Statement by Alexandre Barro Chambrier, Executive Director for the Democratic Republic of the Congo

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

I. Introduction

For more than a decade, the Democratic Republic of the Congo has been facing a very difficult economic and financial situation, owing to the combination of adverse domestic and external factors, including severe economic mismanagement, political turmoil, and war in neighboring countries. These factors greatly contributed to the rundown in the economic and social infrastructure, of which one of the consequences was the accumulation of domestic and external arrears, including vis-à-vis the IMF. The latter ultimately led to the suspension in June 1994, of the DRC's voting and related rights. The impact of this difficult situation was compounded by the war that started in August 1998, leading to the plundering of the country's natural resources, as documented by the recent UN report, the occupation of a large portion of its territory by foreign armies, and further destruction of the social and economic fabric.

These developments have imposed tremendous suffering on the population, exacerbating poverty, in a country where it was already widespread and weakening further social indicators. Based on available information, more than three million people died during the war, and many more are left disabled. Sanitary and health conditions also deteriorated, leading to the increased spread of transmissible diseases like malaria, tuberculosis and HIV/AIDS.

The new President who took office in early 2001 has brought a new leadership, and put in place a strong team in charge of economic management. Available information indicate that, in a relatively short period, this team has been able to bring an encouraging reversal in trends on some financial indicators, particularly at the level of inflation and exchange rate. The authorities are determined to find lasting solutions to the country's woes, to end the war, and to fully normalize relationships with the international financial institutions, including the IMF. On the political front, the authorities are actively working towards the implementation of the Lusaka peace agreement, signed in August 1999, and the beginning of the inter-Congolese dialogue. On the economic front, they have started to take bold actions aim at stabilizing the economic situation, and restoring conditions for the revival of the economic activities. In this context, the staff-monitored program is an important first step, and my Congolese authorities are committed to implementing it in a way that will help them build a track record with the aim of enabling the Democratic Republic of the Congo to access Fund resources under the Poverty Reduction and Growth Facility (PRGF), and later qualify for assistance under the Heavily Indebted Poor Countries (HIPC) initiative, in order to bring its heavy debt burden to sustainable levels, and increase pro-poor outlays.

My authorities are in broad agreement with the staff appraisal and concur with the thrust of policy recommendations by the staff. They are cognizant of the need to clear arrears to the Fund and to establish a strong track record under the SMP. Despite a very difficult situation, they have started making deposits to the special account in June 2001, as agreed with Fund staff and initiated program implementation.

Today, the authorities are facing enormous challenges in every single area, and I believe that current developments provide a window of opportunity for the international community to help the DRC resume normal relationships with the international community, and put its economy on a sustained growth path. In this context, financial as well as technical assistance is needed urgently to support the authorities' efforts towards restoring political and economic stability, and rebuilding the country.

II. Recent Economic Developments

The current economic situation should be assessed against the background of the internal difficulties that the country experienced since the early 1990s. Economic mismanagement, political turmoil and a prolonged deterioration in social and infrastructure, associated with the effects of the war that erupted in August 1998, have brought massive destruction to the country.

Real Growth has been declining continuously and the economic situation has been marked by hyperinflation, originating mainly from the unbridled monetization of a fiscal deficit that has so far proved uncontrollable. Moreover, hyperinflation has had a negative impact on saving, investment, output and real wages.

In the fiscal area, revenue have been weak for many years, while war-related expenditure, lack of transparency, and governance problems have aggravated the already weak fiscal situation. In absence of external assistance, except for humanitarian purposes, the drying up of external financing led to the constant monetization of fiscal deficits.

This situation has also led to a breakdown of financial intermediation, continued depreciation of the currency, increased dollarization, and aggravated the decline in fiscal revenue. Gross external reserves stood at only 2.2 weeks of imports of goods and nonfactor services at end-2000. At 280 percent of GDP at end-2000, the external debt remains heavy and arrears represent about 75 percent of the total public debt.

