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The Democratic Republic of the Congo: Staff-Monitored Program and Request for Disbursement under the Rapid Credit Facility—Press Release; Staff Report; and Statement by the Executive Director for the Democratic Republic of the Congo

Author(s):
International Monetary Fund. African Dept.
Published Date:
December 2019
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Background and Context

1. A new government took office on September 6, 2019—eight months after the first ever peaceful transition of power in the country. It features a “cohabitation” between alliances led by President Tshisekedi and former President Kabila. The 66-strong government (49 ministers and 17 vice-ministers) is purported to include individuals from all parts of the country and to be formed by a large majority of newcomers. Kabila’s coalition (KCC) holds 70 percent of government positions in addition to controlling other government functions (e.g., military, judiciary). The new administration is keen on reestablishing active relationships with the international community, as underlined by the conclusion of the 2019 Article IV consultation last August, after more than three-year delay.1

2. The country displays many aspects of fragility as it remains prone to health and humanitarian crises and violent conflicts. The Democratic Republic of the Congo (DRC) is one of the poorest countries in the world with per capita income of about US$470—less than half its level in 1990 (MEFP ¶1)—with little progress made towards the Sustainable Development Goals (SDGs) (it ranked 154 out of 156 countries in 2018). The current Ebola epidemic in the North-East of the country, which started in August 2018, is still spreading, though at a much slower pace (Box 1). Cholera and measles outbreaks are also ravaging parts of this vast country, the latter accounting for nearly 5,000 deaths so far in 2019. Violent conflicts continue in the East of the country, forcing tens of thousands of people to flee.

Box 1.The Ebola Epidemic in the Democratic Republic of the Congo

The country is experiencing its worst outbreak of the deadly Ebola disease, though the number of new cases has fallen substantially more recently. As of November 3, a total of 3,274 confirmed cases, including 2,185 deaths, had been reported. The epidemic started in August 2018 in northeastern DRC and has been geographically limited to an area close to Uganda, Rwanda, and South Sudan. The response to the outbreak has been coordinated by the World Health Organization, UNICEF, NGOs, and the Ministry of Health with significant funding from the World Bank. However, violent conflict in the affected regions and distrust of the government have hindered efforts to stop the epidemic. The current strategy response plan has been successful in engaging affected communities in the Ebola monitoring and containment efforts, in stepping up security with MONUSCO’s assistance, and in mobilizing a significant increase in international financial assistance (US$ 287 million). The economic impact of the Ebola outbreak so far has been reportedly limited.

DRC Ebola Outbreak

(Number of cases since August 2018)

Source: World Health Organization.

Note: Data from the last observation were assumed for missing data, which are indicated with anasterisk.

3. While elements of macroeconomic stability have been restored in recent years, the economy is not growing as much as it should and remains highly vulnerable to shocks. The commodity price and political shocks of 2015–16 led to large exchange rate depreciations and inflation (55 percent year-on-year at its peak) as the central bank monetized the central government’s deficit in the absence of financing options. The government thereafter proceeded to introduce a cash-based budget to restore fiscal discipline, which helped stabilize the exchange rate and contain 12-month inflation at around 5 percent. Despite such progress, macroeconomic conditions remain precarious and domestic arrears have been accumulated (6.6 percent of GDP as of end-September 2019). In recent months, a fall in key export commodity prices and weaker spending oversight during the political transition period have led to larger financing needs, mostly covered by the central bank. In that context, officially recorded international reserves have fallen to critically low levels (one week of import coverage). More fundamentally, structural weaknesses—a challenging business environment, corruption, poor infrastructure, and limited access to financing— continue to hold back private investment and sustained and inclusive growth. The authorities are aware of these challenges and intend to formulate a medium-term reform strategy that can deliver economic gains to broader segments of the population and tackle deep-rooted social needs.

4. In light of urgent balance of payments needs, the authorities are requesting a disbursement under the RCF. In addition, Fund staff will monitor the authorities’ economic program through a SMP, which could help pave the way to an ECF in 2020. The immediate priority is help fill DRC’s sizeable balance of payments financing gap given the extremely low level of reserves; the requested RCF disbursement will help in this regard. At the same time, the authorities view a move towards a Fund-supported program as the lynchpin of their adjustment and reform plans over the medium term and as a catalyst for significant donors’ support in the pipeline. For example, the World Bank, in addition to its envisaged support to the free education initiative (Box 2), is negotiating a US$500 million budget support operation (DPO) likely to be aligned in timing with an ECF program. In this context, the proposed SMP will provide more time to develop an ambitious medium-term reform strategy that could be the basis for negotiations for an ECF arrangement in 2020.

Recent Economic Developments

5. After rebounding in 2018 owing to strong mining production and favorable international prices, GDP growth is projected to slow in 2019. Real GDP growth would decelerate to 4.5 percent in 2019 from 5.8 percent in 2018, with extractive GDP growth falling from 16.9 to 5.4 percent in the context a substantial fall in the prices of copper and cobalt, DRC’s key exports (Figure 1). By contrast, non-extractive GDP growth is projected to accelerate and reach 4.2 percent due to the resumption of economic activity after the presidential elections, higher demand resulting from increased government employees’ salaries, and a sizable fiscal stimulus provided in part by the President’s 100-day program (see below). Twelve-month inflation, however, has continued to decelerate and the exchange rate has remained stable.

Figure 1.Democratic Republic of the Congo: External Indicators, 2015–2019

Sources: Congolese authorities and IMF staff calculations

6. Despite an improved current account position, international reserves have continued to decrease in 2019. Gross forex reserves of the Banque Centrale du Congo (BCC) declined from US$657 million at end-December 2018 to US$302 million at end-October 2019, equivalent to about one week of imports of goods and services. At the same time, BCC foreign currency assets have remained relatively stable; these include BCC foreign currency deposits held at local commercial banks (US$533 million, of which US$247 million as collateral for government loans and term deposits with different maturities).2 In a highly dollarized financial system, the very low levels of international reserves severely limits the ability of the BCC to intervene in the FX market to contain volatility—though it appears that high FX liquidity reflecting increased repatriation requirements for mining export receipts helped maintain stability in the exchange rate market.3

7. Budget execution through end-October 2019 has reflected new spending initiatives and weaker spending controls, leading to a resumption of central bank financing. The 2019 budget already provided for a large increase in the wage bill to compensate for limited salary increases during the recent high-inflation period. In addition, budgetary outlays expanded on account of the new President’s 100-day infrastructure program and the introduction of free basic education (Box 2). Given limited financing options and a loosening of expenditure oversight during the political transition, the government resorted to BCC advances (CF603 billion or 0.7 percent of GDP by end-October), despite their prohibition in both the central bank law and the public finances law. In addition, as mentioned above the BCC provided collateral for government loans from commercial banks (around CF372 billion or 0.4 percent of GDP) to finance subsidy compensations to fuel suppliers and the execution of strategic investment projects. On the revenue side, though collections were more or less in line with projections, Treasury receipts were eroded by offsets for tax credits and arrears for VAT refunds (0.7 percent of GDP). As of end-October, the central government’s domestic balance had reached a deficit of 1.1 percent of GDP. In October, the government also restarted (after a very long hiatus) the placement of Treasury bills and bonds to diversify its funding sources (see below).

Box 2.Commitment to Free Basic Education

While the right to free primary education is guaranteed by the DRC’s 2006 Constitution, in practice almost all schools have required monetary contributions from parents to complement teachers’ salaries and cover schools’ functioning needs.

President Tshisekedi’s pledge to make free basic (primary plus two years) education effective means that schools are prevented from collecting money from parents and that the government has to step in to fill the gap. This gap is currently estimated at 1 percent of GDP per year, mostly to cover teachers’ direct salary supplement and/or salary arrears and to pay for transportation and housing subsidies. It also includes payments to cover basic school needs, roughly US$50 per school per month. The initiative has brought about 2.4 million children back to school as of end-October—a welcome development given DRC’s significant human capital weaknesses.

8. The monetary base has increased significantly on account of BCC’s budget financing that was not fully sterilized. By end-October 2019, the monetary base had increased by about 35 percent, compared to end-2018, mainly fueled by increased net credit to the government and other depository institutions (Text Figure 1). BCC financing to the government was mainly provided in foreign currency, which helped limit pressures on the exchange rate and domestic inflation. Monetary policy instruments have been managed to contain broad money to a projected increase of 13 percent by end-2019, compared to 30 percent as of end-2018. Specifically, high mandatory reserve requirements on foreign currency deposits and a positive in real terms policy rate were maintained. Reserve requirements set by the BCC are constituted in local currency, regardless of the currency of deposit.

Text Figure 1.Components of BCC Balance Sheet

9. The financial system remains stable, but the issue of dwindling correspondent banking relationships is a concern. The banking system is relatively well-capitalized,4 profitable and liquid, (Text Table 1), but NPLs have increased over the years, reaching 16.1 percent at end-September 2019. The only bank with a correspondent banking relationship in US dollars is a major international bank that is solvent and well-capitalized—though reliance on just one institution greatly elevates systemic risk in case of financial or operational failure in a highly dollarized economy, on top of competition concerns. While credit exposure to the public sector remains below 20 percent of total credit, the sector is increasingly affected by the high stock of arrears in the public sector.

Text Table 1.Democratic Republic of the Congo: Selected Financial Soundness Indicators, 2014–2019
20142015201620172018Mar-19Jun-19Sep-19
Adequacy
Regulatory capital to risk-weighted assets24.517.614.716.013.713.913.813.9
Asset quality
NPLs to gross loans6.918.416.316.113.813.013.216.1
Earnings and profitability
Return on assets (net income/total assets)1.7-1.3-2.6-0.11.11.71.81.4
Interest margin to gross income34.4245.9223.835.435.540.138.438.7
Liquidity
Liquid assets/total deposits and short-term liabilities123.9147.8157.6125.667.268.971.976.0
Sensitivity to market risk
Foreign currency-denominated loans to total loans79.387.592.393.790.092.791.891.5
Source: Central Bank of the Democratic Republic of the Congo (BCC).
Source: Central Bank of the Democratic Republic of the Congo (BCC).

10. The business environment is plagued by serious shortcomings, including excessive taxation and a weak judiciary, that hamper private investment. The tax system includes multiple overlapping and nuisance taxes and many public entities levy fees and charges (some outside the legal framework), which overall significantly increase the tax burden to taxpayers, even though a large share of these collections is not remitted to the Treasury. Private enterprises complain of being constantly harassed by tax authorities and multiple other government entities for payments that in many instances are not justified. The associated costs have become prohibitive, breeding corruption. The lack of fair administration of justice leads to serious violations of property rights and the rule of law. Given the adverse business environment, the number of businesses that operate in the formal sector keeps shrinking as reputable companies either leave the country or cease operations, while many others go informal, significantly reducing the tax base.

Outlook and Risks

11. GDP growth in 2020 is expected to decelerate further due to the shutdown of one of the largest copper and cobalt mines in the country. The planned suspension of production at the Mutanda Mining (MUMI) in 2020 and 2021, the shutdown of Boss mining, and the delayed start of new mining projects would lead to a contraction of extractive GDP (Table 1). However, as non-extractive GDP growth rate will continue to accelerate (to 5.4 percent), overall GDP growth would amount to 3.2 percent in 2020. Inflation would remain stable at around 5 percent, below the BCC medium-run objective of 7 percent. The decline of copper and cobalt production in 2020 (first contraction since 2016) is projected to temporarily worsen the current account balance, which should steadily improve thereafter thanks to the opening of new mining projects, notably the Kamoa-Kakula mining project, which is expected to become the second largest copper mine in the world.

