Public Financial Management

Weaknesses in public financial management in the DRC are mainly due to lack of implementation of established procedures. Budget execution is undermined by a lack of respect for the expenditure chain process, whose purpose is to control spending and make it secure, and the wide use of emergency spending procedures. The expenditure chain procedure consists of four phases: the first two (commitment and liquidation) are currently under the authority of sectoral ministries, while the last two (authorization and payment) are the responsibility of the Ministry of Finance and of the central bank (as the state’s cash office), respectively. However, the share of expenditure executed according to the standard procedures in 2018 was only 1 percent of noncompensation expenditures, while execution under emergency procedures became preponderant that year. In addition, a significant part of bank disbursements takes the form of transfers of funds to natural or legal persons responsible for the final expenditure stage, as there is not yet a properly structured network of treasurers and accountants. This presents a significant risk for fraud.

The lack of budget credibility fosters a reliance on nonstandard budget execution procedures. Budget revenue and expenditure projections tend to be unrealis-tically optimistic, so that budget execution bears little relation to the approved budget. Unrealistic revenue projections appear to be less a result of capacity constraints than of political pressures to accommodate higher spending. The government is then forced to compress spending well below budget allocations, thereby eroding expenditure management, as it permits itself to change the composition of budget spending without formal parliamentary approval. Therefore, the lack of budget credibility undermines the oversight role of Parliament and makes room for the discretionary allocation of public resources. In addition, the large gap between budget projections and outcomes negatively affects the government’s capacity to formulate sound and predictable macroeconomic policies.

Government procurement procedures, particularly for capital investment projects, are particularly vulnerable to corruption. The legal and institutional framework has been in place since 2010 and set competitive bidding as the general principle for procurement. However, the practice is very far from principle. In fact, the use of noncompetitive procedures (private agreements, direct agreements, or mere consultation with suppliers) became the rule in 2018, with just 14 percent of government contracts made through competitive bidding. This trend is mainly due to the diversity of state institutions (public establishments, funds, and public enterprises) and would explain the weak performance of public investment in the DRC. This contributes to the widespread sentiment of collusion between economic operators and public decision-makers.

Improving the quality and coverage of budgetary reports and financial statements and expanding the scope of audit institutions would help improve overall accountability in the management of public resources. General accounting is still prepared using a single-entry system, and budget execution reports cover only expenditures. As of 2019 there was no consolidation throughout the entire country and the public sector. The government reportedly publishes a budget summary, monthly updates on budget revenue and expenditure execution, and biweekly updates on treasury accounts and foreign exchange transactions. However, the final report on budget execution, published a year after the end of the fiscal year, is typically scant. The annual report by the supreme audit institution, the Court of Auditors (Cour des Comptes) is not published. The Court of Auditors is functionally independent, but its oversight is weak as it has no independent and proper budget. The Office of the Inspector General of Finance (IGF) should also play an important role in controlling public finances. It is part of the executive and has the authority to audit the executive accounts and to impose administrative sanctions. Its location under the aegis of the presidency affords the IGF more authority to tackle issues in the ministries, but still leaves it financially dependent and exposed to administrative pressures from the executive branch.

Expanding the scope of the treasury general account (TGA) at the central bank would improve treasury management. The present banking arrangement does not apply to considerable amounts of public resources, making the government more financially fragile. For instance, special accounts and funds with earmarked taxes (for example, the Road Fund and the Industrial Development Fund) and “budget annexes” (around 800 institutions, mostly in health and tertiary education, legally separate from the central government and that collect user fees and receive transfers from the budget to cover any deficit) are exempted from using the bank revenue circuit and the requirement of depositing into the TGA. Numerous transfers of funds to parties responsible for carrying out expenditures also take place outside the TGA. These exceptions have reduced the TGA coverage considerably. In December 2019 the TGA was the depository of only 28 percent of public liquidity. That means that two-thirds of government funds were managed outside the TGA in accounts in commercial banks, in the name of de facto managers, some of whom are not legally authorized to handle public funds. All of this stymies the ability of Parliament and civil society to play their oversight role and opens ample space for corruption.

