Democratic Republic of the Congo: Request for a Three-Year Arrangement under the Poverty Reduction and Growth Facility and for the First Annual Program
Author:
International Monetary Fund
Search for other papers by International Monetary Fund in
Current site
Google Scholar Close
Publication Date:
17 Jul 2002
eISBN:
9781451808506
Language:
English
Keywords:
ISCR; CR; Congo; DRC's arrears; authority; net bank credit; bank credit; Congolese authorities; transition government; central bank; exchange rate; financial support; Poverty reduction strategy; Africa
Download PDF (2.5 MB)

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.

Table 8.

Democratic Republic of the Congo - Financing Requirements, 2002–05

(in millions of US dollars)

article image
Sources: Congolese authorities; and staff projections.

Financing gap excluding grants and new disbursements and including projected interest on arrears for January-May 2002.

The reduction in arrears for 2002 on a calendar year basis is equal to the amount of arrears as of end-2001.

The IMF and World Bank are scheduled to clear arrears through a bridge loan equal to the amount of arrears outstanding projected at the time of clearance, expected in June 2002, and which therefore includes accumulation of arrears on current maturities and interest on arrears in 2002.

The projected accumulation of arrears on current maturities and penalty interest on arrears are both already included in the current account and consequently in the initial financing gap.

Includes debt relief from bilateral and multilateral creditors, other than the IMF. Paris Club and other bilateral and commercial creditors are expected to provide debt relief on Naples flow terms and exceptional treatment of post-cutoff arrears,

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

Includes additional debt relief from 2003 related to the HIPC Initiative.

By Implementing agency. Includes currently unidentified bilateral confinancing for the EMRRP.

Arrears at end-2001 plus interest on arrears and accumulation of arrears on current maturities in 2002.

46. As mentioned in paragraph 1, the proposed three-year PRGF arrangement is in an amount of SDR 580 million, to be fully drawn by 2005, when it would represent about 7.7 percent of the DRC’s projected external debt stock. The improvement in the fiscal and external positions, including the timely financial support of the international community over the medium term, is expected to allow the authorities to meet their repayment obligations to the Fund. The Fund’s Treasurer’s department is conducting a Stage One safeguards assessment of the central bank, and its recommendations will be included in the first review of the arrangement.

47. Nonetheless, balance of payment risks remain, including (i) political risks in a region that has been marked by instability in the last decade, including a resumption of conflict if adequate measures of conflict prevention are not taken in a timely manner; (ii) a delay in international financial support, particularly in the form of project aid and budgetary support, which could lead to increasing adjustment fatigue; and (iii) a possible weakening of government resolve under a transitional government of national unity. However, the authorities have stressed that, with the timely support of the international community and the withdrawal of all foreign forces, they will be able to implement satisfactorily their reform agenda, as they demonstrated under the SMP.

H. Program Monitoring

48. To ensure adequate program implementation and monitoring, the authorities have created two interministerial committees. The first one will be responsible for monitoring the three-year program supported by the Bretton Woods institutions and will be chaired by the Minister of Finance. The second committee will be responsible for implementing the poverty reduction strategy and will be chaired by the Minister of Planning and Reconstruction. Program implementation for the first year under the PRGF arrangement will be monitored according to performance criteria and benchmarks presented in Tables 11 and 12. The definitions of the variables monitored as quantitative performance criteria and benchmarks are contained in the technical memorandum of understanding (attached to the MEFP). The prior actions for the request for the PRGF arrangement have been defined in paragraph 53 and Table 5 of the MEFP. They have all been implemented except for the publication of the mining code, which is with parliament (Table 13). Program implementation will be subject to two reviews per year, with the first to be completed by mid-January 2003, based on the end-September 2002 performance criteria, and the second by mid-July 2003, based on end-March 2003 performance criteria. Indicative performance benchmarks for end-June and end-December 2002 have already been defined. Performance criteria for end-March 2003 will be set at the time of the first review, while reaching understandings on the main variables of the 2003 budget has been set as a prior action for the first review (paragraph 53 of the MEFP).

VI. Staff Appraisal

49. The staff welcomes the authorities’ efforts to strengthen the peace process and the inter-Congolese dialogue, which should lead to the reunification of the country, the formation of a Government of National Unity, a new constitution, and free and transparent elections. The cease-fire is generally holding, and the withdrawal of foreign troops has started with the help of the UN Organization Mission (MONUC). In addition, a regional demobilization and reintegration plan for the Great Lakes region has received strong support from the international community.

50. The staff commends the authorities for their steadfast implementation of their bold and front-loaded interim program monitored by the staff. The new government under President Kabila is to be commended for bringing about a courageous turn in economic policy after years of mismanagement, corruption, and civil strife.

51. The staff-monitored program has produced significant results, and a solid basis has been created for a three-year successor program. The macroeconomic situation has stabilized and the vicious cycle of hyperinflation and currency depreciation has been broken. The business environment is improving, and major price distortions have been eliminated. These results were made possible by a significant strengthening of the public finances and a restrictive monetary policy. With the strict implementation of a monthly treasury cash-flow plan and the progressive return to normal budgetary procedures, the monetization of the budget deficit, the main source of hyperinflation, has ceased.

52. The staff finds the main objectives of the authorities’ three-year program realistic and consistent with the reconstruction phase outlined in their interim PRSP, which aims at creating an enabling environment for economic growth and reducing the widespread poverty.

53. The staff agrees that fiscal consolidation will remain one of the cornerstones of the program. In the staffs view, the fiscal targets are attainable but require continued strong commitment to fiscal discipline and the timely implementation of measures to strengthen the mobilization of revenue, as well as the monitoring and tracking of expenditure. The staff welcomes the progressive shift toward social-related expenditure and basic infrastructure.

54. The staff welcomes the new statutes of the central bank, which enshrine its independence in the conduct of monetary policy and prohibit it from financing expenditure without prior authorization of the Minister of Finance. The central bank is now well positioned to achieve its overriding objective of price stability.

55. The staff agrees that implementation of an effective monetary policy and the progressive expansion of financial savings intermediation through the banking system require a financially sound banking sector. The financial audit of the central bank, the strengthening of its management, and the restructuring of the commercial banks are important steps in that direction.

56. The staff concurs with the authorities’ view that the floating exchange rate system implemented in May 2001 remains appropriate, and it welcomes the authorities’ intention to formally accept the obligations of Article VIII in the course of 2002. The staff also welcomes the authorities’ intention to further simplify external tariffs with technical assistance from the Fund.

57. The staff welcomes the deepening and the sequencing of the structural and sectoral reforms envisaged in the program. It notes that the strengthening of administrative capacity with the timely help of the international community will be crucial to ensure the success of this ambitious but much-needed reform agenda. The staff views the focus of the public enterprise reforms as appropriate, as this sector has not only been a major drain on budgetary resources but has also led to the misallocation of resources. The timely implementation of sectoral reforms, with the help of the World Bank, in the mining, forestry, water, and electricity sectors, as well as infrastructure, is also important to ensure sustainable economic growth.

