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

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

After he took office in January 2001, aware of the fact that it was the main condition for economic recovery and development, President Kabila promised to bring peace to his country. He has delivered on his promise. A new constitution was adopted on April 4, 2003, President Kabila was sworn in as President of the Democratic Republic of Congo on April 7, 2003 for a two-year transition period, four Vice-Presidents were sworn in on July 16, 2003 and an all-inclusive government has been established to prepare the country for transparent elections. Peace is being restored in the Eastern part of the country, thanks to the intervention of the United Nations-sponsored Interim Emergency Multinational Force (UN-IEMF).

My Congolese authorities are fully aware that with the many new cabinet members, one of the major challenges facing the new government of national unity will be to maintain interministerial coordination. To this end, they have strengthened the two interministerial committees in charge of monitoring the implementation of the economic program and the poverty reduction strategy. The advent of the all-inclusive transitional government offers a good opportunity to consolidate the reconciliation and peace process and to stabilize the security situation. However, progress achieved so far in key areas of the economy remains fragile and support from the international community in the form of financial and technical assistance is vital.

Given the progress already made under the PRGF-supported program, my Congolese authorities are hopeful that they will reach the decision point under the Enhanced HIPC Initiative. My authorities are also requesting waivers for the non-observance of three quantitative performance criteria, one continuous performance criterion, and one structural performance criterion. The continuous performance criterion prohibiting budgetary expenditure financed by the Central Bank of Congo (BCC) without the prior authorization of the Ministry of Finance was not observed at end-March 2003, given that the unexpected expenditures required for security and the reconciliation process were supported solely by the government.

II. Major achievements under the PRGF program during 2002 and the first quarter of 2003

Overall macroeconomic performance under the program improved in 2002, with positive economic growth (3 percent) for the first time in 13 years. Inflation decreased substantially from 135 percent at end-2001 to about 16 percent at end-December 2002. In 2003, the rate of inflation for the first semester suggests that the target set for the year could be achieved. The exchange rate has remained relatively stable since the beginning of the year 2003.

Fiscal policy

Overall, fiscal performance for the period under review was satisfactory. However, my Congolese authorities’ efforts to shift the composition of spending towards pro-poor outlays were hampered by a shortfall in foreign-assistance and increases in security and sovereignty related spending. These include the costs related to the reconciliation process, financed exclusively through the government’s budget, and the security vacuum created by the withdrawal of foreign troops.

On the revenue side, the reforms aimed at modernizing the tax and customs administration have proceeded despite some delays due to administrative constraints. The Large Enterprises Directorate as well as the one-stop shop for customs matters in the main port of Matadi are now operational. A new tax code is also being drafted. The Customs and Excise Office (OFIDA) is being computerized. In addition, the 2003 budget has been adopted together with a set of laws reforming customs tariffs and indirect taxation. The new tariff law establishes a simplified tariff and the sales tax has been streamlined and extended to products subject to excise with the aim of introducing a VAT.

On the expenditure side, efforts undertaken in the area of public expenditure management have advanced. The government’s budget adopted by Parliament in March 2003 provides for the elimination of 153 budgets annexes and follows the new functional, administrative and economic classification system. Furthermore, the monthly cash flow plan continues to be implemented. Progress is being made in the establishment of the computer link between the central bank and the Treasury, which is intended to expedite and increase the security and transparency of data sharing between these two institutions.

Monetary Policy and the Financial Sector

Facing an increase in inflation in the last quarter of 2002, the Central Bank of Congo (BCC) increased its refinancing rate and subsequently lowered it in June 2003. To regulate liquidity, the BCC launched a new financial instrument, the “billet de trésorerie”, with maturities ranging from 1 to 4 weeks.

