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

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. Relations between the Democratic Republic of the Congo (DRC) and the international financial community have been interrupted for the last twelve years, including suspension of voting rights in the Fund, over the past eight years. Today’s Board discussion marks a watershed in the relations between the Fund and the DRC.

2. Thanks to the concerted efforts of a number of its bilateral partners, for which my authorities are thankful, the DRC has cleared its arrears to the Fund, through a bridge loan, opening the way for the Fund to play its catalytic role, and for other members of the international financial community to bring much needed assistance to the DRC.

3. This development has also been brought about thanks to the determined leadership of the new President that took office in early 2001, and who has shown great resolve in addressing the political, economic and social problems facing the country. In that respect, he has revived the Lusaka Peace Agreement, and initiated economic and structural reforms in the context of a staff-monitored program (SMP), which has been boldly implemented with impressive results.

4. Recent developments on the political front have been encouraging. In spite of many hurdles innate to any negotiation process, my authorities’ commitment to restore peace in the DRC and bring about political stability, led to the revival of the Lusaka Peace Agreement, through the holding of the Inter-Congolese dialogue in Sun City, South Africa, in March-April 2002; and the signing of an agreement with one of the main rebel groups, and with a majority of representatives of civil society. Another positive development on the political front is that the cease-fire has been generally observed since early 2001, and some foreign troops have been withdrawn from the DRC’s territory. The political agenda for the coming months includes the formation of a transition government of national unity, consistent with the agreement reached in Sun City; the drafting of a new constitution, the implementation of a Disarmament, Demobilization, Repatriation, Resettlement and Reintegration (DDRRR) program, with assistance from the United Nations and the World Bank, and the holding of free and transparent elections, scheduled to take place in about 30 months.

5. Mindful of the importance of peace for the success of their economic strategy, and for poverty reduction, my authorities are continuing discussions aimed at securing a broad agreement with all parties involved in the peace talks. Hence, since the end of the Inter-Congolese Dialogue in Sun City, several meetings have taken place with representatives of different groups and mediators from DRC,’s partners. However, they would like to stress that this is a long process that requires the good will of all parties, including the neighboring countries involved in the conflict.

6. The economic and financial situation, as well as the infrastructure of the DRC were destroyed by more than a decade of mismanagement, political turmoil, and armed conflicts. Therefore, decisive and bold actions were needed to repair the economic and social fabrics of the country. Measures to achieve this objective were initiated in the context of a staff-monitored program (SMP) in early 2001. These measures were put in place in a very difficult environment, without external financial assistance, in a situation of high expectations from a population that had seen its purchasing power vanish, and where the delivery of basic social services, including education and health, had virtually disappeared. Against this background, performance under the program has been impressive in many regards: the vicious circle of hyperinflation and currency depreciation was broken, major price distortions were eliminated, the fiscal position improved, monetary policy was tightened, and a floating exchange rate system was introduced. The authorities also prepared an interim poverty reduction strategy paper (I-PRSP), outlining their priorities in the fight against the widespread poverty that deepened in recent years.

7. My Congolese authorities believe they have demonstrated their resolve to break away from past economic management practices, and to achieve a peaceful resolution of the armed conflict. Although measures implemented in the context of the SMP have had high social costs for a population that was already afflicted by the disintegration of the social and economic fabrics, the population has been supportive so far, and it is hopeful that there will be light at the end of the tunnel. Consequently, my authorities are convinced that failure to seize the unique window of opportunity being offered now, could compromise progress made during the last twelve months. Without strong financial support from the international community, the reform efforts currently underway, cannot be sustained. In this context, my authorities are hopeful that in recognition of their efforts to improve macroeconomic management and governance, and the strengths of the three-year program of adjustment agreed with the staff, the country will be granted access to IMF financing under the PRGF, and would be considered eligible to benefit from assistance under the enhanced HIPC Initiative. This assistance is of critical support to their current efforts to secure peace, reunify the country, and pave the way for sustainable growth and poverty reduction. My authorities believe that progress achieved in macroeconomic stabilization is important to consolidate peace, just as the latter is needed for the pursuit of adjustment efforts.

II. recent developments and performance under the SMP

8. Economic and financial management were completely turned around in mid-2001, as my Congolese authorities initiated the implementation of new policies and reforms, in the context of their interim program. Significant results were achieved in a nine-month period. At end-December 2001, all quantitative and structural indicators but two were met, while at end-March 2002, all quantitative indicators under the program were observed. The population’s purchasing power was strengthened with the elimination of the monetization of the fiscal deficit, which had led to a vicious circle of hyperinflation and currency depreciation. The monthly average inflation rate left the double-digit range and has remained below 1 percent per month between June 2001 and May 2002. Hence, the annualized rate of inflation dropped from 632 percent during the period January-May 2001, to less than 8 percent during the same period of 2002. Economic activity is estimated to have recovered in the second part of 2001, which augurs well for growth prospects in the near term.

