oil-producing countries where such subsidies are sometimes seen as a way for the entire population to directly benefit from the country’s oil wealth. However, several general principles can be drawn from the experience of countries that have made fuel price adjustments:
eliminate as a priority (or substantially reduce) the subsidy which weighs most heavily on the budget and which is mainly captured by the richest; adopt a price-smoothing mechanism that allows a balance between excessive price volatility and fiscal risks;
sequence the reform to allow households to adapt and mitigation measures to be rolled out in a controlled manner;
conduct stakeholder consultations and communication campaigns to address the concerns of different population groups.
The removal of fuel subsidies (except kerosene) would lead to a one-time and limited increase in the price level. However, such an increase would risk having an impact on the purchasing power of the population, because the rise in fuel prices would lead to an increase in the prices of transport and other products and services. The report therefore recommends the implementation of a set of mitigation measures to protect the most vulnerable. This can be achieved by strengthening social safety nets, increasing social spending and improving transparency in public financial management, as well as supporting affected sectors such as transport.
Distributed by African Media Agency (AMA) for World Bank.
Source : African Media Agency (AMA)