Democratic Republic of the Congo: Staff Report for the 2001 Article IV Consultation and Discussions on a Staff-Monitored Program

2001 Article IV Consultation and Discussions on Staff-Monitored Program—Staff Report; Staff Supplement; Public Information Notice on the Executive Board Discussion; and Statement by the Authorities of the Democratic Republic of the Congo

Abstract

2001 Article IV Consultation and Discussions on Staff-Monitored Program—Staff Report; Staff Supplement; Public Information Notice on the Executive Board Discussion; and Statement by the Authorities of the Democratic Republic of the Congo

Executive Summary

Recent political and economic developments

  • Economic mismanagement, political turmoil, and a prolonged rundown in the economic and social infrastructure since the early 1990s, combined with the effects of the war that erupted in August 1998, have created a vicious circle of hyperinflation, continued depreciation of the currency, increasing dollarization, financial disintermediation, lack of saving, falling output, and generalized impoverishment of the population with the concomitant spread of diseases like HIV/AIDS.

  • Under the new President, Joseph Kabila, the political and security situation in the Democratic Republic of the Congo (DRC) has been improving since early 2001, thanks to the reactivation of the Lusaka cease fire agreement, involvement of the United Nations, and the enhancement of the inter-Congolese dialogue. In addition, the authorities have started the process of reconstruction and revitalization of the economy through macroeconomic stabilization, and by liberalizing the Congolese economy and opening it up to the rest of the world. In this context, understandings have been reached on a Fund staff-monitored program (SMP).

The SMP (June 2001-March 2002)

  • To address the alarming economic, financial and social situation, the authorities’ program contains a critical mass of bold and front-loaded adjustment measures, aiming principally at breaking hyperinflation, stabilizing the economic situation, and laying the foundation for a restoration of growth and reconstruction. To achieve these objectives, the macroeconomic policies envisaged in the program include, inter alia:

    • A restrained budgetary policy, centered around strict adherence to a monthly treasury cash plan;

    • A prudent monetary policy consistent with the objective of breaking hyperinflation. Central to the successful implementation of monetary policy will be the restoration of the independence of the Central Bank of the Congo (BCC);

    • The implementation of a floating exchange rate system. On May 26, the new system was put in place, thereby unifying the existing official and parallel market rates.

Far-reaching structural reforms, with the World Bank taking the lead, would pave the way for a significant reduction in price distortions, a strengthening of the banking sector, improvement of economic security, and liberalization of the economy.

Looking beyond the program

  • The authorities intend, in line with progress to securing peace, to put in place in due course a broader strategy for post-conflict reconstruction. They see the SMP as a critical first step toward restoring economic stability to help establish the conditions for a revival of economic activity and a reduction of poverty. A comprehensive post-conflict strategy would address the DRC’s demobilization, reconstruction, and reintegration needs and the rebuilding of administrative and institutional capacity (beyond the immediate needs of the SMP).

  • The DRC has been in continuous arrears with the Fund since 1990 (the stock at end-April was SDR 392 million or 135 percent of its current quota and 74 percent of what its quota would be under the Eleventh Review of Quotas). The authorities are keen to normalize relations with the Fund and recognize the need to make progress toward clearance of arrears to the Fund in the course of the SMP. Clearance of all of DRC’s arrears to the Fund is likely to necessitate arranging a bridge loan (a bilateral creditor has already agreed in principle to do so, if performance under the SMP is sufficiently strong).

Issues stressed in the staff appraisal

  • The authorities believe that the conditions are now ripe for adopting and implementing an interim program that could be monitored by the Fund staff during the period from June 2001 to March 2002. The staff concurs with this assessment, but stresses that successful implementation of the SMP will depend critically on continued progress toward peace, the timely support of the international community, including in the very short term, and the strengthening of government policy coordination, as well as the effective monitoring of the program through the interministerial economic and financial policy monitoring committee (ECOFIN).

  • The strengthening of the control and monitoring of all expenditure, including “sovereign” and security related expenditure, will be key to the success of the program. Therefore, the authorities are urged to rigorously implement the monthly treasury cash flow plan.

  • In order not to endanger the objective of breaking hyperinflation, the authorities would have to resist any pressure for further wage increases, following the salary increases of late May to alleviate the social impact of price adjustment measures, in particular those concerning transportation costs.

  • The staff welcomes the new statutes of the BCC that will provide the legal basis for its regained independence and that will be published in June. The staff stresses that BCC advances to the government will need to be strictly limited in conformity with the new statutes and the monetary program.

  • A solid track record under the SMP could be followed by a program under the Poverty Reduction and Growth Facility (PRGF), underpinned by an interim poverty reduction strategy paper (1-PRSP). Steady implementation of the PRGF should allow the DRC to seek debt relief under the Heavily Indebted Poor Countries (HIPC) framework, with a view to reducing its heavy debt service burden to sustainable levels.

I. Introduction

1. A mission visited Kinshasa during May 2-16, 2001, 1 to conduct discussions for the 2001 Article IV consultation and negotiate a Fund staff-monitored program (SMP).2 The mission met with His Excellency President Joseph Kabila, most ministers of the newly appointed government, including the Minister of Economy, Finance, and the Budget, Mr. Matungulu, and the Governor of the Central Bank of the Congo (BCC), Mr. Masangu. The mission also met with representatives of civil society, including trade unions and the business sector, and the international community. The last Article IV consultation with the Democratic Republic of the Congo (called Zaire at the time) was concluded in March 1996 (SM/96/34; 2/7/96). The Democratic Republic of the Congo (DRC) has continued to avail itself of the transitional arrangements under Article XIV. It is on the standard 12-month consultation cycle.

2. As agreed during a meeting between the Managing Director and President Kabila on February 1, 2001, a mission visited Kinshasa from February 28 to March 12, 2001, to take stock of the situation and initiate discussions on a comprehensive macroeconomic framework that could lay the basis for an SMP aimed at stabilizing the economic situation, restoring economic growth, and initiating the process of reconstruction. At that time, the President stressed the willingness of the authorities to normalize the DRC’s relations with the Fund, and to reach understandings on an interim program that could be monitored by the staff. The mission noted that there had been a marked turnaround in the attitude of the authorities, as evidenced by their strong commitment to liberalize and open up the economy, and break hyperinflation. 3

3. The DRC has been in continuous arrears to the Fund since November 1990. On September 6, 1991, it was declared ineligible to use the general resources of the Fund, and a declaration of noncooperation was issued on February 14, 1992. The voting and related rights of the DRC in the Fund were suspended on June 2, 1994. On March 18, 1998, the Executive Board decided that, at the next review of the DRC’s overdue financial obligations, the Fund would consider adoption of a decision providing for the initiation of the procedure of compulsory withdrawal from the Fund unless the member had resumed cooperation with the Fund. In light of the unsettled political and security situation and the limited information available on economic developments and policies, the Executive Board subsequently decided on several occasions to postpone the postsuspension review of the DRC’s overdue financial obligations to the Fund. On June 4, 2001, the Board once again decided to postpone the review for six months, or until the next Article IV consultation with the DRC, whichever was earlier (EBS/01/75; 5/17/01).

4. Summaries of the DRC’s relations with the Fund and the World Bank Group are presented in Appendices II and III, respectively. Fund and World Bank staff have continued to cooperate closely on the DRC. As indicated above, World Bank staff participated in the March and May 2001 missions. The World Bank is assisting the authorities in developing a strategy in the structural and sectoral areas and is in the process of preparing a Transitional Support Strategy, which is expected to be presented to its Board in mid-July 2001.

5. The statistical apparatus has been severely affected by years of neglect and war through the loss of qualified staff, equipment, and records. Although the authorities provide the core minimum data to the Fund and publish available data, their coverage, quality, and timeliness need to be improved, especially in the areas of national accounts, public finance, and balance of payments statistics. Social data are severely limited (Appendix IV).

