Statement by Mr. Assimaidou, Executive Director Democratic Republic of the Congo

The IMF’s Executive Board completed the first review under the Extended Credit Facility (ECF) arrangement in June 2010 and decided that the Democratic Republic of Congo (DRC) had reached the completion point under the Enhanced Heavily Indebted Poor Countries (HIPC) Initiative. In 2010, an improvement in global economic conditions supported strong macroeconomic performance; however, weaknesses in the financial sector were also exposed. The authorities recognized the importance of strengthening the independence and effectiveness of the central bank to sustain low and stable inflation.

Abstract

The IMF’s Executive Board completed the first review under the Extended Credit Facility (ECF) arrangement in June 2010 and decided that the Democratic Republic of Congo (DRC) had reached the completion point under the Enhanced Heavily Indebted Poor Countries (HIPC) Initiative. In 2010, an improvement in global economic conditions supported strong macroeconomic performance; however, weaknesses in the financial sector were also exposed. The authorities recognized the importance of strengthening the independence and effectiveness of the central bank to sustain low and stable inflation.

On behalf of my Congolese authorities, I would like to express our appreciation of the Executive Board’s support to the Democratic Republic of the Congo (DRC). I also thank Management and staff for maintaining a constructive dialogue with the DRC. My Congolese authorities continue to value greatly Fund advice and engagement. They intend to build on the progress achieved thus far in macroeconomic stabilization and institutional building to further advance their medium-term policy and reform agenda. As expressed in their supplemental Letter of Intent and Memorandum of Economic and Financial Policies (MEFP) of January 2011, my authorities remain fully committed to their ECF-supported program.

I. Recent Economic Developments and Program Implementation

The DRC’s macroeconomic performance in 2010 has been strong, supported by a recovery in mining, construction and tertiary activities. The authorities have pursued generally prudent macroeconomic policies aimed at reducing the domestic fiscal deficit and curbing inflation to single digits. All quantitative performance criteria at end-June 2010 have been met and all but one of the structural benchmarks through end-December 2010 have been observed— albeit some with delays due to technical problems.

Regarding fiscal policy, my authorities have seized the opportunity offered by the improved economic situation to enhance tax and non-tax revenue collections, including from the extractive sectors. On the expenditure side, they have kept strict control over spending and, when necessary, had recourse to cuts in lower priority public investment.

Regarding monetary and financial sector policies, my authorities have continued to register improvements in monetary control owing to the good fiscal performance and enhanced liquidity management on the part of the Banque Centrale du Congo (BCC). After gradually reducing its policy interest rate, the monetary authority has increased the rate to 29.5 percent in late January 2011 from 22 percent, on account of mounting inflationary pressures stemming from the external food supply shock. The BCC also continues to make progress in implementing safeguard measures. On the banking sector, the central bank and the government have decided to move quickly to resolve the problem with a large commercial bank (Banque Congolaise) by appointing a provisional administrator. The bank is under liquidation, with a view to salvaging its branch network through a purchase and acquisition agreement with a financially sound bank.

As regards the external sector, the current account has been marked by a recovery of exports and stronger imports linked to investment projects. Thanks to HIPC and MDRI debt relief, as well as financial and capital inflows, the import coverage of international reserves has improved to 8.4 weeks at end 2010, approaching the objective of 9 weeks of non-aid imports under the three-year program.

On structural reforms, the benchmarks that were met contributed to enhancing transparency practices, notably with regard to fiscal reporting, and timely publication of mining sector contracts; improving public financial management; making steps towards modernizing the tax system (introduction of a single-rate VAT); and advancing the recapitalization of the central bank through the submission to parliament of a draft law. The one missed structural benchmark related to the adjustment in domestic fuel prices was nevertheless partially observed as domestic fuel prices were raised substantially and fuel subsidies eliminated. Going forward, my authorities remain fully committed to the spirit of this measure by implementing gradual increases if world oil prices continue to rise as anticipated.

Beyond the structural benchmarks under the ECF-supported program, my DRC authorities have made efforts towards improving the business environment, with the view to promoting private sector investment. They pursued, under the Comité de Pilotage pour l’Amélioration du Climat des Affaires et des Investissements (CPACAI), the implementation of two roadmaps adopted in early 2010 by the ministerial council to make progress on this front. Measures already adopted include notably the streamlining of documents required for business registration, the reduction and publication of business registration fees, the reduction in the time required to obtain a business identification number, the decentralization of the notary function, the cancellation of the legal visa for the status of associates, the publication of business acts, streamlining of procedures for tax payments, etc. The adoption of these measures has helped improve by seven places the DRC’s ranking in the IFC and World Bank’s 2011 Doing Business report.

