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Democratic Republic of the Congo: Staff Report for the 2015 Article IV Consultation—Debt Sustainability Analysis

Author(s):
International Monetary Fund. African Dept.
Published Date:
October 2015
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Background

1. The DRC’s external debt has remained low following the substantial debt relief in 2010. The DRC reached completion point under the Enhanced Heavily Indebted Poor Countries (HIPC) initiative and benefited from assistance under the Multilateral Debt Relief Initiative (MDRI) in July 2010. As a result, the ratio of public and publicly-guaranteed external debt (PPGE) to GDP was reduced from 75 percent at end-2009 to 22 percent in 2010 and fell further to 13 percent in 2014. Private external debt increased marginally from 2.0 percent of GDP in 2012 to 3.8 percent in 2014.

2. The low debt stock reflects a prudent fiscal stance pursued since 2010 and favorable exchange rate movements.. New disbursements to the central government during 2014 were limited to US$115 million. Also, the appreciation of the US dollar against the Euro contributed to a slight reduction in the value of Euro denominated debt. Furthermore, lower disbursements under the Sino-Congolese Mining Agreement (SCCA or Sicomines) due to delays in obtaining financing from Chinese banks also contributed to the low stock of debt. No new funds were disbursed for infrastructure projects under the SCCA in 2014 (see Box 1).

3. More than half of the public external debt is owed to official creditors. At end-2014, 60 percent of the debt was owed to multilateral creditors and 4 percent to the bilateral official creditors. The share of the debt owed to commercial creditors increased marginally in 2014 to 36 percent from 33 percent in 2013 (see Text Table II.1).

Text Table 1.Democratic Republic of the Congo: Total External Debt Stock, Central Government, 2010–14(Millions of U.S.$, unless otherwise indicated)
201020112012201320142014 (Percent)
Act.Est.
Total45564629466249114576100
Multilateral creditors2530265526532959275160
Bilateral creditors2472422422921884
Commercial creditors11780173317681660163636

Includes publicly guaranteed SCCA debt

Sources: Congolese authorities; and IMF staff estimates.

Includes publicly guaranteed SCCA debt

Sources: Congolese authorities; and IMF staff estimates.

Box 1.The Sino-Congolese Joint Venture (Sicomines)

In April 2008, the DRC signed a cooperation agreement (SCCA) with a consortium of Chinese enterprises involving a US$3.2 billion mining project and US$6 billion for a set of public infrastructure projects to be implemented in two phases. All projects are to be executed by Sicomines, a new mining company jointly owned by the Congolese state-owned mining conglomerate Gecamines (32 percent) and Chinese partners China Railway Engineering Corporation and Sinohydro. The agreement was amended in October 2009 to exclude the second phase public infrastructure projects, leaving just a single phase totaling US$3 billion to be implemented over the period 2009–14. The amended agreement also limited the government guarantee to the financing of the infrastructure projects. By end-2014, only US$ 478 million in infrastructure loans and US$ 1.3 billion in mining loans had been disbursed.

The current debt sustainability analysis (DSA) is conducted based on the terms laid out in the October 2009 amendment. Infrastructure projects are divided into two categories: priority projects and non-priority projects. Infrastructure and mining projects are financed from loans made by Chinese banks and by Sicomines’ Chinese shareholders. Fifteen percent of the earnings from the mining operation are used to pay dividends with the remainder allocated to amortization of the loans (including capitalized interest).20 The amendment specifies a seniority rule according to which the priority infrastructure loans are repaid first, the mining loans second, and the non-priority infrastructure loans last.

The government has guaranteed the US$ 3 billion in public infrastructure loans. However, the guarantee on any such infrastructure debt outstanding can be called only after 2034. If it is not called, there is no repayment burden on the budget. Sicomines is expected to begin production in 2015 and to start servicing its debt in 2016. Based on current information, the earnings from the mining project are forecast to completely pay off the infrastructure loans by 2026. However, the repayment schedule is contingent on Sicomines’ earnings and on the debt disbursement profile. Under the assumed disbursement profile, repayments will extend beyond 2034 if Sicomines’ earnings drop by more than 22 percent each year.

