Democratic Republic of the Congo: Second Review Under the Poverty Reduction and Growth Facility and Request for Waiver of Performance Criteria

For the past two years, the Democratic Republic of Congo has made considerable progress in consolidating its peace process, stabilizing its economic situation, and creating the conditions for sustainable economic growth and poverty reduction. The macroeconomic and fiscal performances under the IMF program were satisfactory. The government also made good progress on structural and sectoral reforms. The authorities have identified the key steps needed for the completion of the poverty reduction strategy paper. The IMF staff commends the authorities for the progress achieved in strengthening the tax and customs administration.

Abstract

For the past two years, the Democratic Republic of Congo has made considerable progress in consolidating its peace process, stabilizing its economic situation, and creating the conditions for sustainable economic growth and poverty reduction. The macroeconomic and fiscal performances under the IMF program were satisfactory. The government also made good progress on structural and sectoral reforms. The authorities have identified the key steps needed for the completion of the poverty reduction strategy paper. The IMF staff commends the authorities for the progress achieved in strengthening the tax and customs administration.

I. Introduction

1. Discussions for the second review under the Poverty Reduction and Growth Facility (PRGF) were held in Kinshasa during May 24–June 7, 2003. In the attached letter of intent dated July 3, 2003 and signed by His Excellency President Joseph Kabila (Appendix I), and in the memorandum on economic and financial policies (MEFP) (Appendix I, Attachment I), and in the technical memorandum of understanding (Appendix I, Attachment II), the authorities review recent political and economic developments and the progress made during October 2002–March 2003, and outline the policies to be implemented during the rest of 2003, taking account of the ongoing reunification of the country. The letter also requests waivers for the nonobservance of three quantitative performance criteria and one continuous performance criterion for end-March 2003 (most of which were missed by small margins), namely, the floor on the net foreign assets of the Central Bank of the Congo (BCC), the ceiling on the net domestic assets of the BCC, the ceiling on net bank credit to the government, and the continuous criterion relating to the abolition of budgetary expenditure financed by the BCC without the prior authorization of the Ministry of Finance, as well as the nonobservance of the structural performance criterion on the establishment of new expenditure procedures, reinstating and rationalizing the full expenditure chain. Prior actions for completing the second review are set out in Table 5 of Appendix I. Table 1 summarizes the Fund’s position during the program period, and Table 2 indicates the phasing of remaining purchases.

Table 1.

Democratic Republic of the Congo: Fund Position During the Period of the PRGF Arrangement, 2002–05

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Sources: International Monetary Fund, Finance Department; and staff projections.

After normalization, new financing and debt relief (incl. HIPC). Ratio for the entire year.

Table 2.

Democratic Republic of the Congo: Proposed Schedule of Disbursements Under the PRGF Arrangement, 2002–05

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Source: International Monetary Fund.

Other than the generally applicable conditions under the Poverty Reduction and Growth Facility (PRGF) arrangement.

2. Summaries of the Democratic Republic of the Congo’s (DRC) relations with the Fund and the World Bank Group are presented in Appendices II and III, respectively. The Fund and World Bank staffs have maintained close contacts with the African Development Bank (AfDB) Group and other multilateral creditors. The Fund and the World Bank have also coordinated closely their activities relating to the DRC with other members of the international community. In early April 2003, Paris Club creditors provided financing assurances for the topping up of the September 2002 Paris Club rescheduling to Cologne terms. A donors’ meeting is likely to take place in the last quarter of 2003.

II. Recent Political and Security Developments

3. Remarkable progress has been made in consolidating the peace process, culminating in the imminent installation of the transitional government and other institutions. The new Transitional Constitution was enacted on April 4, 2003. President Kabila was sworn in as President of the DRC on April 7, 2003 for a two-year transition period, after which free and transparent elections are to be held. An all-inclusive transitional government, comprising the President, four vice-presidents, 36 ministers, and 25 vice-ministers, was nominated on June 30, 2003. The four Vice-Presidents are Mr. Bemba (Mouvement de Libération du Congo), Mr. Ruberwa (Rassemblement Congolais pour la Democratie-Goma), Mr. Yerodia (Mouvance Présidentielle), and Mr. Z’Ahidi (unarmed political opposition). An international committee has been created to monitor the transition process.

4. 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 taken place, giving rise to appalling atrocities, particularly in the town of Bunia. The UN Security Council on May 30, 2003 authorized the establishment in Bunia of an Interim Emergency Multinational Force (IEMF), 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 Security 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 the 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 in the conflict and 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.

