Republic of Congo Economic Update Reforming Fossil Fuel Subsidies 10th edition June, 2023 I © 2023 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy, completeness, or currency of the data included in this work and does not assume responsibility for any errors, omissions, or discrepancies in the information, or liability with respect to the use of or failure to use the information, methods, processes, or conclusions set forth. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Nothing herein shall constitute or be construed or considered to be a limitation upon or waiver of the privileges and immunities of The World Bank, all of which are specifically reserved. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Attribution—Please cite the work as follows: “World Bank. 2023. Republic of Congo Economic Update, 10th Edition: Reforming Fossil Fuel Subsidies. Washington, DC: World Bank.” All queries on rights and licenses should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; e-mail: pubrights@worldbank.org. II Table of Contents List of Figures IV List of Tables IV List of Boxes IV Acknowledgements VI Abbreviations and Acronyms VII Executive Summary 1 Chapter 1. Recent Economic Developments and Outlook 6 1.1 Recent Economic Developments 7 1.1.1 Global and regional economic growth has slowed while higher 7 hydrocarbon prices have supported CEMAC economies 1.1.2 Congo’s economy returned to growth in 2022 9 1.1.3 Congo’s fiscal and external positions improved 10 1.1.4 The level of public debt continued to decrease, but ROC’s debt is still 13 classified as in distress 1.1.5 Overall inflation remained contained, but high food inflation is 14 exacerbating socio-economic challenges 1.1.6 Vulnerability to non-performing loans remains high 16 1.2 Medium-Term Outlook and Policy Options Going Forward 17 1.2.1 Global growth is projected to decelerate sharply 17 1.2.2 ROC’s economy will continue its gradual rebound 19 1.2.3 Reforms are being implemented, but significant challenges remain 22 III Chapter 2. Reforming Fossil Fuel Subsidies 24 2.1 Recent Developments in Fossil Fuel Subsidies 25 2.1.1 Evolution of oil prices and related subsidies – regional overview 25 2.1.2 Fiscal cost of fossil fuel subsidies in the Republic of Congo 27 2.1.3 Distributional analysis of fossil fuel subsidies in the Republic of Congo 29 2.2 General Principles from International Experience 32 2.2.1 Calibrating price adjustments by petroleum products 32 2.2.2 Adopting a price smoothing mechanism to move gradually towards 34 market-based pricing 2.2.3 Staggering the reform 36 2.2.4 Stakeholder consultations 37 2.3 Accompanying Measures of the Reform 37 2.3.1 Reinforcing social safety nets 38 2.3.2 Increasing transparency of public financial management 41 2.3.3 Increasing public social spending 41 2.3.4 Supporting the transport sector 42 2.3.5 Increasing productive structural public investments 42 Technical Annex I. Fossil Fuel Types and Uses 43 Technical Annex II. Defining fossil fuel subsidies in CEMAC 44 Endnotes 45 IV List of Figures Figure 1: Inflation rose sharply across SSA in 2022, increasing food insecurity 7 Figure 2: ROC’s growth performance remains below that of peers 9 Figure 3: Oil production declined, but the non-oil sector supported economic 10 growth in 2022 Figure 4: The overall fiscal surplus improved, but the non-oil primary deficit 11 widened Figure 5: Public debt continued to decline as a percent of GDP, but ROC’s debt 14 is still classified as in distress Figure 6: Food prices are increasing, exacerbating socio-economic challenges 15 Figure 7: Pro-poor social spending increased, although the execution rate is 16 still low Figure 8: Bank deposits and credit increased but vulnerability to NPLs remains 17 high Figure 9: Growth in 2023-25 is projected to remain below long-term averages 18 in several economies Figure 10: The surge in oil prices has led to an increase in fuel subsidies across 25 the world Figure 11: The fiscal cost of energy subsidies in AFW more than doubled while 26 spending on social sectors stagnated or decreased Figure 12: Both oil importers and exporters in AFW have increased their fuel 27 subsidies, although oil exporters have larger buffers Figure 13: Public expenditure on fuel subsidies in ROC increased sharply and is 28 higher than spending on social protection and close to spending for health Figure 14: Subsidies on petroleum products (excluding kerosene) benefit 29 mainly the richest segment of the population Figure 15: Urban population benefits the most from the kerosene subsidy 29 Figure 16: Fuel subsidies are mostly captured by male-headed households 30 Figure 17: Fuel subsidies do not favor the poorest segments of Congo’s 30 population Figure 18: In Congo, the reduction of fuel subsidies through higher retail fuel 31 prices would have a limited one-time effect on the price level Figure 19: But even a limited one-time effect on price levels would add to 31 inflationary pressures in Congo V List of Tables Table 1: Key fiscal indicators 12 Table 2: Key economic indicators of the Congolese economy 21 Table 3: Readiness along the five key building blocks 40 List of Boxes Box 1: International country case – Indonesia 33 Box 2: International country case – Morocco 35 Box 3: International country case – The Philippines 36 Box 4: International country case – Ukraine 37 VI THE WORLD BANK GROUP | REFORMING FOSSIL FUEL SUBSIDIES Acknowledgements This tenth edition of the Republic of Congo Economic Update was prepared by a World Bank team consisting of Marilyne Youbi (Economist, EAWM2), Vincent Tsoungui Belinga (Senior Economist, EAWM2), Joana Monteiro Da Mota (Extended Term Consultant, EAWM2), Houda Karafli (Young Professional, ISAE1), Dukken Gaphi Ossouna (Consultant, EAWM2), Erkin Mamadaliev (Senior Social Protection Specialist, HAWS3), Mervy Ever Viboudoulou Vilpoux (Economist, EAWPV), Lulit Mitik Beyene (Senior Economist, EMFMD), Samer Naji Matta (Senior Economist, EAWM2), Daniel Pajank (Senior Economist, EAWM1), and Anna Bokina (Operations Officer, IAWE4) under the supervision of Raju Singh (Lead Economist, EAWM2). The team received guidance and advice from Elizabeth Huybens (Acting Country Director and Director, Strategy and Operations, AFWVP), Sandeep Mahajan (Practice Manager, EAWM2), Korotoumou Ouattara (Resident Representative, AWMCG), Ashish Khanna (Practice Manager, IAWE4), Keiko Kubota (Manager, AWCC1), Clelia Rontoyanni (Program Leader, EAWDR), Nathalie Lahire (Program Leader, HAWDR), Ambar Narayan (Lead Economist, EAWPV), Yussuf Uwamahoro (Lead Energy Specialist, IAWDR), Olayinka Mutiat Edebiri (Senior Energy Specialist, IAWE4), Elcin Akcura (Senior Energy Economist, IEEGK), (Cemile Sancak (Advisor, IMF) ), Marcello Estevao (Senior Adviser ,GGEVP), Dena Ringold (Regional Director, HAWDR), and Michal Rutkowski (Global Director, HSJDR). Pinar Baydar (Operations Analyst, EAWM2), Irene Sitienei (Program Assistant, EAWM2), and Suhair Murad Al-Zubairi (Program Assistant, EMNPV) supported the team during the preparation of the report. The team would like to thank Erika Jorgensen (Consultant) for her editorial support. The team is thankful to the peer reviewers Cindy Audiguier (Senior Economist, EECM1) and Defne Gencer (Senior Energy Specialist, IEEES); and to Chiara Bronchi (Practice Manager, EGVPI), Chadi Bou Habib (Lead Economist, EMFTX), Gaute Solheim (Senior Public Sector Specialist, EMFTX), Dirk Heine (Senior Economist, EMFTX), and Paolo Agnolucci (Senior Economist, DECPG ) for their contributions and comments. The team is especially grateful for the collaboration with Congolese authorities in the preparation of this report and for sharing the data. A preliminary draft of the report was shared with the authorities for comments. Republic of Congo Economic Update | 10th Edition VII Abbreviations and Acronyms AFW West and Central Africa BEAC Banque des États de l'Afrique Centrale (Bank of Central African States) CEMAC Communauté économique et monétaire de l’Afrique centrale (Economic and Monetary Community of Central Africa) CCDB Cour des Comptes et Discipline Budgétaire (Supreme Audit Institution) CEC Centrale Électrique du Congo (Congo Power Plant) CFAF Communauté Financière Africaine Franc (African Financial Community Franc) COBAC Commission Bancaire de l'Afrique Centrale (Banking Commission of Central Africa) CORAF Congolaise de Raffinage (Congo Refinery Company) COVID-19 Coronavirus disease of 2019 ECF Extended Credit Facility ECOM Enquête congolaise auprès des ménages (Congolese Household Survey) EMDEs Emerging market and developing economies GDP Gross Domestic Product GEP World Bank Global Economic Prospects report HCI Human Capital Index IMF International Monetary Fund LPG Liquified Petroleum Gas MASSAH Ministry of Social Affairs, Solidarity, and Humanitarian Action NPL Non-performing loan NSNP Permanent national safety net program PPP Purchasing Power Parity PPPs Public-Private Partnership PNAS Politique nationale d'action sociale (National Policy for Social Action) ROC Republic of Congo SOEs State-owned Enterprises SSA Sub-Saharan Africa TIAO Taux d'intérêt des appels d'offres (BEAC policy bid interest rate) WAEMU West African Economic and Monetary Union y-o-y year-on-year ZAP Zone Agricole Protégée (agricultural protected areas ) Credits: Freepik Executive Summary 2 THE WORLD BANK GROUP | REFORMING FOSSIL FUEL SUBSIDIES This is the tenth edition of the Republic of Congo Economic Update. Each edition of this annual report presents an overview of the Republic of Congo’s (ROC) evolving macroeconomic position, followed by a detailed exploration of a specific topic. The first chapter of this year’s update presents recent economic developments and macroeconomic outlook and risks. It also includes policy actions that could help strengthen fiscal and debt sustainability, contain food inflation, and sustain economic recovery. The second chapter discusses fossil fuel subsidies, which represent a significant fiscal burden in the Republic of Congo. Recent economic developments and the outlook Congo’s economy returned to growth in 2022, and the economic recovery is set to strengthen in 2023 . Between 2015 and 2021, Congo’s economy contracted by 4.6 percent annually on average, leading to a cumulative decline of real GDP by 28 percent and of GDP per capita by 40 percent. Owing to the non- oil sector, economic activity in ROC is estimated to have increased by 1.5 percent in 2022. Non-oil sector growth of an estimated 3.4 percent was spurred by the complete removal of COVID-19 restrictions and the clearance of government domestic arrears, which provided liquidity to domestic banks and firms. Oil production, on the other hand, declined for the third consecutive year, falling by 3.6 percent in 2022 due to delayed investment and maturing oil fields. In 2023, ROC’s economic growth is set to accelerate to 3.5 percent, driven by both the non-oil and the oil sectors. ROC’s fiscal and external positions improved. Although oil production declined in 2022, high oil prices led to a significant increase in government revenues, which together with a more moderate increase in government spending, resulted in a budget surplus of 6.8 percent of GDP. However, the non-oil primary balance deteriorated, mainly due to energy subsidies which increased from 1.3 percent of GDP in 2021 to 3.4 percent of GDP in 2022 (including 2.4 percent of GDP for oil subsidies and 1.0 percent of GDP for subsidies to the Congo Power Plant, Centrale Électrique du Congo, the state electricity company). Higher export receipts strengthened the current account surplus to 18.2 percent of GDP in 2022. The debt situation is improving, but ROC remains in debt distress. Public debt as a share of GDP fell to an estimated 93.8 percent of GDP at end-2022, driven by improved debt management, fiscal discipline, and higher oil revenues. While the debt is assessed as sustainable, ROC remains in debt distress due to Republic of Congo Economic Update | 10th Edition 3 outstanding external arrears and remaining uncertainty about the magnitude of valid domestic arrears. The stock of external arrears declined from 11.5 percent of GDP at end-2021 to 3.7 percent of GDP in August 2022. However, until the remaining arrears are cleared, the country is likely to remain in debt distress. Overall inflation remained contained, but high food inflation is exacerbating socio-economic challenges. Disruptions in global supply chains and high international food prices exerted inflationary pressures in Congo in 2022. Food prices increased by 6.2 percent in 2022 (y-o-y), pushing overall inflation to 3.0 percent. The increase in food prices is worsening food insecurity in a country where 56 percent of the population is already severely food insecure. Furthermore, economic growth in 2022 was not strong enough to reduce the share of the population living below the international extreme poverty line of US$ 2.15 PPP per day, which rose to 52.5 percent. Despite these challenges, pro-poor social expenditures continue to be under executed, at 74 percent in 2022. Since the second half of 2021, the Bank of Central African States (Banque des États de l'Afrique Centrale, BEAC) has tightened its monetary policy to contain inflationary pressures and support the external viability of the exchange rate arrangement . Following an extraordinary Monetary Policy Committee meeting on November 25, 2021, the BEAC increased the policy rate by 25 basis points to 3.5 percent. Further policy rate increases were adopted, to 4.0 percent in March 2022, 4.5 percent in September 2022, and 5.0 percent in March 2023. The BEAC also decreased its weekly liquidity injections from CFAF 160 billion in April 2022 to CFAF 50 billion in December 2022. The Congolese economy is expected to continue to recover gradually from its recent protracted recession. ROC’s GDP is projected to grow at 3.5 percent in 2023 and to average 3.6 percent in 2024-25. Oil sector growth will be driven primarily by the resumption of investment by oil companies. Non-oil sector growth will be spurred by growth in agriculture and services, and the implementation of structural reforms on the supply side; and by the continued clearance of government arrears, and the gradual increase in social spending and public investment on the demand side. Overall inflation is expected to remain close to BEAC’s 3.0 percent target over the medium term, but food inflation will continue to outpace overall inflation. The fiscal balance is expected to remain