Democratic Republic of the Congo
Enhanced Initiative for Heavily Indebted Poor Countries-Decision Point Document
Author: International Monetary Fund
Publication Date:
28 Aug 2003
eISBN:
9781451808322
Language:
English
Keywords:
ISCR; CR; Congolese authorities; real GDP; public expenditure; short-term debt; exchange rate; HIPC Initiative; physical capital; economic growth
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This paper presents an assessment of the Democratic Republic of the Congo's eligibility for assistance under the enhanced initiative for heavily indebted poor countries. The country has made remarkable progress in consolidating the peace process, stabilizing the economic situation, and creating the conditions for sustainable economic growth and poverty reduction. The analysis supporting the poverty reduction strategy finds that structural constraints prevent the Democratic Republic of the Congo from achieving the international goal of reducing absolute poverty and meeting the goal for absolute poverty reduction.

Abstract

This paper presents an assessment of the Democratic Republic of the Congo's eligibility for assistance under the enhanced initiative for heavily indebted poor countries. The country has made remarkable progress in consolidating the peace process, stabilizing the economic situation, and creating the conditions for sustainable economic growth and poverty reduction. The analysis supporting the poverty reduction strategy finds that structural constraints prevent the Democratic Republic of the Congo from achieving the international goal of reducing absolute poverty and meeting the goal for absolute poverty reduction.

I. Introduction

1. This paper presents an assessment of the Democratic Republic of the Congo’s (DRC) eligibility for assistance under the enhanced Initiative for Heavily Indebted Poor Countries (enhanced HIPC Initiative). The Executive Boards of the IMF and IDA discussed the preliminary HIPC document (EBS/02/88, 5/24/02, and IDA Report No. 24213, 5/23/02) for the DRC on June 12 and 13, 2002, respectively. At that time, the government’s interim poverty reduction strategy paper (I-PRSP) (EBD/02/81, 5/28/02, and IDA Report No. 24216, 5/24/02) and the joint staff assessment (JSA) (EBD/02/82, 5/28/02, and IDA Report No. 24216) were also discussed. On that occasion, Directors made a preliminary determination that the DRC could be eligible for assistance under the enhanced HIPC Initiative on the basis of its heavy debt burden, its track record of performance under IDA- and IMF-supported programs, and its status as an IDA-only and Poverty Reduction and Growth Facility (PRGF)-eligible country. Executive Directors also indicated that the I-PRSP provided an adequate basis for concessional assistance from IDA and the IMF. Most Directors indicated that the DRC could reach a decision point in early 2003, provided that (a) adequate progress continued to be made under the peace process; and (b) the country remained on track with its IDA- and PRGF-supported programs.

2. Over the past two years, the DRC has made remarkable progress in consolidating the peace process (although outbreaks of violence continue to occur), stabilizing the economic situation, and creating the conditions for sustainable economic growth and poverty reduction. An all-inclusive transitional government was nominated on June 30, 2003, to be followed by free and transparent elections after two years. The satisfactory performance under the IMF staff-monitored program (SMP), covering June 2001 to March 2002, paved the way for a PRGF arrangement of SDR 580 million, approved by the IMF’s Executive Board on June 12, 2002, and renewed IDA lending, including an Economic Recovery Credit (ERC) of SDR 360.4 million (approved by IDA Executive Directors on June 13, 2002) and an Emergency Multi-Sector Rehabilitation and Reconstruction Project (EMRRP) of SDR 358.8 million (including an IDA grant of SDR 31.6 million), which was approved on August 6, 2002.2 The first review of the PRGF-supported program was concluded by the Executive Board of the IMF on March 24, 2003. The forestry sector tranche of IDA’s ERC was released on February 14, 2003, and the mining sector tranche on June 25, 2003. The DRC’s demonstrable progress in the areas of peace and economic reform, as well as its heavy debt burden, continue to warrant an early HIPC Initiative decision point. Although the outbreaks of violence imply risks, in the opinion of the IDA and IMF staffs, the DRC has met the conditions for reaching the decision point.

