Democratic Republic of the Congo: Fourth Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility, Requests for Waiver of Performance Criteria and Additional Interim Assistance Under the Enhanced Initiative for Heavily Indebted Poor Countries

This paper discusses Congo’s Fourth Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility (PRGF), and Requests for Waiver of Performance Criteria. Overall performance under the program was satisfactory and at end-March 2004, 8 out of the 11 quantitative performance criteria were observed. The structural performance criterion was met. Economic growth has been higher than envisaged, and inflation has decelerated more rapidly than programmed. As expected, the end-2003, fiscal objectives were missed by less than 1 percent of GDP.

Abstract

This paper discusses Congo’s Fourth Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility (PRGF), and Requests for Waiver of Performance Criteria. Overall performance under the program was satisfactory and at end-March 2004, 8 out of the 11 quantitative performance criteria were observed. The structural performance criterion was met. Economic growth has been higher than envisaged, and inflation has decelerated more rapidly than programmed. As expected, the end-2003, fiscal objectives were missed by less than 1 percent of GDP.

I. Introduction

1. Discussions on the Fourth Review under the Poverty Reduction and Growth Facility (PRGF) were held in Kinshasa during May 15–29, 2004. In the attached letter of intent dated June 24, 2004, signed by His Excellency President Joseph Kabila (Appendix I), and in the memorandum on economic and financial policies (MEFP), the authorities review political and economic developments during 2003 and the first quarter of 2004, and outline their policies for the rest of 2004. They request waivers for the nonobservance of 3 of the 11 end-March 2004 quantitative performance criteria, mainly due to delays in external disbursements and fiscal slippages in 2003 that were partly offset by supplementary measures in early 2004 (MEFP, Table 4). The structural performance criterion for end-March and the two structural benchmarks for February 2004 have been met, while the two March 2004 structural benchmarks, i.e. the submission to Parliament of the new customs code and the selection of an international firm to conduct an external audit of the diamond company (MIBA), have been modified into a prior action for the completion of this review and a structural performance criterion for September 2004, respectively.

2. At the conclusion of the Third Review under the PRGF arrangement on March 3, 2004, Executive Directors commended the authorities for the broadly satisfactory implementation of the PRGF-supported program. Directors welcomed the inauguration of the Government of National Unity in July 2003, which marked the formal completion of the peace and reunification process initiated in early 2001. They cautioned that the Democratic Republic of the Congo (DRC) faces considerable challenges, including the achievement of effective reunification through the demobilization and reintegration of ex-combatants, the creation of a national army and police, and the adoption and implementation of a decentralization law. They stressed that timely and well-coordinated support from the donor community will be needed to help achieve these goals.

3. The Fund and World Bank staffs have been cooperating closely in assisting the DRC. Regarding donor support, in November 2003, Paris Club creditors agreed to top up debt relief to Cologne terms in the context of the enhanced Heavily Indebted Poor Countries (HIPC) Initiative and the topping up has become effective for all creditors, with the exception of the United States. One Paris Club creditor, Switzerland, has already cancelled the entire debt, while seven others1 have indicated their preparedness to do so at the completion point. In addition, four creditors have allowed the suspension of debt service during the interim period. Regarding non-Paris Club creditors, the authorities have signed 13 agreements with commercial creditors (about 40 percent of commercial debt). In December 2003, the African Development Bank (AfDB) approved an economic recovery and reunification support operation of about US$60 million. At a meeting in Kinshasa in June 2004, donors confirmed their pledges for 2004 (about US$1 billion).

II. Recent Political and Security Developments

4. Overall, significant progress has been made toward effective reunification. New provincial governors and vice-governors have been nominated—a precondition for the effective administration of the country’s 11 provinces. The national Disarmament, Demobilization, and Reintegration (DDR) Program has been finalized with World Bank support (Box 1). In addition, a calendar has been drawn up for a constitutional referendum, and local, legislative, and presidential elections in 2005. Funding for the elections (US$284 million), will be provided mainly by the European Union (EU) and the United Nations.

The National Disarmament, Demobilization and Reintegration (DDR) Program

In May 2004, IDA approved a US$100 million grant to support the government’s efforts to demobilize 150,000–200,000 ex-combatants. The program, which is expected to start in September 2004, is phased over three years.

  • The program was developed within the framework of the Multi-Country Demobilization and Reintegration Program (MDRP) for the greater Great Lakes region. Recently, MDRP partners endorsed a US$100 million Trust Fund grant to complement the IDA grant.

  • The program includes criteria to (i) verify whether ex-combatants belong to an eligible armed group; and (ii) whether they are eligible for integration into the army. Those who do not qualify for integration and who volunteer to demobilize will benefit from the DDR program.