Table 1.Democratic Republic of the Congo: Selected Economic and Financial Indicators, 2016–2020
20162017201820192020
Act.Act.Pre l.Projections
(Annual percentage change, unless otherwise indicated)
GDP and prices
Real GDP2.43.75.84.53.2
Extractive GDP-0.77.816.95.4-2.4
Non-Extractive GDP3.52.41.94.25.4
GDP deflator4.343.129.83.05.7
Consumer prices, period average3.235.829.34.85.0
Consumer prices, end of period11.254.77.25.55.0
External sector
Exports, f.o.b. (U.S. dollars)15.6-2.838.3-19.2-5.4
Imports, f.o.b. (U.S. dollars)14.9-6.732.0-19.50.1
Exports volume-6.09.720.80.7-5.4
Import volume-0.74.329.0-18.2-0.3
Terms of trade-5.120.83.2-13.6-1.2
(Annual change in percent of beginning-of-period broad money)
Money and credit
Net foreign assets-4.829.210.26.36.2
Net domestic assets27.013.620.26.00.5
Domestic credit26.53.518.53.80.3
Of which: net credit to government11.10.11.411.03.2
credit to the private sector14.10.620.3-10.8-2.9
Broad money22.242.830.112.36.6
(Percent of GDP, unless otherwise indicated)
Central government finance
Revenue and grants14.011.711.111.112.7
Revenue11.29.810.010.311.3
Grants2.82.01.10.81.4
Expenditures14.510.411.113.813.3
Overall fiscal balance (commitment basis)-0.51.40.0-2.7-0.6
Non-natural resource overall fiscal balance-2.0-0.9-3.2-4.3-2.7
Investment and saving
Gross national saving8.28.97.19.69.2
Government-1.40.8-1.0-3.9-1.3
Non-government9.68.18.013.510.6
Investment12.312.111.713.313.5
Government3.42.31.72.93.0
Non-government8.99.710.010.410.5
Balance of payments
Exports of goods and services32.831.034.126.223.5
Imports of goods and services38.934.737.728.726.9
Current account balance, incl. transfers-4.1-3.2-4.6-3.8-4.3
Current account balance, excl. transfers-7.3-5.2-5.2-4.5-5.6
Overall balance-1.42.00.90.60.6
Gross official reserves (millions of U.S. dollars)6256016578291,078
Gross official reserves (weeks of imports)2.81.92.53.34.2
(Percent of GDP, unless otherwise indicated)
External public debt
Total stock, including IMF17.616.913.714.313.8
Scheduled debt service (millions of U.S. dollars)349212224460632
Percent of exports of goods and services2.92.12.83.55.1
Percent of government revenue8.56.59.79.010.6
Exchange rate (CDF per U.S. dollars)
Period average1,0241,4801,624
End-of-period1,2161,5921,636
Memorandum items:
Nominal GDP (billions of CDF)37,51755,67676,49682,34589,806
Nominal GDP (millions of U.S. dollars)36,64037,61547,09949,90652,591
Sources: Congolese authorities; and IMF staff estimates and projections.
Sources: Congolese authorities; and IMF staff estimates and projections.

12. The economic outlook remains subject to significant downside risks (RAM, Annex I). While the threat of a further spreading of the Ebola epidemic has fallen, the country’s vulnerability to other contagious diseases such as measles or cholera could have significant adverse macroeconomic consequences. The slowdown of the Chinese economy, the main buyer of copper and cobalt, could play a negative role for the Congolese economy leading to a loss of fiscal and export revenues. Other risks include a continued monetization of the fiscal deficit, intensification of armed conflicts, and the withdrawal of the only correspondent banking relationship. On the upside, the new government is keen on actively reengaging with the international community which should lead to increased project and budget support by partners, with a positive impact on private investment inflows and overall economic activity.

Policy Discussions

The requested RCF disbursement will help ease the pressure on international reserves. The SMP discussions centered around key policies that would strengthen macroeconomic stability, reinforce international reserves, and advance key structural reforms to start addressing deep-seated issues related to poor governance, a difficult business environment, and pervasive poverty. Fiscal policy would be anchored on discontinuation of central bank financing of the deficit supported by strong revenue mobilization and expenditure control efforts.

13. In the context of substantial spending pressures and a critically low level of international reserves, the new government is putting in place decisive measures in the short term, as reflected in the attached Memorandum of Economic and Financial Policies (MEFP) for the SMP. The new government is working on an ambitious medium-term economic management and reform program that will be informed by upcoming governance assessment and PEFA missions and could provide the basis for an ECF-supported arrangement in 2020.

A. Restoring fiscal discipline

14. Budget execution in the remainder of 2019 is predicated on stopping the recourse to central bank financing. The government will limit the 2019 domestic and overall fiscal deficits on a cash basis to 1 and 2.3 percent of GDP, respectively, through a strict implementation of a cash-based budget. Halting BCC advances over the last two months of 2019 implies an ambitious, but

realistic, fiscal effort, with a targeted domestic balance surplus of 0.1 percent of GDP for November and December despite seasonally-high levels of spending in December (Text Table 2).

Text Table 2.Democratic Republic of the Congo: Central Government Financial Operations, 2019–2020
20192020
Jan-Oct Prel.Proj.Finance lawProj.
in percent of GDP
Revenue and grants9.511.117.712.7
Revenue8.810.316.011.3
Grants0.80.81.81.4
Expenditure11.413.818.113.3
of which: Current expenditure9.210.611.910.1
Capital expenditure2.02.95.83.0
Overall fiscal balance (commitment basis)-1.9-2.7-0.4-0.6
Domestic fiscal balance (cash basis)-1.1-1.0-0.3-0.3
Overall fiscal balance (cash basis)-1.4-2.3-0.4-0.6
Sources: Congolese authorities; and IMF staff estimates and projections.
Sources: Congolese authorities; and IMF staff estimates and projections.

15. The draft 2020 budget currently in Parliament reflects the president’s pledge to improve the livelihood of the Congolese people. Its spending envelope, as approved by cabinet, approaches US$10 billion (20 percent of GDP), an increase of over 60 percent compared to the projected 2019 budget outcome. The draft budget identifies very ambitious new revenue-generating measures and forecasts spending increases primarily on the wage bill (teachers’ wages) and domestically-financed capital expenditure to continue implementing the President’s 100-day program. The 2020 budget foresees an overall fiscal deficit of 0.4 percent of GDP. However, realistic revenue projections that adjust for overoptimistic assumptions and reflect the announced closure of MUMI mine in 2020 and 2021 (with estimated income tax losses of about 0.5 percent of GDP) suggest a gap of 4.7 percent of GDP. The authorities agreed to base budget execution for 2020 on these more realistic assumptions. In line with their commitment to fiscal discipline, they will implement strong measures to ensure higher revenue collection and rationalization of expenditures in 2020. To that effect, structural benchmarks (SBs) under the SMP are frontloaded (Table 7).

Table 2a.Democratic Republic of the Congo: Central Government Financial Operations, 2016–2020(billions of CDF)
20162017201820192020
Act.Act.Prel.Proj.Q1 proj.Q2 proj.Q3 proj.Q4 proj.year proj.
(Billions of CDF, unless otherwise indicated)
Revenue and grants5,2466,5388,4849,1082,8382,9962,7552,81911,409
Revenue4,1955,4437,6338,4682,4002,6172,5972,57410,189
Tax revenue3,2324,2845,6735,7961,6121,6331,9031,8807,028
Income tax1,2661,5842,7622,7357657657657653,060
Individuals2873301,0158934524524524521,810
Businesses9361195158217052722722722721087
Other unallocable taxes on income, profits, and capital gains445916513741414141163
Taxes on goods and services1,4031,6312,3332,2886046168868732,979
Value-added tax/Turnover tax1,1151,2381,7061,7925105187887792,595
Excises28739362749695989894384
Taxes on international trade and transactions5631,070578773243252252242989
Non-tax revenue9631,1591,9602,1127889846956953,161
Revenue from natural resources and telecommunications3403469038462644832132131,173
Mining royalties1147538937269696969277
Oil royalty and rent9610324019964646464257
Telecommunications941141881821032285252435
Dividents from state-owned enterprises36548693271212727203
Fees from sectoral ministries339407471440178135135135584
Special accounts and budgets2814045167823233233233231,292
Grants1,0511,0958516404383791582451,220
Project1,0491,050851640438166158160921
Budget support145000213085299
Expenditure5,4315,7838,52111,3652,9273,1182,8742,99511,915
Current expenditure3,9264,0806,0418,7372,1312,2352,3092,3839,057
Wages1,9572,0842,7053,5619851,0561,0891,2624,392
Interest due10115232219686878889350
External20323925666624
Domestic8112028317180818283327
Goods and services9689541,6211,7954464464464461,783
Subsidies and other current transfers9008901,3943,1856146466865862,532
Subsidies (incl. VAT reimbursements)3573607042,2442442703042201,037
Transfers to other levels of national government16312617415848536043204
Special accounts and budgets3804045167823233233233231,292
Capital expenditure1,2701,3011,2882,4177598465285752,707
Foreign-financed1,0641,0718721,6195773052972991,479
Domestically-financed2062304167981825412302761,229
Exceptional expenditure12354021,19121238383838151
Overall fiscal balance (commitment basis)-186754-37-2,257-89-122-119-176-506
Change in domestic arrears (repayment = – )27449739100000
Domestic fiscal balance (cash basis)-126807121-86256-19026-116-224
Overall fiscal balance (cash basis)-15979860- 1,866-89-122-119-176-506
Errors and omissions-88-523138000000
Financing246-276-1981,86689122119176506
Domestic financing (banking system)47941051,075508380137350
Foreign financing-233-279-30379139393939156
Project loans152121979139139139139557
Amortization of external debt-248-301-325-189-100-100-100-100-401
Memorandum items:
Gross domestic product (billions of CDF)37,51755,67676,49682,34589,806
Gross domestic product (millions of U.S. dollars)36,64037,61547,09949,90652,591
Unpaid cumulative domestic financial obligations 25301539848154649
Sources: Congolese authorities; and IMF staff estimates and projections.

Mainly expenditure related to security and elections.

Unpaid VAT credit reimbursements and other arrears (cumulative).

Sources: Congolese authorities; and IMF staff estimates and projections.

Mainly expenditure related to security and elections.

Unpaid VAT credit reimbursements and other arrears (cumulative).

Table 2b.Democratic Republic of the Congo: Central Government Financial Operations, 2016–2020(percent of GDP)
20162017201820192020
Act.Act.Prel.Proj.Q1 proj.Q2 proj.Q3 proj.Q4 proj.year proj.
(Percent of GDP, unless otherwise indicated)
Revenue and grants14.011.711.111.13.23.33.13.112.7
Revenue11.29.810.010.32.72.92.92.911.3
Tax revenue8.67.77.47.01.81.82.12.17.8
Income tax3.42.83.63.30.90.90.90.93.4
Individuals0.80.61.31.10.50.50.50.52.0
Businesses2.52.12.12.10.30.30.30.31.2
Other unallocable taxes on income, profits, and capital gains0.10.10.20.20.00.00.00.00.2
Taxes on goods and services3.72.93.02.80.70.71.01.03.3
Value-added tax/Turnover tax3.02.22.22.20.60.60.90.92.9
Excises0.80.70.80.60.10.10.10.10.4
Taxes on international trade and transactions1.51.90.80.90.30.30.30.31.1
Non-tax revenue2.62.12.62.60.91.10.80.83.5
Revenue from natural resources and telecommunications0.90.61.21.00.30.50.20.21.3
Mining royalties0.30.10.50.50.10.10.10.10.3
Oil royalty and rent0.30.20.30.20.10.10.10.10.3
Telecommunications0.20.20.20.20.10.30.10.10.5
Dividents from state-owned enterprises0.10.10.10.10.00.10.00.00.2
Fees from sectoral ministries0.90.70.60.50.20.20.20.20.6
Special accounts and budgets0.70.70.70.90.40.40.40.41.4
Grants2.82.01.10.80.50.40.20.31.4
Project2.81.91.10.80.50.20.20.21.0
Budget support0.00.10.00.00.00.20.00.10.3
Expenditure14.510.411.113.83.33.53.23.313.3
Current expenditure10.57.37.910.62.42.52.62.710.1
Wages5.23.73.54.31.11.21.21.44.9
Interest due0.30.30.40.20.10.10.10.10.4
External0.10.10.10.00.00.00.00.00.0
Domestic0.20.20.40.20.10.10.10.10.4
Goods and services2.61.72.12.20.50.50.50.52.0
Subsidies and other current transfers2.41.61.83.90.70.70.80.72.8
Subsidies (incl. VAT reimbursements)1.00.60.92.70.30.30.30.21.2
Transfers to other levels of national government0.40.20.20.20.10.10.10.00.2
Special accounts and budgets1.00.70.70.90.40.40.40.41.4
Capital expenditure3.42.31.72.90.80.90.60.63.0
Foreign-financed2.81.91.12.00.60.30.30.31.6
Domestically-financed0.50.40.51.00.20.60.30.31.4
Exceptional expenditure10.60.71.60.30.00.00.00.00.2
Overall fiscal balance (commitment basis)-0.51.40.0-2.7-0.1-0.1-0.1-0.2-0.6
Change in domestic arrears (repayment = – )0.10.10.10.50.00.00.00.00.0
Domestic fiscal balance (cash basis)-0.31.40.2-1.00.1-0.20.0-0.1-0.2
Overall fiscal balance (cash basis)-0.41.40.1-2.3-0.1-0.1-0.1-0.2-0.6
Errors and omissions-0.2-0.90.20.00.00.00.00.00.0
Financing0.7-0.5-0.32.30.10.10.10.20.6
Domestic financing1.30.00.11.30.10.10.10.20.4
Foreign financing-0.6-0.5-0.41.00.00.00.00.00.2
Project loans0.00.00.01.20.20.20.20.20.6
Amortization of external debt-0.7-0.5-0.4-0.2-0.1-0.1-0.1-0.1-0.4
Memorandum items:
Gross domestic product (billions of CDF)37,51755,67676,49682,34589,806
Gross domestic product (millions of U.S. dollars)36,64037,61547,09949,90652,591
Unpaid cumulative domestic financial obligations 29.57.15.85.2
Sources: Congolese authorities; and IMF staff estimates and projections.