positive, fueled by high oil prices, increased oil production, and fiscal discipline. Although debt vulnerabilities remain elevated, ROC’s debt-to-GDP ratio is projected to decline to 78.8 percent by 2025. The current account surplus is set to decline as increased investments will lead to an increase in imports, partially offsetting high oil export receipts. Risks to the outlook are tilted to the downside and include volatile oil prices and unsteady oil production, an escalation of the war in Ukraine and related spillovers, and a further tightening of global or regional financial conditions. Strengthening fiscal and debt sustainability, containing food inflation, and sustaining economic growth are among urgent actions to address in the 4 THE WORLD BANK GROUP | REFORMING FOSSIL FUEL SUBSIDIES short term. Exiting debt distress and maintaining long-term debt sustainability will require the government to continue enhancing domestic revenue mobilization as well as debt management and transparency. With the surge in food prices, the government needs to protect the most vulnerable while putting in place measures to reduce gradually ROC’s dependence on food imports. With oil production set to decline in 2025, accelerating human capital development and strengthening governance and institutions are some of the urgent actions needed to diversify the economy and sustain economic growth over the medium term. Credits: Valdhy Mbemba on Unsplash Republic of Congo Economic Update | 10th Edition 5 Reforming fossil fuel subsidies The special focus of this Economic Update looks at fossil fuel subsidies, which represent a significant fiscal burden in the Republic of Congo. In 2022, the sharp rise in international oil prices led to an increase in fuel subsidies, estimated to represent 2.4 percent of GDP. This amount is higher than ROC’s spending on social protection and close to the total spending for health. Yet, while fuel subsidies aim at supporting consumers’ purchasing power and, more particularly, that of the most vulnerable, these subsidies benefit the richest segments of the population, especially groups living in urban areas. This is mainly explained by their consumption of the two most heavily subsidized fuels - diesel and gasoline - in contrast with kerosene, which is much more equally distributed across income groups. Furthermore, fuel subsidies introduce environmental and market distortions, preventing an efficient use of energy and the development of renewable sources of energy or the adoption of low emitting development solutions, locking some countries on a higher emission development pathway in the future. The removal of fuel subsidies (except for kerosene) would result in a limited one-time increase in the general price level. However, such an increase would impact the purchasing power of the population, as higher fuel prices would drive up prices of other products and services, especially in the transport, fishing, and forestry sectors. Therefore, a fuel subsidy reform requires a strong mitigation package aimed at providing targeted support to the key affected stakeholders, focusing on minimizing negative externalities and protecting the most vulnerable. Lessons can be drawn from the experience of countries that have carried out fuel price adjustments. Principles from international experience show four best practices when implementing a fuel subsidy reform: (i) exclude (at least temporarily) from the subsidy reform fuels used more by vulnerable groups (e.g., kerosene); (ii) adopt a price smoothing mechanism that offers a balance between excessive price volatility and fiscal risks; (iii) sequence the reform to allow households to adjust and the mitigation measures to be rolled out in a controlled fashion; and (iv) engage in stakeholder consultations and carry out communication campaigns to address the concerns of various population groups. Moreover, targeted measures should be selected to mitigate the impact on affected groups and sectors. This can be achieved by reinforcing social safety nets, increasing transparency of public financial management, increasing social spending, supporting strategically affected sectors such as transport, and increasing productive structural public investments. Country experiences illustrate the variety of possible accompanying measures that can make adjustments in fuel prices more socially acceptable. They show that there is not a standard single set of actions, but that these measures need to be discussed, identified, and designed to reflect the concerns and the characteristics of each country. 1 Recent Economic Developments and Outlook Republic of Congo Economic Update | 10th Edition 7 1.1 Recent Economic Developments 1.1.1 Global and regional economic growth has slowed while higher hydrocarbon prices have supported CEMAC economies The global economy grew by about three Against this backdrop, economic growth percent in 2022, a slowdown compared to has also slowed in Sub-Saharan Africa . the previous year resulting from tighter Economic growth in the SSA region slowed to an monetary conditions and global trade estimated 3.7 percent in 2022 (from 4.4 percent disruptions. Global growth has been slowing in 2021), with the slowdown driven by weaker since its peak at about 6.0 percent in 2021 external demand for non-energy commodities, when it started to rebound from the pandemic. tightening global financing conditions, and rising Trade disruptions caused by Russia’s invasion of inflation. The cost of living has increased across Ukraine and tightening monetary policies aimed the continent, as higher food and fuel prices at containing high inflationary pressures in resulted in increased vulnerability and distress different regions have been contributing to this (Figure 1). slower growth. Advanced economies including the U.S. and Europe and most emerging markets are experiencing weaker growth. At the same time, risks of debt distress have heightened. Figure 1 : Inflation rose sharply across SSA in 2022, increasing food insecurity Consumer price index inflation Food insecurity in SSA Other goods and services 160 12 Housing, utilities, fuel, and transport Food Inflation 120 Millions of people 9 Percentage points 80 6 40 3 0 2019 2020 2021 2022 0 Ap 0 Ju 0 Ja 0 Ap 2 Ju 2 Oc 0 2 Oc 2 Ap 9 19 Ap 1 Ju 1 Ja 9 Oc 9 Ja 1 Oc 1 2 2 2 2 2 2 t-2 t-2 t-2 l-2 l-2 l-2 1 t-1 l-1 Fragile SSA Nigeria SSA LICs excl. fragile states Other SSA n- r- n- r- n- r- n- r- Ju Ja Source: Global Economic Prospects 8 THE WORLD BANK GROUP | REFORMING FOSSIL FUEL SUBSIDIES Higher hydrocarbon prices have allowed, Monetary Policy Committee meeting on however, CEMAC economies to experience November 25, 2021, the BEAC increased the faster growth in 2022. Higher hydrocarbon policy rate ( taux d’intérêt des appels d’offre , prices, combined with the lifting of COVID-19 TIAO) by 25 basis points to 3.5 percent. containment measures, have had an overall Further policy rate increases were adopted, positive impact on the terms of trade and to 4.0 percent in March 2022, 4.5 percent in economic growth of the region. CEMAC's September 2022, and 5.0 percent in March economic growth is estimated to have reached 2023. The BEAC also decreased its weekly about 3.0 percent in 2022, up from 1.0 percent liquidity injections from CFAF 160 billion in April in the previous year but below the average for 2022 to CFAF 50 billion in December 2022. SSA. ROC’s growth performance also improved Moreover, the regional central bank continues but remained below that of the average for to work towards the effective application of the CEMAC or other oil exporting countries in the new foreign exchange regulation, strengthening SSA region such as Nigeria or Angola (Figure the repatriation of foreign exchange earnings 2). Even though oil and gas exports have been for the extractive sector as agreed in January contributing to improved regional fiscal and 2022. Against this backdrop, the CFA franc external balances, the fiscal costs of fuel depreciated in real effective terms for most of subsidies have been increasingly weighing on 2022 as the Euro depreciated against the US the budgets of CEMAC countries and limiting dollar. Improved terms of trade in the region, their ability to take advantage of rising oil prices thanks to higher commodity prices, and tighter to rebuild fiscal and external buffers (the special fiscal and monetary policies helped to support focus of this edition provides a more detailed the buildup of regional gross reserves, which discussion of this topic). Meanwhile, rising global have been increasing steadily since early 2022 inflation is weighing on domestic prices and real and reached CFAF 6,851 billion in December incomes while the tightening of global financial 2022 (up from CFAF 4,779 billion in January conditions is also constraining growth. 2022). Foreign exchange reserves at the BEAC increased to reach the equivalent of 4.7 months The Bank of Central African States (BEAC) of prospective imports of goods and services by continued to tighten its monetary policy to end-December 2022 (compared to 4.1 months contain inflationary pressures and ensure end-December 2021). external viability. Following an extraordinary Credits: mtcurado on istockphoto.com Republic of Congo Economic Update | 10th Edition 9 Figure 2: ROC’s growth performance remains below that of peers GDP growth in Congo and CEMAC countries, GDP growth in Congo and selected peer 2020 - 2022 countries, 2020 - 2022 6.0 6.0 6.0 4.4 3.6 4.0 3.5 3.6 3.7 4.0 3.4 3.3 3.2 3.2 2.9 3.1 3.1 2.2 2.0 1.5 1.5 2.0 1.5 1.0 1.1 0.0 0.0 0.0 Percent -2.0 - 1.2 -2.0 -2.2 -2.2 -2.8 -4.0 -4.0 -6.0 -6.0 -8.0 Equatorial -8.0 SSA oil Congo Cameroon Chad CAR Gabon Congo Angola Nigeria SSA World Guinea exporters 2020 2021 2022e 2020 2021 2022e Note: SSA oil exporters include Angola, Cameroon, Chad, the Republic of Congo, Equatorial Guinea, Gabon, Ghana, Nigeria, and South Sudan. Source: World Bank staff estimates, national authorities, GEP (June 2023). 1.1.2 Congo’s economy returned to growth in 2022 Congo’s economy returned to growth in transportation, and as well as the non-oil 2022, driven by the non-oil sector. Between industry with increased production of goods 2015 and 2021, Congo’s economy contracted by such as beverages, sugar, mineral water, and 4.6 percent on average, leading to a cumulative cement. The agriculture sector was bolstered decline of real GDP by 28 percent and of GDP by the local content strategy (already used by per capita by 40 percent. The protracted brewing, milling and sugar companies), as well recession was triggered by the 2014-16 collapse as support provided by the Government through in oil prices (that led to a massive cut in public the establishment of agricultural protected investment and accumulation of domestic areas (with 12 such areas already in place in arrears to private sector firms, including banks, 2022 out of about 100 planned). which in turn undercut private investment) and exacerbated by the COVID-19 crisis. In 2022, The oil sector, on the other hand, continued GDP growth turned positive for the first time to underperform. Although oil prices increased since 2015 to reach an estimated 1.5 percent, sharply in 2022, from an average of US$ 69 driven by the non-oil sector which grew at per barrel in 2021 to US$ 97 in 2022, and the an estimated 3.4 percent (Figure 3, right global demand for oil was strong, oil production panel). Non-oil activities benefitted from the declined for the third consecutive year. complete removal of COVID-19 restrictions,1 Production fell by 3.6 percent (y-o-y) reaching an which enabled services to recover, especially estimated 96 million barrels by end-December hotels, restaurants, accommodation, and 2022 (Figure 3, left panel). The sector continued 10 THE WORLD BANK GROUP | REFORMING FOSSIL FUEL SUBSIDIES to be affected by technical challenges, maturing driven by the complete removal of COVID-19 oil fields, and delayed investment, leading restrictions. Furthermore, higher oil revenues to the contraction of the oil sector in 2022 enabled the government to continue to repay (Figure 3, right panel). However, oil production domestic arrears, thus providing liquidity to started rebounding in the first quarter of 2023, domestic banks and firms, helping to boost increasing by 3.1 percent relative to the last private investment. Following the pandemic- quarter of 2022 and by 2.7 percent compared to induced collapse of investment in 2020, foreign the first quarter of 2022. direct investment has continued to rebound, supporting the growth of investment. Increased Although rising domestic demand private consumption, and investment led to an bolstered overall aggregate demand in 2022, increase in real imports, however, while the the external sector hampered economic decline in oil production led to a contraction of recovery . Private consumption increased, exports in real terms. Figure 3: Oil production declined, but the non-oil sector supported economic growth in 2022 Oil production and prices Real GDP growth 8 35 120 30 3 100 25 Percent change 80 -2 Million barrels 20 US$/bbl 60 -7 15 40 -12 10 5 20 -17 0 0 -22 0 Q1 0Q3 1Q1 1Q3 2Q 1 2Q 3 3Q 1 2016 2017 2018 2019 2020 2021e 2022e 202 202 202 202 202 202 202 Oil production Oil prices (right axis) Oil GDP Non-Oil GDP Real GDP Source: World Bank, Congolese Authorities 1.1.3 Congo’s fiscal and external positions improved The budget recorded a surplus in 2022 previous year due to sharply higher oil prices. thanks to higher oil revenues, but the non- ROC’s budget continues to depend heavily oil primary deficit widened, mostly due to on oil revenues as collected tax revenue is increased energy subsidies . Although oil estimated at only 7.4 percent of GDP for 2022 production declined in 2022, overall revenues (compared to 7.5 percent the previous year), increased by 65 percent compared to the 0.4 percentage points lower than the Budget Republic of Congo Economic Update | 10th Edition 11 Law projection. The shortfall in tax revenue spending in 2022 was due to the government was partly due to technical challenges related response to higher food and oil prices, including to the tax authorities transitioning to a new support provided to the agriculture sector and system (which led to fewer tax audits than vulnerable households. Altogether, spending on in previous years) as well as a delay in the energy subsidies (for fuel and gas) increased payment of taxes by oil companies, linked to from 1.3 percent of GDP in 2021 to an estimated negotiations on tax concessions that took place 3.4 percent of GDP in 2022, resulting in a wider in 2022. Total expenditures rose by 40 percent, non-oil primary deficit (Figure 4).2 The overall mostly due to increased fuel subsidies (see fiscal balance, however, remained positive at Chapter 2 on Reforming Fossil Fuel Subsidies) 6.8 percent of GDP in 2022 thanks to high oil and capital spending. Part of the increased revenues (Table 1). Figure 4: The overall fiscal surplus improved, but the non-oil primary deficit widened Fiscal operations (% of GDP) 40 30 20 Percent of GDP 10 0 2015 2016 2017 2018 2019 2020 2021e 2022e -10 -20 Revenues Expenditures Overall balance Non-oil primary balance Source: World Bank, Congolese Authorities Expanded export receipts resulting from country’s total exports). As a result, the current higher oil prices improved the current account surplus rose to 18 percent of GDP in account balance despite a larger import bill. 2022 from 11 percent in 2021. At the same time, Food imports represent 32 percent of Congo’s higher external debt service payments (because merchandise imports. With the rise in the price debt service to oil traders is indexed to oil prices) of imports, driven by high food prices, Congo’s and a higher import bill have eroded Congo’s nominal imports increased by an estimated contribution to regional foreign reserves. Thus, 18 percent in 2022. Notwithstanding lower oil despite the oil windfall, at end-2022, Congo’s production in 2022, higher oil prices also led share of the regional central bank’s reserves to a nominal increase in export revenues (as represented only about 2.5 months of imports oil exports represent about 80 percent of the (compared to 2.4 months at end-2021). 