Democratic Republic of the Congo: Request for a Three-Year Arrangement under the Poverty Reduction and Growth Facility and for the First Annual Program

This paper examines the Democratic Republic of the Congo’s Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility (PRGF) and for the First Annual Program. The authorities requested a three-year PRGF arrangement in support of their program covering April 1, 2002–July 31, 2005, in an amount equivalent to SDR 580 million. The authorities have also steadfastly implemented a Staff-Monitored Program covering June 2001–March 2002, aiming principally at stabilizing the economic situation, and laying the foundation for the restoration of growth and reconstruction.

Abstract

This paper examines the Democratic Republic of the Congo’s Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility (PRGF) and for the First Annual Program. The authorities requested a three-year PRGF arrangement in support of their program covering April 1, 2002–July 31, 2005, in an amount equivalent to SDR 580 million. The authorities have also steadfastly implemented a Staff-Monitored Program covering June 2001–March 2002, aiming principally at stabilizing the economic situation, and laying the foundation for the restoration of growth and reconstruction.

I. Introduction

1. In support of their program covering the period April 1, 2002–July 31, 2005, the authorities of the Democratic Republic of the Congo (DRC) request a three-year arrangement under the Poverty Reduction and Growth Facility (PRGF) in the amount of SDR 580 million. The program’s policies and measures are described in the memorandum on economic and financial policies (MEFP) attached to the authorities’ letter of intent of April 13, 2002, which was circulated to the Executive Board on May 6, 2002 (EBS/02/76). Table 1 summarizes the Fund position during the program period, and Table 2 indicates the phasing of the proposed purchases. If the full amount under the PRGF is drawn, and taking into account the anticipated clearance of the DRC’s arrears with the Fund and the subsequent increase in its quota, the country’s use of Fund resources would amount to 109 percent of quota by July 31, 2005.

Table 1.

Democratic Republic of the Congo; Fund Position During the period of the PRFG Arrangement, June 2002–July 2005

article image
Sources: International Monetary Fund, Treasury’s Department; and staff projections

All percentages are expressed in terms of the DRC’s quota under the Eleventh General Review (SDR 533 million) that will apply after clearance of arrears. The current quota amounts to SDR 291 million.

Before possible HIPC assistance.

Table 2.

Democratic Republic of the Congo: Proposed Schedule of Disbursement Under the PRGF Arrangement, 2002–05

article image
Source: International Monetary Fund.

Other than the generally applicable conditions under the Poverty Reduction and Growth Facility (PRGF) arrangement.

2. On July 13, 2001, when the Executive Board concluded the first Article IV consultation with the DRC since 1996 (EBM/01/73, 7/13/01), Directors commended the authorities for having embarked since late May 2001 on a bold and front-loaded staff-monitored economic program (SMP). They expressed the view that a strong track record under the SMP would create the basis for a normalization of relations with the Fund and other international creditors, help lay the foundation for a successor program supported by a PRGF arrangement, and pave the way for assistance under the enhanced Initiative for Heavily Indebted Poor Countries (HIPC Initiative). The first review of the SMP was completed on January 14, 2002. 1

3. The authorities have prepared an interim poverty reduction strategy paper (I-PRSP) (EBD/02/81), and a joint Fund and World Bank staff assessment (JSA) of the I-PRSP is provided in EBD/02/82; both documents have been issued to the Executive Boards of the World Bank and the Fund. At the same time, a preliminary HIPC Initiative document on the DRC has been issued for the consideration of the two Executive Boards (EBS/02/88). A Stage One safeguards assessment is under way and is expected to be finalized soon after completion of the external audit of the central bank, before the first review of the program. Summaries of the DRC’s relations with the Fund and the World Bank Group are presented in Appendices II and III, while statistical issues are presented in Appendix IV. In December 2002, the World Bank opened a representative office in Kinshasa. The Fund is expected to open a resident representative office in June.

4. The DRC has been in continuous arrears with the Fund since November 1990. On September 6, 1991, it was declared ineligible to use the general resources of the Fund; a declaration of noncooperation was issued on February 14, 1992; and the country’s voting and related rights in the Fund were suspended on June 2, 1994. On March 18, 1998, the Executive Board decided that, at its next review of the DRC’s overdue obligations, the Fund would consider adoption of a decision providing for the initiation of a procedure of compulsory withdrawal from the Fund unless the member had resumed cooperation with the Fund. On several occasions, the Executive Board decided to postpone the review of the DRC’s overdue financial obligations. Initially, this postponement was related to the unsettled political and security situation in the country and the limited availability of economic and financial information. Subsequently, the satisfactory implementation of the SMP and the envisaged arrears clearance operation in the context of the authorities’ request for a PRGF arrangement led the Executive Board to further postpone the review of the DRC’s overdue obligations. The most recent postponement extends to the date of the Board’s consideration of the DRC’s request for a PRGF arrangement or July 31, 2002, whichever is earlier (EBS/02/70, 04/29/02).

