Democratic Republic of the Congo: 2019 Article IV Consultation—Press Release; Staff Report; and Statement by the Executive Director for the Democratic Republic of the Congo
Author: International Monetary Fund. African Dept.
Publication Date:
04 Sep 2019
eISBN:
9781513512822
Language:
English
Keywords:
ISCR; CR; authority; Congolese authorities; debt; Congo; central bank; DRC authorities; foreign exchange; broad money; natural resource; Mining sector; Credit; Bank deposits; Sub-Saharan Africa; Global
Download PDF (928.6 KB)

2019 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Democratic Republic of the Congo

Abstract

2019 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Democratic Republic of the Congo

Context

1. The Democratic Republic of the Congo >(DRC) is a fragile state (Box 1) and one of the poorest countries in the world, despite vast natural resources. Copper, cobalt, and other minerals provide revenue, but they have also helped fuel violent conflict and undermine governance. The economy is undiversified and acutely vulnerable to commodity-price shocks and supply risks. Per capita income remains at about US$470, a sharp decline from over US$1,000 in the 1990s—and much below the sub-Saharan African average of about US$1,600. In 2014, 77 percent of the population lived below the poverty line.

Text Figure 1.
Text Figure 1.

Democratic Republic of the Congo: GDP per Capita, in US$

Citation: IMF Staff Country Reports 2019, 285; 10.5089/9781513512822.002.A001

Source: IMF WEO database.

Democratic Republic of the Congo: Fragility

DRC exhibits the trappings of fragility: political instability, weak institutional capacity, and poor governance. The sheer size of the country creates its own challenges. It is as large as Western Europe. Most of its nine bordering countries have faced violent conflict with spillover effects to DRC. The country has experienced episodes of violent conflict since independence in 1960 and full-scale civil war from 1997 to 2001. Since the end of the civil war, efforts have been made to rebuild the state and transition to democracy, but public management and institutions remain weak and vulnerable. The ongoing violent conflicts have led to a humanitarian crisis with over five million displaced people and widespread violence against civilians.

Poverty is widespread. Social indicators are among the worst in the world in the context of a high population growth rate of around 3 percent a year. DRC ranked 178th out of 185 countries on the 2016 UNDP Human Development Index. Fiscal capacity is weak. Domestic revenue is low even by sub-Saharan African (SSA) standards. Institutional capacity is limited with a CPIA score of 2.7 (a score below 3.2 represents low performance).

uA01fig01

Democratic Republic of the Congo: Episodes of Violent Conflict

Citation: IMF Staff Country Reports 2019, 285; 10.5089/9781513512822.002.A001

Source: Uppsala Conflict Data Program
1/ CNL : Conseil National de Libération. FLNC : Front pour la Libération National du Congo. CNDP : Congrès national pour la Défense du Congo. M23 : Mouvement du 23 mars. APCLS : Alliance des Patriotes pour un Congo Libéré et Souverain.

2. The country is experiencing its worst outbreak of the deadly Ebola disease, recently declared a “Public Health Emergency of International Concern” by the World Health Organization (WHO). As of July 17, a total of 2,532 cases, including 1,705 deaths, had been reported. The epidemic started in August 2018 in northeastern DRC, close to the border with Uganda, Rwanda, and South Sudan. A few cases have been confirmed in Uganda. The response to the outbreak has been coordinated by the WHO, NGOs, and the ministry of health. Violent conflict in the affected regions and distrust of the government have hindered efforts to contain the epidemic despite the widespread use of a vaccine developed towards the end of the 2014–16 outbreak in West Africa which killed over 11,000 people. The economic impact of the Ebola outbreak has been so far limited.

3. The country has also been suffering from other recurring humanitarian and health crises. Violent conflict in the north-east of the country have displaced about five million people within the country. The gap towards the Sustainable Development Goals is large (Text Figure 2).

Text Figure 2.
Text Figure 2.

Democratic Republic of the Congo: Sustainable Development Goals

Citation: IMF Staff Country Reports 2019, 285; 10.5089/9781513512822.002.A001

Source: Bertelsmann Stiftung and Sustainable Development Solutions Network

4. The first ever peaceful presidential transition took place in January 2019. Félix Tshisekedi, an opposition candidate, was declared the winner of the presidential elections which took place in December 2018 after a two-year delay. Former President Kabila’s party received large majorities in the National Assembly and the Senate, requiring compromise solutions for the appointments of the Prime Minister and his cabinet. Sylvestre Llunga, former economic advisor in the previous government, was appointed Prime Minister in May 2019 but cabinet members have yet to be nominated. President Tshisekedi has laid out a 100 day-program with four pillars: (i) good governance; (ii) sustainable economic growth; (iii) the human being; and (iv) solidarity. He intends to scale up public investment to reduce a large infrastructure gap.

