Governance and Corruption Challenges1
In line with the IMF’s revised policy on governance, this note focuses on macro-critical issues related to governance and corruption in DRC.2 Third-party indicators suggest that governance has been poor and corruption widespread in the country. Conducting an audit of the civil service and improving the transparency of its remuneration system, simplifying tax payment processes, and merging the activities of the numerous revenue agencies would boost public efficiency and improve the business environment. Contract enforcement and protection of property rights could be enhanced by insulating the courts from external influence.
A. Fiscal Management
The Budget Process
1. The transparency of the budget process has improved relative to the early 2000s but there is scope for further improvement. The International Budget Partnership’s Open Budget Index, which evaluates budget process transparency, highlights a substantial improvement from a zero rating in 2006 to a rating comparable to the regional average in 2015.3 The government now publishes a budget summary and updates on budget revenue and expenditure execution. However, the Cours de Comptes, the government audit institution, does not publish its annual report. Public financial management (PFM) responsibilities in the DRC are split between the Ministry of Budget, the Ministry of Planning, the Ministry of Finance, and the Central Bank of Congo (BCC).
2. Public participation and oversight have also improved over the past decade but remain limited. The government engages with donors and civil society through 15 thematic groups, including one on public finances. The groups are supposed to meet regularly and be open to civil society, but meetings are not held on a regularly basis.
3. Parliamentary oversight of the budget process has been weak. Prior to 2019 when President Tshisekedi took office, the Executive and legislature were controlled by the same political party. The Court of Auditors assists the National Assembly in overseeing the executive and audits public expenditures, including those of the provinces, decentralized budget institutions, and state enterprises. However, the Court has no independent budget and lacks adequate financing. The Court’s reports are listed but not published on its website. Moreover, the Court’s recommendations are not followed by Parliament and sanctions are not enforced. A Court of Auditors Law establishing the Court’s independence, including financial, has been enacted. The Office of the Inspector General of Finance (IGF) has the authority to audit the executive accounts and impose administrative sanctions. It reports to the Ministry of Finance but is located in the Presidency.
4. Lack of budget credibility undermines parliamentary oversight and allows for discretionary allocation of public resources.4 Budget execution bears little relation to the approved budget because budget revenue projections—driven mainly by political pressures to accommodate higher spending—and expenditure projections have been overly optimistic. The 2011 Public Finance Law approved the introduction of Medium-Term Fiscal and Expenditure Sector Frameworks and the transition to program budgeting by 2018 to improve revenue and expenditure projections, but these have been delayed. The so-called Troika, comprising the Office of the Prime Minister, the Ministries of Finance and Budget, and the Central Bank, is tasked with monitoring budget implementation.
5. Limited information on the budget annexes and special accounts and little or no oversight by the central government, Parliament, and civil society, create scope for corruption. Together, these accounts represented about 15 percent of the overall 2018 budget. Budgets annexes cover some 800 institutions, mostly in health and tertiary education, that are legally separate from the central government. The government controls the administration of these institutions, but not their finances. They collect user fees to cover costs and receive transfers from the general budget to cover any deficit (see SIP on Poverty and Social Spending). The special Accounts cover the budgets for nine special funds, such as the Road Fund and the Industrial Development Fund.
6. There are major gaps in the provision of financial statements. An annual budget execution report is prepared but the central government and provincial governments do not publish annual financial statements. Weak provincial government capacity has been further exacerbated by the division of the then 11 former provinces into 26 in 2015. Also, state enterprises were converted to commercial entities in 2009, and are required under the OHADA Uniform Act to file their annual audited statements with the public registry. Whether state-owned enterprises, including commercial entities, are required to publish their financial statements, remains unclear.
Non-Resource Revenue Management
7. Non-resource revenues, which form the bulk of budget revenues, are low compared to other SSA countries. This is the result of constraints on administrative capacity, inappropriate tax policies, and governance issues. The lack of transparent procedures, and the multiplicity of contact points between tax payers and tax collectors in revenue collection, offers opportunities for corruption.
8. Tax exemptions, under-declaration, and evasion are widespread. A recent FAD TA report identified 140 exemptions, mostly in the mining sector, and estimated the foregone revenues from exemptions at 1.7 percent of GDP. These exemptions are granted under a set of 13 legislations, including the tax- and customs-code; the investment code, the 2002 Mining code; special mining conventions; as well as by administrative discretion. Also, the country’s long, porous borders are difficult to monitor, facilitating tax and customs evasion. Excessive use of tax exemptions and a complex and fragmented tax code widen the gap between potential and actual revenue.
9. The multiplicity of special taxes and fees, some accruing to special accounts outside the Treasury, generate opportunities for corruption and informalization of economic activity. There are over 300 such taxes and fees, levied by a large number of agencies.
10. The central government’s single Treasury account at the BCC should facilitate the monitoring of public finances. However, the central government also hold accounts in commercial banks. Treasury transactions in the fiscal and monetary accounts are not always consistent, making it difficult to reconcile central government fiscal accounts with monetary statistics. Furthermore, although provincial governments are required by law to hold their accounts at the BCC, they also hold accounts in and receive loans from commercial banks; these accounts are not identifiable in the monetary statistics.
Public Financial Management
11. Despite some progress in strengthening public financial management, budget execution remains deficient. The government has formalized the four stages of the expenditure chain and introduced budget commitment plans to align expenditures with revenues. Although fund transfers generally match budget appropriations, expenditure validation and payment orders are problematic and overdue payments are still common. Exceptional procedures are widely used, particularly following the recent crisis. They are required to go through the 4 stages of the expenditure chain and must be regularized within 48 hours, but this is often not the case. Furthermore, budget execution suffers from: (1) redundant and lengthy steps in budget execution processes, including various political interventions in the approval of commitments and payments; (2) abuse in the use of exceptional or emergency procedures; (3) excessive centralization of budget execution authority in the Ministry of Finance and the Ministry of Budget; and (4) inefficient use of public procurement procedures and entities, especially procurement units, that are not yet fully operational. According to the World Bank 2015 Public Expenditure Management and Financial Accountability Review (PEMFAR), the budget preparation process is strongly influenced by political considerations, often leading to the circumvention of instructions.
12. The public procurement system was overhauled in 2010 and a Public Procurement Regulatory Authority established, but procurement practices remain weak. The Public Procurement Law requires public contracts to be tendered, except in special circumstances. In theory, the procurement process is managed by the Cellule de Gestion des Marches Publics, but in practice is managed by the Central Control Office, with deviations from public tender having to be approved by Director General for the Control of Public Contracts. The public tender requests and the results of the competitive process are required to be published but are not in practice. The law prescribes penalties against corruption, but this has failed to curb the practice.
13. Until recently, about 60 percent of the general budget’s spending passed through procurement channels. Yet, only a small proportion passed through standard procedures, while the rest went through exceptional procedures or completely by-passed budgetary channels and were ‘regularized’ ex-post. The use of direct purchases, as opposed to public tenders, increased from 3 percent to 60 percent between 2013 and 2016.
14. Low remuneration and weak institutional capacity undermine the civil service. Currency depreciation and inflation have eroded 80 percent of the purchasing power of salaries and pensions of civil servants since 2015. The remuneration system is opaque, the exact number of civil servants is unknown, and many civil servants who have reached the age of retirement continue to work.
15. Public services are inefficient and costly. Health, education, water, and electricity services are underfunded. The health and education sectors rely heavily on user fees even though the central government pays the bulk of the salaries.
B. Central Bank Governance
16. The BCC is nominally independent but has relied on budget transfers from the central government, undermining its independence.5 The 2014 Financial Sector Stability Assessment noted that lack of operational independence constrained the BCC’s ability to perform its functions. Notably, the Treasury has obtained direct advances from the BCC, contrary to the law. The recently approved Central Bank Law (December 2018) represents a step forward as it aims at reinforcing the BCC independence (including through a recapitalization) together with its accountability and transparency.
17. Banking supervision and regulation capacity has been enhanced with Fund TA. Regulations impose high penalties for non-compliance, but these are not applied consistently. The banking system is generally immune to overt political interference; however, some politically-connected banks sometimes get preferential treatment.
C. Market Regulation
18. The economy is largely informalized and moderately regulated. However, key sectors such as mining, banking, telecommunication, transport, and beverages, dominated by foreign interests and an important source of budget revenue, are subject to tighter controls.
19. The regulatory environment has improved over the last decade. The 2015 World Bank Doing Business Report cited the DRC as one of the ten countries that had made the biggest advances. There are gaps between regulation and implementation, however. Entrenched vested interests benefiting from existing regulations and market distortions have resisted reforms.
20. Regulation continues to weigh heavily on the cost of doing business. DRC scores well below its regional peers on the World Bank Doing Business Indicators and the World Economic Forum Global Competitive Index. The Doing Business survey rates DRC well on starting a business, dealing with construction permits, and registering property, but not so well on protecting minority interests, paying taxes, trading across borders, and contract enforcement. Similarly, the World Economic Forum survey singles out the heavy burden of government regulations in DRC and the shortcomings of the legal framework to challenge regulations, as well as the burden of customs procedures and trade barriers.