II. Political and Security Developments

6. After years of turmoil and war, the political and security situation in the DRC has been improving since early 2001, thanks to the reactivation of the Lusaka cease-fire agreement, United Nations (UN) involvement, and the enhancement of the inter-Congolese dialogue. President Kabila has consistently stated his commitment to restore peace and enforce the terms of the Lusaka agreement. Following his visit to the UN in February 2001, the Security Council demanded that all troops in the DRC withdraw 9 miles from frontline positions within two weeks from March 15. This was to allow the deployment of UN military observers and support troops to monitor a cease-fire. According to UN statements, the withdrawal of troops has been on schedule, and the cease-fire so far has been generally holding. A delegation of 15 members of the UN Security Council visited Kinshasa on May 18 to take stock of the situation. In late May, Uruguayan troops began reopening and policing traffic on the Congo River, a vital link in the country’s transportation system. The Security Council hopes not only to encourage momentum for the pullback of troops but also to win approval of African governments for an international conference on the economic and political development of the Great Lakes region. An important complicating factor in this respect is the continued plundering of the DRC’s natural resources.4

7. At the invitation of President Kabila, the UN-appointed facilitator, Sir Ketumile Masire, former President of Botswana, visited Kinshasa to help with the preparations for the inter-Congolese dialogue. A new, reform-minded government was appointed on April 14, 2001, and on May 18, 2001, a presidential decree was signed liberalizing political activities. The authorities believe that conditions are now ripe for adopting and implementing" an interim program that can be monitored by the staff. The staff concurs with this view but would stress that successful implementation of the SMP will depend critically on continued progress toward peace.

III. Modalities Concerning the Clearance of Arrears with the Fund

8. The SMP, which covers the period from June 2001 to March 2002, provides the DRC with the opportunity to establish a strong track record that could lead to the clearance of arrears with the Fund, and that could be followed by a program under the Poverty Reduction and Growth Facility (PRGF), underpinned by an Interim Poverty Reduction Strategy Paper (1-PRSP). A solid track record under the SMP would also help provide assurances that the country will not fall back into arrears with the Fund. Steady implementation of the PRGF arrangement should allow the DRC to seek debt relief under the Initiative for Heavily Indebted Poor Countries (HIPC) framework, with a view to reducing its heavy debt burden to sustainable levels.

9. The authorities recognize the need to make progress toward clearance of arrears to the Fund during the course of the SMP (June 2001-March 2002).5 In light of this, they have agreed to deposit a monthly amount of SDR 100,000 in an account of the DRC held with the Bank of International Settlernents.6 These deposits will continue to be part of the DRC’s international reserves until their eventual use, and will be monitored by the Fund. Stabilization of the DRC’s arrears to the Fund would have implied annual payments of about SDR 12.0 million, or about SDR 1.0 million a month-which is relatively high given the low level of gross international reserves (US$52 million at end-2000, or 2.2 weeks of imports). The staff has been guided by the Board’s readiness to accept reduced payments by a post-conflict member in arrears, in keeping with the member’s debt service capacity, provided that the member is judged to be cooperating and that all other multilaterals to which the member is in arrears take at least comparable action (EBS/99/46; 3/13/99). The DRC’s arrears to the Fund amounted to SDR 392 million as of end-April 2001, equivalent to about 135 percent of its current quota and 74 percent of what its quota would be under the Eleventh General Review of Quotas (SDR 533 million, compared to the current quota of SDR 291 million under the Eighth General Review of Quotas). Clearance of the DRC’s arrears to the Fund is likely to necessitate arrangement of a bridge loan to a successor PRGF arrangement. 7 It is envisaged that access under the successor arrangement would provide up-front resources sufficient to cover repayment of the bridge loan. This would be possible under average PRGF access limits. Additional program assistance would be needed to provide balance of payments support on a scale consistent with the underlying adjustment pattern and financing need. Before approval of the PRGF-supported program, the authorities also will have to reach understandings with the World Bank and the African Development Bank (AfDB) on a plan and modalities for arrears clearance with these institutions.

10. Immediately after clearing its arrears with the Fund, the DRC would convert to its new quota under the Eleventh General Review of Quotas. The required subscription payment in foreign currency (SDR 61 million) could be immediately financed through a reserve tranche drawing.

11. The DRC’s renewed access to Fund resources, especially under such conditions and on a large scale, presupposes the establishment of a solid track record of policy performance under the SMP. It is hoped that the SMP will encourage a rapid resumption of donor support both in the form of financial aid on highly concessional terms and of technical assistance (see para. 26 below).

IV. Recent Economic Developments 8

12. As indicated in the memorandum on economic and financial policies (MEFP) (Appendix I, Attachment I), the economic and social situation has deteriorated significantly during the war that broke out on August 2, 1998, which has involved not only a systematic plundering of the nation’s natural resources, the death of more than three million Congolese, the displacement of populations, and growing numbers of refugees, disabled persons, and orphans, but also the destruction of infrastructure, including hospitals, and schools. The mortality rate has increased, and malnutrition has become widespread. About half of the national territory is occupied. These developments have added to the effects of economic mismanagement and the prolonged rundown in the economic and social infrastructure since the early 1990s.

13. The authorities and the staff concurred that the economic situation of late 2000–early 2001 was characterized by a vicious circle of hyperinflation, continued depreciation of the currency, increasing dollarization and financial disintermediation, lack of saving, falling production in both agriculture and manufacturing, deterioration of economic infrastructure, generalized impoverishment of the population, an alarming spread of epidemics such as HIV/AIDS, and the reappearance of previously eradicated diseases, like tuberculosis and leprosy. Also, the production of manioc, one of the major staple foods, has been seriously affected by a rapidly spreading plant disease. The lack of medical supplies is further aggravating the situation. The scarcity of inputs in all sectors has contributed to a continuing decline in production and the rising cost of goods and services.9 The government has also had to contend with a serious lack of the office materials and supplies that are needed to operate adequately.

14. In this context, real GDP has fallen by 5 percent per year on average over the past three years (Table 1 and Figure 1). Output in all sectors is well below 1990 levels, and per capita real GDP plummeted from US$224 in 1990 to US$85 (or 23 cents a day) in 2000. Consumer prices rose at an annual average rate of 107 percent in 1998, 270 percent in 1999, and 554 percent in 2000; this deterioration continued through the first four months of 2001 with a cumulative rate of 68 percent. The gap between the official and parallel exchange rates widened from 44 percent at end-1998 to 545 percent in mid-May 2001. Gross international reserves at end-2000 stood at the equivalent of only 2.2 weeks of imports of goods and nonfactor services. External debt rose to 280 percent of GDP (or almost US$13 billion) at end-2000, with arrears accounting for about 75 percent of the total. Multiple exchange rates and controls on prices have resulted in significant distortions in relative prices and shortages of basic items, as well as petroleum products. The regulatory framework has become heavy, lacks transparency, and has been applied in an arbitrary fashion, resulting in a climate of suspicion and economic insecurity that has discouraged investment. Poor maintenance has led to the rundown of infrastructure and the capital stock.

Table 1.

Democratic Republic of the Congo: Selected Economic and Financial Indicators, 1996-2001

article image
Sources: Congolese authorities; and staff estimates and projections

Annual averages based on official rates. Minus sign indicates depreciation.

Annual averages based on parallel market rates. Minus sign indicates depreciation.

Mid-May; on May 26, a floating exchange rate system was introduced

Including interest due on external debt

Revenue and grants minus noninterest expenditure

End of period. Outstanding debt stock includes all arrears.

The net present value of external public debt is 92 percent of the nominal value, reflecting the significant stock of arrears.

End of period

Figure 1.
Figure 1.

Democratic Republic of the Congo: Fiscal Deficit, Money, Prices, and Exchange Rates, 1998-2001

Citation: IMF Staff Country Reports 2001, 114; 10.5089/9781451934458.002.A001

15. The staff agreed with the authorities that the primary source of the hyperinflation was the unbridled monetization of an uncontrolled budgetary deficit. The deficit stems from the collapse of the expenditure control system and of fiscal revenue, which as a share of GDP, has fallen to one of the smallest in Africa. The lack of transparency and problems of governance have also contributed to this situation. Moreover, most of the agencies involved in the budgetary process (for both revenues and expenditure) are badly underequipped.

16. In 2000, the budget deficit (on a commitment basis) is estimated to have been equivalent to about 120 percent of government revenues. With the decline in economic activity and the shift of transactions to the nonofficial economy, the tax base has been shrinking. 10 This shrinkage has been exacerbated by numerous tax exemptions, widespread fraud in the tax administration, and the diversion of revenues from the budget, in particular those from the public mining companies (GECAMINES and MIBA), and the petroleum products sector. As a result, budgetary revenues collapsed, amounting to less than 5 percent of GDP in 2000 (Table 2). Recorded budgetary expenditures (excluding interest due) are estimated to have been almost twice as large as revenues—equivalent to almost 9 percent of GDP. Security-related payments, including military wages, have been given priority while other payments have been cut back. Investment outlays have become negligible, and no external debt service payments have been made. Control over public expenditure is very weak with significant extrabudgetary spending, largely for sovereign and security-related purposes (which amount to 70 percent of total revenue) and partly funded by diverted tax revenues. 11 The overall deficit has been almost entirely financed by monetary expansion and through accumulation of domestic and external arrears.