5. The Fund and World Bank staffs have been cooperating closely in assisting the DRC. On July 31, 2001, the World Bank’s Executive Board approved a US$50 million IDA grant to be used for key infrastructure projects, the social sectors, and capacity building. On April 25, 2002, the World Bank’s Executive Board considered a multi-country demobilization and reintegration program for the Great Lakes region toward which Bank country programs could contribute US$150 million, with another US$350 million likely to be made available by bilateral donors. About one-fourth of the total amount would benefit the DRC, which would cover the costs of its national disarmament, demobilization, repatriation, resettlement, and reintegration (DDRRR) program (Box 1). On June 13, 2002, the World Bank’s Executive Board is expected to consider an Economic Recovery Credit of US$450 million, of which about US$331 million will be used to repay the bridge loan referred to in paragraph 7. Subsequently, on July 12, 2002, the World Bank’s Executive Board is scheduled to consider IDA’s Emergency Multisector Rehabilitation and Reconstruction Project (EMRRP) in the amount of US$454 million over two years, with an anticipated cofinancing of about US$900 million. Additional IDA resources may become available after two years. The EMRRP will finance (i) key infrastructure projects to relieve supply bottlenecks; (ii) the strengthening of administrative and service delivery capacity; and (iii) projects to address the most urgent social needs.

6. Two meetings to brief donors organized by the World Bank took place in July and December 2001, in Paris and Brussels, respectively. On the latter occasion, donors’ commended the authorities for the good performance under the SMP and indicated that progress toward peace and continued good performance would lead to a resumption of aid to the DRC beyond the ongoing humanitarian and food aid. Another donors’ consultation meeting organized by the World Bank took place in Paris, on May 21, 2002.

II. Modalities of Arrears Clearance

7. As of March 31, 2002, the DRC’s arrears to the Fund amounted to SDR 402.2 million, equivalent to 138 percent of its current quota (SDR 291 million) under the Eighth General Review of Quotas, or 75 percent of what its quota would be under the Eleventh General Review of Quotas (SDR 533 million). Clearance of arrears to the Fund before Board consideration of a request from the DRC for the use of Fund resources under the PRGF is envisaged through a bridge loan. Upon clearing its arrears with the Fund, the DRC would convert to its higher quota under the Eleventh General Review of Quotas. The required subscription payment in foreign currency (SDR 61 million) would be financed through a reserve tranche drawing. The clearance of the DRC’s arrears with the World Bank (US$331 million as of March 31, 2002) will also be done through a bridge loan.

8. The Fund and Bank staffs have maintained close contacts with the African Development Bank (AfDB) Group and other multilateral institutions. As of end-2001, the DRC’s arrears with the AfDB amounted to US$942 million. On April 24, 2002, an agreement in principle was reached to consolidate these arrears through a partial payment/partial consolidation operation. 2 Concerning the other multilaterals, they have all agreed that the existing arrears, totaling US$173 million as of end-2001, will be consolidated. 2

III. Background and Recent Political and Economic Developments

9. The DRC, the third largest country in Africa, is richly endowed with fertile land, one of the largest rain forests in the world with numerous species of precious wood, vast mineral reserves (copper, cobalt, coltan, diamonds, gold, etc.), and huge hydroelectric potential. However, this rich endowment has so far been more of a curse to the country than a source of development. Following the outbreak of war in August 1998, six of the nine neighboring countries sent troops to the DRC, three siding with the government (Angola, Namibia, and Zimbabwe), and three with rebel groups (Burundi, Rwanda, and Uganda). About half of the national territory was occupied, and the deterioration of the already dismal economic and social situation accelerated dramatically. The conflict has resulted directly or indirectly, particularly in the areas controlled by the rebels, in a “silent genocide” (about 3 million deaths, or 2, 500 deaths per day), displacement of populations, growing numbers of refugees, disabled persons, widows, and orphans, and the destruction of infrastructure, including hospitals and schools. Pandemics, such as HIV/AIDS, malaria, and cholera, and malnutrition have increased dramatically, and life expectancy has plunged. In addition, according to a UN report, a number of rebel and foreign forces have been systematically plundering the country’s natural resources. 3

A. Political Developments

10. President Joseph Kabila, who in early 2001 succeeded his assassinated father, appointed a new pro-reform government in April 2002 and started to address the country’s formidable challenges. He formulated three main objectives for the new government: (i) to achieve peace through reactivation of the Lusaka peace accord, which provides for the withdrawal of all foreign troops and the disarmament of rebel forces; (ii) to buttress the inter-Congolese dialogue, which should lead to the formation of a Government of National Unity and, after an interim period, free and transparent elections; and (iii) to resume normal relations with the international community, stabilize the macroeconomic situation, and liberalize and open up the economy.