Mainly expenditure related to security and elections.

Unpaid VAT credit reimbursements and other arrears (cumulative).

Sources: Congolese authorities; and IMF staff estimates and projections.

Mainly expenditure related to security and elections.

Unpaid VAT credit reimbursements and other arrears (cumulative).

Table 3.Democratic Republic of the Congo: Monetary Survey, 2016–2020
20162017201820192020Q12020Q22020Q32020Q4
Act.Act.Prel.Projections
(Billions of CDF)
Central bank survey:
Net foreign assets-453-562-306-566-381-143-110-85
Claims on non-residents7599561,0751,4101,6021,8401,8731,898
Liabilities on non-residents-1,212-1,518-1,380-1,976-1,983-1,983-1,983-1,983
Net domestic assets2,0622,5512,8273,6153,4803,2933,3103,429
Net claims on the government4083605911,1451,1451,1451,1451,145
Claims on deposit money banks347661647906924942961915
Other items, net1,2961,5121,5621,8521,8671,8671,8671,867
Monetary base1,6171,9842,5193,0493,0993,1503,2013,344
Monetary survey:
Net foreign assets1,1122,6513,4174,0304,3714,6104,6634,708
Central bank-453-562-306-566-381-143-110-85
Commercial banks1,5653,2123,7224,5964,7524,7534,7734,793
Net domestic assets4,1644,8846,4076,9976,8396,7836,9187,049
Domestic credit3,0793,2664,6625,0394,8574,8014,9375,068
Net credit to government2612643701,4451,4951,5781,6581,795
Credit to the economy2,8193,0024,2933,5943,3623,2233,2793,273
Other items, net1,0851,6181,7451,9591,9811,9811,9811,981
Broad Money (M2)5,2767,5359,80111,00911,19111,37411,55711,739
Narrow Money (M1)1,6821,9662,3822,6522,8082,8542,8992,945
Currency in circulation1,0721,3551,5601,7601,9011,9321,9631,994
Demand deposits610610822892907921936951
Quasi money3,5945,5697,4198,3578,3848,5208,6578,794
Time deposits in domestic currency604646-649-659-670-681-692
Foreign currency deposits3,5345,5237,3739,0059,0439,1919,3389,486
(Annual percent change)
Net foreign assets-15.7138.428.918.016.8
Net domestic assets38.917.331.29.20.7
Domestic credit57.54.245.3-3.0-6.8
Net credit to government219.31.439.9291.024.2
Credit to the private sector29.31.356.4-24.9-10.1
Other items, net1.949.17.812.3… …… …… …1.2
Broad Money (M2)22.242.830.112.36.6
(Annual percentage change of beginning-of-period broad money)
Net foreign assets-4.829.210.26.36.2
Net domestic assets27.013.620.26.00.5
Domestic credit26.53.518.53.80.3
Net credit to government11.10.11.411.03.2
Credit to the private sector14.10.620.3-10.8-2.9
Credit to parastatals11.10.11.411.03.2
Other items, net0.510.11.72.20.2
Broad money (M2)22.242.830.112.36.6
Memorandum items:
Nominal GDP (billions of CDF)37,51755,67676,49682,34589,80689,80689,80689,806
Velocity (GDP/broad money)7.17.47.87.57.77.77.77.7
Foreign currency deposits (percent of M2)67.073.375.281.880.880.880.880.8
Foreign currency deposits (percent of total deposits)84.189.489.597.497.397.397.397.3
Net domestic assets of the BCC (billions of CDF)2,0622,5512,8273,6153,4803,2933,3103,429
Base money (billions of CDF)1,6171,9842,5193,0493,0993,1503,2013,344
Sources: Congolese authorities; and IMF staff estimates and projections.
Sources: Congolese authorities; and IMF staff estimates and projections.
Table 4.Democratic Republic of the Congo: Balance of Payments, 2016–2020
20162017201820192020
Act.Prel.Prel.Projections
(Millions of U.S. dollars, unless otherwise indicated)
Current account-1,504-1,211-2,169-1,873-2,251
Merchandise trade-264208994857141
Exports, f.o.b.11,88511,54815,96712,90412,204
Of which: mining and oil8,68011,42815,77612,47612,177
Imports, f.o.b.-12,149-11,340-14,973-12,047-12,064
Of which: aid-related imports-1,163-1,214-827-363-850
Services-1,961-1,615-2,687-2,076-1,934
Receipts128108115178168
Expenditure-2,089-1,723-2,802-2,254-2,102
Of which: aid-related imports-163-170-116-127-140
Income-614-1,081-1,687-1,308-1,317
Receipts17127399105
Expenditure-630-1,093-1,760-1,408-1,422
Of which: interest payments1-20-69-24-113-121
Current transfers1,3351,2761,211655859
Of which: official aid1,180732294388715
budget support grants13000175
Capital and financial account1,1992,5302,1832,1532,556
Capital account978697485343497
Official1,025709524388540
Private-47-13-39-44-43
Financial account2211,8341,6981,8102,059
Official capital-227-189-187-192-88
Gross disbursements (project loans)141413575676
Scheduled amortization2-242-203-200-417-590
Private capital (net)4492,0221,8852,0022,147
Of which: foreign direct investment9321,0481,2851,6001,889
other private non-banking sector3-484974600402258
Errors and omissions-200-53941000
Overall balance-506750424280305
Financing506-750-424-280-305
Central bank reserves (increase = – )493-19-166146-284
of which: IMF financing789294-32741
Commercial banks reserves (increase = – )13-730-258-426-20
(Percent of GDP, unless otherwise indicated)
Memorandum items:
Debt service after debt relief (percent of exports)2.92.12.83.55.1
Current account balance (excluding official transfers)-7.3-5.2-5.2-4.5-5.6
Current account balance (including official transfers)-4.1-3.2-4.6-3.8-4.3
Gross official reserves (millions of U.S. dollars)6256016578291,078
Gross official reserves (weeks of imports)2.81.92.53.34.2
Sources: Congolese authorities; and IMF staff estimates and projections.

Including interest due to the IMF.

Excluding principal repayments to the IMF.

Including unrecorded transactions. The latter may be substantial given weaknesses in statistics.

Sources: Congolese authorities; and IMF staff estimates and projections.

Including interest due to the IMF.

Excluding principal repayments to the IMF.

Including unrecorded transactions. The latter may be substantial given weaknesses in statistics.

Table 5.Democratic Republic of the Congo: Capacity to Repay the Fund
201920202021202220232024
Total obligations on existing and prospective credit
Total obligations (In millions of SDRs)33.833.814.04.14.14.1
Principal29.729.79.90.00.00.0
Charges and interest 14.14.14.14.14.14.1
Total obligations (In millions of U.S. dollars)46.746.619.45.75.85.8
In percent of exports of goods and services0.40.40.10.00.00.0
In percent of GDP0.10.10.00.00.00.0
In percent of quota3.23.21.30.40.40.4
In percent of gross international reserves5.64.31.30.40.40.4
Fund credit outstanding (end-period)
In millions of SDRs329.3299.6289.7289.7289.7289.7
In millions of U.S. dollars453.2414.4402.8405.1407.6407.6
In percent of exports of goods and services3.53.33.12.82.62.4
In percent of GDP0.90.80.70.70.70.6
In percent of quota30.928.127.227.227.227.2
In per cent of total exter nal debt3.93.53.85.96.87.8
In percent of gross international reserves54.738.427.027.927.729.3
Sources: IMF staff estimates and projections.

On May 24, 2019 the IMF Executive Board approved a modified interest rate setting mechanism which effectively sets interest rates to zero on ECF and SCF through June 2021 and possibly longer. The Board also decided to extend zero interest rate on ESF till end June 2021 while interest rate on RCF was set to zero in July 2015. Based on these decisions and current projections of SDR rate, the following interest rates are assumed beyond June 2021: 0/0/0/0 percent per annum for the ECF, SCF, RCF and ESF, respectively. The Executive Board will review the interest rates on concessional lending by end-June 2021 and every two years thereafter.

Sources: IMF staff estimates and projections.

On May 24, 2019 the IMF Executive Board approved a modified interest rate setting mechanism which effectively sets interest rates to zero on ECF and SCF through June 2021 and possibly longer. The Board also decided to extend zero interest rate on ESF till end June 2021 while interest rate on RCF was set to zero in July 2015. Based on these decisions and current projections of SDR rate, the following interest rates are assumed beyond June 2021: 0/0/0/0 percent per annum for the ECF, SCF, RCF and ESF, respectively. The Executive Board will review the interest rates on concessional lending by end-June 2021 and every two years thereafter.

Table 6.Democratic Republic of the Congo: Indicative Targets Under the SMP, 2019–May 2020
201920202020
end-yearMarchMay1/
Floor on changes in net foreign assets of the BCC (US$ millions)-146116231
Accumulation of new central government loans guaranteed by the BCC (CF billions)37200
Ceiling on changes in net central bank credit to government (CF billions)55400
Ceiling on placement of Treasury bills and bonds by the central government (CF billions)15080150
Ceiling on the contracting or guaranteeing of new nonconcessional external debt, including EADs or the BCC (US$ millions)15086
Accumulation of external arrears (US$ millions)00
Floor on domestic balance – cash basis (CF billions)-86256
Accumulation of wage arrears (US$ million)00
Memorandum items:
Balance of payments support (US$ millions)36800
Contracting of new concessional external debt (US$ millions)317154256
New disbursement of external budget and project loans, and grants (US$ millions)613338541
Scheduled external debt service payments (US$ millions)13164106
Sources: Congolese authorities and IMF staff estimates and projections

Cumulative variables from January till May. Only the first four ITs will be monitored for the May test date.

Sources: Congolese authorities and IMF staff estimates and projections

Cumulative variables from January till May. Only the first four ITs will be monitored for the May test date.