Following the practice of previous years, this DSA includes all debt service payments related to SCCA infrastructure loans in the present value of PPGE debt.

Underlying Assumptions

4. One of the main changes since the 2014 DSA is the sharp drop in international commodity prices. Due to the DRC’s heavy reliance on extractive industries, its exports and fiscal revenues are highly exposed to movements in the prices of minerals, in particular copper. The fall in copper prices in 2014 and the lower outlook for commodity prices in the medium term directly affect the projected trajectory of the debt-to-exports ratio. In the short term, however, the price shock is offset by an upward revision of projected export volumes as Sicomines starts its operations earlier than expected (see Text Table II.2).

Text Table 2.Comparative Debt Ratios, 2013–18
201320142015201620172018
Est.Proj.
PPGE debt to GDP ratio
old DSA17.919.320.721.423.324.8
new DSA15.012.714.314.716.719.0
PPGE debt to exports ratio
old DSA49.249.251.552.055.159.3
new DSA46.537.243.543.250.556.1
PPGE debt to revenue ratio
old DSA137.9138.3147.4145.6156.8166.3
new DSA116.695.6104.3104.4115.7128.0
Sources: Congolese authorities; and IMF staff estimates and projections.
Sources: Congolese authorities; and IMF staff estimates and projections.

5. As in the 2014 DSA, strong growth over the medium term is supported by large investments in mining and public infrastructure projects. The recent decline in commodity prices has not had a significant effect on mining investment and output so far, as prices are still far above the break-even point. As a result, foreign direct investment (FDI) will likely continue to be the most important source of external financing. The strong growth in mining production should also lead to improved fiscal revenues starting in 2015, as the tax holiday for several large mining projects expired at end-2014.

Text Table 3.Democratic Republic of the Congo: Selected Indicators, 2013–18
201320142015201620172018
Est.Proj.
Real GDP growth
old DSA8.58.78.57.97.36.4
new DSA8.59.29.28.58.37.5
Revenues (excluding grants) growth
old DSA−4.816.110.014.59.69.1
new DSA6.413.614.312.312.912.0
Overall fiscal deficit (percent of GDP)
old DSA1.72.21.71.63.03.6
new DSA−1.8−0.2−0.8−0.2−0.2−0.3
Exports of goods and services growth
old DSA16.616.512.111.911.57.5
new DSA7.516.66.513.212.911.6
Imports of goods and services growth
old DSA16.14.75.89.79.69.6
new DSA12.720.8−0.76.612.911.5
Current account deficit (percent of GDP)
old DSA10.19.38.87.87.47.1
new DSA10.69.27.47.69.410.1
Sources: Congolese authorities; and IMF staff estimates and projections.
Sources: Congolese authorities; and IMF staff estimates and projections.

Box 2.Macroeconomic Assumptions for 2015–35

For the medium term (2015–20), projections are consistent with the macroeconomic framework of the 2015 Article IV Consultation.

Long-term (2021–35) projections assume macroeconomic stability, moderate growth, and a more rapid development of the domestic economy, as bottlenecks to private sector activity become less stringent.21 As a consequence, the share of mining activities in GDP is projected to become less important, so that exports, FDI, and mining revenue outflows gradually decline as a share of GDP.

Real GDP growth is expected to remain strong at 9.2 percent in 2015, gradually declining to 5.4 percent in 2020 and reaching an average rate of 3.8 percent for the period 2021–35.

Average Inflation (measured by the GDP deflator in dollars) is 0.7 percent in 2014 and is expected to remain at around 1 percent in the medium-long run.

The primary fiscal balance displayed a surplus of 0.4 percent of GDP in 2014 and is expected to remain positive in the medium term. The long-run average primary surplus is 0.3 percent.

The non-interest current account deficit is projected to remain high in the medium term, at an average of about 9 percent of GDP, reflecting the equipment imports and dividend outflows of the mining sector. In the long term it should narrow to 3.3 percent of GDP by 2035, reflecting the declining share of the mineral sector in the economy.

