Democratic Republic of the Congo
Selected Issues and Statistical Appendix

The Democratic Republic of the Congo (DRC) has the third-largest land area in Africa with a population of about 50 million. This paper elaborates on specific issues concerning the economic policies of the DRC, the former Zaire, through end-2000. An overview of the country's situation is also provided. The phenomenon of hyperinflation is analyzed. The study also contains a description of the country's exchange and trade system. The appendix updates available statistical information about recent economic and financial developments in the DRC.

Abstract

The Democratic Republic of the Congo (DRC) has the third-largest land area in Africa with a population of about 50 million. This paper elaborates on specific issues concerning the economic policies of the DRC, the former Zaire, through end-2000. An overview of the country's situation is also provided. The phenomenon of hyperinflation is analyzed. The study also contains a description of the country's exchange and trade system. The appendix updates available statistical information about recent economic and financial developments in the DRC.

I. Introduction

1. The Democratic Republic of the Congo (DRC) has the third-largest land area in Africa, with a population of about 50 million. The country is rich in natural resources, possesses Africa’s most extensive network of navigable waterways, and has a vast hydroelectric potential, most of it remaining untapped. Notwithstanding this favorable resource endowment, the DRC’s per capita GDP declined steadily from US$380 in 1985 to US$224 in 1990 and to US$85 (or 23 cents a day) in 2000, making it one of the poorest countries in the world (see Figure 1).

Figure 1.
Figure 1.

Democratic Republic of the Congo: Cumulative Growth Rates of Real GDP

Citation: IMF Staff Country Reports 2001, 123; 10.5089/9781451841145.002.A001

2. The dramatic decline in output and income has been the result of misdirected economic and financial policies, pervasive corruption and, especially in the past decade, political turmoil, civil strife, and outright war (since 1998), implying, among other things, the virtual collapse of government control over public finances and public enterprises. Since 1990, the already negative trends have been compounded by an unprecedented cycle of hyperinflation, currency depreciation, dollarization, insufficient saving, financial disintermediation, the spread of epidemics like HIV/AIDS, and generalized impoverishment of the population.

3. This paper elaborates on specific issues concerning the economic policies of the DRC, the former Zaire, through end-2000.1 Section II provides an overview of the country’s situation; Section III deals with fiscal issues and trends; Section IV analyzes the phenomenon of hyperinflation; Section V pictures balance of payments developments; Section VI provides information on the country’s external debt; and Section VII contains a description of the country’s exchange and trade system. The appendix updates available statistical information about recent economic and financial developments in the DRC. The report was prepared by a staff team comprising Jacob Gons, Bernardin Akitoby, Jerome Fournel, Louis Dicks-Mireaux, Nicholas Staines, and Marilyn KlutsteuvMeyer (World Bank).

4. Since early 2001, important changes have occurred in the DRC, including progress toward peace, the start of the inter-Congolese dialogue, and the opening up and liberalization of the economy. Also, the new government adopted an interim program covering the period June 2000-March 2001 that will be monitored by the Fund staff. These new developments are described in the staff report for the 2001 Article IV consultation and discussions on a Fund staff-monitored program (SMP) (EBS/01/94; 6/22/01). The SMP and a strategic list of projects prepared with World Bank assistance address many of the weaknesses in the economy described in the staff report.

II. Overview2

5. The Democratic Republic of the Congo (DRC) is the third largest country in Africa, with an area of 2.3 million square kilometers (about one-fourth the size of the United States, and more than two-thirds that of the European Union). Its population, estimated at about 50 million (including more than 350 ethnic groups), ranks fourth in Africa. The country occupies the basin of the 4,300-kilometer-long Congo River, with 11 highly diverse provinces stretching from the Great Lakes region to the Atlantic Ocean (see Box 1). With a rapidly growing population estimated at about 8 million, the capital city of Kinshasa is one of the largest in Africa.

The DRC’s Eleven Provinces

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6. The DRC is potentially one of Africa’s richest countries, but this potential has not been translated so far into a reduction of poverty. Indeed, even before the recent civil strife and war, social indicators were very low (see Box 2), and a large part of the population relied on informal activities to survive (mainly small-scale trading and cultivation of small plots). The formal economy rests on four pillars:

  • Agriculture. This sector (including forestry) accounts for about 55 percent of GDP and employs about two-thirds of the labor force. It includes two main subsectors:

    • i.small farming (the principal food crops are manioc, plantains, sugarcane, maize, peanuts, bananas, rice, and yams; chicken, goats, pigs, and sheep are raised); because of the war, most small farmers have returned to subsistence farming; and

    • ii.export products (in particular forestry products, coffee, tobacco, palm kernels, cotton, and rubber); however, agriculture exports declined by 75 percent between 1997 and 1999.

  • Mining. The DRC has extensive mineral resources, including copper, cobalt, industrial diamonds, uranium, tin, gold, silver, coal, zinc, manganese, tungsten, and cadmium, as well as offshore petroleum (see Box 3). Mining accounts for about 90 percent of the DRC’s export earnings;

  • Manufacturing. Manufacturing activities remain limited (about 5 percent of GDP). The main activities include mineral processing, followed by petroleum and cement production—and also tires, shoes, textiles, cigarettes, beer, and processed food.

  • Services. Services account for almost 30 percent of GDP and 19 percent of employment, including transportation, government, communication, and banking. Tourism is not significant.

Key Social Indicators

Even before the recent civil strife and war, living conditions were worse in the DRC than in many other African countries (reliable statistics on the current situation are not available):

  • Life expectancy (1995) was 53 years in the cities, and 43 years in rural areas.

  • Illiteracy (1995) was 32.7 percent overall, and 42 percent for women (school attendance fell from 72 percent in 1979 to 59 percent in 1995).

  • Infant mortality (1995) was 101 per 1,000 in the cities, and 161 per 1,000 in rural areas.

HIV/AIDS prevalence has increased over the last years to reach 5 percent, that is, over 2 million people, with large disparities across regions (4.6 percent in Kinshasa, 0.6 percent in Kasai, 8.6 percent in Katanga, and 16 percent in Goma). In Kinshasa, 15 percent of infants under five years are infected.1

The DRC was the first African country to design and implement an HIV/AIDS program (with the support of the World Bank), but the situation has worsened dramatically as a result of the deep economic crisis, the conflicts and the related displacements of people, and the presence of foreign troops originating from highly affected countries.

The government has set up a small unit to coordinate local and international efforts (Programme National de Lutte contre le SIDA, PNLS). With the support of bilateral donors, the PNLS has developed a sound strategy, for which significant support is needed.

1 Data provided by the Programme National de Lutte contre le SIDA.

Mining Sector

The DRC used to be an important producer of copper, cobalt, diamonds, gold, and other base metals. Historically, mining accounted for 25 percent of the country’s gross domestic product, 25 percent of total budgetary revenue, and about three-quarters of total export revenues. It provided 7 percent of employment

Starting in 1955, the mining industry of the DRC entered a phase of steep decline:

  • By the late 1990s, copper production by the state-owned La Génréale des Carrières et des Mines (GECAMINES) had declined to 5 percent of peak 1985 output level of more than 500,000 tons, while cobalt production fell by 70 percent in the period to about 5,000 tons per year.

  • Production of zinc (about 200,000 tons per year) and the by-product cadmium, also produced by GECAMINES, ceased.

  • Gold production has been virtually nil, compared to 6 tons per year of capacity.

  • Manganese production was discontinued at the Kisenge Mining Enterprise (EMK-MN), where capacity was 360,000 tons per year.

  • The columbium-tantalum and monazite operations were discontinued.