Table 2.

Democratic Republic of the Congo: Central Government Financial Operations, 1996-2001

(In millions of CGF, unless otherwise indicated)

article image
Sources: Congolese authorities; and staff estimates and projections.

Including off-budget revenue until May 2001.

No external financing is included in the 2001 budget.

Scheduled interest, excluding interest on arrears.

Before 1999, advances to the diamond company (MIBA) and the mining company (GECAMINES) arc not identified.

Including about CGF 4 billion to guarantee contracts, with petroleum suppliers (also included in total revenue).

For 1996-2000, arrears relating to interest on external debt, for 2001 domestic arrears and arrears relating to interest on external debt.

17. During the first four months of 2001, fiscal revenue collection remained weak while the pace of spending remained fast. The authorities granted sizeable salary increases to the military, police, and civil servants in late 2000, partially to offset the sharp decline in real wages during recent years (Figure 2D). On the revenue side, the diversion of significant revenues from the budget continued.

Key Issues in the Fiscal Area

Revenue collections recorded in the central budget were equivalent to only 3.6 percent of GDP in 2000, and amounted to less than 5 percent of GDP including off-budget revenue. With the decline in economic activity and the shift of transactions to the nonofficial economy, the tax base has been shrinking. The poor revenue performance also results from the following:

  • The structures of the import tariff and tax system are complex. The multiplicity of customs tariffs and tax rates complicates the tasks of the revenue collecting agencies and provides opportunities for fraud and discretionary decisions.

  • There are numerous exemptions and exceptions to the import tariff and tax codes.

  • The consumption tax (contribution sur le chiffre d’affaires) has a narrow base due to numerous exemptions.

  • Fraudulent operations in tax collections through commercial banks were reported to have increased significantly in 2000.

  • Revenue from duties and taxes on imports have eroded during the last two years because the official exchange rate (and not the market exchange rate) has been used to determine the value of taxable imports.

  • The diversion of revenue from the budget is widespread, in particular for those special levies (taxes para-fiscales) applied to imports of petroleum products.

  • For the last two years, the mining industry’s tax contribution (in particular of GECAMINES and MIBA) to the budget has been subject to negotiated arrangements.

  • For the last fifteen years, the two main revenue collecting agencies, the Office des Douanes et Accises (OFIDA) and the Direction Générale des Contributions (DGC) have received only limited assistance to reform and modernize their organizations and procedures. They are badly under-resourced.

Against a background of war, hyperinflation, and cash shortage, established budget procedures were rendered totally ineffective in the DRC in 1999 and 2000:

  • Significant outlays, inter alia, on sovereignty and security, were implemented outside the budget execution process and not recorded by the treasury. Some of these expenditures were undertaken or financed by GECAMINES (mining), MIBA (diamonds), and the petroleum sector.

  • Defense expenditure through the treasury was only recorded in aggregate, with little information on military wages and other sub items.

  • More than half of total expenditure was carried out through emergency procedures without proper recording, resulting in an absence of control and a large stock of expenditure to be regularized at the end of each year.

In those circumstances, budget monitoring and even cash monitoring were performed on an ad hoc basis, and little control over expenditure was achieved. External and domestic arrears accumulated. Wages for civil servants who are in the territories outside the government’s control have not been paid since 1998 (about 120,000 civil scrvants-25 percent of the total civil service-reportedly are in this situation). With hyperinflation, the salary in early 2001 of a lower-ranking civil servant in nominal terms was equivalent to less than US$3 per month, and that of a secretary-general of a ministry to less than USS30 per month.

Figure 2.
Figure 2.

Democratic Republic of the Congo: Fiscal sector, 1998-2001

Citation: IMF Staff Country Reports 2001, 114; 10.5089/9781451934458.002.A001

18. The monetary authorities pointed out that, in the circumstances, the role of the BCC was largely reduced to financing the fiscal deficit along with providing some lending to public enterprises and the private sector (at highly negative real interest rates). As a result, broad money grew by 160 percent in 1998, by 382 percent in 1999, and by 493 percent in 2000 (Table 3 and Figure 1B). For the first three months of 2001, this growth was estimated at 35 percent. The staff noted that the financial position of the BCC had been dangerously weakened; and that a shortage of banknotes was preventing banks from withdrawing excess reserves with the BCC. Moreover, the banking system is largely insolvent, with only one bank reportedly meeting prudential norms.12 The public’s loss of confidence in the national currency and the banking system has led to extensive dollarization and financial disintermediation. Domestic saving has been discouraged by interest rates that are substantially negative in real terms.

Table 3.

Democratic Republic of the Congo: Monetary Survey, 1996-2001

article image
Sources; Congolese authorities; and staff estimates and projections.

19. The external position continues to be weak, reflecting the fiscal stance and domestic supply constraints. The authorities explained that, because of the differential between the official and the parallel market rates, foreign exchange receipts of a number of public enterprises were deposited in accounts abroad putting additional pressure on the foreign exchange market. Foreign exchange reserves are very low, and, in the absence of external financing, the overall balance of payments position has largely been financed by the continued accumulation of external debt service arrears. The parallel exchange rate depreciated sharply to about CGF 325 per U.S. dollar in mid-May 2001, compared with the official rate of CGF 50 per U.S. dollar (CGF 25 and CGF 4.5, respectively, at end-December 1999) (see Figure 1D).

20. The stock of external debt at end-2000 amounted to about US$13 billion (280 percent of GDP). 13 Reflecting the cessation of most payments to creditors since 1992, overdue obligations accounted for more than US$9 billion, with arrears on principal at about US$5 billion and arrears on interest at more than US$4 billion. Bilateral creditors are owed more than 70 percent of the outstanding debt. The six countries with the highest claims on the DRC are the United States (US$2.7 billion), France (US$1.4 billion), Belgium (US$1.2 billion), Italy (US$0.9 billion), Germany (US$0.9 billion), and Japan (US$0.8 billion). Outstanding multilateral debt amounted to more than US$3 billion (including arrears). Overdue obligations to the Fund were about US$0.5 billion, to the World Bank Group US$0.3 billion, and to the AIDB US$0.8 billion.

Banking Sector Issues

Overview

As of December 31, 2000, the balance sheet total of all commercial banks amounted to CGF 9.5 billion. Relative to GDP, credit to the private sector stood at 0.6 percent and deposits at 1.3 percent. By comparison, these ratios were 10 percent and 15 percent in Cameroon. Of the fourteen authorized banks, only eight still do any business, which is conducted in extremely difficult circumstances. They accounted for a total of CGF 4.7 billion in deposits and CGF 2.1 billion in total loans at end.2000. Six banks, three of which are state owned, are no longer in operation.

Financial situation

Activity in the banking system has been declining, and the banks’ overall financial position is precarious. The auditing of their accounts is hampered by the lack of reliable accounting data and ambiguities in the classification and provisioning of loan portfolios.

As of December 31, 2000, only one bank met the capital adequacy requirements. Insufficient equity capital is largely responsible for the nonobservance of this ratio. Indeed, the minimum capital requirement (US$5 million) is not met by any of the banks if the requirement is converted into local currency at the unified floating exchange rate that has been in existence since May 26,2001.

The liquidity of banks, which, in terms of the required ratio, is satisfactory for nearly all banks, is in fact inflated by the maintenance of sizable excess reserves with the BCC. These reserves exist because banks cannot withdraw available amounts in their accounts in cash, as the shortage of banknotes forces the central bank to impose quotas on withdrawals at its counters.

Reported profitability is positive for only five of the eight banks in operation; however, three of them report a problem loan rate of zero.

Institutional aspects

The Comité de Restructuration du Secteur Bancaire Congolais (COREBAC), created in February 1998, is responsible for managing the reorganization of the banking system. However, there is some ambiguity about the duration of this institution’s mandate, which is to expire by end-2001 even though some reorganization plans will still be in progress at that time. A “special reorganization regime” instituted in April 1998 allows banks availing themselves of COREBAC’s protection to benefit from certain tax exemptions. To do so, banks must obtain COREBAC’s approval of their reorganization plan.