III. Fiscal Policy

To address the difficult fiscal situation, the program contains a number of revenue-enhancing and expenditure-restraining in the 2001 budget. However, in the short-term, the focus will be on the improvement of fiscal management, with a monthly treasury cash-flow plan, that was put in place in June 2001. The plan will ensure that monthly expenditures do not exceed fiscal receipts. All expenditures and revenues will be centralized at the treasury, leading to the elimination of all off-budget receipts and expenditures. In addition, the BCC will no longer assume responsibility for executing payment orders that have not been issued by the Treasury.

On the revenue side, the authorities' efforts will aim at improving the revenue performance. To this end, they have taken a number of measures, which include: the centralization and depositing of all receipts in the Treasury's account at the Central Bank of Congo (BCC); the reduction of tax exemptions; the setting of monthly revenue performance targets for the Customs Directorate (OFIDA) and the Directorate General of Taxes (DGC); the abolition of the system of offsetting between enterprises and government entities; the elimination of any possibility of deferred tax payments; a decision to create a large taxpayers' unit; and the assessment of import duties on the basis of the CIF value of imports, calculated at the market exchange rate published by the BCC. It is also their intention to take before end-2001 measures defining the stages leading up to the simplification of taxation system on imports, defining a plan to replace the current turnover tax with a value-added tax in early 2003, and conducting an evaluation to assess tax payment and revenue collection procedures.

On the expenditure side, the authorities are determined to ensure transparency in the expenditure process, to strengthen the monitoring and control of expenditure and prevent overruns. Subsidies to the public enterprises will be sharply reduced, with the view to eliminating them when the public enterprise reform plan is completed. Strict control will be maintained on the wage bill in 2001. As a result, civil service salaries, including those of military and police, will not increase during the program period. Military pay will be included into the regular wages roster. A civil service census is expected to 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. To allocate sufficient resources to the social sectors and the basic infrastructure, nonwage spending, sovereign expenditures, costs of mission abroad and the expenditures of the provinces will be strictly limited and controlled. With regard to capital expenditures, the authorities have agreed to limit them to strategic projects selected in cooperation with the World Bank.

IV. Monetary and Exchange Rate Policies

The main objective of monetary policy is price stabilization. To this end, the BCC advances to the treasury will be limited in conformity with the monetary program. Furthermore, interest rates have been deregulated, and the BCC was granted decision-making autonomy with respect to its monetary policy and the use of its instruments.

The authorities are determined to implement financial policies in a sound manner, in order to restore confidence in the currency and end vicious circle of hyperinflation and currency depreciation. They are also committed to letting market forces play their role, and put in place a floating exchange rate system on May 26, 2001. In the same context, they lifted the measure restricting the holding of foreign currency in the country.

V. Structural and Sectoral Reforms

On structural reforms and Sectoral policies, the focus will be on enhancing governance and transparency and reinforcing legal and regulatory frameworks, in order to promote private sector participation and boost economic growth. The authorities introduced in May 2001, a transparent and automatic market-based pricing mechanism for petroleum products. The new system takes into account changes in international oil prices, operating costs, and the exchange rate. In the mining sector, a more competitive environment was created for the diamond sector, allowing new buyers to operate in the sector. Certification requirements in line with recent UN resolutions will be introduced. New investment and mining codes are being prepared, with assistance from the World Bank.

VI. Conclusion

My authorities are determined to bring tangible changes in the country through sustainable solutions on the political and economic fronts. They are facing enormous challenges and operating under very difficult conditions in a country where the economic, social and infrastructure fabrics have been destroyed by years of mismanagement, plundering of resources, and war; all of which have imposed inhuman suffering on the population. They are committed to implementing measures contained in the program. However, they need the continuous help and support of the international community, to assist their reconciliation efforts in order to end the war, and also to support their economic stabilization efforts aimed at rebuilding the country. Finally, I would like to stress the fact that the restoration of peace and a strong economy in the DRC is also an important element for stability and economic development in the Great Lakes region.