Table 7.Democratic Republic of the Congo: Prior Action for the Rapid Credit Facility and Structural Benchmarks for the Staff-Monitored Program
ActionsRationaleDate
Prior Action
Transfer USD160 million in FX deposits from BCC accounts at domestic commercial banks to BCC accounts in overseas banks which would be accounted for as reservesStrengthen external positionDecember 5, 2019
VAT: The Minister of Finance to make the DGI responsible for the payment of VAT refunds to mining companies (using a risk-based approach) through an escrow accounts receiving proceeds from the VAT collected by the DGDA from mining companies and a quota of overall VAT collected by the DGIIncrease revenueJanuary 2020
Lift the suspension of VAT collection for mining companies at the customs.March 2020
PIT: Enforce the inter-ministerial circular imposing personal income tax withholding on the totality of the compensation (including salaries, bonuses, and other forms of remuneration) of civil servants, other public employees and employees of political institutions.Increase revenueJanuary 2020
Publish a 2020 Treasury Plan on the Ministry of Finances’ website, consistent with realistic receipts and financing previsions to serve as a guide for expenditure commitmentsRationalize expenditureJanuary 2020
Publish the complete, audited 2018 financial statements of the BCC on the BCC’s websiteStrengthen BCC transparencyDecember 2019
Sources: Congolese authorities and IMF staff
Sources: Congolese authorities and IMF staff

16. Decisive domestic revenue mobilization measures will be taken in coming months. Those measures are projected to increase government revenue by more than 20 percent next year.

  • Restoring the functioning of the VAT by (i) transferring back to the DGI the responsibility of paying VAT credits to mining companies (using a risk-based approach) through an escrow account to be fed by the allocation of the VAT collected by the customs administration (DGDA) from mining companies and a fraction of the VAT collected by the internal revenue service (DGI), and (ii) discontinuing blanket VAT exemptions for mining companies (end-January 2020 SB). In accordance with the law, no new VAT exemptions or exemption renewals will be granted.
  • Enforcing the personal income tax (IPR) so that all government employees, including civil servants, public agents, and members of political institutions pay income taxes on the entirety of their compensation (base salary plus bonuses and others—currently only the former is taxed) withheld at the source starting with the January 2020 pay (end-January 2020 SB). This would also enforce fair treatment among taxpayers.
  • Surveying fees and payments to various government entities collected at the port of entry to counter the structural decline in custom revenue and with the purpose of rationalizing and consolidating them in the medium-run.
  • Starting to reduce tax exemptions. To that effect, the 2017 report on tax expenditures will be an annex to the 2020 budget law to enhance transparency on their costs and help create political support for their rationalization.
  • Mobilizing one-off revenue sources from transferring unused earmarked resources from public entities to the Treasury. The timeline and quantification of that measure hinges on bilateral agreements regarding contributions to the budget.

17. The government is stepping up its efforts to control spending execution. Specific spending caps will be communicated to line ministries and other spending units, and weekly meetings of top government officials in charge of public finances under the chairmanship of the Prime Minister will continue to take place to decide on priorities in terms of spending commitments. The government is committed to strictly respect all the steps of the spending chain and to limit exceptional spending procedures to emergency cases. In terms of new spending initiatives, free basic education and the President’s 100-day program will have to be adjusted to be consistent with available resources. Control of spending commitment will be strengthened and aligned with available resources to avoid arrears accumulation.

18. Spending execution will be managed in the context of a Treasury Plan. In recognition of the overly ambitious projections in the draft 2020 budget, a Treasury Plan has been formulated on the basis of realistic revenue and financing projections and consistent with a 0.4 percent of GDP deficit for 2020 and no access to BCC financing. The Treasury Plan will be posted on the ministry of finance’s website, and will guide the execution of budgetary spending while avoiding the accumulation of arrears (end-January 2020 SB). The issuance of Treasury bills and bonds will continue in 2020, with a planned net placement of CF350 billion (Box 3). The government is also planning to start expanding the maturity of Treasury bills (currently 3 months) in 2020.

Box 3.The Reintroduction of Treasury Bills and Bonds

In the past, the Ministry of Finance used to issue treasury bills and bonds to finance the budget. The practice was discontinued in 1991 because demand for government securities dried up as the government started to have problems in repaying them. Following a June 2018 decree, issuances were re-introduced, with repayments automatically debited from the Treasury account of the Ministry of Finance at the BCC to avoid past problems. The BCC acts as the financial agent of the government for issuances on the basis of the Ministry of Finance’s Treasury plan. Updated information on the planned and actual issuance is published on the BCC and Ministry of Finance websites. The first four issuances of 90-day Treasury bills took place in October 2019, raising CF62 billion at a weighted average rate of 4.5 percent. The Ministry of Finance’s goal is to issue (on a net basis) CF150 and CF350 billion in 2019 and 2020, respectively. A debt management technical assistance (TA) mission in November 2019 assisted with the formulation of a medium-term debt management strategy, which is expected to be adopted by the Minister of Finance in the coming weeks.

19. Structural reforms will be critical to strengthen fiscal management. The authorities’ macroeconomic framework needs to be refined to enhance budget credibility, including through improved mining revenue forecasting and the preparation of sectoral expenditure frameworks. Implementation of a treasury single account remains a key objective for the medium term. Fund technical assistance will focus on those high-priority areas to maximize country ownership and absorption capacity.

B. Enhancing monetary policy and strengthening financial sector stability

20. Monetary and exchange rate policies will aim to keep inflation in single digits and help build an adequate international reserve buffer. The BCC will continue to use its main policy instruments, namely issuance of short-term BCC bonds and reserve requirement ratios, to deliver on price stability, though it is expected that Treasury bills and bonds will have a more predominant role in monetary policy management in the future. New repo instruments and open market operations are being designed to increase the effectiveness of monetary policy. In line with inflation objectives, the BCC will keep money base growth (its operational target) below 10 percent in 2020, adjusting its policy rate or other instruments as needed. Foreign exchange sales will be parsimonious to smooth out volatility in the FX market. The BCC will stop providing advances and loan guarantees to the government.

21. Unencumbered foreign currency deposits of the BCC placed in local commercial banks will be transferred to BCC accounts abroad to increase official foreign reserves, starting in December 2019 (prior action for the RCF). Unencumbered BCC FX deposits in domestic commercial banks, including term-deposits that have not yet reached maturity, had increased in recent years reaching around US$241 million at end-October. Similarly, FX deposits used as guarantees against government loans will be immediately transferred to BCC accounts abroad as soon as these guarantees are no longer necessary. In addition, there will be no further use of BCC FX reserves as guarantees against government loans (indicative target). Given ample FX liquidity and the relatively limited size of deposits to be transferred relative to the stock of deposits, those operations should not affect the stability of the banking system. It is expected that this expatriation of deposits, together with the RCF disbursement in December 2019 and the projected fiscal adjustment in 2020, will help increase FX official reserves to at least US$1,078 million by end-December 2020 (Text Figure 2).

Text Figure 2.Projected Increases in BCC FX Gross Reserves

Sources: Congolese authorities and IMF staff calculations.

22. Going forward, new deposits will be subject to reserve requirements in the same currency as their denomination, in an effort to improve financial stability by reducing currency mismatches in banks’ balance sheets. The BCC is currently assessing the operational and monetary policy implications of this measure. Setting this policy only for future increases in deposits in foreign currency would facilitate the gradual operational implementation of this measure, reduce potential related vulnerabilities to the BCC, and improve liquidity in local currency, but it may discourage de-dollarization.

23. Other measures are being considered in order to increase transparency and governance at the BCC. Audited BCC financial statements for 2018 have been recently completed and they will be fully published in coming months (end-December 2019 SB) as required by the BCC Law. Staff was informed that there is a recapitalization plan for the BCC as set by a government decree. It encompasses two measures, a conversion of CF113 billion in equity and the injection of CF104 billion in new equity contributions from the government. The plan is expected to materialize over the medium term. A safeguards assessment mission by the Fund’s Finance Department is set to take place in early 2020. In addition, the BCC continues to evaluate the efficiency of strategic measures taken to de-dollarize the economy and to update them as needed.

24. BCC will continue to improve its banking supervisory capacity in the coming years with technical assistance from the Fund. The authorities are considering implementing Pillar II of Basel II, as well as the NFSR requirements and the market discipline pillar from Basel III. A forthcoming Fund TA mission will strengthen the CAMELS supervisory ratios, while migration to IFRS 9 is also in the process of being implemented. Fund comments on the draft revised Banking Law have been submitted, with the new Law expected to be passed in 2020.

C. Fostering inclusive growth and private sector development

25. Broadening access to health care and education are key policy objectives of the new government. The recently introduced free basic education would provide access to education to millions of children, many for the first time. It is also a rare opportunity where the government is making a progressive transfer to their people, as education costs represent a larger share of income for the poor. The authorities are also preparing to introduce universal health insurance coverage, a step that could save countless lives given the widespread presence of serious tropical infectious diseases. These are important initiatives, but it will be important that they proceed only with adequate financing in place.

26. Improving the business climate is critical to fostering private sector development and growth. The authorities plan to re-launch the survey of all illegal taxes, fees, and payments levied by public entities without the authorization of the Ministry of Finance as per the law and proceed to cancel them. Recommendations of various technical assistance missions on tax policy and revenue administration will be implemented in earnest with support from relevant partners. As for the judiciary, the first step is to organize a national conference with all stakeholders to discuss the issues that undermine the judicial system with a view to finding solutions. In this respect, the authorities plan to approach the judiciary of advanced nations to seek their technical assistance in reforming the judiciary system.

27. It is critical to increase transparency and accountability in the management of DRC natural resources, improving governance in general, and combating corruption. Henceforth, all new contracts entered into by the central government, provincial governments, SOEs, or any other public entities in the mining, hydrocarbon, and forestry sectors will be published in the website of the Ministry with relevant jurisdiction. With support from the World Bank, financial and functional audits of SOEs will be undertaken and published.5 The authorities are prepared to take all steps necessary to facilitate and support the upcoming IMF governance assessment mission and are fully committed to the publication of its final report and to the implementation of its main recommendations. The 13 measures required by the EITI validation process will be implemented expeditiously. In particular, the authorities will hire an EITI national coordinator in line with the EITI procedures and code of conduct, and adopt a governmental decree on the functioning of the EITI Executive Committee in line with the recommendations of the EITI Board’s validation process. In the last few weeks, a dozen previously unpublished mining contracts have been uploaded on the official DRC EITI website, including important ones involving cession of mining rights owned by the Gécamines, DRC’s mining state-owned enterprise.

Capacity Development

28. Capacity development will be stepped up, and is an important part of the Fund’s re-engagement strategy. The technical assistance provided over the last few years was focused on hands-on and near-term topics. The Fund’s capacity development strategy for DRC aims at improving budget preparation and execution, strengthening banking supervision and regulation, reinforcing revenue mobilization, and improving national accounts and fiscal data (Annex II). Those activities will need to be closely coordinated with other providers of technical assistance to avoid overlaps and leverage complementarities, particularly in a context of increased engagement of DRC with the international community. A case in point is the upcoming PEFA exercise financed by the EU and coordinated by the World Bank, where the Fund will participate in its Steering Committee, provide comments on draft reports, and integrate the findings in the workplan of a project under the Managing Natural Resource Wealth Trust Fund.

Program Design and Capacity to Repay

29. The SMP covers a period until May 2020 and will be monitored on the basis of quantitative indicative targets and structural benchmarks (MEFP, Tables 1 and 2). The indicative targets (ITs) include a floor on BCC net foreign assets, a ceiling on net central bank credit to the government, a ceiling on the placement of Treasury bills and bonds by the central government, a ceiling on the contracting or guaranteeing of new nonconcessional external debt, the non-accumulation of external arrears, a floor on the domestic fiscal balance, and a zero ceiling on the accumulation of wage arrears. The test dates for the first review will be end-December and end-March, and end-May (on a select set of ITs) for the second review. Risks to SMP implementation include an inability to control spending pressures and delays in implementing revenue measures.