11. Progress toward peace has continued, and the cease-fire has generally held since early 2001. The withdrawal of foreign troops has started. All Namibian, most Ugandan, and some Angolan and Zimbabwean troops have left the country, and Burundi recently announced its intention to withdraw its troops. However, Rwanda, which has reportedly deployed an average of 30,000 soldiers in eastern Congo, has not yet moved its troops as it insists, inter alia, on the disarmament of the two Rwandese rebel groups operating in the DRC.4 At end-January 2002, the UN Organization Mission in the DRC (MONUC), which has deployed about 3,600 peacekeeping troops, started phase III of its operations, which provides in particular for the disarmament and demobilization of rebel groups in the second half of 2002. As already mentioned, a national DDRRR program will also be implemented. The inter-Congolese dialogue gained momentum at a conference in March/April 2002 in Sun City, South Africa, which brought together for the first time government representa-tives, members of rebel movements, the unarmed political opposition, and representatives of civil society. Although the conference ended without a global agreement, the government reached agreement with one of the main rebel groups, the Mouvement pour la Libération du Congo (MLC), headed by Mr. Bemba and supported by Uganda.5 Under this agreement, which was supported by about 80 percent of the representatives of civil society at the conference, Mr. Kabila will remain President while Mr. Bemba will become Prime Minister. A transition government will be nominated in the near future. The agreement leaves the door open for the participation of, notably, the Rassemblement Congolais pour la Démocratie (RCD-Goma, supported by Rwanda), which rejected the agreement. With this agreement, the transition government will control 70 percent of the country’s territory. A new constitution is expected to be finalized soon, and free and transparent elections will be held in about 30 months. The agreement is seen by the UN as a step forward in the inter-Congolese dialogue.6 Nevertheless, the situation remains fluid and risks remain.

B. Performance Under the Staff-Monitored Program (SMP)

12. The SMP has already produced significant results, particularly the breaking of the vicious circle of hyperinflation and currency depreciation (Figure 1 and Box 2), but the virtual absence of foreign financial aid is causing “adjustment fatigue.” The macroeconomic situation has stabilized, following the implementation of bold and front-loaded measures, and the overall performance has been satisfactory. 7 Inflation sharply decelerated from a monthly average of 18 percent during the period January–May preceding the program (an annualized rate of 632 percent), to 0.7 percent during June–December 2001 (an annualized rate of 8.8 percent) or less than the 1 percent originally programmed. In the first four months of 2002, the average monthly inflation rate continued to be below 1 percent. This remarkable achievement has led to the stabilization of the exchange rate under the floating exchange rate system implemented at the end of May 2001. While economic growth was negative for the year as a whole, there were some signs of recovery in the second half of 2001.

Figure 1.
Figure 1.

Democratic Republic of the Congo: Selected Fiscal and Monetary Indicators

Citation: IMF Staff Country Reports 2002, 145; 10.5089/9781451808506.002.A001

Sources: Based on data provided by the Congolese authorities; and staff estimates and projections.

13. As of December 31, 2001, all quantitative performance indicators were met, with the exception of the ones relating to net bank credit to the government (adjusted downward for any excess of actual revenue over programmed revenue) and the nonaccumulation of wage payment arrears. At end-March 2002, all quantitative indicators were met, and all wage arrears were eliminated, except for CGF 458 million in the Bandundu Province (Table 3). Clearance of these arrears is dependent on the verification of the actual number of civil servants in this province, which is expected to be completed by end-June, 2002.

Table 3.

Democratic Republic of the Congo: Quarterly Quantitative Indicators, June 2001–March 20021/

(In millions of Congo francs, unless otherwise indicated)

article image

The indicators and the procedures for monitoring the indicators are defined in the technical memorandum of understanding for the 2001 enhanced interim program (Appendix I, Attachment 11 of the Letter of Intent of June 20, 2001).

Cumulative changes are calculated from end-May 2001 onward.

For actual stocks, transitory expenditure (expenditure items in transit) are not excluded tan government deposits with the BCC.

In 2001, any excess of total revenue net of refunds to the revenue-collecting agencies (régies financieres) over and above the revenue programmed in the monthly treasury cash-flow plan will lower the ceiling on net bank credit to the government. For the first quarter of 2002, the performance indicator on net bank credit to the government will be adjusted downward by 25 percent of the total surplus over and above the revenue programmed in the monthly cash-flow plan, net of transfers lo revenue-collecting agencies (régies financieres).

The net foreign assets of the BCC have been revised, based on new information.

Stock valued at the program exchange rates further-Staff-Monitored Program (SDR1=US$1.2298; and US$1 = CGF50).

14. Important progress was made in strengthening the public finances through a return to normal budgetary procedures, including the centralization of revenue and expenditure and a reduction in the use of extrabudgetary channels. The budget for 2001 was adopted by parliament and published. In addition, procedures were strengthened to improve control and monitoring of expenditure, while regular progress reports were produced for the first time in several years. A monthly treasury cash-flow plan was strictly implemented.

15. Taking into account the recent upward revision of GDP since 1999, the primary budget balance (on a cash basis) showed a surplus of 0.5 percent of GDP in 2001 against a targeted deficit of 0.2 percent. The overall surplus (on a cash basis) was of the same magnitude instead of a projected deficit. As a result, net bank credit to the government (without adjustment) was well below the programmed level. Fiscal revenue was higher than programmed, amounting to 5.9 percent of the revised GDP, compared with a projection of 5.2 percent. Although the unification of the various fiscal exchange rates with the floating exchange rate was the main factor driving this increase, all revenue categories contributed to this result. Expenditure reached 6.6 percent of the revised GDP, compared with a targeted ratio of 7.1 percent.8 However, one-third of expenditure and revenue was still made or received outside normal budgetary channels, hi late 2001, a bunching of expenditure complicated the implementation of the monthly treasury cash-flow plan and led to the emergence of some wage payment arrears (less than 0.1 percent of GDP). By end-March 2002, most of these arrears had been eliminated.