3. This paper is organized as follows: Section II provides background information on the DRC’s eligibility for assistance under the enhanced HIPC Initiative, the dimensions of poverty, political and security developments, and the macroeconomic and structural adjustment record to date; Section III discusses the PRSP process and the medium-term macroeconomic objectives, as well as the structural and sectoral reforms to be implemented before reaching the completion point; Section IV presents the debt sustainability analysis (DSA); Section V lists the floating completion point triggers, specifies how enhanced HIPC Initiative assistance after the decision point will be used and tracked, and discusses expected progress toward meeting the Millennium Development Goals (MDGs) as a result of the enhanced HIPC Initiative assistance; and, finally, Section VI presents issues for discussion by the Boards of Executive Directors.

II. Assessment of Eligibility

A. PRGF and IDA Status

4. The DRC is currently an IDA-only country, with a nominal per capita GDP of about US$99 in 2002; it is eligible to receive resources under the PRGF. As demonstrated in Section IV, the DRC will continue to need substantial concessional assistance from the international community in the medium term, and is likely to remain an IDA-only and PRGF-eligible country for many years to come.

B. Dimensions of Poverty

5. Over three decades of economic and financial mismanagement, corruption and civil strife have caused nominal GDP per capita to decline dramatically from US$286 at independence in 1960 to US$99 in 2002. Since 1996, widespread suffering from a war involving the armies of seven other African nations and several militias has claimed over 3 million lives, directly through combat and indirectly through war-induced deprivation. It is estimated that 80 percent of the population lives on less than US$0.20 per day. Emerging from this decay and destruction, the DRC may be decades away from reaching the MDGs.3 For the year 2001, the 2003 United Nations (UN) human development index ranked the DRC 167th out of 175 countries.

6. The effects of widespread poverty are reflected in the DRC’s social statistics (Box 1). Infant and child mortality rates are well above the already high averages for sub-Saharan Africa. The HIV/AIDS prevalence rate is especially high in those regions that have been affected by conflict, particularly among women. The number of people newly infected with HIV increased by a factor of 16 between 1990 and 2000. By December 2000, about 1.1 million people were known to be living with HIV/AIDS, and close to a million children had been orphaned by AIDS. Life expectancy declined from 52 years in 1994 to 41 years in 2001. Malaria kills over 500,000 people per year, while more than 12.5 million were infected in 2000 by the parasite causing sleeping sickness. Also, the incidence of tuberculosis and diarrheal diseases (including cholera and typhoid fever) has increased significantly.

7. The I-PRSP finds that 37 percent of the population has no access to any kind of formal health care. In 1995, only 18 percent of households had access to hygienic latrines and 41 percent to potable water. In the eastern provinces, 41 percent of children under 5 years of age are malnourished and 26 percent are severely malnourished. The child vaccination rate is 29 percent. Educational statistics are similarly discouraging. Although literacy rates in the DRC remain higher than the average for sub-Saharan Africa, gross enrollment rates are lower and declined substantially between 1985 and 2000. In addition, the latest UNICEF survey (2001) shows that only 17 percent of children are admitted to primary school at the legally required age of 6 years, against 23 percent in 1995. The admission rate in urban areas is 33 percent, and in rural areas 10 percent. Only 34 percent of children in cities and 20 percent in rural areas, entering primary school, reach fifth grade, while 31 percent of children aged 6–14 have never attended school.

C. Recent Political and Security Developments

8. Remarkable progress has been made in consolidating the peace process. The new Transitional Constitution was enacted on April 4, 2003. Major General Kabila was sworn in as President of the DRC on April 7, 2003 for a two-year transition period, after which free, fair and transparent elections are to be held. An all-inclusive transition government, comprising the President, four vice-presidents, 36 ministers, and 25 vice-ministers, was nominated on June 30, 2003. An international committee has been established to monitor the transition process.

9. However, outbursts of violence have continued to occur. In this context, fighting among rebel groups exploiting historical rivalries between two ethnic groups (the Hemas and the Lendus) in the northeast Ituri region has caused extensive civilian casualties, particularly in the town of Bunia. On May 30, 2003, the UN Security Council authorized the establishment of an Interim Emergency Multinational Force (IEMF) in Bunia, comprising about 1,400 soldiers, including 700 soldiers from France, with a broader mandate than the existing UN Observation Mission in the DRC (MONUC). The Council stressed that the IEMF was to be deployed on a strictly temporary basis in order to reinforce MONUC. It demanded that all parties to the conflict in Ituri cease hostilities immediately, and that all Congolese parties and all states in the Great Lakes region cooperate with the IEMF and MONUC to stabilize the situation in Bunia. A recent UN Security Council delegation that visited the Great Lakes region stated that stabilization of the situation in Ituri will require strong and sustained international pressure on all parties to the conflict, as well as their foreign allies, to cease hostilities, the provision of arms, and the illegal exploitation of the DRC’s natural resources. President Kabila has requested an extension of the IEMF’s mandate beyond its current September 1, 2003 expiration date.