  • Orientation centers will be opened at the provincial level. Eligible ex-combatants will receive, in three installments, a transitional safety net allowance totaling US$350, supporting them for a period of six to nine months. Further, they will benefit from a range of reintegration packages providing training and/or equipment.

  • Health screening and HIV/AIDS prevention measures will be provided during the demobilization and reintegration phase.

5. The security situation in the east remains volatile despite the increased presence of the United Nations Observation Mission in the Congo (MONUC), whose 10,800 troops have a mandate to use force under Article 7 of the UN Charter. The takeover of the border town of Bukavu by ex-combatants (reportedly supported by another country), illustrates the on-going volatility. Growing resentment by the population about the perceived ineffective response from MONUC prompted large demonstrations, particularly in Kinshasa.2 Meanwhile, the ex-combatants have withdrawn and the national army has regained control of Bukavu. A Regional Peace Conference for the Great Lakes Region is scheduled to start in the fall of 2004.

III. Performance Under the PRGF-Supported Program in 2003 and the First Quarter of 2004

6. Overall, the PRGF-supported program has been implemented satisfactorily. Economic growth is estimated to have accelerated to 5.6 percent in 2003, reflecting an improved business climate and an increase in investment. Inflation has decelerated more quickly than envisaged in 2003 and the cumulative rate at end-May 2004 was in line with the program (Figure 1 and Table 3). Since January 2004, prices of petroleum products have been raised gradually to reflect international prices. The demand for money has continued to increase and the Congo franc (CGF) has stabilized against the U.S. dollar. The real effective exchange rate depreciated by about 20 percent over the past 12 months, reflecting the decline of the U.S. dollar vis à vis the Euro. The external current account showed a stronger improvement than expected due to an increase in exports and net transfers.

Figure 1.
Figure 1.

Democratic Republic of the Congo: Selected Fiscal and Monetary Indicators, 1998 –2004 1/

Citation: IMF Staff Country Reports 2004, 243; 10.5089/9781451808353.002.A001

Sources: Congolese authorities; and IMF 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).
Table 1.

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

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

After normalization, new financing and debt relief (including 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.

Table 3.

Democratic Republic of the Congo: Selected Economic and Financial Indicators, 2002–07

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Sources: Congolese authorities; and IMF staff estimates and projections.

Change in annual average. Minus sign indicates depreciation.

Includes interest due on external debt (including 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).

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

From 2003 onward, includes capital projects financed by NGOs.

From 2003, after debt relief from bilateral creditors and HIPC Initiative assistance.

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

Estimates and projections based on end-2002 DSA and after HIPC Initiative assistance.

7. As anticipated at the time of the third review, the fiscal objectives for 2003 have been missed by less than 1 percent of GDP. Total revenue (excluding grants) was lower than anticipated (0.5 percent of GDP) reflecting delays in the adoption of legislative texts related to the tariff and tax reform laws, the granting of tax exemptions, and delays in tax payments (MEFP, para. 3). Total expenditure, including larger net losses of the BCC, was 0.5 percent of GDP higher than envisaged, mainly owing to higher current primary expenditure and foreign-financed investment. The former exceeded the target by 0.3 percent of GDP associated with the creation of new civil institutions envisaged in the Transitional Constitution (MEFP, para. 3). The programmed shift toward pro-poor spending was largely achieved while the share of security expenditure was in line with the program. The domestic primary balance (on a cash basis) showed a deficit of 0.2 percent of GDP instead of the programmed 0.5 percent surplus, and the consolidated overall balance on a cash basis showed a higher deficit than programmed (MEFP, para. 3, and Table 2A). Against this background, net bank credit to the government (NCG), before adjustment for net external nonproject disbursements, was missed by 0.8 percent of GDP.

Pro-Poor and Security Spending

(In percent of GDP, unless otherwise indicated)

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EU grant-related expenditures in 2003 (0.5 percent of GDP) are not incorporated as their classification is not available.

Uses new pro-poor definition, including infrastructure.

8. Fiscal performance for the first quarter of 2004 was better than originally programmed both on the revenue and expenditure sides, given the supplementary measures implemented in early 2004 (MEFP, para. 5 and Table 2B). In light of this, the decrease in net credit to the government, before adjustment, was 0.2 percent of GDP higher than programmed.3

9. Further progress has been achieved in reforming tax policy and strengthening the tax and customs administrations, despite some delays linked to weak administrative capacity and the civil service strike of February 2004 (MEFP, paras. 6, 7 and 8). The legislative texts necessary for the completion of the March 2003 tariff and tax reform laws were finally approved by Parliament in May 2004. The new customs code will be submitted to Parliament in June. The reform of the Customs and Excise Office (OFIDA) is being implemented satisfactorily, with good progress in streamlining the customs clearance process. In addition, the Large Taxpayers Unit (LTU) is now independent in its functioning, including its audit operations.