My Congolese authorities have also begun to implement various measures aimed at strengthening the legal, institutional and regulatory frameworks of the financial system as well as the supervision of the banking system. Significant progress has been made in cleaning up the accounts of the BCC and drafting a roadmap towards the adoption of international accounting standards. The BCC has also issued anti-money laundering instructions. These instructions, which are being discussed with commercial banks, will benefit from Fund’s technical assistance and should be finalized when the anti-money laundering legal framework is implemented by end-2003.

Structural Reforms

My Congolese authorities have also made good progress on structural and sectoral reforms with a view to create an environment conducive to economic recovery and increased private sector activity. A forum for dialogue between the private sector and the government has been established and the government intends to join the Organization for the Harmonization of Business Law in Africa (OHADA).

The Steering Committee on the Reform of Public Enterprises (COPIREP) has been established, and its members have been appointed. The diagnostic study concerning the governance of public enterprises has been submitted to the government. In addition, progress is being made in restructuring the public mining company (GECAMINES).

As regards the forestry sector, the reforms underway aim at clarifying the rules on access to and the management of forestry resources. Although the new forestry code was published last year, the validation of concessions and the accompanying policies for the collection of the area tax were taken only recently because of capacity constraints. In the mining sector, the legal framework was completed in April 2003 with the publication by decree of new mining regulations, the mining registry and the mineral title validation commission.

In the area of governance, a strategy and action plan for combating corruption were approved by the Council of Ministers earlier this year. The Code of Conduct for Civil Servants was enacted last year and a campaign to explain this code has been launched. The decree on the organization and operations of the Observatoire du Code Ethique et Professionnel was published. Additionally, an anti-corruption commission was created last year.

III. The program for the rest of the year 2003

My Congolese authorities will steadfastly pursue their fiscal consolidation efforts and deepen structural and sectoral reforms, with a view to achieving a sustainable growth rate and reducing poverty.

Fiscal policy

To take account of the immediate effect of the country’s reunification on both revenue and expenditure, the government has adopted a supplementary budget, which is based on the new budget classification system. It will be submitted to Parliament in its first session in July 2003. As soon as it becomes possible, my Congolese authorities plan to take stock of the situation in the reunified provinces, assess the revenue and expenditure base, conduct a thorough census of civil servants and military personnel, and prepare a reunification, reconstruction, and pro-poor budget for 2004.

On the revenue side, efforts to increase the effectiveness of the tax collection agencies will continue and taxpayers’ paperwork will be reduced with technical assistance from the Fund. In this context, the customs office directorate for the main provinces will be reorganized. The new customs code will be enacted in September 2003 and the verification of exemptions will be stepped up with the elimination of ad hoc exemptions.

On the expenditure side, the government will eliminate extra-budgetary spending. To this end, the BCC firmly commits itself to refrain from financing any expenditure not previously authorized by the Minister of Finance. A joint commission comprising the Office of the President, the Ministries of Finance and Budget, and the BCC will ensure weekly monitoring of spending. The civil service reform will be undertaken, with a view to removing from the government payroll the identified “ghost workers” and speeding up the retirement of longstanding civil workers. The government is firmly committed to pursuing reforms aimed at improving the control and tracking of public expenditures. The tracking of poverty-reducing expenditures will be made easier by the special code included in the new budget classification to identify these expenditures separately upon execution.

Monetary Policy and the Financial Sector

Monetary policy will continue to aim at price stability in the context of a floating exchange rate system. The BCC will continue to strengthen the operational framework of its monetary program in strict accordance with the Fund’s technical assistance missions. In addition, the monthly cash-flow plans for the government and the BCC will be strictly applied in the context of the monetary program. To this end, the BCC will continue to improve its financial management, reduce its operating costs, and limit its cash deficit to 0.4 percent of GDP. A study on the possible recapitalization of the BCC will be undertaken by end-2003.

External Sector

My Congolese authorities are committed to pursuing efforts to eliminate the few remaining restrictions that are not consistent with their Article VIII obligations. These concern the DRC’s obligation under the bilateral payments agreement with the Economic Community of the Great Lakes Countries and the multiple currency practice with Zimbabwe. In the area of international trade, they have maintained the temporary quantitative restrictions established to deal with the alleged dumping of certain textile products. They will continue to deepen the customs reforms in a consistent manner through their participation in the Common Market for Eastern and Southern Africa (COMESA). Subscription to MIGA has been completed, which should help encourage foreign direct investments.