D. Macroeconomic and Structural Adjustment Record

10. The DRC has also made remarkable progress in stabilizing the macroeconomic situation and in laying the foundations for sustainable economic growth and poverty reduction, first via the SMP, and subsequently via the Government Economic Program (PEG), covering April 2002–July 2005, supported by an arrangement under the IMF’s PRGF, as well as IDA’S ERC and EMRRP.

11. The implementation of bold and heavily front-loaded measures under the SMP marked a turnaround in the conduct of economic policy that has produced significant results, especially by breaking the vicious circle of hyperinflation and currency depreciation. Important progress has been made in strengthening public finances via a return to normal budgetary procedures, including the centralization of revenue and expenditure, and a reduction in the use of extrabudgetary channels. A monthly treasury cash-flow plan has been strictly implemented.

12. Through March 2003, performance under the PRGF-supported program was broadly satisfactory. For the first time in 13 years, economic growth was positive (about 3 percent) in 2002. The end-of-period inflation rate was about 16 percent in December 2002, sharply down from 135 percent the year before. At end-May 2003, end-of-period inflation stood at 4.6 percent, owing to the rise in the prices of petroleum products of 9 percent in mid-February and 10 percent in mid-March. Adjusted for these two price increases, the inflation rate was about 2.5 percent, in line with the rate of 6 percent initially projected for the end of the year. Fiscal performance in 2002 was better than programmed, with revenue slightly higher and expenditure slightly lower than anticipated. In the first quarter of 2003, fiscal receipts (excluding grants) were in line with the program target, while overall expenditure was lower. However, while overall fiscal performance was broadly on track, the anticipated shift in the composition of expenditure toward pro-poor spending has not materialized, owing to a shortfall in foreign-financed investment and social outlays, and an increase in security- and sovereignty-related expenditure associated with the inter-Congolese dialogue and the security vacuum that developed after the withdrawal of foreign troops. At end-2002, while the combined share of defense, security, and institutional spending amounted to 48 percent of government primary expenditure, social expenditure accounted only for 7 percent of government primary expenditure, instead of the targeted 15 percent.

13. While implementing its stabilization measures, the DRC was able to initiate, mainly supported by IDA, (a) the rebuilding of agricultural production and the enhancement of food security; (b) the rehabilitation and reconstruction of critical infrastructure; (c) the restoration of essential social services and the rebuilding of community infrastructure; and (d) the strengthening of the institutional and administrative capacity of the government, with technical assistance from IDA and the IMF.

14. Since early 2001, far-reaching structural measures have been put in place, resulting in the removal of major economic distortions, notably via the unification of multiple exchange rates and the liberalization of prices, the latter including the introduction of a transparent and automatic mechanism for the pricing of petroleum products. Important changes in the judicial and regulatory environment are also under way, as illustrated by the adoption of new legislation on the exchange and payments system; a new banking law; new statutes for the Central Bank of the Congo (BCC) that enshrine its independence in the conduct of monetary policy; new investment, mining, forestry, and labor codes; the abolition of the export monopoly and the implementation of certification of origin for diamonds; and the replacement of exceptional military tribunals by civil courts for business and economic affairs.

15. Further structural and sectoral reforms are being undertaken or initiated as follows:

  • Banking sector reform. With a view to reviving financial intermediation and increasing the effectiveness of monetary policy, the following measures are being implemented with IDA assistance, albeit with some delay compared with the original schedule: (a) the updating, by end-July 2003, of the already completed audits of four commercial banks; (b) the completion, by end-August 2003, of audits of the five commercial banks that have not yet been audited; and (c) the drawing up and introduction, by end-December 2003, of an appropriate recovery plan for those banks that are considered solvent on the basis of the audits. In addition, the BCC is implementing, with technical assistance from the IMF, an action plan aimed at improving its accounting system, management, and operations;