III. Recent Economic Developments and Performance Under the PRGF-Supported Program During 2002 and the First Quarter of 2003

5. Overall macro economic performance under the program (covering April 2002–July 2005) was broadly satisfactory for the first year (Figure 1), with good progress also on the structural side (Box 1). Preliminary data confirm that, for the first time in 13 years, economic growth, estimated at 3 percent, resumed in 2002 (Table 3). Growth occurred in all sectors, except for manufacturing.1 The end-period annual inflation rate, as measured by the consumer price index (CPI), decreased sharply from 135 percent at end-2001 to about 16 percent at end-December 2002, compared with a target of 13 percent. In 2003, the end-period CPI rose by 4.6 percent through end-May, mainly reflecting the pass-through of the recent increases in international oil prices to domestic prices of petroleum products (9 percent on February 15, and another 10 percent on March 17). The underlying rate of inflation, excluding the increase in petroleum prices and the related increase in transport tariffs, is about 2.5 percent, in line with the target of 6 percent initially projected for end-December 2003. After depreciating by 23 percent in 2002, the Congo franc has remained stable so far in 2003, fluctuating narrowly around a rate of US$1 = CGF 415 (Figure 2).

Figure 1.
Figure 1.

Democratic Republic of the Congo: Selected Fiscal and Monetary Indicators, 1998–2005 1/

Citation: IMF Staff Country Reports 2003, 270; 10.5089/9781451808360.002.A001

Sources: Congolese authorities; and staff estimates and projections.1/ The staff-monitored program (SMP) (June 2001–March 2002). The Government Economic Program (PEG) is supported by an arrangement under the Poverty Reduction and Growth Facility (PRGF) (April 2002–July 2005).
Figure 2.
Figure 2.

Democratic Republic of the Congo: Exchange Rate Indices, December 1996–March 2003

(Index, 1990=100; U.S. dollars per Congo franc)

Citation: IMF Staff Country Reports 2003, 270; 10.5089/9781451808360.002.A001

Source: IMF, Information Notice System (INS).
Figure 3.
Figure 3.

Democratic Republic of the Congo: Composition of the Stock of External Debt at End-December 2001

Citation: IMF Staff Country Reports 2003, 270; 10.5089/9781451808360.002.A001

Sources: Congolese authorities; and staff estimates.
Table 3.

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).

Negotiations 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 being 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 assistance under the enhanced HIPC Initiative.

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

The net present value of external public debt is about 94 percent of the nominal value, reflecting the significant stock of arrears.

For 2003, as of June 11.

6. Overall fiscal performance at end-2002 was better than originally programmed. The domestic primary balance (on a cash basis) showed a surplus of 1.4 percent of GDP instead of the 0.9 percent programmed, and the consolidated overall balance (including larger-than-expected central bank losses) on a cash basis was in equilibrium, compared with the targeted deficit of 0.4 percent. Total revenue (excluding grants) at end-2002 exceeded the target by 6 percent, reflecting higher-than-expected petroleum receipts. While total expenditure was lower than envisaged, current expenditure, particularly on goods and services, was higher than anticipated despite measures taken in November and December to freeze nonessential expenditure. This excess is on account of the continued increase (partly extrabudgetary) in military- and sovereignty-related expenditures associated with the inter-Congolese dialogue and the security needs following the withdrawal of foreign troops. In addition, domestic arrears on utility payments, estimated at 0.6 percent of GDP at end-2002,2 accumulated; however, no wage payments arrears accumulated. Taking into account the larger-than-expected nonproject budgetary aid disbursements by the World Bank, net bank credit to the government (without adjustment) at end-2002 was substantially lower than programmed.

7. The overall fiscal outcome during the first quarter of 2003 was broadly in line with program objectives. Total receipts (excluding grants) were in line with the target. Although total expenditure remained lower than programmed because of a shortfall in foreign-financed investment and lower external debt service, domestic primary expenditure was higher than anticipated on account of a continued increase (partly extrabudgetary) in military- and sovereignty-related expenditure. Thus, the continuous performance criterion relating to the abolition of budgetary expenditure financed by the BCC without the prior authorization of the Ministry of Finance was not observed,3 while the originally planned 10 percent wage increase did not take place. The primary domestic surplus was lower than programmed, by 0.4 percentage point of GDP, while the overall consolidated balance showed a smaller deficit. Nevertheless, net credit to the government (without adjustment for net nonproject budgetary aid) was lower than anticipated.

8. Thus, while overall fiscal performance has been broadly on track, the anticipated shift in the composition of expenditure toward pro-poor spending has still not materialized, given the shortfall in foreign-financed investment4 and social outlays and the increase in security- and sovereignty-related expenditure. 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.