Improving the oversight mechanisms for state-owned enterprises (SOEs) in the DRC could help reduce the risks for corruption. SOEs in the DRC operate in critically important sectors of the economy, including key utilities and the mining sector. SOEs tend to record large losses and remain a high source of fiscal risks. According to the World Bank, total SOE losses in the DRC amounted to more than 8 percent of GDP in 2017. Large operational inefficiencies, weak management, and poor oversight explain these losses. A governance reform process was initiated in 2008, including to properly separate commercial from noncommercial enterprises. The state has centralized the management of public enterprises in the hands of the portfolio ministry and has created two consultative entities to conduct financial supervision and to implement public enterprise reforms. However, practice shows that reforms are largely determined by senior management without the involvement of their teams. In addition, the quality of financial information remains poor, disclosures are minimal and, overall, it is unclear which agency has the authority to demand reliable and timely financial data from public enterprises. In fact, conversion of SOEs into commercial entities has had the unintended consequence of shielding them from direct public scrutiny. This issue is particularly important in the mining sector (see the subsection “Resource Revenue Management,” later in this chapter).

Tax System and Revenue Administration

The Congolese tax system is marked by a large number of taxes and charges, creating significant incentives for corruption and abuse of power and harming the business environment. The standard taxes (VAT, income tax, excise duties, customs duties), while accounting for about 80 percent of the central government’s revenues, are fraught with discretionary (end even arbitrary) exemption regimes. In addition, sectoral ministries charge a plethora of nontax revenues managed by a specialized revenue agency, DGRAD. On top of that, there are levies charged by special accounts and funds, by hundreds of organizations in the budgetary annexes, by provinces, and by decentralized territorial entities. The absence of unified tax texts complicates things further, reducing transparency for economic agents. In fact, there is no proper general tax code, other than a collection of texts that currently includes only the main taxes of the state. This incredible complexity is partly due to the lack of credibility of the government’s budget, but also to decentralized rent-seeking behavior. Furthermore, failure to understand the nature of nontax revenue or the normal methods for financing public services leads to strong resistance to reform, since public entities and civil servants believe they are justified in requiring payment for all their interactions with the general public.

Automating currently largely manual processes and addressing distorted incentives would help reduce vulnerabilities to corruption in revenue administration agencies (DGI, DGDA, and DGRAD) (see Chapters 14 and 15). Laws, rules, and procedures have issues in terms of clarity and consistency, while the legal framework does not always provide for an appropriate balance between taxpayers’ rights and the powers of the revenue administration agencies. Despite some improvements at the customs administration, overall revenue administration processes and procedures remain largely manual, fostering direct interactions between agents and taxpayers. On the human resource management front, the existence of remuneration bonuses linked to the issuance of sanctions and penalties and the lack of dissuasive sanctions on agents who act unethically discourage performance and can considerably increase the cost of taxpayers’ compliance with tax obligations. The latter is compounded by the absence of a charter of rights and obligations for taxpayers, which exposes them to the discretionary powers of tax administration agents.

Resource Revenue Management

The Congolese conflict of 1997–2002 had a lingering impact on resource revenues accruing to the treasury. The mining sector was nationalized during Mobutu’s government, and the main natural resource assets were largely held by SOEs, especially Gécamines for copper and cobalt. However, after years of mismanagement and then civil conflict, Gécamines’ capacity to sustain mining operations was much diminished. During and in the immediate aftermath of the civil war, the government’s needs were high, and the balance of bargaining power lay in the resource firms’ favor. The government therefore sold valuable mineral concessions to private firms on favorable purchase and tax terms in exchange for upfront payments that underpriced the assets and that often reportedly failed to reach the treasury. After the civil war, the government sought to improve resource revenue management through the 2002 Mining Code. The code gave favorable fiscal terms to mining companies to attract investors to a high-risk and high-cost operating environment, with the expectation that it would be revised once the operating environment stabilized. While the 2002 code introduced a mining registry, tasked with allocating mining titles transparently, it also assigned mining rights attached to the public domain to SOEs.

A revised mining code, approved in 2018, was aimed at increasing what was then the low revenue yield to the treasury while maintaining the SOEs’ monopoly on mining rights. In fact, as of 2019 Kamoa-Kakula was the only major developed project not associated with any of the SOEs. The original intent of the revision was to increase the budget’s revenue by raising tax rates and curtailing tax exemptions, but the 2018 revisions went much further. They raised royalty tax rates, with yet higher rates for minerals discretionarily declared to be strategic, introduced a super-profit tax, increased the required rate of participation by the state and Congolese private interests, and raised the obligatory portion of export receipts that must be repatriated (though with issues on their measurement). The revised code repudiated the stability clauses in the 2002 code that protected existing mining projects from changes to the fiscal regime for 10 years from the beginning of the project. The revised code also imposed a requirement—to pay part of the royalties directly to subnational governments—which raises questions about the lack of accountability frameworks within those subnational governments and the very limited transparency regarding the management of these resources—and allows the granting of operating exemptions in certain provinces.