  • With the sharp fall in GECAMINES’ output, diamonds became the largest source of export earnings. Because of frequent changes in marketing policies (including nationalization and the banning of foreigners from diamond producing areas), large amounts of diamonds were exported through the parallel market. A monopoly to commercialize artisanal diamonds granted in 2000 to a foreign company, was rescinded in early 2001.

Reasons for this dismal performance include: (i) the huge financial losses of state-owned enterprises, associated with an excessive tax burden that prevented them from renovating plant and equipment; (ii) a legal and regulatory framework not conducive to the development of operations by the private sector; (iii) a marked institutional disorganization; and (iv) the weakness of the regulatory institutions in charge of the sector.

7. The war has taken a heavy toll on the country:

  • Although detailed data are missing, about 200,000 persons, mostly civilians, may have been killed. The increased mortality associated with the collapse of physical and social infrastructure is estimated to have claimed about 3 million deaths since 1997.3 The Food and Agriculture Organization (FAO) estimates that about one-third of the population (i.e., 16 million people) are starving or malnourished;

  • Damage to infrastructure has been extensive, (compounded by the lack of maintenance). Transport infrastructure has collapsed. As a result, farmers have great difficulties in commercializing any surplus, while food prices in urban centers are high. Interregional connections are often limited to minimal air transport, and the country has essentially broken down into a set of economic enclaves (see Box 4). Damage to other infrastructure (e.g., power and water) is also extensive, in particular in the eastern provinces;

  • The impact on the public administration has been severe. Its disintegration allowed for large fiscal evasion, and central government revenue has shrunk to about 5 percent of GDP. As expenditure soared, partly because of a collapse of budgetary control, and partly driven by the war, fiscal deficits mushroomed (see Section III). Most social sectors are no longer financed, while the salaries of most civil servants have dropped to about USS3–5 a month (compared with the amount of about US$150 a month that is needed to feed an average household in Kinshasa).

The DRC’s Prewar Transport Infrastructure

The prewar transport infrastructure was characterized by the following:

  • About 145,000 kilometers of roads, including about 12,000 kilometers of national roads, 18,000 kilometers of provincial roads, and 115,000 kilometers of rural roads. Only 3,000 kilometers of roads were paved (mainly on the Atlantic Ocean-Kinshasa-Lubumbashi-Zambia axis, and in the eastern provinces). Maintenance of the main roads (about 80,000 kilometers) was under the responsibility of the Office des Routes (and in particular of its district-level units).1

  • About 5,200 kilometers of railways, often dating from the colonial era, and operated by several companies—Office National des Transports (ONATRA), Société Nationale des Chemins de fcr du Congo (SNCC) and Chemins de fer des Ueles (CFU). Infrastructure has suffered from the lack of maintenance. Most rolling stock and, in particular, locomotives, are in disrepair.

  • About 170 airports/landing areas, including 4 international airports, managed by the Regie des Voics Aerienncs (RVA). Equipment is often obsolete, while the runway on the critical Lubumbashi airport would need substantial rehabilitation.

  • One main port, Matadi (on the Congo River at about 150 kilometers from the ocean). Traffic has always been modest, compared with other African ports. Infrastructure needs some rehabilitation.

  • Considerable river transport, in particular in the interior provinces (Equator, Oriental Province, Kasai, and Maniema), operated by both public and private companies. Rehabilitation may be needed in some areas (e.g., dredging and signaling).

1 Information provided by the Office des Routes.

8. The past decade of crisis and conflict has taken a heavy toll on utilities. Even before the war, the system was underdeveloped (see Box 5), and the system has further deteriorated during the war, owing to lack of maintenance and the overall weakening of the companies’ technical and administrative capacity. Restoring, and eventually developing, infrastructure is key both for the recovery of economic activity and for the improvement of living conditions.

9. The public health and education systems have largely collapsed: teachers and doctors are paid only symbolic amounts, facilities are not maintained, and textbooks and drugs are missing. Part of the prewar system has been taken over by the traditionally well-developed networks of religious institutions (mostly Catholic and Protestant), which, de facto, operate most educational facilities, from primary schools to universities, and a large number of health facilities. The private sector is also developing its activities, in particular in the health sector (polyclinics).

Utilities in the DRC

Telecommunications

The fixed network is underdeveloped, and operated by a public company, PTT. Mobile services are functioning in Kinshasa, but the interconnections remain unsatisfactory. Improvement of the cellular phone system could be a magnet for investments (as has been the case in neighboring countries).

Energy

Only 6 percent of the DRC’s population has access to electric power (31 percent in Kinshasa), one of the lowest rates worldwide. The system is operated by a 5,000-staff public company, the Societe Nationale d’Electricite (SNEL). It is characterized by its obsolescence and technical heterogeneity (in particular in the distribution system). Direct war damage seems to have been limited. Cost recovery is low (less than 20 percent).

The DRC has an extraordinary potential for hydropower generation, estimated at more than one-third of Africa’s potential. The 1,775 MW Inga power plant, in the lower Congo, is the largest in Africa (although it currently operates at one-third of its capacity). Overall, the generation system includes nine hydropower plants of more than 25 MW, and a large number of smaller ones.

The system is organized around three poles—west (structured around Inga and a transmission line to Kinshasa, and further to the Katanga Province and Zambia), south (mostly within Katanga, to supply the mining industries), and east. The east pole is not connected to the two other poles, and mainly supplies the Kivu provinces and Burundi (with some SNEL facilities in Bujumbura). There is no modern dispatching center.

The DRC is a member of the Southern African Power Pool and exports some of its power to the Republic of Congo, Zimbabwe, and South Africa. There is, however, scope for substantial increase of such exports.

Water

About 30 percent of the population has access to running water, including 70 percent of the urban population. Water supply in urban areas is operated by a centralized, 4,500-staff public company, REGIDESO (93 centers). A national service is in principle responsible for installing systems in rural areas (to be operated and maintained by the population).

The networks are confronted with a series of systemic issues: insufficient production capacity for rapidly expanding urban areas; lack of chemicals and fuel; obsolescence of equipment and lack of spare parts; and weak cost recovery. Specific projects have been identified by REGIDESO for the main urban centers.

III. Fiscal Trends and Issues4

10. The fiscal situation in the Democratic Republic of the Congo (DRC) has been extremely weak over the past ten years. Compared with the annual averages for the late 1970s and the 1980s, the deficit has been larger, and the revenue-to-GDP ratio5 has fallen to levels that are among the lowest for sub-Saharan Africa countries.6 While there have been significant annual variations over the last decade, the pattern of extreme fiscal weakness holds both for the first and the second half of the 1990s.

11. During the 1996-2000 period, the cash deficit averaged 80 percent of total revenue (with little or no payment of debt service), and the revenue-to-GDP ratio stood at about 5 percent.7 With the new government assuming power in 1997, stabilization measures were adopted that yielded some results in 1998, with a revenue-to-GDP ratio near 6 percent of GDP and a cash deficit below 50 percent of overall revenue. However, the resumption of the war in August 1998 rekindled the cycle of budget deficit monetization, high inflation, and currency depreciation, and the revenue-to-GDP ratio fell further to 3.6 percent, excluding off-budget revenue, in 2000 and to 4.8 percent, including off-budget revenues in that year. The cash budget deficit widened again to 80 percent of overall revenue in 20008. The deficit has been financed primarily by monetization and the accumulation of external and internal arrears (see Statistical Appendix Tables 13-15).