9. Fiscal management was significantly improved through sustained efforts to raise revenue, keep expenditure under control, and strictly adhere to a monthly cash-flow plan. As a result, the domestic primary balance turned into a surplus instead of a programmed deficit, revenues were above the program objectives, and expenditures remained below the expected levels. Furthermore, my authorities took the necessary actions to reinstate normal budgetary procedures, centralize revenue and expenditure, and eliminate extra budgetary channels. As they have indicated in their letter of intent, they are aware that further progress is needed in this area, and have taken steps to strengthen budget execution procedures further in 2002, while increasing the focus on pro-poor outlays.

10. Good performance in the fiscal area favorably contributed to developments in the monetary sector, helping the monetary authorities to maintain a restrictive policy stance, as called for under the SMP. Furthermore, with inflationary pressures receding, the refinance rate of the Central Bank was reduced from 140 percent in June 2001 to 39 percent in May 2002. In view of the critical importance of a healthy banking system for financial intermediation and support of economic activity, my authorities are working on an action plan to enhance the conduct of monetary policy, and to restructure the banking system.

11. There were also encouraging developments in the foreign exchange market, where fluctuations that followed the introduction of a floating system in May 2001 faded in the following months, transactions in foreign currency in the interbank market increased, and the spread between the reference exchange rate and the free market one narrowed to less than 1 percent at end-December 2001, down from 600 percent before the introduction of the new system.

12. Consistent with their determination to turn around the country’s economic and financial management, and to significantly improve its growth prospects, my authorities initiated an ambitious structural reform agenda, with assistance from their development partners. Important steps were thus taken to eliminate price distortions and improve resource allocation, strengthen the management of public enterprises in view of the preparation of a privatization and restructuring program for the sector, and improve the business environment. In the fiscal area, my authorities also took actions to improve efficiency in revenue collecting agencies, and expenditure control.

13. Regarding the promotion of good governance and the rule of law, the authorities prepared an anticorruption action plan, and a Code of Ethics and Good Conduct for civil servants. Future actions, supported by the World Bank and the European Union, would include the setting of an anticorruption commission, the strengthening of the Audit Office and the Office of the Inspector-General of Finance, the preparation of a procurement code, and the strengthening of the legal and judicial systems.

14. In the social sector, it is worth to note that, although some of the measures under the SMP had an initial unfavorable impact on prices, the stabilization of the macroeconomic situation, and the breaking of hyperinflation have contributed to the improvement in the supply of basic foodstuffs and transportation, thus alleviating somewhat the hardship of the population. However, more has to be done, not only to address the basic needs of the population in priority sectors, but also to cushion the social impact of adjustment measures for the most vulnerable portions of the population.

15. My authorities are of the view that measures and reforms implemented during the SMP have laid a good foundation for the deepening of reforms in the context of a medium-term program. Such a program, adequately supported by external financial and technical assistance, will help them consolidate the results achieved thus far, and strengthen the social consensus, as well as the ownership of the program, for the continued implementation of reforms that the country needs to be able to fully realize its potential. More importantly, a medium-term program will enable the authorities to begin effectively addressing poverty-related issues in the context of their poverty reduction strategy, and to find solutions for the more immediate fallouts from the armed conflicts, particularly in certain areas of the country.

III. medium term prospects and program for 2002

16. For the medium term, my authorities’ strategy is centered on poverty reduction, through actions on the political and economic fronts, aimed at creating an investment-friendly environment, and increasing transparency and good governance. This strategy is detailed in the I-PRSP that the authorities have prepared after broad consultations with stakeholders at the national and provincial levels. It comprises three stages, the first of which has been completed with measures put in place under the SMP. The second stage coincides with the implementation of a three-year program for which my authorities are requesting support from the Fund under the PRGF. It is expected that the implementation of the program would lead to significant improvement in savings and investment ratios; an expansion in output with the real GDP growth rate reaching an average of 5 percent, after continuous decline in the past several years; the achievement of an annual inflation rate around 5 percent at the end of the period; and the strengthening of the external position. The program will also make it possible for the DRC to eliminate arrears on external debt and to remain current on its external debt obligations. Also, an inventory of domestic payment arrears is planned, the results of which will help to put in place a program for their clearance. The last stage of the authorities’ medium term strategy will be fully developed in the PRSP, and will focus on policy-mix and reforms needed to address the country’s development challenges in a longer-term perspective.

17. For 2002, the program’s objectives are fully in line with the authorities’ medium-term strategy. Building on progress made under the SMP, financial policies will remain prudent and mutually supportive, while structural reforms will be deepened to further improve resource allocation, strengthen the regulatory framework and the judicial system, and restore a well-functioning payment system. The consolidation of the fiscal position will remain the cornerstone of the authorities’ strategy, while monetary policy will continue to be prudent, consistent with the programmed objective of price stability within the framework of a floating exchange rate system.

