Democratic Republic of the Congo
Third Review of the Three-Year Arrangement Under the Extended Credit Facility, Financing Assurances Review, and Request for Modification of Performance Criteria: Staff Report and Press Release on the Executive Board Discussion
Author:
International Monetary Fund
Search for other papers by International Monetary Fund in
Current site
Google Scholar Close
Publication Date:
20 Jul 2011
eISBN:
9781462341573
Language:
English
Keywords:
ISCR; CR; Congo; DRC under the Heavily Indebted Poor Countries; commitment to the program; authorities' effort; food price; signing bonus; government financing
Download PDF (654.6 KB)

Satisfactory policy implementation continues in the program under challenging conditions, but the uncertain economic, social, and political environment will test this commitment. The program is flexible to accommodate a partial pass-through of higher world oil prices to domestic fuel prices and further pro-poor spending, but ongoing fiscal discipline will be essential to achieve the program’s fiscal objectives. The implementation of revenue-enhancing measures will require political will. Executive Directors welcome the efforts to implement the broad range of reforms in extractive industries.

Abstract

Satisfactory policy implementation continues in the program under challenging conditions, but the uncertain economic, social, and political environment will test this commitment. The program is flexible to accommodate a partial pass-through of higher world oil prices to domestic fuel prices and further pro-poor spending, but ongoing fiscal discipline will be essential to achieve the program’s fiscal objectives. The implementation of revenue-enhancing measures will require political will. Executive Directors welcome the efforts to implement the broad range of reforms in extractive industries.

I. Background

1. The Democratic Republic of the Congo (DRC) reached the completion point under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative in early July 2010; the second review of the ECF arrangement was completed in February 2011. External financial support for the program weakened in the middle of 2010 but picked up more recently, as the authorities moved to address concerns over governance and transparency in extractive industries. The European Commission and Belgium have provided grants this year and the World Bank is in the process of considering scaling up project-related financing after a period where the Bank had put the preparation of several projects on hold. However, the program does not include budget support from the World Bank this year.

2. The social and security situation remains fragile: an armed attack on the President’s residence took place during the staff visit. President Kabila met with the staff after the attack and he reassured staff that this incident would not destabilize the political situation nor weaken government’s commitment to the program, including in the lead up to the Presidential elections later this year.

II. Recent Economic Developments and Prospects

3. A marked improvement in the terms of trade and better policy implementation lifted economic performance in 2010; this performance could continue this year although inflation will be higher.

  • Mining, construction, and tertiary activities boosted real GDP growth to some 7 percent last year, compared with 2.8 percent in 2009 (Figure 1 and Table 1). A favorable outlook for mineral production could help maintain the pace of growth at about 6½ percent this year. Moderate increases in global food prices during most of last year and the relative stability of the exchange rate helped lower inflation to below 10 percent by year’s end. However, the recent acceleration of world oil and food prices will likely drive inflation to 13 percent at the end of this year before falling back to single digits in 2012 (Figure 2).

  • External sector developments and outlook improved (Table 2). Higher mineral production and prices helped narrow the external current account deficit in 2010 and this is expected to continue, in view of the positive outlook for copper prices.1 The level of gross official reserves rose from US$1 billion at end-2009 to US$1.3 billion at end-2010 and are projected to reach US$1.5 billion at the end of this year. This is the same level envisaged at the time of the second program review (as discussed in Section IV on page 7), although the coverage in terms of imports is slightly lower reflecting an upward revisions to imports (including higher fuel costs) (Figures 3 and 4).

  • In 2010, fiscal performance was in line with the program despite a shortfall of external financial support equivalent to about 1.6 percent of GDP, even after accounting for the earlier disbursement of budget support from the European Commission. The domestic fiscal balance on a cash basis shifted from a deficit of 2½ percent of GDP in 2009 to a surplus of about 0.9 percent of GDP last year (Table 3a and 3b and Figure 5). Although domestic revenue underperformed—perhaps signaling some weakness in tax and customs administration—this was more than offset by cuts in public investment and exceptional spending, lower domestic arrears payments, and delays in paying wages at the end of the year.2 In this context, the government built up deposits vis-a-vis the banking system.

  • Broad money growth slowed in 2010 alongside the decline in government net credit from banks (Table 4). As inflation declined, the Central Bank of Congo (BCC) reduced its policy interest rates from 70 percent to 22 percent between January and August 2010, while keeping the real interest rate relatively high (Figure 6). World oil and food prices and excess commercial-bank reserves increased in the latter part of last year, prompting the BCC to raise its policy rate to 29½ percent in February 2011.

  • The closure of Banque Congolaise and the initiation of its liquidation helped improve the soundness of the banking sector. The fiscal cost of the liquidation this year is now expected to be smaller than envisaged, as it will take time to unwind the bank’s operations. About US$20–25 million of the bank’s deposits will be covered in 2011 and the rest (about US$35–40 million) in 2012.3 The authorities continue to make progress in implementing priority safeguard measures. The transition to International Financial Reporting Standards (IFRS) is anticipated in 2012 (and will be applied to the BCC’s 2011 financial statements).

  • The authorities are preparing a revised Poverty Reduction Strategy Paper (PRSP) for 2011–15 and expect to finalize it in early May. The revised strategy contains a medium-term expenditure framework developed in consultation with all stakeholders.

Figure 1.
Figure 1.

Real GDP Growth and Contribution of Key Sectors

(Annual percentage change)

Citation: IMF Staff Country Reports 2011, 190; 10.5089/9781462341573.002.A001

Source: Congolese authorities; and IMF staff estimates.
Figure 2.
Figure 2.

Exchange Rate and Inflation (CPI)

(Annualized percent change)

Citation: IMF Staff Country Reports 2011, 190; 10.5089/9781462341573.002.A001

Table 1.

Democratic Republic of the Congo: Selected Economic and Financial Indicators, 2009–15

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

IMF Country Report No. 10/329.

Change in annual average. Minus sign indicates depreciation.