58. The legal and regulatory environment has already been significantly improved following, inter alia, the publication of new exchange regulations, the statutes of the central bank, the banking law and the investment code, the finalization of the new mining code, the abolition of the monopoly on diamond exports, and the creation of commercial courts. To further improve this environment, the staff encourages the authorities to adopt as soon as possible the corresponding decrees and by-laws and to continue to buttress the judiciary. In this context, it will be particularly important to review all existing contracts to ensure their conformity with the new codes and laws, especially in the mining and forestry sectors. It would also be important to finalize the new labor code, which should be supportive of economic activity.

59. The staff is encouraged by the government’s determination to promote good governance and fiscal transparency. In this regard, the staff looks forward to the finalization of the anticorruption strategy and the action plan that is being developed with the help of the World Bank.

60. The staff notes that the return of peace and stability to the entire country will be a key element in the resumption of growth and the reduction of poverty. The authorities are therefore encouraged to accelerate their progress toward peace and to promote an all-inclusive inter-Congolese dialogue.

61. The staff encourages the authorities to assess the economic and financial impact of the country’s reunification and to continue to pursue prudent budgetary and monetary policies in an environment of macroeconomic stability. The preparation of the 2003 budget that will take into account the effects of reunification will be key in this respect.

62. A number of risks remain for program implementation; the first one is related to the current instability in the Great Lakes region and possible resumption of a full-fledged war. The second risk is related to growing adjustment fatigue, owing in part to the lack so far of timely project aid, which is needed to remove supply bottlenecks, and to a possible weakening of government resolve under a transitional Government of National Unity. This situation strengthens the hands of the nonreformers and may decrease the willingness to implement reforms. However, the staff shares the authorities’ view that, with the timely support of the international community and the continued withdrawal of all. foreign forces, they will be able to implement satisfactorily their program. The authorities stated that they were prepared to take any necessary supplementary actions to keep the program on track, including to counterbalance exogenous shocks, as they demonstrated under the SMP.

63. In view of the government’s effective implementation of the SMP and the strength of its three-year program, the staff recommends that the request for the PRGF arrangement be approved.

64. Finally, the staff welcomes the authorities’ intention to make public the staff report, the letter of intent, the I-PRSP, the joint staff assessment, and the preliminary HIPC Initiative document.

Greater Great Lakes Region: Multi-Country Demobilization and Reintegration Program

The program objectives are to (i) provide a comprehensive regional framework for disarmament, demobilization, repatriation, resettlement, and reintegration (DDRRR) efforts for both government and irregular forces, totaling about 3,50,000 combatants, some 80,000 of which in the DRC; (ii) establish a single mechanism for donor coordination and resource mobilization; and (iii) serve as a platform for national consultative processes that lead to the formulation of national demobilization and reintegration programs.

In addition to the DRC, the following countries would be eligible for support, after fulfilling general and country-specific criteria: Angola, Burundi, Central African Republic, Republic of Congo, Namibia, Rwanda, Uganda, and Zimbabwe.

The multi-country demobilization and reintegration program, which was developed by World Bank staff in close collaboration with donors and UN partners, is estimated to cost US$500 million, or about US$1,500 per ex-combatant. IDA intends to provide a series of credits for national programs up to about US$150 million, with the remaining US$350 million expected to be provided by bilateral donors. The program’s main components are (i) national programs; (ii) special projects; and (iii) regional activities. National programs would take up about 90 percent of the total amount. The World Bank is establishing a multidonor trust fund to channel resources to national DDRRR activities.

National programs would focus on the following five areas:

  • Disarmament. Soldiers would be disarmed by the national army before entering the demobilization process. They would be expected to surrender (against a receipt) all weapons (including shared weapons) and munitions. The disarmament of rebel forces in the DRC would be undertaken by the United Nations Organization Mission (MONUC). The World Bank will not finance disarmament, neither through IDA, nor through the trust fund.

  • Demobilization The following steps would be applicable to regular soldiers and members of irregular forces alike: assembly in discharge centers, verification of ex-combatants’ status and provision of nontransferable ED cards, preparation for transition to civilian life, addressing of special needs of female and child ex-combatants, and transportation to areas of return.

  • Reinsertion. Depending on their specific situation, ex-combatants would, after extensive counseling, be provided with transitional safety net assistance to cover basic needs for a period of 6–12 months following demobilization. The use of this assistance would be verified through surveys.

  • Resettlement and reintegration. Assistance would be provided to help ex-combatants establish sustainable livelihoods based on the following guiding principles: minimization of market distortions and maximization of beneficiary choice; assistance should lead to sustainable livelihoods; promotion of community involvement and reconciliation; and assistance should benefit the wider community.

  • Health screening and HIV/AIDS prevention and mitigation measures would be provided during the demobilization and the reintegration phase.

The Staff-Monitored Program, June 2001–March 2002

The staff-monitored program (SMP) coincided with the stabilization phase described in the authorities’ I-PRSP.

Objectives

The main objectives were to (i) break hyperinflation; (ii) reduce the overall fiscal deficit (on a cash basis) from 3.6 percent of GDP in 2000 to 0.3 percent of GDP in 2001; and (iii) maintain a minimum level of gross international reserves of at least 2.4 weeks of non aid imports of goods and nonfactor services.

Macroeconomic policy mix

Fiscal policy

  • A substantial tightening of budgetary policy was key to stopping hyperinflation, because the primary source of hyperinflation had been the unbridled monetization of an uncontrolled budgetary deficit.

  • The SMP thus included a number of revenue-enhancing and expenditure-restraining measures in the 2001 budget, consistent with a substantial reduction in domestic bank financing.

  • A monthly treasury cash-flow plan was strictly implemented to improve fiscal management and to ensure that monthly expenditure was in line with available resources.

Monetary and exchange rate policies

  • The new exchange regulations published in February 2001 provided for a liberal exchange and payment system.

  • The adoption of a floating exchange rate system on May 26, 2001 unified the then existing multiple exchange rates.

  • A restrictive monetary policy consistent with the objective of breaking hyperinflation was implemented.

  • Central to the successful implementation of monetary policy was the restoration of the independence of the central bank.

Structural and sectoral reforms

  • A number of measures to improve resource allocation, including the removal of major economic distortions, were implemented.

  • Far-reaching reforms of the legal and regulatory system, aimed at encouraging private sector activity and restoring growth were undertaken.

Social impact

  • Hyperinflation is one of the most pernicious taxes on the population, particularly on wage earners and the poor; its elimination has alleviated considerably the hardship of the majority of the population.

  • The liberalization of oil imports and the implementation of a transparent and automatic mechanism for the pricing of petroleum products have led to a sharp improvement in transportation as a whole and, therefore, to a better supply of basic foodstuffs.

