Democratic Republic of the Congo
2007 Article IV Consultation: Staff Report; Staff Supplement; Staff Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for the Democratic Republic of the Congo
Author: International Monetary Fund
Publication Date:
24 Sep 2007
eISBN:
9781451808414
Language:
English
Keywords:
ISCR; CR; Congo; government; wage bill equivalent; real GDP; debt service; exchange rate; government strategy; central bank; Debt relief; Fiscal stance; Credit
Download PDF (521.8 KB)

This 2007 Article IV Consultation highlights that the Democratic Republic of the Congo (DRC) has made significant economic and political progress since 2001, after years of conflict and political instability. Adoption of prudent macroeconomic policies resulted in rapid disinflation and the stabilization of the exchange rate. The implementation of structural reforms made the economy more open, removed major price distortions, and strengthened macroeconomic policy management. Executive Directors have encouraged the new government to work with all parties to improve security and bring peace to all country provinces.

Abstract

This 2007 Article IV Consultation highlights that the Democratic Republic of the Congo (DRC) has made significant economic and political progress since 2001, after years of conflict and political instability. Adoption of prudent macroeconomic policies resulted in rapid disinflation and the stabilization of the exchange rate. The implementation of structural reforms made the economy more open, removed major price distortions, and strengthened macroeconomic policy management. Executive Directors have encouraged the new government to work with all parties to improve security and bring peace to all country provinces.

I. Background

1. The DRC, one of the poorest countries in the world, is still very far from meeting the MDGs. Over years of conflict, civil war, and poor economic management, per capita income (in constant 2000 US Dollars) collapsed from US$400 in 1960 to less than US$100 in 2001. As a result, the DRC ranks 166th out of 177 countries in the 2006 UN Human Development Index.

2. The DRC is entering a new era after the first democratic elections in 40 years in 2006 ended three years of political transition. The new government has an opportunity to demonstrate its commitment to economic stability and reform, which would set the stage for the DRC to sustain growth and reduce poverty. However, the tenuous security situation, as demonstrated by continued violence in the eastern provinces, still threatens peace and economic progress.

II. The PRGF Arrangement: Lessons and Challenges

3. The PRGF-supported program (2002-06) was designed to entrench macroeconomic stability, revive growth, and reduce poverty. Given the dire initial political and security conditions, the consensus was that the DRC could not attain the MDGs by 2015. The PRGF-supported program thus defined more realistic targets, including (i) achieving average annual real GDP growth of 5 percent: (ii) reducing inflation to 5 percent; and (iii) increasing international reserves to 10 weeks of imports. Financial policies were anchored on adherence to monthly budget cash-flow plans to avoid bank financing of the fiscal deficit and undermining the ability of the Banque Centrale du Congo (BCC) to conduct prudent monetary policy within a floating exchange rate system.

4. Economic performance improved markedly during 2002–04 as the transitional government focused on reconstruction and reunification. Economic liberalization and financial stabilization helped real GDP grow at about 5 percent (Figure 1). Public finances were reinforced by rising revenue and external financial support, which allowed an increase in public investment. Inflation fell from 357 percent in 2001 to 4 percent in 2004, and by end-2004 international reserves reached US$236 million (5.4 weeks of imports).

Figure 1.
Figure 1.

Democratic Republic of the Congo: GDP Growth and Inflation, 1998–2007

(Annual percentage change)

Citation: IMF Staff Country Reports 2007, 327; 10.5089/9781451808414.002.A001

Sources: Congolese authorites and IMF staff estimates.

5. In 2005, program implementation began to weaken, as focus turned to the drafting of a new constitution and the preparation for general elections. This precluded completion of the last PRGF review; the arrangement expired in March 2006. Large monetized public spending overruns, primarily for security and the elections, continued under a 2006 SMP and into the beginning of 2007 when a new government was installed (Figures 2 and 3). Consequently, in 2006, the Congo franc depreciated by 15 percent against the US dollar, 12-month inflation rose to 18.2 percent, and gross international reserves declined to US$155 million (3 weeks of imports) even though the DRC did not service US$58 million in debt to official creditors. Real GDP growth, which had picked up to 6½ percent in 2004–05, slipped back to 5 percent in 2006 because of stagnating manufacturing production and a drop in diamond exports. Little progress was made in reforming the mining sector, public enterprises, the civil service, the social sectors, customs administration, and the central bank.

Figure 2.
Figure 2.