II. Policies and Reforms for 2011

In 2011, the authorities are determined to pursue the implementation of the medium-term structural reform agenda laid out in the authorities’ MEFP of June 15, 2010.17

Fiscal policies and reforms

The authorities remain committed to a fiscal policy that targets less financing from the central bank. The 2011 budget envisages further revenue improvements thanks to ongoing strengthening of tax and customs administration and the impact of fuel price upward adjustments. Going forward, my authorities will put in place a fuel pricing regime that involves regular and timely adjustments of such prices. They will also follow through with the modernization of tax and customs administrations while also reducing duty exemptions and fighting evasion of fuel import duties.

On the expenditures side, the bulk of increases will come from higher health and education spending, as well as elections-related spending. Unexpected spending needs will continue to be covered by a budget reserve. The new expenditure management procedures will help maintain expenditure control.

As regards public financial management, the new finance law will streamline budget planning, execution and monitoring. It will also lay the grounds for phased devolution of social expenditures from the central government to the provinces, taking into account the latter’s PFM capacities, which are also to be strengthened. Institutional and regulatory measures are in preparation to make the new procurement code effective. Going forward, my authorities will continue to publish, on a monthly basis, reconciled budget execution tables, including externally-financed expenditures with a maximum lag of three months, while further strengthening public financial management notably through the implementation of the Law on public finances. My Congolese authorities hope that they can continue to count on Fund’s technical and financial support to help them carry out their fiscal reform agenda.

Regarding external debt policy, the government will maintain its current cautious borrowing strategy and seek external resources on highly concessional terms, consistent with the program requirement.

Monetary and exchange rate policies

The goal of monetary policy remains price stability under the floating exchange rate regime which has served the economy well as a buffer to external shocks. To help contain inflation, it is the BCC’s intention to keep sufficiently positive its policy rate in real terms and continue to rely on central bank bills to manage liquidity. The BCC will intervene in foreign exchange market only to smooth out large exchange rate fluctuations and help achieve the program’s foreign reserve target.

Financial sector policies

Actions to enhance the independence and capacities of the BCC will be pursued this year. These include the issuance of securities for the recapitalization of the central bank; implementation of Fund TA recommendations on liquidity forecasting; reconciliation of financial flows with the government; advancing the strategic plan to improve the operational and financial viability of the BCC; and completing the remaining safeguards measures.

To enhance the stability and soundness of the banking sector, the central bank will pursue the liquidation of the problem large bank while strengthening banking supervision and regulations, which will be aligned with international best practice.

Other structural reforms

Additional structural reforms for 2011 will build on the progress achieved thus far to further improve the business climate and promote private sector development. In particular, the authorities will make the necessary steps to ratify the OHADA protocols and continue of implement the EITI principles.

Furthermore, my authorities are cognizant of the fact that institutional and human capacity constraints—which will take time to fully overcome—continue to weigh on the business climate. This is why they consider enhancing governance and transparency as a cornerstone of their structural reform agenda. Building on the good practice already in place with the publication of contracts in the mining sector, my authorities will generalize this transparency measure to other extractive industries (forestry and oil) going forward. They will also fully report and transfer to the Treasury the proceeds accruing to the state from all transactions in these three sectors, once they enter into force. Moreover, the authorities are committing to grant rights and concessions only through competitive processes and agree on a plan to sale state’s assets and enterprises also on a competitive basis.

III. Conclusion

On the basis of the progress that is being achieved, it is essential that the Fund continue to accompany DRC’s efforts in strengthening macroeconomic stability, enhancing capacities, and advancing governance and other reforms, with the aim to make further steps towards improving the business climate.

In light of their good program implementation and renewed commitment to their economic program going forward, my authorities request the completion of the second review under the ECF. They also request the completion of the financing assurances review, having secured the full financing of the program.

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See IMF Country Report No. 10/329.

Democratic Republic of the Congo: Second Review Under the Three-Year Arrangement Under the Extended Credit Facility and Financing Assurances Review—Staff Report; Staff Supplement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for the Democratic Republic of the Congo
Author: International Monetary Fund