  • Concerning public enterprises, the Steering Committee on the Reform of Public Enterprises (COPIREP) has been established, and its members are being selected. The program of voluntary separations (about 9,000 staff) at the public mining company GECAMINES, financed by IDA’s ERC, will begin in late July 2003 and is expected to be completed by December 2003. The restructuring plan of GECAMINES is expected to be approved by the government at the same time. The audit of cross debts between public enterprises and the government is expected to be finalized by September 2003. Based on the results of the audit, a timetable will be established by end-2003 for the clearance of certified arrears; and

  • The government has continued to stress the promotion of good governance and measures to combat corruption. An anticorruption strategy and an anticorruption action plan were adopted in February 2003. Results from the audits of the tax and customs administrations, as well as some public enterprises, were published in the local press and led to the replacement of a number of high-ranking public officials. All IDA and most other externally financed public projects are now subject to a transparent bidding process. Government budget execution for 2001 and 2002, as well as the yearly financial accounts of the BCC, will be audited by the General Accounting Office and an international firm, respectively. The Code of Ethics and Good Conduct, applying to all public servants, was published in November 2002.

III. Medium-Term Strategy for Poverty Reduction

A. The PRSP Formulation Process

16. In March 2002, the government produced an I-PRSP through a participatory process that, in preparation of the full PRSP, will broaden as the country reunifies. Consultations carried out in four provinces showed that the population considers the primary causes of poverty to be appalling governance at all levels, economic mismanagement, systematic plundering of public and natural resources, the gross inadequacy of public services, and the lack of maintenance of economic and social infrastructure. The poverty reduction strategy that resulted from these consultations envisages three phases of policy effort—stabilization, reconstruction, and development—and is based on three pillars of activity: (a) restoring peace and achieving good governance; (b) stabilizing the macroeconomic environment and achieving pro-poor growth; and (c) placing local communities in a central position in the formulation and implementation of social and development activities. The I-PRSP has been translated into the four main national languages. Although the participatory processes underpinning the I-PRSP4 were largely restricted to stakeholders in the provinces under government control, all parties to the inter-Congolese dialogue unanimously endorsed the economic agenda of the government embodied in the I-PRSP.

17. A National Poverty Survey, one of the first steps planned for drawing up the full PRSP, has been under preparation since June 2002. It uses a focus-group method (field-tested during November–December 2002), which is faster, but less comprehensive than a household survey.5 The National Poverty Survey will identify poor groups and communities by reference to specific benchmarks (e.g., distance from schools, health centers, water wells). A full PRSP is to be completed in the third quarter of 2005.

18. The joint assessment of the I-PRSP by the staffs of IDA and the IMF concludes that the strategy paper provides an adequate basis for the development of a participatory full PRSP and the provision of concessional assistance. The Executive Directors of the IMF and IDA endorsed this joint assessment on June 12 and 13, 2002, respectively. The recently issued joint staff assessment of the authorities’ PRSP Preparation Status Report of June 2003 recommends that Directors reconfirm their earlier conclusions.

B. Macroeconomic Objectives

19. The macroeconomic objectives for the period 2003–056 include, inter alia, (a) an average real GDP growth rate of 6 percent over the period 2003–05, implying an average annual increase in per capita GDP of about 3 percent; (b) a reduction in the annual inflation rate to 5 percent by 2005; and (c) a gradual increase in gross international reserves to about 11.5 weeks of non-aid imports of goods and services by 2005 (Table 1).7 These growth patterns are consistent with those observed in other post-conflict countries, but imply levels well below those from before the war.

Table 1.

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

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Sources: Congolese authorities; and staff estimates and projections.

Change in annual average. Minus sign indicates depreciation.

For 2003, as of May 22.

Includes interest due on external debt (includes debt service on rescheduling) and, from 2003 onward, expenditure financed by resources released under the enhanced HIPC Initiative.

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

Cash balance after interest rescheduling (including HIPC). Before 2002, excludes the central bank operations.

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

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

Negotiation of agreements with Paris Club creditors, following the September 2002 Paris Club rescheduling, continued into 2003 and, as a result, amounts associated with these agreements and due in 2002 were not finalised. Consequently, amounts are carried over to 2003 when these agreements are signed and the amounts due determined. Similarly, amounts due to non-Paris Club and commercial creditors have not been finalized and are carried over to 2004, From 2003, debt service reflects possible assistance under the enhanced HIPC Initiative. Debt-service data based on the end-2002 DSA in the present document, whereas debt service in the staff report for the second review of the PRGF-supported program based on the end-2001 DSA.