16. As envisaged under the program, monetary policy was restrictive. Net domestic credit in 2001 increased by only 16 percent of the beginning-of-period-money stock, against an originally programmed increase of 55 percent, largely on account of lower net credit to the government. The monetization of the budget deficit, which was the main source of hyperinflation, ceased. In addition, the central bank stopped providing credit to the nonfinancial private sector and public enterprises. Audits of four commercial banks were completed and an internal audit of the management of the central bank was finalized. In January 2002, the authorities lowered the refinance rate from 140 percent to 90 percent.

17. The external current account deficit, including grants, is estimated to have narrowed from 4 percent of GDP in 2000 to 2.2 percent in 2001, primarily owing to stronger merchandise exports. Net foreign assets were slightly higher than programmed, despite delays in foreign project aid.

18. In the context of the SMP, far-reaching structural measures were put in place, resulting in a significant change in the business environment (Appendix V and paragraphs 14–16 of the MEFP). In addition, administrative capacity was buttressed with the help of early technical assistance (TA) from the Fund, the World Bank, and other development partners. This has permitted the drawing up of a clear road map for coordinated and targeted TA.

IV. Medium-Term Outlook, Objectives, and Policies

19. The government’s main objective over the medium term is to reconstruct and revive economic growth, so as to begin reducing the widespread poverty in the country. To that effect, it has formulated a strategy that builds on the achievements of the SMP and aims at further fiscal consolidation, the pursuit of a prudent monetary policy, and the continuation of bold and far-reaching structural reforms, so as to create an environment conducive to private sector-led growth. The government’s I-PRSP details the three “pillars” on which the strategy is based: (i) the restoration of peace and the vigorous promotion of good governance; (ii) macroeconomic stabilization and the achievement of equitable and sustainable growth; and (iii) the promotion of community-based initiatives (Box 3). At the same time, the I-PRSP distinguishes three distinct phases of economic development: a stabilization phase (2001–02), a reconstruction phase (2002–05), and a sustained development phase (starting in 2005).

20. In their I-PRSP, the authorities stress that it is not feasible to try to achieve the internationally accepted goal of reducing poverty by half by 2015. Even the reduction of the poverty rate by one-fourth, from the current rate of 80 percent to 60 percent, would require an average annual rate of real GDP growth of more than 8 percent, given the annual population growth of about 3 percent. Thus, the authorities have set, realistically in the staffs view, the macroeconomic objectives and policies as described in Box 4 and detailed in paragraphs 19 and 20 of the MEFP. They include, inter alia, (i) an average real GDP growth rate of about 5 percent over the period 2002–05, to allow for an annual average per capita increase of GDP of 2 percent; (ii) a reduction in the annual inflation rate to 5 percent by 2005; and (iii) a gradual increase in gross international reserves to about 9½ weeks of non aid imports of goods and services. The projected growth patterns are similar to those observed in other post-conflict countries. They are predicated on three main factors: (i) the removal of major economic distortions (notably the unification of multiple exchange rates) and the profound change in the regulatory environment will boost economic growth by improving resource allocation and supporting a more normal functioning of production and trading activities; (ii) the substantial increase in investment, driven by international aid and largely consisting of rehabilitation of infrastructure, will relieve major supply bottlenecks, leading to broad-based economic expansion; in particular the World Bank’s EMRRP will boost growth in key economic sectors, including agriculture, transportation, and energy; and (iii) the reunification of the country and the restructuring of the mining sector will have strong positive impacts on real exports (an increase of about 11 percent annually during 2002–05). National savings will grow as a result of a gradual increase in government savings. It should be noted that, despite their growth over the next five years, macroeconomic aggregates (exports, imports, investment, saving, real GDP, etc.) will remain well below pre-war levels. The sensitivity of the above-mentioned targets/projections to changes in exports is discussed in Box 5.

21. The medium-term scenario will need to be updated to take into account the implementation of the DDRRR program, the impact of the country’s reunification, and the external assistance actually mobilized, including the precise modalities of the envisaged debt rescheduling, particularly in the context of the Paris Club and the HIPC Initiative. Concerning reunification, the staff has already initiated discussions with the authorities on its modalities and broad impact. Starting in 2003, the medium-term scenario includes preliminary estimates of its fiscal and balance of payments impact (see Box 4). In this connection, the staff has encouraged the authorities to collect more precise information for the provinces concerned, particularly in the areas of budgetary and monetary policy. The impact of reunification will be a key aspect of the discussions for the first review under the PRGF. In particular, understandings will be reached on the main variables of the 2003 budget, which would need to be consistent with macroeconomic stability.

V. The Program for 2002

22. The program for 2002, which covers the period April 2002–March 2003, seeks to restart economic growth and build upon the gains made under the SMP. Fiscal consolidation remains one of the cornerstones of the government’s economic and financial policies. Crucial in this respect will be the implementation of a set of measures designed to strengthen the monitoring and tracking of expenditure, as well as the mobilization of revenue. The adoption and implementation of the 2002 budget within a normal budgetary process represent important steps forward in this regard. Monetary policy will continue to be prudent. The process of improving the business climate through the implementation of structural and sectoral reforms, which was initiated under the SMP, will be continued and intensified. The I-PRSP includes a number of steps toward the finalization of a full PRSP within three years. Technical and financial support of the international community would be essential for the finalization of the full PRSP.