12 THE WORLD BANK GROUP | REFORMING FOSSIL FUEL SUBSIDIES Table 1: Key fiscal indicators (Percent of GDP, unless otherwise indicated) 2019 2020 2021e 2022e Total Revenues and Grants 27.3 21.6 23.4 31.4 Oil Revenues 17.6 10.8 14.2 22.3 Tax Revenues 8.1 9.2 7.5 7.4 Taxes on Goods and Services 2.2 2.4 2.0 2.6 Direct Taxes 4.5 5.1 4.1 3.2 Taxes on International Trade 1.4 1.7 1.5 1.6 Non-Tax Revenues 0.3 0.2 0.5 0.7 Grants 0.8 0.5 0.5 0.5 Other Revenues 0.5 0.9 0.7 0.6 Expenditures 23.8 23.9 22.0 24.6 Current Expenditures  18.8 18.0 16.2 17.9 Wages and Compensation 4.7 5.8 4.8 3.8 Goods and Services 2.4 2.6 3.6 3.0 Interest Payments 4.5 1.8 2.1 2.3 Current Transfers 7.2 7.8 5.7 8.9 Capital Expenditures 3.7 3.8 3.4 4.4 Other Expenditures 1.4 2.1 2.4 2.3 Annex Budgets and Special Accounts 0.9 1.2 1.2 0.9 Common Charges 0.5 1.0 1.3 1.3 Non-oil primary balance -9.7 -11.4 -10.7 -13.2 Non-oil primary balance (percent of non-oil GDP) -16.5 -14.5 -14.1 -18.5 Primary Balance 8.0 -0.6 3.4 9.1 Overall Balance 3.4 -2.4 1.4 6.8 Sources: Congolese authorities, BEAC, and World Bank staff estimates. February 2023. Republic of Congo Economic Update | 10th Edition 13 Credits: Valdhy Mbemba on Unsplash 1.1.4 The level of public debt continued to decrease, but ROC’s debt is still classified as in distress Public debt remains elevated although the Congo, however, remains in debt distress, situation is improving. Public debt as share of reflecting outstanding external arrears and GDP fell to an estimated 93.8 percent of GDP at remaining uncertainty about the magnitude end-2022 (compared to 102.2 percent of GDP of valid domestic arrears. The most recent in 2021), driven by improved debt management, IMF-World Bank Debt Sustainability Analysis fiscal discipline, and higher oil revenues (February 2023) assessed external debt as (Figure  5). External public debt constituted sustainable. ROC remains classified, however, as 44.4 percent of GDP at end-2022. As of August “in distress” because of outstanding arrears. The 2022, bilateral debt accounted for a quarter of stock of external arrears declined significantly total debt (mostly owed to China); commercial (from 11.5 percent of GDP at end-2021 to 3.7 debt was nearly one fifth of the total (with half percent of GDP in August 2022), driven by the owed to oil traders); and multilateral obligations debt restructuring agreements with an oil trader comprised under ten percent of total debt. The and with two Chinese commercial creditors. The authorities implemented a prudent borrowing stock of audited domestic arrears represented policy in 2021 and 2022 by avoiding new external about 13.7 percent of GDP at end-2021. Domestic non-concessional borrowings. Also, during that arrears that were being audited were estimated period, most of Congo’s new debt was raised at an additional 12.1 percent of GDP. 3 The in the regional financial market in the form of Government repaid CFAF 431 billion in domestic T-bills. arrears (4.7 percent of GDP) in 2022. 14 THE WORLD BANK GROUP | REFORMING FOSSIL FUEL SUBSIDIES Figure 5: Public debt continued to decline as a percent of GDP, but ROC’s debt is still classified as in distress Public debt (% of GDP) 120 100 80 % of GDP 60 40 20 0 2015 2016 2017 2018 2019 2020 2021e 2022e External debt Domestic debt Total Public Debt Source: World Bank, Congolese Authorities, IMF. 1.1.5 Overall inflation remained contained, but high food inflation is exacerbating socio-economic challenges Overall inflation remained contained The economic growth rate in 2022 was in 2022, but food inflation was elevated . not strong enough to reduce the poverty Disruptions in global supply chains and high rate. ROC had substantially reduced poverty, international food prices exerted inflationary with the poverty rate declining from 50 percent pressures in Congo, especially on food in 2005 to 33 percent in 2014 because of since about 70-80 percent of Congo’s food strong economic growth. With the economy consumption is imported. Food prices increased in recession during 2015-2021 (coupled with by 6.2 percent in 2022 (y-o-y), pushing overall continued population growth), the poverty rate inflation to 3.0 percent (Figure 6, left panel). is expected to have increased, reaching 52.0 The increase in food prices is worsening food percent in 2021 (using the international poverty insecurity in a country where 56 percent of the line of US$ 2.15 PPP a day). With real GDP per population is already severely food insecure.4 capita falling by an estimated 0.9 percent in Administrative controls on the prices of a wide 2022, poverty rates are estimated to have risen array of consumer necessities have helped further to 52.5 percent in 2022 (Figure 6, right contain inflation, including energy inflation which panel). Moreover, human capital development stood at 0.6 percent in 2022 despite higher has stagnated over the last decade, with Congo’s global oil prices. In February 2023, food inflation score for the World Bank Human Capital Index slightly decelerated to 5.5 percent (y-o-y), but at 0.42 in 2020 (from 0.41 in 2010), remaining overall inflation slightly accelerated to 3.4 well below the average for lower-middle income percent due to the rise in energy and transport countries of 0.48. prices driven by the partial deregulation of fuel prices in January 2022. Republic of Congo Economic Update | 10th Edition 15 Figure 6: Food prices are increasing, exacerbating socio-economic challenges Consumer Price Index (%, y-o-y) Actual and projected poverty rates and real GDP per capita 12 Poverty rate (%) Real GDP per capita (constant LCU) 10 100 1400000 90 8 1200000 80 Percent year-on-year 6 70 1000000 60 4 800000 50 2 600000 40 0 30 400000 20 -2 200000 10 -4 0 0 Jun-20 Jun-21 Jun-22 Oct-20 Oct-21 Oct-22 Apr-20 Apr-21 Apr-22 Aug-20 Dec-20 Aug-21 Dec-21 Aug-22 Dec-22 Feb-20 Feb-21 Feb-22 Feb-23 2011 2013 2015 2017 2019 2021 2023 2025 International poverty rate Overall In ation Food in ation Lower middle-income pov. rate Upper middle-income pov. rate Non-food in ation Real GDP pc Source: World Bank, National Institute of Statistics. Pro-poor social spending increased in execution rates were “basic health and disease 2022, although its execution rate remains control” (85 percent) and “electricity, water and significantly lower than that of the overall sanitation” (73 percent). Revenues collected budget. The authorities committed to increasing in 2022 represented 101 percent of budgeted social spending as a part of a government revenues, so the under execution of pro-poor strategy. As a result, pro-poor social spending social spending likely reflects prioritization increased from 3.3 percent of GDP in 2021 to of other expenditures, weaknesses in public 3.9 percent of GDP in 2022 (Figure 7, left panel). financial management such as weak treasury However, pro-poor social expenditures continue management, and fragmentation of information to be under executed, which is concerning systems throughout the budget chain. given the socio-economic challenges facing the country, which were exacerbated by the COVID-19 pandemic, and the impact of the war in Ukraine on food prices. At end-2022, the pro-poor social spending execution rate stood at 74 percent (Figure 7, right panel). Although better than the 65 percent recorded in 2021, the 2022 execution rate falls well below the 99 percent execution rate for the overall budget in 2022. The components with the highest 16 THE WORLD BANK GROUP | REFORMING FOSSIL FUEL SUBSIDIES Figure 7: Pro-poor social spending increased, although the execution rate is still low Pro-poor social spending (% GDP) Budget execution rate (%) 5.0 4.4 Total pro-poor social expenditure 2022 4.5 2021 3.9 Basic health and disease control 4.0 3.5 3.3 Electricity, water and sanitation Percent of GDP 3.0 2.5 Basic education 2.5 2.0 Agriculture 1.5 Social protection and employment 1.0 Open access infrastructures 0.5 Advancement of women 0.0 2019 2020 2021e 2022e 0 20 40 60 80 100 120 140 Note: The sectors in the figure are those classified as “pro poor” spending in the Government’s budget. Sources: World Bank, Congolese Authorities. 1.1.6 Vulnerability to non-performing loans remains high The banking sector remains solvent, but prudential regulation, ending the temporary vulnerability to non-performing loans (NPLs) COVID-related prudential forbearance (in place remains high. The country’s financial sector since mid-2020). The termination of these continues to be largely dominated by banks. measures, coupled with resumed regular onsite NPLs remain high despite the partial clearance inspections, is expected to contribute to a more of government arrears to suppliers and banks, accurate assessment of banks’ health. which helped increase bank deposits and credit to the private sector by 12 percent and three percent y-o-y respectively as of end-September 2022 (Figure 8, left panel). After declining to 17.2 percent at end-2021, the NPL to gross loan ratio was at 19.1 percent in September 2022 and remains high by international standards (Figure 8, right panel). In July 2022, the regional Banking Commission ( Commission Bancaire de l'Afrique Centrale , COBAC) normalized Republic of Congo Economic Update | 10th Edition 17 Figure 8: Bank deposits and credit increased but vulnerability to NPLs remains high Bank deposits and credit to the economy NPL to gross loans ratio (%) (in CFAF billion) 35 2,100 30 28.8 28.1 1,900 1,700 25 21.7 1,500 CFAF billion 19.7 19.1 Percent 20 1,300 17.2 1,100 15 900 700 10 500 5 20 r. . 22 r. 22 n. . 20 . 21 . 20 Jun . . 20 Dec 20 . 20 Sep 20 ar 22 . 21 . ep 20 un a ec a 20 ec 20 ep u -M -M -M -J -S -J -D -D -S - - - 20 21 19 21 20 20 20 20 20 0 . . . ec . ep . . ep ec ec ep -D -S -S -D -D -S Bank deposits Credit to the economy 20 20 22 19 21 21 20 20 20 20 20 20 Source: BEAC. 1.2. Medium-Term Outlook and Policy Options Going Forward 1.2.1 Global growth is projected to decelerate sharply G l o b a l e c o n o m i c ac t i v i ty i s s et slow growth, tightening financial conditions, to decelerate sharply as a result of and heavy indebtedness is likely to weaken synchronized monetary policy tightening investment and trigger corporate defaults. to contain high inflation, less favorable Further negative shocks—such as higher financial conditions, and disruptions from inflation, even tighter monetary policy, financial the war in Ukraine. Global growth is expected stress, deeper weakness in major economies, to decelerate sharply to about two percent in or rising geopolitical tensions—could push the 2023 (from about three percent in 2022) (Figure global economy into recession. 