Statement by Damian Ondo Mañe, Executive Director for the Democratic Republic of Congo February 19, 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.

I. Introduction

1. The Government that took office in the Democratic Republic of Congo in 2001, under the strong leadership of President Joseph Kabila, made remarkable progress, not only in the country’s quest for a peaceful solution to the war, but also in stabilizing the macroeconomic situation and initiating conditions for sustainable economic growth. The enhanced SMP has produced significant results, particularly by breaking hyperinflation, eliminating the multiple exchange rates, restoring the conditions for macroeconomic stability and progressively creating an environment conducive to growth resumption. The PRGF program amplified these efforts. Furthermore, my authorities have shown their determination to develop a culture of good governance, accountability, and respect for the rule of law. In fact, following the release of the UN report on the illegal exploitation of natural resources in the DRC, President Kabila reacted promptly by suspending the implicated individuals. He has made it clear that the investigation will be allowed to continue in an independent and transparent manner and wrong doings will be dealt with to the full extent of the law.

2. On the political front, my authorities’ efforts to strengthen the peace process are leading to a lasting peace in the Democratic Republic of Congo. The inter-Congolese dialogue in Pretoria resulted in an agreement that was signed by all parties. This agreement foresees a power-sharing structure for an all-inclusive transition government. This transitional government is, according to the Special envoy of the United Nations Secretary-General, expected to assume office between end-March and early April 2003. Work is also near completion on a new constitution, and DRC is gearing itself for a two-year transition period, which should prepare the country for its first free and transparent elections in more than forty years. The United Nations Observation Mission (MONUC) to the DRC continues to play a role in securing peace and the regional demobilization and reintegration program is being implemented with the help of the United Nations (U.N.) and the World Bank. Following the withdrawal of foreign troops and in order to fill the security vacuum, the U.N. raised the number of authorized peacekeeping troops assigned to MONUC from 5,500 to 8,700.

3. I should add that these major achievements were made possible thanks to an early involvement of the Fund and the World Bank that helped catalyze the support of the international community. This timely involvement was preceded by a multi-topic and comprehensive diagnosis mission that permitted a well-designed and well-sequenced approach. Early and continuous technical assistance from the Bretton Woods institutions particularly, in the budgetary, monetary, exchange rate, and structural areas was critical in drawing up a clear map of actions that took into account the limited administrative capacities and specific circumstances of the country, while under foreign forces occupation.

4. Notwithstanding the above achievements, the review of the quantitative performance criteria at end-September 2002 shows that one out of nine performance criteria, namely the ceiling on net domestic assets of the central bank (BCC), was missed by a small margin. Two of the three structural performance criteria, namely, the preparation of a list of banks to be liquidated, privatized or restructured and placement into receivership of the Banque Congolaise du Commerce Exterieur (BCCE), and the publication of a Code of Ethics and Good Conduct for the public service, was observed with a delay because it was necessary to forge a wider consensus. Thus, my Congolese authorities are requesting waivers for the nonobservance of one quantitative and two structural performance criteria.

5. My Congolese authorities reacted quickly to correct some slippages that occurred in October and November 2002, mainly due to unexpected expenditure to cover the security vacuum left by the withdrawal of foreign troops as well as difficulties encountered by the central bank. These actions signal a strong commitment to strictly adhere to the consolidated treasury plan that my authorities have adopted for the future. It is also reassuring to see that, all parties involved in the Pretoria accord have recognized the credibility of the economic program and have subsequently supported the government’s poverty reduction strategies.

6. As Directors may recall, at the conclusion of DRC’s last Board meeting in July of 2002, it was agreed that continued strong performance under the PRGF arrangement would result in a decision point being envisaged at the time of the first review of the program. A signal of recognition of the efforts made to date under difficult circumstances will contribute to the positive dynamic which is gradually taking root in the country. In light of the progress made in implementing their program under the PRGF that has set the basis for reducing poverty, and given the new challenges raised by the reunification, my Congolese authorities’ efforts deserve a timely and predictable support from the international community.

II. Recent Developments and Performance under the PRGF

7. Under the PEG implementation during the period April-September 2002, overall performance under the program was satisfactory, with good progress in structural and sectoral reforms. And following 13 years of negative growth, economic activity is estimated to have recovered in 2002, which augurs well for a successful implementation of the strategy for poverty reduction. The annualized inflation in the first nine months of the year was 11 percent, dropping from 135 percent in 2001 and 511 percent in 2000. The annual inflation rate is estimated to have reached about 15 percent in 2002.