The 2010 NCG takes into account the full proceeds of IMF HIPC debt relief while the program column does not.

Projections are based on calculations under the 2010 HIPC Debt Sustainability Analysis (IMF Country Report No. 10/360). Includes assistance beyond the terms of the enhanced HIPC Initiative granted by some Paris Club creditors. Exports are on a three-year backward moving average.

Figure 3.
Figure 3.

Gross International Reserves

Citation: IMF Staff Country Reports 2011, 190; 10.5089/9781462341573.002.A001

Sources: Congolese authorities; and IMF staff estimates.
Figure 4.
Figure 4.

Copper Price and Terms of Trade

Citation: IMF Staff Country Reports 2011, 190; 10.5089/9781462341573.002.A001

Table 2.

Democratic Republic of the Congo: Balance of Payments, 2009–15

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

Including interest due to the IMF.

Excluding principal repayments to the IMF.

Including unrecorded transactions. The latter may be substantial given weaknesses in statistics.

Mainly arrears to Paris Club creditors.

In 2009, Includes interim debt relief under HIPC (including by the IMF); In 2010, it reflects debt relief provided upon reaching the HIPC Completion point.

Figure 5.
Figure 5.

Fiscal Indicators

(Percent of GDP)

Citation: IMF Staff Country Reports 2011, 190; 10.5089/9781462341573.002.A001

Sources: Congolese authorities; and IMF staff estimates.
Figure 6.
Figure 6.

Central Bank Bills and Interest Rates

Citation: IMF Staff Country Reports 2011, 190; 10.5089/9781462341573.002.A001

Table 3a.

Democratic Republic of the Congo: Central Government Financial Operations, 2009–13

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

IMF Country Report No. 11/54; the ratios are calculated on the basis of revised GDP figures.

Reflects revised calculation of HIPC Initiative assistance on the basis of the 2010 Debt Sustainability Analysis (IMF Country Report No. 10/360).

Exceptional expenditure includes spending for the Demobilization, Disarmament, and Reintegration (DDR) program, and cost of the elections.

The domestic fiscal balance is defined as revenue (excluding the signing bonus from the SCCA) minus total expenditure (excluding interest on foreign debt, foreign-financed capital and exceptional expenditure).

For 2011 onwards, all Banking system financing is central bank only.

Table 3b.

Democratic Republic of the Congo: Central Government Financial Operations, 2009–13

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

IMF Country Report No. 11/54; the ratios are calculated on the basis of revised GDP figures.

Reflects revised calculation of HIPC Initiative assistance on the basis of 2010 Debt Sustainability Analysis (IMF Country Report No. 10/360).

Exceptional expenditure includes spending for the Demobilization, Disarmament, and Reintegration program, and cost of the elections.

The domestic fiscal balance (commitment basis) is defined as revenue (excluding the signing bonus from the SCCA) minus total expenditure (excluding interest on foreign debt, foreign-financed capital and exceptional expenditure).

For 2011 onwards, all Banking system financing is central bank only.

Table 4.

Democratic Republic of the Congo: Monetary Survey, 2007–11

(At current exchange rates)

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

In billions of Congo francs at current exchange rates.

III. Program Performance

4. Policy implementation continues to be satisfactory. The authorities observed all of the program’s quantitative performance criteria at the end-December 2010 test date and the structural benchmarks.

  • The performance criteria (adjusted) through December 2010 were met with comfortable margins, especially with respect to net banking system credit to the government (NCG) and net foreign assets of the BCC (NFA, Table 5).4 The NFA stock was higher because the government reduced dollar-denominated expenditure and the BCC intervened in the first part of last year to ensure achievement of the program objective in the run-up to the HIPC completion point. The authorities indicated that they did not contract non-concessional external debt during the year.5 They have completed the majority of bilateral rescheduling agreements with the Paris Club in the context of HIPC debt relief and should finalize them in the near term. The authorities are in contact and have made progress rescheduling debts with other bilateral and commercial creditors, as well as good faith efforts to reschedule debts with external commercial creditors on HIPC-comparable terms.6

  • Structural reform progressed as planned (Table 6). The government reported that it published all new partnership agreements between public entities and private enterprises; produced fiscal reporting on a timely basis; and recapitalized the BCC with interest-bearing securities. These securities are not fully marketable but the BCC could use them as collateral for reverse repo operations, as it develops its monetary policy instruments.

Table 5.

Democratic Republic of the Congo: Quarterly Quantitative Performance Criteria and Indicative Targets, 2009–10 1

(CGF Millions, unless otherwise indicated)

article image
Source: Congolese authorities; and IMF staff estimates and projections.

For definition and adjustors see the attached Program Monitoring Section of Memorandum of Economic and Financial Polices and the Technical Memorandum of Understanding.

Cumulative changes are calculated from end-December 2009.

The performance criteria for end-June are those established in IMF Country Report No. 10/88 while the performance criteria for end-December and indicative targets for end-September 2010 are those established in IMF Country Report No. 10/329.

The stocks of net foreign assets and net domestic assets of the BCC are valued at the program exchange rates (US$1 = CGF 639.32; and 1 Euro = 905.07).

These performance criteria will be monitored on a continuous basis.

Non U.S. dollar denominated balance of payment support is valued at program exchange rates.

Table 6.

Democratic Republic of the Congo: Structural Benchmarks, Q1/2011

article image
Source: IMF staff.

IV. Policy Issues

5. An exchange of views on the implications of, and appropriate policy response to, the recent increase in commodity prices dominated the discussions. Staff and the authorities generally agreed on measures for containing inflationary pressures and safeguarding the integrity of the budget. The authorities recognized that greater effort is needed to control spending and mobilize higher domestic revenue to manage fiscal risks over the course of the year.

A. Policy Response to Higher Fuel and Food Prices

6. The authorities stressed that fuel and food prices are adding to the challenge of further consolidating macroeconomic stability in this election year. Higher fuel and food prices threaten social stability and cohesion and have a disproportional impact on the poor given the lack of a social safety net in the DRC.