23. Consistent with the medium-term scenario, the program for 2002 aims at (i) an acceleration of economic growth to 3 percent; (ii) an increase in investment from 5 percent of GDP to about 10 percent as a result of the resumption of externally financed investment; (ii) an increase in national savings from about 3 percent of GDP in 2001 to 11 percent of GDP in 2002, resulting from a rise in government savings and net transfers from abroad (including debt relief); (iv) a decline in the average inflation rate from 357 percent to 25 percent over the same period; and (v) an improvement in the external account (including grants and after debt relief) from a deficit of about 2 percent of GDP in 2001 to a surplus of about 1 percent of GDP in 2002.9 With the resumption of international aid and possible debt relief, net international reserves of the banking system would increase by US$77 million from minus US$559 million in 2001 to minus US$482 million in 2002, and gross official reserves would increase over the same period from about 4½ weeks to about 6 weeks of non aid imports of goods and nonfactor services.

A. Fiscal Policy

24. Achievement of the 2002 fiscal objectives will be based on a strengthening of revenue mobilization and expenditure control. A domestic primary surplus, on a cash basis, of 0.9 percent of GDP is targeted, up from 0.5 percent in 2001, while the overall consolidated cash balance (after possible debt relict) would show a deficit of 0.4 percent of GDP,10 which, given the projected amount of external financing, would allow for a further reduction in net bank credit to the government (Table 5b). Total revenue (excluding grants) is expected to reach 7.3 percent of GDP, and total expenditure (on a commitment basis) 11 percent of GDP, with the latter mainly driven by the resumption in externally financed investment and external debt service. It is assumed that external payments arrears will continue to be accumulated until Fund approval of the PRGF-supported program. During 2002, the government will continue to strictly execute its monthly treasury cash-flow plan, effectively limiting expenditure to available resources. The 2002 budget covers only those provinces that are currently under government control. As already noted, the impact of reunification on the fiscal position will be discussed during the first review under the PRGF arrangement and understandings will be reached on the main budgetary variables for 2003. A contingency amount of expenditure equivalent to 0.8 percent of GDP has been set aside in the program, pending the outcome of debt rescheduling operations. If the projected amount of debt relief materializes, this contingency amount will be released for poverty-related expenditure, which still needs to be identified in consultation with Fund and World Bank staffs.

Table 4.

Democratic Republic of the Congo; Selected Economic and Financial Indicators, 2000–05

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

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

For 2002, as of May 6.

Including interest due on external debt and, from 2003 onward, expenditure financed by resources released under the HIPC Initiative.

Revenue (excluding grants) minus expenditure (excluding interest on debt and foreign-financed expenditure),

From 2003 onward, includes investment financed by resources released under the HIPC Initiative.

From 2003 onward, includes capital projects financed through nongovernmental organizations (NGOs).

Based on revised customs data, a major downward adjustment was made for 1996–2001 imports.

After possible debt relief on interest and HIPC Initiative-related resources.

End-of-period debt stock, including arrears and before HIPC Initiative-related resources.

The net present value of external public debt is 94 percent of the nominal value, reflecting the significant stock of arrears.

From 2002 onward, after possible debt relief.

Table 5A.

Democratic Republic of the Congo: Summary of Central Government Financial Operations, 2000–05

Table 5B.

Democratic Republic of the Congo: Summary of Central Government Financial Operations, 2000–05

Source: Congolese authorities; and staff estimates and projections.

HIPC Initiative debt relief corresponds to the additional amount of debt relief stemming from the HIPC operation after arrears treatment and Naples flow operation.

Interest scheduled, excluding interest on arrears before 2002, and interest due before Naples from 2002.

Contingent expenditure that will be mobilized only if the debt rescheduling assumptions materialize

The domestic primary balance is defined as revenue (excluding grants) less expenditure (excluding interest on debt and foreign-financed expenditure).

Internal and external arrears. External arrears accruing in the first months of 2002 before the debt-relief operations are not shown as they are treated during the same year.

Central Bank operational net losses amounted to CGF 15.7 billion in 2001 (1 percent of GDP).

In 2002, arrears include interest and principal.

Debt relief includes rescheduling on interest and principal under Naples flow terms, and consolidation of moratorium interest.

Discrepancy between monetary and fiscal data.

Cash balance after interest rescheduling. For 2002, cash balance derived from the treasury plan.

25. Revenue will increase to a large extent through the full-year impact of the 2001 unification of multiple fiscal exchange rates with the floating exchange rate. Centralizing revenue at the treasury’s general account with the central bank, and ending petroleum product imports by the public oil company (COHYDRO) with petroleum production revenues as collateral, will further enhance revenue collection. In addition, stricter monitoring of customs procedures, including for special procedures such as re-exports, and the initial steps taken to modernize the tax and customs administrations are beginning to yield results. Box 6 summarizes the main issues and measures concerning the mobilization of revenue, while paragraph 26 of the MEFP contains the details.