Several initiatives have sought to increase transparency in the mining sector, though challenges remain. A 2012 government decree mandated the publication of all mining contracts, but actual publication was lagging substantially until 2019. In fact, more than 100 mining and hydrocarbon contracts or related covenants were published between late 2019 and late 2020, including some key contracts identified by NGOs. The DRC also strengthened the transparency of its resource revenue management by joining the Extractive Industry Transparency Initiative (EITI) and published its first report in 2010 (for 2007) and has subsequently published reports for each year up to 2017, albeit with some delay. The EITI reports show only a minor divergence between payments made by the resource sector and the amounts received by the public sector, including the central government, provincial governments, and state enterprises, such as Gécamines, involved in the mining sector. However, the EITI only covers payments that are legally obligated by registered firms and does not, for example, encompass payments made by resource sector firms that are not yet registered or payments transiting outside formal channels. A requirement to disclose beneficial ownership interests in the sector is contained in the 2018 code, but an implementing decree to be drafted by the EITI will have to define materiality, politically exposed persons (PEPs), and other important elements to concretely identify who the ultimate beneficiaries of these payments are.

Implementing EITI recommendations should enhance resource revenue management in the DRC. Despite its membership in the EITI, the DRC’s resource management is still rated poorly by the Natural Resource Governance Indicators. In the 2017 assessment, the DRC generally ranks low (but not in all aspects) in the management of its resource sector compared to other countries in the region. On the legal aspects, the DRC is rated more highly than its peers in the mining sector on both the legal framework and on practice—but not in the oil and gas sector—but there is a large gap between the legal framework and its implementation. A key issue pertains to the oversight and control of SOEs. Currently, the boundaries of oversight and control of the Ministry of Portfolio do not include indirect participation of the state. This leaves out any contract that SOEs enter in with other partners. Consequently, the enforcement of the disclosure of their mining contracts is limited and audited financial statements of mining SOEs are rarely, if ever, published. Gécamines hires an external auditor but releases only the auditor opinion.

Central Bank Governance and Operations

Persistent fiscal dominance and recurrent monetary financing of the government’s deficits have severely undermined the autonomy of the DRC’s central bank, BCC. The BCC’s claims on government of $1.8 billion at the end of December 2018 (about 60 percent of total assets or 4 percent of GDP) are indicative of government pressures on it. The claims include unremunerated advances granted to the government in violation of prohibitions in the legal framework for the BCC, government securities that are remunerated below market rates, and past losses pending recognition and securitization by the government. Furthermore, the advances have been mostly the result of the processing of government payments outside the budget’s expenditure chain. Monetary financing has led to surges in inflation and exchange rate depreciation, seriously undermining achievement of the BCC’s policy objectives. In 2019 some loans contracted by the government were guaranteed by the BCC’s deposits in foreign currency held at domestic commercial banks, encumbering a portion of the foreign official reserves. BCC’s interventions in the foreign exchange market are not fully transparent, and banks have complained that it has not always accepted the winning bid in the auction market. In a similar vein, there have been concerns about the consistent application of regulations for liquidity provision to banks.

Actual implementation of welcome reforms under the 2018 Central Bank Law should enhance the BCC’s governance. The law provides for the autonomy of the BCC in executing its mandate of achieving price stability and strengthened governance arrangements, accountability, and financial transparency. Among other things, and in addition to stopping monetary financing, the BCC needs to (1) fully constitute its board according to the law to be able to make decisions and avoid legal uncertainty risks, (2) appoint a board audit committee and a management committee to improve institutional oversight and avoid the concentration of powers with the governor, and (3) adopt international financial reporting standards as the accounting framework.⁵ Financial independence and the ability to implement monetary policy should be facilitated by a regularization of outstanding credit to the government and remuneration of outstanding government advances.

Financial Sector Supervision

Banking sector supervision has been vulnerable to enforcement that is not sufficiently stringent or consistent, though some reforms are being implemented. As of 2019 the banking system had a relatively high level of nonperforming loans (21.1 percent of total gross loans in December 2019, IMF Country Report No. 21/168). Following the identification of financial sector supervision weaknesses by the IMF, as part of its assessments of the Basel Principle in 2013 and bank failures in 2016, the BCC has been strengthening its banking supervision, including through an extensive review of prudential regulations. A process to adopt risk-based monitoring has started, and methodological guidelines on on-site risks and off-site training on monitoring and evaluation processes are being developed. Regarding prudential regulations, standards on corporate governance, transactions with related parties, internal controls and risk management for banks are being adopted. A draft commercial banking law that would strengthen bank intervention and resolution practices is pending discussion by Parliament.