7. Maintaining the fiscal anchor—zero government financing from the central bank— will be critical to the success of the program. In this context, the staff urged the authorities to pass on the recent increases in world oil prices to domestic prices. The authorities recognized that (implicit) fuel subsidies are not well targeted to protect the purchasing power of the poorest and had earlier indicated their intention to eliminate such subsidies.7 The authorities argued that only a partial pass-through was possible at this stage due to mounting social pressures, resulting in a loss of tax revenue of about 0.6 percent of GDP in 2011. In late-March, they raised domestic fuel prices by average of about 4 percent, which is half of the projected increase envisaged this year. They also indicated a desire to increase pro-poor spending on health and education by CGF50 billion this year (equivalent to about 0.3 percent of GDP), to ensure measurable progress in achieving the goals laid out in the revised PRSP.

8. The staff and the authorities agreed that the program could accommodate the fiscal costs of the fuel pricing policy and the additional pro-poor spending, while maintaining the fiscal objectives for this year. In particular, this will be achieved through: (i) higher commodity-export prices that would boost budgetary revenue by about 0.3 percent of GDP; (ii) higher than programmed external financing of 0.3 percent of GDP; (iii) drawdown of the government’s deposits built up in 2010 equivalent to 0.6 percent of GDP (including the budget support from the EC); and (iv) the use of the (unallocated) budgetary reserve, given the projected lower fiscal cost of liquidating the problem bank (Table 7). The domestic fiscal deficit (cash basis) would widen by about 0.4 percent of GDP this year compared with the budget outlook, mainly reflecting the use of un-programmed external budget support (from Belgium). The program is fully financed and there is no accumulation of domestic debt or arrears.8

Table 7.

Changes to the Fiscal Position in 2011

article image
Sources: Congolese authorities and IMF staff estimates/projections.

9. To alleviate fiscal risks over the course of this year, the government agreed to implement measures to boost domestic revenue. These measures include: phasing out discretionary tax exemptions and incentives previously granted to a number of enterprises (structural benchmark for end-July 2011, ¶3 of the supplemental Memorandum of Economic and Financial Policies, (MEFP)); tightening tax collections on fuel imports to eliminate the fraudulent use of exemptions provided to mining enterprises (structural benchmark for end-July 2011, ¶3 of the MEFP); and further strengthening the one-stop customs windows, including by enhancing the use of information technology.

10. The government indicated that during the 2011 budget discussions, Parliamentarians proposed minimum wage increases for healthcare workers and teachers to ensure adequate retention and recruitment in these sectors. While sympathetic to this overall objective, staff took the position and the authorities agreed that domestic revenue must be increased before considering higher wages. Consequently, no increase is projected for this year. The staff also raised concern over the delayed wage payments in late 2010 and urged the authorities to address them before agreeing to new wage increases. The authorities propose to eliminate some of the carry-over from 2010 during this year, and the rest in 2012. They remain committed to a cautious external borrowing strategy with a focus on maintaining debt sustainability over the long term.9

11. The staff noted that accelerating public financial management reform would help bolster budget monitoring and execution in these challenging times. While satisfactory progress is evident in many areas, more effort is needed to expedite the full implementation of the new procurement code at both the central and provincial levels. The World Bank and the DRC’s development partners are working closely with the authorities to advance these reforms.

12. On the monetary front, staff and the authorities agreed that the BCC would accommodate the impact of the recent rise commodity prices but ensure that second-round effects do not undermine the medium-term objective of single-digit inflation. The staff urged the central bank to remain ahead of the curve to curtail excessive inflationary pressures before they become entrenched in expectations. In this context, the authorities will limit base money growth in 2011 to about 22 percent, consistent with the growth in nominal GDP. Staff supported the stance that the BCC had taken in raising the policy interest rate in response to the recent pickup in inflation, and indicated that further increases may be warranted in the short run if inflation accelerates. The BCC should also carefully monitor inflationary pressures from wage developments, to avoid a further second round effects on inflation.

13. In the context of the improved external outlook, discussions with the BCC also focused on exchange rate policy and potential for accumulating more foreign reserves this year. The authorities and staff agreed that a flexible exchange rate is appropriate for the DRC given its vulnerability to external shocks and narrow export base. The BCC committed to limit intervention to smooth exchange rate volatility and to achieve the program’s foreign reserves objective.10 In this context, the authorities argued that accumulating more reserves—beyond the program’s current objectives—would not be advisable over the short term for two reasons. First, this would require BCC interventions that would not be consistent with its exchange rate policy. Second, although commodity exports (mainly copper) are higher than projected at the time of the second review, most of these receipts are expatriated by foreign companies (through portfolio flows and other investment), thus limiting the scope of the BCC to boost official international reserves in the short term. Consequently, the staff and the authorities agreed that the program’s international reserves objectives should remain unchanged for this year.

14. The authorities requested and staff supported modification of the end-June 2011 performance criteria for NFA and net domestic assets of the BCC (NDA). The performance criteria are adjusted to take into account the early disbursement and use of the EC grant for priority spending (including for goods related to the elections) during the first semester.11 The change of NFA would be lowered by the amount of this grant (CGF 44 billion), while the change of NDA would be increased by a slightly lower amount accounting for revisions to nominal GDP and valuation changes.12 Nevertheless, the level of NFA (NDA) at end-2011 will still be higher (lower) than projected earlier reflecting the over performance in 2010.

B. Structural Reform and Governance

15. The discussions also addressed progress in enhancing the effectiveness and capacity of the BCC, policies to strengthen the financial sector, and governance and transparency reforms in extractive industries.

  • The authorities’ intend to maintain the momentum on BCC reforms. The BCC will finalize a strategic plan to improve its operational and financial viability in June, and decide by end-September 2011 on a time-bound action plan to disengage from the Mint and Central Bank Hospital (structural benchmark, ¶8 of the MEFP). At the same time, it will continue to strengthen liquidity forecasting, introduce higher-denominated bank notes, and implement the outstanding recommendations of the 2010 Update Safeguard’s Assessment (with IMF technical assistance where applicable).