Financing: Although FDI is expected to decrease in percent of GDP from 5.4 percent in the medium term to 4.7 percent on average in the long run, it should remain the main financing source of the current account deficit. Aid flows represented 4.6 percent of GDP in 2014. For the long term, this ratio would decline to an average of around 2 percent.

External Debt Sustainability Results

6. Because repayments of the loans start earlier than expected due to Sicomines starting operations in 2015 instead of 2016, the present value of debt was revised upward for the short to medium term. The delays in disbursements of the infrastructure loans under the SCCA did not lead to a reduction in the PV of debt, as the contracted debt amounts remain unchanged. To the contrary, the earnings of the mining operation will be used to repay the priority infrastructure loans from 2016 on, two years ahead of the estimate underlying the 2014 DSA. Given the concessionality of the infrastructure loans, an earlier repayment raises the present value of debt in the short term, with a steeper decline thereafter.

7. The most extreme shock22leads to a breach of the debt-to-exports ratio, while all other external debt indicators remain below their respective thresholds in all scenarios. With the shock to exports, the PV of debt-to-export ratio would increase significantly from 55 percent in 2015 to 111 percent in 2017 and remain well above the threshold of 100 percent through 2024. Under a one-time depreciation shock, the debt service-to-revenue ratio experiences a near breach of the corresponding threshold. (see Figures 1 and 3, Tables 1 and 2).

Figure 1.Democratic Republic of the Congo: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2015–35

Sources: Country authorities; and staff estimates and projections.

1/ The most extreme stress test is the test that yields the highest ratio on or before 2025. In figure b. it corresponds to a One-time depreciation shock; in c. to a Exports shock; in d. to a One-time depreciation shock; in e. to a Exports shock and in figure f. to a One-time depreciation shock

Figure 2.Democratic Republic of the Congo: Indicators of Public Debt Under Alternative Scenarios, 2015–351

Sources: Country authorities; and staff estimates and projections.

1/ The most extreme stress test is the test that yields the highest ratio on or before 2025.

2/ Revenues are defined inclusive of grants.

Figure 3.Congo, DR: Probability of Debt Distress of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2015–35 1

Sources: Country authorities; and staff estimates and projections.

1/ The most extreme stress test is the test that yields the highest ratio on or before 2025. In figure b. it corresponds to a One-time depreciation shock; in c. to a Exports shock; in d. to a One-time depreciation shock; in e. to a Exports shock and in figure f. to a One-time depreciation shock