The AML/CFT regime presents significant deficiencies and, as of 2019, was not compliant with the 2012 FATF standards. The banking system in the DRC has experienced a significant loss of correspondent banking relations due to concerns about the transfer of funds from ill-gotten sources, funds used illicitly to finance internationally sanctioned organizations, and deposits held by politically connected individuals facing international sanctions. The DRC is particularly exposed to money-laundering risks linked to the integration of proceeds from corruption generated by senior public officials into its financial system, often laundered domestically through the real estate sector and abroad as revealed by several cases involving prosecutorial actions initiated by foreign authorities. The country’s financial intelligence unit (CENAREF) has received few suspicious transaction reports (STRs), with only one resulting in prosecution, which stands in stark contrast to the country’s risk profile. The legal framework for AML/CFT does not sufficiently cover all financial institutions in the DRC.

The Rule of Law

The judiciary faces many governance problems and has limited resources, capacity, and independence. The Worldwide Governance Indicators rate the rule of law in the DRC well below its regional peers. Transparency International’s Corruption Barometer and the World Bank Enterprise surveys also point to the judiciary as particularly vulnerable to corruption. Similarly, the World Economic Forum Competitiveness Index rates the DRC well on formal legal rights but highlights concerns about judicial independence. The judiciary is independent under the constitution and judges are supposed to be selected on merit. However, the judicial system is under-resourced, and underpaid judges are reportedly amenable to side payments. Moreover, the judiciary is subject to political pressure and interference from the executive. Weak governance in the judiciary has implications for economic activity. The Competitiveness Index raises concerns about the efficiency of the legal framework in settling disputes. Parties to civil and commercial disputes reportedly do everything in their power (negotiations, out-of-court settlements, and so on) to avoid bringing a case before the formal judicial process. The situation is further exacerbated by the fact that when official court decisions are made, few are published.

Reinforcing the justice system in the DRC should help tackle serious problems in the execution of commercial contracts and in registering real estate. Resolving contractual disputes is problematic in the DRC, and intimidation is reportedly rampant in commercial disputes. There is a perception that the justice system is fueled by corruption and can be manipulated. The process of registering real estate in the DRC is laborious and fraught with pitfalls. Expensive, time-consuming, and inefficient processes are among the main areas of concern. Newly issued land documents are kept only on paper, which increases the risk of losing or misplacing documents. Overall, the DRC has no reliable system to enforce property and contractual rights and resolve disputes

Market Regulation and Business Environment

The regulatory environment for business has improved recently, but continues to face many challenges. The DRC ranks low in the World Economic Forum Global Competitive Index, though there have been improvements over the last decade. In recent years, the government has taken steps to liberalize the country’s trade and investment regimes (for example, by introducing a single electronic registration system to consolidate different agencies involved in business creation—except for the tax agency—into one central point) and implemented the Organization for the Harmonization of Business Laws in Africa (OHADA) framework, which supersedes all contradictory provisions of national legislation dealing with the formation, incorporation, management, and dissolution of companies. Still, the private sector complains strongly about the impact of complex and costly tax and nontax systems, excessive discretionary application of regulations, and political interference on the business environment and competitiveness. These conditions are propitious for rent-seeking activities and corruption, leading to an unlevel playing field that favors businesses with political connections. Some critically important sectors (electricity, telecommunications) are stifled by malfunctioning regulatory agencies, either because a decree is missing or because regulators have not yet been appointed. Failing to quickly resolve the issues could create a serious drag on the economy and entrench the current monopolistic or oligopolistic structure of these industries.

Anticorruption Framework

A centralized and updated anticorruption framework, augmented by a number of key elements, could significantly improve the fight against corruption in the DRC. The DRC is a signatory to various international conventions on corruption (for example, the United Nations Convention against Corruption, UNCAC), but has not made progress in establishing a centralized and updated anticorruption strategy and enforcement framework. The current government has made the fight against corruption a priority. Law enforcement agencies are not able to investigate and prosecute public officials for corruption-related offenses, as they enjoy constitutional immunity from investigation. The asset declaration regime provided by Article 99 of the Constitution of the DRC has not been implemented. Although the Observatory for Monitoring Corruption and Professional Ethics (OSCEP) seeks to raise awareness of corruption, it has no investigative or enforcement powers and suffers from a general lack of resources. In this regard, the country does not have an independent anticorruption agency with the power to investigate corruption offenses and report to Parliament. The creation of such an agency is an obligation of the signatories of the UNCAC.