Bank supervision

The BCC’s Directorate of Supervision of Financial Intermediaries oversees the financial system and is responsible for off-site and on-site supervision. The body of Congolese regulations includes a very complete series of ratios for banks, the requirements for which take into account the country-specific context by being more strict than the generally accepted capital adequacy and risk diversification standards. As loan classification and provisioning standards are still too lax, 1 capital and profits are likely to be overstated and, therefore, the effectiveness of these ratios is limited.

The commercial banks submit prudential statements for off-site supervision purposes; moreover, not all the prudential ratios are being monitored.2 The lack of a uniform Plan Comptable for the banking industry results in unreliable data and inadequate data processing by the BCC staff.

No exhaustive on-site supervision has yet been undertaken by the BCC. However, audits by external firms have been organized with World Bank financing under the Banking System Rehabilitation and Reorganization Program.

1 Instruction 16 allows two years for the provisioning of problem loans with no collateral and up to four years for collateralized loans.2 With the exception of three of the fourteen licensed banks.

21. The authorities have recently taken steps to simplify and liberalize the trade regime. In particular, the number of import tariff rates was reduced to five tariff brackets and the range of rates changed from 5-30 percent to 0-30 percent. Also, the turnover tax on imports was reduced from a range of 5-30 percent to 0-13 percent, and the number of rates cut from five to three. In 2000, quantitative restrictions on imports (used to protect local industry) were replaced by a surtax, with three rates of 15, 20, or 30 percent. 14 With respect to export taxes, the tax (0.75 percent) on exports of artisanal diamonds and gold was suspended in 1999. As regards its membership in regional trade arrangements, the DRC has not ratified or signed the Southern African Development Community (SADC) trade protocol, and, while it is a member of the Common Market for Eastern and Southern Africa (COMESA), it has not yet participated in that organization’s program of tariff reductions.

V. Policy Discussions and the Fund Staff-Monitored Program

22. To address the alarming economic, financial, and social situation, the authorities have decided to put in place a critical mass of bold and front-loaded adjustment measures, aiming principally at breaking hyperinflation, stabilizing the economic situation, and laying the foundation for a restoration of growth and reconstruction. Initiation of far-reaching and well-sequenced structural reforms, with the World Bank taking the lead, should pave the way for a significant reduction in price distortions, strengthening of the banking sector, restoration of economic security, and the opening up and liberalization of the economy.

23. The authorities intend, in line with progress in securing peace, to put in place in due time a broader strategy for post-conflict reconstruction. They see the SMP as a critical first step for restoring economic stability to help establish the conditions for a revival in economic activity and a reduction of poverty. The staff noted that a comprehensive post-conflict strategy should address the DRC’s humanitarian, reconstruction, and reintegration needs (beyond the efforts already under way). The formulation of a demobilization, disarmament, and reintegration (DDR) program, with the support of the World Bank and other international donors, would be an essential element in the process of establishing social stability. The rebuilding of administrative and institutional capacity, in addition to the immediate needs under the SMP, would also be important. In light of the large needs of the DRC, a concerted international assistance effort will be important for the success of the post-conflict strategy.

24. The main quantitative objectives for 2001 are to: (i) halt the decline in real GDP that has occurred in each of the past five years; (ii) sharply reduce the annual average inflation rate to 300 percent and the end-period inflation rate to 99 percent (compared with rates of 554 percent and 511 percent, respectively, in 2000); (iii) cut the fiscal deficit from 5.7 percent to 1.9 percent of GDP (on a commitment basis and excluding grants) and from 3.9 percent to 0.3 percent of GDP (on a cash basis); and (iv) maintain gross official reserves at a level equivalent to about two weeks of imports of goods and nonfactor services (see table below). 15

Democratic Republic of the Congo: Main Quantitative Targets for 2001 Under the SMP

article image

For 2001, excluding foreign-financed investments.

25. To achieve these objectives, the macroeconomic policies envisaged in the program include a restrictive budgetary policy and a prudent monetary policy. Also, the official exchange rate has been allowed to float freely effective May 26, 2001, thereby unifying the then existing official and parallel market rates. The average rate on Monday, May 28, 2001, the first day of operation of the new system, was quoted at CGF 313.5 per U.S. dollar, representing a depreciation of the official rate of 84 percent in foreign currency terms. These policies will be accompanied by the launching of well-sequenced structural reforms in coordination with the World Bank.

26. The authorities have created an interministerial economic and financial policy monitoring committee (ECOFIN) to better coordinate government actions (see MEFP, para. 34). In addition, timely technical assistance, including in the very short-term, is envisaged to reinforce the administrative capacity to implement and monitor the program. The DRC is already receiving technical assistance from the Fund in the fiscal, monetary, banking, and statistical areas, and from the World Bank for the mining and transportation sectors. On the basis of a strategic list of projects, including the strengthening of administrative capacity, prepared in collaboration with the World Bank, a meeting of multilateral and bilateral donors is scheduled to take place in early July 2001. The aim of the meeting will be to meet near-term needs to support the government’s reform efforts and to help strengthen administrative capacity for the implementation of a possible successor PRGF-supported program, including the design of a poverty reduction strategy that could form the basis of an interim PRSP (see LOI, para. 5). Table 2 of the MEFP contains a listing of the DRC’s technical assistance needs in the fiscal area.

A. Fiscal Policy

27. The authorities concurred with the staff that a substantial tightening of budgetary policy was key to stopping hyperinflation. The program thus includes a number of revenue-enhancing and expenditure-restraining measures in the 2001 budget consistent with a substantial reduction in domestic bank financing. The fiscal deficit, on a commitment basis and excluding foreign-financed investment, is programmed to decrease from 5.7 percent of GDP in 2000 to 1.9 percent in 2001, and on a cash basis from 3.9 percent to 0.3 percent. The government will make net payments to the banking system starting in June 2001 and during the rest of the year. A monthly treasury cash-flow plan was put in place in June 2001 to improve fiscal management and ensure that monthly expenditure does not exceed fiscal receipts. All expenditures and revenues, including those previously outside the budget, will be centralized at the treasury. The authorities also intend to take into account the recommendations of Fund technical assistance missions to strengthen budgetary procedures and revenue administration. 16 The authorities will not be in a position to resume external debt service payments in 2001. In the absence of these payments, the unification of the exchange rates is expected to have a large, positive effect on the budget.

28. On the revenue side, fiscal revenue is targeted to increase from 4.8 percent of GDP in 2000 to 5.2 percent in 2001. To achieve this target, the authorities have taken a number of measures, including: (i) the centralization and depositing of all receipts (tax and quasi-fiscal) in the treasury’s account at the BCC; (ii) the reduction of tax exemptions; (iii) the setting of monthly revenue performance targets for the Customs Directorate (OFIDA) and the Directorate General of Taxes (DGC); (iv) the abolition of the system of offsetting-providing goods and services instead of paying duties and taxes-between enterprises and government entities (in particular, revenue from taxation of petroleum products will be fully included in the budget); (v) the elimination of any possibility of deferred tax payments (including for excises); (vi) a decision to create a large taxpayers’ unit; and (vii) the assessment of import duties on the basis of the c.i.f. value of imports, calculated at the market exchange rate to be published by the BCC (see MEFP, para.12 and Table 1).

29. The authorities also intend to take before end-2001 the following measures: (i) define the stages leading up to the simplification of the taxation system on imports, (ii) define a plan to replace the current turnover tax with a value-added tax (VAT) in early 2003, and (iii) conduct an evaluation to assess tax payment and revenue collection procedures.

30. To ensure transparency in the expenditure process, and to strengthen the monitoring and control of expenditure and prevent overruns, the authorities have decided to implement a number of expenditure restraining measures (see MEFP, Table 1). Total fiscal expenditure (excluding interest on external debt) is programmed to fall from 8.7 percent of GDP in 2000 to 5.3 percent of GDP in 2001. While the adjustment of expenditures under the program is relatively large, it mainly represents a cutback in extrabudgetary spending and misappropriated funds and a return to a more rational structure of spending. The major part of the adjustment will be made in subsidies, sovereign, and off-budget expenditure. Subsidies will be sharply reduced on account of the increase in petroleum prices and the unification of the exchange rate, which, inter alia, will benefit the mining and diamond companies, thereby reducing the amount of financial support from the budget. To take into account the sharp increase in prices of petroleum products and transportation, as well as the impact of the unification of the exchange rates on the cost of living, civil servant salaries, which have decreased by more than 60 percent in real terms in the last two years, were increased by 141 percent 17 in late May 2001. These salaries, as well as those of the military and police, will not increase during the program period. In addition, military and police salaries, which in the past have increased faster than those of civil servants, are no longer being paid in U.S. dollars (or indexed to the U.S. dollar) but in Congo francs. Furthermore, military pay will be incorporated into the regular wage procedures. Overall, notwithstanding the salary increase, the wage bill, including benefits, will fall by about 25 percent in real terms in 2001. In addition, a civil service census will be finalized by end-2001, and, pending its completion, new hiring and replacement of retiring civil servants have been frozen, except for the education and health sectors, and the rehabilitation of infrastructure. Nonsalary expenditures, in particular sovereign expenditures and the expenditures of the provinces, will be strictly controlled. Transfers to public enterprises will be reduced significantly (see MEFP, para. 13).