Table 1.Democratic Republic of the Congo: External Debt Sustainability Framework, Baseline Scenario, 2012–351(Percent of GDP, unless otherwise indicated)
ActualHistorical Average6/Standard Deviation6/Projections
2012201320142015201620172018201920202015-2020 Average202520352021-2039 Average
External debt (nominal) 1/20.317.516.619.721.023.324.824.323.920.319.0
of which: public and publicly guaranteed (PPG)18.315.112.714.314.816.819.120.421.620.319.0
Change in external debt−1.6−2.8−0.93.11.42.31.5−0.5−0.3−0.8−0.5
Identified net debt-creating flows0.32.32.81.41.52.72.82.53.21.1−0.6
Non-interest current account deficit6.810.69.15.54.07.27.38.89.49.510.66.63.25.9
Deficit in balance of goods and services4.35.77.54.42.44.34.34.15.23.3−0.5
Exports35.632.334.332.834.033.133.934.734.631.128.3
Imports40.038.041.837.236.437.438.238.839.834.327.8
Net current transfers (negative = inflow)−2.8−3.3−4.6−4.01.0−3.9−1.8−1.7−1.5−1.5−1.5−2.7−1.6−2.3
of which: official−2.8−3.3−4.6−3.9−1.8−1.7−1.5−1.5−1.5−2.7−1.6
Other current account flows (negative = net inflow)5.38.26.26.66.86.36.66.96.96.15.3
Net FDI (negative = inflow)−4.2−5.2−4.8−5.71.1−4.7−4.6−5.0−5.7−6.0−6.7−5.1−3.4−4.7
Endogenous debt dynamics 2/−2.3−3.1−1.5−1.2−1.3−1.0−1.0−1.0−0.7−0.4−0.4
Contribution from nominal interest rate0.10.10.10.20.30.60.60.60.50.40.3
Contribution from real GDP growth−1.4−1.5−1.5−1.4−1.5−1.6−1.6−1.5−1.2−0.8−0.7
Contribution from price and exchange rate changes−1.0−1.7−0.1
Residual (3-4) 3/−1.9−5.1−3.71.7−0.1−0.5−1.3−3.0−3.6−1.90.1
of which: exceptional financing0.00.00.00.00.00.00.00.00.00.00.0
PV of external debt 4/22.823.823.623.923.421.720.315.113.4
In percent of exports66.672.569.672.069.262.558.648.547.5
PV of PPG external debt19.018.417.417.417.817.817.915.113.4
In percent of exports55.456.151.152.452.451.351.948.547.5
In percent of government revenues142.7134.6123.6120.1119.6117.5116.278.269.6
Debt service-to-exports ratio (in percent)1.81.81.52.54.85.45.67.26.97.04.6
PPG debt service-to-exports ratio (in percent)1.81.81.52.24.63.62.72.42.56.84.4
PPG debt service-to-revenue ratio (in percent)4.64.64.05.311.28.26.25.55.511.06.4
Total gross financing need (Billions of U.S. dollars)0.92.01.71.31.92.73.03.43.82.91.3
Non-interest current account deficit that stabilizes debt ratio8.413.310.04.16.06.58.010.011.07.53.8
Key macroeconomic assumptions
Real GDP growth (in percent)7.18.59.26.61.79.28.58.37.56.75.47.64.13.63.8
GDP deflator in US dollar terms (change in percent)4.79.30.76.56.02.00.61.31.51.51.61.40.91.00.9
Effective interest rate (percent) 5/0.50.50.32.11.81.21.63.03.02.52.42.31.91.41.8
Growth of exports of G&S (US dollar terms, in percent)−9.57.516.625.742.56.513.27.011.610.86.89.33.32.63.3
Growth of imports of G&S (US dollar terms, in percent)−11.412.720.824.732.9−0.76.612.911.59.99.88.32.60.42.3
Grant element of new public sector borrowing (in percent)27.132.634.134.534.134.432.842.340.941.4
Government revenues (excluding grants, in percent of GDP)14.412.913.313.714.114.514.815.115.419.319.318.9
Aid flows (in Billions of US dollars) 7/0.70.50.11.72.12.62.72.42.63.73.4
of which: Grants0.80.80.51.01.21.01.01.11.22.31.9
of which: Concessional loans−0.1−0.3−0.40.80.91.51.71.31.41.51.5
Grant-equivalent financing (in percent of GDP) 8/3.33.73.53.33.02.93.82.13.2
Grant-equivalent financing (in percent of external financing) 8/57.164.756.955.759.460.476.872.774.4
Memorandum items:
Nominal GDP (Billions of US dollars)27.632.735.940.043.747.952.356.660.678.0120.9
Nominal dollar GDP growth12.218.59.911.39.29.89.18.37.19.15.04.64.7
PV of PPG external debt (in Billions of US dollars)6.87.37.68.39.210.010.811.616.1
(PVt-PVt-1)/GDPt-1 (in percent)1.40.51.72.01.51.41.4−0.20.20.4
Gross workers’ remittances (Billions of US dollars)0.00.00.00.00.00.00.00.00.00.00.0
PV of PPG external debt (in percent of GDP + remittances)19.018.417.417.417.817.817.915.113.4
PV of PPG external debt (in percent of exports + remittances)55.456.151.152.452.451.351.948.547.5
Debt service of PPG external debt (in percent of exports + remittances)1.52.24.63.62.72.42.56.84.4
Sources: Country authorities; and staff estimates and projections.

