Democratic Republic of the Congo: Third Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Request for Waiver of Performance Criteria

As envisaged in its interim Poverty Reduction Strategy Paper, the country has moved from the stabilization phase to the reconstruction phase, and the authorities have continued to make major progress in consolidating the peace process. The important tasks will be to preserve macroeconomic stability, deepen structural reforms, promote an environment that is conducive to private-sector led growth, and combat widespread poverty. The policies of the Central Bank of Congo are successful in controlling inflation. It is also important to continue the reform of the mining sector.

Abstract

As envisaged in its interim Poverty Reduction Strategy Paper, the country has moved from the stabilization phase to the reconstruction phase, and the authorities have continued to make major progress in consolidating the peace process. The important tasks will be to preserve macroeconomic stability, deepen structural reforms, promote an environment that is conducive to private-sector led growth, and combat widespread poverty. The policies of the Central Bank of Congo are successful in controlling inflation. It is also important to continue the reform of the mining sector.

1. A staff team visited Kinshasa from January 31-February 7, 2004 to review developments in the last quarter of 2003 and the implementation status of the measures included in the memorandum of economic and financial policies (MEFP) for the third review of the PRGF-supported program. The contents of this supplement are based on the information obtained during and after this visit and do not alter the thrust of the staff appraisal.

2. On the political side, intensive political discussions among all components of government are ongoing and are expected to lead to key decisions in the near future regarding the legal framework for the upcoming elections, the creation of a leaner national army and police, and the formulation of a decentralization law, all of which are key to achieving effective reunification. Parliament has already passed the law on the organization of the Independent Election Commission, and the draft law on the organization of the army was submitted to parliament on February 19. With Belgian and other bilateral assistance, the restructuring and retraining of the new national army have started, while France is involved in creating a national police force.

3. Concerning the disarmament, demobilization, and reintegration (DDR) of ex-combatants, a working committee comprising the Congolese Joint Chiefs of Staff, Belgium, the UNDP, and a World Bank-led donor steering group is working, inter alia, on defining eligibility criteria for retention in the new army and for demobilization. Appointment of a national DDR coordinator is imminent. The World Bank’s Executive Board is to consider an IDA credit in support of a DDR program for the Great Lakes region in May. Sporadic fighting has continued in the East. The United Nations Observation Mission in the DRC (MONUC) has announced its intention to repatriate the remaining 10,000 Rwandan ex-Interhamwe soldiers by April 2004. Meanwhile, some social tensions have developed. In the second week of February, civil service unions called a strike that was followed by about two-thirds of the civil service. The unions suspended the strike after one week, following the government’s promise to grant a salary increase starting April 1, 2004 in line with the 2004 budget (see Table), and the situation is gradually returning to normal.

4. On the economic front, real GDP growth for 2002 has been revised upward from 3 percent to 3.5 percent, while preliminary data for 2003 indicate real growth of 5.3 percent compared with a program projection of 5 percent. As indicated in the staff report, the end-of-period inflation rate was 4.4 percent in December 2003, well below the 8 percent projected for the year. In the first eight weeks of 2004, the cumulative rate of inflation was 0.7 percent, or an annualized rate of 4 percent, compared with the program projection of 6 percent. In line with the deceleration in inflation, the Central Bank of the Congo (BCC) in late 2003 further lowered its refinancing rate from 15 percent to 8 percent. In turn, the commercial banks have lowered their lending rates for prime customers from 20 percent to 10-15 percent. The exchange rate remained relatively stable in the first eight weeks of 2004. Following the Paris Club’s decision of November 2003 to top up debt relief to Cologne terms in the context of the enhanced Heavily Indebted Poor Countries (HIPC) Initiative, seven Paris Club creditors have indicated their preparedness to cancel the entire stock of debt at the completion point, while one other has already decided to do so. The surge in economic activity has created bottlenecks in the country’s only seaport at Matadi, prompting the authorities to further simplify procedures and use the services of private subcontractors.