21. The rule of law is weak in DRC. The Worldwide Governance Indicators rates the rule of law in the DRC well below its regional peers.6 Transparency International’s Corruption Barometer and the World Bank Doing Business and Enterprise surveys all point to the judiciary as particularly corrupt. Private sector operatives have highlighted problems in the area of contract enforcement and property rights protection, and the lack of independence of the courts.
D. Combatting Corruption
22. Despite the proclamation of a “zero tolerance” campaign toward corruption as early as in 2009 and the existence of anti-corruption laws, rampant corruption remains one of the DRC’s key problems. Transparency and accountability are weak, including public procurement. Petty corruption is rampant – and in many cases the only means to survive for employees of the public administration – and largely considered normal by the population, despite a high level of frustration and a growing awareness of the severity of corruption.
23. DRC is a signatory to various international conventions on corruption. It became a signatory to the 2004 UN Convention Against Corruption (UNCAC) in 2010 but has yet to undergo a review of its implementation. In 2007, DRC ratified a protocol agreement with the Southern African Development Community (SADC) on Fighting Corruption.
24. On the domestic level, the government has articulated a commitment to fighting corruption, launching several initiatives. The Initiatives include the Observatory of the Code of Professional Ethics and the inclusive Anti-Corruption Pact in 2013.
25. In relation to the anti-corruption framework, although some initial steps were made to establish an anti-corruption framework, it is not clear whether the legal and institutional framework is in line with the requirements of the UNCAC. Furthermore, the overall effectiveness of the framework is still weak. More precisely:
Anti-corruption policy and transposition of the UNCAC into domestic legislation: In 2015, the position of Special Advisor reporting directly to the President was established. It is charged with developing strategies to promote good governance, fight corruption, and deter money laundering and the financing of terrorism, but no strategy has yet been formulated. DRC is yet to undergo the peer review against UNCAC, the first round of which will be focused on assessing DRC’s compliance to Chapter III on the criminalization of corruption offenses and law enforcement and Chapter IV on international cooperation.
Declaration of assets: The Constitution requires the President and political appointees to government to declare their assets to the Constitutional Court on entering and leaving office. It authorizes criminal prosecution for failure to do so. However, the disclosure is not made public and is not required for members of the legislature or the judiciary and other senior public officials at risk. It is not clear whether verification of the declarations and sanctions for non-compliance are properly conducted.
Prosecuting corruption: DRC does not have an office dedicated to pursuing cases of corruption with sufficient autonomy to investigate and prosecute high-level cases. An office and a special advisor have recently been established to pursue corruption cases in the public service, but they lack independence and operational means. The level of enforcement against corruption is still low.
26. Using anti-money laundering (AML) tools to tackle the proceeds of corruption. Although some progress has been made, DRC should improve its AML/CFT framework informed by the upcoming mutual evaluation by Task Force on Money Laundering in Central Africa (GABAC) to help combat corruption and its proceeds. A 2014 draft AML/CFT assessment by the World Bank identified system-wide strategic deficiencies against the 2012 FATF standard. DRC became a member of the GABAC in late 2017 and a mutual evaluation of DRC’s AML/CFT framework by the body is being finalized. The result of this exercise will help inform policy priorities in mobilizing the AML framework to help detect and deter acts of corruption, in particular, with respect to measures on politically exposed persons.
E. Some Recommendations
Budget process: (i) Improve budget credibility by preparing supplementary budgets. (ii) Provide more information on the budget annexes and special annexes in the budget. (iii) Strengthen institutional oversight of public finances by granting the Court of Auditors and the Office of the Inspector General of Finance greater operational independence and adequate financial resources.
Strengthen revenue management by rationalizing and merging revenue agencies and evaluating tax exemptions.
Public financial management: (i) Restore normal public procurement and expenditure procedures. (ii) Expedite the transition to the Medium-Term Fiscal Framework, the Medium-Term Sector Expenditure Framework and Program Budgeting.
Improve the business environment by simplifying tax payment procedures; and improving contract enforcement and the rule of law by insulating the courts from external influence.
State-owned enterprises: require all state-owned enterprises, including commercial entities, to publish their financial statements
Prepared by Victor Davies based on the work of Nick Staines, former resident representative in Kinshasa. A multi-departmental team will undertake a governance assessment exercise later this year. The assessment will provide a more in-depth analysis of the issues raised in this paper and other issues.
IMF 2017b and 2017c.
International Budget Partnership, 2017
The Government pays interest on a bond issued to the central bank, which has no fixed interest rate.
Use of perceptions-based indicators should be considered carefully, as they may reflect biases of respondents.