5. This Article IV consultation provided a welcome opportunity to re-engage with the DRC authorities after a long hiatus (the last consultation took place in July 2015). The authorities had cited political uncertainty as reasons for delaying the overdue consultation. Provision of economic data has remained broadly adequate for surveillance. Some recommendations from the previous consultation remain outstanding (Annex IV). These include: (i) stepping up domestic revenue mobilization; (ii) removing bottlenecks to private sector activity; (iii) strengthening governance and enhancing transparency, particularly in the management of natural resources; and (iv) recapitalizing the central bank to strengthen its financial and operational autonomy. The authorities have also expressed interest in a Fund-supported program to accompany their economic development agenda.

Main Economic Developments

6. The economic situation deteriorated significantly after the 2015 Article IV consultation. Copper and cobalt prices slumped by 30 and 21 percent, respectively, between 2014 and 2016. Given the dominance of these minerals in the economy (Box 2), the price shocks resulted in sizable declines in government revenue and foreign exchange receipts. In 2017, donors cut support in response to the delayed presidential elections. Growth declined sharply from 6.9 percent in 2015 to 2.4 percent in 2016, and partially recovered to 3.7 percent in 2017. The Central Bank of Congo (BCC) monetized the ensuing fiscal deficit and intervened in the foreign exchange market, while domestic arrears were accrued. Between 2015 and 2017, the Congolese franc depreciated by 72 percent, annual average inflation rose from 1 percent to 36 percent, and BCC reserves fell from 4.9 to 1.9 weeks of imports of goods and services.

7. Macroeconomic policies were subsequently adjusted to avoid a meltdown. In mid-2017, the government introduced a balanced budget on a cash basis while continuing to accrue domestic arrears. The BCC incrementally raised its policy rate (from 2 percent in September 2016 to 20 percent in June 2017) as well as liquidity reserve requirements. As a result, inflation decelerated sharply (Figure 1).

8. Stronger copper and cobalt prices and increased production triggered some recovery in 2018. Total GDP grew by an estimated 5.8 percent, with non-extractive GDP expanding by only 1.9 percent. Twelve-month inflation fell to 7.2 percent by December 2018 and the Congolese franc depreciated by only 2.5 percent over the year. The current account deficit increased from 3.2 percent of GDP in 2017 to 4.6 percent of GDP in 2018, while central bank foreign reserves recovered modestly to 2.6 weeks of imports. Given limited access to foreign financing, external public debt fell slightly to 13.7 percent of GDP at end-2018, while domestic debt, comprising only domestic arrears, rose from 0.3 percent of GDP in 2015 to an estimated 6.5 percent of GDP by end-2018.

9. Financial conditions also strengthened in 2018. Monetary aggregates rebounded (M2 grew by 30 percent), spilling over into a strong recovery in credit to the private sector (56 percent growth). Dollarization in the banking system stabilized following a large increase in previous years linked to a large currency depreciation, with a ratio of foreign currency deposits to total deposits of 90 percent in December 2018 (84 percent at end-2015). Still, many financial soundness indicators remained weaker than prior to the external and political shocks (Table 5).

10. Recent performance underlines persistent challenges. Despite a loosening of fiscal policy towards end-2018 to finance the elections, a budget surplus of 0.4 percent of GDP was recorded for the whole year, thanks to a large increase in mining revenue. The BCC further reduced its policy rate to 9 percent in April 2019, while keeping reserve requirements unchanged. As of end-June 2019, year-on-year inflation was 4.1 percent while the local currency had depreciated by 0.6 percent since the beginning of the year. International reserves increased by about US$48 million during the first five months of 2019 and the fiscal deficit was close to zero percent of GDP.

Mining Sector in the Democratic Republic of the Congo

The mining sector plays a central role in the Congolese economy. Copper and cobalt are the main commodities and represented, respectively, 50 and 35 percent of total mining sales in 2018, followed by gold, diamond, zinc, coltan, cassiterite, wolframite and silver. The DRC was the fourth largest producer of copper in 2018 (5.7 percent of the 2018 world production) and the largest producer of cobalt (64 percent of the world production). Production is undertaken on both industrial and artisanal scales and the sector employs about 4 percent of the working-age population. Mining share in GDP has exceeded 25 percent over the last 5 years and was close to 30 percent in 2018. Its contribution to GDP growth has been volatile in response to copper and cobalt price fluctuations. On average, a quarter of total FDI over the last 10 years has been linked to the mining sector. Apart from the payment of taxes and charges, mining companies play also an important social and economic role in mining regions (i.e., building or maintaining hospitals, schools and public infrastructure such as roads); at the same time, the sector has often been criticized for its lack of transparency and human rights abuses.