End-of-period debt stock, including arrears and before possible enhanced HIPC Initiative assistance.

The net present value of external public debt is about 79 percent of the nominal value in 2002, reflecting the significant stock of arrears.

For 2003, as of June 11.

See IMF EBS/03/12 (2/05/03).

See IMF EBS/03/98 (7/09/03).

20. The external current account deficit including grants but before debt relief, is expected to widen to 8.1 percent of GDP in 2005 (Table 2). As in other post-conflict countries, imports of investment goods, driven by the return of external assistance and reconstruction, will lead this trend. In principle, the program is financed through 2005, with the bulk of program financing being provided by multilateral creditors, and project financing by both multilateral and bilateral creditors. At the December 2002 Consultative Group meeting, assistance in the amount of US$2.5 billion was pledged over the 2003–05 period.

Table 2.

Democratic Republic of the Congo: Balance of Payments Summary, 2000–22

(In millions of U.S. dollar, unless otherwise indicated)

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Sources: Congolese authorities; and staff estimates and projections.

Debt-service data based on the end-2002 DSA in the present document whereas debt service in the staff report for the second review of the PRGF-support program based on the end -2001 DSA Includes debt service on current maturities and on rescheduling following the delivery, from 2003, of possible assistance related to the enhanced HIPC Initiative. Negotiation of agreements with Paris Club creditors, following the September 2002 Paris Club rescheduling, continued into 2003 and, as a result, amounts associated with these agreements and due in 2002 were not finalized. Consequently, amounts are carried over to 2003 when these agreements are signed and The amounts due determined. Similarly, amounts due to non-Paris Club and commercial creditors have no; been finalized and are carried over to 2004.

Includes a disbursement by IDA (valued at US$326 million at end-2001 exchange rates) in 2002 to repay the bridge loan used to clear arrears in July 2002.

Debt-service data based on the end-2002 DSA in The present document whereas debt service in the staff report for the second review of the PRGP support program based on the end -2001 DSA Includes debt relief from multilateral creditors provided from 2002 onwards following the clearance of arrears, which includes debt relief on the accumulation of arrears on current maturities in 2002. Also includes debt relief under the September 2002 Paris Club rescheduling, which provides a Neples flow rescheduling on pre-cutoff date debt, deferral of arrears on post-cutoff-date maturities at end-June 2002, deferral of post-cutoff -date maturities due in the second half of 2002, and capitalization of all moratorium interest during the IMF-support program. Comparable treatment by non-Paris Club official bilateral creditor and commercial creditors is assumed. Additional debt relief is anticipated from 2003 under the enhanced HIPC initiative.

HIPC Initiative debt relief is equivalent to the marginal debt relief provided under the enhanced HIPC Initiative, after treatment of arrears by multilateral creditors and the September 2002 Paris Club rescheduling.

Debt-service data based on the end- 2002 DSA in the present document, whereas debt service in the staff report for the second review of the PRGF-supported program based on me end-2001 DSA. Includes debt relief on interest from multilateral creditor, debt relief interest from official bilateral and commercial creditors under the September 2002 Pans Club rescheduling, enhanced HIPC Initiative relief on interest and principal payments falling due in the interim period, and the consolidation of penalty interest on arrears accumulated in 2002.

21. Fiscal policy will continue to aim at continued consolidation while improving transparency and tracking of public expenditure, as well as reorienting the composition of the budget toward pro-poor spending. Revenue (excluding grants) is projected to increase from 7.9 percent of GDP in 2002 to 10.2 percent in 2005, and grants from 0.4 percent of GDP to 5.7 percent (including HIPC Initiative assistance) (Table 3). Total expenditure (on a commitment basis) will rise from 10.4 percent of GDP in 2002 to 20.2 percent in 2005, driven by foreign-financed investment and the resumption of interest payments on external debt. The overall consolidated balance, on a cash basis and after debt relief, would widen to a deficit of 3.6 percent of GDP in 2005.

Table 3.

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

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Sources: Congolese authorities; and staff estimates and projections.