26. To limit expenditure (including the contingency item) to the targeted ratio of 11 percent of GDP, measures aiming at further strengthening expenditure control are envisaged in 2002. Normal budgetary procedures with a fully functioning expenditure chain will be restored, and all expenditure will require prior authorization from the Minister of Finance. To this end, the budgetary control function will be reinstated, expenditure commitments and payment authorizations will be closely coordinated through a regular exchange of information among relevant departments, and the BCC and the Ministry of Finance will exchange computerized data on a regular basis. Box 6 summarizes the main issues and measures concerning expenditure control, while further details are contained in paragraph 30 of the MEFP.

27. Notwithstanding the need to achieve fiscal sustainability, it is essential that civil service wages be raised from their current very low levels, so as to contribute to the well-functioning of government services (Box 7). In 2002, the full-year impact of last year’s wage increases is about 35 percent. A further 48 percent rise in the average wage in 2002 to partially compensate for previous years’ real wage decrease is foreseen.11 In 2002, the wage bill will be limited to CGF 43 billion, or 2.2 percent of GDP (1.5 percent of GDP in 2001). The government is committed to limiting salary outlays to the budgeted amount and refraining from making salary payments to occupied territories before reunification. The positions of 21,652 “ghost” workers that were identified through the preliminary audit of the civil service in 2001 will be eliminated. In addition, a central civil service database will be set up and linked to the payroll. Finally, a comprehensive analysis of the size and structure of the civil services in all provinces will be conducted with technical assistance from Belgium and the United Nations Development Program (UNDP).

28. In the 2002 budget, the composition of expenditure has started to change. Social expenditure is targeted to increase from less than 5 percent of government primary expenditure in 2001 to about 15 percent, while the combined share of defense, security, and sovereign expenditure will decrease substantially. Including the unallocated contingency expenditure, social- and infrastructure-related expenditure could reach about 3 percent of GDP, compared with less than 0.5 percent of GDP in 2001.

B. Monetary, Exchange Rate, and Other External Policies

29. Monetary policy in 2002 will aim at achieving the overriding objective of price stability within the framework of a floating exchange rate system. For this purpose, broad money is projected to grow by 35 percent, taking into account a slight recovery in the demand for money related to a gradual return of confidence. Reflecting further fiscal consolidation, net bank credit to the government will be reduced by 36 percent, which should allow for a 41 percent increase in credit to the private sector (Table 6). Net international reserves are projected to continue improving concomitantly with gross international reserves, which are expected to reach about six weeks of non aid imports of goods and nonfactor services.

Table 6.

Democratic Republic of the Congo: Monetary Survey, 2000-02

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

Excluding valuation changes.

At end-period exchange rate.

At an exchange rate of US$1=CGF313.6.

30. With the publication in May 2002 of the new statutes of the BCC, which enshrine its independence, the BCC is committed to actively utilizing its monetary instruments (including refinance facilities, reserve requirements, and open market operations) to control liquidity, while facilitating a return to a well-functioning payment system. To achieve the latter, the BCC will gradually liquefy the bank’s free reserves, but only for those banks that are judged to be viable and that meet the reserve requirements. In turn, recipient banks will have to ensure the liquidity of their customers’ deposits. The BCC will limit its bank refinancing operations to short-term foreign currency swaps for domestic currency. In addition, the new statutes prohibit the central bank from financing expenditure without prior authorization from the Minister of Finance and, from mid-2003, to provide credit to the government.

31. Given the sharp deceleration in inflation, the BCC will continue to gradually decrease the refinance rate in such a way that its annualized rate exceeds the annualized certificate of deposit rate. On May 6, 2002 the refinance rate was lowered from 90 percent to 39 percent, and the monthly rate on certificates of deposit from 7 percent to 3 percent, These certificates will become a monetary policy instrument and will no longer be used for financing budgetary operations. In addition, the BCC will further strengthen the operational framework of its monetary programming in accordance with the recommendations of Fund TA missions, with a view to improving the effectiveness of monetary policy.

32. The authorities are aware of the need to strengthen the financial position of the BCC so that it can fully implement monetary policy. An external audit of the BCC’s financial position is being conducted by an internationally recognized firm. The auditor’s report, to be completed by end-September 2002, will serve as the basis for an action plan that is to be finalized by end-December 2002. Already, the BCC has started to strengthen its management on the basis of the findings and recommendations of an internal management audit. Also, the BCC recently created an internal audit department and drafted an Interim Multiyear Audit Plan, which contains an analysis of the risks and weaknesses in BCC’s management. Further improvements in the functioning of the BCC will be obtained through the strengthening of its accounting of foreign exchange operations and the management of its international reserves.

33. The authorities recognize that the revival of financial intermediation and effective monetary policy call for a sound banking system. They are preparing, with the help of the World Bank and the Fund, a comprehensive reform of the banking sector.12 This reform consists of (i) preparing a list of banks to be closed, restructured, and privatized, and the closing by end-September 2002 of three commercial banks that are deemed to be insolvent and beyond recovery; (ii) auditing eight commercial banks (with four audits already completed) by end-September 2002; and (iii) formulating by end-December 2002 an appropriate recovery plan for the banks that are considered viable. All related quasi-budgetary costs will be fully incorporated in the budget. The reform will include the establishment of a 20 percent ceiling on government equity holdings in financial institutions. In addition, on the basis of its new statutes and the new banking law that vests it with full responsibility for supervising the financial system, the BCC will step up its surveillance of the financial system and enforce prudential rules consistent with existing international standards. The BCC also plans, with World Bank assistance, to strengthen its bank supervision department, licensing procedures, and the accounting system for banks.