  • The BCC has also stepped up financial sector reforms—guided by technical assistance provided by the IMF and development partners—with the goal of bringing the legal and regulatory framework in line with international best practices. The ambitious reform program would take considerably longer than earlier envisaged, reflecting the need to amend legal texts of the central bank, commercial banks, and other relevant laws. By end-September 2011, the BCC intends to submit to Parliament amendments to the central bank and commecial bank laws that would facilite crisis management and resolution of banking problems in the future (revised structural benchmark, ¶9 of the MEFP). Over the medium term, it will undertake a comprehensive review of the legal and regulatory framework to, inter alia, introduce rule-based progressive enforcement measures. To support these reforms, the BCC will improve the quality of its human resources, broaden the use of information technology, and enhance offsite bank supervision.

  • Implementation of governance and transparency reforms in extractive industries is proceeding satisfactorily, in close collaboration with the World Bank. The reform agenda includes 30 broad measures covering forestry, mining, and oil sector activities and focuses on transparency and accountability in the management of these resources; ensure best practice in the sale of public assets; and the immunity of contracts (Appendix II contains the full complement of measures and an update of the status of each measure). Implementation has been initiated on all 30 measures and seven have been completed thus far; the timing of some measures has been slower than envisaged but progress is being made on all fronts. Further, the authorities are moving forward as quickly as possible to accede to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

C. Program Risks

16. Recent improvements in macroeconomic stabilization—and the move away from fiscal dominance in particular—has helped the DRC withstand the impact of lower levels of external financial assistance and the sharp rise in commodity prices. Sustaining such gains in an environment where there is mounting inflationary pressure and risk of fiscal slippages pose difficult, but manageable, challenges.

  • Large increases in world oil prices—beyond program projections—could entail unsustainable fiscal costs under the current fuel pricing policy and undermine program implementation. Higher commodity prices also pose an upside risk to inflation.

  • Spending pressures from the fragile security situation and the potential for fiscal slippages in the lead up to the presidential and parliamentary elections also pose a risk to the fiscal position.

V. Staff Appraisal

17. Satisfactory policy implementation continues in the Fund-supported program under challenging conditions. Better macroeconomic management, together with favorable external factors, supported robust growth in real output last year and a decline of inflation to single digits at end-2010.

18. Strong program ownership underpins these recent developments but the uncertain economic, social, and political environment will test this commitment in the period ahead. To mitigate the risks to the program, the authorities must show resolve in protecting hard-fought gains and be ready to take tough decisions, should the external environment deteriorate.

19. The program is flexible to accommodate a partial pass through of higher world oil prices to domestic fuel prices and further pro-poor spending, but ongoing fiscal discipline will be essential to achieve the program’s fiscal objectives this year. This discipline will also be critical to resist political and social pressures to increase spending ahead of the national elections.

20. The implementation of revenue-enhancing measures require political will. Revenue performance has not been commensurate with robust economic growth, especially buoyant production in extractive industries. Unjustified tax exemptions should be eliminated, loopholes closed, compliance improved, and administrative measures brought closer to international standards.

21. The improvement in the fiscal position has supported the BCC’s efforts to reduce inflation. For its part, the BCC must remain vigilant to ensure the second round effects of higher fuel and food prices do not jeopardize the hard won gains in reducing inflation. This is critical for protecting the poor from the vagaries of inflation and the loss of purchasing power from these higher prices.

22. Recapitalization of the BCC is critical for establishing its independence as a central bank. The momentum created by this reform should be maintained by quickly addressing the next steps, which include focusing the BCC’s mandate on its core objectives and shedding non-core activities. Sustained momentum will also be essential to complete the second part of the recapitalization, which involves the politically difficult decision to increase its net worth (capital).

23. The staff welcomes the authorities’ efforts to implement the broad range of reforms in extractive industries. The benefit of these reforms will likely extend beyond the extractive industries, so timely implementation is encouraged. Combined with macroeconomic stability, the improvement in governance and transparency that these actions entail should elevate the medium-term outlook for the DRC.

24. The staff also welcomes the authorities’ ongoing efforts to conclude debt-rescheduling agreements with its non Paris Club and commercial creditors. In this regard, the staff proposes completion of the financing assurances review.

25. Staff recommends completion of the third review under the ECF arrangement and the fourth disbursement in an amount equivalent to SDR 49.493 million and supports the authorities’ request for modification of the performance criterion at end June 2011 on net foreign assets and net domestic assets of the BCC.

Table 8.

Democratic Republic of the Congo: Disbursements and Conditions Under the ECF Arrangement, 2009–12

article image
Source: IMF staff.

Appendix I: Democratic Republic of the Congo

Letter of Intent

Kinshasa

April 11, 2011

Mr. Dominique Strauss-Kahn

Managing Director

International Monetary Fund

Washington, DC 20431

USA

Dear Managing Director,

Policy implementation under our Extended Credit Facility (ECF) arrangement continues to proceed as envisaged and we request the completion of the third review and fourth disbursement under the arrangement in an amount equivalent to SDR 49.493 million. All of the program’s end-December 2010 quantitative performance criteria and indicative targets were observed, as were the structural benchmarks.

Macroeconomic performance was strong in 2010: real GDP growth at about 7 percent, end-year inflation below 10 percent, and significant improvement in the external current account were supported by fiscal discipline and prudent monetary policy. In 2011, growth is projected at 6.5 percent supported by mining, construction, and services activities. However, high world food and fuel prices since the end of last year threaten to accelerate inflation and undermine our efforts to consolidate macroeconomic stability. The monetary authority will conduct policy to ensure the second-round effects of these increases do not undermine our inflation target of below 10 percent over the medium term. On the fiscal front, to maintain social cohesion the government will allow for a partial pass through of the projected increase in world oil prices and will take the necessary fiscal measures to maintain the program’s fiscal objectives for this year. Domestic fuel prices were raised an average of 4 percent in late March.

