Democratic Republic of the Congo: Selected Issues
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International Monetary Fund. African Dept.
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This Selected Issues paper takes stock of poverty in the Democratic Republic of the Congo (DRC). Poverty has receded in the DRC over the last decade on the back of gradual stabilization in the security and political situation, strong economic growth, and sharp decline in inflationary pressures. Most social indicators also improved during the period. However, poverty remains pervasive with a level still among the highest in sub-Saharan Africa, and DRC will likely not achieve any of the Millennium Developments Goals by 2015. Policy actions should focus on fostering the development of labor-intensive sector, increasing social spending, and redirecting public resources to the poorest regions of the country.

Abstract

This Selected Issues paper takes stock of poverty in the Democratic Republic of the Congo (DRC). Poverty has receded in the DRC over the last decade on the back of gradual stabilization in the security and political situation, strong economic growth, and sharp decline in inflationary pressures. Most social indicators also improved during the period. However, poverty remains pervasive with a level still among the highest in sub-Saharan Africa, and DRC will likely not achieve any of the Millennium Developments Goals by 2015. Policy actions should focus on fostering the development of labor-intensive sector, increasing social spending, and redirecting public resources to the poorest regions of the country.

Strengthening Budget Credibility1

Budget credibility in the Democratic Republic of the Congo (DRC) has been undermined by unrealistic resource projections. This situation has complicated budget execution and limited Parliament’s oversight role. This note analyses resource and expenditure forecasts to budget execution over the past five years in order to identify the main causes of low implementation, and proposes measures that would enhance the credibility of the budget.

A. Actual and Forecasted Resources

1. Differences between budgeted resources and outturns in the DRC have been large. As illustrated in Figure 1a and 1b, over the past five years, the execution rates of total budgeted resources have fluctuated between 48.6 and 71.9 percent, driven mostly by developments in external resources. Tax and non-tax revenues, albeit more predictable with execution rates ranging from 75 to 85 percent, also contributed to the fluctuations. While both the budgeted resources and outturns have increased at an average of about 25 percent per annum in nominal terms, revenue projections in the budget process seem to not take into consideration the outturns of the previous year and appear to be based on the previous year’s forecasts. This has led to resources projections always higher on average by 55 percent than the previous year’s outturns.

2. Several administrative weaknesses explain these discrepancies. For external financing, it mainly reflects flaws in the process of gathering data from donors, as well in the administrative capacity to mobilize aid. Concerning tax and non-tax revenue, the differences2 come from natural resource and telecommunication revenues (royalties and other one-off revenues), and reflect both limited technical capacity of the administration to forecast mining and telecommunication revenues, as well insufficient information-sharing between line ministries and revenue administration. They also come from VAT, and indicate difficulties by the tax administration to control the VAT base. For instance, poor VAT performance has accounted for up to 50 percent of the budget/execution gap in 2013 and over 25 percent in 2012.

Figure 1a.
Figure 1a.

Democratic Republic of the Congo: Forecasted and Executed Resources

(CDF billion)

Citation: IMF Staff Country Reports 2015, 281; 10.5089/9781513590189.002.A004

Figure 1b.
Figure 1b.

Democratic Republic of the Congo: Forecasted and Executed External Resources, Tax and Non-Tax Revenue

(CDF billion)

Citation: IMF Staff Country Reports 2015, 281; 10.5089/9781513590189.002.A004

Sources: Congolese authorities and IMF staff calculations.1 Execution rates are indicated in the graphs.
Table 1.

Democratic Republic of the Congo: Breakdown of the Budget/Execution Revenue Gap (Domestic Revenue)

(All figures are percentages of the total Budget/Execution gap)

article image
Sources: Congolese authorities and IMF staff calculations.

B. Actual and Budget Allocations

3. Differences between outturns and forecasted expenditures have mirrored those of resources, in line with the implementation of the fiscal anchor. In recent years, they have hovered between 50 and 60 percent (Figure 2a). Budget execution for investment, both foreign and domestically-financed was lower than that of current spending (Figure 2b). For instance, in 2012, the execution rate of foreign-financed investment was only 35.3 percent. The situation deteriorated in 2013, although the low level of foreign-financed investments in that year appears to be exceptional. Looking at domestically-financed spending3 only, the most important execution gap comes from transfer-based provincial investments (between a third and half of the gap), the rest being scattered across various ministries (see Table 2). Given the small share of domestically-financed and centrally-executed investments in the budget (5 to 10 percent of all investments for every year from 2009 to 2015),4 this means that even domestically-financed investments are poorly executed.

Figure 2a.
Figure 2a.