Minerals accounted for over 90 percent of total exports over the last five years, leaving the country highly vulnerable to external shocks. Price volatility, exemplified by falling prices in 2015–16, highlights the need to build buffers and diversify the economy to mitigate the impact of external shocks.

Democratic Republic of the Congo: Mining Sector, 2014–18

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

The new Mining Code introduced in June 2018 would boost mining revenues. The previous Code, introduced when the country was emerging from civil war, was particularly favorable to mining companies given the need to attract private investment. The new Code substantially hikes mining royalties and taxes and eliminates accelerated depreciation provisions (see Selected Issue Paper on Natural Resource Management in the DRC). Mining companies have criticized some elements of the new Code, notably the rescinding of the ten-year fiscal stability clause and the increase in the share of export proceeds required to be repatriated (from 40 to 60 percent). This, they say, makes it difficult to cover obligations abroad. On the other hand, DRC authorities insist that this is needed for export receipts to have positive spillover effects on the rest of the economy.

Outlook and Risks

11. The baseline scenario, based on status quo policies, shows that development goals— promoting inclusive growth and generating jobs for a rapidly expanding population —cannot be reached. The scenario features continued prudent macroeconomic policies combined with limited economic and governance reforms. It assumes a decline in commodity prices in 2019 by about 7 percent, in line with World Economic Outlook projections, and unchanged levels going forward. Low fiscal deficits are projected as financing options remain limited, restraining investment projects. Monetary and exchange rate policies remain consistent with a slow recovery of BCC’s foreign reserves. GDP growth and inflation are projected to average about 4 and 5 percent respectively over the medium term, while reserve coverage will gradually rise towards 5 weeks of imports. This scenario is suboptimal, leading to insufficient growth rates to tackle DRC’s large development needs and significant demand for employment by a rapidly expanding population; and would yield still limited, although recovering, external buffers to protect against shocks.

12. A reform scenario based on the policy recommendations below would lead to higher inclusive economic growth and stronger policy buffers. The scenario is predicated on a steady acceleration of non-extractive growth supported by reforms. Overall GDP growth would increase relative to the baseline scenario by between 0.3 and 1.7 percentage points over the medium term. Infrastructure and social spending would be substantially scaled up over the medium term (by 4.3 percent of GDP by 2024) through higher fiscal revenue, arising from a range of tax policy and administration reforms, as well as from increased grants and external financing in the context of improved relationships with development partners. As shown in Text Table 1, increasing external borrowing by 1–2.5 percent of GDP per year would still keep public external debt below 15 percent of GDP and the risk of debt distress would remain moderate. The more expansionary fiscal policy would not increase fiscal vulnerabilities, given the growth dividends from reform. Foreign exchange reserves would increase faster and coverage would reach 3 months of imports by 2024. Fiscal revenue, while higher than in the baseline scenario, remains relatively low. This reflects the severity of the constraints to revenue mobilization discussed below. Addressing these constraints more exhaustively would require sustained reform efforts beyond the medium-term.

13. The economic outlook is subject to significant downside risks (RAM, Annex III). An escalation of the present Ebola epidemic to other regions could have adverse macroeconomic implications, depending on the scale of the epidemic and its geographical spread. Economic activity would ultimately be disrupted, leading to a loss of fiscal and export revenues, while scarce public funds would have to be diverted to finance the response efforts. Under such circumstances, the international community must step up considerably logistical and financial support to the response to the epidemic. Financing from the Rapid Credit Facility (RCF) could complement these efforts and help cushion the adverse fiscal and balance of payments consequences. Other risks include resorting to fiscal loosening with related monetary financing; a fall in copper and cobalt prices; and an intensification of ongoing armed conflicts. With correspondent banking relations mainly channeled through one domestic bank, the banking sector is vulnerable. On the political front, tensions within the governing coalition could undermine political and macroeconomic stability. On the upside, the new regime could facilitate the implementation of reforms and the resumption of donor support.

14. The authorities broadly agreed with staff assessment on risks but disagreed with the baseline growth forecast and expect a generally more positive outlook. They project a 2019 growth rate of 5.9 percent (4.3 percent in staff projections), with more optimistic forecasts for both extractive and non-extractive sectors. They expect an increased global demand for electric cars to sustain high growth in the extractive sector, increased public investment driven by the government’s 100-day plan, and a recovery in private sector activity to jumpstart non-extractive sector growth. The authorities also stressed that (i) commercial banks have large net foreign assets; and (ii) a large share of imports is done by mining companies with ample foreign exchange receipts.

Text Table 1.

