Democratic Republic of the Congo: Staff Report for the 2015 Article IV Consultation

This 2015 Article IV Consultation highlights that the Democratic Republic of the Congo's macroeconomic performance remained strong through the first half of 2015 despite a difficult external and domestic environment. Real GDP growth in 2014 is estimated at 9.2 percent, driven by copper production and the service sector. The medium-term outlook is favorable but subject to downside risks. Real GDP growth is projected to remain strong at 9.2 percent in 2015-among the highest rates in the world-and average 8.4 percent in 2016-17 before stabilizing at about 6 percent in 2018-20.

Abstract

This 2015 Article IV Consultation highlights that the Democratic Republic of the Congo's macroeconomic performance remained strong through the first half of 2015 despite a difficult external and domestic environment. Real GDP growth in 2014 is estimated at 9.2 percent, driven by copper production and the service sector. The medium-term outlook is favorable but subject to downside risks. Real GDP growth is projected to remain strong at 9.2 percent in 2015-among the highest rates in the world-and average 8.4 percent in 2016-17 before stabilizing at about 6 percent in 2018-20.

Strong Macroeconomic Performance, but High Vulnerabilites

1. DRC’s macroeconomic performance remained strong. Real gross domestic product (GDP) growth in 2014 is estimated at 9.2 percent,3 essentially driven by copper production and the service sector (telecommunications, trade, and transport). Year-on-year inflation stabilized at 1.0 percent at end-December 2014. The fiscal position recorded a small surplus in 2014 despite a one percentage point of GDP increase in expenditures, driven by higher exceptional spending on security in the context of the fiscal anchor adopted in 20094 while government revenue (excluding grants) increased only marginally (0.4 percentage points of GDP). The external current account deficit narrowed to 9.2 percent of GDP in 2014 from 10.6 percent of GDP in 2013, reflecting an improvement in the terms of trade and strong mineral export volumes.5 Sustained inflows of foreign direct investments (FDI) contributed to an overall balance of payments surplus, despite decreasing official capital transfers. However, international reserves fell in U.S. dollar terms (See Figure 1). The exchange rate remained relatively stable since 2010, even though the de-jure exchange rate arrangement is floating.

Figure 1.
Figure 1.

Democratic Republic of the Congo: Recent Economic Developments

Citation: IMF Staff Country Reports 2015, 280; 10.5089/9781513596662.002.A001

Sources: Congolese authorities and IMF staff estimates.

2. The financial health of the banking system seems to have improved somewhat in 2014. Average ratio of regulatory capital-to-risk-weighted assets improved slightly in 2014 as did profitability and liquidity ratios. However, the quality of the portfolio deteriorated with non-performing loans to total gross loans increasing to 6.9 percent from 5.4 percent in 2013.

3. Nonetheless, vulnerabilities remain elevated:

  • Weak competitiveness. While there is no sign of an exchange rate misalignment for DRC in 2014 other indicators show that DRC’s competitiveness is impaired by structural bottlenecks and a challenging business climate. Electricity shortages are becoming a hindrance to economic activity, particularly mining.

  • Low official reserves. Official reserves declined by US$118 million in 2014 to US$1.6 billion, enough to cover only 1.6 months of next year’s projected imports compared with at least 11.5 months as estimated in the reserve adequacy assessment (see Appendix III).

  • Central bank and financial sector vulnerabilities. The financial position of the Central Bank of Congo (BCC) remained precarious, undermining the conduct of monetary policy. As underscored by the 2014 FSAP, the insurance and pension systems are also in a dire financial position, as are many microfinance institutions (MFIs).

4. DRC continues to display some characteristics of fragility, such as:

  • Fractious political setting. The political situation remains fluid essentially because two major opposition parties still question the legitimacy of the president following the disputed 2011 presidential elections. These parties also declined to join the government of national cohesion appointed last December.

  • Heightened political uncertainty. Seven elections at a total cost of $1.1 billion are to be held between October 2015 and November 2016 without any clear indication of how they will be financed.6 Mixed signals about whether the incumbent president will abide by the term limit imposed by the Constitution are adding to the political uncertainty. Also, a constitutionally-mandated increase in the number of provinces from 11 to 26 enacted in May 2015 further increases uncertainty about the electoral process.

  • Residual security risks. Residual rebel activities in the eastern provinces and delays in institutional reforms, including the security sector reform (SSR)7 are making lasting peace in the east elusive.

5. Implementation of past policy recommendations was broadly satisfactory, but key structural reforms continued to lag (see Appendix I). These relate to the Central Bank and the Commercial Bank Laws, the Mining Code, the recapitalization of the BCC, and measures aimed at enhancing transparency in the management of natural resources and strengthening the corporate governance and accountability of major state-owned enterprises (SOEs). Similarly, reforms to strengthen financial stability, banking supervision, and resolution of financial crises made little progress (see Table 8).

Table 1.

Democratic Republic of the Congo: Selected Economic and Financial Indicators, 2012–20

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

The projections for 2011 and beyond account for mining companies profit outflows.

Projections are based on calculations under the 2010 HIPC Debt Sustainability Analysis (EBS/10/121, 06/16/2010). Includes assistance beyond the terms of the enhanced HIPC Initiative granted by some Paris Club creditors. Exports are a trailing three-year moving average.

Table 2a.

Democratic Republic of the Congo: Central Government Financial Operations, 2012–20

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Sources: Congolese authorities and IMF staff estimates and projections.

From 2013, various funds and previously off budget items are included in the Budget.

Reflects calculation of HIPC Initiative assistance on the basis of the 2010 Debt Sustainability Analysis (EBS/10/121,16/06/2010).

Mainly security and elections.

Overall fiscal balance, minus HIPC/MDRI debt relief, plus debt relief on foreign interest payments.

Excluding grants, interest payments on external debt, and foreign-financed expenditures.

Table 2b.

Democratic Republic of the Congo: Central Government Financial Operations, 2012–20

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

From 2013, various funds and previously off budget items are included in the Budget.

Reflects calculation of HIPC Initiative assistance on the basis of the 2010 Debt Sustainability Analysis (EBS/10/121,16/06/2010).

Mainly security and elections.

Excluding grants, interest payments on external debt, and foreign-financed expenditures.

Table 3.

Democratic Republic of the Congo: Monetary Survey, 2011–15

(At current exchange rates)

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

In billions of Congo francs at current exchange rates.

Table 4.

Democratic Republic of the Congo: Balance of Payments, 2012–20

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

Two reclassifications were introduced in 2013. First, repatriation of profits by international companies operating in the natural resources sector passed from the financial account (other private non-banking sector) to the current account (expenditure under the income balance). Second, a larger part of official grants were registered under the current account (current transfers) for aid covering recurrent expenditures

Including interest due to the IMF.

Excluding principal repayments to the IMF.

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