preface
The country's national economy was hit hard by the June 2014 oil crisis, oil prices plummeted, and the country's worrying economic and financial situation attracted international attention. In fact, in the face of this impact, all CEMAC countries (Central African States and Monetary Community) economies have entered a deep recession. The growing trend in the Congolese external debt stock has become a concern at the level of IMF and the World Bank.
(1986-2020, billions of United States dollars) Congolese external debt stock, GDP and external debt-to-GDP ratio
Between 2000 and 2019, Chinese financiers provided $153 billion to African public sector borrowers. The accumulation of Congolese debt has increased the burden on China to meet its obligations, with a worrying external public debt/GNI ratio of 60 per cent.
According to CARI, at least 80 percent of these loans come from organizations owned by the Chinese government, mainly the Export-Import Bank from China to the Congolese government, and other state-owned banks also provide overseas loans to the Republic of Congo. Between 2000 and 2019, China's loans to the Republic of the Congo totaled $5.393 billion. More than 40% of China's loans in the Republic of Congo are concessional, including CL, PEBC, ZIL and FA-sub.
In terms of credit distribution in the ten major investment sectors, China's loans are mainly used for infrastructure construction, especially transportation, power and ICT, accounting for 52%, 18% and 10% respectively. By breaking down traffic, the extracted data shows that three sectors (roads, airports, and waters) share the majority of transportation loans.
China's loans to Africa are mainly used to build transportation and power infrastructure. In Congo, these Chinese loans are also mainly used for infrastructure such as transport, power and telecommunications (ICT), among many other investment areas. Transport and electricity are the main areas where China's financing (loans) in the Republic of the Congo are concentrated. China's power sector money has gone to hydroelectric dams (Imboulou and Liouesso dams).
In this article, an analysis of China's debt financing in the Republic of the Congo through the repayment of foreign debt by different types of creditors, as well as the resources allowed to finance these debts, will likely highlight the possible need to diversify the Congolese economy.
First, the repayment of the Congolese external debt
Since 2010, the Congolese economy has grown steadily and strongly. In 2019, the Congolese economy is experiencing a recession following the underperformance of the oil sector due to various measures taken due to the decline in production and the decline in world oil prices. During this period, the economic growth of the Republic of Congo fell by around 6.8% after a 0.6% decline in 2019.
Several factors are responsible for the economic downturn:
First, the non-oil sector contracted by 11% and activity fell sharply in all sectors: construction (-9.9%), commerce, catering and hospitality (-18.2%), manufacturing (-8.2%) and other services (-15%), domestic demand, investment and exports all disappeared.
The point is that outstanding external debt accounted for 63% of GDP from 2010 to 2020. Because Congo has not yet reached an agreement with its private creditors, it is unable to participate in the IMF's economic and financial reform program.
There are mainly multilateral, bilateral and commercial creditors in the Republic of the Congo. Multilateral institutions held 10% and 12% of external debt, respectively, between 2019 and 2020. Bilateral creditors, which are Congo's main creditors, accounted for 45% of external debt in 2019 and 42% in 2020.
Then there are commercial creditors, with 46 percent of the external debt between these two years. Among them, international financial markets and commercial banks hold 37674200 billion CFA francs, accounting for 63 per cent of total external debt.
(1986-2020) Evolution of Outstanding Debt (EXDT) and External Debt Services (EXDTS).
After acquiring foreign debt, the state is required to repay principal, interest and commission in foreign currency every year. Outstanding debt went through two distinct phases from 1986 to 2020, with the first phase showing a very significant decline, especially in 2009, 2010 and 2011, and the second phase continuing to grow from 2014. In fact, the amount of repayments increased from 2017 to $400 million in 2019 and $500 million in 2020.
According to the chart below, the distribution of public external debt by debtor category shows that among outstanding debts, those from commercial banks predominate, including private banks benefiting from state guarantees, accounting for 46% of debt between 2019 and 2020. Second, we find outstanding bilateral debt, which was 42% in 2020 and 44% in 2019, and third, multilateral debt, which accounted for 12% and 10% of debt in both years, respectively.