31. Capital expenditures will be limited to strategic projects selected in collaboration with the World Bank; if external project or technical assistance financing is made available the overall deficit (including foreign-financed investment) will be adjusted upward (see MEFP, para. 15).

B. Monetary and Exchange Rate Policies

32. The authorities concurred with the staff that their decision to maintain the local currency (the Congo franc, CGF) necessitates the adoption of mutually consistent monetary, fiscal, and exchange rate policies aimed at breaking the vicious circle of hyperinflation and the depreciation of the CGF so as to restore price stability and confidence in the currency, and improve competitiveness.

33. In this context, a restrictive monetary policy will be implemented consistent with the objective of breaking hyperinflation and achieving the program’s inflation target. For this purpose, the central bank will use base money as a monetary anchor to achieve the inflation target. Broad money is projected to grow by only 53 percent during 2001, on account of a sharp decrease in the expansion of net credit to the government by the banking system which, expressed in terms of beginning-of-year broad money, will increase by only 15 percent as compared with 317 percent in 2000 (see MEFP, para.19 and Table 6). Under the program, net credit to the government and to public enterprises from the banking system will be subject to ceilings. All interest rates have been liberalized as of June 2001, and thus all banks are now free to set interest rates. The BCC will also allow its reference rate to be positive in real terms.

34. Central to the successful implementation of monetary policy will be the restoration of the independence of the BCC (see MEFP, para. 20). For this purpose, all required legislation to affirm the independence of the BCC will be adopted and published by end-June 2001. Also, starting in June 2001, the BCC no longer extends loans to the private sector or public enterprises, and only finances government expenditures accompanied by payment orders from the Treasury. To conduct its monetary policies, the BCC will use existing instruments, i.e., rediscount facilities, reserve requirements, and open market operations in treasury bills. So far, the BCC has issued treasury bills only on behalf of the treasury. The BCC, with Fund technical assistance, intends to review its indirect monetary policy instruments to make them more efficient and more diversified, including its open market operations in treasury bills, and to strengthen its monetary programming. Also, an independent audit of the BCC will be undertaken before end-2001.

35. The authorities intend to implement measures to strengthen the weak banking system (see MEFP, para. 21). For this purpose they will seek the assistance of the international community, including the World Bank, to complete the ongoing audits of the commercial banks. Fund technical assistance will also be provided to reinforce the supervision of banks. A revised banking law that incorporates the comments of Fund and World Bank staff will be published in June 2001.

36. Regarding exchange rate policy, the adoption of a floating exchange rate system on May 26, 2001, unified the then-existing multiple exchange rates. 18 The new foreign exchange regulations published in February 2001 19 already provide for a liberal exchange and payments system. On May 26, 2001, an interbank foreign exchange market was restored, and foreign exchange bureaus operating in the parallel market were reauthorized. The related - legislation, which takes into account comments from the Fund, has been issued. The BCC publishes daily exchange rates based on the transactions carried out in these markets. The BCC will intervene in the market only to smooth exchange rate variations from day to day, but without going against fundamentals. Under the new foreign exchange regulations, there are no restrictions subject to Article XIV. Furthermore, with the restoration of the floating exchange rate system, the exchange and payments system is free of restrictions subject to Article VIII. The previous de facto multiple currency practice has disappeared with the new market-based exchange rate system. In 2002, the authorities intend to accept the obligations of Article VIII (see MEFP, para. 23).20

37. The external current account deficit is expected to decline in 2001 from its peak of 17.6 percent in 2000 to about 14 percent of GDP. Because of the anticipated low level of foreign financing, external arrears will continue to accumulate, and gross reserves are projected to remain at about two weeks of imports.

38. The authorities intend to start discussions in 2001 toward normalizing relations with the DRC’s external creditors. It will not be possible for the DRC to service its external debt fully in 2001, and the authorities will contact their other multilateral creditors, and will inform bilateral creditors of their intention to seek rescheduling under the Paris Club in the context of a possible PRGF-supported program. The normalization of relations with creditors would at the same time be expected to lead to a resumption of new assistance, on concessional terms. The authorities intend to pursue a prudent external debt management policy and to conduct an exhaustive inventory of outstanding external debts and the stock of external arrears (see MEFP, para. 22).

C. Structural and Sectoral Reforms

39. The authorities recognize the importance of good governance and a transparent and fair legal and regulatory environment to encourage private sector activity and restore growth (see MEFP, paras. 24 and 25). To this end, they intend to take a number of measures, and in particular, to strengthen the judicial system with the assistance of the international community. Also, before end-June 2001, parliament will adopt the necessary legislation to introduce commercial courts that will have the sole right to act as arbitrators in - commercial disputes. All cases of intervention outside proper channels, in particular by military courts, will be eliminated. All prices will be liberalized before end-June. Prices of public utilities and services (including electricity, water, and public transport) will be adjusted regularly through a transparent mechanism based on operating costs. The government has introduced a transparent and automatic pricing mechanism for petroleum products that will take into account movements in international oil prices, operating costs, and the exchange rate. Petroleum product prices were adjusted upward by about 300 percent on May 26, 2001 (see MEFP, para. 26).21

40. To create a more competitive environment in the diamond sector, the authorities have recently abolished the monopoly concession that had been granted in 2000; buyers are now free to set up operations in the sector. Also, the authorities intend to introduce certification requirements in line with recent UN resolutions (see MEFP, para. 27). The authorities are also preparing new investment and mining codes in consultation with the World Bank and other interested parties. With the assistance of the World Bank, the authorities intend to launch a public enterprise reform program, as well as a study to verify the arrears among public enterprises and between public enterprises and the government.

D. Promotion of Transparency and Good Governance

41. The authorities recognize that good governance and transparency are essential for creating a stable environment and ensuring economic security. To this end, they have decided to decisively address the problem of corruption (see MEFP, para. 30). Key corrective measures include, inter alia, the following:

  • the centralization of all spending and elimination of all extrabudgetary outlays;

  • the regular publication of the official gazette, the establishment of a transparent and competitive system of public procurement, and, in particular, the publication of public contracts exceeding a defined amount;

  • the payment of taxes by the mining and diamond sectors (specifically, GECAMINES and MIBA) and the petroleum sector through normal collection procedures, instead of via specific accounts and schemes;

  • the curtailment of ad hoc emergency procedures for expenditure, and a ban on payments made on behalf of the government without corresponding payment orders;

  • the development of an action plan for dealing with corruption in customs services and the tax administration;

  • the elimination of the unauthorized use of fiscal authority by individuals and nonfiscal administrations for intimidation and rent seeking at the expense of the Treasury; and

  • the replacement of military courts with commercial courts in resolving commercial disputes.

VI. Staff Appraisal

42. The staff fully concurs with the diagnosis of the authorities on the gravity of the economic and financial situation. Indeed, the macroeconomic situation continued to deteriorate in 2000 and the first four months of 2001, with a fall in real GDP of about 4 percent in 2000, hyperinflation of 511 percent, continued widening of the difference between the official and the parallel market exchange rates, increasing dollarization (about 85 percent of transactions in goods and services), financial disintermediation, the further accumulation of external and domestic arrears, and a very low level of foreign exchange reserves. Real GDP has fallen by an average of about 5 percent per year during the last three years. Production is well below levels recorded in the early 1990s. With the steep decline in real GDP per capita, the economic insecurity, and the effects of the war, poverty is widespread.

43. The primary source of hyperinflation has been the unbridled monetization of an uncontrolled budgetary deficit. The deficit stems from the collapse of the expenditure control system and of fiscal revenues which, as a share of GDP, have fallen to one of the smallest in Africa. A lack of transparency and problems of governance, numerous tax exemptions, widespread fraud in the tax administration, and the diversion of revenues from the budget have contributed to this situation. Recorded budgetary expenditures are estimated to have been almost twice as large as recorded revenues. There has been virtually no investment spending, and no external debt service payments have been made. Control over public expenditure has collapsed, with significant extrabudgetary spending undertaken largely for sovereign and security-related purposes. The overall deficit has been largely financed by monetary expansion and by the accumulation of domestic and external arrears.

