Democratic Republic of the Congo: Request for a Three-Year Arrangement Under the Extended Credit Facility; Review of Performance Under the Staff Monitored Program-Press Release; Staff Report; and Statement by the Executive Director for the Democratic Republic of Congo
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International Monetary Fund. African Dept.
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Publication Date:
28 Jul 2021
eISBN:
9781513588735
ISBN:
9781513588735
Language:
English
Keywords:
Congolese authorities; DRC government; accounting function; government priority; reform program; Global; International reserves; Mining sector
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1. DRC is a fragile state with recurring health and security crises, high macroeconomic volatility, and weak institutions (Figure 1). In addition to COVID-19, the country has experienced recurrent outbreaks of Ebola, cholera, and measles in the past years. Violence in the region has left millions of refugees and internally displaced people. Episodes of high exchange rate and inflation volatility occur frequently (including in 2020) in the context of very limited fiscal space, a highly dollarized financial system, and low central bank’s international reserves. Physical and social infrastructure is weak and insufficient, and institutions remain unstable. The authorities have requested an Extended Credit Facility (ECF) arrangement to accompany their medium-term reform plans and address protracted balance of payments’ needs, summarized in the Country Engagement Strategy (CES, Annex I).

Abstract

1. DRC is a fragile state with recurring health and security crises, high macroeconomic volatility, and weak institutions (Figure 1). In addition to COVID-19, the country has experienced recurrent outbreaks of Ebola, cholera, and measles in the past years. Violence in the region has left millions of refugees and internally displaced people. Episodes of high exchange rate and inflation volatility occur frequently (including in 2020) in the context of very limited fiscal space, a highly dollarized financial system, and low central bank’s international reserves. Physical and social infrastructure is weak and insufficient, and institutions remain unstable. The authorities have requested an Extended Credit Facility (ECF) arrangement to accompany their medium-term reform plans and address protracted balance of payments’ needs, summarized in the Country Engagement Strategy (CES, Annex I).

Background and Response to Covid

1. DRC is a fragile state with recurring health and security crises, high macroeconomic volatility, and weak institutions (Figure 1). In addition to COVID-19, the country has experienced recurrent outbreaks of Ebola, cholera, and measles in the past years. Violence in the region has left millions of refugees and internally displaced people. Episodes of high exchange rate and inflation volatility occur frequently (including in 2020) in the context of very limited fiscal space, a highly dollarized financial system, and low central bank’s international reserves. Physical and social infrastructure is weak and insufficient, and institutions remain unstable. The authorities have requested an Extended Credit Facility (ECF) arrangement to accompany their medium-term reform plans and address protracted balance of payments’ needs, summarized in the Country Engagement Strategy (CES, Annex I).

Figure 1.
Figure 1.

Democratic Republic of the Congo: Fragility-Selected Indicators

Citation: IMF Staff Country Reports 2021, 168; 10.5089/9781513588735.002.A001

2. Following long overdue elections in December 2018 and a change of President in early 2019, active relations were reestablished between the government of the Democratic Republic of the Congo (DRC) and the IMF. The first Article IV consultation since 2015 was concluded in August 2019, followed by the approval of a combined Rapid Credit Facility (RCF) disbursement and a Staff Monitored Program (SMP) in late 2019. The objectives of the SMP, which covered the period from November 2019 to May 2020, were to strengthen macroeconomic stability, reinforce international reserves, and advance key structural reforms to start tackling poor governance, a difficult business environment, and pervasive poverty. A safeguards assessment of the Central Bank of Congo (BCC) was conducted by the IMF staff in February 2020 and a recently published governance and anti-corruption assessment provides a comprehensive diagnostic of vulnerabilities in key economic areas and proposes needed reforms to address them (Annex II).

3. The last year, including the SMP period, was marked by the COVID-19 pandemic and intensifying political challenges. The COVID-19 pandemic has hit the country hard, causing 40,254 confirmed cases and 916 deaths as of late June 2021, and restrictive measures were set to help control its three waves (Annex III). To help address the COVID-19 crisis, an additional RCF disbursement, also equivalent to 25 percent of quota (this time in the form of budget support) was approved by the Board on April 22, 2020. On the political front, after a two-year governing coalition between the FCC (former President Kabila’s alliance) and CACH (President Tshisekedi’s alliance), President Tshisekedi declared its end and succeeded in changing Parliament’s majority to a new alliance favorable to his reform agenda. Jean Michel Sama Lukonde (former Gécamines’ general director and a close ally to the President) was appointed as new Prime Minister.

Recent Economic Developments

4. Economic activity decelerated sharply in 2020 because of COVID-19, but the mining sector proved resilient and continues to grow rapidly. Preliminary data suggests a positive GDP growth in 2020 (1.7 percent), essentially due to a stronger mining sector performance than previously envisaged (an estimated expansion of extractive GDP of 9.7 percent in the context of increasing global prices). The brunt of the pandemic was particularly felt in the services sector, leading to a contraction in non-extractive GDP of 1.3 percent, as various successive lockdowns and restrictions in 2020 affected key sectors such as services, retail, and manufacturing. By contrast, no major mine closed owing to the limited spread of COVID-19 to the mining regions. After a quick rebound, copper and cobalt prices have reached record levels, leading to higher production than originally forecasted. Kamoa-Kakula, the continent’s largest copper mine project, has already started production ahead of schedule (see Box 1). Strong mining exports and lower imports of capital goods explain the improved current account balance in 2020 (-2.2 percent of GDP) despite the drop in remittances inflows.

The Kamoa-Kakula Project and the Copper Industry Boom in the DRC

The Kamoa-Kakula mine is the flagship project in the booming copper industry in the DRC. Projected to be developed in up to 5 phases, Kamoa-Kakula is expected to become the 2nd largest copper mine in the world, with a maximum capacity of 800 kilotonnes per year. Additionally, expected production costs place it among the most efficient copper mines in the world. Phase 1 production began ahead of schedule in May 2021.

Initial capital costs for the Kamoa-Kakula project were estimated at US$1–1.2 billion. Phase 2 is officially underway and is expected to start production in 2022Q3, with more than US$1.1 billion capital expenditures planned for this second phase.

uA001fig01

DRC Copper Production and Prices: 1957–2020

Citation: IMF Staff Country Reports 2021, 168; 10.5089/9781513588735.002.A001

Sources: “The copper industry 1945–1975”, USGS and IMF staff.
uA001fig02

Total Cash Cost Curve: Copper

(USD/lb of payable copper)

Citation: IMF Staff Country Reports 2021, 168; 10.5089/9781513588735.002.A001

Source: S&P Global Market Intelligence
uA001fig03

Kamoa-Kakula: Phases of Development

(in million metric tons of copper ore)

Citation: IMF Staff Country Reports 2021, 168; 10.5089/9781513588735.002.A001

Source: Ivanhoe Mines
uA001fig04

Paid Copper Production

(in kilotonnes per annum)

Citation: IMF Staff Country Reports 2021, 168; 10.5089/9781513588735.002.A001

Sources: Ivanhoe Mines and Company Filings

5. Weak revenues and increased spending pressures led to a sizable fiscal deficit in 2020 (Tables 2a and b). Tax revenues underperformed substantially due to delays in reform implementation, including restoration of normal functioning of the VAT and digitalization of processes, and particularly the impact of COVID-19’s containment measures. On the expenditure side, the implementation of the free education initiative (Annex IV) led to a large increase in wage payments, which represented about two thirds of the current spending in 2020. Additional spending pressures linked to the pandemic further reduced the space for other expenditure items. As a result, the overall fiscal deficit reached 2.1 percent of GDP, compared to a previous estimate of 0.6 percent. As grants did not materialize as originally forecasted and with a negative net placement of short-term Treasury bills (Figure 2), the fiscal deficit was financed by external loans and BCC advances (¶7).

Table 1.

Democratic Republic of the Congo: Selected Economic and Financial Indicators, 2019–2026

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

Democratic Republic of the Congo: Central Government Financial Operations, 2019–2024 1/

(Billions of CDF)

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

Covers the budgetary central government.

Revenue include compensations in 2019 and 2020.

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, 2019–2024 1/

(Percent of GDP)

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

Covers the budgetary central government.

Revenue include compensations in 2019 and 2020.

Mainly expenditure related to security and elections.

Unpaid VAT credit reimbursements and other arrears (cumulative).

Figure 2.
Figure 2.

Democratic Republic of the Congo: Treasury Bills Issuance: October 2019-March 2021

Citation: IMF Staff Country Reports 2021, 168; 10.5089/9781513588735.002.A001

Sources: Congolese authorities and IMF staff estimates.

6. At the start of 2021, the budget recorded a surplus thanks to fiscal discipline and high commodity prices. Tight spending discipline in 2021Q1 and large corporate tax payments in April have helped to build buffers for budget execution for the remainder of the year. However, those buffers may be reduced due to emergency spending link to the Goma Volcano eruption in May. Treasury bills’ net placements remained negative in the first part of 2021 due to the pandemic and limited supply of local currency. 1

7. Monetary deficit financing in early 2020 fed into a spike in exchange rate depreciation and inflation later contained through a tightening of policies. Faced with severe financing constraints, the government opted to recur to BCC advances of about 0.3 percent of GDP (equivalent to US$160 million) through end-April 2020. The associated monetary injection, coupled with negative supply shocks linked to confinement measures and an easing of monetary policy, led to an acceleration of inflation from 4.6 percent in 2019 to 15.7 percent year-on-year in August 2020, fueled by a rapid exchange rate depreciation (13.2 percent between April and August 2020). In May 2020, the BCC and the Ministry of Finance committed to a Treasury Plan to avoid new central bank advances through a stability pact. Such commitment has been respected although new guarantees of the BCC for central government loans have been provided since end-April 2020. Monetary policy was tightened as a result of the discontinuation of advances and the increase of the BCC policy rate in August 2020, although the rate has been recently reverted to pre-pandemic levels, in line with subdued inflation expectations. Annualized inflation has fallen to 4.8 percent in April 2021, while the exchange rate has depreciated by merely 0.9 percent since January. Official FX reserves decreased from US$730 million at end-2019 to about US$709 million at end-2020.

8. As the monetary policy was tightened, some banks recorded shortfalls in their required reserves’ positions due to the existing reserve framework in the context of a highly dollarized financial system. The large increase in FX deposits due to repatriation requirements on booming mining exports and the high exchange rate depreciation, coupled with the scarcity of local currency, forced a few large banks to miss reserve requirements, which are set in local currency. A return to positive excess reserves is expected as the supply of local currency increases.

9. The BCC continues to strengthen the oversight and regulation of the financial system. The supervisory unit at the BCC (DSIF) has experienced substantial operational challenges during the pandemic to effectively fulfill its supervisory mandate. With the technical assistance of the Fund, the DSIF is revising its procedures and regulations to better support the banking sector and to be ready to proactively use its legal intervention powers for banks in financial distress if needed. A new macro-prudential committee led by the Ministry of Finance and the BCC has also been created with the goals of promoting coordination between supervisors and monitoring systemic risks.

SMP Performance

10. Performance under the SMP was initially satisfactory, though later deteriorated due to the COVID pandemic and delays in the implementation of structural reforms. All quantitative indicative targets (ITs) for the December 2019 test date were met except the one concerning the contracting or guaranteeing of new non-concessional external debt. For the March and May 2020 test dates, about half of the ITs were met in a difficult context due to the pandemic. The ITs on net central bank credit to government and the domestic balance on cash basis were missed reflecting budget slippages financed through BCC advances (Text Table 1 and Table 7). 2 As for structural benchmarks (SBs), all were met except the one related to the restoration of VAT on imports by mining companies, which turned out to require a law modification by Parliament not foreseen at the time of the SMP discussions (Table 8). The authorities, in consultation with the private sector, decided to introduce a self-liquidating mechanism as conditions were not conducive for smoothly refunding VAT payments to miners.

Text Table 1.

Democratic Republic of the Congo: Fiscal Table end-2019 – 2020Q2: SMP Projections vs. Preliminary Outcome

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

Mainly expenditure related to security and elections.

Table 3.

Democratic Republic of the Congo: Monetary Survey, 2019–2024

(Billions of CDF)

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

Includes reclassification of accounts to comply with reporting standards of IMF.

Table 4.

Democratic Republic of the Congo: Balance of Payments, 2019–2024

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

Including 2020 IMF RCF loan for budget support.

Table 5.

Democratic Republic of the Congo: Capacity to Repay the Fund

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Sources: IMF staff estimates and projections.

Obligations to the Fund in 2020 reflect the relief grant under the CCRT.

On May 24, 2019 the IMF Executive Board approved a modified interest rate setting mechanism which effectively sets interest rates to zero on ECF and SCF through June 2021 and possibly longer. The Board also decided to extend zero interest rate on ESF till end June 2021 while interest rate on RCF was set to zero in July 2015. Based on these decisions and current projections of SDR rate, the following interest rates are assumed beyond June 2021: 0/0/0/0 percent per annum for the ECF, SCF, RCF and ESF, respectively. The Executive Board will review the interest rates on concessional lending by end-June 2021 and every two years thereafter.

Table 6.

Democratic Republic of the Congo: Financial Soundness Indicators

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Source: Central Bank of the Democratic Republic of the Congo (BCC).
Table 7.

Democratic Republic of the Congo: Indicative Targets Under the SMP, 2019–May 2020

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

Cumulative variables from January till May. Only the first four ITs will be monitored for the May test date.

An incorrect exchange rate of CGF 2,839 per SDR was included in the Technical Memorandum of Understanding for the 2019 SMP. The corrected exchange rate of CGF 2,256 per SDR (as of September 30, 2019) has been used to validate the indicative targets.