30. Consistent with the results from the Article IV consultation, the debt sustainability analysis (DSA) indicates that the DRC remains at a moderate risk of debt distress (DSA). In 2018, external debt was equivalent to 13.7 percent of GDP, of which liabilities from the mining infrastructure project Sicomines represented almost 40 percent. Vulnerabilities reflected in high debt-service-to-revenue ratios persist, highlighting the importance of increasing revenue mobilization. The DRC carries external arrears to four non-Paris Club creditors which date from pre-HIPC period and it is making best efforts to seek Paris Club comparable terms in negotiations with those creditors. DRC capacity to repay the Fund remains adequate in the medium and longer terms but it is affected in the short term by the low level of reserves in 2019 (Table 5). Key risks that could affect the capacity to repay are a slowdown in the Chinese economy (and associated losses of fiscal revenues, exports and reserves), and a continued monetization of the fiscal deficit.

31. An updated safeguards assessment of the BCC is planned for the first quarter of 2020. The last assessment was completed in 2010. The new assessment will review developments in the central bank governance and control framework, including progress in transitioning to IFRS, and provide recommendations to address identified vulnerabilities.

Staff Appraisal

32. The Congolese economy faces multiple long-standing fragility challenges and remains highly vulnerable to external shocks. DRC is a fragile state with pervasive poverty and massive development needs, prone to conflicts and humanitarian and health crises. Economic growth has been lackluster and private investment remains weak because of a challenging business environment, economic governance vulnerable to corruption, and limited access to financing including from external sources. While macroeconomic policies in recent years have achieved elements of macroeconomic stability, the overall situation is precarious. The recent fall in commodity prices, the costs of new spending initiatives to increase access to education and reduce infrastructure gaps, and looser spending oversight during the political transition period have led to a weaker fiscal position mostly financed by the central bank. In that context, international reserves have fallen to critically low levels (one week of import coverage).

33. The new government that took office in September is keen on restoring fiscal discipline and advancing economic reforms. The key focus is on reforms aimed at strengthening spending controls, mobilizing domestic revenue, reinforcing international reserves, and improving governance and transparency. Budget execution in the last weeks of 2019 is being tightened, based on stopping the recourse to central bank financing through a strict implementation of a cash-based budget and by raising one-off revenue sources. Budget execution in 2020 will be anchored on the publication by end-January of a Treasury Plan based on realistic revenue and financing projections. This is a fundamental element of performance under the SMP that will guide the implementation of specific spending caps on line ministries and other spending units and will anchor decisions on spending priorities in weekly meetings of top government officials in charge of public finances under the chairmanship of the Prime Minister. The government is committed to strictly respect all the steps of the spending chain and to limit exceptional spending procedures to emergency cases. The free basic education initiative will be implemented gradually, with assistance from the World Bank, and the implementation pace of the President’s 100-day program will be adjusted to available resources.

34. Decisive revenue mobilization measures are being taken to help fulfill the government’s ambitious developmental and social plans in a sustainable way. The authorities will restore the normal functioning of the VAT system by reestablishing a credible mechanism to pay VAT refunds to mining companies and lifting the suspension of VAT collection on mining companies’ imports. In addition, they will enforce collection of the personal income tax on all compensations of public employees and spearhead the rationalization of tax exemptions by the publication of a 2017 report on tax exemptions as an annex to the 2020 budget; they will also suspend the offsetting of tax arrears against tax liabilities. These measures are projected to yield at least 1 percent of GDP in additional government revenue.

35. Monetary and exchange rate policies will aim to keep inflation in single digits and help build an adequate international reserve buffer. The BCC will continue to focus on delivering price stability. To that effect, new repo instruments and open market operations are being designed to increase the effectiveness of monetary policy. In line with inflation objectives, the BCC will keep money base growth (its operational target) below 10 percent in 2020, adjusting its policy rate or other instruments as needed. Foreign exchange sales will be parsimonious to smooth excess volatility in the FX market. The BCC will stop providing advances and loan guarantees to the government. In addition, the BCC will transfer BCC unencumbered foreign currency deposits placed in local commercial banks into its own accounts abroad to increase official foreign reserves and thereby reduce economic vulnerabilities.

36. Important initial measures to improve governance and the business environment will be implemented. Staff welcomes the authorities’ intention to make all new mining contracts publicly available, ensuring transparency in an area where governance weaknesses have featured in the past. The authorities are committed to continued smooth functioning of the EITI process for resource revenue transparency. They have published new mining contracts and will start reducing the tax burden and other unofficial payments. Staff welcomes these important actions and commitments. The upcoming governance assessment mission will help with the formulation of measures to tackle corruption and improve governance.

37. Addressing DRC’s deep-rooted challenges will take time, determination to stay the course, and sustained and coordinated support from the international community. The immediate priority is to restore the critically low level of international reserves, while starting the formulation and implementation of an ambitious, comprehensive, yet realistic, reform strategy to deliver higher and inclusive growth that can benefit broader segments of the population. To this end, the authorities have requested a Rapid Credit Facility (RCF) to help rebuild international reserves, accompanied by a Staff Monitored Program through end-May 2020 to support the preparation of adjustment policies and a reform strategy. Significant capacity development activities will also be critical to help strengthen institutions and deliver outcomes.

38. Staff supports the authorities’ request for a disbursement under the RCF in the amount of SDR 266.5 million (25 percent of quota) to tackle the urgent balance of payments’ needs linked to the very low level of international reserves and recommend its approval by the Board. In addition, staff has agreed an SMP with the authorities, which is presented to the Board for information. The SMP will provide an opportunity for the authorities, with assistance from their partners, to develop a deeper structural reform agenda that could eventually be implemented with support from the IMF Extended Credit Facility (ECF) arrangement in 2020.

Figure 2.Democratic Republic of the Congo: Real and Fiscal Indicators, 2014–2019

Sources: Congolese authorities and IMF staff calculations

Figure 3.Democratic Republic of the Congo: Monetary and Financial Indicators, 2015–2019

Sources: Congolese authorities and IMF staff calculations

Annex I. Risk Assessment Matrix (RAM) 1
Source of RisksLikelihood/Time HorizonExpected Impact on EconomyPolicy Response
Potential Domestic Risks
Loosening of the fiscal stanceMediumMedium

Macroeconomic stability may be undermined if the government resorts to monetary financing.
- Prepare realistic budgets, aligning spending with available revenue and identified external financing sources.

- Endure prudent external borrowing.
Deterioration of relationship between coalition partnersMediumMedium

Policymaking would be undermined and economic uncertainty would increase.
- Maintain expenditure restraint and avoid monetary financing of government operations.
Escalation of Ebola epidemicLowLow (for the whole country)

The current epidemic is taking place in areas not well integrated with the rest of the country and vaccination campaigns have been effective. Still, economic activity in those areas and trade with neighboring countries may be affected.
- Prepare contingency planning.

- Obtain external technical and financial support and mobilize domestic resources to fight the epidemic.
Ongoing armed conflicts escalateLowLow (for the whole country)

Economic activity would be hurt though mostly in specific areas not well integrated with the rest of the country.
- Make room for a budgetary contingency for such an emergency.
Withdrawal of the only correspondent banking relationshipLowMedium

Short-term disruption of financial transfers to the rest of the world, with potential systemic effects to the whole economy. Substitution by less efficient payment service providers.
- Prepare contingency plans in case of operational or financial failures

- Promote the opening of new correspondent banking relationships with other local banks
Potential External Risks
Rising protectionism and retreat from multilateralism.MediumMedium

Demand for export products and their prices would fall, hurting the domestic economy.
- Accumulate international reserve buffers. Diversify the structure of the economy and export sources.

- Increasing participation in regional trade area agreements (EAC and AfCFTA)
Weaker-than-expected growth in China and globallyMediumHigh

Demand for export products and their prices would fall, hurting the domestic economy.
- Accumulate FX reserve buffers.

- Diversify the structure of the economy and export sources.

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly. “Short term” and “medium term” are meant to indicate that the risk could materialize within 1 year and 3 years, respectively.

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly. “Short term” and “medium term” are meant to indicate that the risk could materialize within 1 year and 3 years, respectively.

Annex II. Capacity Development Strategy

CD Strategy

  • The Fund’s CD strategy for the Democratic Republic of the Congo over the medium term focuses on: (i) improving governance institution and laws and stepping up the fight against corruption; (ii) reinforcing revenue mobilization; (ii) improving public financial management, in particular, reinforcing budget preparation and execution capacity; (iii) strengthening banking supervision and regulation capacity; and (iv) improving collection and publication of national accounts and fiscal data. This CD strategy is broadly aligned with the one delineated in the February 2016 strategy note.

Key overall CD priorities going forward

PrioritiesObjectives
Governance assessmentAssess the quality of institutions and laws in (i) public financial management; (ii) central bank’s governance and operations; (iii) fight against corruption; and (iv) preventing money laundering and terrorism financing.
Public financial managementImprove budget preparation and execution; reform public accounting, treasury management, and audit processes.
Financial supervision and regulationImprove banking supervision and regulation capacity.
Tax policySimplify and rationalize taxes. Estimate and rationalize tax expenditures.
Strengthen macroeconomic and financial statistics compilation and disseminationImprove compilation of national accounts and update data to recent years; improve compilation of fiscal data.

Main risks and mitigation

Political instability is the main risk by complicating the actual delivery of technical assistance (TA) and by undermining the ownership of associated reforms. Commitment and capacity to implement TA recommendations under a new government will need to be assessed. Sustained engagement with the new authorities will be required to agree on TA plans and key objectives and to increase the potential return of the Fund’s CD activities.

Authorities’ views

The authorities agreed on the identified focus areas for CD support from the Fund. Notably, they are seeking assistance in:

  • Developing guidance notes on issues related to budget processes and fiscal data compilation.
  • Organizing a seminar for members of parliament and senators on budget credibility and PFM.
  • Reinforcing banking supervision.
Appendix I. Letter of Intent

Kinshasa, December 3, 2019

Ms. Kristalina Georgieva

Managing Director

International Monetary Fund

Washington, DC 20431

United States of America

Dear Madame Managing Director:

Our government is determined to turn around the fortunes of our country and of our people. For most of its history, the DRC has suffered from recurrent humanitarian and political crises. Violence in too many parts of our country have led to millions of deaths, internally displaced people, and refugees in neighboring countries. Outbreaks of deadly diseases frequently kill scores of people. Economic dislocation and disruptions have led to a drop in real income from above US$1,100 in 1990 to less than US$500 in 2018, exacerbating extreme poverty which hovers around 70 percent. Our natural resources have been a scourge rather than a blessing, feeding corruption and bad governance. Our government is determined to change this situation and deliver positive change, better living conditions, and a hopeful future to our people.

For the first time in our history we experienced a pacific transfer of power and the government immediately set out to address deep-seated economic problems affecting our people. President Tshisekedi took over in January 2019 after peaceful elections and a new coalition government was appointed in September. However, the government faces significant challenges. Growth is not strong nor inclusive enough, poverty is rife, infrastructures are either nonexistent or in advanced state of disrepair, poor governance and an unwelcoming business environment are scuttling business and investment opportunities, and exports are prone to price shocks. The President’s 100-day program set out to address urgent needs of infrastructure and basic social services and is delivering value appreciated by our people. We introduced free basic education, providing schooling opportunities to millions of our children, sometime for the first time. Unfortunately, these initiatives have led to spending pressures and erosion of international reserves, threatening macroeconomic stability that we achieved through self-designed strong adjustment after a severe commodity price shock in 2015–16.

Our economic program is predicated on deep structural reforms supported by a stable macroeconomic environment. We target entering into a medium-term program supported by the IMF Extended Credit Facility (ECF). But we understand that we need some time to develop, with support from our partners, a broad set of reforms that would constitute the basis for the ECF-supported program. In this regard, we welcome the upcoming IMF governance assessment mission, the PEFA exercise, the safeguard assessment of the central bank and other such diagnoses. We will also fully exploit recommendations from various technical assistance received over the years. In the short run our main goal is to safeguard macroeconomic stability in the face of very low level of international reserves (covering only a week of imports).

