Statement by the IMF Staff Representative March 24, 2003

This paper examines the Democratic Republic of the Congo’s 2003 Article IV Consultation, First Review Under the Poverty Reduction and Growth Facility (PRGF), and Request for Waiver of Performance Criteria. Through September 2002, overall performance under the PRGF-supported program was broadly satisfactory, with good progress in the structural area. The annualized rate of inflation for the first nine months of 2002 reached 11 percent, down from 135 percent in 2001. Economic growth is expected to be positive for the first time in 13 years.

Abstract

This paper examines the Democratic Republic of the Congo’s 2003 Article IV Consultation, First Review Under the Poverty Reduction and Growth Facility (PRGF), and Request for Waiver of Performance Criteria. Through September 2002, overall performance under the PRGF-supported program was broadly satisfactory, with good progress in the structural area. The annualized rate of inflation for the first nine months of 2002 reached 11 percent, down from 135 percent in 2001. Economic growth is expected to be positive for the first time in 13 years.

1. Since the issuance of the staff report and the informal Board meeting of February 19, 2003 the staff has continued discussions with the authorities and has received the following information on political and macroeconomic developments, the implementation of structural measures, and information on the advances from oil companies. This information does not alter the thrust of the staff appraisal.

2. On March 6,2003, there was further significant progress toward lasting peace. The parties to the inter-Congolese dialogue reached agreement in Pretoria, South Africa on (i) adoption of an interim constitution; (ii) a memorandum on the creation of a restructured and reintegrated army; and (iii) arrangements to ensure the safety of the members of the transitional institutions in Kinshasa. The inter-Congolese dialogue is expected to be concluded by end-March 2003 in Sun City, South Africa, and to be followed by the nomination of an all-inclusive government in the near future.

3. The end-period annual inflation rate, measured by the consumer price index, reached 15 percent at end-December 2002 compared with a revised program target of 18 percent and an original program target of 13 percent. The CPI increased by 3.5 percent through March 15, mainly reflecting the pass-through of the 8 percent increase in petroleum product prices of February 15, 2003. With the latter, the prior action of an 18 percent increase in petroleum product prices since November 2002 has been met. The Congo franc continues to be stable, and has fluctuated narrowly around US$1=CGF 415 since January 2003.

4. Based on preliminary data for end-2002, the overall fiscal position during the last quarter of 2002 was broadly in line with projections, with revenue slightly higher, and expenditure slightly lower than anticipated. However, the expected shift in the composition toward social and infrastructure-related expenditure has still not materialized, with a shortfall in foreign-financed investment and social expenditure and an increase in security- and sovereignty-related expenditure associated with the on-going inter-Congolese dialogue and the security vacuum that developed after the withdrawal of foreign troops. Net credit to the government may have exceeded the end-December 2002 benchmark because of higher than anticipated amortization of external debt.

5. On the monetary side, the net foreign assets benchmark at end-December 2002 has been met, while the benchmark on net domestic assets of the Central Bank of the Congo (BCC) is likely to have been slightly exceeded.

6. Regarding the exchange system, effective February 10,2003 the DRC has accepted the obligations of Article VIII, Sections 2, 3, and 4 of the Articles of Agreement. In this regard, the BCC issued revised exchange regulations and other relevant instructions on February 14, 2003.

7. With respect to other structural reforms, during February-March, the BCC implemented several key measures of its action plan to improve its management, operations and accounting system. In particular, there has been significant progress in cleaning up the BCC’s accounts and in drawing up a road-map for a move to international accounting standards, taking into account the recommendations of the Fund’s safeguards assessment mission. The bank restructuring commission (COREBAC) was made fully independent via its integration into the BCC’s banking supervision department, which is being restructured. Furthermore, a pilot committee was instituted to (a) coordinate the implementation of the action plan; (b) propose a timetable to address existing weaknesses in the organizational structure of the BCC; and (c) coordinate technical and financial assistance from donors. In the governance area, the Government has adopted the draft organic law against corruption, money laundering and transnational crime, which is expected to be discussed in the next parliamentary session starting in April 2003. Meanwhile, the BCC has prepared draft regulations to combat money laundering, which will be refined with assistance from the Fund and discussed with financial institutions over the coming months. The Steering Committee on the Reform of Public Enterprises (COPIREP) was established and its members are currently being selected. On March 10, 2003, the authorities decided to liquidate the Banque Congolaise du Commerce Exterieur (BCCE) in its present form and structure (a structural performance criterion for end-September 2002). Finally, the implementing decrees of the new mining code and forestry law will be published by end-March 2003.

8. Regarding the issues raised during the informal Board meeting of February 19, 2003, the staff met with President Kabila in Brussels on February 22. Subsequently, the President sent a letter to management, dated February 24, 2003, in which he reaffirmed his personal commitment and that of the government to continue to implement the economic program supported by the PRGF. He further confirmed the authorities’ commitment to implement the 2003 budget, as well as the measures aimed at strengthening revenue mobilization and expenditure management, as outlined in the letter of intent of February 4, 2003.