Table 8.

Democratic Republic of the Congo: Prior Action for the Rapid Credit Facility and Structural Benchmarks for the Staff-Monitored Program

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Sources: Congolese authorities and IMF staff

11. Corrective actions were put in place since the SMP expiration, with fully satisfactory implementation under difficult circumstances, which paves the way for an ECF arrangement:

  • Publication of all new mining contracts since November 2019 and stepped-up publication of past contracts (see Figure 3). 146 contracts have been published out of a list of 162 contracts prepared by EITI-DRC and civil society organizations. Budgetary transfers to the national EITI committee were also regularized after the appointment of a new coordinator.

  • Preparation of a decree (including Fund staff’s comments) to strengthen public debt management and monitor all new debt contracts by mandating the Public Debt Directorate to evaluate all new debt contracts for consistency with program conditionality and to enforce debt reporting from SOEs.

  • Identification of contingent spending and urgent revenue mobilization measures to safeguard the execution of the 2020 budget and avoid the recourse of BCC advances.

Figure 3.
Figure 3.

Publication of Mining Contracts

In addition to transparency commitments made as part of EITI membership, a May 2011 decree provides the legal basis for the required publication of all mining, oil, and forestry contracts by the Government. The 2021 EITI-DRC condensed report for the 2018–2020H1 period provides information on recent developments in this area.

Between August and December 2020, a list of 162 contracts was jointly prepared by EITI-DRC and other NGOs, of which 146 have already been published, and 16 additional contracts are in the process of being obtained and/or verified from mining companies. The list is publicly available in the EITI-DRC website. Among the contracts published in 2021, at least 21 contracts were signed prior to 2012, according to the list provided by EITI.

Citation: IMF Staff Country Reports 2021, 168; 10.5089/9781513588735.002.A001

Source: EITI-DRC.

The SMP proved to be instrumental in terms of reestablishing effective working relations with the authorities, enhancing institutional capacity for program monitoring, and preparing the ground for an ambitious yet realistic structural reform agenda. Governance and safeguards assessments took place over the SMP period, providing comprehensive diagnostics of key economic challenges and laying the basis for needed progress in these areas.

Economic Outlook and Risks

12. The near-term economic outlook still remains uncertain and dependent on the evolution of the pandemic as well as on a stable political environment. Following the sharp deceleration in 2020, GDP growth is expected to slowly recover from 2021 onwards thanks to the boom in the mining sector—with Kamoa’s production ahead of schedule (see Box 1) and the expansion of other mining projects—and the gradual resumption of public infrastructure and private investment projects. The fiscal stance will tighten somewhat in 2021 despite a significant pickup in externally financed projects. The external current account will continue to improve in 2021, propelled by high mining prices and export volumes, leading to an improvement in international reserves (which will nonetheless remain limited).

13. The medium-term outlook hinges on the implementation of reforms aimed at ensuring macro stability and realizing DRC’s high growth potential (Text Table 2). Average non-extractive GDP growth during the program period is expected to increase to 5.1 percent, compared to an average growth of 4.6 percent during 2014–19. Higher growth is based on enhanced macroeconomic policy management, the resumption of public and private investment, and an improved business environment as a result of the ambitious reform agenda. Improvements in the business environment will pave the way for increased private investment as well as financial deepening, particularly in domestic currency. The mining sector is expected to continue to thrive as the Kamoa-Kakula and other expansion plans are completed in a context of strong global demand and high prices. The ECF arrangement is expected to help stabilize inflation below the BCC medium-term objective of 7 percent while fostering economic growth by pursuing sound and credible public finances, increased fiscal space, and an effective monetary policy framework. Based on an updated DSA, DRC remains at a moderate risk of external and overall debt distress, with some space to absorb shocks. Most external debt thresholds are breached under the stress tests, highlighting the country’s vulnerability to external shocks. Given limited buffers, prudent borrowing policies are essential by prioritizing concessional loans and strengthening debt management policies.

Text Table 2.

Democratic Republic of the Congo: Medium-term Macroeconomic Framework

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Sources: Congolese authorities and IMF staff estimates and projections.

14. Risks are tilted downward as uncertainty remains elevated (Annex V). The economic outlook is predicated on the temporary nature of the pandemic and a gradual normalization of the global economic outlook. A more protracted pandemic would further deepen and delay the economic recovery. Domestically, key downside risks are related to the speed of the recovery, and political instability. At the same time, there are potentially upside risks from a quicker resumption of public and private investments, revamped relationships with the international community, and booming mining exports.

Program Objectives and Policies

The ECF arrangement will meet protracted balance of payment needs and support the authorities’ medium-term reform program aimed at (a) maintaining macroeconomic stability, including by strengthening international reserves; (b) increasing fiscal space for infrastructure and social spending while maintaining a moderate risk of debt distress; and (c) promoting a sustainable and private sector-led economic growth. To achieve these goals, the ECF arrangement will focus on three key areas: (i) stepping up domestic revenue mobilization; (ii) strengthening governance including natural resource management and transparency; and (iii) strengthening the monetary policy framework and the central bank’s independence. The ECF arrangement is expected to catalyze budget (and project) support from external partners.

A. Creating Fiscal Space While Preserving Debt Sustainability

15. Fiscal policy will be anchored on no central bank financing to the government and on maintaining a moderate risk of debt distress. To that end, containing the domestic balance and contracting mostly concessional borrowing will be necessary. Absent additional grants and financing, this would imply domestic fiscal deficits of up to 0.5 percent of GDP linked to the net issuance of Treasury bills in the domestic market (including the introduction of dollar-indexed T-bills in 2021Q2). The ECF arrangement is expected to catalyze budget (and project) support from external partners, particularly the World Bank and the AfDB. The authorities are also committed to favor concessional borrowing, reflecting DRC’s weak debt carrying capacity and maintaining the moderate risk of debt distress under the DSA. If an adverse scenario materialized, the fiscal program will be revised by reducing lower-priority investments while protecting social spending.

16. In a welcome development from past practice, the approved 2021 budget was based on realistic revenue and financing assumptions. Parliament approved a 2021 Budget Law broadly in line with staff revenue projections, conservative financing assumptions (particularly domestic), and an ambitious shift from current to capital spending. This was a prerequisite for the ECF arrangement discussions, and a much-needed change relative to previous budgets.

17. The program will hinge on significant improvements in revenue mobilization. Over the last five years, DRC’s central government revenue to GDP averaged 9.9 percent of GDP with mining revenues representing almost a third (versus an SSA average of 17.3 percent). As noted in the governance assessment, the revenue system is highly fragmented, including hundreds of central and provincial non-taxes and parafiscal charges which burden the private sector, overwhelm the tax administration, and foster corruption. In addition, the VAT is significantly underperforming. According to the DSA, weak revenue mobilization contributes to vulnerabilities in DRC’s debt repayment capacity. The ECF arrangement will focus on four axes with the goal of increasing the revenue to GDP ratio by 3.5 percentage points by 2023, 2.1 percentage points above the 2019 level 3 (MEFP ¶22):

  • Restoring VAT normal functioning. VAT collections fell by half (from 4.4 percent of GDP) between 2015 and 2019. A self-liquidating VAT was introduced in March 2021 for imports from mining companies to restore the VAT collection chain and eliminate a large loophole stemming from their exemption. The associated legislation will be fine-tuned to ensure it applies to mining companies as a whole, in addition to other crucial reforms. The General Inspectorate of Finance (IGF) will conduct an audit to evaluate the VAT arrears to mining companies by December 2021, which will help determine a repayment schedule.

  • Rationalizing non-tax and parafiscal charges. All legal provisions on non-tax revenues will be consolidated in a single document (SB, September 2021). The authorities will elaborate a plan to rationalize non-tax charges, which will be adopted by March 2022, with Fund technical assistance. The rationalization will be later extended to decentralized entities and provinces. Excises duties will be streamlined and their rates adjusted to compensate for revenue losses. Rationalization of parafiscal charges is expected by December 2022.

  • Streamlining tax expenditures. Tax expenditures are relatively significant (about 22 percent of central government revenue as of 2017) and preferential tax regimes and other related exemptions need to be reformed. The authorities are committed to continue to estimate and publish the size of tax expenditures on a yearly basis and to finalize a rationalization plan based on IMF CD recommendations by end-2021.

  • Modernizing revenue administration. The governance of the three main revenue administration agencies needs to be strengthened, taxpayer rights ascertained, and procedures digitalized and streamlined. Supported by donors, the authorities will continue to computerize the revenue chain through ongoing projects (such as ISYS-Régies, data warehouse or LOGIRAD). Customs administration will be reinforced with the implementation of ASYCUDA World at all custom offices, starting with additional 10 offices (SB, December 2021). Also, a decree will be adopted to strengthen the internal audit functions by revising the governance structure of the three tax administration agencies.

18. Spending discipline will also be critical to the program success. Expenditures need to be tightly controlled and their composition improved to create space for much needed social and public infrastructure spending (Annex IV). Domestically financed investment should increase from 0.3 percent of GDP in 2020 to over 2.5 percent of GDP in 2023. With the implementation of the free education initiative, wages increased from about one third of total revenue in 2018 to two thirds in 2020. The authorities committed to rationalize the wage bill, including in the education sector, and non-priority expenditure (MEFP ¶24). If there are delays in the economic recovery, they will also streamline the domestically financed investment. Additionally, the authorities will improve the fuel price structure and limit its associated subsidies and publish an independent audit of the stock of arrears, with a repayment plan included in the 2022 budget law. They also plan to gradually reform the civil servants’ pension system to limit the need for government transfers and ensure its long-term sustainability.

19. Stronger public financial management (PFM) will support fiscal transparency and accountability (MEFP ¶27). On the basis of various diagnostics (including a recent PEFA exercise), PFM reforms will focus on (i) reinforcing budgetary credibility, including through improved inter-institutional coordination and macroeconomic budgetary resources forecasting; (ii) enhancing treasury management and consolidating all government accounts (including those related to special accounts and annexed budgets), to set up the single treasury account at the BCC; (iii) strengthening the public procurement system; (iv) reinforcing the expenditure chain and limiting the use of emergency procedures; (v) developing and publishing an annual fiscal risks statement; (vi) restoring the State’s accounting function through the creation of the treasury and public accounting general directorate (DGTCP); and (vii) strengthening financial reporting and oversight (including for state-owned enterprises). Those reforms are in line with past CD recommendations and will be supported by IMF CD activities.

20. The authorities have also made significant progress on their COVID-related expenditure and transparency commitments (Box 2).

Implementation of 2020 RCF Commitments to Track COVID-Related Expenditure

• US$52 million have been identified as COVID19-related spending. Detailed information has been provided, including spending by the Inter-ministerial Committee to Fight against COVID-19, contributions for GAVI’s vaccination campaigns (US$16 million), and about US$10 million spent by the Ministry of Health. Other spending includes wages and payments undertaken under emergency spending procedures (some with no procurement process), and some regular spending redirected for COVID-19 purposes (mostly in security, sanitation, and transport sectors) for which information is not yet available due to limited capacity. In addition, the Ministry of Health published detailed information on spending by categories (https://sante.gouv.cd/wp-content/uploads/2021/04/COVID-19-FONDS-FMI-JUSTIFICATIVES.pdf), and by provinces, including their beneficiaries. Regarding specific COVID19-related spending committed and executed by external donors, the Ministry of Health published a note with details of this spending which amounts to more than US$200 million in commitments and US$116 million executed by end-April 2021

• The authorities have identified 35 COVID-19 related contracts over the US$12,000 limit through detailed process (see MEFP ¶28). By June, 23rd, 2021, the authorities have published 32 contracts, totaling US$6.8 million (https://sante.gouv.cd/publication-des-contrats-de-marches-publics-covid-19/?preview=true), including one contract above one million with the name of the supplier but not the one of its beneficial owner.

• To address capacity constraints, the authorities (i) requested technical assistance for the publication of beneficial ownership in public contracts with the objective of permanently lowering the current US$1 million threshold; and (ii) committed to limit the use of emergency procedures and agreed to produce reconciled quarterly reports on their use.

• The authorities reiterated their commitment (MEFP, ¶28) for an audit, by including a chapter on COVID-related spending in the annual report by the Cour des Comptes to be published after presentation to Parliament in September 2021. Monthly audits were prevented by the launch of a special audit by the IGF, as the IGF has seniority over the Ministry of Finance. IGF audits can be used to sustain judicial prosecution when irregularities are found, a fact that prevents their publication.

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Source: Congolese authorities’ data

B. Monetary and Financial Sector Policies

21. The monetary policy framework will be gradually modernized with the objective of maintaining low and stable inflation. While it is expected that monetary aggregate targets will continue to function as the main medium-term nominal anchor, the adoption of the new reserve requirement framework and the MoU signed between the BCC and the Ministry of Finance to regularize the outstanding credit of the government (SBs, December 2021) will contribute to modernize the monetary policy instruments and strengthen the BCC financial position (MEFP, ¶35). The full constitution of the BCC board in accordance with the 2018 BCC Law (prior action) is much needed to enhance the BCC independence and accelerate the implementation of the 2020 safeguards assessment recommendations. In addition to the discontinuation of advances, new guarantees from the BCC to the private sector will also be banned, and a plan will be implemented for the gradual elimination of existing operations.

22. The BCC is also determined to enhance the risk-based supervisory framework and the oversight of banks. The submission of the new Commercial Banking Law to Parliament by end-November 2021 that integrates IMF staff’s comments (SB) represents the cornerstone upon which a modernized regulatory framework will be developed in the coming years. The Financial Sector Stability Review (FSSR) planned for end-2021 will provide a detailed diagnostic of the banking system and develop a strategy with CD priorities for the coming years (MEFP, ¶38).