The Government of the DRC requests the support of the IMF to shore up central bank international reserves during the transition period while we prepare a strong and broad structural reform agenda. We request support of 25 percent of quota under the Rapid Credit Facility together with a six-month Staff Monitored Program. This program’s main policies include enhanced revenue mobilization and expenditure controls to reduce the fiscal deficit and repay some of the advances the Bank of Congo made to the government in 2019; discontinue any advances from the central bank; transfer abroad the BCC foreign currency deposits in local banks to increase its international reserves; take steps to improve governance in the mining sector and in state-owned enterprises; improving the business climate through measures to rationalize taxes and charges and make the judiciary system fairer.

The Government agrees to provide the IMF with information on the implementation of the agreed measures and the execution of this program, as provided for in the attached Technical Memorandum of Understandings (TMU). In addition, the Government of DRC agrees with the publication of this Letter of Intent (LOI), the attached MEFP and TMU, as well as the IMF staff report related to the request for a disbursement under the RCF and the Debt Sustainability Analysis, following approval by the Executive Board of the IMF. As per the consultation clause, the authorities will consult with the IMF before implementing any revisions to the policies contained in the MEFP.

Sincerely,

/s/

Ilunga Ilunkamba Prime Minister

Attachments:

- Memorandum of Economic and Financial Policies

- Technical Memorandum of Understanding

Attachment I. Memorandum of Economic and Financial Policies (MEFP) for a 2019 Staff-Monitored Program

I. Background and Overview

1. For most of its history, the DRC has experienced recurrent humanitarian, health, and political crises and violent conflicts. Our abundant natural resources have unfortunately been sources of armed conflicts and political instability. Violent conflicts in many parts of the country have led to millions of internally displaced and refugees in neighboring countries. Frequent outbreaks of Ebola and measles and cholera have killed many. Political instability has led to non-pacific transfers of power since independence. This instability has affected economic performance, perpetuating and sometimes exacerbating poverty. Real income per capita declined from above 1,100 USD in 1990 to less than 500 USD in 2018. Extreme poverty incidence has reached 73% in 2018, one of the highest in Sub-Saharan Africa and in the world. The Congolese people wants to see an end to this sorry situation and their government is determined to deliver positive change, better living conditions, and a hopeful future.

2. For the first time in our history we enjoyed a pacific transfer of power with the swearing in of President Tshisekedi early in 2019. This milestone has been followed by the installation of a coalition government including members of the CASH and of the FCC coalitions, which took office in September. The government is determined to usher in a new era of peace and rapid, sustainable, and inclusive growth. To achieve these objectives, it is important for our country to renew relations with our partners

3. The present memorandum of economic and financial policies presents the program of reforms of the DRC government for the rest of 2019 and the first half of 2020. It supports the staff monitored program and accompanies the request for a disbursement under the Rapid Credit Facility. Over recent years the country has achieved macroeconomic stability as illustrated by the reduction of inflation to single digits and the relative stability of the exchange rate and of the financial sector. However, in the face of a recent sharp erosion of international reserves, the government seeks in the near term to safeguard macroeconomy stability. Policies will focus on building international reserves, increasing revenue mobilization, and implementing governance reforms, such as enhancing transparency.

4. To address urgent balance of payments needs, the government has asked for IMF financial support under the Rapid Credit Facility together with a six-month SMP. Our policy of re-engagement with the international community envisages a medium-term economic program supported by an IMF’s Extended Credit Facility (ECF) in the second semester, which would play a catalytic role in unleashing donors’ support. However, the government understands that it needs more time to develop a well-balanced macroeconomic policy package and a strong structural reform agenda that could be supported by such facility. In this respect, the government welcomes an upcoming governance assessment mission by the IMF, the EU-funded PEFA exercise, and other relevant diagnostics that would provide additional inputs for developing our structural reform agenda. In the meantime, to bolster the very low level of international reserves, the government has requested balance of payment support under the RCF together with an SMP.

II. Recent Economic Developments and Short-Term Outlook

5. After rebounding in 2018 owing to strong mining production and international prices, real GDP is projected to slow in 2019. Real GDP growth is projected to slow to 4.5 percent in 2019 from 5.8 percent in 2018, with extractive GDP growth falling from 16.9 to 5.4 percent in the context of lower international commodity prices. By contrast, non-extractive GDP growth is projected to accelerate thanks to the resumption of economic activity after the presidential elections, higher demand resulting from increased government employees’ salaries, and the President’s 100-day program. Twelve-month inflation has continued to decelerate and the exchange rate has remained stable.

6. GDP growth in 2020 is expected to slow down further due to the shutdown of one of the largest copper and cobalt mines in the country. GDP growth is projected to slow to 3.2 percent in 2020, mainly reflecting the negative impact of the planned suspension of production at the Mutanda Mine (MUMI) in 2020 and 2021 as well as the closure of Boss Mining, and despite continued acceleration in non-extractive GDP growth rates (5.4% in 2020). Inflation would remain stable at around 5 percent, below the medium-run objective of 7% annual inflation

7. The macroeconomic situation appears fragile as recent data point to the need to take measures to safeguard macroeconomic stability. The fiscal deficit in 2019 has been picking up relative to 2018 and, given the absence of financing options, it has been financed through central bank provision of advances and of central bank loan guarantees (in the form of foreign currency deposits) to commercial banks, and Treasury bonds. The fact that part of the monetary financing was made in foreign currency allowed to stabilize the exchange rate and keep in check the increases in inflation while eroding international reserves to barely a week of import coverage. This can threaten the relative stability of the exchange rate and increase the risk of re-igniting inflation. Aside from that, the central bank has carefully managed liquidity through the issuance of BCC bills and bonds and has maintained its policy rate at 9 percent and a high ratio of mandatory reserves which are constituted in local currency regardless of the currency of deposit.

8. Despite generally prudent debt policy DSA indicates that DRC is at moderate risk of debt distress. While the external public debt stock amounts to only 14 percent of GDP, the debt service to revenue ratio remains elevated.

III. Economic and Financial Program for the remainder of 2019 and for 2020

Fiscal policy

9. Spending pressures and repayment of domestic arrears have complicated budget execution in 2019. The implementation of the President’s 100-day program, the increase of the wage bill, and the introduction of free basic education (primary plus two years of secondary schooling) have significantly increased spending. Revenue collections, on the other hand, have been more or less in line with projections but offsets for tax credit and other domestic arrears by taxpayers has limited revenue remitted to the Treasury. As of end-September, the central government domestic balance in cash basis reached a deficit of 1 percent of GDP financed through central bank advances and loans from commercial banks collateralized by the central bank. This compares to a surplus of 0.2 percent of GDP in 2018. The government intends to restrain spending and boost revenue through one-off measures so as to limit the 2019 domestic and overall deficits on a cash basis to 1 and 2.3 percent of GDP, respectively, partly financed by the issuance of newly introduced Treasury bills. The government will discontinue recourse to central bank financing as of end-October. For the year as a whole, central bank advances to the government will be limited to 0.7 percent of GDP.

10. The government is ramping up efforts to control spending. Free basic education will be implemented gradually by focusing on lower grades first. Spending will no longer be initiated by the State House outside of normal budgetary procedures. The government is committed to strictly respect all the steps of the spending chain. Exceptional spending procedures will only be used in case of emergency and in line with the code of procedures and the public spending circuit. The remaining path of implementation of the (one-off) President’s 100-day program will be adjusted to available resources. In order to regain control over spending, the government will institute monthly caps for each ministerial-level cabinet and for those of other top-level government and Parliamentary officials. The government will continue with the practice of convening weekly meetings of top government officials in charge of public finances under the chairmanship of the Prime Minister to review incoming data and spending commitments and decide on priorities. The government will strengthen control of spending commitment and strictly align them with available resources so as to avoid the accumulation of arrears. To that end, the government will check the consistency between the spending commitment plan and the cash flow plan.

11. The government will mobilize one-off revenue sources in the short-term to limit the deficit in 2019 and reduce the stock of central bank advances. We will seek a one-off transfer from deposits of public entities into the Treasury. Efforts will be made to start redirecting into the Treasury revenue streams that normally belong in the Treasury, including earmarked funds. The government will require detailed financial statements from all “comptes speciaux” and appoint public accountants to certify them and determine potential contributions to the budget in the future.

12. The 2020 budget seeks to fulfil the President’s ambition to improve the livelihood of the Congolese people. In this context, the government will continue with the recently introduced policy of free basic education. Any residual intervention under the President’s “100 day” program will be fully integrated into the budget and associated spending will be undertaken following normal budgetary channels. The budget also seeks to provide relief and basic services to every corner of our country. However, it would be a challenge to increase revenue enough to meet budgeted spending plans. We will endeavor to adjust those to match realistic revenue projections and reasonable expectations of international support. In that context, and to guide expenditure commitments by line ministries and spending units, we will prepare a realistic Treasury Plan that will be posted on the website of the Ministry of finance (structural benchmark).

13. The government will substantially step up its domestic revenue mobilization efforts. By January 30, the government will take steps to restore the functioning of the VAT by (i) transferring back to the DGI the responsibility of paying VAT credits to mining companies (using a risk-based approach) through an escrow account to be fed by the allocation of the VAT collected by the DGDA from mining companies and a fraction of the VAT collected by the DGI, and (ii) discontinuing blanket VAT exemptions for mining companies (structural benchmark). In accordance with the law, no new VAT exemptions or exemption renewals will be granted. The personal income tax (IPR) will be more strictly enforced so that all government employees, including civil servants, public agents, and members of political institutions will henceforth pay the income tax on the entirety of their compensation (base salary plus bonuses and others) withheld at the source beginning starting with the January 2020 pay (structural benchmark). This would also enforce fair treatment among taxpayers. In the face of the structural decline in custom revenue in relative terms, we will survey fees and payments to various government entities collected at the port of entry for the purpose of rationalizing and consolidating them in the medium-run. This measure will help reduce customs costs as well as incentives for fraud and smuggling and ultimately increase custom revenue. The government intends to resolutely reduce tax exemptions to boost revenue. In this context, we will attach the 2017 report on tax expenditures as an annex to the 2020 budget law to enhance transparency on their costs and help create political support for their rationalization. The government intends to digitize all internal receipts recovery procedures by revising all the legislation pertaining to the means of debt payments to the central administration. The government commits to stop the use of tax offsetting mechanisms.

14. The 2020 budget plan is predicated on no central bank advances. The domestic and overall deficits will be limited to 0.3 and 0.6 percent of GDP, respectively. The government intends to issue a net amount of CF350 billion worth of Treasury bills and bonds in 2020. Given the uncertainty around the amount and timing of budget support and/or concessional lending from development partners that could be secured in 2020. We understand that the World Bank and the AfDB will be prepared to disburse their budget support soon after an ECF-supported program would have been approved.

15. The government will continue to work on improving public financial management, including with support from the IMF. The government intends to update its public financial management reform strategy in 2020. Preparation of the medium-term macroeconomic framework needs to be refined to enhance budget credibility, including through improved mining revenue forecasting and the preparation of sectoral expenditure frameworks. The IMF will assist with those objectives through dedicated technical assistance on PFM. In the next few months, the government will sign a decree establishing the Direction Générale du Trésor et de la Comptabilité Publique. Implementation of a treasury single account remains a key objective for the medium-term.

Public debt policy

16. Debt policy will be tightened given that our country is classified by the DSA to be in moderate risk of debt distress. Our policy will be guided by our medium-term debt strategy to be adopted by the Ministry of Finance by end-December 2019. The government will seek to contract concessional lending in priority. Any non-concessional borrowing will have to be in line with an improving debt profile and debt sustainability analysis. We commit to establishing a mechanism for collecting and reporting data on SOEs debt stock and debt service on a quarterly basis, focusing initially on debt passed on to companies in the State’s portfolio We commit not to run any external arrears.

Monetary policy and stability of the financial system

17. Monetary and exchange rate policy will aim at keeping inflation in single digits and help build an adequate international reserve buffer. The BCC will continue to use its policy instruments, namely the repo rate, issuance of BCC bonds, and reserve requirement ratios to control liquidity (base money growth should be restricted to less than 12 percent in 2020) and deliver on price stability. However, it is expected that issuance of Treasury securities will have an increasingly prominent role in setting monetary policy targets. In collaboration with the Ministry of Finance, the BCC has taken steps to ensure that maturing government Treasuries are repaid automatically. The BCC has set up an escrow account where all proceeds from T-bills and bonds issuance are deposited and from where repayments at maturity will be made. In the context of weak international reserves, foreign exchange sales will be parsimonious and will be used primarily to smooth out volatility in the forex market.

