Statement by Mr. Raghani, Executive Director and Mr. Alle, Senior Advisor for the Democratic Republic of the Congo August 26, 2019

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

1. Our Congolese authorities would like to thank Management and Staff for their effort that led to the resumption of the Article IV consultation with the Democratic Republic of Congo (DRC) delayed since 2015. In this regard, they are particularly grateful to the Managing Director for the fruitful meeting with President Tshisekedi on April 5 of this year, which paved the way for closer Fund engagement with DRC. The subsequent staff mission in Kinshasa provided the opportunity to discuss the main economic developments of the past years as well as the key challenges facing the Congolese economy. The authorities broadly share the thrust of staff reports as a fair reflection of the discussions and policy recommendations.

2. The Congolese authorities have managed to restore macroeconomic stability amid adverse shocks that included a sharp fall in world prices of the country’s main exports and heightened and protracted security situations. The year 2018 has seen an improvement in macroeconomic indicators compared to the 2014–16 period, though an outbreak of the Ebola epidemic has added to the many challenges already facing the country.

3. The December 2018 presidential election and the ensued first-ever democratic transition in the DRC opened up promising possibilities for positive changes. The strong resolve of the new administration to combat corruption and significantly improve governance, paired with its fast-paced re-engagement with key external partners, are early signs that bode well for DRC’s economic and social prospects

4. The Congolese authorities value the cooperation with the Fund and look forward to a strengthened engagement which will be instrumental in entrenching the new reform momentum. With the Board support, the conclusion of the 2019 Article IV consultation would give a strong signal to the international financial community on the authorities’ commitment to reforms and sound economic management. Furthermore, this would open up possibilities for negotiating a Fund-supported program to meet balance-of-payment needs as already expressed by the authorities.

Key Economic Developments and Outlook

5. The 2014–18 period was characterized by two major and distinct developments. In 2014–16, the collapse in international prices of copper then cobalt had an adverse and deep impact on the economy given their importance in DRC’s exports. Growth decelerated sharply from 6.9 percent in 2015 to 2.4 percent in 2016. Between 2015 and 2017, inflation rose from 1 percent to 36 percent on average. Government revenue decreased significantly, and the central bank stepped in to finance the deficit. The external position deteriorated as a result of falling exports receipts and reserves dwindled from 4.9 to 1.9 weeks of imports cover. The Congolese franc lost 72 percent of its value against the US dollar.

6. In 2017–18, the economy recovered somewhat as stronger copper and cobalt prices drove production and dynamism in the mining industry. GDP growth rate rebounded to an estimated 5.8 percent in 2018 while inflation dropped to 7.2 percent by year-end. Foreign reserves slightly improved to 2.6 weeks of imports and the Congolese franc depreciated by 2.5 percent over the year.

7. Alongside the improvement in mineral prices, the authorities have taken decisive actions to support the recovery. The central bank has played a significant role in these positive developments, including by adjusting downward [?] its policy rate and conducting operations to manage reserves. Economic figures from the first half of 2019 confirm that the authorities’ actions are bearing fruits and that the recovery is firming up despite challenges. Inflation and has continued to decline while the depreciation rate of the Congolese franc has moderated, and international reserves have strengthened. As well, financial conditions have continued to improve since end-2018. Dollarization in the financial system has steadied and credit to the private sector has strongly recovered.

8. Our authorities remain cautiously optimistic about the outlook. First, the recovery that started in 2018 should continue and form the basis for a stronger baseline growth forecast o f 5.9 percent in 2019 compared to staff’s scenario of 4.3 percent. Early investment projects should boost activity in the non-extractive sectors and contribute to overall growth. Second, the authorities foresee higher demand for their main exports resulting from increased global demand for electric cars. The confidence in the overall outlook is backed by the strong determination to initiate reforms and lift bottlenecks that have constrained the economy thus far. The planned actions to scale up public investment, improve the business climate and diversify the economy, are expected to yield high payoffs in the short to medium term. The authorities will also endeavor to address risks, including mobilizing more revenue to build buffers against shocks and stepping up actions to fight insecurity and contain the Ebola epidemic.

Policies and Reforms Going Forward

9. President Tshisekedi has early on made public his commitment to overhaul governance in DRC and engage in comprehensive reforms both to improve democracy and give a new impetus to the economy. His 100-Daysprogram gave an indication of this agenda with an emphasis on four pillars: (i) promoting good governance; (ii) sustaining economic growth; (iii) fostering human well-being; and (iv) ensuring solidarity. The positive outcome of this program will form the ground for policies and reforms going forward. The interactions with Fund staff during the Article IV mission have helped shed more light on challenges and on specific policy priorities as well. Accordingly, in the period ahead, the authorities will endeavor to increase domestic revenue mobilization, scale up public investment while strengthening the quality of capital spending, enhance monetary and financial sector policies, improve the business climate and diversify the economy.

Stepping up domestic revenue mobilization

10. The authorities are committed to working towards significantly increasing DRC’s tax- to-GDP ratio from the current 12 percent which is low compared to peers. To this end, they intend to take actions on many fronts. First, they are committed to enforcing the new Mining Code for the government to get its fair share of resource revenue. Second, taxes, tax collection processes and institutions will be reviewed to enhance transparency and accountability and ensure that revenue effectively goes to the Treasury. An important effort also lies in collecting more non-resource revenue, including by broadening the tax base and streamlining tax expenditures. The recently completed tax expenditure assessment with the assistance of FAD and the World Bank will help rationalization going forward.

11. Reforms on the expenditure side will complement revenue efforts to create fiscal space for much-needed public investment. In the face of scarce resources, the authorities are determined to address any source of potential waste. The current balance of current expenditures versus investment would be reversed to emphasize the latter.

Scaling up public investment and strengthening its quality

12. Scaling up public investment to close the infrastructure gap ranks high on the authorities’ agenda as evidenced by early actions under the president’s 100-Days program. This strategy will gain more traction moving forward. For the financing, the government will rely on both domestic and external resources. The former will come from Treasury securities to be issued starting in 2019 and the latter is expected to kick in as the country normalizes its relations with its partners. DRC is ranked in the category of moderate risk of debt distress and has borrowing space. Yet, the authorities are committed to pursue a prudent debt strategy for maintaining long-term debt sustainability. This will entail reinforcing the selection of investment projects based on their economic and social returns and ensuring accountability in project execution.

Enhancing monetary and financial sector policies

13. Despite limited space for maneuver in the recent period, the authorities have utilized monetary and exchange rate policies to address the negative developments stemming from the shock on minerals’ prices. Going forward, the authorities took good note of staff recommendations on the monetary policy stance and reserves management as welcomed inputs for their decision-making process. They particularly considered the advice on ways to fine-tune and improve the monetary policy framework. Likewise, aware of the weak external position, they are stepping up prudent macroeconomic policies and structural reforms to improve competitiveness and address external vulnerabilities. These policies should also help build trust in the Congolese Franc and contribute to de-dollarization.

14. The authorities clarified to staff the rationale behind the requirement made to mining companies under the new Mining Code of 2018, to repatriate 60 percent of export receipts to their accounts in the DRC and the restrictions on the use of these resources. This measure is meant to increase the spillover of the mining industry to the rest of the economy and address some loopholes in the past Code. They took note of staff assessment that “this measure constitutes a tightening of the existing capital flow management measure (CFM) under the Fund’s Institutional View on capital flows”.

15. The financial sector’s indicators have improved significantly as a result of the improved economic situation. The authorities are taking steps to further strengthen the sector so that banks can avail enough credit to match the expected dynamism of the private sector. A new Central Bank Law enacted in December 2018 reinforces its supervisory role and banks ultimately. The minimum capital requirement has been increased to US$30 million – as recommended by the last FSAP – and the majority of banks have complied with this requirement. The minimum capital requirement is planned to be raised to US$50 million at end-2020. The authorities are also committed to addressing the loss of correspondent banking relations (CBRs), including by improving their AML/CFT framework. In addition to steps taken recently including an onsite evaluation against the 2012 FATF standards in late 2018, the prompt implementation of the upcoming mutual evaluation’s priority actions should help improve the framework.

Improving the business climate

16. The authorities are committed to improving the business climate with the view to attracting private sector investment. The provision of infrastructures including in the underserved regions is part of this objective. Many other planned initiatives, such as tax reforms, the civil service reform, the enforcement of property rights and a professional and independent judiciary system would contribute to enhance the business climate. As well, combating corruption and improving overall governance should also contribute to the same goal. In this regard, efforts will be made to improve transparency in the mining sector, including in the management of key SOEs such as Gecamines and Sicomines. Moreover, the results of the forthcoming governance assessment under the Fund’s new governance framework would help the authorities in the design and prioritization of their reform plans.

Diversifying the economy

17. The dependency on mineral export is a major vulnerability that should be addressed. The authorities envisage strategies to add value locally to minerals through medium-sized processing units across resource-rich regions. This approach is meant to limit revenue volatility associated with the export of raw materials and provide job opportunities to youths. They also intend to promote other sectors like agriculture and agri-business. These job-rich sectors are as well targeted for their potential to help address poverty in rural areas. Additionally, it is expected that efforts to improve the business climate paired with policies to attract private investment would help promote activities in the non-resource sector. The flow of foreign investors which have been exploring business opportunities in DRC since the presidential elections bodes well for the future.

Conclusion

18. The Democratic Republic of Congo has come a long way towards improving its economic prospects. The authorities have strived to restore macroeconomic stability and spur recovery following shocks in recent years related to the high volatility in the world prices of its main mineral exports. Furthermore, the new leadership that emerged from the end-2018 presidential election has taken decisive steps to re-engage with key external partners while setting an ambitious reform agenda. A renewed relationship with the Fund ranks high among the country’s priorities to deliver on its development agenda.

19. In view of the authorities’ commitment, we would appreciate Executive Directors’ support for the conclusion of the 2019 Article IV consultation.