10. Good progress has also been made in strengthening public expenditure management (PEM) (MEFP, para. 10). The new expenditure procedures aimed at restoring and streamlining the entire expenditure chain, including commitment, verification, payment order and payment, are now operational. All expenditures that bypassed the new procedures for the first four months of 2004 have now been processed. Finally, the audits of the 2001 and 2002 budget executions were submitted to Parliament while good progress has been made on establishing a simplified double-entry accounting framework by end-June 2004.

11. Monetary policy has remained prudent. Money supply increased faster than nominal GDP in 2003 and the first quarter of 2004. The decline in velocity by 10 percent reflects the increased demand for the CGF and foreign currency deposits (Table 5). The BCC successfully introduced higher denomination banknotes (of CGF 200 and CGF 500). However, whereas it had CGF notes at its disposal and the demand for CGF was manifest— reflecting the drop in inflationary expectations and the need for CGF in the reunified provinces—the BCC issued relatively small amounts and hesitated to purchase foreign exchange in the market. More active purchases of foreign exchange by the BCC would have helped to meet its net foreign assets (NFA) target at end-March 2004, without undermining price stability. Taking into account lower-than-expected nonproject foreign disbursements, the end-March performance criterion on its cumulative NFA was missed by US$77 million (MEFP, Table 4).4 Since demand for broad money and base money grew in line with projections, the under performance on the BCC’s NFA was matched by an overrun of its net domestic assets, reflecting higher-than-programmed NCG and an increase in other items net. The latter is a cause of concern addressed by the external audit of the end-March 2004 performance criteria, which provided recommendations to avoid increases in suspense and provincial liaison accounts. Credit to the private sector (mainly in U.S. dollars) grew strongly in 2003 and the first quarter of 2004, albeit from a low base (MEFP, paras. 13 and 14).

Figure 2.
Figure 2.

Selected Monetary Data, 2003-04

(Annual changes in percent of beginning-of-period broad money)

Citation: IMF Staff Country Reports 2004, 243; 10.5089/9781451808353.002.A001

12. In line with the drop in inflation, the BCC lowered its refinancing rate in steps from 20 percent at mid-September 2003 to 8 percent since November 2003, and commercial banks’ lending rates (in CGF) fell from an average of 50 percent to 25 percent.

13. The BCC continued to implement its comprehensive action plan, with good progress in the preparation of a new computerized accounting system, the management of international reserves, the strengthening of banking supervision, and the preparation of a bank-wide computerization plan (MEFP, para.15 and Table 3). The restructuring of the banking system advanced well with the approval by the BCC, in March 2004, of the restructuring plans of 7 banks and the decision to liquidate 2 private banks, in addition to 4 private and 3 public banks already in liquidation (MEFP, para. 16).

14. Regarding the DRC’s obligations under Article VIII, sections 2 (a), 3, and 4 of the Fund’s Articles of Agreement, the authorities have started discussions to eliminate the remaining restriction arising from the payments agreement under the Economic Community of the Great Lakes Countries (CEPGL). The staff is assessing whether the authorities’ actions have been successful in eliminating the multiple currency practice arising from the payments agreement with Zimbabwe (MEFP, para. 19). On external trade policy, the authorities have eliminated the quantitative restriction on imports of printed fabric.5 The government has also started the process to adhere to OHADA (Organization for the Harmonization of Business Law in Africa).

15. With the help of the World Bank, and despite some delays, good progress has been made in implementing structural reforms (MEFP, paras. 20–43). All public enterprises have been audited, and restructuring plans for the most important ones are being prepared. Government net cross arrears with the domestic private sector (US$840 million) have been audited. Measures have been taken to improve governance; notably the draft law on combating money laundering and the financing of terrorism has been submitted to Parliament and the draft anti-corruption law will be submitted in June 2004. However, the operations of the new Mining Registry (cadastre minier) have not been fully in line with the mining code and measures are being taken to ensure fuller transparency. Similar measures are being taken in the forestry sector.

IV. Report on the Policy Discussions and the Program for 2004

16. The medium-term macroeconomic framework for 2004–07 has been updated to take into account (i) the cost of the elections; (ii) the effective reunification of the country; (iii) the cost of the DDR program; (iv) the more favorable debt relief that goes beyond the enhanced HIPC Initiative; (v) anticipated external assistance; and (vi) revised estimates of the impact of the changing international environment, including higher oil prices.6

17. The macroeconomic objectives for the period 2004–07 include (i) an average real GDP growth of about 6.8 percent, implying a per capita increase of about 3.8 percent; (ii) an average annual inflation rate of 5 percent; (iii) a sharp increase in gross investment associated with reconstruction needs and the rebound in activity; and (iv) a gradual increase in gross official reserves to about 14 weeks of non-aid-related imports of goods and nonfactor services (Table 3). Debt sustainability is better than envisaged at the time of the decision point, especially in light of the commitments by a number of Paris Club creditors to provide debt relief beyond what is envisaged under the enhanced HIPC Initiative (MEFP, para. 18). The NPV of debt to exports ratio is expected to decline to 110 percent in 2006, the assumed timing of the completion point, compared with 125 percent originally envisaged. The program is, in principle, financed over the medium term, through multilateral and bilateral disbursements (Table 9).

Selected Economic and Financial Indicators, 2004-07

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Sources: Congolese authorities; and IMF staff estimates and projections.

A. Macroeconomic Framework for 2004

18. Economic growth has been raised to 6.3 percent, while the average rate of inflation has been revised downward to 5 percent. Investment would increase by 6 percentage points of GDP as a result of the acceleration of foreign-financed investment; while national saving is to increase by 3 percentage points, resulting from a rise in government savings and net external transfers. Taking into account the higher debt relief, the BCC’s gross international reserves are targeted to double to six weeks of non-aid-related imports.

Fiscal policy

19. Fiscal policy for 2004 will remain prudent while continuing the reorientation of expenditure toward pro-poor spending (MEFP, para. 45). The authorities have prepared a supplementary budget law, to be approved by the government before end-June 2004, which is consistent with the approved 2004 budget, except for including (i) the demobilization of 50,000 soldiers instead of the 150,000 previously estimated; (ii) the cost of elections preparation; (iii) the cost of the domestically financed liquidation of private commercial banks; and (iv) payment of net cross-arrears with the domestic private sector, financed by the World Bank.

20. Achievement of the 2004 fiscal objectives will be based on the continued implementation of revenue enhancing measures and better control of expenditure (MEFP, para. 46). Total revenue (excluding grants) is expected to reach 9.2 percent of GDP while total expenditure (on a commitment basis) is projected at 19.3 percent of GDP in 2004. The wage bill will increase by 1 percent of GDP reflecting (i) a civil service wage increase (as of April 1, 2004) of 20 percent (30 percent for primary and secondary school teachers) and the doubling of some transportation allowances;7 (ii) the cost related to the de facto reunified army and the demobilization of 50,000 soldiers (100,000 less than originally planned for 2004); and (iii) the retirement of 10,000 civil servants. Pro-poor expenditure, including infrastructure, would increase by about 5 percentage points of GDP, while security expenditure would remain unchanged. Because the DRC has obtained debt relief beyond the enhanced HIPC Initiative, external debt service has been revised downward by one percent of GDP in the supplementary budget. Overall, the domestic primary surplus, on a cash basis, is projected at 1 percent of GDP, while the overall consolidated cash deficit (including the projected net financial losses of the BCC) would widen to 3.2 percent of GDP in 2004 (Tables 4A and 4B). The decrease in net credit to the government will be about 0.6 percent of GDP instead of the programmed zero increase.

Table 4A.

Democratic Republic of the Congo: Summary of Central Government Financial Operations, 2002–07

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Sources: Congolese authorities; and IMF 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.

From 2002 onward, scheduled interest before any treatment, plus interest on the September 2002 Paris Club rescheduling. From 2003 onward, interest on the rescheduling under the enhanced HIPC Initiative.

Transfers and subsidies include costs of liquidation of commercial banks.

In 2002 and 2003, includes a preliminary estimate for accumulation of arrears on utilities (CGF 12 billion per year).

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. In 2004, including repayment of domestic debt, to be financed by the World Bank.

In 2002, arrears include interest and principal.

Reflects debt relief on all reschedulings, less HIPC assistance, which enters the fiscal accounts as a grant.

Discrepancy between monetary and fiscal data.

Includes part of HIPC expenditure.

Cash balance after interest rescheduling (including HIPC).

Table 4B.

Democratic Republic of the Congo: Summary of Central Government Financial Operations, 2002–07

(In percent of GDP; unless otherwise indicated)

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Sources: Congolese authorities; and IMF 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.

From 2002 onward, scheduled interest before any treatment, plus interest on the September 2002 Paris Club rescheduling. From 2003 onward, interest on the rescheduling under the enhanced HIPC Initiative.

Transfers and subsidies include costs of liquidation of commercial banks.

In 2002 and 2003, includes a preliminary estimate for accumulation of arrears on utilities (CGF 12 billion).

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. In 2004, including repayment of domestic debt, financed by the World Bank.

In 2002, arrears include interest and principal.

Reflects debt relief on all reschedulings, less HIPC assistance, which enters the fiscal accounts as a grant.

Discrepancy between monetary and fiscal data.

Cash balance after interest rescheduling (including HIPC).

Table 5.

Democratic Republic of the Congo: Monetary Survey, 2002–04

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Sources: Congolese authorities; and IMF staff estimates and projections.