Includes both public and private sector external debt.

Derived as [r − g − ρ(1 + g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Assumes that PV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Sources: Country authorities; and staff estimates and projections.

Includes both public and private sector external debt.

Derived as [r − g − ρ(1 + g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Assumes that PV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Table 2.Democratic Republic of the Congo: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External 2015–35
Projections
20152016201720182019202020252035
PV of debt-to GDP ratio
Baseline1817171818181513
A. Alternative Scenarios
A1. Key variables at their historical averages in 2015-2035 1/1817171717161311
A2. New public sector loans on less favorable terms in 2015-2035 21818181818191820
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2016-20171818181919191614
B2. Export value growth at historical average minus one standard deviation in 2016-2017 3/1819212121211715
B3. US dollar GDP deflator at historical average minus one standard deviation in 2016-20171817171818181513
B4. Net non-debt creating flows at historical average minus one standard deviation in 2016-2017 4/1817171717181513
B5. Combination of B1-B4 using one-half standard deviation shocks1817181818181513
B6. One-time 30 percent nominal depreciation relative to the baseline in 2016 5/1825252525252119
PV of debt-to-exports ratio
Baseline5651525251524847
A. Alternative Scenarios
A1. Key variables at their historical averages in 2015-2035 1/5651525149484138
A2. New public sector loans on less favorable terms in 2015-2035 25652545453545770
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2016-20175651525251524847
B2. Export value growth at historical average minus one standard deviation in 2016-2017 3/56761131111071079993
B3. US dollar GDP deflator at historical average minus one standard deviation in 2016-20175651525251524847
B4. Net non-debt creating flows at historical average minus one standard deviation in 2016-2017 4/5650515150514747
B5. Combination of B1-B4 using one-half standard deviation shocks5655595958585453
B6. One-time 30 percent nominal depreciation relative to the baseline in 2016 5/5651525251524847
PV of debt-to-revenue ratio
Baseline1351241201201171167870
A. Alternative Scenarios
A1. Key variables at their historical averages in 2015-2035 1/1351231191171121076556
A2. New public sector loans on less favorable terms in 2015-2035 213512512312312212191103
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2016-20171351271281271251248374
B2. Export value growth at historical average minus one standard deviation in 2016-2017 3/1351351481441401379178
B3. US dollar GDP deflator at historical average minus one standard deviation in 2016-20171351231211201181177869
B4. Net non-debt creating flows at historical average minus one standard deviation in 2016-2017 4/1351221171171151147668
B5. Combination of B1-B4 using one-half standard deviation shocks1351231221221191187970
B6. One-time 30 percent nominal depreciation relative to the baseline in 2016 5/13517517017016716511098
Debt service-to-exports ratio
Baseline25432274
A. Alternative Scenarios
A1. Key variables at their historical averages in 2015-2035 1/24332242
A2. New public sector loans on less favorable terms in 2015-2035 225433375
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2016-201725432274
B2. Export value growth at historical average minus one standard deviation in 2016-2017 3/267655138
B3. US dollar GDP deflator at historical average minus one standard deviation in 2016-201725432274
B4. Net non-debt creating flows at historical average minus one standard deviation in 2016-2017 4/25432274
B5. Combination of B1-B4 using one-half standard deviation shocks25433385
B6. One-time 30 percent nominal depreciation relative to the baseline in 2016 5/25432274
Debt service-to-revenue ratio
Baseline5118666116
A. Alternative Scenarios
A1. Key variables at their historical averages in 2015-2035 1/511865573
A2. New public sector loans on less favorable terms in 2015-2035 25118777117
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2016-20175129766127
B2. Export value growth at historical average minus one standard deviation in 2016-2017 3/519877127
B3. US dollar GDP deflator at historical average minus one standard deviation in 2016-2017518666116
B4. Net non-debt creating flows at historical average minus one standard deviation in 2016-2017 4/518655116
B5. Combination of B1-B4 using one-half standard deviation shocks518666116
B6. One-time 30 percent nominal depreciation relative to the baseline in 2016 5/51612988169
Memorandum item:
Grant element assumed on residual financing (i.e., financing required above baseline) 6/8282828282828282
Sources: Country authorities; and staff estimates and projections.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly a an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