44. The BCC has lost control of monetary policy, and its role has been reduced mainly to financing the fiscal deficit. Its financial position has been severely weakened, and the public’s loss of confidence in the national currency and the banking system has led to extensive dollarization and financial disintermediation. The external position is fragile, as illustrated by the virtual depletion of foreign exchange reserves, the heavy external debt burden, including sizeable external arrears, and the free fall of the parallel exchange rate through May 2001.

45. The authorities intend to address the difficult situation with the implementation of a program which consists of a critical mass of bold and front-loaded adjustment measures aiming principally at breaking hyperinflation, stabilizing the economic situation, liberalizing the economy and opening it to the rest of the world, and laying the foundation for reconstruction and the restoration of growth. The authorities are to be commended for taking a courageous turn in economic policies that, if fully adhered to, will represent a clear break with the past.

46. The authorities believe that the conditions are now ripe for adopting and implementing an interim program that could be monitored by the Fund staff during the period from June 2001 to March 2002. The staff concurs with this assessment, but stresses that successful implementation of the SMP will depend critically on continued progress toward peace, the timely support of the international community, including in the very short term, the strengthening of government policy coordination, as well as the effective monitoring of the program through the ECOFIN. However, implementation of the program will take place in a very difficult environment. In particular, the security situation, while improving, remains fragile and political tensions have not yet subsided. Hence, the risks to the program are substantial.

47. The staff finds the following quantitative objectives of the program for 2001 ambitious but realistic and appropriate: (i) the revival of economic growth; (ii) an average annual inflation rate of 300 percent and an end-December rate of 99 percent; (iii) an overall fiscal deficit on a commitment basis and excluding grants, of 1.9 percent of GDP, and on a cash basis of 0.3 percent of GDP; (iv) an external current account deficit of 14.0 percent of GDP; and (v) a minimum level of gross international reserves equivalent to 2.4 weeks of imports of goods and nonfactor services.

48. The staff agrees with the authorities that achievement of the major targets call for a strong fiscal adjustment effort, a restrictive monetary policy, and a well-sequenced implementation of structural and sectoral reforms, together with the timely strengthening of administrative capacity with the help of the international community. The staff commends the authorities for their decision to implement a floating exchange rate regime on May 26, 200 1, supported by the implementation of a coherent set of macroeconomic policies. The new regime, which unified existing multiple rates, will significantly enhance the competitiveness of the economy and improve resource allocation. The staff encourages the authorities to further liberalize the trade regime, including the simplification of the tariff structure and the elimination of tariff exemptions.

49. The staff concurs with the authorities that a key element of the program is to rein in government finances to substantially reduce the fiscal deficit, with the primary objective of breaking hyperinflation. In this regard, the staff welcomes the implementation of a monthly treasury cash flow plan as of June 1, 2001, and the decision that all taxes and expenditures will be centralized at the treasury, implying the elimination of all off-budget receipts and expenditure. The strengthening of the control and monitoring of all expenditure, including sovereign and security-related expenditures, will be key to the success of the program. Therefore, the authorities are urged to rigorously implement the monthly treasury cash flow plan, which, in the second half of the year, should result in net repayments to the banking system. The authorities are encouraged to make full use of the recommendations of Fund technical assistance in the revenue and expenditure areas, as well as to improve the quality and coverage of statistics. The staff notes that the unification of multiple exchange rates should have a net positive impact on the budget. However, given the still limited amount of foreign aid expected, it is unlikely that the government will be able to fully service its external debt in 2001.

50. On the expenditure side, the staff is of the view that the increase in civil service wages that was decided at end-May 2001 is necessary to alleviate the social impact of the price adjustment measures, particularly the related steep increase in transportation costs. It will be important for the authorities to ensure that no further wage increase is allowed before end-2001, so as not to endanger the objective of breaking hyperinflation. Since hyperinflation is one of the most pernicious taxes on the population, particularly on wage earners and the poor, its elimination will alleviate considerably the hardship of the majority of the population. In addition, the staff welcomes the authorities’ intention to finalize a survey of the civil service by end-2001.

51. As price stability should be the main goal of monetary policy, the BCC’s advances to the government will need to be strictly limited in conformity with the forthcoming new statutes of the BCC and the monetary program. To regain its credibility, the BCC should have decision-making autonomy with respect to its monetary policy and the use of its instruments. The staff welcomes in this regard the new statutes of the BCC that the authorities intend to publish in June 2001. It also welcomes the intention of the authorities to have the BCC accounts audited by an internationally recognized firm before end-2001.

52. The authorities are encouraged to strengthen, with the help of technical assistance from the Fund, the supervision of the banking system. In this context, the publication of a new banking law, scheduled before end-June 2001, is welcome. The staff encourages the authorities to pursue the audits of all commercial banks in a timely manner with the help of the international community, and in particular the World Bank.

53. On the external side, the new foreign exchange regulations in February 2001 liberalized transactions and payments. The new exchange rate system has eliminated the multiple currency practices arising from the segmentation of the exchange market that are subject to Article VIII, Sections 2(a) and 3. As a result, the DRC now maintains an exchange and payments system with no restrictions on the making of payments and transfers for current international transactions. The staff welcomes the authorities’ intention to accept the obligations of Article VIII in 2002.

54. On the structural side, economic recovery will require not only a consistent macroeconomic framework, but also a clear and transparent legal and regulatory environment, as well as economic security and good governance. The staff welcomes the intention of the authorities to stop arbitrary arrests and to empower commercial courts with the sole authority to settle disputes involving economic and commercial matters. The staff commends the authorities’ intention to launch an action plan aiming at the elimination of corruption in certain government services.

55. The staff welcomes the authorities’ decision to reaffirm the liberalization of prices of goods and services. The authorities will need to review regularly the prices of electricity, water, and transportation. They are to be commended for implementing a transparent and automatic mechanism for setting the prices of petroleum products on May 26, 2001, and for making the difficult decision to increase these prices to market levels. This measure should in due course help to avoid disruptive shortages of petroleum products. The staff also welcomes the decision of the authorities to liberalize the diamond sector and to introduce the certification of diamonds to establish their origin. The staff commends the authorities for preparing mining and investment codes in coordination with the World Bank.

56. It will be important for the authorities to launch, with the help of the World Bank, the reform of the public sector and a study aimed at verifying the amount of domestic cross arrears in the public sector.

57. Overall, the staff considers that the SMP represents a credible effort by the authorities to address head-on the difficult economic and social situation in the DRC. It is of the view that this courageous and bold approach by the authorities deserves the full and immediate support of the international community not only in the form of technical assistance to buttress the administrative capacity, but also in the form of highly concessional and quick-disbursing aid, preferably grants, to finance the list of strategic projects selected with the help of the World Bank. Realization of these projects is crucial not only to alleviate a number of supply bottlenecks, particularly in the transportation sector, but also to reduce the hardship inflicted on the population during the adjustment process.

58. The staff believes that the SMP, if implemented forcefully, will create the basis for a normalization of relations with the Fund and other international creditors. It notes the authorities’ wish that the establishment of a track record under the SMP would help lay the foundation for a successor program that could be supported by a PRGF arrangement, so as to have the country benefit from debt relief, in particular under the enhanced HIPC Initiative. In order to establish the basis for a successor PRGF-supported program, there is a need to develop a poverty reduction strategy, to reinforce good governance and administrative, institutional, and policy implementation capacity, and to garner the support of the international community through a concerted effort.

59. The staff welcomes the intention of the authorities to make public the staff report, as well as the documents related to the SMP. It is recommended that the next Article IV consultation with the DRC be held on the standard 12-month cycle.

Table 4.

Democratic Republic of the Congo: Balance of Payments, 1996--2001

article image
Sources: Congolese authorities; and staff estimates and projections.

An average of about 90 percent of official grant assistance is assumed to be spent on imports of goods and services. Spending on the UN peacekeeping forces is not included.

Merchandise imports are adjusted to reflect higher estimates from customs data. Financing of these additional imports is assumed to be financed from sales of foreign

Converted at the parallel market exchange rate (period average).

lncluding interest on arrears.

Table 5.

Democratic Republic of the Congo: External Public Debt, 1996-2001

(In millions of U.S. dollars)

article image
Sources: Congolese authorities; and staff estimates and projections.