(2019-2020) Congo's public external debt structure by debtor category
1. Loans by different types of creditors in the Congo
The data in the table below show the evolution of expenditures by creditors in the Republic of the Congo as follows: Multilateral creditors accounted for 79% of all external expenditures in 2020. IDA is the largest multilateral creditor, providing 23.67 billion CFA francs or 31% backed by BDEAC (Development Bank of Central African States).
ADB/ADF Group paid 11.04 billion CFA francs, or 15 per cent, and IBRD 8.53 billion CFA francs, or 2 per cent. Bilateral creditors then accounted for 16.13% of all external expenditures in 2020. China accounted for 68.26 billion CFAF in 2019, accounting for 86%. The French Development Agency (FDA) accounted for 15.86 billion CFAF (African CFA francs), or 21%, followed by the Export-Import Bank of India with 270 million CFAFs (African CFA francs), or 0%.
(2010-2020) Changes in creditor payments
2. Repayment of external debts
According to the IMF report on the Republic of Congo (IMF, 2020), arrears in external payments have increased in recent years, as financial difficulties have prevented the Republic of Congo from servicing its debts, especially to oil traders.
External arrears fell from 453 billion CFA francs ($908 million) at the end of 2018, mainly due to the accumulation of arrears with oil traders, although bilateral and other trade arrears decreased. Cancellation of part of private external debt following legal arbitration and an agreement with Saudi Arabia to construct HIPC pre-HIPC debt under HIPC clauses reduced HIPC pre-HIPC arrears by $324 billion ($584 million) at the end of 2017 to about $283 billion at the end of 2018 CFAF ($497 million).
The remaining HIPC pre-arrears have accumulated mainly with the United Arab Emirates (UAE), Angola and some external private suppliers. In accordance with the policy on arrears to official bilateral creditors, arrears to the United Arab Emirates and Angola continued to be discarded because the Paris Club HIPC Foundation Agreement was sufficiently representative.
A 2018 rescheduling agreement with China Machinery Engineering Corporation (CMEC) also helped reduce pre-HIPC external arrears by about $115.8 million.
But by 2019, external arrears more than doubled to 1,364 billion CFA francs ($2.2 billion). Most of the increase was due to arrears to oil traders, which increased by 800 billion CFA francs. Similarly, new arrears by oil traders are the result of outstanding debts and debt reconciliation procedures carried out with financial advisers in preparation for debt negotiation debt restructuring; In the process, some existing debts were reclassified as arrears.
(2010-2020) principal and interest repayment
In its 2020 report, the Congo Amortization Fund showed that the repayment of principal and interest external debt amounted to 245.17 billion CFA francs in 2019 and 318.25 billion CFA francs in 2020, of which interest was 57.88 billion CFA francs, and external debt accounted for 56%, as shown in the table below ((2010-2020) external debt principal repayment) and ((2010-2020) external debt interest payments) to show the structure of Congo's external debt repayment.
(2010-2020) Principal repayment of external debt
(2010-2020) Interest payments on external debt
According to the data in the table above (External Debt Interest Payment (2010-2020)), as of the end of December 2020, external debt interest expense for the same period was 57.88 billion CFA francs, compared to 154.04 billion CFA francs in 2019.
Bilateral debt has a large maturity of 29.31 billion CFA francs, commercial banks 9.70 billion, African Export-Import Bank 9.84 billion CFA francs, multilateral creditors 5.30 billion CFA francs, and finally 2.04 million CFA francs, DebtTraders and other Chinese companies 1.59 billion and 100,000 CFA francs, respectively.
Second, the bottleneck and potential of Congolese resources to repay China's debt
1. An income system that relies heavily on oil resources
Since 2006, China's financial assistance to the Republic of the Congo has increased significantly. Congolese loans from China were contracted on favourable terms with a grace period of 5 years and a term of 20 years at an interest rate of 0.25%. To secure the loan, Congolese authorities must maintain a minimum deposit balance equivalent to approximately 20% of the total outstanding loans in the escrow account of the Export-Import Bank of China, based on oil sales to China (IMF, 2014).