Sources: Country authorities; and staff estimates and projections.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly a an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

8. Overall, compared with the 2014 DSA, the current results suggest that the DRC’s risk of debt distress remains moderate. In the baseline scenario all indicators remain far below their respective critical thresholds. This result reflects the authorities’ prudent fiscal stance and comes despite a downward revision of commodity prices since the 2014 DSA. On the other hand, the analysis reveals that a further drop in export prices may put debt ratios above their respective thresholds. The overall risk assessment is validated by the probabilistic approach.23 A caveat applies, as the DSA methodology cannot fully capture the modalities of the SCCA with its variable repayment. The prospect of early amortization raises the debt indicators in the short and medium term, even though it significantly reduces the government’s exposure. However, this risk reducing factor is outweighed by the fact that the Public Debt Management Agency (DGDP) does not monitor disbursements under the SCCA. Moreover, a further shock to copper prices would inevitably slow down the amortization, thereby raising the government’s exposure.

Public DSA Results

9. The DRC’s (estimated) domestic debt primarily consists of domestic arrears, most of which were incurred prior to 2007. These include arrears owed to domestic creditors, “social debts” (e.g., wages owed to past government employees), arrears owed to state-owned enterprises (SOEs), arrears owed to suppliers and contractors, and unpaid monetary awards stemming from judicial decisions. No new arrears were reported since the 2014 DSA. However, the DGDP’s estimate for arrears is based on an audit conducted with the assistance of two audit firms, but with a two-year lag in reporting. Not all the arrears identified in the initial audit have been certified and many claims on the government may be at least partly offset by liabilities owed to the government. Information on interest rates is missing. Based on the audit, the potential domestic government debt outstanding at the end of 2014 remained at US$1.4 billion (3.9 percent of GDP). The baseline includes the expected clearance of all arrears by 2028.

10. Public debt remains sustainable even under the most extreme shock scenario. The most extreme shock is a one-time real depreciation by 30 percent in 2016. This implies a rise of the PV of the debt to GDP ratio from 18.5 percent to a maximum of 25 percent in 2016, below the benchmark for public debt ratios of 38 percent. The shock has also a significant impact on the PV of the debt-to-revenue ratio, which rises from 123 percent of GDP in 2015 to 150 percent in 2016 and a gradual decline thereafter. All other scenarios closely follow the baseline in its gradual decline of debt ratios (see Figure 2).

Authorities’ Views

11. The authorities concurred with the overall assessment of DRC’s debt sustainability. They reiterated their commitment to a cautious fiscal policy stance and to seeking a high degree of concessionality for new borrowing.

Conclusion

12. The DRC’s debt sustainability rating remains at “moderate” risk of debt distress. This is mainly on account of sound macroeconomic fundamentals. A significant portion of the public debt stock and repayment profile in the DRC is attributable to the publicly-guaranteed infrastructure loans under the Sicomines agreement. Regular updates on projected disbursements and debt service are thus crucial to provide a valid assessment of the DRC’s debt sustainability. Under the current framework, the country is still vulnerable to shocks to commodity prices that would reduce growth and drive the PV of debt-to-export ratio above its threshold. Moreover, a sufficiently large price shock could undermine the economics of the Sicomines mining project, in particular its ability to generate the earnings necessary to pay off the infrastructure loans, thus transferring the repayment burden for much or all of those loans to the central government. It is urgent that the DRC continues to improve its compilation of debt data, including Sicomines data, and strengthen its debt management capacity. Meanwhile, given the uncertainties, the DRC should continue its cautious approach to external borrowing.