5. On the fiscal side, very preliminary estimates for end-December 2003 show a relatively small shortfall in revenue (0.4 percent of GDP), mainly due to delays in tax payments, and a modest excess (also 0.4 percent of GDP) in current expenditure, mainly related to the cost of reunification. Overall, net credit to the government, taking into account a somewhat larger net financial deficit of the BCC, may have exceeded the revised program indicators by 0.8 percent of GDP. This seems not to have compromised the inflation target, given the increased demand for the Congo franc. However, to ensure achievement of the program’s fiscal objectives, the authorities have taken a number of supplementary revenue and expenditure measures. The revenue measures include (i) accelerated collection of overdue taxes and of taxes falling due from large companies in the oil distribution, mining and telecommunication sectors; (ii) review of all existing tax exemption agreements to bring them in line with existing codes; and (iii) strict application of the tax reforms throughout the whole territory and strengthened accountability (with incentives and sanctions) for the provincial directors of tax-collecting agencies. On the expenditure side, the measures include (i) strict control of expenditure commitments and payment orders consistent with the monthly treasury cash plan and a reduction in government mission, utility, and sovereign spending; (ii) strict application of the new budget execution procedures; and (iii) monitoring and limitation of the BCC’s cash deficit consistent with the limits set in the Government Economic Program.

6. The 2004 budget, which is in line with the macroeconomic framework included in the MEFP, has been adopted by the government and submitted to parliament (a prior action). The fiscal measures included in the MEFP for early 2004 are being implemented, albeit with delays in some cases, mainly reflecting some technical and procedural complications (Attachment).

7. The implementation of structural reforms is progressing (see Attachment). Notably, the draft law on money laundering and the financing of terrorism is expected to be adopted by government in the next few days, while the draft anticorruption law is being discussed. Both laws are expected to be submitted to parliament soon. The external audit of the civil service pay system started in early February 2004. Restructuring plans have been proposed by all commercial banks to the monetary authorities, who have drawn up a list of banks that could be restructured or liquidated.

Table: 2004 Budget

(In percent of GDP)

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ATTACHMENT Democratic Republic of the Congo—Implementation Status of Fiscal and Structural Measures Included in the MEFP for Early 2004

As of February 27, 2004

(Timetable Envisaged in the MEFP Indicated in Parentheses)

A. Fiscal

  1. The ministerial decree concerning the nation-wide use of tax identification numbers was issued on January 13 (in line with staff report, para. 10 and MEFP, para. 7)1;

  2. The audit of the 2002 budget was presented to parliament in early February (staff report, para. 10 and MEFP, para. 8: January);

  3. The legislation relating to the enactments of the March 2003 tariff reforms (eliminating excise taxes on sugar, cement and matches, abolishing the proportionality principle for the turnover tax (ICA) deductibility and confining it to large enterprises, and eliminating the ICA on exports), was submitted to parliament on February 22, for adoption in March (MEFP, para. 7: adoption by end-January);

  4. The new revenue classification for the Directorate of Administrative and State Revenues rationalizing the number of taxes was sent to parliament on February 16 (a structural benchmark for February 2004, see MEFP, Table 5B);

  5. Submission of the new customs code to the ministerial steering committee is expected before end-March (MEFP, para. 7: by end-January);

  6. The daily electronic transfer of debit/credit memoranda and account statements between the Central Bank of the Congo (BCC) and the Ministry of Finance has been delayed because of a strike and technical difficulties but is expected to be fully effective in March (MEFP, para. 8: end-February);

  7. The agreement between the Ministry of Finance and the BCC concerning the latter’s function of government cashier was signed in mid-February (MEFP, para. 8: end-January);

  8. The payment for utility consumption and any services rendered is expected to be operational before end March (MEFP, para. 26: starting January 1, 2004);

  9. An interministerial decree on the increase in the area tax from US$0.0625 per hectare to US$0.11 per hectare (taking into account the views of large foreign forestry firms), while lowering quasi taxation and modifying export taxes and stumpage fees, is expected before end-March (MEFP, paras. 38 and 59 assume an increase to US$0.15 per hectare by January 1); and

  10. The Office of the Inspector General of Finance (Inspection Generate des Finances (IGF)) was again brought under the auspices of the Ministry of Finance (presidential decree signed on February 20), but its role needs to be reviewed (MEFP, para. 39: IGF’s role will be reviewed).

B. Structural

1

Staff report, 2/17/04.