Includes Fund interest charges on principal in arrears.

Non-Fund interest on arrears has been estimated for 1996-99 and is not included in estimates of debt stocks prior to 2000 (including valuation changes).

The components of the stock of arrears have been imputed from debt-service flows and may not add up to the aggregate due to valuation adjustments.

Figure 3.
Figure 3.

Democratic Republic of the Congo: External Debt

Citation: IMF Staff Country Reports 2001, 114; 10.5089/9781451934458.002.A001

Figure 4.
Figure 4.

Democratic Republic of the Congo: Exchange Rate Indices, January 1996 - March 2001

Citation: IMF Staff Country Reports 2001, 114; 10.5089/9781451934458.002.A001

Source: IMF, Information Notice System.

Appendix I

Kinshasa, June 20, 2001

Mr. Horst Köhler

Managing Director

International Monetary Fund

Washington, D.C. 20431

Dear Mr. Köhler:

1. The efforts of the new government of the Democratic Republic of the Congo (DRC) under the supreme authority of His Excellency Joseph Kabila, President of the Republic, are focused on simultaneously achieving three key objectives: (a) the restoration of peace; (b) the pursuit of a dialogue among the Congolese people, with a view to holding free and transparent elections; and (c) the liberalization of the Congolese economy, its opening to the rest of the world, and its reconstruction and revitalization. The government also intends to normalize its relations with the international financial institutions, especially the IMF and the World Bank.

2. The government is committed to rehabilitating the country’s economic and financial situation and creating an environment more conducive to economic recovery. To do so, the role of the state has been redefined, and its institutions and capacities will be strengthened, so that it may become, among other things, a facilitator of, rather than a competitor with, the private sector, and so that it can focus on providing essential public services. The government intends to create a more secure and stable business environment by establishing a simplified and transparent legislative and regulatory framework, and by eliminating disruptive and arbitrary procedures. To this end, commercial courts will be established shortly. The government also intends to do more to promote good governance in the management of public affairs, including public procurement.

3. Based on a frank analysis of the present situation, the government has formulated a set of far-reaching and comprehensive economic and structural policies in the context of a consistent macroeconomic framework. The main objective of this program of economic stabilization and liberalization is to break hyperinflation. The attached memorandum on economic and financial policies, which covers the period June 2001-March 2002, sets forth the policies the government intends to firmly implement to attain its macroeconomic and structural objectives. The government hopes to receive the necessary support from Fund staff to monitor its enhanced interim program, which is described in the memorandum. Accordingly, the government will submit to the Fund staff all information necessary to monitor implementation of the measures called for in the program.

4. The government intends to intensify its cooperation with the Fund and appreciates the in-depth Article IV consultation discussions it had with the IMF mission that visited Kinshasa from May 2-16, 2001. The government of the DRC reaffirms its desire to fully normalize its relations with the IMF and to find a solution to its arrears with the Fund. During the period June 200!-March 2002, the government will deposit a monthly amount of SDR 100,000 in an account of the DRC held with the Bank for International Settlements, as indicated in the memorandum. The government hopes that the implementation of this enhanced interim program and the settlement of its arrears with the Fund (possibly with external assistance in the form of a bridge loan) will lead to a three-year Fund-supported program under the Poverty Reduction and Growth Facility (PRGF). Moreover, the government has begun discussions with its external development partners to find appropriate solutions to the arrears on its debt with them, particularly the World Bank and the African Development Bank.

5. In the context of the enhanced interim program, the government, with assistance from the international community and in particular the staffs of the IMF, the World Bank, the United Nations Development Program (UNDP), and the African Development Bank, intends to initiate a dialogue with the private sector, civil society, and all other development partners with a view to developing a poverty reduction strategy. This dialogue, carried out at the national level, would provide strategic inputs for the drafting of an interim poverty reduction strategy paper (1-PRSP) and thus help lay the foundation for a three-year program that could be supported by the IMF, the World Bank, and other external development partners. The government hopes that with these efforts the DRC will be able to benefit in due course from relief under the Initiative for Heavily Indebted Poor Countries (HIPC Initiative) and thus alleviate the heavy burden of its foreign debt.

Sincerely yours,

article image

Attachments

Attachment I Democratic Republic of the Congo Memorandum on Economic and Financial Policies

The Government’s Enhanced Interim Program for the Period June 2001-March 2002

I. Current Economic Situation

1. The economic situation has deteriorated significantly during the war that broke out on August 2, 1998, which involves not only a systematic plundering of the nation’s natural resources, the death of more than three million Congolese, the displacement of populations, and growing numbers of refugees, disabled persons, and orphans, but also the destruction of infrastructure, including hospitals and schools. The mortality rate has increased, and malnutrition has become widespread.

2. The current economic situation is characterized by the vicious circle of hyperinflation, continued depreciation of the currency, increasing dollarization, lack of saving, financial disintermediation, falling production in both agriculture and manufacturing, generalized impoverishment of the population, an alarming spread of epidemics like HIV/AIDS, and the reappearance of previously eradicated diseases, such as tuberculosis, trypanosomiasis, leprosy, the plague, etc., as well as the spread of plant diseases that are seriously reducing the production of manioc (one of the major staple foods for the whole population). The lack of medical supplies is further aggravating the situation. The scarcity of inputs in all sectors has contributed to a continuing decline in production and rising cost of goods and services. The government also has had to contend with a serious lack of material resources. In this context, real GDP has fallen by 5 percent a year on average over the past three years. Output in all sectors is now well below the 1990 level. Per capita real GDP plummeted from US$224 in 1990 to US$85 (or 23 cents a day) in 2000. Consumer prices rose at an annual average rate of 107 percent in 1998, 270 percent in 1999, and 554 percent in 2000. This deterioration continued through the first four months of 2001, with a cumulative rate of 68 percent. The gap between the official and parallel exchange rates widened from 44 percent at end-1998 to 545 percent at mid-May 2001. Gross international reserves stood at the equivalent of only 2.2 weeks of imports of goods and nonfactor services at end-2000. External debt rose to 280 percent of GDP (amounting to almost US$13 billion) at end-2000, with arrears of more than US$9 billion accounting for about 75 percent of the total.

3. On the aggregate demand side, the main source of hyperinflation is the unbridled monetization of a fiscal deficit that has so far proved uncontrollable. This growing deficit is the result of the collapse of the expenditure control system and a sharp decline in the collection of revenue, which has fallen to one of the lowest levels in Africa. War-related expenditure, Jack of transparency, and governance problems have exacerbated this situation. The proliferation of extrabudgetary spending, tax exemptions, quasi-fiscal operations (mainly involving the revenues of mining companies, such as MIBA and GECAMINES, and the oil companies), ad hoc interventions, taxpayer harassment, and corruption in a number of government services have contributed significantly to the erosion of government finances. Furthermore, with the war, security and sovereign expenses (which are partly off-budget and amount to 70 percent of total revenues), not to mention other extrabudgetary expenditures, have increased significantly. Spending on health, education, and infrastructure has remained far below the average for sub-Saharan Africa. The fiscal deficit has been financed by the Central Bank of the Congo (BCC) and through accumulation of both domestic and external arrears. The overall deficit of the government (cash basis) amounted to 45 percent of revenue in 1998 and 81 percent in 2000.

4. The drying up of external financing has compounded this difficult situation. To meet the needs of the government, the BCC has become a mere cashier. To cover the growing fiscal deficit and those of money-losing public enterprises, the BCC has printed money, and the government has accumulated arrears with its employees (wage arrears), foreign creditors, and local suppliers. The BCC has also lost all independence in the conduct of monetary policy and the control of its instruments. In addition, the BCC’s financial position has been seriously weakened. Lastly, the shortage of banknotes (whose printing costs have risen sharply owing to hyperinflation) has contributed to the disruption of the payments system and financial disintermediation. The money supply grew by 160 percent in 1998, by 382 percent in 1999, and by 493 percent in 2000. For the first three months of 2001, this expansion is estimated at 35 percent.

5. The loss of confidence in the Congo franc has led to the use of foreign currencies in its place, resulting in a widespread dollarization of the economy. Financial saving in local currency has been discouraged by largely negative real interest rates.