23. The program will strengthen foreign exchange reserves. Staff assesses DRC’s external position in 2020 as moderately weaker than the level implied by fundamentals and desirable policies (see Annex VI). Gross official FX reserves of the BCC are projected to reach US$1.3 billion by end-2021 or 3.4 weeks of imports, and about 6 weeks of imports by end-2024. The BCC is committed to strengthening reserves by following the recommendations of the safeguards assessment and of future Fund CD support. In addition to the ECF disbursements, the implementation of the new reserve requirement regulation and the transfer abroad of BCC FX deposits at local commercial banks will help to boost reserves. The repatriation requirement of 60 percent of export receipts constitutes a capital flow management measure (CFM) under the Fund’s Institutional View on capital flows (IV). Tightened in 2018, the measure helped to mitigate acute balance of payments’ pressures. In line with the IV, the repatriation requirement should be scaled back as adjustment progresses and balance of payments’ pressures subside. Given the very low level of FX reserves and the importance of allowing the exchange rate to act as a shock absorber, the authorities are committed to minimizing the use of FX interventions (MEFP, ¶37).

C. Enhancing Governance and Fostering Inclusive Growth

24. The authorities intend to improve the business environment. The business environment is hampered by excessive regulation weighing heavily on costs and competitiveness. Key government priorities include streamlining the multiplicity of levies and implementing a fair and predictable tax system (¶15). The system for the resolution of commercial disputes, and the enforcement and protection of property rights will also be improved (MEFP, ¶33).

25. Important governance reforms will help the fight against corruption. The recently published governance assessment 4 highlighted key vulnerabilities (Annex II). The authorities’ governance strategy includes the strengthening of the Anti-Corruption Prevention Agency operational since July 2020, in line with the United Nations Convention Against Corruption and international best practices. In recent months, high-level public officials, and businessmen have been arrested or sentenced to prison for embezzling public funds. The authorities also committed to endow the Court of Auditors and the IGF with sufficient independence, resources, and powers to carry their functions more effectively (MEFP, ¶29–30).

26. The AML/CFT framework needs improvements. Amendments to the AML/CFT Law to meet global standard recommendations, including the banning of anonymous bank accounts, will be submitted to parliament. The authorities will also submit to Parliament amendments to the asset declaration framework to strengthen the effectiveness of measures concerning politically exposed persons, in line with the Article 99 of the Constitution (MEFP, ¶32).

27. Mining sector transparency will continue to be strengthened. Transparency commitments made under the SMP delivered satisfactory results (see Figure 3). On top of continuously publishing all new contracts (continuous SB), all remaining past mining contracts are expected to be gradually published. To that effect, the government formally adopted the EITI roadmap on mining transparency in early June (prior action). In addition, complete and audited financial statements of mining SOEs need to be regularly published, starting with GECAMINES (SB, August 2021) (MEFP, ¶31).

28. The authorities are concerned about the impact of climate change, though a comprehensive climate change strategy is yet to be formalized. A major plank of this strategy will be an update of forest management and land use regulations, under the helm of the Central African Forest Initiative, which coordinates donors’ actions in this domain. Fiscal revenues linked to the global carbon market could offer promising opportunities to the country, but deforestation is an important concern. Therefore, important progress in the electrification of the country must be achieved tapping into the country’s vast renewable energy potential while protecting and enhancing the value of its enormous natural resources (MEFP, ¶34).

Data Issues and Capacity Development

29. Data provision is broadly adequate for surveillance and program monitoring, with some shortcomings that need to be addressed, including with Fund CD support, notably on fiscal statistics, debt data coverage, and globally on the timeliness of the data submission.

30. Capacity development is crucial for the program success. A revised CD strategy was discussed with the authorities (Annex VII), taking stock of evolving needs in the crisis context. Priorities are fully aligned and integrated with program objectives, including strengthening reforms in tax policy and administration, PFM, monetary and financial sector oversight, and the anti-corruption legal framework.

Program Modalities, Financing Assurances and Risks

31. The authorities request a three-year arrangement under the ECF to meet protracted balance of payment needs and support their medium-term reform program. Staff proposes access of SDR1,066 million, or 100 percent of quota, under the ECF arrangement to be disbursed evenly over the program period. DRC’s balance of payments need arises from limited availability of foreign exchange—which hinges on volatile mineral exports—and DRC’s curtailed access to external financing. The ECF arrangement will be used to increase the very low level of BCC FX reserves, and together with the CCRT and DSSI relief initiatives, would partially fill external financing gaps. Strong program performance will be key for the program’s catalytic role to mobilize further other donors’ support.

32. Program monitoring and policy commitments. Program monitoring will be based on semi-annual reviews, with Quantitative Performance Criteria (QPCs) for the end of the second and fourth quarters, and Indicative Targets (ITs) for the end of the first and third quarters. QPCs will be on (i) net international reserves of the BCC; (ii) net credit of the BCC to the central government; (iii) net domestic assets of the BCC; (iv) domestic balance on a cash basis; (v) contracting or guaranteeing new non-concessional external debt by the central government; and (vi) external payment arrears. Monetary QPCs will be validated by an external auditor. Indicative targets are set on BCC deposits used as guarantees for central government loans, the accumulation of wage arrears, government revenues and social spending. Additionally, reform progress will be evaluated based on structural benchmarks. Staff has updated information on external arrears, including the known legacy arrears from the time of the HIPC initiative to bilateral official and private creditors, and ascertained the authorities’ latest progress in this regard.

33. Financing assurances are in place for the first year of the program, with good prospects for the remainder of the program. Projected financing needs include assumptions for clearance of the current sock of external arrears of US$282 million over a 5-year period (see DSA). To secure the financing needed for their reform agenda, the authorities are closely engaged with key donors, including the World Bank and the AfDB. Disbursements of exceptional financing by other partners are expected to amount to US$357 million (Text Table 3), ensuring full financing of the first year of the program. For 2022 and later years, there are good prospects of additional support by these lenders to fill the financing gap, and funding is expected to be reinforced by the program’s catalytic role. Over the total program period, exceptional financing from sources other than the IMF accounts for about 58 percent of the external financing gap.

Text Table 3.

Democratic Republic of the Congo: Financing Gap 2021–2024

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

The ECF assumes total access at 100 percent of quota, with 7 equally distributed disbursements.

34. The authorities have devised contingency measures in the face of substantial uncertainty. An adverse growth outlook could materialize due to a delayed recovery from the pandemic, lower than projected external financing, or a sudden drop in mining prices. This could negatively affect economic growth and tax revenues, creating a fiscal gap. In such an adverse scenario, the authorities are committed to reduce lower priority spending within goods and services and domestically financed capital expenditures, while preserving social spending. Conversely, higher mineral prices and the positive impact of government reforms would translate into a further increase in government revenues. In such a favorable scenario, the authorities will consider additional spending in priority areas—particularly domestically financed investment—while respecting the program objectives of fiscal and debt sustainability. This should also lead to a larger reserve accumulation at the BCC. The authorities agreed to discuss the use of the upcoming SDR allocation during the first ECF review (MEFP, ¶19).

35. DRC’s capacity to repay the Fund is assessed as adequate but subject to considerable risks given the low level of FX reserves, state fragility, and high vulnerability to recurrent shocks. Fund credit outstanding is projected to remain close to 100 percent of gross international reserves throughout the program and total obligations to the Fund will peak in 2029 at 10.6 percent of gross international reserves (0.5 percent of GDP), both of which are around the top quartile of the historical distributions of PRGT-eligible countries. The associated debt servicing risks are mitigated by the country’s moderate level of indebtedness and the availability of concessional financing. Increasing the level of FX reserves is a crucial objective of the ECF arrangement that should gradually crystalize over time through consolidation of macroeconomic stability and increased support from international partners. The proposed CD strategy will strengthen institutional capacity whereas domestic revenue mobilization will increase resilience against shocks.

36. Safeguards assessment. The constitution of the BCC Board in accordance with the 2018 BCC Law (prior action) is expected to accelerate the implementation of recommendations of the 2020 safeguards assessment. In addition to the prior action, some of the priority reforms include: developing compliance to help assure internal accountability and integrity; strengthening capacity and oversight of the Audit Committee; and adopting of IFRS. The BCC has committed to using a monitored account at the BIS for Fund disbursements and validating monetary QPCs as well as transactions on the BIS monitored account by the external auditors.

Staff Appraisal

37. The DRC is a fragile state, with high vulnerability to shocks like the COVID-19. The DRC economy is characterized by low and fragmented government revenue, substantial development and infrastructure needs, very low FX reserves, a highly dollarized financial system, and weak institutional capacity. The pandemic has negatively affected the non-extractive economy and the collection of government revenue. The extension of advances to the government by the BCC, coupled with negative supply shocks and an easing of monetary policy, led to a rapid exchange rate depreciation and an acceleration of inflation that required a subsequent monetary policy tightening. By contrast, the mining sector is expected to continue to expand fueled by record high prices and investments in new projects.

38. Although performance under the SMP was mixed, implementation of corrective actions was strong, paving the way for an ECF arrangement. Macroeconomic policies were adjusted to maintain macroeconomic stability, including by discontinuing central bank advances and tightening monetary policy. Substantial progress was also achieved in the publication of mining contracts and through the approval of a 2021 budget based on realistic revenue and financing projections.

39. The DRC government has articulated an ambitious, yet realistic structural reform agenda aimed at promoting a robust and sustainable economic growth. The authorities’ medium-term economic and reform program focuses on maintaining macroeconomic stability, increasing fiscal space for infrastructure and social spending, and promoting a sustainable and private sector-led economic growth. The authorities have requested an ECF arrangement to accompany specific efforts towards (i) stepping up domestic revenue mobilization; (ii) strengthening governance including natural resource management and transparency; and (iii) strengthening the monetary policy framework and the central bank’s independence.

40. Decisive implementation of domestic revenue mobilization reforms is critical to increase fiscal space in the DRC. A comprehensive rationalization of tax exemptions, as well as of non-tax and parafiscal charges, is expected to facilitate revenue mobilization efforts. The authorities have also committed to the restoration of the normal functioning of the VAT and the audit of VAT arrears. Ongoing projects to further computerize the revenue chain and customs will also contribute to a stronger tax administration performance. The authorities acknowledge that some reforms, especially on non-tax revenue, will require strong political support to be successful.

41. Spending discipline and public financial management reforms are aimed at enhancing the quality and execution of government spending. Improved inter-institutional coordination will reinforce budget formulation and execution, and the government will persevere in its efforts to set up the single treasury account at the BCC, strengthen the public procurement system, and reinforce the expenditure chain and the State’s accounting function. The composition of expenditures will be enhanced by limiting non-priority spending and improving budgeting of wage and pension outlays, while targeted and high-impact health-related spending will be specifically monitored under the ECF arrangement. The debt level remains at a moderate risk of debt distress and good faith negotiations are ongoing to solve external arrears.

42. The DRC government will continue to enhance governance and the business environment. Following important progress in mining sector transparency, the authorities have formally adopted the EITI medium-term roadmap and are committed to the publication of all new and existing mining contracts. The authorities are also committed to reinforce key anti-corruption institutions and the legal AML/CFT framework to be aligned with international standards. Efforts to streamline the multiplicity of levies and to implement a fair and predictable tax collection system are a key plank towards an improved business environment.

43. The modernization of the monetary policy framework and the strengthening of banking supervision and regulation are also crucial objectives. The reforms proposed are aimed at improving the efficiency of the monetary framework in a context of high financial dollarization, including by reinforcing the BCC’s governance and independence and strengthening its financial position. ECF disbursements and additional measures will help boost FX reserves and its management will be enhanced through implementation of the safeguards assessment recommendations and Fund CD support. The authorities are committed to minimize the use of FX interventions and allow the exchange rate to act as a shock absorber. In addition, a new Commercial Banking Law should help the BCC acquire stronger supervision and intervention powers while fostering much-needed financial inclusion.

44. Based on the protracted balance of payment need and policy commitments, staff supports the authorities’ request for a three year-arrangement under the ECF, with access equivalent to 100 percent of DRC’s quota (SDR 1,066.0 million).

Figure 4.
Figure 4.

Democratic Republic of the Congo: External Indicators, 2015–21

Citation: IMF Staff Country Reports 2021, 168; 10.5089/9781513588735.002.A001

Sources: Congolese authorities and IMF staff calculations.1/ Original data of exports and imports are in millions of USD.
Figure 5.
Figure 5.

Democratic Republic of the Congo: Real and Fiscal Indicators, 2013–21

Citation: IMF Staff Country Reports 2021, 168; 10.5089/9781513588735.002.A001

Sources: Congolese authorities and IMF staff calculations.
Figure 6.
Figure 6.

Democratic Republic of the Congo: Monetary and Financial Indicators, 2015–21

Citation: IMF Staff Country Reports 2021, 168; 10.5089/9781513588735.002.A001

Sources: Congolese authorities; IMF STA INS database; and IMF staff calculations.
Table 9.

Democratic Republic of the Congo: Proposed Reviews and Purchases Under the Three-Year Extended Credit Facility Arrangement

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Source: International Monetary Fund.

Annex I. Summary of DRC Country Engagement Strategy1

A. Background and Context

  • Despite its vast mineral resources and other riches, the Democratic Republic of Congo (DRC) fits almost all aspects of state fragility, with a history marked by protracted internal armed conflict and lack of security

  • Six million Congolese are either internally displaced persons or refugees in neighboring countries and hundreds of armed groups are fighting across the country.

  • DRC experiences high levels of corruption, state capture, and weak governance in most areas of the economy and the society.