Structural Reforms

In the period through December 2003, my Congolese authorities will emphasize effective monitoring of the introduction of measures to fight corruption. To this end, the legal and regulatory framework for the anticorruption and ethics measures will be supplemented by the dissemination to the public of information about the Code of Good Conduct and the submission of the draft law on corruption, money laundering, and transnational organized crime to the new Parliament before end-2003.

With a view to strengthen the banking system and increasing the effectiveness of monetary policy, the BCC plans to introduce new instructions for prudential ratios by end-July 2003 and develop plans for the restructuring of commercial banks based on the external audits.

Concerning natural resources, the government will publish a report on the collection of taxes and the concessions of delinquent taxpayers will be revoked. In the mining sector, the program of voluntary separation at GECAMINES will be completed by end-December 2003. For the mining registry, the government will introduce financial management, audit, performance monitoring, and assessment mechanisms by end-November 2003.

IV. I-PRSP, DSA, and HIPC Decision Point

Poverty remains widespread in the DRC and the 2003 UN human development index ranks the country 167th out of 175 countries. 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. We would like to note that the JSA of the I-PRSP concludes that the strategy paper provides an adequate basis for the development of a fully participatory PRSP and the provision of concessional assistance. A National Poverty Survey, one of the first steps planned for drawing up the full PRSP, which is to be completed in October 2005, has been under preparation since June 2002.

My Congolese authorities are very thankful to creditors for their willingness to participate in the enhanced HIPC Initiative. However, it is to be noted that under the “reduced performance” scenario in which some main variables are out of my authorities’ control, the NPV of debt-to-export ratio would never fall below the Enhanced HIPC threshold and risks persist. My authorities are hopeful that the DRC’s creditors will assist in mitigating these risks. This implies that good performance in the DRC will need to be rewarded with timely and adequate financial assistance, especially in the event of adverse external developments.

My Congolese authorities have already taken measures to ensure transparency and efficiency in the use of the HIPC resources. A special account has been opened at the BCC to record receipts of enhanced HIPC Initiative assistance. The use of resources in this account will be limited to the financing of agreed upon poverty-related expenditures and, to this end; the account will be subjected to independent audits, with the results made publicly available. My authorities have also indicated that the overall composition of expenditure will be tracked, and public expenditure-tracking exercises will be conducted in priority sectors, with assistance from the World Bank. They have already put in place the instruments. The new expenditure chain, from the commitment to the payment phase, has been put in place with a codification of social outlays.

V. Technical Assistance

My Congolese authorities are very thankful for the external technical assistance that they have received so far including that from the Fund. The country’s statistical data and institutional capacity have been gradually upgraded with the help of technical assistance from the international community. However, weaknesses remain and the progress made needs to be consolidated and sustained. On external debt management, my authorities have received assistance from Debt Relief International to identify the public debt management office’s (OGEDEP) capacity building needs. Furthermore, a completion point trigger has been set on the installation and activation of a computerized debt-recording system at OGEDEP. In this context, my authorities are requesting further technical assistance from the international community on this issue. Assistance provided in the statistical area has also been essential in enabling my authorities to complete the remaining steps necessary for participation in the GDDS. With the country’s reunification, the need to build the administrative capacities of the provinces will become acute; my authorities call for an extension of Fund’s technical assistance in the fiscal area.

VI. Conclusion

With the progress made by my Congolese authorities under the PRGF and their ongoing efforts towards peace, they are hopeful that timely financial and technical assistance from the international community will be forthcoming and help to consolidate the reconciliation and reconstruction process. To this end, I would like to request the approval of the second review and the granting of the decision point under the Enhanced HIPC Initiative.