Table 3.Democratic Republic of the Congo: Public Sector Debt Sustainability Framework, Baseline Scenario, 2012–35(Percent of GDP, unless otherwise indicated)
ActualAverage5/Standard Deviation 5/EstimateProjections
2012201320142015201620172018201920202015-20 Average202520352021-35 Average
Public sector debt 1/23.619.416.918.017.919.421.322.223.120.819.0
of which: foreign-currency denominated18.315.112.714.314.816.819.120.421.620.319.0
Change in public sector debt−3.2−4.2−2.61.2−0.11.51.80.90.9−1.0−0.5
Identified debt-creating flows−5.4−6.0−2.1−3.7−2.9−2.9−2.8−2.5−2.2−4.32.1
Primary deficit−1.9−1.9−0.2−2.21.6−1.1−0.7−1.0−1.2−0.8−0.7−0.9−3.12.8−0.3
Revenue and grants17.215.314.616.116.816.616.817.117.416.822.220.921.3
of which: grants2.92.41.32.42.72.11.91.91.92.91.6
Primary (noninterest) expenditure15.313.414.414.916.115.615.616.316.719.123.7
Automatic debt dynamics−2.7−3.4−1.8−1.4−1.1−0.8−0.8−0.8−0.7−0.4−0.7
Contribution from interest rate/growth differential−2.8−3.6−1.7−1.4−1.1−0.8−0.8−0.8−0.7−0.4−0.7
of which: contribution from average real inter est rate−1.0−1.8−0.10.00.30.60.60.50.40.40.0
of which: contribution from real GDP growth−1.8−1.8−1.6−1.4−1.4−1.4−1.4−1.3−1.1−0.9−0.7
Contribution from real exchange rate depreciation0.10.2−0.10.00.00.00.00.00.0
Other identified debt-creating flows−0.8−0.6−0.1−1.2−1.1−1.1−0.9−0.9−0.9−0.7−0.1
Privatization receipts (negative)−0.8−0.6−0.1−1.2−1.1−1.1−0.9−0.9−0.9−0.7−0.1
Recognition of implicit or contingent liabilities0.00.00.00.00.00.00.00.00.00.00.0
Debt relief (HIPC and other)0.00.00.00.00.00.00.00.00.00.00.0
Other (specify, e.g. bank recapitalization)0.00.00.00.00.00.00.00.00.00.00.0
Residual, including asset changes2.21.8−0.44.92.84.44.63.43.23.3−2.6
Other Sustainability Indicators
PV of public sector debt23.122.120.520.019.919.619.415.513.4
of which: foreign-currency denominated19.018.417.417.417.817.817.915.113.4
of which: external19.018.417.417.417.817.817.915.113.4
PV of contingent liabilities (not included in public sector debt)
Gross financing need 2/−1.0−1.10.40.11.40.70.30.50.6−0.65.2
PV of public sector debt-to-revenue and grants ratio (in percent)158.5137.6122.2120.4118.9114.9112.069.964.3
PV of public sector debt-to-revenue ratio (in percent)173.6161.7145.9138.2134.3129.4125.980.569.6
of which: external 3/142.7134.6123.6120.1119.6117.5116.278.269.6
Debt service-to-revenue and grants ratio (in percent) 4/5.45.24.37.612.210.48.57.77.611.511.4
Debt service-to-revenue ratio (in percent) 4/6.56.24.78.914.611.99.68.78.513.212.3
Primary deficit that stabilizes the debt-to-GDP ratio1.32.32.4−2.3−0.5−2.5−3.0−1.7−1.6−2.13.4
Key macroeconomic and fiscal assumptions
Real GDP growth (in percent)7.18.59.26.61.79.28.58.37.56.75.47.64.13.63.8
Average nominal interest rate on forex debt (in percent)0.60.50.42.11.71.82.34.44.23.32.83.11.81.11.6
Average nominal interest rate on domestic debt (in percent)3.24.48.59.911.914.38.749.0123.1
Average real interest rate (in percent)−4.1−8.1−0.5−5.65.00.11.93.53.32.42.12.22.10.11.6
Average real interest rate on foreign-currency debt (in percent)−4.5−8.4−0.6−5.75.6−1.9−0.6−1.3−1.4−1.5−1.5−1.3−0.8−0.9−0.8
Average real interest rate on domestic debt (in percent)1.13.06.07.39.111.46.344.8116.8
Real exchange rate depreciation (in percent, + indicates depreciation)0.51.1−0.7−0.511.30.3
Inflation rate (GDP deflator, in percent)4.79.31.316.110.32.21.42.32.52.62.62.32.93.02.9
Growth of real primary spending (deflated by GDP deflator, in percent)5.3−5.517.61.96.113.517.24.87.511.37.910.43.51.86.2
Grant element of new external borrowing (in percent)27.132.634.134.534.134.432.842.340.9
Sources: Country authorities; and staff estimates and projections.

