Statement by Kossi Assimaidou, Executive Director for the Democratic Republic of the Congo, September 24, 2012

Economic performance in the Democratic Republic of the Congo (DRC) has improved markedly. To safeguard the fiscal position, the government has to rigorously monitor budget execution and reduce nondiscretionary spending. The current monetary and floating exchange rate regime should be maintained. Recent efforts to shore up financial stability and develop the banking sector give opportunities for closer regional and global financial integration. Institutional weaknesses, the business environment, and establishing a strong foundation for the exploitation and development of DRC’s natural resources will be critical.

Abstract

Economic performance in the Democratic Republic of the Congo (DRC) has improved markedly. To safeguard the fiscal position, the government has to rigorously monitor budget execution and reduce nondiscretionary spending. The current monetary and floating exchange rate regime should be maintained. Recent efforts to shore up financial stability and develop the banking sector give opportunities for closer regional and global financial integration. Institutional weaknesses, the business environment, and establishing a strong foundation for the exploitation and development of DRC’s natural resources will be critical.

The authorities of the Democratic Republic of the Congo (DRC) highly appreciate the strong cooperation with the IMF and are thankful to the Executive Board, Management and Staff for the continued assistance provided to their country. In particular, Fund’s technical assistance to the DRC has been of critical importance to the improvements in macroeconomic performance. They look forward to continued assistance to help them in their efforts to further strengthen the country’s institutional and administrative capacities.

Significant progress in macroeconomic and structural policies has been achieved since the last Article IV consultation. Macroeconomic stability has been enhanced, notably through continued fiscal consolidation, a significant decline in inflation, and continued buildup of international reserves, despite a challenging external environment. In addition, strong efforts have been made in the area of governance and transparency in extractive industries (e.g., over hundred of contracts in the mining sector have been published) albeit few delays related to security concerns. Enhancing the central bank (BCC)’s capacity to meet its core mandate—where advances have also been made—remains in the authorities’ structural reform agenda.

The authorities welcome and broadly agree with staff’s assessments and analyses. This Article IV consultation—which focuses more on medium-term challenges—comes at an opportune time when the DRC is moving from urgent post-conflict policies to more sustainable economic development. In this vein, the authorities, in consultation with various stakeholders, have prepared a second-generation poverty reduction strategy document (PRSP-2) which, while building on the first PRSP, places more emphasis on growth, employment and the impact of climate change. The strategy seeks to achieve, among others, the Millennium Development Goals (MDGs) by 2020.

Recent Economic Developments and Outlook

The assessment that macroeconomic performance in the DRC has been strong during 2010–11 amid a weak global economy and limited external financial support should be recognition of the authorities’ sound macroeconomic policies and efforts made in meeting their program objectives. Their actions in ensuring adequate macroeconomic buffers have been underpinned by favorable commodity prices and translated into broad-based activity as the mining sector but also the construction and services sectors have largely contributed to growth since 2010. Inflation continues to be reigned in despite high prices of imported food and fuel. The external sector remains vulnerable due to a number of factors, including high imports of food and capital goods.

On the fiscal front, significant progress has been made. Fiscal consolidation has been the main objective, with strong measures taken to restrain spending. At the same time, structural reforms to enhance public financial management and natural resource management have been undertaken and are being pursued. The steps taken, including the commitment to zero (net) financing from the BCC has brought the fiscal deficit down from 2½ percent of GDP in 2009 to a projected deficit of 0.9 percent of GDP in 2012, and has been instrumental in lowering inflation and stopped the inflation-exchange rate depreciation cycle. For 2012, the budget has been elaborated by the authorities to respond to the tremendous needs facing the Congolese economy and population. Nevertheless, for the rest of 2012, the authorities will execute spending only as revenue becomes available in accordance with clearly set priorities.

Technical support from the IMF, the World Bank and other partners has been instrumental in the progress made on some structural fronts, notably public finance reforms (through the Strategic Plan for Public Finance Reform), fiscal planning, macrofiscal forecasting, steps toward a medium-term budget framework, and governance measures in the natural resource sector. Efforts by the BCC are also underway to strengthen financial supervision, deepen banking sector development, enhance its own financial situation through a recently completed pension reform, and eliminate non-core activities such as the management of a hospital center and real estate.