Democratic Republic of the Congo: Selected Economic Indicators, 2018–24 (in percent of GDP, unless otherwise indicated)

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

Policies and Reforms

A. Increasing Fiscal Space and Budget Credibility

15. On current trends, limited revenue mobilization and financing options call for a continuation of a tight fiscal stance. Revenue prospects are constrained and potentially volatile, and access to financing limited, despite a moderate risk of debt distress (see Debt Sustainability Analysis). In the circumstances, the authorities should persevere with spending restraint and the implementation of a balanced budget on a cash-basis as the fiscal anchor. Broad reforms would help expand the government’s resource envelope, including by reactivating donor support. A return to strict compliance with the rule of no central bank financing of the budget should be enforced to avoid monetizing the deficit and creating inflation. Over the medium term, staff recommended formulating a fiscal policy framework based on the non-mineral domestic balance to smooth spending vis-à-vis volatile mineral revenue and allow a scaling-up of public investment while maintaining debt sustainability. To that effect, the forecasting of mineral revenue needs to be improved, including by updating the Fiscal Analysis of Resource Industries (FARI) model with Fund capacity development (CD) support, and enhanced inter-institutional coordination.

16. Increasing fiscal space through enhanced revenue mobilization, especially non-resource revenue, is a priority. DRC’s revenue-to-GDP ratio is less than 12 percent, compared to the SSA average of over 20 percent, suggesting a significant tax gap (estimated by the World Bank at 5.3 percent of GDP). The objective should be to cut this gap sharply (see below). A range of weaknesses underlies this gap: large tax expenditures and widespread informality, a narrow tax base, a breakdown of the VAT system, proliferation of nuisance taxes and of tax collection agencies, overlap between national and provincial taxes, the difficulty of policing long borders, and pervasive corruption. With CD support from FAD and the World Bank, a tax expenditure assessment was recently completed. Staff recommended publishing the assessment with the 2020 budget and devising a plan to rationalize tax expenditures over the medium term.

Text Figure 3.
Text Figure 3.

Total Revenue

Citation: IMF Staff Country Reports 2019, 285; 10.5089/9781513512822.002.A001

Sources: DRC authorities and IMF staff calculations

17. A simplification of the tax system should strengthen the tax base and enhance revenue collection. Tax expenditures are estimated at around 2 percent of GDP. The current system is extremely complex and fragmented with more than 350 taxes and 800 parafiscal levies for the central government alone. The proliferation of taxes and tax collection institutions undermines transparency and accountability, generates uncertainty, and penalizes businesses. Coordination among the three main tax collection agencies and several supplementary agencies, while improving, is limited. Computerized collection systems and platforms need to be updated and integrated to facilitate information-sharing and reduce tax evasion.

18. Natural resource revenues would increase with the implementation of the new Mining Code, but would remain volatile. The average effective tax rate would be well above international comparators (Natural Resource Governance Institute, 2018), particularly for gold. While an increase in the government’s take in the mining sector is welcome, the revised Code could limit the development of the mining sector going forward. The authorities should further integrate mining revenue into the central government’s Treasury (including from state-owned enterprises and the mineral fund for future generations) and strengthen tax administration to, e.g., limit transfer pricing practices. The authorities have stopped collecting the VAT on imports of mining companies because of their inability to refund VAT credit. VAT credit arrears amounted to US$0.8 billion as of end-March 2019. The authorities envisage progressive reimbursements against future tax payments. Staff recommended setting up a proper institutional arrangement to reinstate VAT collections and develop a plan to audit and clear VAT credit arrears.

19. Expenditure needs to be made more efficient in light of limited resources. Total central government expenditures remain modest, but current expenditures have increased faster than investment in recent years. The wage bill, equivalent to about half of tax revenues, weigh heavily on the central government’s budget and the efficiency of spending is low (SIP on Poverty and Government Social Spending in the DRC and Text Figure 4). Reform of the civil service is needed to increase its efficiency, streamlining the number of civil servants while increasing salaries. In addition, investment needs are considerable, and the authorities have developed an ambitious investment program based on the President’s 100-day plan, though financing options are limited. The Ministry of Finance plans to issue Treasury securities starting in 2019. Donor financing could be forthcoming, though not in the immediate future.

Text Figure 4:
Text Figure 4:
Text Figure 4:

Democratic Republic of the Congo: Expenditure Efficiency and Composition

Citation: IMF Staff Country Reports 2019, 285; 10.5089/9781513512822.002.A001

Sources: IMF staff calculations.