The Strategy for Poverty Reduction

The authorities’ poverty reduction strategy centers on three key poverty reduction “pillars”: (i) the political one of restoring peace and good governance; (ii) macroeconomic stabilization and achievement of equitable and sustainable growth; and (iii) the promotion of local communities and their participation in decision making not only at the local, “grassroots” level, that is, community-based initiatives, but also by providing feedback for decision making at the national level. At the same time, three distinct phases of the strategy are identified:

  • Phase I (2001–02) corresponded, on the economic side, with the period of stabilization covered by the staff-monitored program (SMP) and, on the political side, with continuous progress in the peace process and the inter-Congolese dialogue. Concerning community-based initiatives, it involved the preparation of the I-PRSP and the first steps taken to buttress the partnership between the government and the various actors at the community level.

  • Phase II (2002–05) is to be a period of reconstruction and includes (i) on the political side, the consolidation of peace, including the demobilization and reintegration of ex-combatants, the reunification of the country, and measures to improve governance; (ii) on the economic side, a deepening of the structural reforms to consolidate macroeconomic stability and promote sustainable growth, a “pro-poor” budget with an appropriate composition of expenditure, the rehabilitation and reconstruction of infrastructure, and the preparation of sectoral strategies; and (iii) with respect to community-based initiatives, capacity building at the grassroots level and institutional reforms at the central level. This phase coincides with the implementation of a three-year program that could be supported by the Fund through the PRGF; by the World Bank through an Economic Recovery Credit (ERC) and the Multisector Emergency Reconstruction and Rehabilitation Project (MERRP); by the UN, the World Bank, and other donors through the financing of the disarmament, demobilization, repatriation, resettlement, and reintegration (DDRRR) program; and, starting in 2003, possibly by resources released under the enhanced HIPC Initiative.

  • Phase III (starting in 2005) will be one of sustained development, with a tangible reduction in poverty and a marked improvement in people’s living conditions. The I-PRSP does not discuss in detail the actions and policies of this phase; this will be done in the full PRSP.

Key Elements of the Medium-Term Program to be Supported by the PRGF

The program’s time span, 2002–05, coincides with the reconstruction phase of the I-PRSP

The program’s main quantitative objectives are (i) an average real GDP growth rate of about 5 percent, there by permitting an annual per capita increase of about 2 percent of GDP; (ii) a reduction in the annual inflation rate to 5 percent by 2005; and (iii) a gradual increase in gross international reserves to more than two months of non-aid-related imports of goods and nonfactor services by 2005.

Starting in 2003, the projections include preliminary estimates of the impact of reunification, for example, the number of civil servants (80,000) that will be added to the payroll, and a modest rise in exports, while allowing for additional imports.

The external current account deficit (including transfers and excluding possible debt relief) is expected to widen from 3.7 percent of GDP in 2002 to 7.3 percent of GDP by 2005, reflecting the country’s reconstruction import needs, particularly those related to externally financed investment, and the external debt-service profile. The investment ratio is projected to increase from 5 percent of GDP in 2001 to about 19 percent in 2005 as a result of the resumption of externally financed investment. National savings would increase from 3 percent of GDP in 2001 to 16 percent in 2005, resulting from an increase in government savings and official transfers from abroad.

Macroeconomic policy mix

Fiscal policy will be geared toward achieving a further consolidation, with the domestic primary cash surplus increasing from 0.9 percent of GDP in 2002 to 5.4 percent of GDP in 2005. Key aspects of fiscal policy include further improvements in the public expenditure management system, with a view to having full tracking of expenditure, a sustained strengthening of revenue mobilization, strict adherence to a monthly treasury cash-flow plan, and a shift in the composition of expenditure toward the social sectors.

Monetary policy will aim at achieving the overriding objective of price stability within the framework of a floating exchange rate. The central bank will:

  • promote the revival of financial intermediation, particularly through the restructuring of the banking system;

  • strengthen bank soundness, through effective surveillance of the financial system and enforcement of prudential rules consistent with existing international standards;

  • gradually restore the normal operation of the country’s payment system, and

  • draw up an action plan to strengthen its financial position following an external audit.

Structural and sectoral reforms will be deepened, with a view to creating an enabling environment for the resumption of growth and private sector-led activity. The reforms cover public enterprises, mining, forestry and agriculture, the social sectors, institutional capacity building, and the rehabilitation of key infrastructure.

Social impact

  • The implementation of a “pro-poor” budget will address the most urgent social needs.

  • The stabilization of prices will stop the erosion of the income of the poor.

  • The poor will also benefit substantially from the reunification and reconstruction of the country.

  • The rehabilitation of infrastructure should improve the availability, and reduce the cost, of goods and services.

Sensitivity to Lower Export Growth

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

The DRC is particularly rich in natural resources and, if supported by foreign financed investment, exports are expected to provide about one-third of the economic growth through the medium term.

Assumptions

The projections shown above reflect the impact of lower export volume growth, compared with the baseline scenario, assuming an unchanged level of external assistance and investment. Growth in merchandise export receipts is 3 percentage points lower than projected in 2003 and 4 percentage points lower in both 2004 and 2005; as a result, by the end of 2005, merchandise exports are about 9 percent lower than projected.

Impact

Real GDP growth would be expected to decline by between 0.6 percent and 0.8 percent each year. Government revenues would also decline. By the end of 2005, the cumulative decline in nominal GDP would be 2 percent.

Current account: Lower exports are expected to have little impact on imports owing to the continued need for imports for reconstruction; however, this decrease can be expected to reduce somewhat investment income outflows. Lower export growth can, therefore, be expected to accentuate the deterioration in the current account (including grants and before debt relief), by as much as 1.5 percentage points in 2005.

Gross official reserves: The larger part of the impact, however, is expected to be reflected in a smaller net accumulation of net foreign assets. The central bank accumulation of reserves—gross official reserves in terms of weeks of nonaid-related imports—would be smaller in 2005 than in 2002, rather than larger as currently projected.

Debt service: Assuming that disbursements and debt service remain unchanged, the debt service after debt relief, including possible HIPC assistance, would increase relative to both exports and fiscal revenues.

Key Issues and Measures in the Fiscal Area

Revenue collection improved substantially in 2001 but, even at the projected level of 7.3 percent of GDP in 2002, remains one of the lowest among sub-Saharan African countries. The three main revenue-collecting agencies—Office des Douanes et des Accises (OFIDA), for customs; Direction Générate des Contributions (DGC), for direct and indirect taxes; and Direction Générate des Recettes Administrates, Judiciaires et Domaniales (DGRAD), mainly for nontax revenues—are stepping up efforts to track key sectors of the economy (mining, forestry, and petroleum), where ad hoc (mostly off-budget) arrangements have proliferated. In addition, insufficient equipment, poor motivation, and fraud have undermined these agencies’ ability to generate revenue.

Full restoration of administrative capacity will be a long process. However, some key revenue-generating measures can yield rapid results:

  • reinvolvement of revenue-collecting agencies in the key sectors through strict application of existing legislation, including the recently published investment code and the soon to be approved mining code, which enshrine the principles of equitable treatment of investors/taxpayers;

  • creation of a large taxpayers’ unit to focus on a limited number of large taxpayers, regardless of their activities, to ensure their full taxation while avoiding multiple, and counterproductive, inspections by the various agencies;

  • modernization of the revenue-collecting agencies through improved data collection and basic equipment; and

  • further reforms, especially a simplification and rationalization of customs tariffs and the tax system, to eliminate distortions and provide a sound basis for economic development.