18. Expatriation of forex deposits at domestic banks. Most unencumbered BCC forex deposits in domestic commercial banks (US$160 million) will be transferred to BCC bank accounts abroad by December 5, 2019 (prior action). BCC term deposits at commercial banks that have not yet reached maturity will be transferred abroad upon their maturity. Similarly, foreign exchange deposits used as collateral against government loans will be immediately transferred to BCC accounts abroad as soon as those collaterals are no longer necessary. No new guarantees against government or BCC loans with BCC international reserves will be allowed, henceforth. The BCC will evaluate the efficiency of strategic measures taken to de-dollarize the economy and update them as needed.

19. We are also considering other governance measures to strengthen transparency and operational efficiency of the BCC. We will study the possibility of constituting all new mandatory reserves in the currency of deposits, and the operational and monetary policy implications of this measure. Also, there is a recapitalization plan for the BCC as set by government decree. The plan encompasses two measures, a conversion of capital gains from assets revaluations worth CF113 billion into equity, and the injection of CF104 billion in new equity contributions from the government. The plan is expected to be materialized in the medium-term. The BCC will publish on its website its audited financial statements for 2018 by end-December (structural benchmark). We will cooperate with IMF staff by providing them with any document or information requested to prepare for the safeguard assessment of the BCC that will take place in early 2020. Based on the recommendations received, we will set a plan to reform the 2018 Central Bank Law.

20. The financial system remains stable, but the BCC will continue strengthening its banking supervisory capacity in the coming years with the technical assistance of the IMF. The banking system is adequately capitalized and relatively profitable and liquid, but NPLs have increased in the past years, reaching a level of 16.1 percent as September 2019. Pillar II of Basel II is being implemented, as well as the NFSR requirement and market discipline pillar from Basel III. Forthcoming technical assistance missions will have to be organized to implement CAMELS and ORAP rating systems. Efforts will have to be made to conclude the migration of the accounting framework towards IFRS 9 international accounting standards. In addition, the BCC will have to look into the IMF comments on the draft of the new Banking Law for the purpose of its adoption in 2020.

21. Our country is down to one single correspondent banking relationship, which raises systemic risk in case of failure in a highly dollarized economy. In a recent visit to Washington DC, the BCC Governor met with the US Treasury Undersecretary and requested a technical mission from the US Treasury to visit DRC and assess for themselves the DRC financial system.

Anti-money laundering and fight against terrorism financing

22. The government is committed to continue improving the AML/CFT framework. DRC was admitted as an associate member of the Action Group against Monetary Laundering in Central Africa (GABAC), following the agreement signed on September 5, 2017 in Brazzaville. The process of mutual evaluation of the DRC’s control mechanism by GABAC experts was initiated in line with FATF standards and methodology of 2012. The findings of this mutual assessment will be published in October 2020 at the latest. In addition, the government will receive US$10 million in technical and training assistance to enhance security and fight against corruption as part of the U.S.-DRC Privileged Partnership for Peace and Prosperity, signed in Kinshasa in September 2019. Detailed priorities are currently in discussion with the State Department’s Bureau of International Narcotics and Law Enforcement Affairs.

Inclusive growth

23. Broadening access to health care and education are key policy objectives. The government has introduced free basic education which would provide access to education to millions of children, many for the first time. The government is also preparing for the introduction of universal health insurance coverage. The President’s 100-day program allowed the construction or rehabilitation of public and social infrastructure that are improving living conditions for millions of Congolese and opening opportunities for investment and business. We will continue to explore avenues to create opportunities for the Congolese people and to reinforce our policy of providing safety net for the most vulnerable.

Improving Governance and Combating Corruption

24. The government is committed to increasing transparency and accountability in the management of DRC natural resources, improving governance in general, and combating corruption. To that effect, and in accordance to the legislation, all new contracts entered into by the central government, provincial governments, SOEs, or any other public entities in the mining, hydrocarbon, and forestry sectors will be published in the website of the Ministry with relevant jurisdiction. The government will undertake, with support from the World Bank, to publish financial and functional audits of SOEs. We will take all steps necessary to facilitate and support the upcoming IMF governance assessment mission and are fully committed to the publication of its final report and to the implementation of its main recommendations. We will comply expeditiously with the 13 measures required by the EITI validation process. In particular, we will hire an EITI national coordinator in line with the EITI procedures and code of conduct, and adopt a governmental decree on the functioning of the EITI Executive Committee in line with the recommendations of the EITI Board’s validation process.

Improving the business climate

25. The government is determined to improve the business climate. The government commits to correct the weaknesses of the tax regime and the judiciary in order to attract private and foreign investment. The government will re-launch the survey of all illegal taxes, fees, and payments levied by public entities without the authorization of the ministry of finance as per the law and proceed to cancel them. Progress on these issues will be monitored on a continuous basis at the highest-level. Over the medium term, the government will work with the IMF and other relevant partners to implement recommendation of recent technical assistance missions on tax policy and revenue administration. As for the judiciary, the government will organize a national conference with all stakeholders to discuss the issues that plague the judiciary with a view to finding solutions. We will approach the judiciary of advanced nations to seek their technical assistance in reforming our judiciary.

Program financing

26. A disbursement under the Rapid Credit Facility for 25 percent of quota will help replenish BCC international reserves. Including such disbursement, gross official reserves are projected to recover to above 3 weeks of import coverage at the end of 2019. At the same time, net foreign assets of commercial banks should continue to increase. In 2020, a net increase in central bank reserves and a smaller increase in commercial banks’ reserves are expected.

Program monitoring

27. The SMP will have three test dates of December 2019, March and May 2020 with indicative quantitative targets and structural benchmarks as shown in the attached Tables. These criteria and indicators are defined in the attached Technical Memorandum of Understanding (TMU), which defines the indicative quantitative targets and requirements with regard to the reporting of data to IMF staff. The monitoring of the program will be done by a technical troika chaired by the Finance Ministry and composed of the Budget Ministry and the BCC. The CTR will be in charge of secretariat/reporting. Such report will be shared with IMF staff on a set frequency.

/s//s//s/
Jose Sélé YalaghuliDeogratias Mutombo Mwana NyemboJean Baudouin Mayo Mambeke
Minister of FinanceGovernor of the Central Bank of CongoDeputy Prime Minister & Minister of Budget
Text Table 1.Additional measures to improve revenue mobilization
Measures2020 impact
Witholding of income tax on bonuses of civil servants, central government employees, and members of political institutionsCF 432. 5 billion
Cancellation of the compensation process of revenuesCF 461 billion
Transfer of part of special account proceed to the treasury
mining fund for future generationUS$ 10 million
FONERUS$ 10 million
RVAUS$ 1 million
Systematic transfer of the SOE income tax to the treasury
Cap on operational expenditure of public institutions
Source: Congolese authorities
Source: Congolese authorities
Table 1.Democratic Republic of the Congo: Indicative Targets Under the SMP, 2019–May 2020
201920202020
end-yearMarchMay1/
Floor on changes in net foreign assets of the BCC (US$ millions)-146116231
Accumulation of new central government loans guaranteed by the BCC (CF billions)37200
Ceiling on changes in net central bank credit to government (CF billions)55400
Ceiling on placement of Treasury bills and bonds by the central government (CF billions)15080150
Ceiling on the contracting or guaranteeing of new nonconcessional external debt, including EADs or the BCC (US$ millions)15086
Accumulation of external arrears (US$ millions)00
Floor on domestic balance – cash basis (CF billions)-86256
Accumulation of wage arrears (US$ million)00
Memorandum items:
Balance of payments support (US$ millions)36800
Contracting of new concessional external debt (US$ millions)317154256
New disbursement of external budget and project loans, and grants (US$ millions)613338541
Scheduled external debt service payments (US$ millions)13164106
Sources: Congolese authorities and IMF staff estimates and projections

Cumulative variables from January till May. Only the first four ITs will be monitored for the May test date.

Sources: Congolese authorities and IMF staff estimates and projections

Cumulative variables from January till May. Only the first four ITs will be monitored for the May test date.

Table 2.Democratic Republic of the Congo: Prior Action for the Rapid Credit Facility and Structural Benchmarks for the Staff Monitored Program
ActionsRationaleDate
Prior Action
Transfer USD160 million in FX deposits from BCC accounts at domestic commercial banks to BCC accounts in overseas banks which would be accounted for as reservesStrengthen external positionDecember 5, 2019
VAT: The Minister of Finance to make the DGI responsible for the payment of VAT refunds to mining companies (using a risk-based approach) through an escrow accounts receiving proceeds from the VAT collected by the DGDA from mining companies and a quota of overall VAT collected by the DGIIncrease revenueJanuary 2020
Lift the suspension of VAT collection for mining companies at the customs.March 2020
PIT: Enforce the inter-ministerial circular imposing personal income tax withholding on the totality of the compensation (including salaries, bonuses, and other forms of remuneration) of civil servants, other public employees and employees of political institutions.Increase revenueJanuary 2020
Publish a 2020 Treasury Plan on the Ministry of Finances’ website, consistent with realistic receipts and financing previsions to serve as a guide for expenditure commitmentsRationalize expenditureJanuary 2020
Publish the complete, audited 2018 financial statements of the BCC on the BCC’s websiteStrengthen BCC transparencyDecember 2019
Sources: Congolese authorities and IMF staff
Sources: Congolese authorities and IMF staff
Attachment II. Technical Memorandum of Understanding 2019

Kinshasa

December 3, 2019

1. This Technical Memorandum of Understanding (TMU) accompanies the MEFP of December 3, 2019. Unless otherwise indicated, all quantitative targets are measured in terms of cumulative changes since the beginning of the year. Variables denominated in U.S. dollars will be converted to Congolese Francs by using the program exchange rate of CGF 1654 per U.S. dollar; variables denominated in currencies other than the U.S. dollar (excluding the SDR and Euro) will first be converted to U.S. dollars at the September 30, 2019, US$/currency exchange rate. Variables denominated in SDRs will be valued at the program exchange rate of CGF 2839 per SDR. Variables denominated in Euro will be valued at the program exchange rate of CGF 1809 per Euro.

2. Institutional coverage: The central government comprises all units of government that exercise authority over the entire economic territory. However, unless otherwise indicated for the purposes of this memorandum, the central government does not include nonprofit organizations controlled and financed by the central government. The banking system comprises the Central Bank of the Congo (BCC) as well as existing or newly licensed commercial banks.

I. Quantitative Indicative Targets

3. The quantitative indicative targets have been established for end-December 2019 and for end-March 2020 with regard to the following variables:

  • Changes in the net foreign assets of the BCC;
  • Accumulation of new central government loans guaranteed/collateralized by the BCC;
  • Changes in net central bank credit to the government (central government);
  • Changes in the placement of Treasury bills and bonds by the central government;
  • Nonconcessional foreign loans contracted or guaranteed by the central government, local governments, or the BCC;
  • Accumulation of external payment arrears;
  • Domestic fiscal balance of the central government; and
  • Accumulation of wage arrears by the central government.

4. The quantitative indicative targets have been established for end-May 2020 only for the following variables:

  • Changes in the net foreign assets of the BCC;
  • Accumulation of new central government loans guaranteed/collateralized by the BCC;
  • Changes in net central bank credit to the government (central government);
  • Changes in the placement of Treasury bills and bonds by the central government;

Floors on the Net Foreign Assets of the BCC

5. Definition: Net foreign assets (NFA) are defined as the difference between the BCC gross foreign assets and its total foreign liabilities. Gross foreign assets are defined as the sum of the following items: (i) monetary gold holdings of the BCC kept abroad; (ii) SDR holdings kept abroad; (iii) receipts in foreign currency and (iv) convertible claims on nonresidents, such as foreign deposits and foreign securities. The following items are excluded from the definition of gross reserves: claims on residents in foreign exchange, nonconvertible currency holdings, and reserves that are encumbered or pledged in one form or another, including but not limited to reserve assets used as collateral or security for foreign third-party liabilities, and swap transactions. Foreign liabilities are all BCC foreign exchange liabilities to nonresidents (including SDR allocations), including the IMF.