20. Some progress has been achieved in public financial management, but core functions remain weak. The macroeconomic framework is now updated on a quarterly basis and cooperation between services to provide revenue forecasts has improved. However, the credibility of the budget is affected by remaining weaknesses in revenue forecasting and Parliament’s pressures to set high revenue targets to justify larger expenditure allocations. Staff recommended producing realistic revenue (particularly from the mineral sector) and expenditure projections and incorporating them in a revised 2019 budget and the draft 2020 budget. In addition, budget execution has mostly relied on a weekly cash management committee that monitors incoming revenues and prioritizes payments through widespread use of ad-hoc/emergency spending procedures. Therefore, the expenditure chain needs to be gradually restored and the use of emergency spending procedures restricted. A computerized expenditure chain system in place should help to that effect but it needs to be supported by regulations strictly framing the use of non-standard spending procedures.

21. Improved cash planning and full implementation of a Treasury Single Account (TSA) are needed to enhance cash management. The monitoring of Treasury flows needs to be reinforced and coordination between the government and the BCC in the formulation of treasury plans enhanced. Revenues are only partially integrated into the TSA, which consists of a general treasury account and multiple sub-accounts whose funds cannot be reallocated to the general account. Furthermore, there are public sector accounts completely outside the treasury’s circuit, including so-called “special accounts” with dedicated resources spent outside the central government’s budget (e.g., the Roads Fund). The authorities should adopt legislation to allow direct transfer of revenue flows into the administration’s general account and formalize the fungibility of resources from government’s sub-accounts. In addition, the special accounts should be gradually integrated into the budget.

22. A strategy is needed to pay off potentially sizable domestic arrears. As of end-2018, the stock of domestic arrears, including VAT refund arrears, amounted to 6.5 percent of GDP, of which 61 percent are audited arrears (mostly debt from social sectors and judiciary rulings), and the rest are debt to provinces and oil-related companies. Up to 7 percent of GDP in potential arrears remains to be audited. The strategy should entail an independent audit by international and/or local experts of all non-audited domestic arrears, cross-settlement in the case of cross debts, and the formulation of a medium-term action plan for settlement.

23. DRC’s risk of debt distress is assessed as moderate despite a low debt-to-GDP ratio. External debt was equivalent to 13.7 percent of GDP, of which liabilities from the mining-infrastructure project Sicomines represented almost 40 percent. It has declined since the 2015 DSA, but domestic debt increased from 0.3 percent of GDP in 2014 to 6.5 percent in 2018, due in part to the authorities’ efforts to broaden coverage of domestic debt by including the provinces and auditing legacy arrears. Vulnerabilities—reflected in high debt-service-to-revenue ratios—persist, highlighting the importance of increasing revenue mobilization. While re-engaging with the international community, DRC should avoid expensive external borrowing, collateralized loans, and external arrears. The authorities should develop a medium-term debt strategy to maximize efficiency of borrowing flows and ensure debt sustainability. They should continue broadening debt coverage, especially by including debt of state-owned enterprises without explicit guarantees from the central government.

24. While broadly agreeing with staff views, the authorities had more optimistic revenue forecasts. They believed that higher revenues from the new Mining Code and the issuance of treasury bonds should allow the financing of investment in the government’s 100-day plan. They are eager to reengage with the international community to help finance investment projects and provide budget support. The authorities plan to finalize an agenda of domestic revenue and public financial management reforms once the new government is in place with inputs from requested CD support, including from a project under the Managing Natural Resource Wealth trust fund.

B. Monetary and Exchange Rate Policies

25. Monetary policy is hampered by the high levels of financial dollarization. Monetary policy’s ultimate objective is to achieve a medium-term inflation rate of 7 percent. The BCC sets monetary aggregates’ targets accordingly. A key monetary policy instrument is the reserve requirement, which is set at differentiated rates based on currency and maturity. However, required reserves must be maintained in local currency only, creating an exchange rate mismatch in commercial banks’ balance sheets. The interbank market is shallow—partly because banks carry large liquidity buffers in foreign currency—limiting the tools for monetary policy and the transmission mechanism of changes in BCC’s policy rate. Given low BCC foreign exchange (FX) reserves, the space for FX interventions is very limited, even to counter disorderly market conditions. The low level of BCC FX reserves is partly due to the BCC’s policy of holding its foreign currency deposits at local banks.

26. The BCC policy framework can be fine-tuned to enhance its effectiveness. The recent conduct of monetary policy has yielded positive results despite limited space for maneuver. In that context, staff called for maintaining the current monetary policy stance and framework, but to take advantage of ample liquidity in the banking system to increase BCC FX reserves by sending abroad its foreign currency deposits currently held at domestic banks. Staff also called for reserve requirements on foreign currency deposits to be constituted in foreign currency and agreed with keeping lower requirement rates for local currency deposits. Staff acknowledged that financial de-dollarization should be a long-term objective that would be gradually achieved through prudent macroeconomic policies and by building trust in the Congolese Franc and in the conduct of monetary policy.

