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

This 2005 Article IV Consultation highlights that the economic activity in the Democratic Republic of the Congo (DRC) started to recover in 2002, after declining for 13 years. Inflation declined from 511 percent at end-2000 to 4 percent at end-2003. Fiscal developments were mixed in 2004, with government revenue higher and expenditure lower than programmed. The main risks for the rest of 2005 relate to security and social tensions, which could worsen in the case of further delays in the transition process.

Abstract

This 2005 Article IV Consultation highlights that the economic activity in the Democratic Republic of the Congo (DRC) started to recover in 2002, after declining for 13 years. Inflation declined from 511 percent at end-2000 to 4 percent at end-2003. Fiscal developments were mixed in 2004, with government revenue higher and expenditure lower than programmed. The main risks for the rest of 2005 relate to security and social tensions, which could worsen in the case of further delays in the transition process.

August 29, 2005

On behalf on my authorities, I would like to express our appreciation to Management and staff for their valuable advice and support in the implementation of the economic program of the Democratic Republic of the Congo (DRC).

Following satisfactory implementation in 2002 and 2003, the Government Economic Program (PEG) experienced some setbacks in 2004 on account of increased insecurity concerns in the eastern part of the country. My authorities had to act quickly to contain the situation which could have had a severe negative impact on the social and economic environment. The United Nations and the international community provided an invaluable support in this regard, for which my authorities are grateful.

The intervention of the government in the east created additional outlays, which caused some of the program’s objectives not to be met, and the overall performance under the PRGF-supported program was lower than expected. Nonetheless, once tensions in the eastern region eased in the last quarter of 2004, my authorities took measures to contain the macroeconomic effects of the military action, while ensuring that structural measures are implemented albeit with some delays.

The difficult security environment, the complexity of the political situation and the time needed to build a consensus from all stakeholders in the preparation of the new Constitution and the transition laws caused a delay in the transition period which was extended by 6 months. The authorities remain committed to the ongoing process of national reunification and the completion of the transition. In this regard, they expect to complete the necessary work for the organization of a referendum on the draft Constitution in November 2005 and for the holding of Presidential, Parliamentary and local elections in early 2006.

My authorities remain committed to the successful implementation of their economic program. To this end, they are requesting an extension of the arrangement supporting the PEG until March 31, 2006 to allow for the completion of the sixth review before the end of the arrangement. They are also requesting an additional annual tranche of interim assistance under the HIPC Initiative to cover part of the debt service obligations falling due to the Fund between August 1, 2005 and July 31, 2006.

Recent Developments and Performance under the Program

The DRC’s macroeconomic performance in 2004 was broadly satisfactory with output growth higher than expected despite the troubles in the eastern part of the country. GDP in 2004 is estimated to have reached 6.8 percent against 6.3 percent in the program.

On the fiscal front, the overall objectives in 2004 were met with government revenue higher than programmed thanks to increased oil revenues. However, as noted above, at mid-2004 unforeseen security expenditures caused outlays to be redirected to deal with the rising insecurity situation, while other spending lines were reduced on account of lower than anticipated foreign-financed expenditure. The overall expenditure target in 2004 was nevertheless met. My authorities took measures in December 2004 and February 2005 to tighten the fiscal stance, in order to help restore macroeconomic stability. The fiscal measures included a cut of non priority expenditures, a freeze on civil service recruitment and a tightening of tax collection. Preliminary data for the first four months of 2005 show that the budget execution, on both the revenue and expenditure sides, is in accordance with that stance.

Under the Fund-supported program, important progress has been made as regards the implementation of monetary policy. The instruments put in place had enabled the central bank to reduce inflation to single digits and led also to a stabilization of the exchange rate. However, inflation accelerated in the early part of this year, in relation to the security situation. The central bank, starting in September 2004, began to tighten monetary policy by raising in steps the discount rates. At the same time, government expenditure was reduced and these have helped to stabilize prices, and also led to an appreciation of the exchange rate. The quick response of the economy to the monetary measures being taken is an indication of the effectiveness of the monetary instruments being used, despite a very difficult environment. The authorities expect further progress on the inflation front during the remainder of the year and in 2006. Moreover, and in the context of the ongoing reforms aimed at improving the coordination between the central bank and the Ministry of Finance, the BCC implemented new spending procedures from commitment to payments. Thus, settlements of payments order by the BCC is now done within 48 hours of their receipts.