  • Poverty is widespread with 71 percent of the population in absolute poverty. Social indicators are among the worst in the world in the context of a high population growth rate.

  • DRC is subject to repeated outbreaks of deadly diseases such as Ebola, measles, or cholera.

  • Physical and social infrastructure is weak and insufficient. Few roads and airports have left large parts of the country inaccessible. Moreover, safety nets are very limited.

  • DRC’s political situation has been marked by instability, though there is currently some hope. Since independence in 1960, it took until 2019 for the first peaceful transfer of power. when President Tshisekedi took over from President Kabila. President Tshisekedi has shown a willingness to open the political system and to fight against corruption.

Lessons from the Staff Monitored Program

1. Performance under the SMP was mixed due partly to the COVID pandemic and to weaknesses in policy management. The program’s quantitative indicative targets were only partially met, due to the impact of the COVID-19, but also as a result of policy slippages that took place before the pandemic. Revenue mobilization efforts continued to lag, while the other SBs were met. Unrealistic budgets have led to spending overruns and to a breakdown of the expenditure process and the use of emergency procedures.

2. The authorities have committed to take corrective actions to redress problems encountered in the SMP’s implementation. Central bank advances have been discontinued after the signature of a MOU between the central bank and the ministry of finance. All new mining contracts since November 2019 have now been published and the budget allocations to the national committee of the EITI will be released following the takeover by a new coordinator. Public debt management and monitoring will be strengthened.

3. All in all, the SMP was a key step in many aspects. It was instrumental in reestablishing effective working relations with the authorities. The SMP helped enhance institutional capacity for program monitoring, improve cooperation between the MoF and the central bank, and prepare the ground for an ambitious yet realistic structural reform agenda. Governance and safeguards assessments also provided comprehensive diagnostics of key economic areas.

Some important lessons that were learned from the SMP for future Fund engagement are:

  • Close and continued engagement by staff with various government institutions is essential.

  • Broad involvement of the authorities in the design of targets and benchmarks is crucial to ensure that all relevant government parties are involved, and all processes known.

  • In discussing program targets, finding the right balance between significant and realistic efforts in key areas will be essential in light of the complex political economy of the country.

  • Technical assistance will be needed to strengthen the authorities’ capacity in implementing policies and structural reforms.

  • Further work needs to be done in data provision. Not having a Fund program since 2012 has weakened capacity and coordination among different institutions.

B. Strategy Going Forward

4. The DRC needs to devise a medium-term strategy aimed at:

  • Achieving rapid, sustainable, and inclusive economic growth to help reduce poverty;

  • Reducing large physical and social infrastructure gaps;

  • Increasing government spending through improved domestic revenue mobilization;

  • Ensuring debt sustainability;

  • Re-affirming the central objective of price stability, enhance central bank independence and operations and strengthen the oversight and regulation of the financial system;

  • Improving economic governance and reducing corruption.

5. The new President and his government support these key strategic objectives, but questions remain on the ability to deliver tangible reform proposals, including in governance.

Reengagement and Key Policies through an ECF Arrangement

6. The DRC faces protracted balance of payment problems and weak growth, justifying an ECF arrangement. The economy undergoes recurrent shocks and its public finances and external buffers are weak. Economic growth is insufficient given a relatively large population growth rate. In addition, the economy is subject to recurrent inflation and exchange rate depreciation bouts. The stock of external debt is relatively low, but risk of debt distress is moderate as result of low (and volatile) fiscal revenue and exports receipts. A medium-term Fund-supported program should help to achieve more durable macroeconomic stability and poverty reduction, including by catalyzing donor support. However, it will be challenging to put in place such a program given the fragmented nature of DRC politics, entrenched vested interests, and the electoral calendar. It is therefore important to carefully manage expectations and the pace of reforms.

Key policies under an ECF arrangement would be:

  • Strengthen the framework and technical capacity for macroeconomic and natural resource management. The coordination between key institutions in charge of macroeconomic policymaking needs to be enhanced, the fiscal dominance that limits the independence of the BCC eliminated, and the oversight and control of SOEs strengthened. Concessional lending needs to be favored to ensure debt sustainability.

  • Step up domestic revenue mobilization by streamlining and simplifying taxes, improving the operations of tax collection agencies, reducing redundancies, fighting against fraud and evasion at borders, and against corruption of tax and customs officials.

  • Enhance control and discipline over spending. There is a need to approve realistic budgets, strictly implement public procurement law provisions, minimize the use of emergency procedures, strengthen cash and Treasury management, and reinforce budget reporting and audit functions. More technical assistance on PFM issues will be needed.

  • Boost the quality, inclusiveness, and growth-impact of government spending. Public spending on infrastructure should be increased given substantial gaps. Health and education needs are vast and require sizable resources too. In addition, there is a need to provide a safety net for the poorest and for the fight against gender-based violence.

  • Maintain low and stable inflation through an effective monetary policy framework. The BCC needs to modernize its policy instruments and tools to ensure price stability. Reinforcing central bank independence and strengthening its financial position are also essential to improve the conduct of monetary policy.

  • Strengthen the oversight and regulation of the financial sector. The BCC needs to continue enhancing the risk-based supervisory framework and the oversight of banks. The current regulatory framework needs to be modernized and harmonized.

  • Improve the business environment and reduce the regulatory burden to unleash private sector investment. It would be critical to reduce effective taxation and simplify and make predictable the interactions with public entities and the judiciary.

  • Step up the fight against corruption through reforms and strengthening of the judiciary and law enforcement, transparency in the use of public resources, accountability for actions by policy makers and those in position of authority, and respect for the rule of law.

Pre-Requisites for an ECF Arrangement and Sequencing Reforms to Achieve Incremental Success

7. Some policy measures will need to be implemented before approving an ECF arrangement as early signals of commitment to reforms. Given many policy gaps and sizable capacity constraints, conditionality will have to be parsimonious and quite focused. One key measure will be the adoption of a realistic 2021 budget, consistent with maintaining macroeconomic stability and with the restoration of sound PFM practices. It is also critical to set up the BCC’s Board and management in line with the 2018 BCC Law. Increased transparency in the mining sector is key given its role as a source of government revenue and export receipts.

8. Success should be expected to be incremental, with early wins hopefully creating a snowball effect. This strategy suggests that associated program conditionality should be limited at the beginning and gradually build-up over time given DRC’s fragmented politics, relatively weak institutions, and widespread corruption. Incremental success will be critical in changing the mindset of the society and engendering trust. It would be crucial as well to reach out to various stakeholders and explain the rationale for and gains to expect from reforms, while also being candid about the sacrifices that reforms might entail. Civil society and international NGOs play a critical role in bringing forth issues and are very important partners for reforms. It is therefore crucial that both the authorities and staff maintain a dialogue in the context of a future ECF arrangement.

Stepping up Capacity Development and Coordination with other Partners

9. Capacity development (CD) is critical to the success of an ECF arrangement, as it will underpin needed institutional improvement. CD support from both HQ and AFRITAC Central has already been making a difference in DRC. But the governance and safeguard assessments have provided more comprehensive diagnoses of the issues and priorities. Given the depth of the shortcomings, the possibility of posting resident advisors in key areas should be considered. The final objective is to constitute a roster of highly trained and ethically conscious civil servants. Coordination with other donors and CD providers will be actively pursued.

10. As most partners share similar policy objectives as the Fund, staff will continue to closely collaborate and exchange information with them. This also provides a chance to strategize on how to best target CD and respond to the authorities’ needs. Staff will continue to debrief the donor community on CD accomplishments to further the flow of information and cooperation.

Communication Strategy

11. The Congolese public is very skeptical of the government, which puts a premium on communication. Outreach takes a critical importance and it should target the vibrant civil society, faith-based organizations, academia, politicians, women organizations, and others. DRC has also been a magnet for large and powerful international media outlets. Communication around major events should be well-organized and coordinated for maximum effect and to deliver a coherent message. Given the depth and breadth of the issues the country faces and public skepticism, it is critical to be candid not to risk losing credibility.

Annex II. Main Recommendations of the Governance Report 1

1. Four cross-cutting issues affect the effectiveness of the economic governance framework in the DRC: institutional complexity, normative complexity, data integrity and transparency, and checks and balances. The institutional complexity is due to a blurring of roles and responsibilities, for example in the way the government manages public enterprises through different ministries. Normative complexity derives from unclear legislative rules and regulations. Low levels of transparency are associated with low audit practices, which has an impact on the quality of financial data and disclosure practices.

2. On the fiscal side, significant vulnerabilities that may contribute to corruption exist in the areas of revenue administration agencies owing to largely manual processes. The exceptional complexity of the Congolese tax system creates incentives for corruption and abuse of power, harming the business environment. The scope of the General Treasury account remains narrow, while the remaining accounts are placed outside it without proper oversight. Standardized, public financial management procedures in areas like public procurement and budget execution are not followed, while the low quality and coverage of budgetary reports and financial statements undermines accountability and oversight mechanisms for state-owned enterprises are weak.

3. The BCC has not yet introduced necessary measures stemming from the 2018 law that were aimed at increasing its autonomy, governance, accountability, and financial transparency.

4. The judiciary faces many challenges in terms of resources, capacity and independence which undermine its ability to prosecute corruption effectively. The anti-corruption framework in the DRC is disjointed and lacks several key elements. Overall, the AML/CFT regime presents significant deficiencies and is not compliant with the 2012 FATF standards, as underscored by the mutual evaluation report by GABAC just recently completed.

5. The DRC institutional framework to combat corruption is subject to considerable shortcomings. Two key agencies are charged with the oversight of public finances but neither agency has a specific mandate to target or investigate corruption. Corruption is pervasive at all levels but there is a growing awareness of corruption by government officials. The absence of clear, effective oversight of the wealth/assets of public officials presents an opportunity to engage in corrupt behavior with impunity.

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Annex III. COVID-19—Health Impact and Policy Response

1. The health impact of COVID has so far been limited to 40,254 confirmed cases and 916 deaths as of late June 2021, with a large majority of cases concentrated in the capital city of Kinshasa. During the first COVID wave in Spring 2020, a lockdown was imposed in Gombe, the business district of Kinshasa. Industrial mining sites located in the Katanga and Lualaba provinces were placed in severe lockdown throughout the pandemic, with workers banned from leaving the compound, but an agreement with mining companies was reached in July to lift the most stringent measures. As a result of a second COVID-19 wave, the government announced new restrictions in December 2020, such as the establishment of a curfew, the obligation of wearing a mask, or compulsory COVID testing for domestic and external travelers. In early June 2021, a third wave of COVID-19, with Kinshasa as its epicenter, was officially announced by the health authorities.

2. In early March 2021, a first shipment of 1.7 million doses of the COVID-19 vaccine arrived at Kinshasa. This was part of the first wave of supplies sent to the country by COVAX, the global initiative led by the WHO and other health partners that aims at equitable access to the COVID-19 vaccine. The goal of this first stage of the vaccination is to cover 20% of the population, including health workers, people aged over 55 or suffering from serious health conditions, although fear of side effects and mistrust of the population have delayed the launch of the vaccination campaign.

3. It must be noted that COVID is just one of DRC’s current critical health issues. Since 2018, DRC has battled four Ebola outbreaks, of which the 2018 South Kivu outbreak was the most severe with 3,470 cases and 2,299 deaths, making it the world’s second largest Ebola outbreak on record. Another outbreak started in Equateur in June 2020, a province already hit by an outbreak in 2018, and it was declared over in November 2020 thanks to the timely mobilization of vaccines and treatments. Importantly, the response to COVID has also interfered with the vaccination campaigns against measles, which has now spread to every province of the country and caused more deaths than the recent South Kivu Ebola outbreak.

4. A range of fiscal and monetary measures were adopted in response to COVID. A preparedness and response national plan, with a US$135 million budget (or 0.3 percent of GDP) was designed with support from development partners. Coordinated by Dr. Muyembe, who was in charge of the response to the 10th Ebola outbreak, the plan aimed at (i) strengthening early detection, surveillance, and enhancing technical and operational coordination within the government; (ii) improving the quality of medical care; and (iii) developing effective preventive communication.

5. The following fiscal measures were adopted: (i) a three-month VAT exemption on pharmaceutical products and basic goods; (ii) the suspension of tax audits for companies; (iii) a grace period for businesses on tax arrears; (iv) full tax deductibility of any donations made to the COVID relief fund; (v) the provision of water and electricity for a period of two months, free of charge; (vi) the prohibition to evict renters in case of nonpayment of financial obligations from March to June 2020; and (vii) the suspension of VAT collection on the production and on the sales of basic goods.

6. The BCC took several measures in March 2020 to ease liquidity: (i) reducing the policy rate by 150 bps to 7.5 percent; (ii) eliminating mandatory reserve requirements on demand deposits in local currency; and (iii) creating a new collateralized long-term funding facility for commercial banks of up to 24 months to support the provision of new credit for the import and production of food and other basic goods. The BCC has also deferred the adoption of new minimum capital requirements, encouraged the restructuring of NPLs, and promoted the use of e-payments. In order to re-anchor inflation expectations and maintain a positive in real terms policy rate, in 2020 the BCC increased its policy rate to 18.5 percent, and also undertook a limited US$25 million foreign exchange intervention to help stem depreciation pressures.

Annex IV. Social Spending—Free Education Initiative and the Health Sector 1

President Tshisekedi has highlighted enhancing social welfare as one of his Presidency’s main priorities, especially through education with the free education initiative and health.