27. The new Mining Code of 2018 requires mining companies to repatriate 60 percent (raised from 40 percent) of export receipts to their accounts in the DRC, with their uses subject to restrictions under the Exchange Regulation of 2014. This measure constitutes a tightening of the existing capital flow management measure (CFM) under the Fund’s Institutional View on capital flows (IV). The increased repatriation requirement helped mitigate acute balance of payments pressures. In line with the IV, the tightening of the repatriation requirement on export proceeds should complement needed macroeconomic policy adjustments and be scaled back as adjustment progresses and balance of payments pressures subside.

28. The central bank would benefit from increased autonomy and enhanced financial transparency. The 2010 safeguards assessment and the 2014 Financial System Stability Assessment noted that the BCC needed to be recapitalized to increase its operational autonomy and that the absence of an international financial reporting framework impaired transparency. A plan to increase the capital of the BCC to about US$130 million has been formulated; however, given budgetary constraints, the recapitalization schedule is still being discussed. Two Congolese commercial banks publish their reports under the IFRS, while the rest of the banks and the BCC anticipate complying before end-2020. Only an abridged version of the audited financial statements of the BCC is published on the BCC website, a departure from the safeguards policy requirements.

29. DRC’s external position remains weak. The current account balance was estimated at -4.6 percent of GDP in 2018 despite a strong export performance supported by commodity prices. The real effective exchange rate (REER) appreciated during 2018 and the nominal exchange rate stabilized following two years of sustained depreciation. DRC’s external position in 2018 was weaker than warranted by fundamentals and desirable policy settings. Revised EBA-lite regression models suggest a current account gap of around -2.5 percent of GDP, mainly derived from policy gaps, and an around 10 percent exchange rate misalignment. While the current account balance is projected to stay around the norm over the medium term, mainly financed by the foreign direct investments, an inadequate level of foreign exchange reserves remains a key challenge for external sustainability. Over the medium term, prudent macroeconomic policies and structural polices aimed at improving competitiveness and the business and institutional environments should be implemented to address the external vulnerabilities.

30. The authorities broadly agreed with staff views on monetary policy. They explained that the repatriation requirement was intended to stimulate domestic investment and that mining companies could ask for a waiver to meet additional external obligations. They also noted that mining companies in practice did not comply with the 60 percent requirement as the associated sanction system is not very effective. The authorities mentioned that different options were under discussion to increase the effectiveness of monetary policy, including aligning reserve requirements to their original currencies. They broadly concurred with the staff assessment of the external sector and related policy recommendations.

C. Financial Sector Policies

31. The financial system is highly vulnerable to shocks. The net open FX position and the large expansion in deposits and credit to the private sector in foreign currency during 2018 are sources of risk. During the 2015–16 commodity price shock, all financial soundness indicators deteriorated substantially reflecting the economic deterioration and lack of buffers (SIP on Macro-financial Linkages in the DRC). In 2016, the fourth largest bank, BIAC, experienced financial distress and was put under BCC administration. The BCC should speed up the process of rehabilitating or resolving the BIAC while continuing to monitor closely the banking system.

32. Some FSAP recommendations were adopted, but others remain relevant. Those adopted include a revised law on leasing in March 2015 and a law on payment systems in July 2018. In terms of strengthening the regulatory framework in line with international best practices, AFRITAC Central is providing support in this area through end-2020. Some guidelines and regulations have been recently adopted and should be enacted this year. Progress has been achieved to implement a risk-based supervision system and upgrade other supervisory processes. Still, further efforts are needed to develop institutional capacity, improve the quality of financial data, and implement a BCC rapid response process. To enhance capital and liquidity positions to adequately cover risks and contribute to financial system stability, the minimum capital requirement has been increased to US$30 million, but 6 out of 16 banks (excluding BIAC) have not complied with it yet. The capital requirement will be raised to US$50 million at end-2020.

33. The legal supervisory framework is being improved. A new Central Bank Law was enacted in December 2018. It aims to (i) reinforce the BCC independence together with its accountability and transparency; (ii) increase its capital; (iii) protect BCC assets; (iv) reinforce the privilege of BCC credit operations; and (v) enhance the supervisory role of the BCC to ensure the well-functioning of the payment system. A Banking Law to regulate credit institutions is under consideration in the Senate. Fund staff made suggestions to fully align it with best international practices. The microfinance sector is growing steadily but is still underdeveloped. The sector could play a key role in enhancing financial inclusion. The legislation regulating microfinance institutions and cooperatives should be improved and the audits and controls of financial data strengthened.