6. The weakening of government finances, together with the fall in economic activity, has led to a deterioration of the BCC’s external accounts and depletion of its international reserves. The nonrepatriation of foreign exchange earnings by a number of public enterprises has put added pressure on the foreign exchange market. Multiple exchange rates (official rate, fiscal rate, and parallel rate) and price controls (especially on petroleum products) have seriously distorted relative prices and resource allocation, and have Jed to shortages of essential goods and petroleum products. The regulatory framework has been increasingly burdened over the years by the proliferation of often contradictory decrees and decisions. Impromptu and often arbitrary interventions have created a climate of suspicion and insecurity that acts as a deterrent to saving, investment, and, consequently, economic growth. The virtual lack of maintenance of infrastructure and means of production has also contributed to increases in the prices of essential goods, falling production, a rural exodus, and the impoverishment of the population. This situation has been further exacerbated by the effects of the war, the displacement of populations, the influx of refugees, and the occupation of much of the national territory.

7. Finally, poor coordination among ministries in the preparation and implementation of economic and financial policies and the absence of a consistent macroeconomic framework have added to the deterioration of the country’s economic and financial situation.

II. The Government’s Enhanced Interim Program for June 2001–March 2002

8. To address the alarming situation that the DRC is facing and correct the economic and financial disequilibria, the new government intends to put in place a coherent set of macroeconomic, structural, and sectoral policies. The main objectives of the government’s enhanced interim program are to: (a) break hyperinflation; (b) liberalize the economy and open it to the rest of the world; (c) establish a more favorable environment for growth, especially for private sector activity, the true engine of growth; and (d) lay the foundation for economic reconstruction and recovery.

9. The principal quantitative targets for 2001 are the following: (a) the revival of economic growth; (b) an average annual inflation rate of 300 percent, and an end- December 2001 rate of 99 percent; (c) an overall deficit, on a commitment basis and excluding grants, of 1.9 percent of GDP, and on a cash basis of 0.3 percent of GDP; (d) an external current account deficit of 14.0 percent of GDP; and (e) a minimum level of gross international reserves equivalent to 2.4 weeks of imports of goods and nonfactor services.

10. To reach these targets, the government intends to pursue a strict fiscal policy and a prudent monetary policy. A floating exchange rate regime was put in place on May 26, 2001, that unified the existing multiple rates, enhanced the competitiveness of the economy, and improved resource allocation. These policies will be accompanied by the sequenced implementation of major structural measures, with assistance from the World Bank in particular. The success of the program will also depend on well-targeted technical assistance to build administrative and institutional capacities. In this regard, the government is receiving technical assistance from the Fund in the fiscal and banking areas, and in macroeconomic statistics. The World Bank is providing technical assistance, in particular in the mining and transportation areas.

A. Fiscal Policy

11. A key element of the program is to rein in government finances so as to substantially reduce the fiscal deficit (cash basis), with the primary objective of breaking hyperinflation. The government intends to introduce measures designed to generate tax revenues and reduce spending. A monthly treasury cash flow plan was put in place on June 1, 2001, and all tax and off-budget revenues will be deposited in the treasury’s General Account with the BCC. The government intends to take full account of the recommendations of the Fund technical assistance missions on the auditing of budgetary procedures, the modernization of fiscal and budgetary policies, and the strengthening of the financial administration (revenue collecting, budget, and treasury agencies). Given the still limited amount of expected foreign aid, it will not be possible for the government to fully service its external debt in 2001. However, the authorities will continue to pay interest on the BCC’s net advances to the government. The interest rate on new advances will be adjusted to match the BCC’s key interest rate starting in June 2001.

12. For 2001, the government has set a revenue target of CGF 58.9 billion (5.2 percent of GDP), of which CGF 25.0 billion will be customs receipts, CGF 10.4 billion direct taxes, and CGF I.7 billion administrative and government property revenues. To this end, the measures described in Table I will be put in place according to the established timetable. The authorities will ensure that a sufficient supply of the necessary tax returns and assessment forms will be available. Any excess of total revenue net of refunds to the revenue-collecting agencies (régies financiéres) over and above the revenue programmed in the monthly Treasury cash flow plan will lower the ceiling on net banking system credit to the government.

13. The government intends to limit overall spending (excluding foreign interest payments) to CGF 59.4 billion (5.3 percent of GDP) in 2001, of which CGF 44.4 billion will be for current expenditure (excluding interest), and CGF 3.2 billion for domestically financed capital expenditure. For this purpose, the government will adopt the measures described in the attached Table 1. In light of the large share of personnel expenses in total expenditure, the government intends to maintain strict control of the wage bill in 2001. The government has decided that, in view of the pay raises granted in recent months (25 percent for the military and national police and 141 percent for the civil service, including a special bonus to cover increased transportation costs owing to higher oil prices), there will be no more increases during the rest of 2001. Moreover, an in-depth study of the staffing and structure of the civil service will be conducted with the assistance of a bilateral partner and completed by end- 2001. While awaiting the results of this study, the government has decided to freeze hiring in all sectors and not replace retirees, except concerning the health and education sectors, and the rehabilitation of roads. Nonwage spending will be strictly limited and controlled, including sovereign expenses, the costs of missions abroad, and the expenditure of the provinces, so that maximum resources can be allocated to social and priority infrastructure spending. The government will significantly reduce subsidies to public enterprises, with a view to eliminating them when the public enterprise reform plan has been worked out with the World Bank. In anticipation of a steady return to peace, the 2002 budget will give priority to appropriations for the education and health sectors, infrastructure, and any other expenditure that will help reduce poverty.

Table 1.

Democratic Republic of the Congo: Fiscal Measures Planned for 2001

article image

14. The government intends to seek technical assistance from the international community to help build administrative capacity for the rehabilitation of government finances, as described in Table 2.

Table 2.

Democratic Republic of the Congo: Technical Assistance Requirements in the Fiscal Area

article image

15. In the area of capital expenditure, the government intends to carefully select projects to be retained for the remainder of 2001. Thus, the amount of domestically financed capital expenditure will be CGF 3.2 billion and will basically be allocated for spending in the following sectors: transportation, health, and rural development. The amount of capital expenditure financed with external assistance (including technical assistance for administrative and institutional capacity building) will be adjusted upward to the extent that foreign-financed spending is executed. The same adjustment will apply to the overall deficit. The list of foreign-financed capital expenditures was prepared jointly with World Bank staff.

B. Monetary and Exchange Policy

16. The authorities’ decision to retain the local currency, the Congo franc, requires the implementation of consistent monetary, fiscal, and exchange rate policies aimed at restoring confidence in the local currency and ending the vicious circle of hyperinflation and depreciation of the local currency.

17. In the area of exchange rate policy, the authorities introduced on May 26, 2001, a floating exchange rate system that unified the existing multiple exchange rates. It should be noted that the new foreign exchange regulations published on February 22, 2001, permit the unrestricted holding of foreign currencies in the DRC.

18. The government has published all legislation and regulations concerning the introduction of a floating exchange rate regime (involving the interbank market, exchange bureaus, and fund-wiring services). The government has taken due account of the Fund’s comments on the drafts of this legislation. The introduction of the floating exchange rate system has also benefited from the recommendations of a Fund technical assistance mission. The BCC has reviewed and discussed with commercial banks their capacity to manage the exchange risk associated with the structure of their balance sheets and their foreign currency transactions. A foreign exchange interbank market was created concurrently with the introduction of the floating exchange rate system, and exchange bureaus were allowed to operate again. On the basis of information received daily by exchange bureaus and banks on the amounts and rates applied in transactions with their customers, the BCC publishes the daily exchange rate, based on transactions on each of these markets and the combined average rate of these markets. The BCC, while respecting the international reserves target in the monetary program, will intervene to smooth exchange rate fluctuations, but without going against market fundamentals.

19. The main objective of monetary policy is price stability, and for this purpose BCC advances to the treasury will be limited in conformity with the new statutes of the BCC and the monetary program. Base money will be the monetary anchor. Money supply is projected to increase by 53 percent in 2001, compared with 493 percent the previous year. Its growth in 2001 is below that of nominal GDP. The monetary program is described in Table 6. In particular, net credit of the banking system to the government will increase only by CGF 3,234 million for the year 2001 as a whole; it will decrease by CGF 30 million in June 2001, by CGF 998 million between end-May and end-September 2001, and by CGF 4,376 million between end-May and end-December 2001. All interest rates have been deregulated and the BCC will freely set its key interest rate, which will become positive in real terms in June 2001.

Table 6.

Democratic Republic of the Congo: Monetary Programming, 2000-01

article image
Sources: Congolese authorities; and staff estimates and projections.

End-May projections take account of the gap between net credits to the government in the monetary survey and the treasury accounts, It is expected that the figures will be reconciled by end-June 2001.