18. Decisive actions have been taken to bolster revenue collection, and to overhaul budget execution procedures, so as to safeguard the attainment of fiscal targets for 2002. In the particular case of expenditure, programmed measures will strengthen its management and monitoring, while improving coordination between all agencies involved in the execution of the budget, and ensuring the elimination of extrabudgetary operations. My authorities believe that those measures, as outlined in paragraph 30 of their LOI, together with the review of public expenditures, scheduled to be completed with assistance from the World Bank by end-September 2002, will help them establish a solid foundation for the preparation and execution of the 2003 Budget Law. At the same time, they are committed to continue prudently executing and monitoring the budget, based on a cash-flow plan. This execution will, however, reflect the change in expenditure composition in favor of priority sectors, as established in the I-PRSP. In view of the dramatic decline in real wages over the past several years, and taking into account the need to strengthen administrative capacities, my authorities are planning to adjust wages upwards, with in the programmed fiscal targets, while at the same time initiating an overall reform of the civil service.

19. The authorities have also prepared an ambitious agenda of measures and reforms for the banking system, aimed at improving the management of the Central Bank of Congo (BCC), and the conduct of its functions, enhancing the health of commercial banks, and encouraging financial intermediation. In this context, new statutes of the BCC were issued in May 2002, and its management will be improved based on recommendations from an internal audit, IMF technical assistance missions, and an external audit scheduled to be completed at end-September 2002. Furthermore, the financial position of the BCC will be strengthened through the implementation of a cash-flow plan. At the same time, my authorities have drawn a rehabilitation and privatization program for the banking sector, in collaboration with the World Bank, as described in paragraph 37 of the LOI. My Congolese authorities remain committed to the implementation of a flexible exchange rate, and intend to formally accept the obligations of Article VIII of the Fund, before the end of the year.

20. My authorities are aware of the crucial need to maintain the momentum of the reform agenda initiated under the SMP, in order to achieve their medium term objectives. They are therefore, working with the World Bank for the preparation and implementation of reforms in key sectors as described in paragraphs 39-46 of the LOI. They are convinced that these reforms, together with the sound financial and economic policies they have put in place, are the best way forward for the DRC, and the best tools in the fight against poverty.

IV. Poverty-related issues and the hipc initiative

21. The debt sustainability analysis indicates that, the DRC’s external debt will remain at unsustainable levels for the next ten years, if debt relief is limited only to existing traditional mechanisms. In the meantime, and as indicated in my authorities I-PRSP, some 80 percent of the population is living at the brink of what human dignity can endure, on less than 20 cents a day. Compelling evidence of the depth of poverty exists in many areas, and is evident in the outbreak of diseases, including those already eradicated in other developing countries. In this context, my authorities have given the highest priority to poverty alleviation, in the context of their poverty reduction strategy. However, they are constrained by the availability of resources and by the high burden of external debt obligations. As they normalize relations with creditors, remaining current on external debt obligations will add to existing constraints on budgetary allocations for pro-poor spending.

22. Preliminary estimates indicate that assistance under the enhanced HIPC Initiative will bring the NPV of DRC’s debt-to-exports ratio to 132 percent by 2006. My authorities believe that this assistance is an essential complement to their poverty reduction efforts, and hope therefore, that the DRC will be considered eligible to benefit from assistance under the enhanced HIPC Initiative, with a decision point early next year.

V. Conclusion

23. My Congolese authorities have continued their unrelenting efforts to achieve peace and political stability in the framework of the Lusaka Peace Agreement. They have established a good track record of policy and reform implementation under a staff-monitored program. Significant results have been achieved including macroeconomic stabilization, the breaking of hyperinflation, the improvement of the fiscal position, the liberalization of the economy, and the stabilization of the exchange rate. The authorities have prepared an interim poverty reduction strategy paper, and have reached an agreement with the staff of the Fund on a three-year adjustment program, which aims at strengthening growth prospects, improving resource allocation in the economy, and consolidating progress made under the SMP. A structural reform agenda consistent with the medium-term strategy is under preparation with assistance from the World Bank. Based on these elements, my authorities’ commitment to reforms, and the support by the international community to assist the DRC reestablish relations with its creditors, I would like to ask my colleagues for their full support of the DRC’s request to use Fund resources under the PRGF, and to consider the country eligible to receive assistance under the HIPC Initiative, with a decision point early next year.

24. Finally, I would like to thank Management and the staff for their continued support to the The staff’s dedication and good work is highly valued by my authorities, who are also very appreciative of efforts, contributions and support to the peace process, from the United Nations, and from their bilateral and multilateral partners.