9. From the President’s letter and subsequent contacts with the authorities, including a visit to headquarters by a delegation headed by the Minister of Economy, Mr. Futa, during March 10-12, the following information about the advances from oil companies has become available:

  • Royalty collections from oil companies are governed by a special agreement (“convention”, signed in 1969 and last amended in September 1999), which sets forth the modalities and dates of payment. Payments of royalties are made through provisional transfers at the end of each month, based on the oil exports of two months before. The balance of the royalty payments for the year is paid on March 31 of the following year, when the actual yearly royalty due is calculated. The agreement envisages the possibility of advancing the monthly provisional royalty payments (advances with interest), to help deal with temporary treasury cash-flow problems, stemming from a mismatch between fiscal receipts in cash and expenditures to be paid in cash. Each advance, and its conditions, is subject to a specific contract signed by the Minister of Energy and Mining and the Minister of Finance, in consultation with the Governor of the central bank. Like the royalties, the proceeds of the advances are deposited in a separate central bank account at a local commercial bank, with the counterpart in Congo francs credited to the Treasury general account at the central bank.

  • Under the PRGF-supported program, advances with interest from oil companies have only been obtained in January and February 2003. They amounted to a total of US$9.5 million (0.16 percent of GDP), had maturities of a few days to 59 days, and, under current conditions, will be repaid by March 2003. The petroleum companies are registered under Congolese law; hence these advances should be considered as domestic borrowing and do not breach the performance criterion relating to short-term external borrowing on nonconcessional terms.

  • Concerning the expenditure financed with these advances, as of end-February 2003 an amount of US$2.3 million had been used to pay wages, and an additional amount of US$ 1.3 million (0.02 percent of GDP) was used for military expenditure. The authorities stressed that these expenditures are incorporated in the budget and the treasury cash flow plan, and have been authorized by the former Minister of Finance, in compliance with the presidential decree of April 2002 that forbids the financing of expenditure without prior authorization of the Minister of Finance. An amount of US$0.3 million was used by the central bank to pay finance charges not related to the advances. Finally, the remaining amount of US$5.6 million was kept on deposit, and is to be used for expenditure related to the peace process (about US$1 million), aircraft repair (US$2 million), debt service payments to the African Development Bank (US$ 1.4 million), and military expenditure (US$ 1 million). The remainder (about US$0.2 million) will cover some finance charges of the BCC. The execution of the government expenditures will follow the normal budgetary procedure. As it is difficult for the staff to verify at this early stage in the year whether the expenditures financed with the advances are part of the 2003 budget, these expenditures, and their composition, will continue to be reviewed by the Fund Resident Representative and the upcoming mission for the second review under the PRGF arrangment.

10. It was agreed with the visiting delegation that the government will no longer have recourse to advances with interest from oil companies until the second review by the staff under the PRGF arrangement, which is scheduled for May 2003, when the authorities will reassess with the staff the terms and usefulness of the advances, and the best way to address temporary treasury cash-flow problems.

11. The 2003 budget, after adoption by Parliament, was promulgated on March 4,2003. Its main aggregates (including the wage bill), are in line with the letter of intent of February 4, 2003. Together with the budget, a number of important indirect tax and tariff reform laws have been adopted, as envisaged under the program. The 2003 budget follows the new expenditure classification, developed with Fund technical assistance, to allow particularly for the tracking of poverty-related expenditure. Pending the adoption of the 2003 budget, January and February 2003 budget execution has been based on a monthly allocation of one-twelfth of the 2002 budget. Effective February 1, 2003, the authorities have eliminated the offsetting of quasi taxation on petroleum products for the Defense Department and the Office of the President, while sovereignty outlays have been frozen. The price of petroleum products has been increased further by 10 percent in March, in conformity with the transparent and automatic oil pricing formula, reflecting the sharp increase in international oil prices. The Large Taxpayers’ Unit will become operational shortly.

12. On external debt, the authorities have all but finalized the reconciliation of external debt data with the DRC’s creditors and have initialed bilateral agreements with 12 of the 15 Paris Club creditors. However, at the tour d’horizon on the DRC on March 11, 2003, Paris Club creditors indicated that they could not provide financing assurances for the anticipated topping up of the September 2002 Paris Club rescheduling to Cologne terms in the absence of signed bilateral agreements, which are needed to satisfy particular national legal and budgetary procedures. At the time of the tour d’horizon, only one agreement (with France) had been signed. As soon as the necessary bilateral agreements have been signed, Paris Club creditors will consider topping up their September 2002 rescheduling to Cologne terms. A HIPC decision point document will be circulated to the Executive Board in due time.