Significant progress was made in 2001 in rebuilding a basic public expenditure management function. Achievements that can already be identified are the following: (i) the budget for 2002 was finalized and approved in early January 2002 through a normal budgetary process; (ii) basic budgetary procedures with the key expenditure stages (commitment, payment authorization, and actual payment) have been in place since the middle of 2001, albeit highly centralized at the Ministry of Finance and the Treasury level; and (in) overall fiscal reporting has been improved and made more reliable through regular reconciliation with central bank data.

Recently, important gains have also been made in reducing the incidence of off-budget expenditure. Petroleum production revenues and specific taxes on public enterprises have begun to be centralized at the treasury account at the Central Bank of the Congo (BCC) rather than in government-held commercial bank accounts. In addition, by early 2002, “payment orders” processed by the BCC without prior approval of the Minister of Finance had been reduced (about CGF 2 billion in November 2001, CGF 0.8 billion in December 2001, and CGF 0.2 billion in January 2002).

Progress is still needed to ensure the return to a normal budget execution process with built-in controls to ensure the full tracking of expenditure. This will require the following:

  • elimination of all off-budget expenditure through the strict application of the presidential decree prohibiting expenditure without prior authorization of the Minister of Finance;

  • rebuilding the key administrative departments responsible for financial control and reporting at all stages of the budget execution process;

  • improved equipment and integration within each department;

  • the reinstatement of controls and monitoring of bank accounts managed by institutions and ministries, and of amounts transferred to provinces; and

  • undertaking public expenditure reviews, with the help of the World Bank.

Democratic Republic of Congo and Other African Countries: A Wage Comparison

The average wage level in the civil service (excluding military and police) remains low by all standards. The wage scale (including transportation bonuses) at the beginning of 2002 was between US$4 (bottom level outside Kinshasa) and US$50 a month with an average of less than US$15. The salary of a Permanent Secretary (Secrétaire général) in a ministry in Kinshasa was US$35 a month.

The share in the wage bill of the military and the police, which amounted to 40 percent in 2000, was reduced to around 35 percent in 2001, and is projected to decrease further to 30 percent in 2002.

The chart below compares the DRC in 2001 with other Sub-Saharan African countries in two respects: overall central government wages in percent of GDP and civil service wages per capita as a multiple of GDP per capita (a measure of the relative well-being of the civil service compared to that of the average individual). In either case, the DRC is at the bottom end.

uA01fig01

Democratic Republic of the Congo and Other African Countries: A Wage Comparison

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

External Debt

Debt estimates

The DRC’s outstanding debt at end-2001 is estimated at US$12.9 billion with US$10.1 billion in arrears.

The main creditors as of end-2001 were as follows: IMF, US$503 million; World Bank Group, US$1,360 million; the African Development Bank (AfDB)/African Development Fund (AfDF), US$1,186 million; other multilaterals, US$283 million; Paris Club, US$8,780 million; other official bilaterals, US$435 million; commercial creditors, US$166 million. Short-term debt in arrears for more than one year amounted to $167 million.

The DRC accumulates about USS52 million in arrears each month, about half from unpaid debt service on current maturities and half from late interest on accumulated arrears. From end-December 2001 to the end of May 2002, the DRC’s external debt will have increased by US$261 million and arrears outstanding will have increased to US$10,342 million. The latter category comprises the IMF, US$507 million; World Bank Group, US$331 million; AfDB/AfDF, US$966 million; other multilaterals, US$173 million; Paris Club, US$7,855 million; other official bilaterals, US$291 million; commercial, US$49 million; and short-term debt, US$169 million.

Paris Club rescheduling

It is expected that the Paris Club and other bilateral and commercial creditors will agree to a comprehensive treatment of debt, including the following:

(i) A consolidation of pre-cutoff-date arrears (US$6,830 million at end-2001) and the rescheduling of debt issued prior to the cutoff date (1983) on Naples flow terms (67 percent forgiveness of debt service falling due during the consolidation period, and the rescheduling of the remaining 33 percent with a three-year consolidation period);

(ii) The capitalization of moratorium interest generated by the rescheduling of arrears and pre-cutoff-date maturities; and

(iii) The exceptional treatment of post-cutoff-date arrears (US$656 million at end-2001), which would be rescheduled over five years at market rates with a one-year grace period.

HIPC Initiative

Eligibility. The DRC is eligible for assistance under the HIPC Initiative since it is IDA and PRGF eligible. As discussed in the DRC’s preliminary HIPC document, it is anticipated that the DRC will qualify for HIPC relief as the end-2001 ratio of net present value (NPV) of debt to the three-year (1999–2001) historical average of exports exceeds 150 percent.

Sustainability. Following arrears clearance and related rescheduling operations and before HIPC Initiative assistance, total debt service would increase substantially from US$56 million in 2002 to US$228 million in 2003 and subsequently to US$679 million in 2005, or from 5 percent of exports of goods and services in 2002 to 17 and 40 percent in 2003 and 2005, respectively.

Impact of HIPC. Under current estimates, assistance under the HIPC Initiative, with a decision point expected in early 2003, would reduce the NPV of the debt stock from US$12.1 billion at end-2001 to US$1.5 billion in end-2001 NPV terms (if delivered unconditionally).

Debt service. Taking account of new financing, total debt service after HIPC Initiative assistance would rise to US$178 million in 2003 and US$357 million in 2005 (14.5 and 20.5 percent of exports, respectively). Debt service on public debt would decline significantly in the longer term, falling below 10 percent of exports in 2008 and ranging between 4–5 percent beyond 2010.

Structural Conditionality Under the PRGF-Supported Program

Status of structural measures taken under the staff-monitored program (SMP)

Key structural measures were taken at the start of the program. These include the introduction of a floating exchange rate system, the liberalization of all prices, except for water, electricity, and transportation, the introduction of an automatic and transparent pricing mechanism for petroleum products, and liberalization of the diamond market.

Other key structural measures relate to public finances, the initiation of public enterprise reform, the restructuring of the central bank (including securing its independence through new statutes) and the commercial banks, reform of the Judiciary and the adoption of a new investment code and the finalization of a new mining code. Only the publication of the new statutes of the central bank and the new mining code have met with some delays.

Taken together, these measures eliminated major distortions in the economy and started the process of creating an environment conducive for private sector-led activity.

Key structural performance criteria and benchmarks in the PRGF-supported program

The audit of the central bank and the subsequent formulation of an action plan would strengthen its management and ability to effectively implement monetary policy. Likewise, the placement into receivership of three commercial banks and the drawing up by end-September of the list of other banks to be liquidated, restructured, or privatized, would significantly strengthen the financial sector, contribute to a restoration of confidence, and promote financial reintermediation. The audit of the state oil company, COHYDRO, and the formulation of an action plan for the restructuring of the state mining company, GECAMINES, will pave the way for a strengthening of the public finances and improved resource allocation. The preparation of an action plan for the fight against corruption and adoption of the Code of Ethics and Good Conduct for the whole civil service would significantly enhance transparency and efficiency of the public sector.