The government and the monetary authority believe that the policies and measures set forth in the Memorandum of Economic and Financial Policies (MEFP) of January 2011, supported by additional policy actions contained in a supplemental MEFP (attached), are appropriate to achieve the objectives of our medium-term program. During the period of the ECF arrangement, the government and the monetary authority will consult with Fund staff on the adoption of any measures that may be necessary to achieve the program’s objectives, including fuel pricing policy, or whenever Fund staff requests such a consultation.

The government intends to make the contents of this letter and the attached supplemental MEFP, as well as the staff report accompanying its request for completion of the third review of the program, available to the public and authorizes the Fund to arrange for them to be posted on its website, subsequent to Executive Board approval of our request.

The fourth review will be based on quantitative performance criteria for end-June 2011 and is expected to be completed in the fourth quarter of this year. In this context, we request a modification to the June 2011 performance criterion on the change in net foreign assets (NFA) and net domestic assets (NDA) of the Central Bank of Congo to take account of the receipt of external financial support from the European Commission earlier than anticipated, and its planned use during the first half of 2011. This support was initially programmed for the second semester of 2011. The fifth review will be based on quantitative performance criteria for end-December 2011 and should be completed in the second quarter of 2012.

Sincerely yours

______/s/______

Adolphe Muzito

Prime Minister

Attachment: Supplemental Memorandum of Economic and Financial Policies, 2011 Technical Memorandum of Understanding

Appendix I Attachment I

Democratic Republic of the Congo

Supplemental Memorandum of Economic and Financial Policies, 2011

Kinshasa

April 11, 2011

1. This Memorandum of Economic and Financial Policies (MEFP) supplements that attached to the government’s Letter of Intent of January 21, 2011. It elaborates on policies to address challenges posed by rising global commodity prices and associated social concerns while maintaining macroeconomic stability. It also updates the timing of reforms to strengthen the independence and capacity of the Central Bank of the Congo (BCC).

2. Fiscal policy. The implementation of fiscal policy was strong during 2010 and the domestic fiscal balance improved from deficit into a small surplus (0.2 percent of GDP), and the government accumulated savings beyond those attributed to HIPC debt relief. These savings in part reflected early disbursement of European Commission budget support originally expected in the second half of this year.

3. In 2011, our objective is to maintain the fiscal anchor of zero government financing requirement from the BCC. In view of mounting social pressures, the government will allow for a partial pass through of the projected increase in world oil prices (based on the IMF’s April 2011 World Economic Outlook assumptions)—entailing a revenue loss estimated at about 0.6 percent of GDP this year—and increase pro-poor spending (mainly in health and education) by the equivalent of about 0.3 percent of GDP. The program can accommodate a partial fuel price adjustment and higher pro-poor spending through: (i) a projected revenue increase (of about 0.3 percent of GDP) from better prospects for mining and petroleum activities and higher than programmed budget support from Belgium; (ii) a drawdown of projected government savings; and (iii) the use of the (unallocated) budgetary reserve. At end-March, the government raised domestic fuel prices by about 4 percent on average, which is about half of the envisaged increase over the rest of this year. To minimize fiscal risks, we will also implement additional reforms including the tightening of tax collections on fuel imports (structural benchmark, Table 2); further strengthening customs administration (especially the use of computer/scanning technology); and phasing out discretionary tax exemptions and incentives previously granted to a number of enterprises (structural benchmark).

Table I.1.

Democratic Republic of the Congo: Modified Quarterly Quantitative Performance Criteria and Indicative Targets, 2010–11 1

(CGF Millions, unless otherwise indicated)

article image
Source: Congolese authorities and IMF staff estimates and projections.

For definition and adjustors see the attached Program Monitoring Section of Memorandum of Economic and Financial Polices and the Technical Memorandum of Understanding.

Cumulative changes are calculated from end-December 2010.

Performance criteria on net foreign assets of the BCC and on net domestic assets of the BCC are revised from IMF Country Report No. 11/54.

The stocks of net foreign assets and net domestic assets of the BCC are valued at the program exchange rates (US$1 = CGF 639.32; and 1 Euro = 905.07).

These performance criteria will be monitored on a continuous basis.

Non U.S. dollar denominated balance of payment support is valued at program exchange rates.

Table I.2.

Democratic Republic of the Congo: Structural Benchmarks, 2011

article image

4. The domestic fiscal deficit is projected to deteriorate by about 0.4 percent of GDP, compared with the budget outlook but the government will not accumulate domestic debt this year. We expect this deterioration to be further reduced by the tax measures and administrative reforms we will take later this year. The program is fully financed.

5. In debating the 2011 budget, Parliament had requested the government to increase the minimum wage for teachers and healthcare workers. The government would like to accommodate this request but only when sufficient domestic revenue can be raised to ensure any increase is sustainable over the medium term. We remain committed to a cautious external debt strategy as part of our effort to ensure fiscal sustainability. In this context, the government expanded the definition of the external debt concessionality limit covered under the program to include key public enterprises.

6. Monetary policy. The BCC will be vigilant to the recent rise in food and fuel prices and remain ahead of the curve. It will accommodate the impact of these prices increases on the price level but will ensure that second-round effects do not undermine the medium-term objective of single digit inflation. The BCC raised its policy interest rate in January as inflation accelerated, in line with the BCC’s view of maintaining real interest rates at a relatively high level. Growth of broad money of about 23 percent this year should be consistent with an end-period inflation rate of about 13 percent.

7. Exchange rate policy. The BCC will limit its intervention in the foreign exchange rate market to smooth exchange rate volatility and to help achieve the program’s foreign reserve target.

8. Central bank reform and financial sector policies. Together with the BCC, the government continues to press ahead with reforms to the BCC to strengthen its independence and capacity. In this regard, the BCC will finalize its strategic plan to improve its operational and financial viability, and decide by end-September on a time bound strategy to disengage from the mint and the central bank hospital (structural benchmark).