9, left panel). The sharp downturn in growth is expected to be widespread. The United States In SSA, growth in 2023-25 is projected and the Euro area are undergoing a period to remain below long-term averages in of pronounced weakness, and the resulting several economies . Economic growth in spillovers are exacerbating other headwinds the region is projected to remain modest in faced by emerging market and developing 2023 at about three percent (from about 3.7 economies (EMDEs). The combination of percent in 2022) before picking up to about 18 THE WORLD BANK GROUP | REFORMING FOSSIL FUEL SUBSIDIES four percent on average in 2024-25 (Figure 9, in food insecurity and poverty. Meanwhile, right panel). Per capita income in the region as weakening growth in advanced economies a whole is expected to grow by only about one is expected to pose headwinds for external percent a year on average in 2023-25, half a demand, particularly among exporters of percentage point below its trend rate before industrial commodities. Risks are tilted to the the pandemic. In the CEMAC region, economic downside. A more pronounced weakness in growth is projected to slow down marginally, major economies, further increases in global with an average real GDP growth of 2.7 percent interest rates, higher and persistent inflation, in 2023 and about three percent in 2024-25. fragility, and increased frequency and intensity Even though an expected moderation of global of adverse weather events could further slow commodity prices should temper increases growth across the region, exacerbating poverty in the cost of living, tighter policy stances to and leading to debt distress in some countries. address elevated inflation and public debt will weigh on domestic demand. Subdued growth will make it difficult to reverse increases Figure 9: Growth in 2023-25 is projected to remain below long-term averages in several economies Global growth GDP growth in SSA (%) 2000-19 average 6 6 5 5 4 3 4 Percent 2 3 Percent 1 2 0 -1 1 -2 0 -3 2025 2025 2025 2023 2023 2023 2024 2024 2024 2022 2022 2022 2021 2021 2021 -4 Sub- Angola, Nigeria, Other SSA Saharan and South Africa Africa 00 05 20 25 90 10 95 15 20 20 20 20 20 20 19 19 Source: GEP Republic of Congo Economic Update | 10th Edition 19 1.2.2 ROC’s economy will continue its gradual rebound Congo is expected to continue to recover finance thanks to the new factoring and leasing gradually from its recent protracted laws adopted in December 2021. recession . ROC’s GDP is projected to grow at 3.5 percent in 2023 and an average 3.6 Overall inflation is expected to remain percent in 2024-25 (Table 2). The oil sector is close to the regional convergence criterion expected to grow at 5.8 percent in 2023-2024 over the medium term. Spillovers from of the on average, driven primarily by the resumption war in Ukraine and rising internal demand will of investments by oil companies (started in exert inflationary pressures, but international the second half of 2022), including in asset agricultural and oil prices are expected to maintenance, which had been postponed due decline gradually as tighter monetary and to the pandemic and supply chain constraints. financial conditions rein in global demand and New oil wells that started producing at end-2022 dampen growth. The expansion of the non-oil will also contribute to the expected increase economy is also expected to increase domestic in oil production in 2023-2024, but by 2025, production, partially mitigating inflationary oil production is projected to start declining pressures. Overall inflation is expected to steadily due to maturing of major oil fields, with accelerate slightly to 3.2 percent in 2023, partly the sector expected to contract by 0.3 percent due to the partial deregulation of fuel prices, in 2025. and then slow to 3.0 percent by 2025 with the expected decline of global food and oil prices. Non-oil sector activity will play a Food inflation is, however, expected to continue significant role in the economic recovery. to outpace overall inflation, worsening food Non-oil economic growth (expected at 3.3 insecurity. percent in 2023 and 4.0 percent on average in 2024-2025) will be spurred by several The current account surplus will gradually factors and policies. The continued clearance narrow . Increased imports to support oil of government arrears will support private investment, including for asset maintenance, investment across economic sectors as well and investment in the non-oil sector as well as household consumption (through expected as reduced oil export receipts will narrow the repayment of social arrears). Public investment current account surplus to 9.7 percent of GDP is set to increase, underpinned by spending percent in 2023 and to an average of 3.2 percent reprioritization. On the supply side, agricultural of GDP in 2024-2025. As the current account sector growth will improve thanks to the balance gradually declines, driven by reduced local content strategy, which aims to replace prices, the external sector may experience gradually imported inputs with local production, some pressures. However, these pressures as well as support provided by the Government would be partially mitigated by the gradual through the formation of agricultural protected increase in non-oil exports (e.g., processed areas (Zone Agricole Protégée, ZAP). Activity wood, cement, gas), foreign direct investment, in the telecommunication sector is also and the decrease in external debt service. expected to pick up, supported by the recent Meanwhile, Congo’s contribution to the region’s interconnection of the fiber optic network with gross foreign exchange reserves is projected Cameroon. Non-oil growth may be further to increase gradually, driven by lower external supported by the development of the gas sector debt service payments and budget support from (as European Union countries search for new development partners. suppliers) and the expected improved access to 20 THE WORLD BANK GROUP | REFORMING FOSSIL FUEL SUBSIDIES Strengthening of financial sector policies, in 2023 and 3.0 percent of GDP on average the gradual economic recovery, and payment during 2023–2025. The non-oil primary deficit is of government arrears to the private sector set to narrow to 10.5 percent of GDP on average will positively impact the financial sector. Net in 2023-2025 with improved domestic revenue foreign assets are expected to increase, driven mobilization. by the reasons mentioned above. Domestic credit is expected to continue expanding with Debt is expected to continue to decline, the ongoing clearance of government arrears to but clearance of arrears is needed for domestic suppliers and banks. The Government the country to come out of debt distress . has committed to repay CFAF 211 billion in Improved debt management, fiscal discipline, domestic arrears in 2023, which would reduce and significant oil revenues will help reduce the its total domestic arrears. debt stock. Public debt is, thus, anticipated to decline to 87.9 percent of GDP by 2023 and to The fiscal balance is expected to remain 78.8 percent of GDP by 2025. The Government positive. The impact of a decrease in oil prices still owes external arrears; and until these will be partially offset by a projected increase arrears are cleared, the country is likely to in oil production (in 2023-2024) and improved remain classified as in debt distress. While domestic revenue mobilization. Due to lower oil the debt is assessed as sustainable, there are revenues, total budget revenues will decrease several risks to its sustainability, in particular to an average of 26.8 percent of GDP in 2023- negative oil price shocks but also tighter 2025 (from 31.4 percent of GDP in 2022). Tax conditions in the CEMAC regional markets and revenues are projected to rise, driven by a an exchange rate depreciation against the US combination of tax policy (e.g., compulsory dollar. These risks are, however, substantially use of the Unique Identification Number mitigated by debt service to the largest external and increases in excise taxes on alcohol and commercial creditors being tied to oil prices and tobacco) and tax administration reforms (e.g., the availability of financing from the regional e-filing and e-payments of taxes and taxpayer financial market. service centers). Expenditures are set to average 23.4 percent of GDP in 2023-2025 (compared to 24.6 percent of GDP in 2022). While the Government is expected to expand social spending, the wage bill (due to the recruitment of new civil servants in social sectors and the increase in the retirement age of civil servants), and public investment, savings are also expected from reduced fuel subsidies. The retail price of gasoline and diesel, which had been unchanged since 2018, increased by five percent in January 2023 and could increase further by the end of 2023. The reduction of direct transfers to energy state-owned enterprises (SOEs), per the 2023 Budget Law, combined with the deregulation of fuel prices, are expected to decrease energy subsidies to 1.4 percent of GDP in 2023 from 3.4 percent of GDP in 2022, creating some fiscal space for increased spending on investment, the wage bill, and the social sectors. Thus, the fiscal surplus is projected at 4.2 percent of GDP Republic of Congo Economic Update | 10th Edition 21 Table 2: Key economic indicators of the Congolese economy 2020 2021e 2022e 2023f 2024f 2025f Real economy (Annual percent change) GDP growth -6.2 -2.2 1.5 3.5 4.3 2.8 Demand      Private consumption -6.9 8.5 6.7 6.0 6.0 5.8      Government consumption -33.1 16.9 -2.0 3.2 3.8 3.3      Gross fixed investment -45.0 9.5 8.3 11.5 8.5 7.0      Exports -11.1 -12.2 -0.9 4.4 6.2 0.9      Imports -36.3 2.5 4.8 10.6 10.3 5.2 Production (oil vs non-oil)      Oil GDP -4.5 -10.6 -3.6 5.0 6.6 -0.3      Non-oil GDP -5.9 3.1 3.4 3.3 3.8 4.1 Production (economic sectors)      Agriculture 4.5 1.5 3.1 3.3 3.9 4.3      Industry -3.7 -7.9 -1.7 4.4 5.8 1.2      Services -9.2 3.9 3.5 3.3 3.8 3.9 Real GDP per capita -8.6 -4.6 -0.9 0.9 1.7 0.3 Inflation, consumer prices 1.4 2.0 3.0 3.2 3.1 3.0 (annual %, period average) Fiscal accounts (Percent of GDP) Overall fiscal balance- including grants -2.4 1.4 6.8 4.2 3.5 2.6 Primary fiscal balance -0.6 3.4 9.1 6.7 5.9 5.1 Total public debt 113.2 102.2 93.8 87.9 82.5 78.8 External public debt 66.3 56.2 44.4 40.1 38.4 35.4 Selected monetary accounts (Annual percent change) Credit to the economy 3.0 11.0 3.0 6.5 10.9 11.0 Broad money 18.0 5.8 4.6 6.0 9.4 9.6 External Accounts (Percent of GDP) Current account balance 0.9 10.9 18.2 9.7 4.2 2.1 Net foreign direct investment 2.4 3.8 3.8 4.2 4.7 5.0 Memo GDP per capita - nominal (US$) 1899.8 2362.8 2520.2 2493.2 2449.2 2481.3 GDP (current LCU, billions) 6034.0 7412.0 9116.6 9246.2 9311.3 9671.0 Oil production (Millions of barrels) 112.0 99.9 96.3 101.1 107.8 107.5 Congolese oil price (U.S. dollars per barrel) 39.0 67.0 96.0 81.0 79.0 78.0 Sources: Congolese authorities, BEAC, and World Bank staff estimates and projections. February 2023. Risks to the outlook are tilted to the in oil production or a substantial decline in downside. Several external and domestic oil prices would have a significant impact on factors could adversely influence the export receipts and government revenues. country’s economic outlook . External risks Growth in the non-oil sector depends partly on to the outlook include volatile global oil prices, the progress of regulatory and public finance an intensification of the war in Ukraine and reforms and on the progress in the clearance related spillovers (including persistent high of domestic debt (which affects the financial food inflation and refined oil shortages in situation of the private sector and of the banking Congo), further tightening of global or regional system). In addition, since the government is financial conditions, and weaker-than-expected expected to secure financing mostly by issuing global demand. Internal risks include unsteady T-bills, tighter conditions in the regional market oil production, weak reform implementation, could weaken debt sustainability. and adverse weather conditions. A shortfall 22 THE WORLD BANK GROUP | REFORMING FOSSIL FUEL SUBSIDIES 1.2.3 Reforms are being implemented, but significant challenges remain The Government has taken several actions and the implementation of the National recently as it tries to build a stronger, more Development Plan 2022-2026. Furthermore, resilient, and diversified economy in line although Congo’s debt is now classified as with its National Development Plan 2022- sustainable, the debt is still assessed as in 2026. Reforms implemented over the past two distress due to outstanding arrears and years relate to public financial management, uncertainty regarding the real level of domestic human capital development, governance, debt arrears. management, and transparency. In October 2022, the Government adopted reforms that aim → Domestic revenue mobilization could to improve social protection (by establishing a be enhanced by : (a) streamlining tax permanent national safety net program) and expenditures, which have eroded the budget allocations and execution in health tax base, by identifying and quantifying and education (by establishing clear rules for exemptions (through tax expenditure prioritizing commitments and budget releases analyses) to help close policy gaps created to service delivery units in health and education by value-added tax policy and laws that and by establishing a formula-based resource create exemptions and zero and reduced allocation mechanism). Debt management rates, including incentives aimed at attracting and transparency have also been enhanced. foreign direct investment; and (b) making In May 2022, the debt management office sure that recently adopted regulations published its second annual report, which of October 2022 are being implemented, included the debt stock of the ten largest SOEs such as the mandatory use of the Unique for the first time. As indicated in the 2021 and Identification Number, the decree clarifying 2022 finance laws, external borrowing was the applicability of ordinary taxation for restricted to concessional loans; and in July oil upstream operations, and the decree 2022, the authorities officially adopted a new establishing rules for the determination and medium-term debt management strategy for payment of dividends from SOEs. 2023-2025. The government is strengthening anti-corruption measures with the March 2022 → Debt management and transparency could adoption of a new anticorruption law and the be enhanced by: (a) continuing to not enter August 2022 decree clarifying conflict of interest into any contractual obligations for new rules and procedure (although ministerial external public and publicly guaranteed orders are being prepared to address shortfalls non-concessional debt; and (b) finalizing the in declaration requirements in the law/decree). ongoing audit of domestic arrears, which will The law on Public-Private Partnerships (PPPs), be required for an accurate assessment of enacted in January 2023, is also a significant the stock of domestic arrears. development which could facilitate investments in non-oil-related sectors, but implementing Continued actions to mitigate the impact of decrees still need to be prepared. the war in Ukraine and building resilience to future shocks is essential. The most significant Going forward, strengthening fiscal and negative impact in Congo of the war in Ukraine debt sustainability remain key priorities . has been higher global food prices which While the government has recently implemented harm the poorest the most and increase food several reforms, ROC still faces significant insecurity in Congo. The government should: (a) challenges in mobilizing domestic resources continue to support farmers and the agriculture which may impede long term debt sustainability sector to reduce the country’s dependence on Republic of Congo Economic Update | 10th Edition 23 food imports by providing training to farmers, Similarly, the government should ensure the improving farmers' access to inputs and finance operationalization of the new national safety for leasing or buying equipment, securing land net program by allocating a budget for it in rights, and establishing PPPs between the the 2024 Budget Law. Government and agroindustry to help implement and manage the ZAP; (b) ensure that the → Continue to strengthen governance and budget allocated to social sectors in the 2023 institutions : To achieve more diversified Budget Law is fully executed and free of delays development, ROC