World Bank lending conditionality

Structural areas covered by the World Bank in its Economic Recovery Credit (ERC) include public enterprise reform, governance, financial sector restructuring, and mining and forestry. In the forestry sector, where the overall objective is to foster sustainable development and use of the DRC’s forests, conditionality relates to the presentation of a revised forestry law, which will ensure that cutting rights are based on market principles and that concessionaries comply with land management plans. In the mining sector, the ERC’s conditionality relates to the creation of a commission that is to validate mining titles under the new mining code and a commission to oversee the restructuring plan for GECAMINES.

Interim PRSP—Participatory Consultations

With the collapse of the state and the concomitant deterioration, if not disappearance, of basic government services, local communities have developed initiatives and procedures to ensure the provision of a range of basic services, including health, education, agriculture, and the protection of human rights. These procedures have effectively prevented the collapse of Congolese society. The interim PRSP seeks to identify and strengthen these procedures so that they can serve as the basis for the development and implementation of a poverty reduction strategy.

The government of the DRC, through the Ministry of Planning and Reconstruction, created a Technical Committee for the Elaboration of Poverty Reduction Strategies in the DRC and National Reconstruction (TC). The members of the TC are representatives of line ministries, including Economy, Finance, and the Budget; Planning; Infrastructure and Environment; Education; Health; Social Affairs; and Agriculture; the private sector; civil society; donor agencies; and small farmers. The TC organized participatory consultations, so as to allow the general population to discuss and influence government policies and the decision-making processes that have an impact on their lives.

The TC prepared the key activities for the consultations, with World Bank assistance, as follows:

  • training the TC members in participatory methods and concepts;

  • recruiting 56 “participation specialists,” introducing them to PRSP concepts and challenges, and training them in the design and implementation of the participatory consultation process; and

  • designing the strategy and agenda of the participatory consultations, and the estimation of their cost.

The participatory consultations took place in November and December 2001 in four provinces under the central government’s control: Kinshasa (ten consultation sites), Katanga (four sites), Bas-Congo (three sites), and Kasai Oriental (one site). Consultations had also been arranged in Kivu with the rebel administration, but the UN could not provide travel clearance in time to include these consultations in the sample. The number of participants per site was limited to 100. Participants were representatives from decentralized line ministries, civil society organizations, nongovernmental organizations (NGOs), women’s and youth groups, religious groups, farmers’ groups, parliamentarians, and private sector institutions. Participants addressed and made contributions to the following poverty issues:

  • perceptions, causes, manifestations, evolution, and consequences of poverty in their lives, the economy, and society;

  • strategies and priority actions for poverty reduction;

  • priority sectors for the short and medium terms; and

  • constraints on the implementation of the priority actions and plans.

The participatory consultations have set the tone for community involvement in the DRC’s socioeconomic recovery process. Rebel groups and the unarmed opposition participating in the inter-Congolese dialogue in Sun City, South Africa, have indicated their full subscription to the interim PRSP methodology. Discussants have identified corruption, economic mismanagement, and civil strife as the major determinants of poverty.

Technical Assistance

The existing administrative capacity in most ministries and institutions has been weak. The reinstatement of regular administrative processes has been impaired by both a lack of experience and an absence of basic equipment. A strongly staffed resident technical assistance program, coupled with a substantial amount of external assistance, is key to addressing administrative shortcomings in the short run and strengthening significantly the country’s institutional capacity.

In the fiscal area, and in addition to several short-term missions in January 2002, three IMF resident experts were posted for an initial six-month assignment:

  • For customs administration, the objective is to help sustain the modernization effort (monitoring capacity, one-stop window, and computerization).

  • For tax administration, the aim in the short run is to focus on the available resources for the main tax base (creation of a large taxpayers’ unit) and on improving monitoring and controls (taxpayer’s identification number, and targeting of key economic sectors).

  • For public expenditure management, the main objectives are to reinstate regular administrative budget execution processes, and to enhance the Ministry of Finance’s monitoring and reporting capacity to enable full tracking of expenditure.

  • In parallel, the Fund is providing assistance on public finance and real sector statistics.

In the monetary and exchange areas, a multisector Fund mission in February-March 2001 helped put in place a road map for technical assistance (TA) concerning monetary and exchange policy and central bank management. The road map has been implemented as follows:

  • TA for the introduction of a floating exchange rate system in May 2001.

  • TA in the drafting of key legislation: the statutes of the central bank, the banking law, and the foreign exchange regulations.

  • In October 2001, the Fund provided TA in the areas of financial intermediation, monetary management, foreign exchange markets and operations, and central bank audit and organization. Several follow-up missions will take place in 2002.

  • Posting of a resident Fund expert to help strengthen monetary and exchange rate policy, and bank supervision.

Additional assistance is being provided by other donors. The World Bank is providing TA, notably in the areas of public enterprise reform, the restructuring of the banking system, public expenditure review, governance, and the I-PRSP (the latter together with the UNDP). The European Union (EU) is providing TA for the reform of the judiciary, and the International Labor Organization for the draft of the new labor code. Belgium, together with the UNDP, is providing TA for civil service reform.

Coordination of technical assistance. To ensure well-coordinated and well-sequenced TA from the international community and to avoid duplication, a TA coordinating committee has been created with the help of the World Bank.

Projected External Assistance 1/

(In millions of U.S. dollars)

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

Based on projected disbursements by implementing agency.

The framework incorporates estimates of total external assistance (after arrears clearance) of US$4.9 billion over 2002-05 (US$1.5 billion in 2004 alone): US$1.6 billion in assistance on debt service (including HIPC Initiative resources) and US$3.3 billion in additional grant and loan assistance.

Grant and loan assistance. The US$3.3 billion in additional assistance is expected to (i) be allocated for humanitarian aid (US$541 million), for project aid (US$2 billion), and budget and balance of payments support (US$699 million); (ii) be equally distributed between grants (US$1.7 billion) and loans (US$1.6 billion); and (iii) shift sharply away from grants in 2002 toward loans by 2005, reflecting the shift away from humanitarian assistance toward project aid and budget and balance of payments support.

The World Bank. The World Bank is expected to provide net additional assistance totaling US$1,078 million (other than arrears clearance), all but US$50 million in IDA credits. A post-conflict grant of US$50 million has already been approved. The World Bank is also expected to provide US$454 million for the Emergency Multisector Rehabilitation and Reconstruction Project (EMRRP), US$25 million for a mining sector project, and US$477 million for budget support.

Project aid. The projections include US$2.1 billion in project aid: US$1.6 billion for the EMRRP and US$0.5 billion in other project aid. The EMRRP is fully financed in 2002, but about US$376 million in cofinancing to complement the World Bank contribution has yet to be identified for subsequent years.

Budget and balance of payments support. The framework incorporates US$477 million in IDA fast-disbursing credits for budget support, as well as US$222 million in PRGF resources from the Fund.

Table 9.