Education

1. One of the flagship projects of President Tshisekedi was the introduction of free education (primary plus two years) in September 2019. Prior to 2019, the education system required parents’ monetary contributions to pay for teachers’ salaries and school operational fees. The project aims at reducing the financial burden of public primary school fees on households and increase access for poor children. Indicative data from household phone surveys in three provinces (Kinshasa, Ituri, and North Kivu) suggest that the policy has had large impacts on enrollment rates at the primary and secondary levels. National projections based on these partial results indicate that primary enrollment was nearing 95 percent in 2020, up from 75 percent three years earlier.

2. Close to 60,000 public primary school teachers have been identified and added to the government’s payroll starting in November 2020. These teachers were identified through a national census exercise and are currently working in recognized public primary schools and meeting the Ministry of Education’s transparent qualification criteria. This represents a 13 percent increase in the total number of public primary school teachers, and future identification rounds are expected to add more qualified teachers in a transparent manner. In addition, also starting in November 2020, over 80,000 public secondary school teachers, pre-school teachers, and administrative staff were added to the payroll. Public spending in education reached 2.3 percent of GDP in 2020, a 51 percent increase when compared to spending over the previous seven years.

3. Through the Emergency Equity and Systems Strengthening in Education Project (US$700 million over 3 years) approved in June 2020, the World Bank is assisting the initiative in 10 of the 16 provinces, or about 54 percent of the children. Additional donors, including the French Development Agency (AFD) and the Global Partnership for Education (GPE) have also recently supported the incorporation of a limited number of unpaid teachers into the payroll. Several partners are currently preparing plans for new support to the primary education sector in DRC, including the United States Agency for International Development (USAID), the United Kingdom Foreign & Commonwealth Office (FCDO), and AFD.

Health

4. The health sector in the DRC suffers from several ailments. First, per capita health expenditure is low at US$20 per person of which only US$3 is covered by the government according to the 2018 National Health Accounts (NHA) published in 2020. Additionally, there is a low budget allocation to health (10 percent in 2019, Ministry of Health’s Budget) and half of it is subsidized by donors channeling resources through the Ministry of Finance. Household expenditure is the main driver of health expenditures, representing 45 percent of total health expenditures or US$9 per capita. Finally, DRC is highly depending on external funding, 35 percent of total health expenditures pertained to donor funding according to 2018 NHA. Cognizant of these challenges, the Ministry of Health developed a national health strategy in 2018, the National Plan of Sanitary Development (NPSD) 2019–22, which sets out the main priorities to reach Universal Health Coverage (UHC), also one of the cornerstones of President Tshisekedi’s reform areas. Yet the NPSD encounters a funding gap that COVID-19 pandemic has exacerbated. In addition, the pandemic has compounded difficulties in reaching people: in Kinshasa, the number of patients visiting health facilities dropped by more than half between March and July 2020 due to the COVID-19.

5. One of the key priorities of the NPSD is the provision of a package of maternal and child health services (including vaccination) as well as interventions preventing and treating communicable diseases (TB, HIV/AIDS, Malaria). The government has started covering those expenditures on vaccines and HIV/AIDS, TB, and Malaria through donors’ counterparties but also through domestic budget for reproductive, maternal, neonatal, child and adolescent health (RMNCAH).

6. Drawing from NPSD’ key priorities, the social spending indicative target was developed in close collaboration with the donors involved in the health sector. It should ensure that essential health services remain protected and effectively prioritized in the Ministry of Health budget. It should also support the monitoring of use of existing spending for essential health services on a regular basis. The target was designed as a floor of spending around three basic health programs:

  • RMNCAH and primary health care, excluding wages

  • Disbursement of GAVI-supported vaccine co-financing and traditional vaccines procurement

  • Disbursement of TB/ Malaria/HIV/AIDS co-financing.

Annex V. Risk Assessment Matrix 1

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Annex VI. External Sector Assessment

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Annex VII. Capacity Development Strategy

CD Strategy

1. The Fund’s CD strategy for the Democratic Republic of the Congo over the medium term focuses on: (i) reinforcing revenue mobilization and public financial management, in particular, budget preparation and execution capacity; (ii) enhancing central bank monetary operations, data reporting, audit and control; (iii) improving debt data collection, especially on SOEs; (iv) strengthening banking supervision and regulation capacities; (v) improving anticorruption institution and laws; and (vi) improving collection and publication of national accounts and fiscal data.

Key Overall CD Priorities Going Forward

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Main Risks and Mitigation

2. Political instability and weak institutional governance are the main risks by complicating the actual delivery of technical assistance (TA) and by undermining the ownership of associated reforms. Commitment and capacity to implement TA recommendations will need to be regularly monitored. Sustained engagement with the new authorities will be required to agree on TA plans and key objectives and to increase the potential return of the Fund’s CD activities.

Authorities’ Views

3. The authorities agreed on the identified focus areas for CD support from the Fund. Notably, they are seeking assistance in:

  • Developing guidance notes on issues related to budget processes and fiscal data compilation.

  • Organizing a seminar for members of parliament and senators on budget credibility and PFM.

  • Reinforcing banking supervision.

  • Strengthening central bank reporting and control processes, monetary policy implementation & instruments.

Appendix I. Letter of Intent

Kinshasa, DRC June 28, 2021

Ms. Kristalina Georgieva

Managing Director

International Monetary Fund

Washington, D.C. 20431

Dear Madam Managing Director:

1. Our economy has been severely affected by the COVID-19 pandemic, with GDP estimated to have grown by only 1.7 percent in 2020 despite the expansion of the extractive sector by almost 10 percent. The associated public revenue shortfall led to central bank advances to the government and a sharp increase in inflation in parallel with a quick depreciation of the Congolese franc. In this context, a Stability Pact signed between the central bank and the government’s economic team, together with the disbursement under the Rapid Credit Facility in April 2020, critically helped stabilize the economic and financial conditions, although substantial financing needs remain over the medium-term to alleviate the social consequences of the crisis and bolster the economic recovery.

2. To help close external financing needs and support our medium-term policy and reform agendas, the Government of the Democratic Republic of the Congo (DRC) hereby requests financing under the Extended Credit Facility in the amount of SDR 1,066 million, corresponding to 100 percent of quota, over a three-year period. We are confident that the IMF involvement will play a catalytic role in securing additional financing from development partners, which we will continue to actively seek over the program’s period.

3. The attached Memorandum of Economic and Financial Policies (MEFP) outlines the policy measures and structural reforms envisaged to support the post-COVID-19 recovery and resume progress towards raising and sustaining inclusive growth. The government’s program was presented by the Prime Minister to the National Assembly on April 26, 2021, drawing from the vision of the President of the Republic that have been developed in the National Strategic Development Plan for 2019–2023. Our medium-term program aims at building fiscal space for much-needed spending in the health and education sectors and for public investment in infrastructure through substantial increases in revenues and improved composition of expenditures. In addition, it will pursue a significant strengthening of budget transparency, economic governance, as well as stepping up the fight against corruption so as to strengthen social cohesion and improve the business climate. Our program also aims at further enhancing the monetary policy framework and financial supervision to foster credit and deepen financial inclusion.

4. As detailed in the MEFP, we have made significant progress towards improving the transparency and traceability of public resources directed to the fight against the COVID-19 pandemic, in line with our commitments laid out in the Letter of Intent attached to the April 2020 disbursement under the Rapid Credit Facility.

5. In addition, having requested the temporary debt service suspension from our official bilateral creditors, in line with the Debt Service Suspension Initiative (DSSI) supported by the G-20 and Paris Club, we are committed to adhere to its requirements: we will use freed resources under the DSSI for COVID-19 health spending and mitigating measures to provide economic relief from the crisis and we will closely monitor and report on the use of the COVID-19 resources.

6. The first disbursement under the requested Extended Credit Facility (ECF) arrangement will help fill the projected balance of payment financing gap and increase international reserves of the central bank (Banque Centrale du Congo, BCC) from their current low level.

7. We do not intend to introduce measures or policies that would exacerbate the current balance of payments difficulties. We do not intend to impose new or intensify existing restrictions on the making of payments and transfers for current international transactions, import restrictions for balance of payments purposes, or multiple currency practices, or to enter into bilateral payments agreements which are inconsistent with Article VIII of the IMF’s Articles of Agreement. Furthermore, in line with the IMF safeguards policy, the BCC commits to complying with recommendations of the 2020 safeguards assessment.

8. We believe that the measures and policies set forth in the attached MEFP are appropriate and sufficient to achieve the objectives of the program. However, we stand ready to take any further measures that may be necessary to meet these objectives. We will consult with the IMF prior to adopting any revisions to the policies set forth in the MEFP, in accordance with the IMF’s policies on such consultations. We will also provide Fund staff with all data and information needed to assess the policies and measures contained in the Technical Memorandum of Understanding (TMU).

9. The authorities of the DRC agree to the publication of this Letter of Intent (LOI) and the attached MEFP and TMU, as well as the IMF staff report related to the request for an arrangement under the ECF and the Debt Sustainability Analysis, after approval by the Executive Board of the IMF.

Sincerely yours,

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Attachments:

  • - Memorandum of Economic and Financial Policies

  • - Technical Memorandum of Understanding

Attachment I. Memorandum of Economic and Financial Policies

This Memorandum of Economic and Financial Policies (MEFP) reviews recent economic developments and lays out the medium-term economic objectives and policy framework of the government of the Democratic Republic of the Congo (DRC), for which we are seeking support under a three-year Extended Credit Facility (ECF) arrangement. This MEFP describes the government’s macroeconomic and structural reform policies to enhance macroeconomic stability, create fiscal space, improve governance, and strengthen financial sector stability and development, consistent with the objectives of the government to increase sustainable economic growth, raise living standards, and improve social conditions.

Introduction

1. The DRC remains extremely fragile, after suffering decades of recurrent humanitarian and political crises. Our country is still recovering from a series of conflicts that broke out in the 1990s and caused, directly or indirectly, more than 5 million deaths. We are still facing acts of violence in some regions, and our country hosts more than half a million refugees and five million internally displaced people (IDPs), the largest IDP population in Africa. Outbreaks of deadly diseases frequently kill scores of people. Economic dislocation and disruptions, also fueled by political instability, have led to a drop in real per capita income from above US$1,100 in 1990 to about US$500 today, exacerbating extreme poverty, with more than two thirds of the population living in extreme poverty on less than US$1.90 a day. In a context of extreme fragility, our exceptional natural resources, including huge reserves of minerals and at least 80 million hectares of arable land of which less than 10 percent are used remain under-exploited.

2. Faced with these challenges, we are determined to deliver positive change, better living conditions, and a promising future to our population, and we have actively reengaged with the IMF and other international partners. After his inauguration in January 2019, following the first peaceful transfer of power in our history, President Felix Tshisekedi re-engaged with the international community to seek support for his development vision. After completing the first Article IV consultation since 2015 in August 2019, our request for a disbursement under the Rapid Credit Facility (RCF) was approved in late 2019 together with a Staff Monitored Program (SMP), supporting our efforts to strengthen macroeconomic stability and key structural reforms to start improving governance and fighting against pervasive poverty. The objective was also to pave the way towards a program supported by an Extended Credit Facility (ECF) arrangement. In April 2020, another RCF disbursement was approved to address the COVID-19 pandemic.

3. An ECF arrangement will support our efforts to respond to the economic impact of the pandemic, advance the reform momentum to raise and sustain growth in line with the government priorities, and catalyze donor financing. In the short-term, the ECF arrangement will help support our efforts to mitigate the impacts of the pandemic and lay the foundation for a sustained recovery through a credible macroeconomic framework. Building on reforms launched since 2019, the new government confirmed by the parliament on April 26, 2021 is committed to accelerate the implementation of a strong structural reform agenda to sustain inclusive growth and address long-standing fragilities, maintain macroeconomic stability, create fiscal space for much-needed investment in physical and human capital, and reduce poverty. Program engagement with the IMF under the ECF arrangement will help address our balance of payments needs, catalyze much-needed external project and budget support, and attract foreign private investment.

Recent Developments

4. The pandemic led to a sharp deceleration of non-mining economic activity while the mining sector managed to expand substantially. We estimate output to have grown by about 1.7 percent in 2020 compared to an anticipated growth of more than 3 percent before the pandemic. The impact of a lockdown in the first quarter of 2020 affected the non-mining sector (estimated to have contracted by about 1.3 percent in the entire year), but the extractive sector was resilient and expanded by 9.7 percent, with no major or prolonged closing of mines owing to the limited spread of COVID-19 to the mining regions.

5. The government has taken mitigation measures, coordinated through a multi-sectoral response plan, and adjusted policies to address the economic and social impact of the pandemic. On March 21, 2020, the President declared the state of health emergency (which ended in July 21), complemented by regulatory measures such as temporary border closures, quarantines and systematic testing of travelers, restrictions on public events, and temporary lockdowns, notably in Gombe, the business district of Kinshasa. With support from our development partners, we prepared an emergency multi-sectoral response plan, with a US$135 million budget (0.3 percent of GDP). Specific measures included (i) targeted spending to strengthen detection, surveillance, and improve the quality of medical care; (ii) various fiscal measures, including targeted tax relief measures, and deadline extensions for certain declarations and payments; and (iii) support by the Banque Centrale du Congo (BCC) to the financial sector through measures to ease liquidity issues.

6. The impact of the pandemic on both revenue and spending led to a higher fiscal deficit than expected under the SMP projections. Tax revenue was negatively affected by the containment measures that complicated revenue administration and from delays in tax reform implementation, including the restoration of normal functioning of the VAT and the digitalization of revenue collection processes. On the spending side, beyond the impact on the wage bill linked to the implementation of the free education initiative, additional pressures came from the need to address the pandemic. In total, the overall fiscal deficit of the central government reached 2.1 percent of GDP in 2020 versus a 0.6 percent deficit anticipated at the time of the SMP’s approval.