needs to strengthen by prioritizing social expenditures (to improve the quality of its policies and institutions or on the 74 percent execution rate for pro-poor “intangible capital.” The mechanisms to spending in 2022). manage volatile resource earnings, provide high quality social services, and administer Take urgent and bold actions to diversify public spending as well as regulate the economy and sustain economic growth. the domestic market can only emerge By 2025, ROC’s oil production is set to begin a from effective and enabling institutions. permanent decline barring new discoveries, Among urgent reforms, Congo should: and GDP growth is expected to decelerate from (a) strengthen the ability of the Supreme 4.3 percent in 2024 to 2.8 percent in 2025. Key Audit Institution ( Cour des Comptes et policies that could support the Government’s Discipline Budgétaire , CCDB) to oversee diversification efforts and help sustain and public resources by adopting the CCDB increase non-oil sector growth include:5 Organic Law and its implementing decrees; (b) adopt the implementing decrees of the → Develop human capital : The government recently adopted PPPs law; and (c) accelerate ought to implement the October 2022 decree the preparation of the horizontal law on that aims to improve resource allocation and inspections and the law on competition to prioritize budget releases in education and improve the business environment. health starting with the 2024 Budget Law. Credits: Valdhy Mbemba on Unsplash 2 Reforming Fossil Fuel Subsidies Republic of Congo Economic Update | 10th Edition 25 2.1. Recent Developments in Fossil Fuel Subsidies 2.1.1 Evolution of oil prices and related subsidies – regional overview The recent surge in international oil measures to ease the impact of these high prices has led to an increase in fuel subsidies energy costs on households and businesses, across the world. After a price decline induced energy consumption subsidies rose sharply by slower economic activity and reduced in 2022, reaching more than US$ 700 billion demand due to the COVID-19 pandemic, energy for oil, natural gas and coal, the highest level commodity prices have been rising since late ever recorded (Figure 10, right panel). These 2020 and reached new heights in 2022 amid subsidies are mostly broad-based, instead of the war in Ukraine (Figure 10, left panel). As being targeted towards vulnerable groups, and governments around the world introduced have generated significant fiscal costs.6 Figure 10: The surge in oil prices has led to an increase in fuel subsidies across the world Crude oil, average (USD/bbl) Fiscal fuel consumption subsidies worldwide (USD billion) 120 800 700 100 600 80 500 400 60 300 200 40 100 20 0 20 22 0 8 6 9 5 3 4 2 21 7 1 1 1 1 1 1 1 1 1 1 1 20 20 20 20 20 20 20 20 20 20 20 20 20 0 20 22 0 18 16 19 15 13 14 12 21 17 11 1 Oil Natural Gas Coal 20 20 20 20 20 20 20 20 20 20 20 20 20 Source: International Energy Agency (IEA) and World Bank Countries in West and Central Africa fiscal cost of fossil fuel subsidies in CEMAC (AFW), including in the CEMAC region, have countries reached CFAF 1,243 billion in 2022, seen a similar development. The fiscal cost equivalent to about 1.8 percent of the region’s of energy subsidies in AFW more than doubled GDP, above the average of West African compared to pre-COVID levels (Figure 11, left countries at 1.5 percent of GDP. While some panel). In contrast to rising energy subsidies, CEMAC countries increased retail fuel prices in public spending on social sectors has stagnated early 2023, subsidies (with the exception of the or even decreased (Figure 11, right panel). The Central African Republic) are still substantial.7 26 THE WORLD BANK GROUP | REFORMING FOSSIL FUEL SUBSIDIES Figure 11: The fiscal cost of energy subsidies in AFW more than doubled while spending on social sectors stagnated or decreased8 Fuel subsidies in AFW (in % of GDP) Social public spending in AFW (% of GDP) 2.0 7.0 6.0 5.0 1.5 Percent (%) 4.0 Percent (%) 3.0 1.0 2.0 1.0 0.5 0.0 2018 2019 2020 2021 2022 Education Health 0.0 2018 2019 2020 2021 2022 Social protection Social spending Source: National authorities and World Bank staff calculations. CEMAC economies are exposed to oil Both oil importers and exporters have price volatility and have not managed to increased their fuel subsidies, although oil translate their natural wealth into sustainable exporters have larger buffers. Fuel subsidies development. Oil accounted in 2022 for more have been rising in both net oil exporting and net than 25 percent of GDP in CEMAC economies oil importing countries in AFW (Figure 12, upper and covered roughly 80 percent of the region’s panel). A share of the oil windfall in oil exporting exports of goods. Tax and nontax revenues countries has been used to finance subsidies related to oil contributed about 55 percent of and protect their population from the higher total revenues. Many crude oil exporters rely to international prices for oil. These countries a great extent on imports of refined products still have maintained larger external and fiscal because of constraints in refining capacity. Given buffers than oil importing countries, with the size of the oil sector and its importance sharp improvements in both current account in commanding public resources, these and fiscal balances (Figure 12, lower panel). countries are highly exposed to the volatility However, subsidizing fuel, even for oil exporters, in international oil prices. Their fiscal space is is a story of an expensive missed opportunity as less predictable, and they have been challenged these resources could have been used for other in using oil revenues to invest in physical and purposes and perhaps to a greater benefit. human capital to lay the foundations of more sustainable and inclusive growth. Republic of Congo Economic Update | 10th Edition 27 Figure 12: Both oil importers and exporters in AFW have increased their fuel subsidies, although oil exporters have larger buffers Fuel subsidies, by net oil exporters and Fuel subsidies and oil revenues for net oil importers (in % of GDP) exporters (in % of GDP) 2.0 12.0 10.0 1.5 8.0 1.0 6.0 4.0 0.5 2.0 0.0 0.0 2018 2019 2020 2021 2022 2018 2019 2020 2021 2022 Exporters Importers Fuel Subsidies Oil Revenues Fiscal balance, by net oil exporters and Current account balance, by net importers (in % of GDP) exporters and importers (in % of GDP) 3.0 0.0 2.0 -1.0 1.0 -2.0 -3.0 0.0 -4.0 -1.0 -5.0 -2.0 -6.0 -3.0 -7.0 -4.0 -8.0 -5.0 -9.0 2018 2019 2020 2021 2022 2018 2019 2020 2021 2022 Exporters Importers Exporters Importers Sources: National authorities and World Bank Staff calculations 2.1.2 Fiscal cost of fossil fuel subsidies in the Republic of Congo Despite declining in recent years, Congo’s from an average of 3.3 percent in 2018-19 fossil fuel subsidies increased sharply in (Figure 13, left panel). However, in 2022, due to 2022 . In 2019, the Congolese government’s the sharp increase in international oil prices, medium-term fiscal strategy aimed to reduce regulated domestic prices acted as a strong non-priority current spending, including by deterrent for private sector led imports of fuel. improving the transparency of SOEs and This situation – coupled with the limited capacity reducing transfers to Congolaise de Raffinage of the national refinery –led to fuel shortages (CORAF) and Centrale Electrique du Congo across the country. In response, the authorities (CEC) —the oil refinery and Congo Power decided to cover directly the losses incurred by Plant. In 2020-21, fuel subsidies (excluding gas importers of refined oil. As a result, fuel subsidies subsidies) to state-owned enterprises declined increased from 0.3 percent of GDP in 2021 to an substantially, averaging 0.6 percent of GDP estimated 2.4 percent of GDP in 2022 (about 28 THE WORLD BANK GROUP | REFORMING FOSSIL FUEL SUBSIDIES four times what was planned in the initial budget panel). In Congo, out-of-pocket expenditures law for 2022).9 This note focuses on subsidies represent 52 percent of total health on kerosene, diesel and gasoline (see Technical expenditures. Congo spends only 3.6 percent of Annex 1 for information on the uses of various GDP on education, which is low compared to the fossil fuels). average of Sub-Saharan Africa of 4.3 percent of GDP. In addition to social spending, Congo also The use of public funds to freeze retail fuel lacks fiscal space to improve and maintain its prices diverts resources from alternative infrastructure, such as paved roads or reliable uses. Human capital development has stagnated electricity: only 13 percent of the road network over the last decade, with Congo’s score for is paved, compared to 18 percent for SSA. the World Bank Human Capital Index at 0.42 Furthermore, infrastructure maintenance has in 2020 from 0.41 in 2010. Based on the latest been underfunded (at 0.08 percent of GDP as available data, expenditure on fuel subsidies as of 2020), at negligible levels compared to most a percentage of GDP in Congo is higher than peer countries in CEMAC and the West African spending on social protection and close to the Economic and Monetary Union (WAEMU), hence total public spending for health (Figure 13, right reducing the quality of Congo’s roads. Figure 13: Public expenditure on fuel subsidies in ROC increased sharply and is higher than spending on social protection and close to spending for health Fiscal cost of fuel subsidies in Congo Social public spending in Congo (in % of GDP) (in % of GDP) 3.4 3.5 4.0 3.1 3.5 3.0 2.4 3.0 2.5 2.5 2.0 2.0 1.5 1.5 1.0 0.8 1.0 0.5 0.3 0.5 0.0 0.0 2018 2019 2020 2021 2022 Health Education Social Protection Note: the fiscal fuel subsidies in the figure exclude gas subsidies to Congo Power Note: The latest available data is for 2020 Plant Source: Authorities of Congo Source: World Bank calculations based on data from the Congolese authorities Fuel subsidies also introduce pricing does not encourage an efficient use of environmental and market distortions . By energy, with adverse effects on the environment. preventing domestic retail prices from being Such distortions might prevent countries from aligned with international prices, fuel subsidies reducing reliance on the subsidized fossil fuels distort the actual cost of energy. This distorted and from developing renewable sources of Republic of Congo Economic Update | 10th Edition 29 energy or adopting low emitting development of an informal parallel market or cross-border solutions, locking them into a higher emission smuggling. Such practices could generate development pathway in the future. In addition, domestic energy supply shortages, harming the such market distortions may encourage local economy. unlawful market practices, such as the creation 2.1.3 Distributional analysis of fossil fuel subsidies in the Republic of Congo Fuel subsidies are mostly captured by areas, although in the case of Congo, the richer male-headed rich households living in urban urban population still benefits the most from the areas . Subsidies on petroleum products kerosene subsidy (Figure 15). Gender patterns (excluding kerosene) benefit mainly the richest show that 97 percent of both diesel and gasoline segments of the urban population (Figure 14). are consumed by male-headed households The richest decile consumes 77 and 73 percent (Figure 16). Even in terms of people’s income of diesel and gasoline, respectively, while the (estimated by their consumption), fuel subsidies poorest consume less than one percent; thus, do not favor the poorest segments of Congo’s most of the subsidies are captured by the population, representing only about 2.2 percent wealthiest. By contrast, kerosene, used mostly of their income (compared to 4.7 percent for for lighting, is much more equally distributed the richest decile) (Figure 17). In other terms, across income groups, although the richest still fuel subsidies provide limited relief to the final benefit more from subsidies on this fuel when fuel consumption of the poorest Congolese in compared to the poorest deciles. At the regional comparison to their total spending. level, kerosene is used both in urban and rural Figure 14: Subsidies on petroleum products (excluding Figure 15: Urban population benefits the most from the kerosene) benefit mainly the richest segment of the kerosene subsidy population Fuel consumption by income group (in Kerosene consumption by income group and percentage, by decile) region (in percentage, by decile) 16 80 14 70 12 60 10 50 8 40 30 6 20 4 10 2 0 0 The poorest 2 3 4 5 6 7 8 9 The richest The poorest 2 3 4 5 6 7 8 9 The richest Kerosene Gasoline Diesel Urban Rural Source: World Bank calculations based on the 2011 Household Consumption Survey (ECOM 2011) 30 THE WORLD BANK GROUP | REFORMING FOSSIL FUEL SUBSIDIES Figure 16: Fuel subsidies are mostly captured by Figure 17: Fuel subsidies do not favor the poorest seg- male-headed households ments of Congo’s population Share of fuel consumption over total budget Fuel consumption by gender (in percentage) by income group (in percentage, by decile) 100 5.0 4.5 80 4.0 3.5 60 3.0 2.5 40 2.0 1.5 20 1.0 0.5 0 0.0 The poorest 2 3 4 5 6 7 8 9 The richest Kerosene Other Fuels Male Female Note: “Other Fuels” include Gasoline and Diesel Source: World Bank calculations based on the 2011 household consumption survey (ECOM 2011)10 An increase in fuel prices could have The reduction of fuel subsidies would, direct and indirect effects, implying a limited nevertheless, add to the inflationary increase of the general price level. Directly, pressures in Congo (Figure 18) and, if not households are affected through their own accompanied by mitigation measures, could consumption of gasoline or kerosene. Indirectly, push some households into poverty . While they are also affected since petroleum products representing a very small share of their income are used as intermediary products in many (as measured by consumption), the reduction sectors, and their higher price will feed into the of fuel subsidies does erode the purchasing price of final goods produced by these sectors. power of households. The reduction of fuel Preliminary analysis in the case of the Republic subsidies could also exacerbate the severity of Congo would suggest that increasing the of living conditions for those who are already price of all petroleum products by 50 percent, poor. International experience shows that for instance, would lead to a one-time 4.2 even small losses risk