34. Although some progress has been made, DRC should improve its AML/CFT framework informed by the upcoming mutual evaluation. Congolese banks have been affected by the loss of correspondent banking relations (CBRs)—with only one local bank maintaining direct links with the global payments system—while the imposition of sanctions against some prominent individuals in DRC has added pressures on banks to be compliant with AML regulations. A 2014 AML/CFT assessment by the World Bank identified system-wide strategic deficiencies against the 2012 FATF standard. DRC became a member of the Central African Anti-Money Laundering Action Group in late 2017 and an onsite evaluation against the 2012 FATF standards was undertaken in late 2018, with its results still being finalized. Some clearance of international transactions across local commercial banks is facilitated by the BCC, avoiding delays in using swift transfers. Upon conclusion of the evaluation, DRC should promptly implement the priority actions identified in the report.

35. The authorities broadly agreed with the Fund staff assessment. They were pleased with the recovery of the financial soundness indicators after the commodity shock and with the effects of the revised Mining Code on the financial sector’s liquidity. They agreed with the vulnerability of the banking system to the loss of CBRs and are committed to fully comply with AML/CFT provisions.

D. Business Environment, Governance and Corruption

36. The fight against corruption and the improvement of economic governance are government priorities. During the consultation’s closing seminar, the President’s Chief of Staff underscored these objectives. The authorities and civil society echoed staff calls for decisive actions in these areas beyond existing processes. A 2011 decree requiring the Government to publish all mining, oil, and forestry contracts has not been fully applied. DRC is a signatory to the Extractive Industries Transparency Initiative (EITI), with the 2016 report published last June. The EITI report shows minor divergences between tax revenues paid by mining companies and received by the government, but there are coverage issues, including from SOEs. Several significant mining deals have not been published. Staff urged enhanced transparency, including through public tendering of mining assets, publication of all mining contracts, disclosure of true ownership of contractual parties, publication of audited financial statements of SOEs, and greater involvement of the legislative branch in monitoring the management of public assets (SIP on Governance and Corruption Challenges in the DRC). Staff also called on the authorities to expedite the passage of the anti-corruption law and the law establishing an independent anti-corruption commission. Stepping up enforcement will help deter corruption. Corruption vulnerabilities could be further reduced by the reforms recommended elsewhere in this report to enhance PFM, tax administration, SOEs and central bank governance, financial sector oversight, and the AML/CFT framework. The authorities requested the Fund to conduct a governance assessment under its new governance framework. Its results would help in the design and prioritization of the government’s reforms plans.

37. Improving the business climate is needed to accelerate growth in the non-mining economy and foster inclusion. Private sector representatives pointed to cumbersome administrative procedures, extortion, arbitrary judicial decisions, and a plethora of taxes and other charges. All this makes doing business difficult and shrinks the formal economy and the tax base (Text Figure 5). Staff urged the authorities to reduce red tape, simplify the tax system, and provide regulatory and physical security to the business community. Staff stressed that it is essential to respect and enforce property rights and to have a professional and independent judiciary system. Staff also underscored that civil service reform would also assist in reducing entrenched petty corruption caused in part by very low salaries. To improve transparency, all SOEs, including Gécamines and Sicomines, should comply with regulations requiring the submission of the audited financial statements to the register of public enterprises. Furthermore, they should publish these statements on their websites or on the website of the Ministry of State Portfolio.

Text Figure 5.
Text Figure 5.

Democratic Republic of the Congo: Doing Business Indicators

Citation: IMF Staff Country Reports 2019, 285; 10.5089/9781513512822.002.A001

Source: World Bank Doing Business Report, 2019.

38. The authorities agreed that reforms in these areas would unleash economic activity, lead to a larger tax base and higher revenue, and ultimately more inclusive growth. However, they pointed to challenges in effecting these reforms including difficulties in changing deep-seated habits and overcoming vested interests; the need to mobilize funding and social consensus for such structural changes as civil service reform; the requirement for sustained high levels of public investment that would lead to a critical mass of infrastructure to drive progress; and political capital in a fragmented political scene.

E. Other Issues

39. DRC requested to join the East African Community (EAC) in June 2019. It hopes to promote regional integration by improving trade relationships with other members (Burundi, Kenya, Rwanda, South Sudan, Tanzania, and Uganda). The EAC aims to create a political federation that would expand and reinforce economic political, social and cultural integration. Its accession to the EAC should be discussed in November this year.

40. Data provision is broadly adequate for surveillance. The authorities continue to improve statistics, including with Fund CD support. They need to improve the timeliness of the data submission and improve debt data coverage.

41. The Fund’s CD strategy for DRC focuses on improving budget preparation and execution; strengthening banking supervision and regulation; reinforcing revenue mobilization; improving national accounts and fiscal data; and undertaking a governance assessment (Annex II).

Staff Appraisal

42. With the 2015–16 commodity shock and political uncertainty now largely behind, the DRC faces a window of opportunity to forge ahead with transformational reforms. The economy is recovering from large negative external shocks thanks to prudent macroeconomic policies, particularly a cash-based fiscal policy; and the first ever peaceful transition of power took place at the beginning of 2019. The new government has ambitious plans but faces substantial challenges as DRC continues to exhibit the complex trappings of fragility. As the current set of policies has stabilized the economy but remains insufficient to tackle DRC large and long-standing development needs, decisive structural reforms are needed to attain higher inclusive growth and stronger policy buffers. Staff’s reform scenario underlines the potential gains from decisive reform actions.

43. Increasing domestic revenue mobilization is critical to create sustainable fiscal space for much needed development spending. DRC has a sizable revenue gap and its tax-to-GDP ratio remains well below the SSA average. Mining revenue is expected to increase due to the revised Mining Code, but it should be further integrated into the central government’s Treasury. Staff recommends expanding non-mining revenue through reduced exemptions, enlargement of the tax base, simplification of the tax system, and improved tax administration and control of borders.

44. PFM systems need to be strengthened to improve fiscal management and the efficiency of public expenditures. Realistic revenue (particularly from the mineral sector) and expenditure projections should underpin the formulation and execution of the government’s budget. The expenditure chain needs to be gradually restored and the use of emergency spending procedures restricted. Reform of the civil service is needed to increase its efficiency, streamlining the number of civil servants while increasing salaries. Full implementation of the TSA is necessary to enhance cash management, and treasury plans have to be frequently updated. Public investment projects need to be carefully vetted and expensive borrowing and collateralized loans avoided to maintain debt sustainability. A strategy to clear domestic arrears and an audit of unresolved ones are also urgently needed.

45. Fine-tuning the monetary policy framework will enhance its effectiveness. Staff calls for the recapitalization of the BCC to help it fulfill its mandates. Staff recommends increasing FX reserves to allow the BCC to intervene to counter disorderly market conditions and to support the external position which was weaker than warranted by fundamentals and desirable policy settings in 2018. To that effect, the BCC should take advantage of ample liquidity in the banking system to transfer abroad its foreign currency deposits currently held at domestic banks. Staff calls also for implementation of IFRS by the BCC to enhance its financial transparency.

46. Financial sector regulations should be further improved to help safeguard and develop the financial system. Regulations and guidelines have been recently adopted but need to be enacted and enforced. The authorities should swiftly adopt the Banking Law in line with international standards. DRC should improve its AML/CFT framework by promptly implementing the priority actions identified in the upcoming evaluation report of the Central African Anti-Money Laundering Action Group. Microfinance should be promoted to improve inclusive growth and financial inclusion.

47. Fighting corruption and improving governance are crucial to enhance the legitimacy of government institutions and underpin confidence. Enhanced transparency is urgently needed, including through public tendering of mining assets, publication of all mining contracts, disclosure of true ownership of contractual parties, publication of audited financial statements of SOEs, and closer monitoring of public assets. The authorities should expedite the passage of the anti-corruption law and the law establishing an independent anti-corruption commission. The request for an IMF governance assessment should help in the design and prioritization of the government’s reforms plans in this area. The business climate needs to be improved to attract private investment and generate inclusive growth by reducing red tape, simplifying the tax system, and providing regulatory and physical security.

48. Staff recommends that the next Article IV consultation with the DRC be held on the standard 12-month consultation cycle.

Figure 1.
Figure 1.

Democratic Republic of the Congo: External Indicators, 2014–2018

Citation: IMF Staff Country Reports 2019, 285; 10.5089/9781513512822.002.A001

Sources: DRC authorities; and IMF staff estimates.
Figure 2.
Figure 2.

Democratic Republic of the Congo: Real and Fiscal Indicators, 2014–18

Citation: IMF Staff Country Reports 2019, 285; 10.5089/9781513512822.002.A001

Sources: DRC authorities; IMF staff estimates.
Figure 3.
Figure 3.

Democratic Republic of the Congo: Monetary and Financial Indicators, 2014–18

Citation: IMF Staff Country Reports 2019, 285; 10.5089/9781513512822.002.A001

Sources: DRC authorities; and IMF staff estimates.
Table 1.

Democratic Republic of the Congo: Selected Economic and Financial Indicators, 2016–24

article image
Sources: Congolese authorities; and IMF staff estimates and projections.
Table 2a.

Democratic Republic of the Congo: Central Government Financial Operations, 2016–24

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

Mainly expenditure related to security and elections.

Unpaid VAT credit reimbursements and other arrears (cumulative).

Table 2b.

Democratic Republic of the Congo: Central Government Financial Operations 2016–24

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

Mainly expenditure related to security and elections.

Unpaid VAT credit reimbursements and other arrears (cumulative).

Table 3.

Democratic Republic of the Congo: Monetary Survey, 2016–24

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