7. After some slippages in the first half of 2020, we were able to contain jumps in exchange rate depreciation and inflation through a tightening of policies. Partly due to the pandemic, the BCC provided advances to the government equivalent to about 0.3 percent of GDP through April 2020. This contributed to an acceleration of inflation, which peaked at 15.7 percent year-on-year in August 2020, and a rapid exchange rate depreciation. Following the RCF budget support disbursement in April 2020 (see ¶2), the BCC, the Ministry of Finance and the Ministry of Budget signed a stability pact, which was decisive to tighten spending execution and discontinue central bank advances. In addition, the monetary policy was substantially tightened. As a result, inflation slowed down sharply, and exchange rate pressures eased in the second half of 2020.

8. The prompt RCF disbursement in April 2020 was instrumental in closing short-term fiscal and balance of payment gaps, preserving stability in the face of the pandemic. Early support from the IMF with an RCF disbursement amounting to US$363 million (0.7 percent of GDP) approved in April 2020, directed to the budget, was crucial to finance essential and urgent spending. This support allowed the government to partly compensate the fall in government revenue, while spending was strictly controlled in line with the Treasury’s cash-flow situation. Immediate balance of payment needs were also closed, and the fall in BCC international reserves was contained from US$730 million at end-2019 to US$709 million at end-2020, equivalent to less than 2 weeks of imports.

Macroeconomic Program and Targets

A. Performance under the Staff Monitored Program

9. Despite difficult circumstances, we believe that performance under the SMP was broadly satisfactory once associated corrective actions implemented after its expiration are taken into account. We met all the indicative targets (ITs) for the end-December 2019 test date, with the exception of the ceiling on the contracting or guaranteeing of new non-concessional external debt due to the financing of an important development project for N’Djili International Airport. In the context of the economic impact of the pandemic, we missed several ITs for the March and May 2020 test dates, including the floor on the fiscal domestic balance (in cash basis), and the ceiling on net financing from the BCC to the government. However, we were able to implement all structural benchmarks (SBs) with the exception of the restoration of VAT on imports by mining companies, given legislative constraints, including the calendar of the parliamentary session. An achievement worth highlighting under the SMP is the publication of all new mining contracts since late 2019 with a total of 146 contracts published out of a list of 162, including all the critical ones highlighted by the civil society. Moreover, we have implemented strong corrective actions, including the signing of an inter-ministerial decree to strengthen public debt management and to monitor all new debt contracts, and the signing of a stability pact between the BCC and the Ministry of Finance ruling out BCC advances to finance the fiscal deficit.

10. Two crucial assessments undertaken during the period covered by the SMP and active technical assistance have paved the way for program engagement under an ECF arrangement. The governance and the safeguards assessments that took place in December 2019 and February 2020, respectively, show the extent of the reforms needed and provide clear recommendations for their prioritization and articulation with a view to a timetable for implementation. In addition, the extensive technical assistance we received has strengthened our institutional capacity to implement a program supported by the IMF.

B. Program Objectives and Outlook

11. The government is committed to maintaining macroeconomic stability and placing the DRC on a path of sustainable and inclusive growth building on improved physical and human capital, and strong governance, as laid out in the government’s program. The government’s program was presented by the Prime Minister to the National Assembly on April 26, 2021, followed by the new government inauguration. This program builds on the vision of the President of the Republic that have been further developed in the National Strategic Development Plan for 2019–2023 unveiled in December 2019. This plan is organized around five main pillars: (i) the development of human capital and social inclusion, supported by strengthened social policies and spending, with strong focus on education, health, and housing; (ii) the strengthening of governance and the consolidation of peace; (iii) the consolidation and diversification of economic growth, with the strengthening of sectors with high growth potential (mining, hydrocarbons, metallurgy) and those with strong job creation potential (forestry, agriculture, agro-industry); (iv) the reconstruction and modernization of much needed infrastructures in transport, energy and telecommunication; and (v) the environmental protection, making use of our natural resources in a sustainable manner, respecting environmental standards, and improving resilience to climate change.

12. The priorities under the ECF arrangement are aligned with the government’s reform agenda. Our immediate priority is to support the economic recovery. We will also focus on urgent and well-targeted structural reforms to promote inclusive growth, reduce poverty, and address long-term fragilities. Our key objectives to be supported by the ECF arrangement are to:

  • 1. Step up domestic revenue mobilization to increase fiscal space for the financing of much needed investment and social spending.

  • 2. Strengthen governance, including natural resource management and transparency and the anti-corruption framework.

  • 3. Strengthen monetary policy and financial stability, including by improving the central bank’s independence.

13. The 2021 budget law was based on credible revenue and financing assumptions. In contrast to the 2020 Finance Law, which ended up being overly optimistic and complicated budget execution, the 2021 budget law approved in December 2020 was based on more realistic revenue assumptions and conservative domestic financing assumptions, given the recent relaunch of the domestic government securities market.

14. In line with the program baseline scenario, we expect economic growth to rebound in 2021 and continue to accelerate in the medium-term as external demand recovers and our reforms start to bear fruits. We forecast GDP growth to rebound to 4.9 percent in 2021 fueled by strong mining production and a partial recovery of the non-mining sector. In the medium-term, we expect an acceleration of GDP growth to near 6 percent. The DRC will rely on higher production of the mining sector—with several major projects such as the Kamoa project at an advanced stage— and on the development of several promising sectors, such as agriculture and agro-industry, energy, transportation, and telecommunications. To achieve our objectives for strong and sustainable growth, we must make substantial progress in improving physical and human capital, which requires significant increases in investment. We will rely on improved tax and non-tax revenues and better quality of spending to foster public investment, and improvements in the business environment to mobilize private investment. We expect exports to continue recovering from the crisis, and imports to rise as capital spending is expected to increase, with the current account deficit (including transfers) stabilizing at around 1.3 percent of GDP in the medium term, allowing for a gradual increase in international reserves.

C. Program Policies and Risks to the Outlook

15. Our fiscal policy will be anchored on limiting the overall fiscal deficit to levels consistent with no direct financing from the central bank and medium-term fiscal sustainability. This implies an overall fiscal deficit (cash basis) of about 1 percent of GDP per year over the medium-term, which will be the fiscal anchor of the program as a Quantitative Performance Criterion (QPC). We are committed to refrain from any central bank financing of the budget (direct or indirect through the provision of guarantees), which will be ensured through both a QPC with a zero ceiling on changes in net central bank credit to the government and a QPC with a ceiling on the BCC’s net domestic assets (see Table 1 for details). We will also provide detailed information on payments related to existing secured loans, on the terms of such loans and on related guarantees.

16. The ECF arrangement will help increase BCC foreign exchange reserves. Our policies supported by the ECF arrangement are expected to improve DRC’s macroeconomic conditions and gradually add some buffers to the very low level of BCC foreign exchange reserves (about two weeks of imports’ coverage). In fact, the stabilization of our external accounts and of our budgetary situation (which should allow the accumulation of some government deposits at the BCC over the medium-term), the adoption of a new reserve requirement framework for foreign currency deposits, and more active support from the international community over time, are expected to help increase gradually the level of official international reserves to more than 5 weeks of imports by the end of the program. This crucial program objective will be monitored through a QPC with floors on the changes in net international reserves.

17. External financing will continue to rely mostly on grants and concessional loans to preserve debt sustainability. At about 14 percent of GDP, our stock of external public debt is low, but the risk of debt distress remains moderate due to low fiscal revenue and volatile export receipts. We will continue to follow a prudent debt management strategy aimed at maintaining the current risk of debt distress rating and debt sustainability. With this objective, newly contracted public debt will favor loans offered on concessional terms. That said, some long-term non- and semi-concessional borrowing can be considered in limited circumstances to support critical expenditure needs (e.g., for high-yield investment projects). To reconcile our investment needs and related external financing with the need to preserve debt sustainability, we commit to maintain a ceiling on the contracting or guaranteeing of new non-concessional external debt by the central government, set as a QPC (see Table 1 and TMU for details). We will keep on strengthening the collection and reporting of debt-related data from SOEs. We commit to avoid any external arrears (QPC).

18. In parallel with the preparation of the initial budget law for 2022, the government will prepare a 2021 revised budget law. While the spending envelope will be refined to be aligned with the new government’s priorities, the revised budget law will continue to be based on credible revenue projections and on updated financing assumptions.

19. We take note of the announcement of a potential SDR allocation, which could materialize by end August 2021. Regarding the use of this allocation, notably the possibility to redirect part of it to the budget in addition to the strengthening of the international reserves at the BCC, we are aware of the impact of such a decision on the program’s macro-framework and quantitative objectives. Therefore, we will discuss the use of the upcoming SDR allocation during the first ECF review.

20. Considering the uncertainties in the global economic environment and on budget support prospects, we discussed an adverse scenario with IMF staff and potential contingency plans. An adverse growth outlook with delayed growth recovery could materialize due to delayed recovery from the pandemic and difficulties to eradicate the disease, requiring more containment efforts, or a sudden drop in mining prices. This could impact DRC’s growth in 2021, through weaker external demand and lower externally-financed public investment. The impact on tax revenue would create, in the absence of policy actions, an additional fiscal gap. While we expect that keeping the IMF-supported program on track will help catalyze budget support, lower than projected external financing represents an additional risk. If such an adverse scenario materializes, our response would rely on some budgetary savings, by reducing lower priority spending while preserving social spending and priority domestically-financed investment.

21. Conversely, a more favorable scenario could materialize if higher prices for minerals and the result of the first reforms translate into an increase in government revenues above the assumptions of the baseline of the program. We believe that the first reforms that the government will launch, and economic developments that could be more favorable than anticipated (in particular with the possibility of higher mining production than in the macroeconomic framework of the program baseline) could translate into higher than expected budget revenues. In this scenario, while respecting the objectives of the program, particularly in terms of public deficit, we could consider additional spending in priority areas.

Structural Reforms

D. Fiscal Reforms

Mobilizing Domestic Revenue

22. We have ambitious medium-term revenue mobilization objectives supported by a strategy covering both revenue administrations and tax policies. Our objective is to gradually increase the revenue-to-GDP ratio, in line with peers in sub-Saharan Africa and with our tax potential. While there is a significant potential to increase fiscal and non-fiscal revenues in the DRC, we are aware that it might take time given the need to change incentives, strengthen revenue administration and its transparency, and, relatedly, build trust. An intermediate objective would be to increase the tax revenue to GDP ratio by 3.5 percentage points towards 12.2 percent of GDP by 2023, which will be monitored by an indicative target (Table 1). Revenue mobilization will build on the following reforms:

  • We will take necessary steps to restore the proper functioning of the VAT. Based on recent TA recommendations, we set up a self-liquidating VAT system for imports from mining companies starting end-March 2021 to restore the VAT collection chain and eliminate a large loophole stemming from their exemption. We will also revise the related decree instruction to make it consistent with existing legislation and international best practices, and for the decree to apply to mining companies as a whole, not to specific products. The General Inspectorate of Finance (IGF) will be responsible for carrying out an audit limited to the certification of VAT arrears to mining companies, to be finalized by December 2021, to determine the VAT arrears to mining companies. On this basis, a repayment schedule will be adopted. The Ministry of Finance will give instruction for this audit by August 2021. VAT liability criteria will be reviewed within the structural reform of the DGI (tax directorate). Also, more efficient rules for transferring files between tax departments will be implemented. Controls will be strengthened and better targeted through dynamic risk analysis.

  • We will modernize our revenue administration. To this effect, the governance of the three main revenue administrations will be strengthened and taxpayer rights ascertained. Ongoing projects to computerize the revenue chain supported by the Agence Francaise de Developpement and the European Union will continue, and we commit to finance recurring costs and to encourage the users to work actively with the new softwares (ISYS-Régies, data warehouse, LOGIRAD). The ASYCUDA World system will be implemented in the electronic single window at all custom offices, starting with 10 offices by end-2021. This would bring the total of offices with ASYCUDA World to 77 out of a total of 117 offices representing more than 95% of the country’s customs revenue in 2020. The implementation of the excise duty traceability system (STDA) is also expected to start to yield results in 2022. We also intend to strengthen the performance of the tax administrations with a more equitable distribution of revenue administration bonuses and by developing performance contracts, while strengthening our system for evaluating individual performance. In addition, a decree revising the framework and organic structures of the three tax administrations will be adopted with a view to strengthening the internal audit function and establishing the accounting network of financial administrations.

  • We will streamline tax expenditures. We estimated tax exemptions at about 22 percent of central government revenue in 2017. To enhance transparency of those exemptions and help create political support for their rationalization, we will continue to estimate and publish their costs on a yearly basis and we will publish by end-2021 the report on tax expenditures for 2019 and 2020. A rationalization plan based on existing FAD TA recommendations will be finalized by end 2021. Preferential tax regimes should be reformed, as well as all conventions, approvals, agreements, letters or other that include tax exemptions, except in the codes currently in place. The high de facto threshold for daily import for personal use needs to be reformed to prevent import fractioning and duty avoidance.

  • We will continue to rationalize non-tax charges. We will bring together all the legal provisions on non-tax revenue included in the sectoral laws in a single document by September 2021. We are committed to significantly rationalizing non-tax charges based on a prior assessment to be carried out by the end of December 2021. The plan to rationalize these charges will be adopted by the Government by March 2022. To this end, we will seek technical assistance from the IMF. We will extend the rationalization to ETDs and provinces later. Excise duties will also be rationalized by refocusing them on products generally subject to excise duties and by slightly adjusting the rate on these products in order to compensate for the loss of revenue.

  • We will rationalize parafiscal charges. As a first step, we will carry out an inventory of all parafiscal deductions from special accounts and budgets by June 2022 with a view to rationalizing them from December 2022.