12. The available information still understates the true extent of the deficit. While reliable data are hard to come by, and information on off-budget expenditure is only partial, the deficit in 2000 is higher than 10 percent of GDP when external arrears and quasi-fiscal activities of the central bank9 and public enterprises are included. Available data on recent arrears for wages, pensions, and supplies of goods and services are limited. The only data on domestic debt to the nonbank sector are those on claims verified prior to May 1997.

13. The weak fiscal performance described above relates to specific weaknesses in fiscal policy and management, which affect both revenue and expenditure.

A. Weaknesses in Revenue Performance

14. The tax system lacks rationality, distorts the economy, and is a management conundrum. The structure of the tax system is complex, owing to a plethora of taxes and other levies and to the multiplicity of rates that applies to each of them (particularly for customs duties, the turnover tax, and excises). The objectives of the various levies are unclear, particularly the excises, which are aimed at both protecting domestic industry and boosting the tax yield, without any prioritization. In addition, the tax base is narrow owing to the numerous exemptions and deductions that affect the assessment of the various levies. Consequently, the yield of many taxes is low. The turnover tax, for instance, generates less than 1 percent of GDP, whereas in most countries value-added-tax (VAT)-type turnover taxes have a yield of 7-8 percent of GDP.

15. Discretionary decisions in the form of exceptions to ordinary law, particularly for public enterprises, routinely were taken by the Minister of Finance and served as the basis for offsetting mechanisms that affect transparency in the application of the system’s principles and rules. Thus, the taxation of large public enterprises, such as GECAMINES (mining company) and MIBA (diamond company), does not conform to ordinary law. Their tax payments have been negotiated in recent years. This process compromises the efforts to rationalize the tax system and the stability of fiscal revenue.

16. The three main tax- and nontax- collecting agencies10 are poorly staffed (especially in terms of training and experience) and poorly equipped. For example, the Office des Douanes et Accises (OFIDA) has no database of prices of imported goods against which to check declared values, while the Direction Générale des Contributions (DGC) has neither a reliable identification system for monitoring taxpayers nor a specialized unit for large taxpayers. In addition, the system of paying taxes through commercial banks by mainly using stamps has proved to be highly unreliable and fraud prone, as evidenced by the misappropriation of funds, shortages of stamps, falsification of documents, and fraudulent operations at several levels.

17. In addition to these general factors, three main causes may be considered as important sources of revenue underperformance in the past few years:

  • The first factor stems from the use of the official exchange rate to assess the value of the taxable base for import and export duties and more generally, for all revenues whose taxable base is expressed in—or related to—dollar-terms.11 Against a background of a widening gap between the official and the parallel market exchange rates,12 the use of the official exchange rate lowers the effective taxation rate. With about 60 percent of revenue having a dollar-denominated base, the loss in revenue collection is huge.

  • The second factor is the diversion of revenues to specific accounts outside the control of the treasury. In 2000, an amount equivalent to at least 1.2 percent of GDP was kept outside the treasury account (compte général du Tréesor) at the central bank. The taxation of petroleum products at the distribution level is a significant example of such schemes. In 2000, no revenue was collected by the treasury from this source.13 The annual taxation, however, amounted to CGF 2.6 billion, of which a substantial part was directly offset against petroleum deliveries “free of charge” to government administrations and the military, and the rest was used for other “sovereign” purposes through a special account under the control of the presidency.

  • The third factor in revenue underperformance may be traced to the domestic income and profit taxes, which bear the bulk of the impact of high inflation through the “Tanzi effect.”14 This effect is, however, partially tempered by the use of withholding mechanisms (for income taxes) and of taxation multipliers (applied to the tax base to limit its erosion) to adjust for inflation.

B. Weaknesses in Expenditure Management

18. The inability of the authorities to adjust expenditures to the low levels of revenue collection and, hence, the existence of a continuous large deficit financed both by arrears (domestic and external) and by an unbridled monetization is the second main feature of the fiscal position of the DRC over the past decade, and especially over the last three years. Two intertwined characteristics provide an explanation for this underachievement: (i) the composition of expenditure and the increasing share of sovereign and security outlays, and (ii) the collapse of budget processes and controls.

19. With respect to the first characteristic, sovereign and security expenditure represents a substantial proportion of overall expenditure, while wages and investment expenses have been severely curtailed. The provisional data on the 2000 budget execution illustrate the shift in the composition of expenditure. The aggregate level of cash expenditure was in line with the initial budget projection when excluding off-budget expenditure (CGF 23.4 billion compared with CGF 24.9 billion projected). However, the composition of expenditure differs considerably from that of the initial budget projection. Personnel and investment expenses are lower by more than half the projected amount even though inflation was higher than projected. By comparison, sovereign and security expenditure (including related off-budget expenditures) was substantially higher than projected and accounted for more than 70 percent of overall revenue.

20. Real wages, in particular, have declined substantially in the last two years; and in 2000 the wage bill represented only 27 percent of overall cash expenditure15 (about 2.3 percent of GDP). The decline has been even more pronounced for civil service wages, as military wages were partially shielded from inflation in the past.16 In the course of the 2000 fiscal year, the pay scale for all civil servants was doubled, so that by year’s end they were receiving between CGF 665 and CGF 6,650 per month, with most receiving about CGF 1,000.17 Although active (nonmilitary) and retired (civilian and military) personnel currently receiving pay number approximately 389,000 (84,000 of whom are retired), there is no central file of government employees, and information on employees effectively on duty is poor. Government employees in occupied territories, estimated at 120,000, are not paid.18

21. The second factor explaining the weak expenditure performance is the total absence of control over expenditure. Again, taking the 2000 fiscal year as an example, it is estimated that only a marginal proportion of expenditure (less than 2 percent, according to some estimates) was executed through normal procedures. Most expenditure was paid either (i) from diverted revenue sources without any control, or (ii) through direct payment orders to the central bank without the prior knowledge of the treasury, or (iii) through fast-track procedures. In any event, these procedures strongly differ from the country’s formal and rather orthodox budget practices (see Box 6 below for a brief description of the normal budget execution process and its recent evolution).

22. Overall, the proliferation of parallel channels deprived the Ministry of Finance of its capacity to record and control expenditure.19 In addition, the certainty of being able to finance expenditure with central bank advances certainly favored a “benign neglect” attitude toward enforcing controls. The budgets and cash-flow plans that at some point were designed to control expenditure proved ineffective, and no timely adjustments could be made to expenditure to match shortfalls in revenue.

General Fiscal Management in the DRC

The government expenditure cycle is based in principle on (i) an expenditure preparation, commitment, and validation phase, and (ii) a payment authorization and payment execution phase. The first phase is carried out by various appropriations managers (ministers) and is supervised by the Minister of Economy, Finance, and the Budget through the Directorate of Budgetary Control. The second phase is carried out by the Treasurer-Payment Authorization Officer, with payment handled primarily by the Central Bank of the Congo (BCC) acting as government cashier.

The budget is based on an administrative, economic, and operational classification adopted in 1997. The expenditure chain is essentially manual, although each of the major central departments (budget, treasury, and BCC) has its own computer applications that are partial at best. The Public Accounting Department and the tax-collecting agencies have largely been deprived of their recording and monitoring roles in the expenditure and tax collection management process. In 1997, in an effort to reduce corruption, the functions of public accountants and tax officers were taken over by the BCC, commercial banks, and other financial institutions to handle the bulk of financial flows both for payment and for tax collection.

If the execution process phases mentioned above had been adhered to, budget execution data should in principle be provided by the treasury. However, the use of parallel expenditure channels and fast-track procedures have shifted the focus onto the central bank as, de facto, the only source of data (exclusively on a cash basis and still partial). These data are then reprocessed by the treasury to come up with some budget execution figure along a simplified classification, as the central bank data are not broken down.