Democratic Republic of the Congo: Recent Fiscal Developments

Citation: IMF Staff Country Reports 2007, 327; 10.5089/9781451808414.002.A001

Sources: Congolese authorities and IMF staff estimates.
Figure 3.
Figure 3.

Democratic Republic of the Congo: Recent Monetary Developments

Citation: IMF Staff Country Reports 2007, 327; 10.5089/9781451808414.002.A001

Sources: Congolese authorites and IMF staff estimates.

6. Recent slippages apart, there is no doubt that the situation of the DRC has improved remarkably since 2001. The program provided a framework for the country to start rebuilding the economy, which is crucial to lasting peace and security. In particular, rapid disinflation proved vital to restoring economic confidence and encouraging trade and private sector activity. The economy is now relatively open, major price distortions have been removed, the exchange rate is floating, the private sector is the driving force behind growth, and fiscal and monetary policies have become more effective.

7. However, the experience of 2002–06 suggests that achieving durable macroeconomic stability and high growth will be an arduous process with unavoidable setbacks. Very weak implementing capacity and poor governance put a strain on the focus and quality of policies (Figure 4). Although the international community provided considerable technical and financial support, endemic corruption is testing donor relations and must be addressed if vital support is to be forthcoming. Rebuilding infrastructure also demands increasing attention if the population is to have more opportunity to participate in the economy. Freeing up resources spent on security and building political institutions is important in this regard. Effectively mobilizing the DRC’s vast natural resource wealth—governance problems have been particularly rife in the mining sector—will also be essential.

Figure 4.
Figure 4.

Democratic Republic of the Congo, Governance Indicators, 2005

Citation: IMF Staff Country Reports 2007, 327; 10.5089/9781451808414.002.A001

Source: Kaufmann, Kraay, and Mastruzzi (2006). Methodology and details of underlying survey are provided on “http://info.worldbank.org/governance/wgi2007/home.htm.”Note: Percentile rank indicates the percentage of countries worldwide that rate below selected country subject to a margin of error. The statistically likely range of the indicator is shown as a thin black line.

III. Macroeconomic Framework for 2007

8. With a view to stabilizing the economy and giving the new government time to craft its medium-term strategy, staff and the authorities agreed on a SMP for 2007.1 The program is intended to reduce inflation to 12 percent by year-end, stabilize international reserves, and increase real GDP growth to 6½ percent—boosted by a recovery in mining and manufacturing, and supported by public and private investment (Table 1).

Table 1.

Democratic Republic of the Congo: Selected Economic and Financial Indicators, 2004–12

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Sources: Congolese authorities and IMF staff estimates and projections.

Change in annual average. Minus sign indicates depreciation.

Includes interest due before debt relief and expenditure financed by HIPC resources.

Cash balance after debt relief on interest payments.

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

End-of-period debt stock includes accumulated arrears and reflects the arrears clearance arrangements concluded at the HIPC decision point.

Estimates and projections are based on joint 2007 World Bank/IMF DSA; for 2008 and beyond, it is assumed that the DRC reaches the HIPC Decision Point by mid-2008 and benefits from debt relief under HIPC and MDR initiatives. Exports are on a three-year backward moving average.

9. Avoiding money-financing of government expenditure requires increasing the underlying fiscal surplus by 0.9 percentage point of GDP to 1.3 percent (Tables 2 and 3). It assumes that government revenue is kept at 13¼ percent of GDP in 2007 by increasing the turnover tax rate from 13 to 15 percent, adjusting nominal fees and duties, and reinforcing tax administration. To contain spending, the government is to keep the wage bill at 5.5 percent of GDP and limit spending to revenue collected.

Table 2.

Democratic Republic of the Congo: Central Government Financial Operations, 2004–12

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Sources: Congolese authorities and IMF staff estimates and projections.

Reflects revised calculation of HIPC Initiative assistance from 2002-based Debt Sustainability Analysis (DSA).

For 2004 and 2005, program figures reflect a change in classification of retirement allowances as part of exceptional spending.

For 2005, interest payments include rescheduling agreements with commercial creditors under the enhanced HIPC Initiative.

Exceptional expenditure includes spending for the Demobilization, Disarmament, and Reintegration (DDR) program, cost of the elections, payments for retirement allowances, repayments of domestic arrears, and payment for bank restructuring.

For 2005, HIPC Initiative savings used for pro-poor wages and domestic investment were recorded under wages and domestic-financed investment.

Internal and external arrears.