9. Reforms to the financial sector are progressing, with extensive technical assistance from the IMF. A major focus is amendments to the banking law and regulations to bring them into line with international best practice. In this regard, the BCC had envisaged moving quickly with these reforms by mid 2011. However, consultations with IMF staff and other experts have suggested that the scope of the amendments will take much longer than initially envisaged. Consequently, by end-September the BCC aims to review the central bank law, commercial bank law, and banking sector regulations, and prepare appropriate draft amendments to strengthen crisis management and resolution of the banking sector (structural benchmark). The liquidation of a problem bank is also proceeding as planned.

article image

Appendix I Attachment II

Democratic Republic of the Congo

Technical Memorandum of Understanding

Kinshasa

April 11, 2011

1. This memorandum updates the Technical Memorandum of Understanding (TMU) accompanying the MEFP of January 2011.1 Unless otherwise indicated, all quantitative targets are measured in terms of cumulative changes since the beginning of the year. Variables denominated in U.S. dollars will be converted to Congolese Francs by using the program exchange rate of CGF 639.32 per U.S. dollar; variables denominated in currencies other than the U.S. dollar (excluding the SDR and Euro) will first be converted to U.S. dollars at the December 31, 2010, US$/currency exchange rate. Variables denominated in SDRs will be valued at the program exchange rate of CGF 994.02 per SDR. Variables denominated in Euro will be valued at the program exchange rate of CGF 905.07 per Euro.

2. Institutional coverage: The central government comprises all units of government that exercise authority over the entire economic territory. However, unless otherwise indicated for the purposes of this memorandum, the central government does not include nonprofit organizations controlled and financed by the central government. The banking system is understood to mean the Central Bank of the Congo (BCC) as well as existing or newly licensed commercial banks.

I. Quantitative Performance Criteria

3. The quantitative performance criteria at end-June 2011 have been modified, and quantitative performance criteria have been established for end-December 2011 and indicative targets for end-September 2011 with regard to the following variables:

  • Changes in the net foreign assets of the BCC;

  • Changes in the net domestic assets of the BCC;

  • Changes in net banking system credit to the government (central government);

  • Payments of government expenditures (including emergency expenditures) by the BCC without the prior authorization according to proper budgetary procedures by the Ministries of Budget and Finance;

  • Nonconcessional medium- and long-term foreign loans contracted or guaranteed by the central government, local governments, or the BCC;

  • Nonconcessional short-term foreign loans contracted or guaranteed by the central government, local governments, or the BCC; and

  • The accumulation of external payment arrears.

Floors on the Net Foreign Assets of the BCC

4. Definition: Net foreign assets (NFA) are defined as the difference between the BCC gross foreign assets and its total foreign liabilities. Gross foreign assets are defined as the sum of the following items: (i) monetary gold holdings of the BCC; (ii) SDR holdings; and (iii) convertible claims on nonresidents, such as foreign deposits and foreign securities. The following items are excluded from the definition of gross reserves: claims on residents in foreign exchange, nonconvertible currency holdings, and reserves that are encumbered or pledged in one form or another, including but not limited to reserve assets used as collateral or security for foreign third-party liabilities, and swap transactions. Foreign liabilities are all BCC foreign exchange liabilities to nonresidents (including SDR allocations), including the IMF.

5. The following adjustments will be made to the NFA floors:

  • Balance of payments support (BPS): NFA floors will be adjusted upward by an amount equivalent to 50 percent of total BPS in excess of the programmed levels. There will be no downward adjustments to the NFA floors for any shortfall in BPS.

  • External debt service payment: NFA floors will be adjusted (i) upward by an amount equivalent to under payment of external debt service relative to programmed amounts; and (ii) downward by an amount equivalent to the excess of external debt service payments relative to programmed amounts.

  • Signing bonus from the Sino-Congolese Cooperation Agreement (SCCA): NFA floors will be adjusted (i) upward by an amount equivalent to 50 percent of total disbursement of signing bonus from SCCA in excess of the programmed levels; and (ii) downward by an amount equivalent to total shortfalls in the disbursement of signing bonus from SCCA relative to programmed levels.

  • Privatization proceeds in convertible currencies (PPCC): NFA floors will be adjusted upward by 50 percent of total PPCC in excess of the programmed levels. There will be no downward adjustment for any shortfall in these proceeds.

6. Definition: BPS is defined as all foreign grants and loans, excluding those tied to projects. External financing for the National Disarmament, Demobilization, and Reintegration Program (DDR) are considered project-related and therefore not included in the definition of BPS.

7. Definition: External debt service payments are defined as interest and principal due to foreign creditors (excluding the IMF).

Ceilings on the Net Domestic Assets of the BCC

8. Definition: The net domestic assets (NDA) of the BCC are defined as base money (see ¶19 below) minus NFA. Based on this definition, the NDA of the BCC include: (i) net credit to the government (central government, see ¶10 below); (ii) credit to the private sector; (iii) credit to public enterprises; (iv) credit to commercial banks; and (v) other net assets.

9. The following adjustments will be made to the NDA ceilings:

  • BPS: NDA ceilings will be adjusted downward by an amount equivalent to 50 percent of total BPS in excess of the programmed level. There will be no upward adjustment to the NDA ceilings for any shortfall in BPS.

  • External debt service payment: NDA ceilings will be adjusted (i) downward by an amount equivalent to under payment of debt service relative to programmed amounts; and (ii) upward by an amount equivalent to the excess of external debt service payments relative to programmed amounts.

  • Signing bonus from the SCCA: NDA ceilings will be adjusted (i) downward by an amount equivalent to 50 percent of the total disbursement of signing bonus from SCCA in excess of the programmed levels; and (ii) upward by an amount equivalent to total shortfalls in the disbursement of signing bonus from SCCA relative to programmed levels.

  • Privatization proceeds: NDA ceilings will be adjusted downward by 50 percent of the total amount of privatization proceeds (including PPCC) in excess of the programmed level. There will be no upward adjustment to the NDA ceilings for any shortfall in these proceeds.