Reflects revised calculation of HIPC assistance from 2002-based DSA, HIPC assistance is equal to (a) for official bilateral and commercial creditors, the difference between debt service due after a hypothetical Naples stock operation at end-2002 and debt service due after HIPC relief; and (b) for multilateral creditors, the difference between debt service due after arrears clearance operations and debt service due after HIPC relief.

Scheduled interest before any treatment, plus interest on the September 2002 Paris Club rescheduling from 2002, and interest on the rescheduling under the enhanced HIPC Initiative from 2003. Excludes interest on arrears before 2002.

Negotiations of agreements with Paris club creditors, following the September 2002 Naples rescheduling, are still ongoing. As a result, amounts associated with these agreements and due in 2002 have not been finalized. Consequently amounts are carried over to 2003 when it is expected that these agreements will be signed and the amounts due determined. Similarly, amounts due to non-Paris Club and commercial creditors have not been finalized and are carried over to 2004. From 2003 onward, debt service reflects possible rescheduling under the enhanced HIPC Initiative.

In 2001 and 2002, includes a preliminary estimate for accumulation of arrears on utilities (CGF 12 billion). Utilities payments and arrears to be surveyed in 2003.

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, foreign-financed expenditure and HIPC-related 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 consolidated during the same year.

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

In 2002, arrears include interest and principal.

Nonzero financing gap in 2003 owing to the revision of debt service data with the completion of the 2002-based DSA after the negotiation of the 2003 budget and completion of the IMF staff report for the second review of the PRGF-supported program. Automatic adjusters will modify the program’s performance criteria to account for changes in programmed debt service.

Discrepancy between monetary and fiscal data.

Cash balance after interest rescheduling (including HIPC). Before 2002, excludes BCC operations.

22. The BCC will continue to pursue a monetary policy aimed at price stability in the context of the floating exchange rate regime.

C. Governance, Structural, and Institutional Reforms

23. Reducing corruption and improving governance. The government is responding to widespread civil society skepticism about the commitment of any Congolese government—past or present—to reducing corruption. To this end, the government’s anticorruption strategy, adopted in November 2002, focuses on (a) the establishment of a credible legal, regulatory, and institutional framework to combat corruption; (b) the implementation of effective sanctions against corruption; and (c) reform of key public sector institutions. With regard to the legal, regulatory, and institutional anticorruption framework, the authorities have (i) created an anticorruption commission (in August 2002); (ii) supported independent civil society watchdog structures; (iii) adopted the Code of Ethics and Good Conduct applicable to all public officials (in November 2002); and (iv) prepared an anticorruption law.8 Sanctions will include withdrawal of business licenses and operating agreements, and fines. The government also intends to foster effective partnership among the public sector, civil society, the private sector, and international organizations specialized in the fight against corruption, such as Transparency International and Interpol, and improve public access to relevant information. Finally, reform of public institutions will include civil service reform, judicial sector reform, improved public finance management on both the revenue and expenditure sides, reform of the procurement system, increased transparency and accountability at the local level, and a major effort to improve the quality of public services in priority sectors (i.e., health, education, rural development, and infrastructure).

24. Civil service reform. The government is aware that a comprehensive reform of the public administration is needed to reduce corruption and to improve governance and public service delivery. Its strategy focuses on redefining the key missions of priority ministries and public service agencies, as well as upgrading the skill levels and productivity of their staffs. In the meantime, with the strengthening of revenue mobilization and the streamlining of the civil service, salary levels will gradually increase from their relatively low levels, while maintaining fiscal sustainability. This will help to reduce corruption, while setting up broader incentives and control systems to improve productivity and performance. Thus, emphasis will be on (a) eliminating ghost workers from the civil service payroll; (b) putting in place a retrenchment program for civil servants having reached the retirement age, for which assistance has been solicited from IDA; (c) undertaking a comprehensive civil service census; and (d) implementing a functioning and secure integrated personnel and payroll management system.

25. The management of public financial resources. The 2002 Public Expenditure Review, which focused on the Assessment and Action Plan (AAP) and the sectors that would benefit from HIPC Initiative assistance, has identified specific steps to strengthen public expenditure management in the short and medium term. These include the implementation of a new budget classification system and a rationalized budget expenditure chain, the full integration of externally financed projects in budget formulation and reporting, the rationalization of control and audit procedures, and the implementation of a new accounting system. The I-PRSP (para. 15) calls for specific monitoring provisions to ensure that expenditures are compatible with the National Poverty Reduction Charter.