34. In 2002, the authorities will continue to maintain the floating exchange rate system they introduced in late May 2001. The central bank will intervene in the exchange market only to smooth short-term fluctuations.

35. As regards the exchange system, the government undertakes not to introduce or expand exchange restrictions, reintroduce multiple exchange rates, enter into bilateral payment agreements contrary to Article VIII of the IMF Articles of Agreement, or introduce or expand import restrictions for balance of payments purposes. The publication of the new exchange regulations in 2001 has led to the liberalization of external transactions and made them consistent, de facto, with Article VIII of the IMF Articles of Agreement. The government intends to formally accept the obligations of Article VIII in the course of 2002.

36. The outstanding stock of external debt at the end of 2001 amounted to US$12.9 billion, of which US$10.1 billion was in arrears (Figure 2, Box 8, and Table 9). In the context of the PRGF arrangement, the DRC could benefit from a substantial reduction in its external debt and debt-service obligations through possible comprehensive debt relief from its creditors, in particular the Paris Club. The latter could include a deferral of post-cutoff-date arrears and the capitalization of moratorium interest. The Paris Club’s formal decision is anticipated in early July. The arrears with the IMF and the World Bank are expected to be cleared through bridge loans while arrears with the AfDB Group and other multilaterals will be consolidated.

Figure 2.
Figure 2.

Composition of Stock of External Debt at end-December 2001 Before Full Use of Traditional Debt Relief Mechanisms

Citation: IMF Staff Country Reports 2002, 145; 10.5089/9781451808506.002.A001

C. Structural and Sectoral Reforms

37. To eliminate distortions and create an enabling environment for the resumption of growth and private sector-led activity, the authorities are vigorously pursuing a wide-ranging program of structural and sectoral reforms (Box 9). The role of government is being modified to facilitate and support, rather than compete with, private sector activity. The reforms that are being pursued, with the help of mainly the World Bank, cover agriculture, forestry and mining, public enterprises, the financial sector, the social sectors (education, health, welfare, and community development), institutional capacity building, and the rehabilitation of key infrastructure (transportation, water, electricity, the sanitation system, urban and rural development, and the environment).

38. Concerning the public enterprises, the preparation of the reform strategy adopted in 2001 is progressing. A Public Enterprise Reform Steering Committee will be responsible for guiding the reform. Its main tasks will be to (i) build a consensus to enable the authorities to successfully carry out this complex reform; (ii) prepare diagnostic studies of all public enterprises and formulate a divestiture action plan by end-September 2002; and (iii) ensure that public enterprises or their assets cannot be sold by the government or the enterprises themselves without its authorization. The terms of reference have been finalized for a financial audit of the public oil company COHYDRO by an internationally recognized firm, and invitations to bid will be issued by end-July 2002. The audit will be completed by end-December 2002. Pending the completion of the audit and the formulation of a restructuring (or liquidation) plan, COHYDRO ceased all importing of petroleum products financed with public resources as of end-March 2002. With the help of the World Bank, a study on public sector cross arrears, as well as arrears with the private sector, was launched. On the basis of this study, which should be finalized by December 2002, an appropriate schedule for the elimination of verified arrears will be defined.

39. The government has, with World Bank support, begun a reform of the mining sector, including the restructuring of the state mining company (GECAMINES). The new mining code will soon be adopted by parliament and published. The government will approve the new mining rules and regulations by end-October 2002. The new by-laws for the mining register (cadastre minier) are being finalized. All unexpired mining rights, whether abandoned or canceled, will be referred to a Mining Rights Validation Commission, which will be created by end-May 2002. Also, arrangements have been made for the certification of the origin of diamonds.

40. In collaboration with the World Bank, the government is drafting a new forestry law, which could be submitted to parliament by end-June 2002. The government has issued a ministerial decree declaring a moratorium on the issuing of new concessions, extensions, and renewals until new rules have been drawn up, and will prepare a study on forestry taxation.

D. Transparency and Governance Issues

41. The legal and regulatory environment in the DRC has significantly improved following the implementation of far-reaching structural measures under the SMP (Appendix V). The government is determined to implement an additional package of measures aimed at instituting good governance and fiscal transparency. Taking into account the conclusions of a forthcoming anti-corruption seminar, an anticorruption strategy and an action plan will be prepared by end-September 2002 with assistance from the World Bank Institute.

42. Also by end-September 2002, the government will adopt a Code of Ethics and Good Conduct, applicable, without exception, to the entire civil service. In addition, it will adopt as soon as possible the by-laws on implementing the BCC statutes, the new banking law, the new mining and investment codes, and the forthcoming forestry law and labor code. With assistance from the World Bank and other development partners, an anticorruption commission will be created. In addition, the government will strengthen the Audit Office and the Office of the Inspector-General of Finance, and it will take steps to strengthen procurement procedures, including the appointment of independent foreign experts to the contract award board. By end-2002, expenditure execution statements for 2001, with supporting documents, will be forwarded to the Audit Office, so that the external auditing process can begin while the 2002 budget will be fully audited by end-2003. Lastly, to promote the rule of law, the government will continue to strengthen the legal and judicial system, with the assistance of the European Union and the World Bank.