triggering negative percent increase in the overall price level (Figure coping mechanisms, such as pulling children 18).11 The highest increases would be observed out of school or selling productive assets, that for electricity, forestry, fishing and transport erode human capital and contribute to the products and services. Because subsidies for intergenerational transmission of poverty. kerosene do not account for the bulk of the fiscal Therefore, a fuel subsidy reform requires a costs, excluding them from a price adjustment strong mitigation package aimed at providing would not erode much of the potential fiscal targeted support to the most vulnerable savings of this action. segments of the population. Republic of Congo Economic Update | 10th Edition 31 The government’s use of the fiscal without redistribution of the savings would have resources freed up by the removal of been detrimental to growth and employment. subsidies is critical for the ultimate impact The more the savings from subsidy removals on poverty, employment, and growth . are reallocated to certain sectors (agriculture, Governments can reduce the fiscal burden of services, and light industry), the greater the energy price subsidies and use the new fiscal positive effects on these macroeconomic space for more sustainable and equitable variables.13 Investing in a country’s people, in spending. The various options include paying their health, their skills, and their resilience down debt, investing in public infrastructure and to shocks, is critical to foster more inclusive in people, protecting specific population groups, growth, especially for CEMAC countries where and targeting assistance to certain industries. the average child born today will be only 37 Simulations using economy-wide models tend percent as productive as he or she could be. to show that building or protecting human and physical capital lead usually to higher employment and growth rates.12 In the case of China, for instance, these simulations would suggest that removing all energy subsidies (estimated to be 1.4 percent of GDP in 2007) Figure 18: In Congo, the reduction of fuel subsidies Figure 19: But even a limited one-time effect on price through higher retail fuel prices would have a limited one- levels would add to inflationary pressures in Congo time effect on the price level Price increase in Congo in case of a 50 Congo Consumer Price Index (%, y-o-y) percent increase of fuel prices (by sector, in %) 3.5 14 12 3.0 10 8 2.5 6 2.0 4 2 1.5 0 y t n) ity n g s or tr io ct in bo 1.0 ic es sp t sh u uc tr ar od r an Fi ec Fo tr oc pr Tr ns El dr n Co de hy oo n- 0.5 no W s( ive ct ra 0.0 xt re he 0 0 0 2 2 2 0 1 1 1 2 1 Ot -2 -2 -2 -2 -2 -2 -2 -2 -2 Price increase by sector -2 -2 -2 Q3 Q3 Q3 Q4 Q4 Q4 Q2 Q2 Q2 Q1 Q1 Q1 General price level Note: For illustration, the figure considers a 50 percent increase in the Source: Authorities of Congo price of petroleum products, but as discussed in section 2.2.3, a best practice is to raise prices in an incremental manner.Source: Congo- lese authorities and World Bank calculations based on the 2016 social accounting matrix. 32 THE WORLD BANK GROUP | REFORMING FOSSIL FUEL SUBSIDIES 2.2. General Principles from International Experience International experience shows that transparency and trust between the authorities removing fuel subsidies has been difficult. and the population are crucial to convincing In many countries with limited social safety the population about a credible mitigation nets, a generalized subsidy is seen as a part of package. A number of general principles can the social contract. This could be particularly be drawn from the experience of countries that true for oil-producing countries where fuel have carried out fuel price adjustments. These subsidies are sometimes perceived as a way for principles could frame a discussion for the the general population to share directly in the Republic of Congo. country’s oil wealth. As further developed below, 2.2.1 Calibrating price adjustments by petroleum products Fuel subsidies reforms can be calibrated to be sensitive to the impact of subsidy reform in numerous ways such as prioritizing the on different parts of Congolese society. For removal (or substantial reduction) of the instance, some countries have decided to subsidy that represent the highest fiscal cost exclude (at least temporarily) from the subsidy and is consumed most by the richest. Not all reform socioeconomically strategic fuel(s). This petroleum products are consumed similarly includes, for instance, fuels which: (i) are used by across income groups. In Congo, as in many the most vulnerable households; and/or (ii) have developing countries, gasoline and diesel are a universal use (both from a geographic and a consumed mainly by wealthier households socioeconomic perspective); and/or (iii) are used with private cars and/or power generators, in a critical segment of the economy (agriculture, as well as by the industrial sector. In contrast, industry). As a general principle, eliminating (or kerosene tends to be consumed by poorer substantially reducing) subsidies for the fuels households and in rural areas. By taking into consumed most by the richest could limit the consideration the consumer profile of each fiscal cost while mitigating the impact on low- fuel (e.g., income group, region, gender, usage), income households. the reform of fuel subsidies can be structured Credits: Valdhy Mbemba on Unsplash Republic of Congo Economic Update | 10th Edition 33 Box 1: International country case – Indonesia → Since 1967, Indonesia had been subsidizing retail prices of fuel, a policy facilitated by its status of net oil exporter (a status lost in 2003 as the country increased oil imports to meet rising domestic demand). → The Indonesian government mainly subsidized two categories of fuel: cooking gas in the form of LPG (liquified petroleum gas) and two other petroleum products used for transportation – gasoline and diesel (the latter being used for public transportation, fisheries, and small and medium-sized enterprises).14 → This fuel subsidy policy favored the richest households: over 50 percent of subsidized fuel was bought by the richest 20 percent of the population in 2014.15 → The fiscal and social opportunity cost of energy subsidies (LPG, petroleum products, and electricity) had become particularly heavy, accounting for 20 percent of Indonesia’s central government budget during 2008 to 2014, far surpassing government expenditure on health and infrastructure during the same period.16 → In November 2014, President Joko Widodo launched a reform of gasoline and diesel subsidies: prices for gasoline were increased by 31 percent and prices for diesel by 36 percent in 2014, while prices of kerosene were kept unchanged.17 The price gap was further narrowed by a decrease in international oil prices. As a result of the reform, the Revised State Budget 2015 saved USD 15.6 billion (IDR 211 trillion) on fossil fuel subsidies, equivalent to 10.6 percent of government expenditure.18 → As of January 2015, the Government fully removed the subsidy on gasoline but introduced a fixed subsidy on diesel because it was used in public transportation (mostly serving the poorer segments of the population) and by small and medium enterprises. Domestic diesel prices were allowed to fluctuate, while benefitting from a fixed subsidy of 1,000 rupiah per liter. → Although this temporary measure in favor of diesel should have been part of a longer-term agenda aimed at phasing out subsidies more broadly, it is still in place. 34 THE WORLD BANK GROUP | REFORMING FOSSIL FUEL SUBSIDIES 2.2.2 Adopting a price smoothing mechanism While eliminating subsidies and allowing national retail prices to reflect international prices, many countries have opted to keep some smoothing mechanism in place to protect their population and their economy from wide swings in fuel prices. Limiting a full pass-through of price changes to domestic consumers can entail potentially high fiscal costs, especially during periods of sustained increases in international prices. Adopting an explicit fuel pricing formula that smooths price variations but allows for the pass-through of international prices to domestic consumers, both increases and decreases, may offer a balance between excessive price volatility and fiscal risks. The adoption of such automatic pricing mechanisms should be viewed as the first step towards a fully liberalized and competitive fuel market. Such a mechanism would include three pillars: (i) The first pillar of such an option is to design a fuel price adjustment formula. Several price smoothing mechanisms are possible.19 One of the most common price smoothing mechanisms is the establishment of a price band mechanism. This mechanism sets a cap on the magnitude of possible retail price changes (either defined as a percentage of current retail prices or as an absolute amount). At a pre-defined interval (for example, monthly), the retail price will be determined based on the average import cost of the previous month and will be allowed to increase within the limits of this cap, either in a one-shot or in successive increases, allowing prices to catch up gradually to international price levels. Another common price smoothing mechanism is the establishment of a moving average mechanism. This mechanism defines domestic retail price adjustments based on changes in the average of past import costs. The longer the average period of import costs used (for example, the past three or five months of imports), the smoother the price changes but the higher the fiscal risk. (ii) The second pillar of this measure is the adoption of a calendar to review the price adjustment formula. For instance, the margins defined in a formula can be updated based on the findings of studies to be commissioned regularly. (iii) The third pillar of this measure is the creation of a technical autonomous body in charge of the implementation and supervision of the automatic pricing mechanism. The intention is that price changes do not result from a political decision but rather reflect international market price fluctuations. Republic of Congo Economic Update | 10th Edition 35 Box 2: International country case – Morocco20 → In the early 2010’s, a multiyear subsidy reform strategy was launched to reform retail fuel prices in Morocco (excluding liquefied petroleum gas which was deemed socioeconomically strategic). → The strategy comprised three stages: (i) a preparation phase characterized by incremental increases in retail prices to gradually reduce subsidies; (ii) a partial indexation phase whereby prices were defined according to an automatic pricing mechanism with smoothing rules aimed at gradually eliminating subsidies; and (iii) a final phase of price liberalization.21 → In 2013, following a preparation phase which introduced differentiated ceilings on unit subsidies (with higher ceilings for diesel), the government introduced an automatic pricing mechanism for diesel and gasoline. This mechanism was based on a moving average of international prices in the previous two months. The adjustment frequency was monthly and was later adjusted to become more frequent (bi-monthly) until subsidies were fully eliminated (in January 2014 for gasoline and fuel oil and December 2014 for automotive diesel). 36 THE WORLD BANK GROUP | REFORMING FOSSIL FUEL SUBSIDIES 2.2.3 Staggering the reform Rather than eliminating fuel subsidies the population to adjust gradually, hence in one go, many countries have sequenced reducing risks to social stability, especially when and gradually implemented the reform . combined with strengthening of social safety A gradual reform allows households and nets, including temporary targeted transfers, firms time to adjust, which, accompanied by and supported by consistent communications mitigation measures, supports both groups in to raise awareness of the benefits of the reform. the transition process. A review of cases of fuel Transparency, including clear communication subsidy reforms shows that subsidy reforms and managing expectations, is critical are less subject to rejection and/or reversal throughout the reform process. A staggered when prices are raised in an incremental reform opens the possibility of announcing the manner over periods ranging from a few timing of price increases to prepare citizens, months to a few years. This approach slows allowing them time to change their behavior and down the passthrough of the impact, allowing adopt more energy efficient alternatives. Box 3: International country case – The Philippines22 → The Philippines is an example of a successful sequenced reform, having phased out fossil fuel subsidies in the late 1990s following several policy milestones. → Before fully liberalizing fuel prices, the Philippines went through several stages ranging from: (i) 1984: implementing an oil stabilization fund (intended to smooth international price volatility); (ii) 1996-1997: transitional subsidies assisted by the stabilization fund; (iii) 1996-1997: implementing an automatic pricing mechanism adjusting monthly prices, with special attention given to the three most socially sensitive products (LPG, kerosene, and regular gasoline); and (iv) 1998: market- based fuel pricing. → The impacts of these fuel subsidy reforms were mitigated using targeted cash transfers as well as transitionary targeted regulated subsidies aimed at low-income households, specific sectors, and socially sensitive fuels. → In parallel to the fuel subsidy reform, an electricity sector reform took place as part of a comprehensive energy sector policy strategy. This reform was designed to deregulate the sector while protecting the most vulnerable customers (a lifeline rate for low-income users cross-subsidized by high-income groups, targeted subsidy providing discounted electricity prices to senior citizens, a one-off cash transfer for marginalized electricity consumers to cushion the impact of rising electricity and fuel prices). Republic of Congo Economic Update | 10th Edition 37 2.2.4 Stakeholder consultations Countries that have successfully reformed most of the population. These sessions are energy subsidies have undertaken extensive also the occasion to unbundle misconceptions consultations and communication campaigns about fuel prices, subsidies, and compensation to address the concerns of various population mechanisms. They can be the opportunity to groups . Consultations have helped the discuss the magnitude, timing, and relevant government identify differentiated measures mitigation measures of the subsidy reform. according to each group's vulnerability. Organizing consultations with key stakeholders Communication has stressed the urgency gives them a platform to express their views, of the reform, as well as the government's reducing the risk for an abrupt rejection of the commitment to reallocating resources made reform during its implementation. available by the reform to programs that benefit Box 4 : International country case – Ukraine23 → In 2015, Ukraine undertook a subsidy reform for gas, electricity, and district heating. → In addition to providing a set of mitigation measures such as strong social protection interventions, the reform significantly relied on dialogue with key stakeholders (especially end-consumers) to: (i) explain the objective of the reform (common good), as it was largely misunderstood; (ii) guide the sequencing of reform policy at a pace deemed acceptable; and (iii) revitalize access to compensatory social safety net mechanisms, little known or understood. → The communication strategy was successful in: (i) mapping key stakeholders (2,000 citizens were polled in 20 strategic cities); (ii) informing these stakeholders through the organization of 40 dialogue groups as well as reaching-out campaigns (advertisements were broadcasted 400 times a week through 19 credible and popular TV channels); and (iii) co-designing the reform with citizens. 