Congo Law N066-2020 of December 31, 2020 sets the production level at 344,000 b/d and introduces new rules of the game that, while more beneficial for the Congolese state, do little to encourage oil operators to invest.
In addition to this, these new rules have led to questions about the tax framework, with the unilateral abolition of provisions benefiting oil operators in 2020. In the 2021 fiscal law, the Republic of the Congo achieved only 50% of the sale of oil cargo, which accounts for about 80% of the country's budget revenue. While production in 2019 hit a record of 339,000 b/d, oil production will contract to 300,000 b/d in 2020 due to the natural decline in the oil industry and weak investment.
The evolution of Congolese oil profits
CrudeOil(WTI)(Unit:perbarrel)
Despite judicial arbitration and an agreement with Saudi Arabia to restructure its pre-HIPC claims under the terms of the HIPC Initiative, pre-HIPC arrears decreased from 324 million francs ($584 million) at the end of 2017 to about 283 billion francs ($497 million) at the end of 2018.
The Republic of Congo's 2018 rescheduling agreement with China Machinery Engineering Corporation (CMEC) also helped reduce external arrears of about $115.8 million after HIPC. In response to the IMF's suspension of payments to Congo-Brazzaville, the Republic of Congo re-signed a second debt restructuring agreement with China in 2021, allowing oil-producing Congo to receive a $449 million loan from the IMF. But a revenue system heavily dependent on oil resources and an increasing external debt have bottlenecked Congo's ability to service its debt.
2. The Congolese economy is diversified
The Congolese economy is dominated by the exploitation and export of basic products, particularly oil and timber, which account for more than 80 per cent of the State budget revenue. As a result, Congo's foreign trade continues to be dominated by exports of crude oil (75.11%)22. In addition, Congo exports logs (8.96%), sawn timber (6.48%), refined copper and alloys (4.23%) and primary zinc (1.82%).
Congo's trade balance shows a deficit of 50 billion francs in the third quarter of 2021, an increase of 12.28% over the previous quarter (INS, 2021). In terms of exports, Congo's main export partner in the third quarter of 2021 was the People's Republic of China. Exports from Congo to this country account for 73.77% of the total flow. Australia, Malaysia and Belgium ranked second, third and fourth with 12.98%, 1.59% and 1.25% respectively.
In terms of imports, Congo's main import partner in the third quarter of 2021 was the People's Republic of China, followed by France, Russia and the Democratic Republic of the Congo.
In fact, Congolese imports from these countries accounted for 23.92 per cent, 10.42 per cent, 9.91 per cent and 9.11 per cent, respectively, of total imports during the period. The main import and export partners of the Congo in the third quarter of 2021 are shown in the chart (main Congolese export partners in the third quarter of 2021) and the chart (main Congolese import partners in the third quarter of 2021).
Congo's main export partner in the third quarter of 2021
Congo's main import partner in the third quarter of 2021
In order to achieve and support sustainable and sustainable long-term growth, the President of the Republic, with its social project "Together, Let's Move On", whose vision is to transform the structure of the economy by diversifying economic activities, restore sustainable macroeconomic balance, promote direct private investment and create jobs, based on the advanced transformation of raw materials.
Congo has 10 million hectares of arable land, of which only 2% is arable. The agricultural sector accounts for only 3.8% of GDP. Therefore, in order to attract foreign direct investment (FDI), policymakers must further improve the business environment while developing infrastructure to attract private investment targeting the non-oil sector (Mampassi, Ngouembe, & Domba Mbiongo, 2021).
In seeking to avoid the budget anchoring procedure, Congo has established four Special Economic Zones (ZES) that benefit from customs and tax incentives (ZES) 23: Pointe-Noire route: created by Law 19-2018 of June 5, 2018, creating the Pointe-Noire Special Economic Zone and Law 3-2021, of January 21, 2021, amending and supplementing certain provisions of Law No. 19-5, 2018, creating the Pointe-Noire Special Economic Zone in 2018. It will house a mining, steel and petrochemical complex, tourist activities and an ore port.