IV. Hyperinflation in the Democratic Republic of the Congo20

23. The Democratic Republic of the Congo (DRC) experienced hyperinflation throughout the 1990s. For instance, from October 1990 to December 1995, the cumulative increase in prices was 6.3 billion percent. This note analyzes the causes and consequences of such dramatic hyperinflation. It also explores policies that can be implemented to break the vicious circle of hyperinflation.21

A. Causes of Hyperinflation in the DRC

24. The primary cause of hyperinflation in the DRC lies in the uncontrolled budgetary deficit financed by money creation. As can be seen in Figure 2, there is a strong correlation between the fiscal deficit (on a cash basis), net credit to the government, and the average inflation rate (as measured by the consumer price index). The deficit arises from the breakdown of public administration against the backdrop of political instability, governance problems, civil strife, and war. In this context, there has been an extraordinary weakening of fiscal performance, as evidenced by the fall in fiscal revenue, and the collapse of the expenditure control system (see Section III).

Figure 2.
Figure 2.

Democratic Republic of the Congo: Fiscal Deficit, Money, Prices, and Exchange Rates, 1998-2000

Citation: IMF Staff Country Reports 2001, 123; 10.5089/9781451841145.002.A001

25. Reflecting the drop in revenue and the surging of expenditure, the government cash deficit reached extremely high levels. In the absence of external borrowing options, recourse was taken to central bank credit to finance the budget.22 As a result, the government accounted for the bulk of the increase in money, thereby completely crowding out the private sector. Broad money grew by 160 percent in 1998, 382 percent in 1999, and 493 percent in 2000, while net credit to government surged by 104 percent, 392 percent, and 317 percent during the same three years.

B. Macroeconomic Consequences of Hyperinflation

26. The vicious circle of hyperinflation has led to a breakdown of financial intermediation, an uncontrolled spiral of exchange rate depreciation, increased dollarization, and compounded the fall in fiscal revenue. Moreover, by creating macroeconomic instability and uncertainty, and jeopardizing the transactions role of money, hyperinflation has also had a contractionary impact on key macroeconomic variables, such as investment, savings, GDP, and real wages.

27. Financial disintermediation. Owing to the collapse of the domestic payments system, banks have ceased operating as financial institutions. Sight deposits represented less than 2 percent of broad money over the 1996-2000 period, and have been largely demonetized, as checks and bank transfers have been used almost exclusively for transactions with the central government, at a steep discount. A shortage of banknotes prevented banks from withdrawing excess reserves from the central bank. The excess reserves of commercial banks are equivalent to about 50 percent of their local currency deposit base. In the absence of formal financial intermediation, banking activity has been confined to the brokerage of foreign exchange transactions between importers and exporters.

28. Depreciation of the parallel market exchange rate. As a direct consequence of the hyperinflation, the parallel market exchange rate has experienced a sharp depreciation. There is a strong correlation between the inflation rate and the parallel exchange rate, suggesting that the latter truly reflects the differential of inflation rates, as predicted by the theory of relative purchasing power. Since the fixing of the official exchange rate, the gap between the official and parallel exchange rates widened, rising from 44 percent at end-1998 to 545 percent in mid-May 2001 (see Figure 2D),

29. Dollarization. As in most cases of hyperinflation, several years of hyperinflation have left a trail of strong inertial inflationary expectations and an extensive dollarization of the economy,23 based on informal institutions and arrangements centered on exchange bureaus. The dollarization has been fueled both by currency substitution and asset substitution practices. The quoting of prices in foreign currency terms (U.S. dollars and Belgian francs) has been pervasive, while most people, including wage earners, have relied on foreign currency as a store of value.

30. Decline in fiscal revenue. Hyperinflation has reduced nonmining government revenue in real terms, thereby contributing to rising fiscal deficits. This adverse impact comes about through two channels:

  • As the tax system is not indexed, the usual lags in collection, combined with manipulated delays in payment, have led to the erosion of real revenues. This negative effect is known as the Tanzi-Olivera effect.24 The importance of the Tanzi-Olivera effect in the context of hyperinflation has been underscored by Dornbusch (1993).

  • With the deterioration in tax compliance, the tax yield of a given tax structure has declined. Moreover, the tax base has been shrinking as a result of the decline in economic activity and the thriving nonofficial economy.

31. Depressed investment and saving. As shown by Fischer (1993) and Barro (1995), hyperinflation has a negative impact on capital formation, by creating macroeconomic instability and uncertainty. This negative impact on investment spending in real terms has also been present in the case of the DRC. In parallel with the decline in investment, domestic saving has also been discouraged by interest rates that are substantially negative in real terms. Also, as hyperinflation makes the holding of real balances more expensive than consumption, households consume more and save less.

32. Output contraction. The negative impact on output comes about mainly through the investment channel. In the DRC, prolonged depressed investment has led to a sharp decline in output.

33. Decline in real wages. Several years of hyperinflation have all but eroded real wages in both the private and public sectors. Data compiled by the central bank show that in the private sector the real wage index has declined by more than 99 percent during 1996-99. The decline can be attributed to inelastic labor supply and to an insufficiently flexible wage setting in the face of hyperinflation. In the public sector, wages also have experienced a sharp decline in real terms, despite frequent wage increases. The erosion of wages has depressed the consumption of wages earners (considered to have a high marginal propensity to consume), thereby contributing to output contraction.

C. Stopping Hyperinflation

34. Stopping hyperinflation in the DRC requires a decisive stabilization policy, underpinned by a strong political will. The experience gained from short-lived stabilization efforts in 1995 and 1997 clearly shows how to lend credibility to the anti-inflation strategy: a substantial tightening of the fiscal stance is key to stop hyperinflation. An anti-inflation program would, therefore, include revenue-enhancing and expenditure-restraining measures. However, improving revenue collection and effectively controlling expenditure require strong political commitment. As described in the accompanying staff report, the new government of the DRC has demonstrated its commitment in this area.

Analytical framework for stabilization program

35. The following analytical model, which captures the specificities of the DRC’s economy, shows how the recourse to money creation for financing large fiscal deficits creates hyperinflation dynamics.

Consider an open economy with exogenous output (yt).

Government deficit

36. The government cannot issue bonds to the public and finances its primary deficit solely through seignorage, while interest payments on foreign public debt are accumulated as arrears. The government budget in nominal terms is given by the following:

Dt=(gt-μt)Ptyt(1)

where gt is noninterest expenditure (as a share of nominal GDP), μt is government revenue (as a share of nominal GDP), and Pt is the price of output.

The financing of the deficit is given by

Dt=M˙t(2)

where M˙t is the change in nominal money stock at a given time t.

Money market equilibrium

37. The demand for money can be summarized by the quantity equation

MtVt=Ptyt(3)

where income velocity of money, Vt, is assumed to be variable, as is the case in a country with high inflation.

We further assume that velocity is a linear function of money growth

Vt=α+βVt-t+γM˙t-1α,β,andγ>0;(4)

where ^ denotes the percentage change. This specification of velocity implies that inflation expectations are adaptive.

Household decisions

38. We assume that the country’s financial system is largely underdeveloped and the economy is highly dollarized. Accordingly, the nominal wealth of the representative household consists of nominal money stock and foreign currency (because of the extensive dollarization of the economy). The constraint on the household budget flow is given by the following:

M˙t+(αEt+(1-α)Etp)F˙t=(1-μt)Ptyt-Ct(5)

where Et denotes the official exchange rate which is fixed, Etp the parallel market rate, Ft the stock of foreign currency, a the share of transactions carried out at the official rate, and C, nominal consumption.