8. In the fiscal sector, the domestic primary balance (on cash basis) recorded a surplus and the overall balance (non-consolidated) on cash basis resulted also in a surplus, instead of a programmed deficit. Revenues stood above the program objectives, while expenditures remained below the expected levels. Cash-flow management improved through the gradual centralization of revenue under the control of the Treasury. On the expenditure side, my authorities froze all operating expenditure (including mission costs), except for minimal allocations for operations, until year-end 2002. My authorities are aware that further efforts are needed to strengthen the fiscal performance and they will do their utmost to increase the focus on pro-poor outlays.

9. In the monetary sector, the slowdown in inflation observed in 2002 helped the monetary authorities in further reducing the refinance rate of the Central Bank. My authorities are taking bold actions to enhance the conduct of the monetary policy. On the institutional side, positive developments occurred and they included the completion of the financial audit of the BCC by an international firm as well as an internal management audit by BCC staff; the formation, at the BCC, of an Accounts Reconciliation Committee (CAC) to follow up on the recommendations of external auditors and by IMF technical assistance missions; and the strengthening of the operations of the Internal Audit Department.

10. In the external sector, the external current account (including grants, and after debt relief) showed a small surplus in 2002, from a deficit in 2001, due mainly to an increase in export volumes. Official reserves have increase to 4.2 weeks of imports of goods and services after declining to 1.4 weeks in 2001. With regard to the exchange and payments system, the exchange market is performing in a satisfactorily manner, as evidenced by the small spread between the exchange rates in formal and informal markets, which remained, on average, below 2 percent.

11. On the structural area, my authorities have continued to implement an ambitious agenda, with assistance from the Fund and the World Bank, which would create an environment conducive to private sector activity and economic recovery. In the mining sector, a new mining code was published in July 2002. In addition, Preparatory work is under way concerning the restructuring of the country’s main mining company (GECAMINES). Regarding the forestry sector, a new code was published. With regard to public enterprise sector, a Presidential decree created a steering committee on the reform of public enterprises (COPIREP).

III. Medium Term Outlook and Program For 2003

12. In maintaining the medium-term macroeconomic framework for reconstruction and development, my authorities are pursuing the following preliminary objectives for 2003: (i) a growth rate of 5 percent, (ii) an annual average inflation rate of 13 percent, and (iii) an external current account deficit (including grants, before debt relief) of 5.0 percent of GDP, linked to a strong resurgence of investment financed by international assistance.

13. With regard to growth, we appreciate the analysis of the sources of growth in the DRC carried out by staff, which has particularly identified critical factors that had negatively affected growth. We would encourage the staff to make good use of the outcome of the survey on poverty, when it becomes available, in the framework of steps taken through the full PRSP.

14. Fiscal consolidation will be the cornerstone of economic policy in 2003. My authorities have proposed a “pro-poor” budget for the year, with an increase in social and infrastructure spending designed to be conformed with the I-PRSP. They are considering a supplementary budget to take account of the impact of reunification, the civil service census, the implementation of the regional demobilization and reintegration program, and the HIPC decision point. To achieve the fiscal target my Congolese authorities plan to take additional measures to cut non-priority spending and mobilize revenue. On the revenue side, mobilization efforts will continue based on IMF recommendations and with IMF technical assistance. On the expenditure side, extra-budgetary spending will be eliminated and the overall wage bill increase will not exceed 35 percent (including the preliminary identified costs of reunification at disposal and the voluntary retirement program). Moreover, the share of social and infrastructure expenditure will increase considerably and expenditure traceability and tracking will be strengthened.

15. On the Monetary and financial sector issues, my Congolese authorities will pursue a monetary policy aimed at price stabilization. In addition, the BCC will strictly adhere to the elimination of advances to the government. About financial intermediation and dollarization, my authorities are fully aware of the need to restore confidence in the national currency. They endorse the staffs analysis on the costs and risks related to a highly dollarized economy in a quest of reviving local currency intermediation. They are confident that a good implementation of reforms and their achievements on the macroeconomic and structural fronts will revive the public confidence in the domestic financial system. On the external front, my authorities intend to formally adopt the obligations of the Article VIII., sections 2 (a), and 4 of the Fund’s Articles of Agreement. They will take the necessary measures to eliminate the remaining restrictions.

Structural reforms

16. My authorities are fully aware that further structural reforms are needed to create an environment conducive to private sector development activities. To this end, efforts are under way to improve the legal and judiciary systems, revive banking intermediation and implement the mining, labor energy and water codes.

17. Concerning the mining sector, my authorities plan to pursue and deepen structural and sectoral reforms with the help of the World Bank. The new mining regulations are expected to be published soon and the preparation of the overall strategy for restructuring GECAMINES will be finalized in March 2003. Regarding the forestry sector, the Ministry of the Environment will publish a decree presenting the official listing of existing concessions recognized as valid by the government soon and adopt the main implementing regulations for the forestry code.