The Ignié Special Economic Zone was created by Law 35-2019 of October 14, 2019 and is located in the north of Brazzaville. It will house financial and logistics services as well as agro-processing and building materials manufacturing units.
The Oyo-Ollombo Special Economic Zone was created by Law No. 33-2019 of October 14, 2019, with its concentrated bipolarity located in Oyo. It will be oriented towards a green economy (processing of agricultural and livestock products).
The Ouesso Special Economic Zone was created by Law No. 34-2019 of October 14, 2019. The Ouesso Special Economic Zone takes into account the potential of the Sangha and Likouala sectors, including agro-industrial activities, wood processing, and mining.
Due to its proximity to ports and airports, the Special Economic Zone (SEZ) will host heavy and light industry as well as service activities, which will favor exports. In order to move away from heavy dependence on oil resources, the Republic of the Congo should take more relevant measures and must find sufficient means to finance the four (04) SEZs that benefit from customs and tax incentives. These customs and tax incentives will enable the Republic of the Congo to attract foreign direct investment, which will have a positive impact on the eventual resumption of economic activity, accelerating its diversification and promoting job creation.
The Congo should also follow China's example in diversifying its economy at all levels of the development process. In addition, the Congo must develop tourism, which was one of the fastest growing emerging industries in the world. Tourism is critical to the success of many economies around the world. It has increased economic revenues, created thousands of jobs, developed a country's infrastructure, and created a sense of cultural exchange between foreigners and citizens.
summary
Several factors contributed to the economic slowdown, the decline in which the oil sector underperformed due to a decline in production and a fall in world oil prices. The stock of external debt declined very significantly between 2009 and 2011, while the level of repayment increased between 2014 and 2019. The breakdown of public external debt by debtor category shows that the bulk of the outstanding external debt of the Republic of the Congo comes from commercial and private banks, which benefit from State guarantees, including bilateral and multilateral debt.
In terms of the evolution of expenditures by creditors in the Republic of the Congo, multilateral creditors (IDA, BDEAC, AfDB/ADFGroup and IBRD) were the largest multilateral creditors, accounting for 147% of all external expenditures in 2020, while bilateral creditors (China, AFD and Export-Import Bank of India) accounted for 105.13% of all external expenditures in the same year.
As for external arrears to the Congo, they had increased in recent years as financial difficulties prevented the country from meeting its commitments. These external arrears increased at the end of 2018, mainly due to the accumulation of arrears from oil traders, although bilateral trade and other arrears decreased. In addition, new arrears owed to oil traders were the result of outstanding debts and a process of debt reconciliation with financial advisers in connection with the restructuring of external debt.
Oil resources are the main source of debt (loans) provided by the Congo to external creditors (multilateral, bilateral and commercial). As a result, the fall in world oil prices in 2014 prevented Congo from meeting its commitments to external creditors.
The collapse of Congolese oil revenues underscores the importance of economic diversification and more efficient use of public resources. And heavy dependence on oil resources has hindered the development of other industries such as agriculture and forestry. To achieve and sustain long-term sustainable and sustainable growth, the vision is to transform the structure of the economy and restore sustainable macroeconomic equilibrium by diversifying economic activity, promoting direct private investment and creating jobs based on advanced processing of raw materials.
To guarantee China's loans to Congo, Congolese authorities must maintain a minimum deposit balance equal to about 20% of the total outstanding loans to China for oil sales in the escrow account of the Export-Import Bank of China.
Also remember that the Congolese economy is mainly dependent on the extraction of natural resources, especially oil, which accounts for 90% of its exports and 50% of its budget revenues, and it is the third largest oil producer in sub-Saharan Africa, after Nigeria and Angola, OPEC members.
Finally, it should be remembered that the oil industry sector is still the sector that generates budget revenues for the next 30 years and is the main guarantor of foreign loans, not only for China but also for other international creditors. In addition, the diversification of the Congolese economy will allow the country's economy to diversify into growth-boosting sectors and avoid budget anchoring of oil revenues in the coming years.