Reducing Fiscal Risks and Improving the Quality of Spending

23. We will start publishing a yearly statement on fiscal risks and introduce a fiscal risk management function. With technical assistance from the IMF, we are developing a detailed statement with information on (i) macroeconomic risks; (ii) risks associated with public debt; (iii) risks associated with public sector entities other than the State; (iv) risks related to the financial sector; (v) institutional risks; and (vi) long-term risks, notably related to climate change. As a first step, we will publish it as an annex to the Medium-Term Budget Framework (CBMT) for 2022–2024, and we plan to annex it to the initial finance laws in the future. We plan to set up a formal mechanism for defining and sharing the main macroeconomic assumptions so that all administrations have a common and central reference for upside and downside risks. The necessary coordination for the management of fiscal risks will be ensured by a dedicated committee. Also, the organizational modalities of the fiscal risk management function will be regulated by a decree on fiscal governance that will be adopted by the Government.

24. We are committed to limiting non-priority spending. This is crucial to increase fiscal space, as sustainable and inclusive growth requires increased priority spending, especially on infrastructure, education, healthcare, and targeted social assistance. We will streamline the wage bill (by consolidating wage payment systems, reviewing bonuses and eliminating ghost workers). We will improve the fuel price structure in consultation with the oil industry by the end of August 2021. In addition, an independent firm will be recruited by December 2021 to audit the charges of the oil commercial and logistics companies. We commit to publish the certification report of the stock of arrears to be paid to commercial companies and to include in the 2022 budget the planned repayments. We will also regularize the payments made in 2021 by including them in the 2021 revised budget law. We will also gradually reform the civil servants’ pension system to control the need for government transfers and ensure its long-term sustainability. We commit to limit the use of emergency procedures (IT) and restore the proper use of the expenditure chain.

25. We will ensure higher spending in priority social areas, a key priority of the government. Given the importance of this commitment, and for monitoring purposes under the ECF arrangement, an IT with a floor on social spending has been defined for key targeted projects. Our social priorities include:

  • On the education sector, pursuing the development of the ongoing free education by continuing the regularization of teachers and strengthening infrastructure.

  • On the health sector, ensuring health spending in three critical areas (IT): (i) child and mother prevention; (ii) traditional vaccination, and (iii) HIV, malaria and TB prevention. To this end, we commit to ensuring our share of funding on a regular basis, as we did in 2020 with the payment of US$16 million to the GAVI and of US$17 million in 2021.

  • On needed progress in terms of peace and stability with the gradual withdrawal of MONUSCO, we are committed to a structured dialogue with the United Nations through a joint working group in order to establish a transition plan and allocate the appropriate resources in the areas of departure of the Mission in order to consolidate the authority of the State, to implement the Disarmament, Demobilization and Community Reintegration (DDRC) strategy, pursue the reform of the FARDC and the PNC, in particular ensuring the good management of the workforce, continue to improve the protection of civilians and the fight against impunity, respond to humanitarian needs, resolve the root sources of conflicts and foster inclusive development.

26. The planned scaling-up of public investment will come with better prioritization and execution. Our ambitious public investment objectives will be further clarified, including the prioritization of projects considering implementation and absorptive capacity constraints. We will undertake with IMF TA a Public Investment Management Assessment (PIMA) to strengthen our investment procedures – planning, allocation of resources and project implementation, monitoring and transparent reporting – and ensure the best use of our funds.

Improving Public Financial Management (PFM)

27. Efforts are ongoing to revitalize the PFM reform agenda and address weaknesses. Based on the recent assessment of the performance of public finance management (according to the PEFA methodology), and with support from technical assistance from the IMF and other partners, an updated public finance reform strategic plan will be adopted by the Government by the end of 2021. We will focus our reform agenda on:

  • Reinforcing budgetary credibility, including through improved inter-institutional coordination, formulation of the macroeconomic framework, and forecast of budgetary resources.

  • Enhancing treasury management through a stronger institutional framework and enhanced treasury plans; and an inventory and consolidation of government accounts (including those related to special accounts and annexed budgets), in order to set up the general treasury account at the BCC.

  • Reinforcing the expenditure chain and limiting the use of emergency procedures. To help enforce the expenditure chain (which was weakened by the emergency nature of COVID-related spending), we will produce quarterly reports on derogatory procedures detailing the nature and amount of each procedure. These quarterly reports will be reconciled with the treasury plan and the BCC debit notices. We will start with the third quarter of 2021, to be published by end-2021.

  • Strengthening financial reporting and oversight (including for state-owned enterprises).

  • Strengthen public debt management. An inter-ministerial decree has been signed on December 5, 2020, mandating the Public Debt Directorate to evaluate and monitor all new debt contracts, including their consistency with program conditionality and to enforce debt reporting from SOEs.

  • Strengthen the public procurement system by favoring calls for open tenders.

  • Restore the State’s accounting function through the creation of the DGTCP.

28. We are taking the necessary steps to fulfill our commitments regarding the proper use of resources, including from the April 2020 RCF disbursement, for COVID-19 related spending. As committed, we published budget execution figures contained in the treasury plan with specific information on COVID-19 spending. We also started to publish online COVID-19 related procurement contracts that exceeded US$12,000: to this end, the government initiated 15 itinerant missions in the provinces to collect all available information on COVID-19 spending. Based on the information collected, we already published 32 contracts totaling US$6.7 million by June 23, 2021 out of a total of 35 contracts identified. The three remaining contracts will be published in coming days. Despite difficulties related to the treatment of information which are not under digital format, we will continue this effort and we strongly reiterated our commitment to publish all the contracts in our possession. Even if most of the spending at the level of the decentralized entities, including the health centers which have benefited from transfers, has not been the subject of contracts (for instance, payment of indemnities for medical workers), we will still insist to receive any supply contract of which we have not yet been informed, and we will publish them. Regarding the commitment to disclose the beneficial ownership information of contracted companies for contracts exceeding USD 1 million, we have requested IMF technical assistance to improve transparency and align with best practices in this area while taking into account the specificities of our country. Based on the TA recommendations and in consultation with Fund staff, we would adopt, by end-September 2021, amendments to the procurement regulatory framework to require (i) bidders to submit beneficial ownership information and (ii) the publication of such beneficial ownership information by the procurement agency on an easily accessible website for all awarded contracts above USD 12,000. Finally, in addition to an audit by the Inspection Générale des Finances, a specific audit of COVID-19 related expenditures is ongoing as part of the annual control by the Audit Court, which we commit to publish soon after its presentation to the Parliament in September 2021.

E. Governance, Fight against Corruption, and Business Environment

29. Improved governance and the fight against corruption are central in our strategy. Better governance is a cross-cutting theme connecting all areas of the country’s sustainable development objectives: strengthening public security and political stability, peace and security, rule of law, human rights, the fight against of corruption, and the efficiency of administration and institutions. Based on the comprehensive governance assessment that took place in December 2019, we will prepare a governance strategy plan to be undertaken by a special committee formed to that effect by the prime minister.

30. Our strategy includes the strengthening of the Anti-Corruption Prevention Agency (APLC), in line with international standards. The APLC, operational since July 2020, will be strengthened in line with the United Nations Convention Against Corruption (UNCAC) and international best practices. In addition, we also commit to commence the first cycle of the UNCAC review mechanism and to criminalize acts of corruption in line with this Convention. We are also committed to ensuring the independence of the Audit Court and the Finance Inspectorate General and to devote sufficient resources for the efficiency of their work.

31. We will continue our efforts for transparency in the mining sector. We will continue to publish all new contracts (continuous structural benchmark). We are also committed to strengthen EITI implementation: we appointed a new coordinator of the national EITI committee through a transparent process, we have regularized budgetary transfers to the national EITI committee, and a progress report on 2018, 2019 and first semester 2020 has been formally adopted and published on the EITI DRC website (https://drive.google.com/file/d/1UA-2n-HVRBB1NEhj9YZOaTjCzZnp-OOB/view). The executive committee also validated on March 16, 2021 a three-year work plan for 2021–23 that was formally adopted by government on June 4th (prior action). In addition, we are auditing the financial statements of mining SOEs and we will publish them.

32. We are committed to improving the AML/CFT framework and its implementation. By end-October 2021, we will submit amendments to the AML/CFT Law and related regulations to meet global standard recommendations, including the banning of anonymous bank accounts, enacting stronger customer due diligence measures with wire transfers, and establishing basic correspondent banking customer due diligence requirements. In addition, by end-October 2021, and in line with the Article 99 of the Constitution, we will submit to the Parliament amendments to the asset declaration framework to strengthen the effectiveness of politically exposed persons (PEP) measures.

33. We will continue our efforts to promote a favorable business climate, which is essential to boost private investment. We recognize that the business environment is hampered by excessive regulation weighing heavily on costs and competitiveness. Our key priorities include streamlining the multiplicity of levies and implementing a fair and predictable tax collection system. We also intend to improve the functioning of the judiciary system, the system for the resolution of commercial disputes, and the enforcement and protection of property and contractual rights.

34. Preserving the environment is also part of our strategy. The Democratic Republic of the Congo has the second largest tropical massif in the world, after the Amazon, spread over 155 million hectares of forests. This vast carbon sink is a major asset in the fight against climate change. In addition to forests, the country has large expanses of peatlands as well as strategic minerals necessary for ecological transition. To develop these resources, the Government intends to mobilize specific funding, public, private, and from multilateral or bilateral institutions. A National Climate Fund will be set up to channel these resources and allocate them to projects that preserve the environment.

F. Monetary, Financial and External Sector Policies

35. The monetary policy’s framework will be gradually modernized with the objective of maintaining low and stable inflation. While we expect that monetary aggregate targets will continue to be used as the main nominal anchor for the medium-term, new monetary instruments and tools will be adopted to modernize the BCC’s monetary policy framework and ensure price stability. The adoption of a regulation on the new reserve requirement framework in the same currency of deposits and the signature of a MoU between the BCC and the Ministry of Finance to regularize the outstanding credit of the BCC to the government, both to be adopted by December 2021 (structural benchmarks), are fundamental building blocks over which the BCC will modernize the monetary policy framework. We will also continue, in accordance with the Stability Pact, to ban any direct advance by the BCC to finance the public deficit. In addition, the granting of new guarantees from the BCC to the private sector (in the form of documentary credits, CREDOCs, any other guarantee or advance of that type) will also be banned, and we will put in place a plan for the gradual elimination of existing operations, taking into account potential budgetary room for maneuver, in order to restore the BCC’s international reserves. This information will be officially brought to the attention of commercial banks. We are also planning to develop a FPAS (Forecasting and Policy Analysis Systems) quantitative model that will take into account the very particular features of the DRC economy and will serve to guide monetary policy decisions going forward. We will continue relying on the Fund’s technical assistance for this modernization process.

36. We are committed to implement the recommendations of the 2020 safeguards assessment. With the set-up of the new BCC Board, in accordance with the 2018 BCC Law (prior action), we expect an acceleration of the implementation of the key recommendations that will decisively reinforce the governance of the BCC. It includes the development of a compliance function to help assure internal accountability and integrity; the strengthening of capacity and oversight of the Audit Committee; and the adoption of plan towards the adoption and implementation of IFRS accounting framework. We are also committed to reinforcing our ex-ante controls and reporting practices by using a monitored account at the BIS for Fund disbursements, validating the QPCs as well as transactions on the BIS-monitored account at test dates by the external auditors, and providing monthly statements of the BIS account to the IMF. Finally, we will reinforce the financial autonomy of the BCC by restructuring the government debt with the BCC and implementing the recapitalization plans already approved by the parliament.

37. We will continue our efforts to strengthen substantially our weak external position. The level of gross official FX reserves of the BCC is expected to reach about US$1.3 billion by end 2021 or close to 3.5 weeks of imports, and about 6 weeks of imports by end 2024. We are committed to strengthening the management of international reserves of the BCC by following the recommendations of the safeguards assessment and also with the future technical assistance of the Fund. In addition to the ECF disbursements, the implementation of the new reserve requirement regulation and the transfer abroad of available FX deposits in local commercial banks will help to boost FX reserves at the BCC. Given the very low level of FX reserves and the importance of allowing the exchange rate to act as a shock absorber, we will minimize the use of FX interventions so we can continue building an adequate level of international reserves.

38. Strengthening the oversight and regulation of the financial sector remains a priority. The BCC is determined to enhance the risk-based supervisory framework and the oversight of banks. As long as the effects of the pandemic last, and with the technical assistance of Fund, we will apply best practices of appropriate supervision and regulatory measures used in exceptional times, and adopt all required measures and available enforcement powers to recapitalize vulnerable banks. In the event there are bank failures as a result of the current crisis, we will firmly apply the best resolution options to failed banks, which will be discussed with the Fund. We also plan to submit the new Commercial Banking Law to the Parliament that includes IMF staff’s comments by end-November 2021 (structural benchmark), as it represents the cornerstone upon which a modernized regulatory framework will be developed in the coming years. We also requested a Financial Sector Stability Review (FSSR), which is planned for 2021 and will be crucial to provide a detailed diagnostic of the banking sector and develop a strategy with key TA priorities for the coming years.

39. We are strengthening financial inclusion, notably through innovative fintech products and services, and micro-finance. Despite progress in recent years, financial inclusion remains low, with at least two-thirds of the adult population with no access to financial services. Credit to the private sector is below 10 percent of GDP, reflecting both supply and demand factors, such as lack of credit culture, asymmetric information, low competition, underdeveloped financial market infrastructures, weak consumer protection and creditors rights. Our strategy includes supporting the development of mobile money and other fintech services, which is playing an increasingly important role in financial inclusion in the DRC, particularly important in remote rural areas, which goes hand in hand with improving access of the population to information and communication technologies. We are also working on restructuring and strengthening microfinance institutions (MFIs), which have a great potential to support financial inclusion, and reducing the vulnerability of banks to cyber risks and information technology failures. In addition, we are promoting financial education to build trust in financial products and services, especially in local currency.