For simplicity, we assume that consumption is a share of nominal GDP (Ct=δtPtyt).

Balance of payments

39. As is the case of the DRC, we assume that the country (i) is faced with no external borrowing options; and (ii) does not service its external debt, and therefore incurs arrears in external interest payments and amortization. Therefore, in the absence of private capital flows in the capital account, the change in foreign reserves is equal to the current account excluding interest payments:

Xt-IMt=(αEt+(1-α)Etp)F˙t,(6)

where Xt denotes exports, which are assumed exogenous in dollar terms

(Xt=(αEt+(1-α)Etp)X¯), and IMt is imports defined as a fixed share of GDP (IMt=mPtyt)

The parallel market rate is defined by a modified version of the relative purchasing power theory:

E^tp=λ(P^t-P^t*)(7)

where Pt* denotes the foreign price level. This equation captures the fact that in the DRC the depreciation of the parallel market rate is highly correlated with the inflation rate.

Goods market equilibrium

40. The above model is closed and fully determined. Combining equations (1), (2), (5), and (6) yields the market-clearing condition on the goods market:

Ptyt=Ct+gtPtyt+Xt-IMt(8)

Solution of the model: hyperinflation dynamics

41. The model can be solved to show how large fiscal deficits can generate hyperinflation dynamics, which, in turn leads to uncontrolled depreciation of the parallel market exchange rate.

The linear approximation of the percentage change of equation (3) yields the inflation rate25

P^t=σ1M^t+σ2V^t(9)

where σ1, and σ2 are parameters. For simplicity, we assume that real output growth is zero.

From equation (3), Mt is given by

Mt=PtytVt(10)

Equations (1) and (2) imply that

M˙tPt=(gt-μt)yt(11)

Substituting equations (10) and (11) in (9) yields

P^t=σ1(gt-μt)Vt+σ2V^t(12)

Equation (12) clearly shows how uncontrolled fiscal deficits can trigger a hyperinflation spiral. First, past fiscal deficits financed through seignorage lead to an exponential growth in the income velocity of money, which, in turn, affects the current inflation rate. Second, the current deficit (gt - μt) also has a direct impact on the current inflation rate. Through equation (7), the hyperinflation spiral will translate into a spiral of exchange rate depreciation. Thus, the only way of stopping hyperinflation is to drastically reduce the fiscal deficit, which will lead to a decline in income velocity.

Empirical evidence for the DRC

Exchange rate dynamics

42. We estimate equation (7) using monthly data over the period 1990-2000. By applying the ordinary least squares (OLS) method to the data, we obtain the following results:

E^tp=-0.24+1.03(P^t-Pt*)R2=0.67(2.88)(0.06)df=129(13)t=(-0.085)(16.25)F1,129=264.24

Examining the results, we observe that the estimated λ is positive, in accordance with prior expectations. The estimated value suggests that a 1 percent increase in the inflation differential will lead to 1.03 percent depreciation in the parallel market exchange rate. As to the significance of the estimated slope coefficient, the null hypothesis that there is no relationship between inflation and exchange rate depreciation can be rejected at a 0.01 percent level of significance. As the estimated intercept coefficient is not statistically different from zero, we reestimate the equation without an intercept, which gives the following results:

E^tp=1.03(P^t-Pt*)R2=0.67(0.05)df=130(14)t=(19.4)

Inflation dynamics

43. The data used are annual data for the period 1990-2000. Given the short span of the data, these estimates should be interpreted with caution, as the robustness of the results would need to be tested on longer data series.

We estimate the following modified version of the inflation equation:

P^t=β1+β2DEFGt+β3V^t(15)

where DEFGt is the government cash deficit as a share of GDP, and V^t the percentage change in income velocity of money. The OLS regressionb’s results are as follows:

P^t=171.6+253.3(DEFGt)+27.9V^tR2=0.74(844.1)(114.13)(5.77)df=8(16)t=(0.20)(2.22)(4.83)F2,8=11.89

As the estimated intercept coefficient is not statistically significant, we also run the regression without an intercept:

P^t=271.4(DEFGt)+28.4V^tR2=0.74(67.38)(5.01)df=9(17)t=(4.02)(5.66)

Both estimated coefficients are overwhelmingly significant, and their signs are in accordance with prior expectations. The coefficient of the budget deficit is very large, implying a very rapid disinflation in response to a small decline in the budget deficit ratio from its current level. As observed above, the results of this study should be interpreted with caution. Nevertheless, the results clearly indicate that adoption of a prudent fiscal stance rapidly leads to disinflation.

D. Concluding remarks

44. The following conclusions can be drawn:

  • The monetization of fiscal deficits is identified as the primary source of the hyperinflation.

  • Based on the analytical framework used in this section, a money-based stabilization program could break the cycle of hyperinflation in the DRC.

  • In light of the strong relationship between inflation and the exchange rate, breaking the cycle of hyperinflation will also stabilize the exchange rate.

V. Balance of Payments Developments Over the Past Decade26

45. The deterioration in economic activity in the 1990s in the Democratic Republic of the Congo (DRC) was pronounced in the external trade sector. From its peak in 1989, the U.S. dollar value of exports and imports of goods and services combined had declined by 35 percent by 1996 and by 60 percent by 2000. In addition, in the second half of the 1990s the economy increasingly turned inward: the external trade sector’s share of the economy declined from about 70 percent of GDP in the first half of the 1990s to 45 percent in 2000. Moreover, as the decline was more pronounced in exports, the merchandise trade surpluses of the early 1990s turned into a deficit in 1998 reaching US$275 million or 6 percent of GDP (Statistical Appendix Table 23).27

46. Both merchandise export volumes and earnings declined by about 70 percent between 1989 and 2000, with earnings falling from US$2,400 million to US$760 million.28 However, while volumes had declined 55 percent by 1996, the decline in earnings by 1996 was a more modest 30 percent. This evolution in exports was driven by three major developments: the collapse of copper prices and exports in the early 1990s and the shift in the composition of exports; the impact of the conflict; and the gains in commodity prices in the early and mid-1990s, followed by their subsequent reversal in the late 1990s.

47. The composition of merchandise exports changed sharply during the 1990s, primarily owing to the collapse of copper exports in the early 1990s. In 1989, the main sources of export receipts, accounting for about 95 percent of all receipts, were copper (about 45 percent of total earnings, or US$1,200 million), diamonds (about 25 percent, or US$600 million), cobalt and crude oil (each about 10 percent) and coffee (about 5 percent). Other exports included zinc, gold, silver, rubber, and timber. Following the collapse of copper exports, diamonds in 2000 became the main source of export earnings (57 percent of total earnings, or US$435 million). Other significant sources of earnings comprise crude oil (19 percent, or US$141 million) and cobalt (13 percent, or US$97 million), copper (6 percent, or US$45 million), and coffee (1.5 percent, or US$ 12 million). Exports of other commodities, such as zinc, silver, gold, rubber, and timber, were zero or negligible in 2000.

48. At the start of the 1990s, the export sector, especially for copper and cobalt, was dominated by the GECAMINES company, which was responsible for 50-60 percent (about US$1,300 million) of all export earnings. However, the dependency of the export sector on copper made the sector, particularly GECAMINES, vulnerable to the sharp decline in copper prices that began in 1989 and reached 30 percent by 1993 and 40 percent by 2000. Moreover, since much of the copper production was only marginally profitable, the decline in copper prices was accompanied by a sharp decline in production; as a result, total copper export earnings had fallen by 87 percent by 1993, and by 96 percent to US$45 million by 2000. Low profitability, lack of investment and maintenance, the impact of the conflicts and the recent downturn in commodity prices have impeded the ability of GECAMINES to sustain or intensify its earnings from other sources, especially cobalt. By 2000, the export earnings of GECAMINES had collapsed to about 10 percent, or US$140 million, of its earnings in 1989.29

49. In contrast to copper, export earnings for the other main commodities benefited from a broad increase in commodity prices in the early 1990s, which peaked in 1995 at 50 percent above 1989 levels. Excluding copper, exports earnings in 1996 (US$1,560 million) were 25 percent higher than in 1989. However, the onset of the war in 1998 and the recent declines in commodity prices (except for oil) led to a significant reversal of these gains, so that by 2000 export earnings, excluding copper, had fallen to US$715 million, or about 60 percent of earnings in 1989. Moreover, except for crude oil, export volumes for all commodities in 2000 were significantly below their 1989 levels.

50. Production of diamonds is widely distributed. Socité Minière de Bakwanga (MIBA), the largest producer of industrial diamonds, accounted for only 18 percent of diamond exports in 2000, the artisanal sector accounted for 38 percent, and the unrecorded parallel market is estimated to account for the remainder. Diamond export earnings peaked at over US$700 million in 1998 but subsequently declined to about US$440 million in 2000. This decline was in part owing to weaker prices but was also caused by the installation of monopoly control in 2000 over diamond exports; together these factors reduced export volumes by 35 percent from their level in 1998. Crude oil exports receipts are derived mostly from offshore fields and have therefore been relatively unaffected by the conflict. Oil exports varied between 8 million and 11 million barrels during the 1990s and benefited from the recovery in world prices. Thus, oil export revenue in 2000 reached US$140 million on 8 million barrels, modestly lower than the earnings of US$ 160 million on 10 million barrels in 1989.

51. Total merchandise imports over the second half of the 1990s were in line with economic activity, declining by about 25 percent from 1996 to just over US$1 billion in 2000.30 Imports recovered from the conflict-related slump but have remained constrained by the weak economy and damage to the transportation infrastructure, including a sharp increase in shipping and insurance costs. Since 1998, imports have also been severely constrained by the shortage of foreign exchange and the reluctance of exporters to deposit export earnings with the banking sector at the significantly appreciated official rate, rather than at the parallel market rate, or to even repatriate earnings. A significant portion of importers, especially exporters with large import needs, have attempted to bypass this constraint by paying for imports with funds retained overseas, and using the parallel foreign exchange market, leading to a divergence between imports recorded by the central bank and customs data.

52. Refined petroleum imports, the single-largest import commodity, fluctuated significantly during the 1990s, and, while spending increased sharply during the conflict, it generally failed to keep pace with economic activity. Spending on petroleum imports averaged 1.7 percent of GDP in the early 1990s but, except during the conflict, has since only averaged about 1.0 percent of GDP. Similarly, except during the conflict, import volumes have averaged about 40-50 percent of the level recorded in the early 1990s. Moreover, retail price controls and the de facto monopoly on petroleum product imports by COHYDRO (a public enterprise) caused import volumes to slump sharply in 1999 and again in 2000. By 2000, import volumes had fallen to about 20 percent of the level in 1989, resulting in a severe shortage of petroleum products.

53. A significant portion of merchandise imports is driven by the export sector, especially exports of diamonds, petroleum and copper. In the early 1990s, the export sector accounted for about 30 percent of total imports, and GECAMINES alone was responsible for about 20 percent of total imports. Export-related imports have since declined in tandem with the level and composition of exports and averaged about 20 percent of imports in the latter half of the 1990s.

54. Anecdotal evidence suggests that there has been a shift in the composition of imports toward the import of basic commodities, especially food, in part because of the difficulties encountered in domestic agricultural production and in the transporting of foodstuffs from the interior. However, such evidence also indicates that there has been significant capital imports in sectors that have recently experienced strong foreign direct investment, especially in the capital-intensive telecommunications sector. Aid-related merchandise imports are estimated to have reached US$110 million in 2000. The import component of external aid (much of it humanitarian assistance) is currently thought to be as high as 95 percent and allocated mostly to merchandise imports, rather than services.

55. During the 1990s, in addition to the deficit for goods and services, the income account also posted large deficits owing to the USS350-400 million in scheduled interest payments, including substantial interest on arrears. The scheduled amortization of principal of external debt was of a similar magnitude. The current account deficit doubled from US$400 million in 1996 to US$800 million in 2000 reaching about 18 percent of GDP in the latter year. The prevailing uncertainty and insecurity in the DRC was, until 2000, reflected in sustained private capital outflows as well as negative current private transfers of about US$350-385 million, or 6-9 percent of GDP over the 1996-99 period. However, net outflows diminished significantly to US$253 million in 2000, reflecting increased foreign direct investment. These outflows were partially offset by external aid, which had fallen to about US$70 million in 1997 but increased to about US$138 million in 2000.

56. The developments outlined above have resulted in large overall balance of payments deficits, which, with the drying up of foreign financing, have been financed mainly through the accumulation of external payments arrears of about US$700-800 million a year. Gross international reserves have fallen to low levels—at 2.2 weeks of imports at end-2000.

VI. Trends In External Debt31

57. During recent years, the external position of the DRC has remained precarious, reflecting the fiscal stance (exacerbated by security-related spending pressures and the erosion of the tax base) and domestic supply constraints. In the absence of external financial assistance, except for humanitarian purposes, the overall balance of payments position has been primarily financed by the continued accumulation of external debt-service arrears.

58. The stock of public and publicly guaranteed medium- and long-term external debt is preliminarily estimated to have amounted to USS 12.7 billion at end-2000 (see Table 1 and Statistical Appendix Table 27); this is equivalent to about 280 percent of GDP, or over 15 years of the current diminished value of exports of goods and services and almost 60 years of fiscal revenues in 2000.32 Including short-term (central bank and government) debt and International Finance Corporation (IFC) loans (one of which may have been assumed by the government), total debt is estimated at US$12.9 billion in 2000. Paris Club creditors accounted for the largest share (72 percent) of total medium and long-term public debt (Figure 3).33 The six bilateral creditors with the highest exposure are the United States (US$2.7 billion); France (US$ 1.4 billion); Belgium (US$1.2 billion); Italy (US$901 million); Germany (US$862 million); and Japan (US$791 million). Debt owed to non-Paris Club bilateral creditors amounted to US$391 million. About one-fifth of bilateral debt is not in arrears, of which some 80 percent (US$1.4 billion) is on concessional terms. Multilateral creditors accounted for 25 percent of medium- and long-term public debt, owed mainly to the World Bank Group (US$1.4 billion), the African Development Bank (US$1.1 billion), and the IMF (US$506 million).

59. Total external debt service falling due (including on arrears) in 2000 amounted to US$721 million (US$438 million, excluding arrears), equivalent to almost 90 percent of exports of goods and nonfactor services and about 330 percent of fiscal revenues.

60. About 75 percent of total public debt is composed of arrears, reflecting the nonpayment of debt-service payments to virtually all creditors since 1992. Concomitantly, no new bilateral loans have been contracted since the early 1990s. Arrears on medium- and long-term debt—principal and interest—at end-2000 amounted to US$9.4 billion, of which US$7.4 billion and US$286 million in arrears were owed to Paris Club and non-Paris Club bilateral creditors, respectively. As regards multilateral creditors, US$781 million was owed to the African Development Bank, US$506 million to the IMF, and US$280 million to the World Bank Group. At end-2000, the net present value (NPV) of public and publicly guaranteed medium- and long-term debt stood at US$11.7 billion, less than 10 percent smaller than its nominal value, reflecting the significant stock of outstanding arrears.