On the external front, higher oil and cobalt international prices and increasing mining production contributed to the increase in commodity exports in 2004. However, higher reconstruction-related imports and interest payments on rescheduled debt resulted in a wider than programmed external current account deficit (including grants) by 2 percentage points.

Debt management is improving. The government managed to settle all its external debt service commitments for 2004. It also secured bilateral agreements on Cologne terms with all Paris Club creditors but the US, and signed agreements with 32 commercial creditors while negotiations are underway with five others. In addition, the average debt relief granted to the Kinshasa Club amounted to 70 percent of the stock of debt. However, two creditors are seeking payments through the judicial courts, and new creditors are introducing old claims on the Democratic Republic of the Congo. An agreement was also reached on the terms and the conditions for the settlement of government debt to the private sector. The implementation of the repayment plan will begin during the third quarter of 2005.

The implementation of the reform agenda experienced delays due to the complex decision-making process in the country. As a result, some reforms envisaged in the program were completed only after the scheduled dates. On fiscal reforms, the Parliament adopted the new customs code in June 2005. The law on the nomenclature for nontax revenue was promulgated in July 2004 and amended in March 2005 to incorporate the revenue formerly collected by the autonomous agencies. Measures to strengthen the tax administration at the central and local levels are being undertaken. Since the beginning of 2005, and to sustain its fiscal tightening stance, my authorities pursued the strengthening of the budget management. In particular (i) the expenditure management system has become operational since June 2005, (ii) government accounts with commercial banks that did not meet the criteria for opening such accounts were closed; and (iii) the submission of monthly and quarterly budget monitoring reports to the government and the parliament respectively started since June 2005. The mining taxation regime was brought in line with the new Mining Code in 2004. This code, while specifying the royalties, taxes and fees to be paid, also provides for revenue sharing with provincial and local governments. The authorities have also enforced strictly the taxation laws in the forestry sector. Owners of forest concessions who had not paid their taxes saw their contracts cancelled, and the government thus reclaimed over 120 million acres of forestry land.

Regarding the public enterprises sector, the strategic audit of the Conseil Supérieur du Portefeuille and a draft reorganization plan of the petroleum distribution company (COHYDRO) were completed in July 2005 instead of September 2004. As for the audit of the public diamond mining enterprise MIBA, the international bid to select an auditor could not be held by end-September 2004 as planned, because the anticipated foreign financing was not available. However, the government decided to finance this audit with domestic funds. Following an international tender offer launched in January 2005, an international consulting firm was selected in July 2005.

In the banking system, the central bank issued in August 2004 a broad map for restructuring the BCC and the commercial banks, strengthening the financial system and developing a legal framework for microfinance institutions. As regards the commercial banks, nine of them are being liquidated and five others out of the nine banks in operation are implementing restructuring plans. The BCC has also introduced a number of measures to strengthen commercial banks’ operations. These include instructions on banks’ prudential ratios, adoption of a formal framework for on-site and off-site audits, reform of the tax and legal framework for commercial banks to make it more transparent and in line with good international practice, and the adoption of a decree in early 2004 to facilitate the reconstitution of equity capital.

Several steps have been taken to improve governance and transparency. In particular, the law on combating money laundering and the financing of terrorism, and the anticorruption law were promulgated in August 2004 and March 2005 respectively. As regard public procurement processes, a public procurement reform commission was established and its members appointed. The audit of the judicial system was completed with the assistance of the European Union and other donors. In order to enhance the transparency of military spending, the government, through the High Defense Council, mandated an audit of the expenditures associated with events in the eastern provinces during 2004.

Regarding the peace and reunification process, an integrated army and a police force is being created and the implementation of the National Disarmament, Demobilization, and Reintegration (DDR) program, which should reduce the size of the army by at least one-half, is proceeding well.