Ceiling on Net Banking System Credit to the Government

10. Definition: Net banking system credit to the government (NCG) is defined as the sum of net BCC and commercial bank claims on the central government, plus the BCC’s net cash deficit. For purposes of program monitoring, government deposits related to externally-financed projects are excluded from NCG. All foreign currency denominated flows to the budget will be converted to domestic currency by using the market exchange rate prevailing at the time of the disbursement.

11. The following adjustments will be made to the NCG ceilings:

  • BPS: NCG ceilings will be adjusted downward by an amount equivalent to 50 percent of total BPS in excess of the programmed level. There will be no upward adjustment to the NCG ceilings for any shortfall in BPS.

  • External debt service payment: NCG ceilings will be adjusted (i) downward by an amount equivalent to under payment of debt service relative to programmed amounts; and (ii) upward by an amount equivalent to the excess of external debt service payments relative to programmed amounts.

  • Signing bonus from the SCCA: NCG ceilings will be adjusted (i) downward by an amount equivalent to 50 percent of total disbursement of signing bonus from SCCA in excess of the programmed levels; and (ii) upward by an amount equivalent to total shortfalls relative to programmed levels in the disbursement of signing bonus from SCCA.

  • Privatization proceeds: the NCG ceilings will be adjusted downward by an amount equivalent to 50 percent of total privatization proceeds in excess of the programmed levels. There will be no upward adjustment for any shortfall in these proceeds.

Ceilings on Nonconcessional External Debt Contracted or Guaranteed by the Public Sector

12. Definition: The public sector comprises the central government, local governments, the central bank (BCC), key public enterprises (La Générale des Carrières et des Mines (Gécamines), Société nationale d’électricité (SNEL), and Societé Miniere de Bakwanga (MIBA)), and nonprofit organizations controlled and financed by the central government.

13. Definition: Debt is defined as set out in Executive Board Decision No. 6230 (79/140) Point 9, as revised on August 31, 2009 (Decision No. 14416-(09/91)) (see Annex).2 For program purposes, external debt is measured on a gross basis using the residency criterion.

14. Definition: A debt is concessional if it includes a grant element of at least 35 percent, calculated as follows: the grant element of a debt is the difference between the present value (PV) of debt and its nominal value, expressed as a percentage of the nominal value of the debt. The PV of debt at the time of its contracting is calculated by discounting the future stream of payments of debt service due on this debt.3 The discount rates used for this purpose are the currency specific commercial interest reference rates (CIRRs), published by the Organization for Economic Cooperation Development (OECD). For debt with a maturity of at least 15 years, the ten-year-average CIRR will be used to calculate the PV of debt and, hence, its grant element. For debt with a maturity of less than 15 years, the six-month average CIRR will be used. To both the ten-year and six-month averages, the same margins for differing repayment periods as those used by the OECD need to be added (0.75 percent for repayment periods of less than 15 years, 1 percent for 15 to 19 years, 1.15 percent for 20 to 29 years, and 1.25 percent for 30 years or more).

15. Definition: The ceiling on nonconcessional external debt applies to contracted or guaranteed external debt for which the equivalent value has not been received. It excludes (i) the use of Fund resources; (ii) debts incurred to restructure, refinance, or prepay existing debts, to the extent that such debt is incurred on more favorable terms than the existing debt; (iii) concessional debts; and (iv) normal import credits having a maturity of up to one year.4

16. Definition: The guarantee of a debt arises from any explicit legal obligation of the public sector to service a debt in the event of nonpayment by the debtor (involving payments in cash or in kind), or from any implicit legal or contractual obligation of the public sector to finance partially or in full any shortfall incurred by the debtor.

Ceiling on the Accumulation of External Payment Arrears

17. Definition: External payment arrears are defined as external debt service obligations (principal and interest) that were not paid on the contractual due date. The ceiling on new external payment arrears applies continuously throughout the period covered by the ECF arrangement. It does not apply to external payment arrears in process of renegotiation or to cases in which the creditor has agreed to the suspension of payments pending the outcome of negotiations.

II. Quantitative Indicative Targets

18. The indicative targets pertain to narrow base money, the non-accumulation of wage arrears, and the domestic fiscal balance.

Ceilings on Base Money

19. Definition: Narrow base money is defined as the sum of (i) currency in circulation; (ii) cash holdings by banks; (iii) bank deposits held with the BCC; (iv) nonbank private sector deposits held with the BCC; and (v) public enterprises deposits held with the BCC.

Ceilings on the Accumulation of Wage Arrears

20. Definition: Wage arrears are defined as approved personnel wages and salaries that have not been paid for 30 days. Wages and salaries include the total compensation paid to public employees, including permanent benefits. These arrears will be valued on a cumulative basis from January 1, 2011.

Ceiling on the Domestic Fiscal Balance

21. Definition: The domestic fiscal balance (cash basis) is defined as (domestic revenue) minus (domestically financed expenditure). Domestic revenue is defined as (total revenue and grants) minus (grants) minus (signing bonus from the SCCA). Domestically financed expenditure is defined as (total expenditure and net lending) minus (externally financed investments) minus (foreign interest payments) plus (the BCC’s operating deficit) plus (the net accumulation of domestic arrears).

22. The following adjustments will apply to the floor on the domestic fiscal balance:

  • BPS: There will be no upward or downward adjustment to the floors of domestic fiscal balance on account of shortfalls or excesses of BPS (excluding that from the IMF).

  • Privatization proceeds. The floors on the domestic fiscal balance will be adjusted: (i) upward by an amount equivalent to the full shortfall of privatization relative to programmed levels; (ii) downward by 50 percent of the total amount of privatization proceeds in excess of the programmed levels.

III. Consultation Clause

23. The authorities will consult with the IMF before implementing any revisions to the policies contained in the MEFP.

IV. Data to be Reported for Program Monitoring Purposes

The authorities of the DRC will provide IMF staff with the data needed to monitor the program within the prescribed time limits, as indicated in the following table. In addition, it will provide monthly data on the domestic fuel price structure to assess the fiscal cost of the fuel pricing policy.