2.3. Accompanying Measures of the Reform Country experiences illustrate the variety shows that there is not a standard single set of of possible accompanying measures to actions, but that reform measures need to be make adjustments in fuel prices socially discussed, identified, and designed to reflect acceptable and with minimized impacts on the the concerns and the characteristics of each population. The diversity of country experience country. 38 THE WORLD BANK GROUP | REFORMING FOSSIL FUEL SUBSIDIES 2.3.1 Reinforcing social safety nets International experience shows that social safety nets can play an important role in mitigating the adverse effects of the subsidy reform on the poor.24 Most countries spend 1–2 percent of GDP on safety net programs (excluding subsidies). Safety nets are effective and efficient at supporting the poor and vulnerable by: (i) redistributing income, with an immediate impact on both poverty and inequality, (ii) enabling households to make better investments in their future—both in the human capital of their children and in their livelihoods, and (iii) helping households manage risk and cope with shocks. To mitigate the immediate impact of fuel subsidy reform, measures can be designed to provide temporary targeted financial support to protect the purchasing power of affected groups, especially the poorest households. The success of these measures greatly depends on several factors, such as the modality of their design (scope, conditionality, roll-out) as well as the adequacy of local capabilities (such as fiscal space, existence of a complete and up-to-date social registry, administrative management). Such support can be provided through a social safety net system. Social safety nets can play a key role in mitigating the negative effects of a fuel price adjustment. Depending on the state of development of the social safety programs, various options are possible.25 (i) Increase the benefit levels of existing social safety net programs. This is the preferred, most direct and most effective option if - and only if - the programs already cover the majority of the poor and have the capacity to absorb a reasonable number of new eligible households. This option is particularly relevant in countries where there are existing programs with high coverage, but low benefit levels (e.g., Azerbaijan, Egypt, Philippines, Russia). (ii) Introduce a new dedicated program directly linked to the subsidy reform. This program should be able to expand very quickly to cover the poor and vulnerable. This is often the most difficult option, but sometimes it is the only viable strategy. Examples of the use of this option include subsidy reform in Indonesia in 2005-2008 (see below), subsidy reform in India in 2013, or, more recently, temporary compensation in Jordan as part of the 2012 and 2018 reforms. This option requires significant administrative, implementation and coordination capacity, which may not be readily available. (iii) Reform and extend the coverage of an existing program to cover a significant share of the poor and vulnerable. International experience shows that an expansion and an increase in benefit adequacy can happen relatively quickly: for example, programs in Tanzania, Senegal and Indonesia have moved from 5-10 percent coverage of the poor to more than 50 percent coverage of the poor within 2-4 years. The reform in the Dominican Republic is another example: a pre-existing cash transfer program was substantially expanded to mitigate the impact of the subsidy reform on the poor. Republic of Congo Economic Update | 10th Edition 39 The 2005 cash transfer program assistance to support poor and vulnerable in Indonesia was effective in building households has fluctuated between 0.3 acceptance of fuel subsidy reform . The percent of GDP and 0.5 percent of GDP up to Government of Indonesia launched a cash 2018, lagging the SSA average of 1.5 percent transfer program in October 2005 to support of GDP. The Lisungi social safety net project, the poor and vulnerable adapt to the effects implemented by the Ministry of Social Affairs, of higher gasoline, diesel and kerosene prices Solidarity, and Humanitarian Action (MASSAH) (Box 1). First, the timing of the program was since 2014, delivers the largest cash transfer key in reducing protests against the reform, program in the country but remains limited in its as the program was designed and deployed in coverage. The program has been shown to have less than five months, providing timely support positive impacts on its beneficiaries, including to affected groups. Second, using an existing an improved ability to meet basic consumption delivery system (the national postal system), needs and cover health and education costs. the cash transfer program was able to reach Cash transfer beneficiaries have been able to those most in need with limited delay. Last, the make productive investments in agriculture amount provided (Rp 100,000, equivalent to 20 and/or micro-enterprises. The transfers also percent of the 2005 national minimum wage) improved health behaviors, school enrollment, was significant enough to improve outcomes. and financial inclusion as well as lower poverty The transfers were mainly used for purchasing of non-beneficiaries. rice, kerosene, and health services as well as repaying debt and led to slight improvements Until recently, social safety nets have in labor, education and health outcomes. While been project-based and externally funded two-thirds of the benefits went to the poorest and, therefore, lacked sustainability . The 40 percent of the population, the cash transfer government established a permanent national program encountered, nevertheless, several safety net program (NSNP) through its Decree challenges, including the lack of transparency No 2022-1859 in October 2022, providing in the selection of beneficiaries (some the legal foundation for the provision of the households receiving transfers should not have following benefits: (i) a social pension for poor been eligible), increasing the fiscal cost of the and vulnerable elderly people living alone, (ii) program. income support including conditional cash transfers and/or productive grants for income- The government of Congo has increasingly generating activities; and (iii) any other type of recognized the role of social protection in cash or in-kind transfer related to the minimum achieving its development objectives . The social protection floor, in particular access National Policy for Social Action ( Politique to health care, education, water, electricity, nationale d'action sociale , PNAS) for 2018- and emergency support—related to climate 2022 identified three priorities for the sector: shocks, for instance—for certain categories (i) increase non-contributory social protection; of the population. The NSNP will build on the (ii) reduce the poor’s vulnerability to natural experience of the social protection delivery and man-made disasters; and (iii) strengthen systems developed by the donor-financed institutional capacities through a relevant legal Lisungi project, which uses program design framework and the development of human features based on best international practices. resources. The NSNP is expected to reach about 65,000 households (about 9.0 percent of poor Social protection coverage in Congo households) by 2025. Budget allocations for remains low, with only about eight percent NSNP will need to increase significantly for it of the poorest households covered by social to reach a more substantial share of the poor safety net programs . Spending on social beyond 2025. 40 THE WORLD BANK GROUP | REFORMING FOSSIL FUEL SUBSIDIES Establishing a new universal or quasi- interrelated components or “building blocks” universal compensation scheme would be that must be evaluated to determine safety useful for rapid subsidy reform, but Congo net readiness.26 Table 3 summarizes the five faces significant challenges . The scale-up components and provides a rapid assessment would require significant administrative and of the Congo’s current social safety net program coordination capacity to rapidly launch and along each component. implement such a scheme. There are five key Table 3: Readiness along the five key building blocks Key building block Readiness The delivery A key strength of the current program is its objective and 1 chain Safety nets pass through common transparent targeting system. However, it relies on household data collection, which can be time-consuming. Rapid expansion of safety nets to areas and households not yet covered by the implementation phases, including program can rely on the existing social registry, which covers registration and needs assessment, more than 800,000 households but is subject to data validation beneficiary selection and enrollment, and which relies on physical household visits. delivery of benefits. The program has also piloted digital payments for the COVID-19 emergency response in predominantly urban areas. Key challenges for scaling up include pending regulatory measures, lack of national IDs, and distance to pay points in rural areas. Institutions and governance The current social safety net program is implemented by an 2 Institutional aspects include central agencies, horizontal and vertical externally funded implementation unit under the MASSAH. Most of its staff at both central and local levels are employed on term contracts. The establishment of the NSNP provides a legal coordination, and partnerships with foundation for a more sustainable program, but the program service providers (such as payments is still in its infancy and may require several years before it agents and non-governmental can serve as an effective tool to mitigate the impact of subsidy organizations). Governance aspects reforms on the poor and vulnerable. include a legal foundation. Information systems While the Lisungi program has made substantial investments in 3 platform Information systems link beneficiaries its information system, its functionalities can be improved and expanded. and institutions while also enabling monitoring, reporting, and data analytics. Citizen interface The grievance and redress mechanism of the existing program 4 This refers to the access point of potential/current beneficiaries to the remains embryonic. program for queries, grievances, and user feedback. Performance monitoring, The program has robust monitoring and evaluation and 5 evaluation, learning, and adaptation reporting mechanisms in place but needs to be expanded to serve a much larger coverage of beneficiaries. This includes program outcome indicators as well as overall inclusion, efficiency, effectiveness, and transparency. Republic of Congo Economic Update | 10th Edition 41 A significant increase in coverage government has developed a social registry of targeted cash transfers will require which potentially can enable quick and effective implementation of the Decree establishing the identification and channeling of support to NSNP and increased government financing. households that are more likely to be hit by This effort is underway and can benefit from the various shocks, including as a result of subsidy experience and systems developed by the Lisungi reform. The registry currently includes data project. Putting institutional and implementation on more than 800,000 households, however, arrangements in place is the first and essential much of the data requires validation through step in the implementation of the Decree. In household visits, which in turn requires addition, mobilizing adequate government adequate institutional capacity and resources. financing is key to accelerating the program Strengthening the digital payment system would scale-up and ensuring predictable payments enable the government to transfer funds directly of cash transfers to beneficiaries. To reach 20 to beneficiaries while reducing deployment time percent coverage or the poorest quintile of the and costs. It will also improve financial inclusion Congo’s population, the government would need and economic resilience for the recipients. to spend about CFAF 60 billion (less than one Deployment of the payment system can benefit percent of GDP) each year, which is much less from the experience accumulated by the Lisungi than current spending on fuel subsidies. project. The same applies to developing and strengthening of information management The systems to transfer benefits need systems, citizen interface, and of performance to be further strengthened (Table 3). The monitoring and evaluation 2.3.2 Increasing transparency of public financial management Some countries have chosen to reinforce (2006-2007) was accompanied by reforms to trust in public action and public financial improve the transparency of oil revenues and management . In some countries, stronger investments to improve electricity services. trust was achieved by promoting greater More specifically, post-reform compensatory transparency as part of the mitigation measures measures have gone hand in hand with offered in the compensation package. Concrete, increased transparency in the management of attributable, and monitorable actions were taken social safety net mechanisms, including social targeting one or several segments of public insurance and targeted social assistance resource management. Azerbaijan provides an administrations. interesting example, where fuel subsidy reform 2.3.3 Increasing public social spending An additional channel to rebuild trust beneficial effect: (i) support the purchasing between a government and its constituencies power of affected groups, especially low-income – especially during critical times of a subsidy groups; and (ii) allow citizens to easily trace the reform – is to retarget fiscal policy towards use of savings realized thanks to the reform. social spending, especially in a context where out-of-pocket expenditure for social services Morocco, for instance, reinvested the is high. This approach could generate a double savings it achieved through its fuel subsidy 42 THE WORLD BANK GROUP | REFORMING FOSSIL FUEL SUBSIDIES reform in the early 2010’s in social sectors. in the education sector. The Government of These savings were redirected to: (i) targeted Morocco took the opportunity of putting in support for poor households through several place these mitigation measures to support mechanisms (conditional cash transfers, free the implementation of other sectoral reforms, medical care for low-income groups, financial by conditioning some of its aid to specific items support for widows, orphans, and people (e.g., school enrollment and the establishment of with disabilities); and (ii) investment projects a social security number). 