Other Issues and Program Monitoring

40. We highly value the technical assistance received from the Fund, complemented with the one from other partners. TA provision has already been instrumental in providing in-depth diagnoses essential to start the implementation of our reform plans. We hope that this effort will continue in the coming years to address new needs and challenges arising from the implementation of the economic reform agenda supported by the ECF arrangement.

41. While data provision is broadly adequate for surveillance and program monitoring, we remain committed to allocating sufficient human, financial, and material resources to the production of statistics. The government will continue to support the National Institute of Statistics and other government branches in fulfilling its missions, and we count on continued technical and financial assistance from our partners. Our priorities include improving debt data collection, especially on SOE; enhancing the quality and frequency of data reporting by the BCC; and strengthening the accuracy of indictors for the real sector, the balance of payments, as well as fiscal variables.

42. The program will be evaluated based on quantitative performance criteria and structural benchmarks (Tables 1 and 2) and semi-annual reviews. Definitions of key concepts and indicators, as well as reporting requirements, are set out in the accompanying TMU. The first and second reviews are scheduled to be completed on or after September 15, 2021 and March 15, 2022 respectively, based on test dates for periodic performance criteria of end-June 2021 and end-December 2021, respectively. Under the direction of the Minister of Finance, the Budget Minister and the Governor of the BCC, the monitoring of the program will be done by a technical troika chaired by the Finance Ministry and comprising the Budget Ministry and the BCC. Monetary QPCs and transactions on the BIS-monitored account at test dates will be validated by the external auditors of the BCC. The CTR will be in charge of secretariat and reporting that will be shared with IMF staff.

Table 1a.

Democratic Republic of the Congo: Quantitative Performance Criteria and Indicative Targets Under the ECF arrangement, June 2021–June 2022

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Sources: Congolese authorities and IMF staff estimates and projections

continous

calculated in flow: for Q2 2021 IT, spending from beginning 2021 to end-June 2021. The rest of ITs are calculated as cumulative flows between the test date and the beginning of each calendar year.

Table 1b.

Democratic Republic of the Congo: Continuous Targets

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Table 2.

Democratic Republic of the Congo: Prior Actions and Structural Benchmarks Under the ECF Arrangement–First and Second Reviews

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Sources: Congolese authorities and IMF staff

Attachment II. Technical Memorandum of Understanding

1. This Technical Memorandum of Understanding (TMU) contains definitions and adjuster mechanisms that clarify the measurement of quantitative performance criteria and indicative targets in Tables 1 and 2, which are attached to the Memorandum of Economic and Financial Policies. Unless otherwise indicated, all performance criteria and indicative targets will be evaluated in terms of cumulative flows since the beginning of each calendar year.

Definitions

2. For purposes of this TMU, external and domestic shall be defined on a residency basis.

3. Institutional coverage: The central government comprises all units of government that exercise authority over the entire economic territory. However, unless otherwise indicated for the purposes of this memorandum, the central government does not include nonprofit organizations controlled and financed by the central government. The banking system comprises the Central Bank of the Congo (BCC) as well as existing or newly licensed commercial banks.

4. The program exchange rates for the purposes of this TMU are as follows (BCC indicative rates as of December 31, 2020):

  • Variables denominated in U.S. dollars will be converted to Congolese Francs by using the program exchange rate of CGF 1971.8046 per U.S. dollar.

  • Variables denominated in SDRs will be valued at the program exchange rate of CGF 2852.0774 per SDR.

  • Variables denominated in Euro will be valued at the program exchange rate of CGF 2421.1594 per Euro.

  • In addition, variables denominated in currencies other than the U.S. dollar, SDR or Euro will first be converted to U.S. dollars at the December 31, 2020, US$/currency official exchange rate (obtained from the IMF rates database), then converted to Congolese Francs by using the program exchange rate CGF/US$.

5. Quantitative Performance Criteria (QPCs) included in the program, as defined below, refer to the net international reserves of the BCC, net central bank credit to the government, net domestic assets of the BCC, external payments arrears, new non-concessional external debt owed or guaranteed by the central government and/or the central bank, including EADs, and the domestic balance (cash basis). Performance criteria are set for end-June 2021 and end-December 2021 while indicative targets are set for end-September 2021, and end-March 2022.

6. In addition to the specific QPCs listed in paragraph 5, as for any Fund arrangement, continuous QPCs also include the non-introduction of exchange restrictions and multiple currency practices. Specifically, continuous conditionality covers (i) non-imposition or intensification of restrictions on the making of payments and transfers for current international transactions; (ii) non-introduction or modification of multiple currency practices; (iii) non-conclusion of bilateral payments agreements that are inconsistent with Article VIII; and (iv) non-imposition or intensification of import restrictions for balance of payments reasons. These continuous QPCs, given their non-quantitative nature, are not listed in the QPC table annexed to the MEFP.

Quantative Performance Criteria and Adjustors

Floors on changes in Net International Reserves of the BCC

7. Definition: Net international reserves (NIR) are defined as the difference between the BCC gross foreign reserves and its total foreign liabilities. Gross foreign reserves are defined broadly consistent with the Sixth Edition of the Balance of Payments Manual and International Investment Position Manual (BPM6) and are defined as the sum of the following items: (i) monetary gold holdings of the BCC kept abroad; (ii) SDR holdings kept abroad; (iii) receipts in foreign currency and (v) convertible claims on nonresidents, such as foreign deposits and foreign securities. The following items are excluded from the definition of gross foreign reserves: any other claims on residents in foreign exchange, nonconvertible currency holdings, and foreign reserves that are encumbered or pledged in one form or another, including but not limited to reserve assets used as collateral or security for foreign third-party liabilities, and swap transactions. Total foreign liabilities are all BCC foreign exchange liabilities to nonresidents, including the IMF and SDR allocations of the BCC.

8. The following adjustments will be made to the NIR floors:

  • Balance of payments support (BPS): NIR floors will be adjusted upward by an amount equivalent to 50 percent of total BPS in excess of the programmed levels. There will be no downward adjustments to the NIR floors for any shortfall in BPS.

  • External debt service payment: NIR floors will be adjusted (i) upward by an amount equivalent to under payment of external debt service relative to programmed amounts; and (ii) downward by an amount equivalent to the excess of external debt service payments relative to programmed amounts.

  • Privatization proceeds in convertible currencies (PPCC): NIR floors will be adjusted upward by 50 percent of total PPCC in excess of the programmed levels. There will be no downward adjustment for any shortfall in these proceeds.

9. Definition: BPS is defined as all disbursed foreign grants and loans to the central government, excluding those tied to projects.

10. Definition: External debt service payments for the central government are defined as interest and principal due to foreign creditors (excluding the IMF).

Ceilings on changes in Net Domestic Assets of the BCC

11. Definition: The net domestic assets (NDA) of the BCC are defined as narrow base money (see definition ¶2 below) minus net international reserves (see definition ¶7) minus external assets excluded in NIR. Based on this definition, the NDA of the BCC include: (i) net credit to the central government (see ¶12 below); (ii) credit to the private sector; (iii) credit to public enterprises; (iv) credit to commercial banks; (v) other claims on the rest of the economy (on other financial institutions, and other non-financial institutions); and (vi) other net assets.

12. Definition: Narrow base money is defined as the sum of (i) currency in circulation; (ii) cash holdings by banks; (iii) bank deposits held with the BCC; (iv) nonbank private sector deposits held with the BCC; and (v) public enterprises deposits held with the BCC.

The following adjustments will be made to the NDA ceilings:

  • BPS: NDA ceilings will be adjusted downward by an amount equivalent to 50 percent of total BPS in excess of the programmed level. There will be no upward adjustment to the NDA ceilings for any shortfall in BPS.

  • External debt service payment: NDA ceilings will be adjusted (i) downward by an amount equivalent to under payment of debt service relative to programmed amounts; and (ii) upward by an amount equivalent to the excess of external debt service payments relative to programmed amounts.

  • Statutory reserve requirements for foreign currency deposits: NDA ceilings will be adjusted upwards (downwards) by the increase (decrease) in the statutory reserve requirements for foreign currency deposits relative to program projections (memorandum item).

  • Privatization proceeds: NDA ceilings will be adjusted downward by 50 percent of the total amount of privatization proceeds (including PPCC) in excess of the programmed level. There will be no upward adjustment to the NDA ceilings for any shortfall in these proceeds.

Ceiling on changes in Net Central Bank Credit to the Central Government

13. Definition: Net central bank credit to the central government (NCG) is defined as the difference between gross BCC claims on the central government minus central government deposits at the BCC. For purposes of program monitoring, central government deposits related to externally financed projects are excluded from NCG.

The following items are excluded from this definition: Perpetual government securities that cover past operating loses, unsecuritized operating losses from 2011 and later years, unpaid interest payments for securities linked to operating losses of the BCC, and foreign currency translation losses. All foreign currency denominated flows to the budget will be converted to domestic currency by using the market exchange rate prevailing at the time of the disbursement.

14. The following adjustments will be made to the NCG ceilings:

  • BPS: NCG ceilings will be adjusted downward by an amount equivalent to 50 percent of total BPS in excess of the programmed level. There will be no upward adjustment to the NCG ceilings for any shortfall in BPS.

  • External debt service payment: NCG ceilings will be adjusted (i) downward by an amount equivalent to under payment of debt service relative to programmed amounts; and (ii) upward by an amount equivalent to the excess of external debt service payments relative to programmed amounts.

  • Privatization proceeds: the NCG ceilings will be adjusted downward by an amount equivalent to 50 percent of total privatization proceeds (including PPCC) in excess of the programmed levels. There will be no upward adjustment for any shortfall in these proceeds.

Floor on the Domestic Fiscal Balance

15. Definition: The domestic fiscal balance (cash basis) is defined as (domestic revenue) minus (domestically financed expenditure). Domestic revenue is defined as (total revenue and grants) minus (grants). Domestically financed expenditure is defined as (total expenditure) minus (externally financed investments (loans and grants)) minus (foreign interest payments) plus (the net accumulation of domestic arrears).

The following adjustments will apply to the floor on the domestic fiscal balance:

Privatization proceeds: The floors on the domestic fiscal balance will be adjusted: (i) upward by an amount equivalent to the full shortfall of privatization relative to programmed levels; (ii) downward by 50 percent of the total amount of privatization proceeds in excess of the programmed levels.

Ceiling on the Accumulation of External Payment Arrears

16. Definition: External payment arrears are defined as external debt service obligations (principal and interest) of the central government that were not paid on the contractual due date. The ceiling on new external payment arrears applies continuously throughout the period covered by the Extended Credit Facility (ECF) arrangement. It does not apply to external payment arrears in process of renegotiation or to cases in which the creditor has agreed to the suspension of payments pending the outcome of negotiations. For the purposes of this continuous PC, which is monitored continuously, the government will immediately report to the IMF staff any new external arrears it accumulates.

Ceilings on Non-concessional External Debt Contracted or Guaranteed by the Public Sector

17. Definition: The public sector comprises the central government, local governments, the central bank (BCC), state-owned enterprises, 1 decentralized territorial entities and public entities controlled and financed by the central government.

18. Definition: Debt is defined as set out in Executive Board Decision No. 6230 (79/140) Point 9, as revised on August 31, 2009 (Decision No. 14416-(09/91)). The external debt is defined as contracted when all parties signed the debt contract. For program purposes, external debt is measured on a gross basis using the residency criterion.

19. Definition: A debt is concessional if it includes a grant element of at least 35 percent, calculated as follows: the grant element of a debt is the difference between the present value (PV) of debt and its nominal value, expressed as a percentage of the nominal value of the debt. The PV of debt at the time of its contracting is calculated by discounting the future stream of payments of debt service due on this debt. 2 The discount rates used for this purpose are the currency specific commercial interest reference rates (CIRRs), published by the Organization for Economic Cooperation Development (OECD). For debt with a maturity of at least 15 years, the ten-year-average CIRR will be used to calculate the PV of debt and, hence, its grant element. For debt with a maturity of less than 15 years, the six-month average CIRR will be used. To both the ten-year and six-month averages, the same margins for differing repayment periods as those used by the OECD need to be added (0.75 percent for repayment periods of less than 15 years, 1 percent for 15 to 19 years, 1.15 percent for 20 to 29 years, and 1.25 percent for 30 years or more).

20. Definition: The ceiling on non-concessional external debt applies to contracted or guaranteed external debt by the public sector (as defined above) for which the equivalent value has not been received. It excludes (i) the use of Fund resources; (ii) debts incurred to restructure, refinance, or prepay existing debts, to the extent that such debt is incurred on more favorable terms (including in particular a grant element higher than 35 percent) than the existing debt; (iii) concessional debts; and (iv) normal import credits having a maturity of up to one year. 3

21. Definition: The guarantee of a debt arises from any explicit legal obligation of the public sector to service a debt in the event of nonpayment by the debtor (involving payments in cash or in kind), or from any implicit legal or contractual obligation of the public sector to finance partially or in full any shortfall incurred by the debtor.

Indicative Targets

Ceiling on the variation of deposits used as Collateral/Guarantee by the BCC for the Central Government Loans.

22. Definition: Deposits used as collateral/guarantee by the BCC for central government loans cover central government loans guaranteed by the BCC, and is specifically understood to include central government liabilities secured by liens over BCC deposits in local or foreign currency.

Floor on revenues of the central government

23. