Abstract
This paper reviews the 2006 Staff-Monitored Program (SMP) and a New Staff-Monitored Program for 2007 for the Democratic Republic of the Congo. Most quantitative and structural benchmarks under the SMP for April–December 2006 were not met; nevertheless, the SMP helped prevent major financial instability during the protracted electoral period. Cognizant of the need to reestablish macroeconomic stability, the government agreed on a policy framework for 2007 to be monitored by the IMF staff. Satisfactory performance under the SMP would open the way for discussions on a new arrangement under the Poverty Reduction and Growth Facility.
June 18, 2007
This statement sets out recent developments and key policy challenges. These developments do not alter the thrust of the staff assessment.
1. Since issuance of the staff report for the staff monitored program (SMP), a mission visited Kinshasa to conduct discussions for the 2007 Article IV consultation. A staff report on the discussions will be circulated in late July.
2. Fiscal tightening since end-February means that key quantitative benchmarks for end-June are likely to be met. The underlying fiscal surplus exceeded the program target by 0.8 percent of annual GDP during the first four months of 2007, reflecting mainly higher government revenue (oil revenue and profit taxes), and lower spending on goods and services, than anticipated.
3. International reserves have increased sharply and inflation declined. The central bank almost doubled international reserves (to 3 weeks of imports) in the three months to end-May reflecting the government reducing its net liabilities to the central bank and commercial banks’ excess reserves declining. The increase is also due to the government continuing not to serve its external debt to the Paris Club. During the same period, the Congo franc appreciated by 12 percent against the US dollar, which helped bring annualized inflation down to 12 percent in April-May. These developments allowed the central bank to cut its base rate from 50 percent to 30 percent. Economic activity remains buoyant underpinned by major projects in mining.
4. Discussions at the National Assembly on the draft 2007 budget suggest that the budgetary framework agreed under the SMP will not be adhered to. The Economic and Financial Commission of the National Assembly may recommend a very large increase in revenue projections and a concomitant increase in expenditures—with salaries being among the main beneficiaries. The draft budget submitted to Parliament already deviated from the SMP framework by envisaging higher expenditure (0.3 percent of GDP; a budget submission in line with the SMP is a benchmark for end-May). The government increased spending mainly for goods and services and scholarships, while reducing budget appropriations required to cover the expected deficit of the central bank and the cost of the merger of the Union des Banques Congolaises (UBC), which is bankrupt, with the Banque Congolaise (BC).
5. Implementation of structural reforms remains slower than envisaged. None of the four structural benchmarks for end-May were fully met: in addition to the submission of the draft budget to the national Assembly, the government has just started publishing joint venture contracts signed by public enterprises; 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 on a plan to cover the cost of the mergers of the UBC and BC are ongoing. Progress has also been slow on benchmarks to be completed by end-June.
6. Against the background of the SMP, the key policy challenges are:
Avoiding central bank financing of the budget. This will deepen macroeconomic stability and means that it is important for the National Assembly to adopt a 2007 budget that is consistent with the program, in particular regarding spending.
Receiving and making effective use of additional financial support from the international community. This is required for the Democratic Republic of the Congo to meet its external debt service and avoid recourse to domestic financing by the government. There remains a residual financing gap equivalent to 1 percent of GDP in 2007.
Implementing the government’s governance compact. This is essential to improve transparency in tax collection and strengthen public financial management, the quality of public spending, and the business environment.
Accelerating the implementation of structural reforms, especially those constituting structural benchmarks for the SMP.
Restructuring the central bank and strengthening its key departments. This is a crucial step to make monetary policy more effective and credible.
Greater coordination on economic policy. This is crucial for the government to successfully implement the 2007 program and design a medium-term macroeconomic framework that could serve as a basis for discussions on a Fund-supported program.