Underlying fiscal balance is defined as revenue minus expenditure and excluding interest on foreign debt, foreign-financed capital expenditure, all exceptional spending, and repayment of domestic arrears. Difference between estimated figure for 2005 and one reported in IMF Country Report No. 05/374 reflects the change in definition to exclude all exceptional spending.

Table 3.

Democratic Republic of the Congo: Central Government Financial Operations, 2004–12

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Sources: Congolese authorities and IMF staff estimates and projections.

Reflects revised calculation of HIPC Initiative assistance from 2002-based Debt Sustainability Analysis (DSA).

For 2004 and 2005, program figures reflect a change in classification of retirement allowances as part of exceptional spending.

For 2005, interest payments include rescheduling agreements with commercial creditors under the enhanced HIPC Initiative.

Exceptional expenditure includes spending for the Demobilization, Disarmament, and Reintegration (DDR) program, cost of the elections, payments for retirement allowances, repayments of domestic arrears, and payment for bank restructuring.

Internal and external arrears.

10. The first results of the 2007 program were encouraging. Strong revenue collection and lower than anticipated spending on goods and services reduced net bank credit to the government (Tables 4 and 5). This contributed to a decline in base money, a fall in commercial banks’ excess reserves, an appreciation of the Congo franc of 12 percent in the three months to May 2007, and a decline in annualized inflation to 12 percent in April-May. International reserves also increased to US$190 million at end-May, partly because the DRC did not service debt due to Paris Club creditors amounting to US$52 million. Preliminary data are consistent with the projected real GDP growth rate of 6.5 percent.

Table 4.

Democratic Republic of the Congo: Monetary Survey, 2004–07

(At current exchange rates)

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Sources: Congolese authorities and IMF staff estimates and projections.
Table 5.

Democratic Republic of the Congo: Accounts of the Central Bank of the Congo, 2004–07

(At current exchange rates)

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Sources: Congolese authorities and IMF staff estimates and projections.

11. However, the 2007 budget promulgated in July threatens progress. It contains unrealistic revenue projections—4½ percent of GDP higher than the draft budget submitted by government—that are not supported by specific tax measures, and total budget appropriations were increased by 3½ percent of GDP—including 1½ percent of GDP for wages, nearly half of which is for large pay increases for parliamentarians. Execution of budgeted spending would lead to a new round of currency depreciation and inflation.

12. Structural reforms are also moving slowly. On program structural benchmarks, the government has just started publishing joint venture contracts signed by public enterprises on the website of the Ministry of Finance; it rejected the first draft of the audit of the central bank’s organization prepared by foreign consultants, because it did not meet the terms of reference; and discussions continue on a plan to limit the cost of the merger of the Union des Banques Congolaises and Banques Congolaise to that envisaged under the SMP.

IV. Policy Discussions and the Medium-Term Policy Framework

13. The discussions focused on three medium-term challenges the DRC faces: (i) growth and poverty alleviation; (ii) the fiscal strategy; and (iii) financial sector development. The government indicated that its medium-term strategy incorporates policies included in the 2006 PRSP. However, it had not yet had time to prepare a detailed macroeconomic framework taking all priorities into account. Nevertheless, it was made clear that the government saw fiscal tightening, economic reforms, and improved governance as crucial steps to build the economy and regain international support.

A. Medium-Term Growth and Poverty Alleviation

14. The mission emphasized that the DRC can achieve high economic growth by stepping up structural reforms and improving governance. This would allow the DRC to break out of its current constrained path where fiscal space is limited by low revenues and a lack of external financing and private sector activity is inhibited by a poor business climate.

15. An illustrative baseline scenario predicated on the aggressive resumption of reforms and increased donor financing for development, projects annual real GDP growth of 8 percent through 2012 (see Text Table).2 It assumes successful execution of the agreed 2007 program, agreement on a new PRGF arrangement, and reaching soon the HIPC completion point.3 Medium-term growth would be led by a rebound in mining output and a pick-up in the reconstruction effort. While the growth rate is ambitious, improvements in the sociopolitical situation and high commodity prices have sparked investor interest in the mining sector, which holds a large share of world reserves. The authorities estimate that total investments in copper and cobalt projects could reach US$3 billion through 2012, allowing output to return to levels not recorded since the 1980s and contributing about 2.0 percentage points a year to GDP growth (Figure 5). Concomitantly, an ambitious program—within a budget that is consistent with macroeconomic stability—to rebuild infrastructure would boost activity in construction and public works, water and electricity, transport, and telecommunications. This would require measures to boost revenue and better spending prioritization.

Figure 5.