E. PRSP and Poverty Reduction

43. The interim PRSP proposes a strategic framework for future poverty reduction policies and actions. Over the next three years, the government will endeavor to convert this strategic framework into an operational plan. This involves the prioritization of the planned actions, an estimation of program costs, and the identification of domestic and external financing sources, In this context, action will be needed to further develop the sectoral strategies and to ensure consistency between the composition of fiscal expenditure and the PRSP. At the same time, the government will make arrangements for the management, support, and monitoring of poverty reduction actions at the grassroots level. In this connection, the scope and depth of the participatory consultations on which the formulation of the poverty reduction strategy is based will be expanded as the country reunifies (Box 10). As mentioned in the joint staff assessment, the full PRSP will be completed in early 2005, at the latest. In the mean time, the authorities intend to publish annual PRSP preparation status reports to assess progress in the design and development of the full PRSP.

F. Administrative Capacity Building and Technical Assistance

44. The IMF, the World Bank, the AfDB, the UNDP, and several other external partners are providing technical assistance covering a broad spectrum. Currently, four Fund resident experts are stationed in Kinshasa, covering public finances and the monetary area (Box 11). The upcoming opening of the IMF resident representative office, in addition to the existing World Bank office in Kinshasa, will help to ensure an effective monitoring of the program. The critical mass of technical assistance provided so far has enabled the authorities to start building the government’s administrative and institutional capacity and improving the quality and timeliness of macroeconomic statistics, especially for the monetary and government finance sectors. While there is a need to further improve the statistical apparatus and buttress administrative capacity, in the staffs view the minimum conditions are in place for the implementation and monitoring of a program under the PRGF.

G. Financing Requirements, Access, Capacity to Repay, and Risks

45. External financing requirements under the baseline scenario are expected to remain large under the program period (Table 8).13 While the external current account deficit (excluding official grants and before debt relief) is projected to almost double from about 9 percent of GDP in 2002 to about 15 percent in 2004, a trend that is similar to other post-conflict cases, the government is committed to settle or consolidate arrears, rebuilding international reserves, paying debt service after possible debt relief, and seeking donor contributions. However, despite the projected resumption of foreign investment, an increase in net capital inflows, and continuing humanitarian assistance, the financing gap after arrears clearance is projected to remain substantial, ranging from US$659 million in 2002 to US$1,428 million in 2004. This gap is expected to be closed by project grants and loan assistance totaling US$197 million in 2002 and peaking at US$743 million in 2004, as well as by budget and balance of payments assistance from the Fund and the World Bank totaling US$49 million in 2002 and rising to US$268 million in 2005 (Box 12). In addition, following arrears clearance, all creditors are expected to provide debt relief, including HIPC Initiative assistance, totaling US$413 million in 2002 and peaking at $446 million in 2004.

Table 7.

Democratic Republic of the Congo: Balance of Payments Summary, 2000–05

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

Estimates of non-aid merchandise imports have been adjusted downward for 1996–2001 since May 2001 as a result of a better reconciliation of banking, customs and tax revenue data.

An average of about 80 percent of official grant and loan assistance is assumed to be spent on imports of goods and services, including freight and insurance. Direct MONUC imports are not included.

Expenditures of the U.N. peacekeeping forces, MONUC, are included on a net basis and include estimates for local purchases of goods and services, salaries of local employees, and expenditures by expatriate MONUC staff in the DRC. The impact of the DDRRR program is not yet included.

Includes interest on current maturities plus projected penalty interest on arrears up to end-May 2002. Thereafter includes interest on current maturities plus interest on rescheduled debt.

Includes a $331 million disbursement by the World Bank to repay the bridge loan incurred for the clearance of arrears expected in June 2002.

Includes amortization on current maturities up to 2001, There after also includes principal on rescheduled debt.

For 2002, the reduction in arrears for all creditors is equal to the amount of arrears outstanding as of end-2001.

Includes the accumulation of arrears to the IMF prior to 2002. In 2002, net Fund credit is net of the reduction in arrears.

Includes debt-relief from bilateral and multilateral creditors, other than the IMF, including debt relief on the accumulation of arrears on current maturities in 2002. Paris Club and other bilateral creditors are assumed to agree to reschedule debt on Naples flow terms and to provide exceptional treatment of post-cutoff date arrears.

Paris Club and other bilateral creditors are expected to provide additional assistance through the capitalization of moratorium interest.

Additional debt relief resources expected in 2003 and related to the HIPC Initiative (a decision point is expected in early 2003). For bilateral debt, this includes debt relief beyond Naples flow terms and the capitalization of moratorium interest expected to be provided in 2002 as well as additional debt relief expected on Naples stock terms.

Includes debt relief on interest from the rescheduling of debt on Naples flow terms and the capitalization of moratorium interest, plus HIPC resources related to debt-relief on both interest and principal, plus the consolidation of penalty interest on arrears in 2002.