In sum, and despite a difficult environment, performance under the PRGF was broadly satisfactory with eight out of 11 quantitative performance criteria for end-September 2004 and the two structural performance criteria observed, although one structural criterion was observed with delay. In light of the efforts to correct slippages and restore macroeconomic stability, my authorities are requesting waivers for the missed performance criteria.

Program for the Remainder of 2005 and over the Medium-Term

The next six months will be marked by important events, which will affect significantly the political, economic and social life of the country. The events linked to the transition process include notably the holding of the referendum on the Constitution and elections. My authorities are hopeful that the implementation of the DDR program and the reintegration and reorganization of the army and the police will be completed soon. The financial impact of those events have been taken into account in the 2005 Budget adopted in March 2005 by the Parliament.

The program for the remainder of 2005 aims at achieving successfully the preparation and the organization of those important events while pursuing prudent policies initiated since late 2004 in order to restore the macroeconomic stability, and speed up the pace of reforms to foster growth and fight poverty. It is expected that the pursuit of the policies envisaged in the program will (a) help the economy achieve real GDP growth of 6.6 percent in 2005; (b) reduce the end-of-period annual inflation to 22.6 percent; and (c) achieve an external current account deficit, including grants, of 5.1 percent of GDP.

In addition to helping restore macroeconomic stability and ensuring an adequate financing of the program associated with the transition process, the objective of fiscal policy for the second semester of 2005 is to maintain the improvement in revenue performance and expenditure control while ensuring higher share of poverty-reduction expenditure. Higher budgetary revenues are expected, among others, from improved tax collection in the reunified provinces, payment to the government of tax and fees previously collected by autonomous agencies and higher oil revenues. Total government revenue is projected to increase by 1.1 percentage points of GDP to 10.7 percent.

On the expenditure side, my authorities will pursue the rationalization of domestic-financed currents outlays. My authorities expect savings of around 2 percent of GDP essentially from cuts in the operating expenses of ministries and political institutions. In that connection, there has been a 20 percent reduction in daily allowances during missions from staff and members of these bodies. Other measures taken relate mainly to utilities consumption. The large increase in budgeted foreign-financed projects would lead to an overall increase of expenditure of 2.3 points of percentage to 17.7 percent.

Fiscal reforms seek to strengthen accounting, tax and customs legislation and procedures with notably the implementation of the VAT to replace the turnover tax in the medium term. On the expenditure side, measures will seek to ensure a more effective use of debt relief and the reform of the civil service.

Regarding particularly the latter, my Congolese authorities are fully cognizant of the need to improve the management and the performance of the civil service to ensure a better provision of the public services. To this end, they are of the view that, among others, a better remuneration of civil servants is necessary. My authorities intend to raise civil wages in a way that will not worsen the fiscal situation. Thus, as a start, they completed an audit of the civil personnel which enabled the detection of many ghost workers and the results have been implemented in Kinshasa in the May 2005 payroll. Based on that experience, a similar action will be implemented later during the year for the rest of the country and as the DDR process is completed, the authorities will determine to what extent wages could be increased. In addition a new payroll system is being implemented to prevent the reoccurrence of ghost workers.

The monetary policy objective will be to restore price stability within the floating exchange rate system. In particular, with the projected reduction in central bank financing of the government and slower growth of money supply, and an interest rate policy in accordance with the monetary policy objective, inflation for end-2005 is set at 22.6 percent. To enhance its credibility, the central bank has widely disseminated the objectives of monetary policy and intends to report regularly on monetary policy implementation. It will continue to implement its strategic action plan in line with the plan prepared in cooperation with the Fund to improve its operations. In particular, to eliminate the losses of the BCC, the government will adopt the strategy for restructuring the balance sheet of the central bank before end-September 2005. The BCC will also strengthen its supervision of financial sector notably through the continuation of the banking system restructuring and the preparation of a draft legal framework for microfinance institutions by the end of 2005.