Table 1.

Democratic Republic of the Congo: Public and Publicly Guaranteed External Debt, End-2000

(In millions of U.S. dollars)

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Sources: Congolese authorities; and staff estimates.

Includes cumulative stock of scheduled interest in arrears, interest on interest payments in arrears, late interest, and other charges.

Commercial debt has been classified with bilateral debt pending further clarification of loan details. As a result, possible London Club creditors are included as part of Paris Club; debt owed to London Club creditors is estimated to comprise a relatively small portion of total amount included under Paris Club debt.

Short-term debt of the BCC and the government. All short-term debt is in arrears.

IFC loan that may have been assumed by the government.

Figure 3.
Figure 3.

Democratic Republic of the Congo: Composition of Medium- and Long-Term External Public and Publicly Guaranteed Debt by Creditor, End-2000

Citation: IMF Staff Country Reports 2001, 123; 10.5089/9781451841145.002.A001

Sources: Congolese authorities and staff estimates.

61. The last Paris Club rescheduling was in June 1989, in the form of a flow operation on Toronto terms, with a cutoff date of June 30, 1983. Under this agreement, US$1.5 billion in debt-service obligations falling due over a 13-month period was consolidated and rescheduled. The DRC is eligible for assistance under the Initiative for the Heavily Indebted Poor Countries (HIPC Initiative), subject to its meeting the requirements of the initiative for receiving debt relief.

62. The DRC’s external debt is large relative to its resource base and ability to service its debt. Some indication of the sustainability of the level of debt is provided by looking at the ratios of the stock of debt and debt-service payments to selected economic variables: nominal GDP, exports of goods and services, and population. Except for population, the debt-stock ratio has deteriorated significantly over the past decade (Table 2).

63. A large part of the deterioration in the debt stock ratios of the DRC reflects the accumulation of arrears (and interest accrued on the arrears). However, the doubling in the debt ratios over the past decade is also attributable to a sustained and significant decline in the level of economic activity. An alternative perspective is given by recalculating the debt ratios using a “normal” level of economic activity in 2000. The “normal” level is assumed to be the same as in 1991, just before the economy started its accelerated downturn.34 The debt ratios in 2000 are significantly lower in this counterfactual scenario but are still higher than in 1991, reflecting the accumulation of arrears.

64. The DRC’s external debt situation compares unfavorably with that of other countries in sub-Saharan Africa, and the DRC is one of the poorest and most heavily indebted nations. Two groups of countries against which the DRC might be compared are the heavily indebted poor countries (HIPCs) and sub-Saharan Africa (excluding Nigeria and South Africa). In 2000, the DRC’s income per capita (US$85) was significantly lower than the average for the HIPCs (US$304) or for sub-Saharan Africa (US$321). Even after adjusting for a “normal” level of economic activity in 2000, the DRC’s income per capita (US$160) would still rank it among the poorer of the HIPC countries.

65. Owing to its large population, the DRC’s debt per capita in 2000 (US$254) is below the average for either the HIPCs (US$303) or sub-Saharan Africa (US$319). However, the DRC’s debt-to-GDP ratio (283 percent) in 2000 was significantly higher than that for sub-Saharan Africa (99 percent) or the HIPCs (also 99 percent) and remains so (at 158 percent) even after adjusting for a “normal” level of economic activity. The unfavorable position of the DRC vis-à-vis the two comparator groups is greater in terms of the ratio of debt to exports of goods and nonfactor services—in 2000, the ratio for the DRC was 1,522 percent, much higher than for sub-Saharan Africa (278 percent) or the HIPCs (279 percent), and remains so even after a counterfactual adjustment is made (699 percent).

Table 2.

Democratic Republic of the Congo: External Debt Indicators, 1991-2000

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Sources: Congolese authorities; and staff estimates.

Counterfactual scenario; assuming the same population, GDP and exports in 2000 as in 1991.

Excluding Nigeria and South Africa.

VII. Exchange, Payments, and Trade Systems35

A. Exchange and Payments System, 1996-2001

66. With the onset of the 1990s, the DRC entered a period marked by episodes of political turmoil and armed conflict. These troubles undermined fiscal and monetary policy: the fiscal stance was typically expansionary, in particular as a result of pressures to provide for security needs, and was financed almost entirely by currency issue. As a result, the country experienced an extended period of very high inflation, at times slipping into hyperinflation. Reflecting these developments, as well as the drying up of external financing, the exchange rate steadily depreciated throughout the period, and, in an effort to conserve foreign exchange resources for official uses, the foreign exchange system was tightened.

67. From late 1995 to August 1998, the authorities maintained a floating exchange rate system. Under the system, the interbank rate was closely aligned to the rate prevailing in the free market as quoted by the foreign exchange bureaus (previously, the bureau rate was referred to as the “parallel exchange rate”). Daily fixing sessions with commercial banks held at the Central Bank of the Congo (BCC) (the interbank market) opened with quotations based on the market-determined bureau rate. Throughout the period, the spread between the interbank rate and the bureau exchange rate stayed below 10 percent.36

68. In line with the intent of the new floating exchange rate system introduced in 1995, the authorities maintained a foreign exchange system from late 1995 through 1998 that was relatively free of restrictions. Several measures were taken to liberalize the payments system, and the rate of exchange was freely determined.37 On November 3, 1995, a short-lived decision to restrict foreign exchange holdings related to artisanal gold and diamond exports, which led to a sharp drop in the supply of foreign exchange, was rescinded.38 The surrender requirement was reduced to 30 percent and, on March 25,1996, further reduced to 20 percent. Although the volume of transactions at the fixing sessions picked up, the banking system remained marginalized and the official foreign exchange market remained small and largely artificial.

69. On December 27, 1996, new foreign exchange regulations were introduced that, among other things, liberalized imports and exports of foreign banknotes, eliminated surrender requirements of export proceeds to the BCC and other banks, eliminated import and export licensing requirements, liberalized capital transfers for direct and portfolio investments, and abolished the prior authorization (from the BCC) needed for opening foreign currency accounts at banks. Requests for foreign exchange for travel abroad of US$20,000 or more were subject to authorization by the central bank for prudential reasons. The official market for foreign exchange transactions outside the banking sector was expanded on June 12, 1997 with the official recognition of foreign exchange guichets operated by private individuals; a US$50 license was required. On September 28, 1998, reporting and prudential requirements were introduced for the guichets.

70. During the period 1998-2000, the floating exchange rate system was replaced (effective August 1998) by a fixed exchange rate system, and the exchange system was progressively restricted. As hyperinflation returned, so the depreciation of the currency in the parallel market accelerated. The official rate was periodically adjusted, but the spread between the official rate and parallel rate progressively widened—at end-1998 the spread was 44 percent and by mid-May 2001, 545 percent.39 Reflecting these developments, the official interbank market for foreign exchange effectively fell into disuse.

71. On January 9, 1999, domestic transactions in foreign exchange were banned. On September 22, 1999, new foreign exchange regulations were issued that introduced further restrictions, of which the major elements were the following: domestic holdings of foreign currency were banned, the limit on requests for foreign exchange for travel abroad subject to authorization by the central bank was lowered to US$10,000, export surrender requirements were restored, and import and export licensing requirements were reintroduced. Also, foreign exchange bureaus and guichets were banned.40 In practice, the operations carried out by the bureaus and guichets shifted to the parallel market. Effective October 25, 2000, taxes on imports and exports of goods had to be paid in foreign currency. In early February 2001, the requirement for imports was modified, with payment no longer required in foreign currency.