Democratic Republic of the Congo: Nominal, Net Present Value, and Arrears of External Debt Outstanding by Creditor Groups, End-December 2001

article image
Sources: Congolese authorities; and staff estimates.
Table 10.

The Democratic Republic of the Congo and Sub-Saharan Africa: selected Poverty and Living Standard Indicators

(In percent, unless otherwise specified)

article image
Source: I-PRSP, DRC: Social Sector and Poverty Indicators, June 12, 2000.
Table 11.

Democratic Republic of the Congo: Quarterly Quantitative Performance Criteria and Indicators, June–December 20021/

(In millions of Congo francs, unless otherwise indicated)

article image

Quantitative performance criteria and indicators and the procedures for monitoring are defined in the technical memorandum of understanding attached to the letter of intent (EBS/02/76).

Cumulative changes are calculated from end-December 2001 onward

The stock of net foreign assets and net domestic assets of the Central Bank of the Congo (BCC) are valued at the program exchange rates (SDR1 = US$ 1.26537; and USEl = CGF 313.6).

Any non project external budgetary assistance, including external debt rescheduling, that exceeds program levels, will be used to finance poverty reduction expenditure. In the event that such assistance falls short of program levels, the corresponding contingent expenditure item will be reduced accordingly.

Twenty-five percent of any revenue (excluding grants) in excess of program levels will be used to reduce the stock of certificates of deposit (CDs) issued before end-March 2002.

This performance criterion applies not only to debt as defined in item No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt, adopted on August 24, 2000, but also to commitments contracted or guaranteed for which value has not beenreceived. Excluded from this performance criterion are rescheduling arrangements and purchases from the Fund. For purposes of this performance criterion, the terra “nonconcesssional” means that the debt has a grant element of less than 35 percent, calculated using currency-specific discount rates that are based on the OECD commercial interest reference rates (CIRRs).

This performance criterion applies not only to debt as defined in item No. 9 of the Guidelines on Performance Criteria with. Respect to Foreign Debt, adopted on August 24, 2000, but also to commitments contracted or guaranteed for which value has not been received. Excluded from this performance criterion are rescheduling arrangements, purchases from the Fund, and normal import-related credits other than, for petroleum imports. For purposes of this performance criterion, the term “nonconcessional” means that the debt has a grant element of less than 35 percent, calculated using currency-specific discount rates that are based on the OECD commercial interest reference rates (CIRRs).

Table 12.

Democratic Republic of the Congo Structural Performance Criteria and Indicators, 2002

article image
Table 13.

Democratic Republic of the Congo: PRGF-Supported Three-Year Program—Prior Actions

article image

Except for CGF 458 million in the Bandundu Province. Clearance of these arrears is dependent on the verification of the actual number of civil servants in this province.

APPENDIX I Democratic Republic of the Congo: Relations with the Fund

(As of April 30, 2002)

I. Membership Status:

Joined: September 28, 1963

II. General Resources Account:

article image

III. SDR Department:

article image

IV. Outstanding Purchases and Loans:

article image

V. Latest Financial Arrangements:

article image

VI. Projected Obligations to Fund

(SDR Million; based on existing use of resources and present holdings of SDRs)

article image

VII. Exchange Rate Arrangement:

The Democratic Republic of the Congo’s currency is the Congo franc (CGF), which, since May 26, 2001, has been freely floating. On April 30, 2002, the rate was US$1-CGF 308.27. From July 1, 1998 through May 25, 2001, a multiple exchange rate system was in effect, implying an official rate, the most recent one being US$1=CGF 50, and a rate determined in the parallel market.

VIII. Last Article IV Consultation:

(a) Consultations with the Democratic Republic of the Congo are on the standard 12-month cycle.

(b) The last Article IV consultation was concluded by the Executive Board on July 13, 2001 (EBS/01/94; 6/22/01).

IX. Safeguards Assessment

A Stage One safeguards assessment is under way.

X. Technical Assistance:

article image

XI. Short-Term Resident Experts

article image

XI. Resident Representative:

The resident representative was recently appointed, and is expected to assume his duties by end-June 2002.

APPENDIX II Democratic Republic of the Congo: Relations with the World Bank Group

The overall objective of the World Bank’s activities is to support the transition to peace and stability in the DRC and the subregion. The strategy for reengagement in the DRC is set forth in the Transitional Support Strategy (TSS) discussed by the Board on July 31, 2001, which will be updated periodically. The TSS has four areas of focus: (i) meeting basic and urgent needs, (ii) rebuilding effective public institutions and policies, (iii) revitalizing economic activity; and (iv) rebuilding administrative and implementation capacity. The TSS promotes “early wins” to build a track record for the government to begin to restore confidence among the local population, donors and private investors. The Bank has reopened a country office in Kinshasa and a Resident Representative assumed his post in December 2001.

The Transitional Support Strategy

article image

The World Bank’s financial support is provided or envisaged through five instruments:

  • Emergency Early Rehabilitation Project (EERP). A USS$50 million grant was approved on July 31, 2002 at the same time as the TSS. Most of the funds provided under the EERP have been committed in support of road rehabilitation (Kinshasa–Matadi, the country’s only seaport), community development projects, the fight against AIDs, technical assistance (including an audit of the central bank, revision of investment and mining codes, and deepening of the work on an I-PRSP). These complement activities funded under a Bank-administered donor Emergency Trust Fund (Emergency Stabilization and Recovery Project) of US$10 million, which finances small community type projects in a variety of areas: water, roads, agriculture, and others. These steps are essential prerequisites to further development assistance measures.

  • Post-conflict and institutional development (IDF) grants. Post-conflict grants (US$3 million) are financing the preparation of the demobilization and reintegration program for vulnerable groups and the reintegration of street children in urban areas; a grant has been approved to prepare for a household survey and another for labor-intensive social infrastructure reconstruction in rebel-controlled Kisangani. IDF Grants supported the drafting of a new mining code, the elaboration of a mining cadastre, and audits of commercial banks as a prelude to their liquidation or restructuring.

  • The proposed Economic Recovery Credit (ERC) (US$450 million), under preparation, is scheduled for Board presentation in the second week of June 2002. The ERC would provide financing mainly for the repayment of a bridge loan used to settle DRC’s arrears to the World Bank (US$331 million). In general, the credit is in support of the government’s reform program in the areas of (i) governance (overall strategy to improve governance and reduce corruption, improve environment for private sector development, and improve quality of public expenditures and services); (ii) reform of the public enterprise sector; and (iii) initial steps toward management of natural resources (mining and forestry). The structural components of the PRGF and the ERC are largely equivalent or complementary.

  • The proposed Emergency Multisector Rehabilitation and Reconstruction Project (EMRRP), with US$454 million to be provided by IDA over a two-year period (and another US$900 million through co-financing) scheduled for Board presentation in early July 2002 to support rehabilitation in key sectors. The EMRRP would pull together the country’s most urgent and non-deferrable rehabilitation needs and provide a framework for channeling donor support.

    The proposed program would help prevent the further deterioration of health and loss of life by increasing food security, delivering health care and other basic services, restoring water and energy supply services, and improving public health conditions in cities. It would also help lay the groundwork for policy and institutional reforms and an investment program for the country’s development.

    The overall purpose of the proposed EMRRP is to initiate the long-term process of reconstruction and economic rehabilitation. The program comprises five components: (i) rehabilitation and reconstruction of critical infrastructure (transport, water, electricity, and urban infrastructure); (ii) agriculture; (iii) delivery of social services (education, health, and social protection) and community development; (iv) development of sector strategies for the medium and long term, and strengthening of human and institutional capacities; and (v) management, monitoring, and evaluation of the implementation of the project.

  • A Multi-Country Demobilization and Reintegration program in the amount of US$150 million, with another US$350 million in the form of cofinancing, about one-fourth of the total amount would benefit the DRC.

Other Activities

Public Expenditure Review

A public expenditure analysis cycle will focus on the role of central government in (a) pro-viding services in key sectors (health, education, transport and infrastructure) and more importantly in (b) increasing the availability of these services as currently provided by the private/nongovernmental sector, whose role has increased dramatically as the state’s ability to meet basic needs has withered away. It will contribute to a budget law for 2003 that has improved estimates for budget allocations for all categories of recurrent and capital expenditure.

Emergency Trust Fund

An Emergency Stabilization Recovery Project is providing assistance to help tackle the worst aspects of poverty via projects in the health, education, agriculture, water, and infrastructure rehabilitation sectors. The World Bank is administering this trust fund for the DRC on behalf of donors with initial support from Belgium and Canada; supplemental Belgian and Canadian contributions have been received. The Netherlands and the European Commission have recently pledged funds and work is underway to receive the contributions.

IFC

Arrears to the IFC are about US$59 million. All the IFC’s prior investments have been written off. IFC is currently monitoring improvements in the investment climate.

MIGA

Currently, MIGA is not in a position to issue guarantees for projects in the DRC because the country has not paid in full its capital subscription. The total subscription is US$3,657,160, of which the amount required to be paid in order to become current is US$274,287. MIGA does not have any exposure in the DRC. However, investors have expressed interest in the agribusiness, manufacturing, mining, power, and telecommunications sectors.

APPENDIX III Democratic Republic of the Congo: Statistical Issues

Despite a difficult environment, the DRC authorities have continued to produce a vast array of statistics, most of which are contained in the Annual Report of the Central Bank of Congo (BCC). The BCC also issues a monthly Statistical Bulletin. A comprehensive set of external debt statistics is being compiled by the Office de Gestion de la Dette Publique (OGEDEP). The coverage and sectoral areas identified for improvement are described below.

Fund fact-finding missions in real sector and government finance statistics visited Kinshasa in June 001, with a view to making recommendations for improvements in the short and medium run. In both areas, the technical assistance will need to be supported by capacity building, covering not only training, data processing, and communications, but also (and foremost) basic needs (such as furniture and supplies, air conditioning, building repair, etc.).

National accounts

The aggregated national accounts are available in constant and current prices. They are produced by the Directorate of Research of the BCC and published on an annual basis. The methodology for preparing the national accounts conforms to the 1968 System of National Accounts (SNA) and is based on the balance sheets of enterprises and the results of surveys of public and semipublic enterprises and agencies. However, most of these surveys date back to the late 1980s. The activities of the traditional sector (including the informal sector) are also included, using extrapolation techniques based on industry-specific data. On average, the traditional sector accounts for more than 60 percent of GDP

The fact-finding mission of June 2001 recommended that priority be given to the national accounts. A technical assistance mission may take place in FY 2003.

Employment and unemployment

Annual data on employment in the central government are available from the Ministry of Economy, Finance, and the Budget, together with employment in the formal sector.

Prices

Various consumer price indices are calculated for Kinshasa by the BCC, the Institute of Economic and Social Research (IESR), and the Economics Section of the U.S. Embassy. The IESR also calculates a monthly consumer price index for the Lumumbashi markets. The household surveys on which these calculations are based date back to the late 1980s.

Government accounts

The BCC produces aggregated monthly statistics on a cash basis based on its own accounting records on the government cash operations it executes. The Treasury produces two sets of monthly statistics based on its own records. One relates to the data executed through the Central Bank and are reconciled with BCC data. The other set attempts to consolidate operations through commercial bank accounts and off-budget operations. These statistics do not rely on an integrated double entry public accounting system and provide insufficient details about the nature of expenditure owing to problems in the expenditure chain. However, the Treasury has started to produce, on a quarterly basis, expenditure data reports broken down by ministry and institutions.

The ongoing improvements in tax administration and expenditure control will have a positive impact on the quality and timeliness of fiscal statistics. In parallel with technical assistance in the public expenditure management area, and during a fact-finding mission in June 2001, a work program for public finance statistics improvement was developed and agreed with the authorities. This program would consist of several visits by a peripatetic expert and would aim at producing a well-documented set of government finance statistics in a format common to francophone countries in the region and familiar to Fund staff. A preliminary version of this presentation is close to being completed.

Monetary accounts

The Directorate of Research of the BCC regularly produces timely monetary statistics. Overall, the reliability of these statistics is good. Nevertheless, problems remain concerning the sectorization of the accounts.

However, since the last money and banking statistics mission in June 2000, only data for interest rates (through December 2000) have been reported by the BCC for publication in International Financial Statistics (IFS). A follow-up monetary and financial statistics mission is planned during FY2003. The mission will address the outstanding statistical issues and will provide assistance to the BCC in resuming the regular and timely reporting of monetary data to STA.

Balance of payments

The balance of payments is prepared on an annual basis, based on information on exports and imports of large public and semipublic enterprises, the BCC’s payments records, and a survey of residents’ foreign accounts operations. The official data are adjusted significantly to take account of the informal sector. Data on foreign aid flows are provided by the local United Nations Development Program (UNDP) office, which collects them from the European Union, embassies, and nongovernmental organizations.

Given the various data sources, the balance of payments is compiled partly on a cash basis and partly on a transactions basis.

External and domestic debt

External and domestic debt statistics are compiled by OGEDEP and are of reasonable quality for external debt, despite the virtually complete absence of computer equipment. Domestic debt and, in particular, cross arrears in the public sector, are yet of very poor quality. However, the World Bank is providing assistance in the compilation of cross arrears in the public sector, and public sector arrears with the private sector.

Public enterprise sector

There is no centralized, comprehensive database on the operations of the public enterprises. However, some information is made available to Fund missions by individual enterprises. Data are on an annual basis and become available with at least a six-month delay. As part of the public enterprise reform, the World Bank is collecting data on the public enterprise sector.

Social indicators

The most consistent data sets are those assembled for the UNDP human development, human poverty, and gender-related development indices, and for two multiple indicator cluster surveys in 1996 and 2001, in collaboration with the UNICEF. A national household living standards survey will be undertaken with the help in particular of IDA. In addition, in the context of the interim poverty reduction strategy paper (I-PRSP), the authorities, with assistance from the World Bank and the UNDP, have initiated work to construct a database for social indicators. They are considering participation in the IMF’s General Data Dissemination System (GDDS), which would provide a framework for statistical development and capacity building and would cover economic and socio-demographic (population, health, education, and poverty) indicators.

Democratic Republic of the Congo: Core Statistical Indicators

(As of May 30, 2002)

article image

Frequency of data, reporting, and publication: D=daily, W=weekly, M=monthly, Q=quarterly, or A=annually.

Source of data: A=direct reporting by central bank, Ministry of Finance, or other official agency, or N=official publication or press release

Mode of reporting: E=electronic data transfer, C=cable or facsimile, T=telephone, M=mail, V=staff visits, or 0=other.

Confidentiality: A=for use by staff only, B=for use by the staff and the Executive Board, or C=for unrestricted use.

APPENDIX IV Democratic Republic of Congo: Governance and Transparency Issues

After decades of corruption, mismanagement, and the collapse of the state, the new authorities recognize that good governance and transparency are essential to create an environment conducive to private sector-led activity. Consequently, their promotion has been given high priority. Under the staff-monitored program (SMP) covering June 2001–March 2002, key corrective measures were taken, while further actions are envisaged during the Poverty Reduction and Growth Facility (PRGF) arrangement period.

Measures taken under the SMP

The following fiscal and public sector reforms were implemented:

  • rehabilitation of public finances, including a return to a normal budgetary process;

  • strengthening of revenue-collecting agencies and public expenditure control, with three Fund TA resident experts posted in Kinshasa to help strengthen tax administration, customs administration, and expenditure management; and

  • initiation of a public enterprise reform program, with World Bank assistance.

Transparency and accountability in public resource management were improved through the following actions:

  • reduction of the use of extra budgetary channels;

  • reduction of customs and tax exemptions, tax evasion, and fraud;

  • preliminary financial audits of the customs and tax departments and of most of the public enterprises (following these audits, most directors of revenue-collecting agencies and public enterprises were dismissed and replaced);

  • strengthening of the management of the Central Bank of the Congo (BCC) on the basis of recommendations of an internal management audit;

  • preliminary audit of the size of the civil service, which identified 21,652 “ghost” workers; and

  • replacement of all provincial governors. The new governors have attended a seminar on good governance.

The legal and regulatory system is being changed profoundly with the adoption of the following measures:

  • new foreign exchange legislation and the unification of multiple exchanges rates;

  • liberalization of all prices, except those of certain public utilities, adjusted to reflect changes in their respective costs;

  • liberalization of oil imports, accompanied by a transparent and automatic mechanism for the pricing of petroleum products;

  • new statutes for the central bank, enshrining its independence;

  • publication of a new investment code, which provides equal treatment of investors;

  • the drafting of a new mining code, labor code, and a new forestry law;

  • the abolition of the diamond export monopoly and the implementation of certification of origin;

  • the replacement of exceptional courts for business and economic affairs by commercial courts; and

  • the strengthening of the judiciary, with the support of the European Union.

Measures planned within the framework of the PRGF

Building on its achievements under the SMP, the government is determined to introduce a set of measures aimed at strengthening good governance and fiscal transparency. These include the following:

Governance-related measures under structural performance criteria and indicators

  • completion of the financial audit of the BCC and drafting of an action plan taking into account the recommendations of the audit;

  • publication of a Code of Ethics and Good Conduct applicable to the whole civil service, without exception;

  • preparation of a global strategy and action plan for the fight against corruption;

  • completion of the formulation of a strategy for the restructuring of the state mining company, GECAMINES.

Other governance-related measures envisaged

  • effective centralization of revenue in the Treasury’s account at the central bank;

  • provision of measures under the 2002 budget to eliminate all extrabudgetary procedures, on the basis of a Presidential decree notifying that all budgetary spending—without exception—must be authorized by the Minister of Finance;

  • rehabilitation of the budgetary control function;

  • production of the information needed for improved tracking of expenditures

  • audit of the budget execution statements for 2001, with supporting documents, by the Audit Office by end-2002; and audit of the 2002 budget by end-2003; and

  • audits of all public enterprises.
1

The related letter of intent was circulated to the Executive Board for information on January 16, 2002 (EBS/02/06, 1/16/02).

2

This agreement was reconfirmed on May 21, 2002 at the donors’ consultation meeting held in Paris.

3

Report of the Panel of Experts on the Illegal Exploitation of Natural Resources and Other Forms of Wealth of the DRC (United Nations, 04/12/01, and Addendum of 11/13/01).

4

One of these rebel groups is reportedly composed mainly of militias that participated in the 1994 genocide in Rwanda.

5

The staff already met with representatives of the MLX. The head of the MLC has stressed that the PRGF-supported program will be implemented steadfastly by the future transition government.

6

In the report of the Security Council mission to the Great Lakes region from April 27- May 7, 2002, it is noted in paragraph 30: “The Security Council mission takes the strong view that further progress in the peace process should take the form of economic dividends for the population. The delay in achieving this risks the credibility of the process and of the international community. Accordingly, all efforts should be made to ensure that humanitarian aid, as well as longer-term economic and development assistance, is provided to the Democratic Republic of the Congo as soon as possible in support of the peace process. Only thus can a sound basis be created for a more durable peace.”

7

A more detailed description of performance under the SMP is contained in paragraphs 6-16 of the MEFP.

8

The targeted ratio under the revised GDP would have been 5.2 percent.

9

However, the external current account deficit, including grants and before debt relief, will widen from 2.2 percent of GDP in 2001 to 3.7 percent of GDP in 2002, in line with the resumption of foreign-financed investment.

10

On a commitment basis, the overall balance (excluding the net balance of the central bank’s operations) is projected to show a deficit of 2.5 percent of GDP in 2002, compare with a deficit of 0.8 percent in 2001.

11

In 2000 and 2001, the total drop in real wages was about 65 percent.

12

A description of the DRC’s banking system is contained in Box 2 of EBS/01/94 (6/22/01).

13

The financing requirement of the 2002 program is detailed in paragraph 48 of the MEFP.

Same Series

Other IMF Content

Other Publishers

  • Collapse
  • Expand
Cover IMF Staff Country Reports
Democratic Republic of the Congo: Request for a Three-Year Arrangement under the Poverty Reduction and Growth Facility and for the First Annual Program
Author:
International Monetary Fund
Volume/Issue:
Volume 2002: Issue 145
Publisher:
International Monetary Fund
ISBN:
9781451808506
ISSN:
1934-7685
Pages:
79
DOI:
https://doi.org/10.5089/9781451808506.002
  • Figure 1.
    View in gallery
    Figure 1.

    Democratic Republic of the Congo: Selected Fiscal and Monetary Indicators

  • View in gallery
  • Figure 2.
    View in gallery
    Figure 2.

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

  • View in gallery

    Democratic Republic of the Congo and Other African Countries: A Wage Comparison

Figure 1.

Democratic Republic of the Congo: Selected Fiscal and Monetary Indicators
Figure 2.

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

Democratic Republic of the Congo and Other African Countries: A Wage Comparison