On the debt issue, my authorities are committed to conduct a prudent debt management policy. In this regard, they will seek to sign all the bilateral debt relief agreements and continue their efforts to convince all creditors to participate in the enhanced HIPC Initiative. The government is working with the World Bank on the repurchase of debt vis-à-vis London Club creditors. As regards commercial debt, the government will hire an audit firm to review the terms and conditions of all agreements signed with individual creditors and to certify the validity of new claims before negotiating debt relief agreements on terms similar to those of the enhanced HIPC Initiative. Meanwhile, the installation of the new public debt management software, with support from external partners, will be completed by end-August 2006.

My authorities remain committed to the reforms as demonstrated by the implementation of the long list of prior actions taken ahead of the completion of this review. Table 1 attached to the MEFP outlines the range of reforms that my authorities have started to implement and will complete by year-end. Apart from the fiscal- and central bank-related reforms, efforts will be made to complete reforms already initiated in the public enterprise sector, private sector development, judicial system, mining sector, forestry sector and governance and transparency with the aim to fighting corruption and removing impediments to growth and poverty reduction. Regarding the mining sector which my authorities consider as vital for the economic development of the country, the government will pursue the cleaning up of the accounts of the companies through notably audits and restructuring of the public enterprises concerned in order to improve their efficiency and transparency. The authorities are also considering other steps to ensure the mining sector’s future growth and to enhance its contribution to the economy and government revenue. However, in these efforts, the authorities will require technical assistance from the donor community.

As regards poverty-reduction, the draft of the Poverty Reduction Strategy Paper (PRSP) was circulated to civil society and to development partners in May 2005. This version defines the government’s priorities. However, the macroeconomic framework as well as a quantified estimate of the cost and impact of the proposed strategies have yet to be prepared. Following the incorporation of the 1–2-3 survey in Kinshasa and the surveys on the perception of poverty in the provinces into the paper, the final PRSP is expected to be adopted by government in the fourth quarter of 2005 as planned, following consultations with the development partners and stakeholders.

Misreporting Issue

My authorities reported to the staff the occurrences of expenditures carried out for the government by the central bank without the prior authorization of the Minister of Finance between July 2003–July 2005. In particular some of these expenditures occurred during the period preceding the completion of the third and the fourth review of the current arrangement. At that time, my authorities indicated wrongly to the staff that there were no such expenditures. In fact, the implementation of a computerized expenditure system as well as the improvement of the accounting system of the central bank at the same time led to the non accounting of some financial transactions, including those indicated above. The urgent nature of these expenditures–to avoid a disruption in the functioning of the civil service–is the main reason for their occurrences. Given the small amounts involved in these expenditures and actions taken promptly after their discovery, to ensure that such expenditures do not reoccur in the future, I would appreciate Directors’ support for the Managing Director’s recommendation to grant waivers on the nonobservances of the continuous budgetary expenditure performance criterion at the time of the third and the fourth review. For the same reasons, I am requesting Directors’ support for my authorities’ request for waiver for the nonobservance of the same continuous budgetary expenditure performance criterion in the second semester of 2004.

Conclusion

I would like to reiterate the commitment of my authorities to macroeconomic stability, economic reforms and peace consolidation. However in face of the exceptional event that occurred in the second part of 2004, it is my authorities’ view that the situation in the east was very urgent and needed to be dealt with. Accordingly, as they could not afford tensions to intensify and spread, they devoted the necessary means to ensure that security is reestablished in the eastern region of the country. My authorities have since taken measures to reverse the negative macroeconomic effects of their action. Six months later, the macroeconomic situation has been stabilized thanks to the tightening of fiscal and monetary policies. Nevertheless, my Congolese authorities are aware that prudence in policy implementation is still necessary, and intend to maintain such a stance. The DRC is still recovering from the civil conflict and much needs to be done. External assistance has been critical in the transition phase to peace, and will be much more needed in the coming months and years to consolidate the progress achieved so far. My DRC authorities are very thankful for the ongoing support they are receiving from the international community, and they are hopeful that as they consolidate the peace process and develop their economy, they can continue to rely on this assistance, including from the Fund.

Democratic Republic of the Congo: Staff Report for the 2005 Article IV Consultation Fifth Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility Requests for Waiver of Performance Criteria Additional Interim Assistance Under the Enhanced Initiative for Heavily Indebted Poor Countries and Request for an Extension of Arrangement
Author: International Monetary Fund