72. In late 2000, the authorities issued new foreign exchange regulations. Although these were largely similar to the existing 1999 regulations, they signaled a move toward greater liberalization with the abolition of the outright ban on domestic holdings of foreign currency and the authorization of such holdings for a limited number of purposes. In early 2001, the authorities began to reopen and liberalize the foreign exchange system with the introduction of new foreign exchange regulations on February 22. The sweeping changes introduced by the new regulations paved the way for the reintroduction of a floating exchange rate system on May 26, 2001 and the unification of the then existing multiple exchange rates. On May 28, the first day of operation of the new system, the average exchange rate was CGF 313.5 per U.S. dollar, representing a depreciation of the official rate of 84 percent in foreign currency terms.41 At the same time, the interbank foreign exchange market was restored, and foreign exchange bureaus operating in the parallel market were reauthorized. A new interbank convention was signed by participating banks, and new prudential and reporting regulations were introduced for foreign exchange bureaus.

73. The main innovations of the February 2001 foreign exchange regulations were as follows: the surrender of foreign currency by travelers was abolished; the ban on domestic transactions in foreign currency was rescinded; import and export licensing requirements were replaced by “declarations” for administrative and statistical purposes; and payments for services, current transfers, and capital account transactions were liberalized (reporting requirements were introduced for statistical and monitoring purposes, including to guard against possible money laundering or other illegal activities).

74. Under the new floating exchange rate system, the interbank and customer (bank-customer and foreign exchange bureaus) exchange rates are closely aligned. Daily sessions of the interbank market take as an opening rate a weighted average of the interbank and bureau exchange rate of the previous day. During the day, rates on foreign transactions are freely determined by banks as calls and offers of foreign exchange are made.

75. Under the new foreign exchange regulations, there are no restrictions subject to Article XIV of the Fund’s Articles of Agreement. Furthermore, with the restoration of a 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 and the integration of the interbank and foreign exchange bureau markets for foreign exchange. Two bilateral payments accords with Angola and Zimbabwe (which do not constitute restrictions under Article VIII) are in place but inoperative; when active, they accounted for only a small share of the DRC’s trade.42

B. The Trade System

76. The system of import tariffs and taxes is complex involving a multiplicity of tariff and tax rates, advance payments on domestic taxes, and numerous exemptions (Box 7). This lack of transparency complicates the task of the revenue agencies and provides opportunities for fraud and discretionary decisions. Moreover, the weak state of customs administration has led to considerable and burdensome delays in the customs clearance process for imports. In order to be effective, reforms to the tax and tariff systems would need to be accompanied by a strengthening of the customs administration and improvements in governance. The authorities are planning to reform the customs administration in the near future.

77. Since 1997, the authorities have taken some steps to simplify and make less restrictive the trade regime. In particular, the system of import tariff rates was reduced to five tariff brackets and the minimum tariff rate reduced to zero, changing the range of rates from 5-30 percent to 0-30 percent. Also, the amount of advance payment of the turnover tax was reduced from a range of 5-30 percent to 0-13 percent, and the number of rates cut from 5 to 3. In 2000, quantitative restrictions on imports (used to protect local industry, especially textiles and tires) were replaced by a surtax, with 3 rates of 15, 20, or 30 percent. With respect to export taxes, in 1999 the tax (0.75 percent) on exports of artisanal diamonds and gold was suspended; the remaining export taxes on other commodities range from 1-10 percent. The authorities are in the process of converting to the 1996 Harmonized System trade codes.

78. 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 participated in that organization’s program of tariff reductions. Participation in these arrangements would require modifications to the DRC’s import tax structure. With respect to COMESA, the authorities estimate that elimination of the DRC’s import tariffs vis-à-vis members of COMESA would result in a relatively small loss in tax revenues; in part, however, this may reflect the extent of the DRC’s trade carried out through the informal sector. Nevertheless, with the recent introduction of a floating exchange rate system and following the planned reform of the customs administration, a return of trade payments through the formal sector could be expected. The DRC became a member of the World Trade Organization (WTO) on January 1, 1997.

Tariff and Tax System for Imports and Exports, 2000

Imports

Tariffs

Taxes are assessed on the c.i.f. value of imports. There are five tax rates: 0, 5, 15, 20, and 30 percent, The major categories of goods covered by each tariff rate arc as follows: at zero percent, agricultural inputs, banknotes, and stamps; at 5 percent, “heavy” machinery and equipment, primary industrial and pharmaceutical goods, parts for assembly in the DRC, information processing equipment, wheat, and certain basic goods, such as milk, salt, and grain; at 15 percent, the main food items for consumption (e.g., flour), basic essential goods, “light” machinery and equipment, and spare parts; at 20 percent, items that compete with locally produced final or intermediate goods for which domestic production falls short of demand; at 30 percent, luxury goods and items that compete with products for which local production is sufficient. There are numerous exemptions and special reduced rates for essential production inputs not available locally, and with respect to the investment and mining codes.

Surtax

For the protection of local industry, a surtax is assessed (in addition to the normal tax rates) at rates of 15, 20, and 30 percent. The surtax is applied to the following products: wheat, flour, and tires (15 percent); sugar (20 percent); and biscuits, textiles, and electrical batteries (30 percent).

Fees

A fee of 5 percent is applied to imports by charitable organizations exempted under the investment code, and other goods benefiting from preferential customs treatment.

Other tax payments

Several domestic taxes are assessed on the value of imports, and collected by the customs administration. The rates applied for each of these taxes are the same as those assessed on the domestic base for the tax. As such, the border tax payments are nondiscriminatory. The major payment of this kind is the turnover tax (payments at rates of 0, 3, and 13 percent).

Export taxes

Export taxes are assessed on a number of goods at the following rates: coffee (1 percent); industrial gold and diamond exports (3 percent); 5 percent on goods previously taxed at 5-10 percent (largely mining products), logs (6 percent); and 10 percent on all other mining products previously taxed at rates greater than 10 percent. A tax of 0.75 percent on artisanal gold and diamond exports was suspended in February 1999.

Democratic Republic of the Congo: Basic Data

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Sources: Congolese authorities; World Bank; 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.

Table 1.

Democratic Republic of the Congo: Gross Domestic Product by Sector at Market Prices, 1996-2000

(In millions of Congo francs)

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Sources: Central Bank of the Congo (BCC); and staff estimates.

Including processing of minerals.

Table 2.

Democratic Republic of the Congo: Gross Domestic Product by Sector at 1987 Prices, 1996-2000

(In millions of Congo francs)

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Sources: Central Bank of the Congo (BCC); and staff estimates.

Including processing of minerals.

Table 3.

Democratic Republic of the Congo: Gross Domestic Product by Sector at 1987 Prices, 1996-2000

(Annual changes in percent)

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Sources: Central Bank of the Congo (BCC); and staff estimates.

Including processing of minerals.

Table 4.

Democratic Republic of the Congo: Gross Domestic Product by Sector at 1987 Prices, 1996-2000

(In percent of GDP)

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Sources: Central Bank of the Congo (BCC); and staff estimates.

Including processing of minerals.

Table 5.

Democratic Republic of the Congo: Supply and Use of Resources, 1996-2000

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Sources: Congolese authorities; and staff estimates.

Including public enterprises.

At parallel market rates.

Table 6.

Democratic Republic of the Congo: Mineral and Agricultural Production, 1996-2000

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Sources: Central Bank of the Congo (BCC); and staff estimates.

In millions of carats.

In millions of barrels.

Table 7.

Democratic Republic of the Congo: Manufacturing Output, 1996-2000

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Sources: Congolese authorities.