9. Further progress has been achieved in strengthening tax and customs administrations and reforming the tax structure (see MEFP, para. 9, and Box 3). In particular, the Large Taxpayers’ Unit was established in March 2003 and is now operational. The reform of the Customs and Excise Office (OFIDA), approved in March 2003, is being implemented satisfactorily, with the one-stop window (guichet unique) scheduled to open at end-June 2003. In addition, new tariffs and indirect taxation laws were adopted in March 2003 to simplify the tariff structure, extend the scope of the turnover tax, and rationalize the levies on petroleum products. The new tariff law establishes a simplified tariff involving three rates (5, 10, and 20 percent), while eliminating the surtax and preferential treatment options. Also, the Directorate General of Administrative and State Revenues (DGRAD) has prepared a plan to reduce the number of taxes it administers (MEFP, para. 9).

10. Progress in improving expenditure management has been slower than anticipated (MEFP, paras. 10–11). The budget for 2003 is now presented according to a new expenditure nomenclature. However, the effective implementation of the newly adopted expenditure procedures reinstating and rationalizing the full expenditure chain is proceeding with some delay, in part owing to administrative reasons. The procedures manual and the reorganization of the relevant directorates have now been approved by the Minister of Finance, and the effective implementation of the rationalization of the full expenditure chain has just started. The General Accounting Office (Cour des Comptes) has begun the audits of the 2001 and 2002 budget executions, which are expected to be completed by end-July 2003 and end-September 2003, respectively.

11. On the monetary side, in light of the acceleration of inflation in the last quarter of 2002, the BCC increased its refinancing rate from 12 percent to 27 percent in January 2003; it made a downward adjustment to 25 percent in late May 2003, keeping the rate positive in real terms. The real interest rate remains relatively high, owing to the high risk premiums. In mid-December 2002, the BCC launched its own liquidity control instrument (billet de trésorerie), with a maturity of one to four weeks. The interest rate on this instrument was 26 percent in the first quarter of 2003. In 2002, broad money grew by 26 percent, compared with the 35 percent projected under the program. Net domestic credit declined by 16 percent of the beginning-of-period money stock, against an originally programmed increase of 2 percent, on account of much lower net bank credit to the government, which shrank by 17 percent of the beginning-of-period money stock, instead of the programmed 6 percent decline. Credit to the private sector and credit to the parastatals only increased slightly, compared with a planned increase of 8 percent. After several years of decline, the net foreign assets of the banking system are estimated to have increased in 2002, albeit more slowly than targeted.

12. At end-March 2003, the outcomes relating to the quantitative performance criteria were verified by an international audit firm. The nonobservance of three quantitative performance criteria and one continuous performance criterion can be traced to higher-than-anticipated military- and sovereignty-related expenditure, owing to costs related to the inter-Congolese dialogue and the security vacuum created by the withdrawal of foreign troops. In this context, the ceiling on net bank credit to the government, adjusted for net external nonproject disbursements, was missed (by 0.2 percent of GDP), as was the adjusted ceiling on the net domestic assets of the BCC (by 0.6 percent of GDP). To accommodate the higher-than-expected current expenditure without igniting inflation, the BCC chose to sell part of its gross reserves against Congolese francs, thereby breaching the performance criterion on the floor of the net foreign assets of the BCC (by US$7 million). The authorities agreed that this policy was not sustainable and that better control of military- and sovereignty-related expenditure was needed (which would be made easier with the formation of an all-inclusive government and the reunification of the country). Overall, money supply increased by 6 percent during the first quarter of 2003, instead of the 4 percent programmed (Table 5).

Table 4A.

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

(In millions of Congo francs, unless otherwise indicated)

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Sources: Congolese authorities; and staff estimates and projections.

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

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 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 being 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 assistance under the enhanced HIPC Initiative.

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

Contingent expenditure that was to be mobilized in 2002 only if certain debt rescheduling assumptions were met.

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 (hey are consolidated during the same year.

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

In 2002, arrears include interest and principal.

Debt relief includes exceptional treatment under the September 2002 Paris Club rescheduling.

Discrepancy between monetary and fiscal data.

Including a portion of HIPC expenditure.

Cash balance after rescheduling of interest due (including enhanced HIPC Initiative assistance). Before 2002, excludes central bank operations.

Table 4B.

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

(In percent of GDP, unless otherwise indicated)

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Sources: Congolese authorities; and staff estimates and projections.

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

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 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 being 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 assistance under the enhanced HIPC Initiative.

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

Contingent expenditure that was to be mobilized in 2002 only if certain debt rescheduling assumptions were met

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.

Debt relief includes exceptional treatment under the September 2002 Paris Club rescheduling.

Discrepancy between monetary and fiscal data.

Cash balance after rescheduling of interest due (including enhanced HIPC Initiative assistance). Before 2002, excludes central bank operations.

Table 5.

Democratic Republic of the Congo: Monetary Survey, 2000–03

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Sources: Congolese authorities; and staff estimates and projections.Note: The end-2001, end-2002, and end-March 2003 monetary surveys nave been audited by an international firm.

At end-2000 exchange rate (1US$ = CGF 50).

At end-2001 exchange rate (1US$ = CGF 313.6).