The DRC authorities appreciate the candid dialogue with Staff and thank the Board and Management for the continuous support to their development agenda. The recent discussions held in Kinshasa in the context of the 2015 Article IV consultation gave another opportunity to take stock of the country’s progress in ensuring macroeconomic stability and implementing structural reforms and to assess the challenges facing the economy. The staff report put forward is a fair analysis of the economic and financial situation and broadly reflects the authorities’ views. The Selected Issues Paper is also welcome as a useful element in the authorities’ overall thinking on the DRC’s development dynamics.
In the recent past, the DRC has been posting a strong macroeconomic performance on the back of buoyant mineral exports and continuously improving overall economic management. The 2014 growth rate ranks among the highest in the world and inflation has drastically abated. Significant progress has also been recorded in the governance of the natural resource sector with the authorities committed to keep pace with this positive momentum. Likewise, the authorities are cognizant that they need to step up reforms in many areas with the view to entrench growth and reduce poverty in a sustainable fashion. In this regard, the authorities’ efforts over the medium term will focus on easing the business and socio-political environment for private sector development, improving fiscal management to build buffers against commodity price shocks, stepping up de-dollarization to enhance monetary policy and foster financial deepening, diversifying the economy to further structural transformation for job creation.
Recent Developments and Outlook
2014 has confirmed the trend of strong growth displayed by DRC over the past years. Real GDP growth is estimated to have recorded a solid 9.2 percent owing to high copper production and performing telecommunications, trade and transport sectors. Inflation is subdued at 1 percent, falling sharply from double digits territories in three years. The government budget is in balance with a low debt ratio.
The medium term outlook remains positive, with growth projected to remain strong, at 9.2 percent in 2015 and around 8.4 percent in 2016-17, essentially driven by the mineral and service sectors. It is the firm intention of the authorities to pursue steadfastly policies that will maintain high, sustainable and inclusive growth while also ensuring macroeconomic stability. However, the authorities are cognizant of the risks highlighted by staff. While they will continue their efforts to address them, they are also of the view that some of these risks are manageable. In this vein, they see scope for their ongoing actions to maintain a benign political situation, which should help to boost investor confidence. Likewise, the efforts initiated with the electoral commission – CENI - to cut elections costs should help keep spending pressures in check and not jeopardize further the fiscal stance.
Macroeconomic Policies Going Forward
Cognizant of the challenges still facing the economy, the DRC authorities are committed to implementing policies to further improve the outlook. In this regard, enhancing fiscal policy remains a key objective, with a particular emphasis on domestic revenue mobilization. Efforts will consist of bringing the VAT back to its performance path. To this end, the authorities concur with the staff’s recommendations and will enhance the VAT administration through measures to modernize and simplify procedures. An important line of actions of the authorities will consist of increasing significantly the contribution of the natural resource sector to fiscal revenue. They have already implemented the conclusions of the National Conference on Mineral Resources Management, which should help boost the revenue share of the sector. Enacting a new mining code aligned with international best practice is another option under discussion. The revenue-enhancing measures identified by Fund TA will also be part of the overall action plan.
On the spending side, the authorities are committed to keep outlays under control. To this end, a decree on Fiscal Governance in the DRC is being finalized and will be adopted soon as a major anchor for fiscal policy. This is expected to strengthen the medium-term expenditure framework. The authorities also share staff’s recommendations for enhancing budget credibility, including the need to improve resource forecasts. The overall effort to build capacity, especially on national account statistics will help address this issue going forward.
Along with the favorable macroeconomic fundamentals, the authorities welcome staff assessment indicating that DRC’s risk of debt distress remains “moderate”. Our authorities are committed to maintain a prudent borrowing strategy and to enhance debt management capacity to preserve long-term debt sustainability.
Monetary policy and financial sector development
Enhancing the effectiveness of monetary policy is an important endeavor for our authorities. Among others, the development of the financial sector should help to this end, besides its key role of supporting the private sector activity. Discussion with staff and past initiatives such as the 2014 FSAP provided useful materials and policy directions, which the authorities intend to follow through with concrete actions. In this regard, they will take steps to strengthen the central bank –BCC. Measures include the BCC’s recapitalization, cutting its operating costs by focusing on core activities and improving its governance and enhancing staff’s capacity.
The passage of the Central Bank Law is set to help on many of these fronts and strengthen the BCC’s credibility.
The authorities are also committed to enhance the financial sector by implementing structural reforms aimed at improving financial intermediation and financial inclusion. New financing instruments are being devised such as a foreign exchange swap facility arranged with the International Finance Corporation. Going forward, other reforms meant to strengthen the financial sector are underway, including measures to enhance consumer protection and mobile banking, as well as to further de-dollarization and reinforce banking supervision.
Natural Resource Management
Natural resource endowment is a major asset to the DRC’s economy. The authorities are mindful that its sound management is critical to growth, to government revenue and to the country’s overall development. Significant progress has been made recently to improve transparency in the sector by implementing the recommendations of the Extractive Industries Transparency Initiative (EITI). The authorities share staff’s views on the need to take additional measures “to strengthen the government’s oversight of the SOEs and ensure that they comply with the obligations to publish contracts of all mining operations and resort to competitive biddings when natural resource assets are sold.” Moreover, the authorities place a particular importance on the new mining code under discussion, and set to replace the current 2002 code. Key features of the new code should further enhance transparency and accountability in the mining sector and help address critical issues such as its fair contribution to domestic revenue. Main proposed changes include: (i) increase in the royalty rate; (ii) alignment of the corporate income tax (30 percent) to the general regime (35 percent); (iii) introduction of super profit tax; and (iv) provisions to secure corporate tax basis.
Structural Reforms for Economic Diversification and Job Creation
The DRC authorities are fully aware that enhancing the inclusiveness of growth, creating jobs and addressing poverty on a more sustainable footing require the implementation of bold structural reforms to bolster economic diversification and structural transformation. Staff’s selected issues chapter on “The Quest Towards Diversification” shed light on the structural shift from agriculture to industry and services being witnessed in DRC. The authorities are of the view that such shift should be accompanied with measures to enhance productivity in the agriculture sector to maintain and strengthen output, while enlarging the industrial and export bases. In this regard, reforms underway in the natural resource sector should improve the business environment in this specific area and attract new investors.
Furthermore, improving the overall business climate is a top priority to the authorities. They concur with staff that pressing measures should include: (i) simplifying the tax system to support higher non-mineral activity and promote inclusive growth, (ii) streamlining the regulation for granting construction permits and transferring ownership, and (iii) facilitating access to credit while enforcing contracts. The authorities are also mindful that they should sustain their ongoing efforts to address key bottlenecks such as the electricity shortages and the infrastructure gap. Furthermore, they see scope for their financial sector reforms to support the dynamism in the service sector and avail credit to help reduce informality in commerce activities.
The improvement of the general security situation of the country and the political environment is also a key element to enhance confidence of private investors. In this regard, the authorities are determined to address all factors of fragility and implement the agreed institutional reforms aimed at entrenching democracy.
The DRC has made important strides over the past years in terms of macroeconomic performance and poverty reduction. Growth has been strong in a stable environment and the outlook is promising owing to positive prospects on mining activity. Yet, unemployment and poverty still remain acute despite some progress. The DRC authorities are striving to conduct the needed reforms to entrench growth and bolster economic diversification. In the period ahead, they are committed to step up macroeconomic policies to enhance buffers and ring-fence against shocks as they take steps to transform the economic landscape. In this effort, harnessing natural resource endowment for the country’s overall development is of particular importance. Our DRC authorities appreciate the Board’s continuous support in their challenging endeavors.