Despite a relatively positive short-term outlook, the DRC authorities recognize that the tail risks facing this economy—weaker global demand, falling commodity prices, and even an aggravated conflict in eastern provinces—argue for further strengthening macroeconomic buffers. They have drawn lessons from the experience of the global financial crisis that hit the country’s economy in 2009, and continue to build a stronger position to absorb external shocks. On the external front, the DRC authorities will strive to eliminate inefficient public investment financed by external resources and which accentuate the high debt risk.

Medium-Term Policies

Poverty Reduction Strategy for 2011–15

The authorities’ actions over the medium term will be guided by their new PRSP. Building on macroeconomic stability and good economic performance of recent years, the authorities will implement a poverty reduction strategy based on an ambitious medium-term framework that would be underpinned by greater expansion of the natural resource and agriculture sectors as well as efforts to enhance infrastructure, notably in the transport, energy and telecommunication sectors.

Employment is at the core of the country’s strategy. In implementing this strategy, particular emphasis is being put on demographic, education, health and social protection issues, with the view to strengthen human capital. At the same time, actions to further improve governance and the business environment are needed to attract private sector investment.

My authorities are appreciative of the encouragements from Fund and World Bank staffs, and welcome their recommendations to strengthen the PRSP-2, including in the areas of macroeconomic policies, institutional capacities, sectoral priorities, resource allocations, and implementation risk.

Establishing a Fiscal Policy Anchor

The authorities view the zero central bank financing of the budget as a key objective in managing public finances. They will continue to control expenditures and make full use of the recent fiscal reforms (value-added tax, strengthened capacity of the large taxpayer unit, one-stop customs window, improved information technology systems) to raise highly needed domestic revenue.

The DRC authorities look forward to continued Fund technical assistance to help them realize the potential of the natural resource sector, further improve public financial management and enhance the quality of spending. Regarding the fuel price mechanism, they intend to reform it, fully cognizant of its propensity to be subjected to political pressures and to generate volatile fuel prices and tax revenue. They are reflecting on the automatic price-smoothing mechanisms proposed by staff, which have significant advantages over the current policy in terms of retail price volatility and fiscal costs.

Enhancing the Effectiveness of Monetary Policy

The authorities welcome staff’s assessment of the factors that hamper the efficacy of monetary policy, and share such evaluation. They confirm their commitment to the current monetary and exchange rate regime which is better adapted to the country’s circumstances and necessary ability to absorb exogenous shocks. They share the recommendations detailed in Annex VIII of the report, aimed at strengthening the independence of the central bank, enhancing its data and analytical capacity, deepening financial markets and encouraging de-dollarization.

Structural Reforms to Bolster Economic Resilience

The DRC economy remains vulnerable to external shocks but also to internal developments. The authorities agree on the need to enhance both the resilience of the financial sector and the business environment. They welcome staff’s recommendations in this regard and they intend to implement them with technical assistance from the Fund and other partners. In particular, regarding the financial sector, the authorities requested a financial sector evaluation under FSAP and will pursue stress testing to assess vulnerabilities. They will also submit to parliament a new payment systems law aimed at reducing transaction costs and developing the banking sector.

On extractive industries, the authorities have already implemented a number of measures supported by the World Bank to strengthen governance in the natural resource sector, and they have submitted the instruments to adhere to OHADA (Organization for the Harmonization of African Business Law). The authorities will continue to build on the good progress made in ensuring the sanctity of contracts and private property rights and reviewing the mining code, to complete the governance and transparency agenda. They remain committed to the timely publication of natural resource contracts. They have expressed their intention to put in place measures to make commercially-run SOEs accountable to the government as their sole shareholder, strengthen the legal and regulatory framework applicable to the governance of those enterprises, and limit their external financing to concessional resources with the view to safeguarding public debt burden.

In conclusion, I would like to reaffirm my DRC authorities’ determination to pursue steadfastly policies that are conducive to macroeconomic stabily, poverty reduction and inclusive growth. They will continue to work closely with their development partners and the Fund in the achievement of the objectives spelled out in their PRSP.