26. Improving the quality of public services and institutions in priority sectors. Major efforts are planned to improve the quality of services needed to reduce poverty (see subsection D) and promote private sector-led growth. A public expenditure tracking exercise will be undertaken in key sectors to assess the share of public resources that is actually spent on intended uses and to verify that these resources arrive at their intended destinations (e.g., schools, health centers, agricultural extension services, and road maintenance units). This exercise will be complemented by (a) assessments by beneficiaries of the quality of services provided, and (b) assessments by service providers of the difficulties encountered in the provision of services. Work is under way on a comprehensive reform of the government procurement system, with assistance from IDA.

27. Promotion of private sector development. A major objective of the government’s economic program is to promote private sector activity through (a) a new legal and regulatory framework and related institutions (i.e., courts, arbitration centers, and regulatory agencies); (b) a revised tax system, including simplified enterprise and indirect tax systems, based on a review that was completed in March 2003; (c) a reduction in transaction costs pertaining to enterprise creation and commercial transactions (e.g., through one-stop windows for investment and international trade transactions); (d) an improvement in financial intermediation; (e) the reform of public enterprises; and (f) the settlement of government arrears to private enterprises. Private sector development will be supported by IDA in the context of a Private Sector Development and Competitiveness Project, currently under preparation, and future fast-disbursing operations, whose preparations are to begin shortly. Both types of operation will be supported by specific conditionalities.

D. Social and Sectoral Policies

28. The DRC is far from meeting the MDGs related to mortality, health, and education. Public contributions to social services (e.g., health and education) have declined to negligible levels over the last two decades, mainly as a result of a lack of government resources and the effects of conflict. The large-scale displacement of people has also seriously disrupted the delivery of social services.

29. Health. Since 1975, health care delivery has been based on decentralized health zones,9 and access to primary health care services is available to 50 percent of the population, up from 10 percent in 1975. However, public health and health services delivery have deteriorated drastically over the past decade. Key objectives in the health sector for 2003–05 are (a) establishment of a legal and regulatory framework suitable for the development of public-private partnerships that are essential to an improvement in service provision; (b) reinforcement of existing partnerships among the public, private and non-profit participants in the sector, and local communities; and (c) better access to essential health services, through, among other things, rehabilitated infrastructure and improved human resources, and better provision of financing, medicine, and other inputs to local units, particularly for the 50 percent of the population living in targeted health zones. To this end, the I-PRSP envisages the allocation of at least 15 percent of the national budget to health sector spending by 2005, up from about one percent in 2001. These resources will be complemented by continued assistance from foreign donors, particularly under the IDA-coordinated EMRRP, whose health component envisages assistance to 55 health zones that are currently unassisted. Thus, the DRC would be able, especially at the community and health zone levels, to begin combating HIV/AIDS, malaria, sleeping sickness and other diseases, and supporting vaccination campaigns.

30. Education. The coverage, quality, and equity of education have also deteriorated, especially in primary education.10 Government support of public education has become virtually nonexistent. Multilateral and bilateral external financing for education (US$12 million in 2002) lags far behind donor financing for other sectors. Most schools in the DRC are operated by nongovernmental groups, mainly churches, and are entirely financed by fees. The I-PRSP (para. 130) commits the government to providing free primary education and upgrading the quality of teachers and teacher-training institutions.

31. To improve education, the authorities intend to conduct a thorough analysis of the education sector and develop a strategic financing plan for major reform by end-2005, in collaboration with private sector and civil society stakeholders and donors. The government will also ensure timely payment of teacher salaries and will support programs that rehabilitate physical infrastructure, supply essential learning materials, and provide intensive in-service training. Also by end-2005, the government will have (a) clarified its role in primary education vis-à-vis other partners and drawn up a transparent framework for cost sharing in the sector; (b) allocated at least 10 percent of the national budget to education; (c) identified specific measures that will accelerate the implementation of the Education for All Initiative;11 (d) updated the national textbook policy and distributed 5 million textbooks to primary schools; (e) put in place and implemented a policy on teacher recruitment, training, and remuneration; (f) established a policy and operational mechanism for school mapping; and (g) renovated 200 primary schools.