18. In the public sector, COPIREP will be fully staffed and become operational by April 2003. The auditors of the petroleum corporation (COHYDRO) and other public enterprises have been instructed to submit their reports by end-February 2003. As regards the national utilities companies, my authorities plan to prepare and adopt new water and energy codes during the year 2003. Concerning the private sector, a new labor code has already been adopted and will enter into effect soon. A one-stop shop for investors will be set up by end-April 2003 with World Bank assistance.

19. As regards Governance issues, it is expected that implementation of the regulations recently published public service Code of Ethics and Good Conduct will be finalized by end-March 2003. A draft law against corruption, money laundering, and transnational organized crime will be submitted to Parliament and be published, while the reform of the public procurement system will also be launched with World Bank support.

IV. Poverty-Related Issues and the HIPC Initiative

20. Since its implementation in June 2002, the government has had the I-PRSP translated into the four main national languages, to ensure the broadest possible access to it. The government plans to launch the national Survey on Poverty, in the coming weeks, using a methodology based on the collection of data through discussions in “target groups” drawn from a sample of villages and urban areas. A National Poverty Unit will be set soon to track and evaluate the poverty indicators and compare them with the objectives set out in the I-PRSP. This survey will be essential in drafting the full PRSP.

21. With regard to debt issue, we are thankful to Paris Club creditors for the agreement reached with my Congolese authorities on September 13, 2002, on a comprehensive rescheduling of DRC’s debt. My authorities are also appreciative of the initiative taken by its partners in December 2002, to set up a Multi-donor Trust Fund to help the government service its multilateral debt and for their pledge to contribute to this Fund. I would like to encourage non-Paris Club bilateral and commercial creditors to provide comparable treatment for DRC’s outstanding debt, since the issue of debt service calls for urgent assistance. Indeed, debt service in the DRC, even after benefiting from favorable conditions from the Paris Club, remains heavy. Thus, in light of their strong performance achieved under the PRGF program, my authorities believe that they have met the conditions for reaching the decision point under the enhanced HIPC Initiative before end-March 2003.

22. My Congolese authorities recognize the important role that NGOs and religious organizations have played, particularly in alleviating the suffering of the most vulnerable segments of the population in remote areas where security and the delivery of public goods and services became almost non-existent. Now that the situation in the country is improving, it is essential that foreign aid be disbursed largely through official channels, namely the central bank and the government budget. This will enhance the effectiveness of fiscal and monetary policy.

V. Technical Assistance Issues

23. Since the country embarked on a program with the Bretton Woods institutions, it has benefited from technical assistance in key areas of Fund’s expertise. Additional assistance is being provided by other donors in areas of public enterprise reform, the restructuring of the banking system, governance, the fight against corruption, procurement reform, and the I-PRSP. Although significant progress was achieved in key sectors of the economy, the challenges ahead are still daunting and human resource and technical needs are likely to increase as the country reunifies. Thus, providing a continued assistance to the DRC will be critical for the success of the reunification process. A well-coordinated and well-sequenced technical assistance from the international community remains essential in order to avoid duplication. In this connection, a TA coordinating committee was created with the assistance of the World Bank.

VI. Conclusion

24. My Congolese authorities have made many efforts to set a peaceful environment and they are hopeful that with the help of the UN and the international community, a long standing peace will be restored in the country and create the conditions for growth resumption. My authorities place a particular importance to the restoration of a lasting peace, necessary to ensure the development of not only the Democratic Republic of Congo, but also the Great Lakes Region. With the recent progress made toward peace, a window of opportunity for a peaceful and successful reunification has widened. The challenges ahead remain daunting, but my Congolese authorities are committed to pursuing their efforts to reform, in order to maintain macroeconomic stability, create an environment conducive to the development of the private sector activities and improve the living standards of the Congolese people. To this end, they intend to strengthen the coordination of their PEG.

25. My authorities are thankful to the creditors’ community, notably the Paris Club members’ creditors for their exceptional debt rescheduling conditions and their contribution to the Multi-donor Trust Fund. They call upon other creditors to give them the same conditions. In light of progress achieved under the PRGF, given the debt service overhang in the budget and the revenue to GDP ratio among the lowest in Sub-Saharan Africa, it is critical for the DRC to reach the decision point in the first quarter of 2003. This will help my authorities to maintain the momentum of the reforms, and contribute to the positive dynamic that is gradually taking root in the country. Now, program budgetary aid is also needed by the DRC to sustain its comprehensive reform program.

26. Finally, I would like to thank Management and the staff for their continued efforts and support to the DRC. My authorities are cognizant and appreciative of the international community in helping DRC achieve lasting peace and economic recovery.