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

The primary source of hyperinflation has been unbridled monetization of an uncontrolled budgetary deficit. The Central Bank of the Congo (BCC) has lost control of monetary policy, and its role has been reduced to financing the fiscal deficit. The IMF staff agrees with the government that achievement of the major targets requires 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.

Abstract

The primary source of hyperinflation has been unbridled monetization of an uncontrolled budgetary deficit. The Central Bank of the Congo (BCC) has lost control of monetary policy, and its role has been reduced to financing the fiscal deficit. The IMF staff agrees with the government that achievement of the major targets requires 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.

1. Available information through mid-June indicates that the authorities are rigorously implementing their economic program for the period June 2001-March 2002 that is being monitored by the Fund staff.1 All prior actions have been taken, with the exception of the adoption of the new statutes of the Central Bank of the Congo (BCC) (see Table 1). The new statutes of the BCC, which would restore its independence, require an amendment to the Constitution which is expected to be adopted soon, with enactment of the new BCC statutes and the new banking law in the next few weeks. Strict adherence to the monthly treasury cash-flow plan has prompted a steep decline in inflation in June, as foreseen under the program.

Table 1.

Democratic Republic of the Congo: Prior Actions 1/

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See EBS/01/94 (6/22/01), Appendix I, Attachment I, Table 3.

Adoption of the new statutes of the BCC requires an amendment to the Constitution to allow for the independence of the BCC. Publication of the new banking law has also been delayed because there is a need to harmonize this legislation with the statutes of the BCC. Both pieces of legislation will be published at the same time in the next few weeks.

2. In the first four months of 2001, the Congolese economy continued its downward slide. Output in agriculture, mining (with the exception of cobalt), and manufacturing declined as compared with the corresponding period of 2000.

3. The cumulative rate of inflation, which amounted to 68 percent in the first four months of the year, jumped to about 130 percent for the January-May period, in line with an accelerated depreciation of the Congo franc (CGF) in the parallel market; the depreciation was partly related to speculation about imminent government action in the exchange rate area in the context of the staff-monitored program (SMP). In June, the monthly rate of inflation decelerated noticeably to 2 percent, from about 36 percent in May. In fact, in the second half of the month the consumer price index, as prepared by the BCC, actually dropped (prices of certain basic items like rice, flour, and vegetables reportedly have declined). This trend continued in the first week of July.

4. In the fiscal area, information provided by the treasury shows that the accumulated cash deficit for January-May amounted to CGF 4.2 billion (0.4 percent of GDP), or about CGF 3.4 billion (0.3 percent of GDP) less than projected. In May, when the authorities started to effectively implement the monthly treasury cash-flow plan, a surplus of almost CGF 0.2 billion was recorded (against a projected deficit of CGF 2.0 billion) (Table 2). Consequently, net credit to government was negative for the first time in many years. Indications for June point to a surplus that may well exceed the programmed target of CGF 30 million, despite an unforeseen cash bonus of CGF 250 million (1.2 percent of the programmed wage bill for 2001) given to the military on Independence Day, June 30.

Table 2.

Democratic Republic of the Congo: Monthly Treasury Cash-Flow Plan, January-May 2001

(In millions of Congo francs)

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Sources: Congolese authorities; and staff estimates (see EBS/01/94, 6/22/01, Appendix I, Attachment I, Table 7).

A commission was created in May 2001 to reconcile the gap between net credit to the government as recorded in the monetary survey and as recorded in the treasury accounts.

5. In the foreign exchange market, after an initial depreciation to about US$1=CGF 350 following the announcement of the new floating exchange rate system on May 26, 2001, the Congo franc appreciated in late June/early July to about US$1=CGF 300 (see Figure 1). The difference between the exchange rate quoted by the foreign exchange bureaus and the commercial banks is minimal.

Figure 1.
Figure 1.

Democratic Republic of the Congo: Evolution of the Exchange Rate Following the Implementation of a Floating Exchange Rate System on May 26, 2001.

Citation: IMF Staff Country Reports 2001, 999; 10.5089/9781451841114.002.A002

Source: Congolese Authorities

6. Concerning economic security, the law creating commercial courts was adopted by Parliament early July 2001.

7. During the donors’ information meeting on the Democratic Republic of the Congo (DRC) held in Paris on July 3, 2001, participants congratulated the authorities for the bold and courageous measures included in their program monitored by the Fund staff. In general, participants agreed to support the DRC’s efforts, including in the very short term. Progress toward peace, the inter-Congolese dialogue, and macroeconomic stability were seen as three intertwined objectives. In addition to the US$280 million in ongoing projects (mostly in the form of humanitarian aid), participants indicated their intention to provide additional assistance of US$240 million (including US$50 million in IDA grants). The assistance will finance, inter alia, a list of strategic projects amounting to US$ 156 million, developed with World Bank assistance, to address in particular supply bottlenecks, administrative capacity, and social hardship. Upon approval by the World Bank Board of the IDA grant, quick-disbursing projects are envisaged to begin as early as August 2001. Another donors’ meeting is envisaged before the end of this year to take stock of the situation in the DRC and of the support of the international community.

8. The authorities have deposited SDR 100,000 in their account at the Bank for International Settlements. They intend to make a second deposit of this magnitude before July 13, 2001.

Table 3.

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

(In millions of Congo francs)

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Sources: Congolese authorities; and staff estimates (see EBS/01/94, 6/22/01, Appendix I, Attachment I, Table 6).

A commission was created in May 2001 lo reconcile the gap between net credit to the government as recorded in the monetary survey and as recorded in the treasury accounts.

1

A staff team comprising Mr. Clément (Head) and Mr. Gons (both AFR) participated in a donors’ information meeting in Paris on July 3, and subsequently visited Kinshasa to take stock of developments since the inception of the staff-monitored program. The authorities have so far broadly complied with the data reporting requirement listed in the Technical Memorandum of Understanding (TMU) (see EBS/01/94, Appendix I, Attachment II).

Republic of Congo: 2001 Article IV
Author: International Monetary Fund
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    Democratic Republic of the Congo: Evolution of the Exchange Rate Following the Implementation of a Floating Exchange Rate System on May 26, 2001.