Summary of Data to be Reported

article image
article image
Annex Definition of debt

(a) For the purpose of this guideline, the term “debt” will be understood to mean a current, i.e., not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. Debts can take a number of forms, the primary ones being as follows:

  • (i) loans, i.e., advances of money to the obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans and buyers’ credits) and temporary exchanges of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements);

  • (ii) suppliers’ credits, i.e., contracts where the supplier permits the obligor to defer payments until sometime after the date on which the goods are delivered or services are provided; and

  • (iii) leases, i.e., arrangements under which property is provided which the lessee has the right to use for one or more specified period(s) of time that are usually shorter than the total expected service life of the property, while the lessor retains the title to the property. For the purpose of the guideline, the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement excluding those payments that cover the operation, repair or maintenance of the property.

(b) Under the definition of debt set out in point (a) above, arrears, penalties, and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt are debt. Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.

Appendix II Democratic Republic of the Congo Enhancing Governance and Transparency in Extractive Industries

1. Concerns over governance and transparency brought a slowdown of external financial support for the DRC in the second half of 2010. In response, the government broadened its economic governance reforms with the help of the World Bank, the IMF, and its development partners. The reforms focus on extractive industries—mining, forestry, and oil—and aim, inter alia, to ensure the sanctity of contracts and private property rights, and enhance the transparency of transactions in these activities.

2. The Congolese authorities and IMF and World Bank staff discussed progress under this reform program during a mission February 21–March 1, 2011. Further discussions took place between the authorities and World Bank staff during discussions in mid-March 2011. Table 1 below reflects understandings on the status of each measure from both sets of discussions.1

Table II.1.

Democratic Republic of the Congo: Time-Bound Reforms to Enhance Governance and Transparency in Extractive Industries

article image
article image
article image
article image
article image
article image
article image
article image
Source: Congolese authorities; and IMF and World Bank staff.
1

The balance of payments data should be interpreted because of weaknesses in the data.

2

December’s wages and salaries were paid with a delay of about 20 days reflecting concerns over liquidity management. Under the program, wage arrears do not accumulate if paid within 30 days of the end of each month.

3

The liquidation will take about two years to be completed. The Banque Congolaise’s financial statements are currently being audited by an international auditor.

4

Adjustors for end December 2010 include a shortfall in budget support and signing bonus from the Sino-Congolese Cooperation Agreement.

5

The authorities signed a US$360 million loan agreement with the Export-Import Bank of China to finance a hydroelectric project. The grant element of the loan is about 38 percent compared with the program’s minimum threshold of 35 percent. The government also recently signed a new framework agreement with the China Development Bank but they informed the staff that no financial terms were included at this stage. The staff will seek further information and clarification of possible financial terms as they emerge and their implication for the program in the period ahead.

6

The authorities concluded an agreement with the Kinshasa Club last year.

7

The baseline assumptions of the macroeconomic framework for the third review reflect those contained in the April 2011 World Economic Outlook. The average price for crude oil is projected at US$105 per barrel this year.

8

If satisfactory progress in strengthening governance and transparency continues (see ¶15 on page 10), the government anticipates a resumption of budget support from the World Bank and African Development Bank.

9

The authorities agreed to extend the non-concessional external borrowing ceiling (minimum grant element of 35 percent) to three public enterprises assessed to pose the largest fiscal risk: La Générale des Carrières et des Mines (Gécamines; copper mining company); Société nationale d’électricité (SNEL); and Societé Miniere de Bakwanga (MIBA, diamond mining company).

10

The authorities stressed that the BCC’s intervention in the forex market last year was related to concern that the program’s NFA target be observed in the run up to the HIPC completion point. The programmed accumulation of reserves is largely premised on Fund disbursements and the signing bonus from the Sino-Congolese agreement, which is adequate to achieve the program’s objectives.

11

Under the program, foreign aid is programmed to be spent and absorbed. Thus support from the European Commission in late December 2010 (equivalent to CGF 44 billion) will be used in the first semester, resulting in a larger-than-programmed increase in NDA and drawdown of NFA. The modification to the ceiling on the changes in NDA would allow the BCC to maintain the path of broad money consistent with the program objective.

12

Program performance criteria are evaluated at the program exchange rate, which is different than the actual exchange rate.

1

The TMU accompanying the June 2010 MEFP remains applicable to the definitions for the performance criteria and adjustors set for end-December 2010 and the third review.

3

The calculation of concessionality will take into account all aspects of the loan agreement, including maturity, grace period, payment schedule, upfront commissions, and management fees.

4

A financing arrangement for imports is considered to be “normal” when the credit is self-liquidating.

1

In the context of enhancing governance and transparency, the authorities are also strengthening public procurement with the assistance of the World Bank. A number of measures are being addressed in this regard but are not included in Table II.1., which focuses on extractive industries.

Same Series

Other IMF Content

Other Publishers

  • Collapse
  • Expand
Cover IMF Staff Country Reports
Democratic Republic of the Congo: Third Review of the Three-Year Arrangement Under the Extended Credit Facility, Financing Assurances Review, and Request for Modification of Performance Criteria: Staff Report and Press Release on the Executive Board Discussion
Author:
International Monetary Fund
Volume/Issue:
Volume 2011: Issue 190
Publisher:
International Monetary Fund
ISBN:
9781462341573
ISSN:
1934-7685
Pages:
56
DOI:
https://doi.org/10.5089/9781462341573.002
Figure 1.

Real GDP Growth and Contribution of Key Sectors

(Annual percentage change)
Figure 2.

Exchange Rate and Inflation (CPI)

(Annualized percent change)
Figure 3.

Gross International Reserves
Figure 4.

Copper Price and Terms of Trade
Figure 5.

Fiscal Indicators

(Percent of GDP)
Figure 6.

Central Bank Bills and Interest Rates