32. Social protection. The I-PRSP emphasizes the need to support grassroots approaches based on local priorities. To achieve this goal, the Ministry of Social Affairs is using a participatory approach, which includes other relevant government ministries, donors, nongovernmental organizations (NGOs), and community groups to develop a comprehensive strategy to deal with social protection issues. The primary objective for 2003–05 will be the development and implementation of this strategy, as well as the development of a coherent social-protection program, to be supported by IDA.

33. Infrastructure. Neglect, mismanagement, and war damage have led to the near-collapse of the DRC’s infrastructure. As the country moves from a period of stabilization to one of reconstruction, the government will initiate during 2003–05 a long-term process of infrastructure rehabilitation, with assistance from the international community. The I-PRSP (paras. 123 and 155) describes the authorities’ program for infrastructure rehabilitation, and the use of community and regional service brigades to maintain this infrastructure. Development strategies have been prepared or are being drawn up for transport, water, sanitation (I-PRSP, paras. 139–142), and electricity. IDA’s EMRRP is financing activities to improve road, river, rail, and air transportation, rehabilitate the electricity and water supply networks and, in major cities, improve solid waste services, maintain and rehabilitate streets and drainage systems, and control erosion. Particular attention is being given to the rehabilitation of major roads and rural tracks, to reduce the cost of transportation.

34. Natural resources. The natural resource sector (i.e., mining and forestry) is expected to make a major contribution to economic growth, export earnings, and poverty reduction. New mining and forestry codes were adopted in 2002 that aim at improving transparency and increasing the role of the private sector. Concerning the mining code, the implementing decrees were issued in April 2003. By end-2005, the government intends to have (a) completed the legal and regulatory reform programs in the mining and forestry sectors; (b) significantly improved the capacity to enforce the new mining and forestry codes; (c) substantially restructured key public enterprises operating in the mining sector through, inter alia, partnerships with the private sector; and (d) implemented a framework for community forestry management and the distribution of revenues to local communities. Strenuous efforts will be made in both sectors to implement dissuasive sanctions against illegal exploitation. These policy reforms will be supported by future IDA operations and monitored under the government’s IMF- and IDA-supported economic program.

35. Rural development. Rural development is a key instrument for reducing poverty and improving food security. During the next three years of reconstruction, the government intends to focus on improving agricultural production capacity, enhancing the efficiency of domestic marketing, and formulating a comprehensive development strategy. These activities are supported by the EMRRP, whose rural sector component is focused on the rehabilitation of rural access roads and tracks, and the provision of agricultural extension services to farmers, particularly via distribution of seeds and pesticides.

IV. Debt Sustainability Analysis and Enhanced HIPC Initiative Assistance

36. The debt sustainability analysis (DSA) presented in this section is an update of the one presented in the preliminary enhanced HIPC Initiative document.12 It was prepared jointly by the Congolese authorities and the staffs of the IMF and IDA, based on loan-by-loan data on external debt outstanding and disbursed as of end-December 2002 provided by the authorities and creditors.13 The loan-by-loan debt reconciliation process has been completed with all of the DRC’s multilateral creditors, except one,14 and the reconciled multilateral data account for about 37 percent of the total net present value of the DRC’s outstanding stock of debt at end-2002. The loan-by-loan reconciliation process has been carried out with most bilateral creditors via the review of pending or signed bilateral agreements with Paris Club creditors under the September 13, 2002 rescheduling. Overall, about 83 percent of the net present value of the DRC’s total stock of external debt outstanding at end-2002 is reconciled, although, in some cases, estimates were used where full accounting data were unavailable.15 The baseline projections presented in this section simulate the impact of a hypothetical stock-of-debt operation by Paris Club creditors on Naples terms at end-2002, as well as comparable treatment by all other official bilateral and commercial creditors. The end-2002 exchange rates and discount rates used for the calculation of the net present value (NPV) of debt are presented in Table 7.16

Table 4.

Democratic Republic of the Congo: Stock of External Arrears at End-2001

(In millions of U.S. dollars, unless otherwise indicated)

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Sources: Creditor statements, Congolese authorities, and staff estimates.

Includes short-term debt in arrears and estimated penalty interest on arrears.