Democratic Republic of the Congo: Forecasted and Executed Expenditures

(CDF billion)

Citation: IMF Staff Country Reports 2015, 281; 10.5089/9781513590189.002.A004

Sources: Congolese authorities and IMF staff calculations.
Figure 2b.
Figure 2b.

Democratic of the Republic of the Congo: Forecasted and Executed Foreign/Domestically-Financed Expenditures

(CDF billion)

Citation: IMF Staff Country Reports 2015, 281; 10.5089/9781513590189.002.A004

Sources: Congolese authorities and IMF staff calculations.1 Execution rates are indicated in the graphs.
Table 2.

Democratic Republic of the Congo: Breakdown of the Budget / Execution Expenditure Gap (Domestically-Financed)1

(Breakdown by “Budget Items” - All figures are percentages of the total Budget / Execution gap)

article image
Sources: Congolese authorities and IMF staff calculations.

Based on the “Budget Items”. Includes a very small share of non-investments foreign-financed expenditures.

4. Execution rates for domestically-funded non-investment expenditures have differed and fluctuated over time between ministries and within ministry. As illustrated in Table 2, the Presidency and Defense have over-executed almost systematically (but with more or less regular execution rates, except for the Presidency), while sovereign institutions had normal execution rates. In addition, line ministries had much lower and irregular execution rates. Table 4 shows this erratic movement in a more visible manner.

Table 3.

Democratic Republic of the Congo: Execution Rates for Domestically-Funded Non-Investment Budget Items1

(Breakdown by “Administration”)

article image
Sources: Congolese authorities and IMF staff calculations.

Excludes foreign- and domestically-funded investments and foreign-financed exceptional expenditures. Small foreign-funded salaries and operations expenditures (“Other institutions” and “Other ministries” may subsist but do not significantly affect results).

Table 4.

Democratic Republic of the Congo: Execution for Domestically Funded Non-Investment Budget Items 1

(Breakdown by budget Items)

article image
Sources: Congolese authorities and IMF staff calculations.

Excludes foreign- and domestically-funded investments and foreign-financed exceptional expenditures. Small foreign-funded salaries and operations expenditures (“Other institutions” and “Other ministries” may subsist but do not significantly affect results).

C. The Road to Enhance Budget Credibility

5. Large gap between actual and forecasted revenue and expenditures undermines budget credibility and the oversight role of Parliament. Shortfalls in the revenue collection in the DRC’s context inevitably lead re-prioritization and re-allocation of resources, thus depriving Parliament of its authority and rightful role in the budget management process. Inasmuch as expenditure cuts heavily fall on investments, this could inhibit private sector development because of the ensuing lack of enabling environment.

6. Ensuring the realism of resource projections is paramount to budget credibility. In this regard, it is necessary to use past realizations as a basis for projections. Tax measures attached to the draft budget should be adopted simultaneously with the budget law or otherwise the related resources deducted from the draft budget. The capacity of revenue administration to forecast natural resource revenues needs to be strengthened. In this regard, the FARI5 model provided by the IMF to the authorities through a technical assistance could be used to forecast natural resource revenues. Better information sharing between line ministries and the Ministry of Budget in one hand, and the authorities and donors on the other hand could help reduce discrepancy between revenue projections and outcomes.

7. The increased use of supplementary budget is a means to restore the credibility of the budget and the oversight of the parliament. It would allow to factor into the budget (revenue and expenditure) the impact of unanticipated developments since the adoption of the budget, preserving then the oversight role of parliament. Frequent budget overruns in some lines would then be avoided.

1

Prepared by Patrick Petit.

2

Before 2011, by far the most important cause for the gap in tax and non-tax revenues was difficulties in forecasting revenues from the provinces. Since the adoption in 2011 of the Law on Public Finance Management, revenues from provinces are excluded from the central government’s budget.

3

Which here includes the 0 to 10 percent of non-investment foreign-financed expenditures.

4

This corresponds to the line « Domestically-financed investments in Table 1.

5

The Fiscal Analysis of Resources Industries (FARI) model is a tool developed in the IMF’s Fiscal Affairs Department.

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Democratic Republic of the Congo: Selected Issues
Author:
International Monetary Fund. African Dept.
  • Figure 1a.

    Democratic Republic of the Congo: Forecasted and Executed Resources

    (CDF billion)

  • Figure 1b.

    Democratic Republic of the Congo: Forecasted and Executed External Resources, Tax and Non-Tax Revenue

    (CDF billion)

  • Figure 2a.

    Democratic Republic of the Congo: Forecasted and Executed Expenditures

    (CDF billion)

  • Figure 2b.

    Democratic of the Republic of the Congo: Forecasted and Executed Foreign/Domestically-Financed Expenditures

    (CDF billion)