6. The following adjustments will be made to the NFA floors:

  • Balance of payments support (BPS): NFA floors will be adjusted upward by an amount equivalent to 50 percent of total BPS in excess of the programmed levels. There will be no downward adjustments to the NFA floors for any shortfall in BPS.
  • External debt service payment: NFA floors will be adjusted (i) upward by an amount equivalent to under payment of external debt service relative to programmed amounts; and (ii) downward by an amount equivalent to the excess of external debt service payments relative to programmed amounts.

7. Definition: BPS is defined as all disbursed foreign grants and loans, excluding those tied to projects.

8. Definition: External debt service payments for the central government are defined as interest and principal due to foreign creditors (excluding the IMF).

9. Definition: Disbursements of external budget and project loans, and grants are defined as cash payments to the central government for contracted budget and project loans or grants by the government (excluding the IMF).

Ceilings on the Accumulation of Central Government Loans Collateralized/Guaranteed by the BCC

10. Definition: The accumulation of central government loans collateralized/guaranteed by the BCC covers central government loans guaranteed by the BCC, and is specifically understood to include central government liabilities secured by liens over BCC deposits in local or foreign currency.

Ceiling on Net Central Bank Credit to the Government

11. Definition: Net central bank credit to the government (NCG) is defined as the difference between gross BCC claims on the central government minus central government deposits at the BCC. For purposes of program monitoring, government deposits related to externally financed projects are excluded from NCG. All foreign currency denominated flows to the budget will be converted to domestic currency by using the market exchange rate prevailing at the time of the disbursement.

12. The following adjustments will be made to the NCG ceilings:

  • BPS: NCG ceilings will be adjusted downward by an amount equivalent to 50 percent of total BPS in excess of the programmed level. There will be no upward adjustment to the NCG ceilings for any shortfall in BPS.
  • External debt service payment: NCG ceilings will be adjusted (i) downward by an amount equivalent to under payment of debt service relative to programmed amounts; and (ii) upward by an amount equivalent to the excess of external debt service payments relative to programmed amounts.

Ceilings on the Placement of Treasury Bills and Bonds by the Central Government

13. Definition: The placement of Treasury bills and bonds by the central government is defined as the net issuance of domestic bills, bonds and other similar securities used to finance central government operations. This definition excludes short-term bonds issued by the BCC (“BCC bonds”) for use as instruments for monetary policy operations.

Ceilings on Nonconcessional External Debt Contracted or Guaranteed by the Public Sector

14. Definition: The public sector comprises the central government, local governments, the central bank (BCC), state-owned enterprises,1 decentralized entities and nonprofit organizations controlled and financed by the central government.

15. Definition: Debt is defined as set out in Executive Board Decision No. 6230 (79/140) Point 9, as revised on August 31, 2009 (Decision No. 14416-(09/91)). For program purposes, external debt is measured on a gross basis using the residency criterion.

16. Definition: A debt is concessional if it includes a grant element of at least 35 percent, calculated as follows: the grant element of a debt is the difference between the present value (PV) of debt and its nominal value, expressed as a percentage of the nominal value of the debt. The PV of debt at the time of its contracting is calculated by discounting the future stream of payments of debt service due on this debt.2 The discount rates used for this purpose are the currency specific commercial interest reference rates (CIRRs), published by the Organization for Economic Cooperation Development (OECD). For debt with a maturity of at least 15 years, the ten-year-average CIRR will be used to calculate the PV of debt and, hence, its grant element. For debt with a maturity of less than 15 years, the six-month average CIRR will be used. To both the ten-year and six-month averages, the same margins for differing repayment periods as those used by the OECD need to be added (0.75 percent for repayment periods of less than 15 years, 1 percent for 15 to 19 years, 1.15 percent for 20 to 29 years, and 1.25 percent for 30 years or more).

17. Definition: The ceiling on nonconcessional external debt applies to contracted or guaranteed external debt by the public sector (as defined above) for which the equivalent value has not been received. It excludes (i) the use of Fund resources; (ii) debts incurred to restructure, refinance, or prepay existing debts, to the extent that such debt is incurred on more favorable terms (including in particular a grant element higher than 35 percent) than the existing debt; (iii) concessional debts; and (iv) normal import credits having a maturity of up to one year.3

18. Definition: The guarantee of a debt arises from any explicit legal obligation of the public sector to service a debt in the event of nonpayment by the debtor (involving payments in cash or in kind), or from any implicit legal or contractual obligation of the public sector to finance partially or in full any shortfall incurred by the debtor.

Ceiling on the Accumulation of External Payment Arrears

19. Definition: External payment arrears are defined as external debt service obligations (principal and interest) of the central government that were not paid on the contractual due date. The ceiling on new external payment arrears applies continuously throughout the period covered by the Staff Monitored Program (SMP) (i.e., until end May 2020). It does not apply to external payment arrears in process of renegotiation or to cases in which the creditor has agreed to the suspension of payments pending the outcome of negotiations.

Ceilings on the Accumulation of Wage Arrears by the Central Government

20. Definition: Wage arrears are defined as approved personnel wages and salaries that have not been paid for 60 days. Wages and salaries include the total compensation paid to central government employees, including permanent benefits. These arrears will be valued on a cumulative basis from October 31, 2019.

21. Definition: Public employees are defined as civil, police, and military personnel either statutory civil servants or contractual employee of the central government.

Floor on the Domestic Fiscal Balance

22. Definition: The domestic fiscal balance (cash basis) is defined as (domestic revenue) minus (domestically financed expenditure). Domestic revenue is defined as (total revenue and grants) minus (grants). Domestically financed expenditure is defined as (total expenditure and net lending) minus (externally financed investments) minus (foreign interest payments) plus (the net accumulation of domestic arrears).

II. Data to be Reported for Program Monitoring Purposes

23. The authorities of the DRC will provide IMF staff with the data needed to monitor the program within the prescribed time limits, as indicated in the following table. In addition, it will provide monthly data on the domestic fuel price structure to assess the fiscal cost of the fuel pricing policy.

Overview of Data to be Transmitted by the Authorities
InformationProducerFrequencyTransmission expected after
1Amounts of foreign currency sold or purchased in the interbank marketBCCDaily1 day
2Amounts of foreign currency sold or purchased in the interbank market by the BCCBCCDaily1 day
3Average reference exchange rate FC/US$ on the interbank marketBCCDaily1 day
4Average reference exchange rate FC/US$BCCDaily1 day
5Average reference exchange rate FC/US$ offered by commercial banks to their customersBCCDaily1 day
6Average reference exchange rate FC/US$ used in bureaux de changeBCCDaily1 day
7Detailed monetary situation: Deposit Institutions, BCC, and other institutions with depositBCCMonthly1 week
8Detailed BCC balance sheetBCCMonthly1 week
9BCC income statementBCCMonthly2 weeks
10Interest rates term structure of deposit institutionsBCCMonthly2 weeks
11Reserves (mandatory and voluntary) of deposit institutionsBCCWeekly1 week
12Total amount of FC transactions in the interbank marketBCCDaily1 day
13Amount of BCC claims on deposit institutionsBCCDaily1 day
14Stock and issuance of BCC bondsBCCWeekly1 week
15Sales of foreign currency by the BCC (including by public tender)BCCWeekly1 week
16BCC Interest rates term structureBCCMonthly1 week
17Consumer Price IndexBCCWeekly1 week
18Consumer Price IndexINSWeekly1 week
19Financial stability indicators for all deposit institutionsBCCMonthly2 weeks
20Production, imports, and exports figures (value and volume) for main products (Tables I.3 et I.3 bis of the Condense Statistique)BCCMonthly3 weeks
21Capital and financial accounts of the Balance of PaymentsBCCQuarterly3 weeks
33Budget execution of the Treasury plan/foreign currency budget of the BCCBCCWeekly1 week
23Execution of the Treasury plan/local currency budget of the BCCBCCMonthly1 week
24Amounts and identity of holders of promissory notes guaranteed by the BCCBCCMonthly3 weeks
25Dashboard of main external indicatorsBCCDaily1 day
26Evolution of the execution of the budget plan and of the cash-flow planMF/MBWeekly1 day
27Issuance and amortization of Treasury bills and bonds: amounts, maturities, and interest ratesMFWeekly1 day
28External debt service (interests and principal) detailed by lenderMFMonthly2 weeks
29Updated amounts of external arrearsMFMonthly3 weeks
30Execution of the government cash-flow planMFMonthly2 weeks
31Promissory notes: stock, new issuance, rates and identity of creditors.MF/BCCMonthly3 weeks
32Revenues from customs and excise taxes, including from the mining sector, broken down by category.MFMonthly4 weeks
33Revenues from direct and indirect taxes, including from the mining sector, broken down by category.MFMonthly4 weeks
34Para-fiscal revenues, including from the mining sector, broken down by category.MFMonthly4 weeks
35Collection of receipts from natural resourcesCTRMonthly4 weeks
36Evolution of IBP payments by taxpayersDGIQuarterly4 weeks
37Projected spending commitment planMBQuarterly2 weeks
38État de suivi budgétaire (ESB)MBMonthly2 weeks
39Wage bill to be paid, by employee categoryMF/MBMonthly3 weeks
40Wage bill effectively paid, by employee categoryMF/MBMonthly3 weeks
41Number of employees by categoryMF/MBMonthly3 weeks
42Wage scale in the public sectorMF/MBIf any change made3 weeks
43Emergency spending: amounts approved by the Committee on emergency spending, and amounts paid and regularized by the BCCMF/BCCMonthly3 weeks
44Privatizations proceedsMF/BCCMonthly3 weeks
45Domestic debt of the central administration, by category and by creditor: stock and debt service.MFMonthly3 weeks
46Stock of budget arrearsMdBMonthly3 weeks
47Stock of wage arrearsMdF/MdBMonthly6 weeks
48Contracting of any new loans by the central administration guaranteed by the BCCMF/BCCMonthly1 week
49Contracting of any new external debt issued and/or guaranteed by the BCC in favor of any central or local administrationMF/BCCMonthly3 weeks
50Budget execution table showing the annual Treasury and commitment plans and all the spending execution stages until paymentMF/MB/BCCWeekly3 days
51Production and exports, broken down by mine and by mineralMinistère des MinesMonthly2 weeks
52Statistical brief from the weekly Tuesday meeting with the Prime MinisterMinistère du Plan / CTRWeekly3 days
53Updated GDP estimates and forecastsINS/BCCQuarterly3 weeks
2

According to the authorities, proceeds from term deposits help finance BCC operations.

3

The new Mining Code of 2018 requires mining companies to repatriate 60 percent (raised from 40 percent) of export receipts to their accounts in the DRC, with their uses subject to restrictions under the Exchange Regulation of 2014. This measure constitutes a tightening of the existing capital flow management measure (CFM) under the Fund’s Institutional View on capital flows (IV).

4

Three small banks (out of 17 in the banking system) have insufficient capital (two with Tier 1 capital under the minimum regulatory requirement of 6 percent, and one slightly above at 7 percent). The BCC has developed an action plan with those banks to increase their capital ratios to appropriate levels.

5

The WB’s planned DPO will focus on the development of human capital, improving public financial management, and reinforcing transparency and governance of state-owned enterprises and sectoral regulation. It will be accompanied by a multi-year technical assistance plan to help with the implementation of associated reforms.

1

GECAMINES, SNEL, and MIBA.

2

The calculation of concessionality will take into account all aspects of the loan agreement, including maturity, grace period, payment schedule, upfront commissions, and management fees.

3

A financing arrangement for imports is considered to be “normal” when the credit is self-liquidating.

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