2.3.4 Supporting the transport sector Providing temporary compensation for of transport infrastructure which would the transport sector could help prevent positively impact the maintenance cost of higher fuel prices from translating into vehicles, and the implementation of public higher prices for other goods and services. policies aimed at facilitating mobility (e.g., Examples of short-term measures include mass transportation, congestion control the temporary implementation of subsidies to through transportation, and urban planning). carriers to limit higher fuel prices from being However, such measures can carry high risks of passed on to travelers, especially the most leakage. The Dominican Republic has prevented vulnerable households. Such subsidies could such abuses by limiting compensation to truck be implemented through various mechanisms, drivers whose vehicles were officially registered such as direct financial support to transporters with the tax authority. Country experiences with or travelers or tax relief targeting the transport transfers to the transport sector also highlight sector. the risk of capture of transfers by private operators, without the benefits being passed Examples of measures include the through to end users. As a general principle, the support for the adoption of energy efficient closer the benefit is to the end user, the higher modes of transportation, the improvement the chance of success of the selected measure. 2.3.5 Increasing productive structural public investments As with higher social spending, allocating through several mechanisms, such as increased additional resources to productive structural budgetary allocations to particular ministries public investments can serve the double (Education, Agriculture, Transport, Public purpose of reinforcing trust in public action Works and Housing), capital increases of key as well as contributing to a positive structural state-owned enterprises in the transport and transformation. Subsidy reform in Indonesia agriculture sectors, and investment projects in (2015) was combined with increased spending key sectors at the local level (health, mobility, on health, education, and transfers to local local economy). governments. This spending was provided Republic of Congo Economic Update | 10th Edition 43 Technical Annex 1. Fossil Fuel Types and Uses Fuel type Sub-category Common uses Automotive (light and medium duty, including motorized bicycles), Gasoline aviation, and marine transportation; limited use in very small-scale electricity generation. Bioethanol Automotive (usually blended with gasoline). Kerosene Heating, cooking, lighting, aviation. Oil Automotive (medium and heavy duty), rail, marine transportation, Diesel aviation, heavy equipment, electricity generation, irrigation. Automotive and aviation (usually blended with petroleum diesel fuel), Biodiesel electricity generation, heavy equipment. Fuel oil Electricity generation, industrial application, marine transportation. Natural gas Electricity generation, industrial application, space and water heating, (Methane) cooking, refrigeration, automotive, marine transportation. Gas Liquified Petroleum Cooking, heating (water, space, process), lighting, refrigeration, Gas (LPG, Butane) automotive. Lignite (brown coal), anthracite, Coal Electricity generation, industrial heat, space heating, cooking. bituminous and sub-bituminous Source: Identifying and quantifying energy subsidies, Masami Kojima, Energy Subsidies – Good Practice Note 1, ESMAP and World Bank Group 44 THE WORLD BANK GROUP | REFORMING FOSSIL FUEL SUBSIDIES Technical Annex 2. Defining fossil fuel subsidies in CEMAC A fossil fuel subsidy can be broadly defined as a deliberate policy action by the government that specifically targets fossil fuels and that results in at least one of the following effects:27 - It reduces the net cost of fuel purchased - It reduces the net cost of fuel produced or delivered - It increased the revenues retained by those engaged in fuel production and delivery. This definition excludes: (i) government inaction (such as weak capacity to implement regulations or tax administrations); and (ii) policy actions which would affect the whole economy, such as lowering the corporate income tax rate or the general income tax rate. The cost of subsidies can be either covered by direct budgetary transfers (such as direct support to oil producers), foregone fiscal revenues (such as tax exemption at any point of the fuel supply chain), or other implicit channels (such as the underpricing of government or government-regulated inputs to the fuel production and supply chain or transfer of the cost of subsidies from one category of customer to another, as is the case in cross-subsidization). In CEMAC, fossil fuel subsidies make use of various mechanisms.28 CEMAC Country Fossil fuel subsidy provision mechanism Cameroon Budgetary transfers, tax exemption Central African Government-induced transfers between importers and distributers, Republic underpricing of services Congo, Republic of Budgetary transfers, tax exemption Equatorial Guinea Budgetary transfers, tax exemption Government-induced transfers between consumers, budgetary Gabon transfers, tax exemption This chapter focuses on the result of fossil fuel subsidies, taking the form of price distortions whereby the price set by the government or charged by the fuel seller (retail price) is purposely maintained below the price that would prevail in a competitive market (reference price). This definition does not include indirect forms of subsidies to producers (such as credit guarantees or financial assistance, which eventually lower the production cost and/or sale price). However, it allows for an easier cross-country comparison and is commonly used, including by the World Bank, the International Energy Agency, and the International Monetary Fund. Republic of Congo Economic Update | 10th Edition 45 Endnotes 1. In early 2022, the government relaxed most of the remaining restrictive could gradually increase by the equivalent of 30 percent by end-2023 measures introduced in April 2020 to contain the spread of the and by another 45 percent in 2024. Based on World Bank calculations, COVID-19 pandemic, including the removal of the curfew (between increasing the price of all petroleum products by 25 percent would lead 11 pm and 5 am) in Brazzaville and Pointe-Noire and the reopening of to a one-time adjustment of about 2.1 percent in the overall price level. nightclubs and land and river borders. A bigger increase of fuel prices, by 75 percent for instance, would lead 2. The total fiscal cost of energy subsidies is estimated at 3.4 percent to a one-time adjustment of about 6.4 percent in the overall price level. of GDP 2022, including 1.0 percent of GDP to the Congo Power Plant 12. Burns, Andrew; Djiofack Zebaze, Calvin; and Prihardini, Dinar (Centrale Électrique du Congo, CEC) , the state electricity company, for (2018) “Energy Subsidy Reform Assessment Framework: Modeling gas subsidies and 2.4 percent for oil subsidies. Macroeconomic Impacts and Global Externalities. World Bank, 3. Domestic arrears are being audited to determine the validity of the Washington, DC. arrears and, therefore, there is uncertainty about the magnitude 13. Lin, B., and Z. Jiang. 2011. “Estimates of Energy Subsidies in China and of valid domestic arrears. The 2022 ROC debt report which would Impact of Energy Subsidies Reform.” Energy Economics 33:273–83. provide some reliable information on the current stock of audited 14. A citizen’s guide to energy subsidies in Indonesia – IISD, Global and unaudited domestic arrears as of 2022 was still being prepared Subsidies Initiative and IESR, by the Debt Management Office at the time of the preparation of this 15. Financing development with fossil fuel subsidies – The reallocation Economic Update. of Indonesia’s gasoline and diesel subsidies in 2015 – IISD, Global 4. https://www.fao.org/3/cc0639en/cc0639en.pdf. The prevalence of Subsidies Initiative, P2EB - May 2016. severe food insecurity in the population is defined as the percentage of 16. Indonesia’s effort to phase out and rationalize its fossil fuel subsidies – A people in the population who live in households classified as severely self-report on the G20 peer review of inefficient fossil fuel subsidies that food insecure. A household is classified as severely food insecure when encourage wasteful consumption in Indonesia, 2019 at least one adult in the household has reported to have been exposed, 17. President Jokowi's Economic and Energy Reforms: A Year in Review – at times during the year, to several of the most severe experiences The National Bureau of Asian Research, October 2015. described in the Food Insecurity Experience Scale (FIES) questions, 18. Financing development with fossil fuel subsidies – The reallocation such as to have been forced to reduce the quantity of the food, to have of Indonesia’s gasoline and diesel subsidies in 2015 – IISD, Global skipped meals, having gone hungry, or having to go for a whole day Subsidies Initiative, P2EB - May 2016. without eating because of a lack of money or other resources. 19. Automatic Fuel Pricing Mechanisms with Price Smoothing: Design, 5. The 2023 Republic of Congo Country Economic Memorandum provides Implementation and Fiscal Implications - IMF, Fiscal Affairs detailed analysis and recommendations on key policies and reforms Department, December 2012. to build the foundations for diversified development in ROC that will 20. The time is right! Reforming Fuel Product Pricing Under Low Oil Prices – support long-term economic growth. IMF, Fiscal Affairs Department, July 2020. 6. Recently published estimate from IEA based on data from 51 countries, 21. A phased approach to energy subsidy reform – The Morocco covering the OECD, G20 and 33 other major energy consuming and experience – ESMAP, Practicioner’s exchange series. producing economies. 22. Lessons Learned: Fossil Fuel Subsidies and Energy Sector Reform in 7. In early 2023, Cameroon increased retail fuel prices (diesel +25 the Philippines – GSI Report, International Institute for Sustainable percent, gasoline +15 percent, kerosene to industries +60 percent), Development and Global Subsidies Initiatives, March 2014. as well as Central African Republic (diesel +70 percent, gasoline +50 23. Designing Communication Campaigns for Energy Subsidy Reform, percent) and Congo (diesel +5 percent, gasoline +5 percent). Heather Worley, Sara Bryan Pasquier, Ezgi Canpolat - Energy Subsidies 8. Due to data availability, in the fiscal cost of fuel subsidies graph (left – Good Practice Note 10, ESMAP and World Bank Group. panel), the “West and Central African countries, AFW” refers to the 24. Social safety nets are non-contributory transfer programs targeted following countries: Burkina Faso, Cabo Verde, Cameroon, Central to the poor, including cash transfers, income support through public African Republic, Republic of Congo, Cote d’Ivoire, Equatorial Guinea, works programs, or in-kind transfers such as school feeding. Gabon, Ghana, Mauritania, Nigeria, Senegal, The Gambia, Togo. In 25. Yemtov, R., & Moubarak, A. (2018). Good practice note 5: Assessing the the social spending graph (right panel), “West and Central African readiness of social safety nets to mitigate the impact of reform. Energy countries, AFW” refers to the following countries: Benin, Burkina Faso, subsidy reform assessment framework. Cabo Verde, Central African Republic, Chad, Republic of Congo, Cote 26. Yemtsov, Ruslan; Moubarak, Amr. 2018. “Energy Subsidy Reform d’Ivoire, Gabon, Ghana, Guinea, Mali, Mauritania, Nigeria, Senegal, Assessment Framework: Assessing the Readiness of Social Safety Nets Sierra Leone, The Gambia, Togo. to Mitigate the Impact of Reform.” World Bank, Washington, DC. http:// 9. Driven by the sharp increase in the fiscal cost of subsidies in 2022, hdl.handle.net/10986/30255. the Government of the Republic of Congo is conductinga study on 27. This definition is based on the Energy Sector Management Assistance the impact of reforming fuel subsidies. Results of the study are not Program (ESMAP) Good Practice Note 1 – Identifying and quantifying mentioned in this document as the study was still being finalized at the energy subsidies, by Masami Kojima. time of the preparation of this Economic Update. 28. These mechanisms are based on the nomenclature presented in 10. ECOM (2011). Enquête Congolaise auprès des Ménages pour le suivi et the Energy Sector Management Assistance Program (ESMAP) Good l’évaluation de la pauvreté (2011). INS Congo Brazzaville. Practice Note 1 – Identifying and quantifying energy subsidies, by 11. Under the Government’s program with the IMF, retail prices for fuels Masami Kojima