[Indicate coverage of public sector, e.g., general government or nonfinancial public sector. Also whether net or gross debt is used.]

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Sources: Country authorities; and staff estimates and projections.

[Indicate coverage of public sector, e.g., general government or nonfinancial public sector. Also whether net or gross debt is used.]

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Table 4.Democratic Republic of the Congo: Sensitivity Analysis for Key Indicators of Public Debt 2015–35
Projections
20152016201720182019202020252035
PV of Debt-to-GDP Ratio
Baseline2221202020191613
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages222120202019137
A2. Primary balance is unchanged from 20152220202019191613
A3. Permanently lower GDP growth 1/2221202020201719
B. Bound tests
B1. Real GDP growth is at historical average minus one standard deviations in 2016-20172221222222221820
B2. Primary balance is at historical average minus one standard deviations in 2016-20172221202020191616
B3. Combination of B1-B2 using one half standard deviation shocks2221212121211719
B4. One-time 30 percent real depreciation in 20162227252423221513
B5. 10 percent of GDP increase in other debt-creating flows in 20162222222121211716
PV of Debt-to-Revenue Ratio 2/
Baseline1381221201191151127064
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages1381221211201151096033
A2. Primary balance is unchanged from 20151381221201181141117264
A3. Permanently lower GDP growth 1/1381231211201171147490
B. Bound tests
B1. Real GDP growth is at historical average minus one standard deviations in 2016-20171381261291291251238195
B2. Primary balance is at historical average minus one standard deviations in 2016-20171381221211191151127075
B3. Combination of B1-B2 using one half standard deviation shocks1381241251241211197789
B4. One-time 30 percent real depreciation in 20161381621511421321246663
B5. 10 percent of GDP increase in other debt-creating flows in 20161381331311281231197578
Debt Service-to-Revenue Ratio 2/
Baseline812108881211
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages81211987107
A2. Primary balance is unchanged from 2015812108881211
A3. Permanently lower GDP growth 1/812109881213
B. Bound tests
B1. Real GDP growth is at historical average minus one standard deviations in 2016-2017813119881313
B2. Primary balance is at historical average minus one standard deviations in 2016-2017812108881211
B3. Combination of B1-B2 using one half standard deviation shocks813119881213
B4. One-time 30 percent real depreciation in 2016814141110101614
B5. 10 percent of GDP increase in other debt-creating flows in 2016812119881212
Sources: Country authorities; and staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period.

Revenues are defined inclusive of grants.

Sources: Country authorities; and staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period.

Revenues are defined inclusive of grants.

This DSA was prepared by International Monetary Fund (IMF) staff with input from the World Bank, using the standard debt sustainability framework for low-income countries (LIC-DSA); see “Staff Guidance Note on the Application of the Joint Bank-Fund Debt Sustainability Framework for Low-Income Countries.”

Sicomines is exempt from any taxes and customs duties until its debt has been repaid.

By 2014, the relative contribution of the services sector to real GDP growth was already substantial, and it is expected to further increase in the long term.

When looking at the debt-to-export ratio, the most extreme shock is calibrated as an export shock in 2016–17 equal to the historical average of export growth minus one standard deviation.

The analysis of debt indicators alone places the DRC at the borderline between low and moderate risk, so that the complementary analysis of distress probabilities (Figure 3) is required.

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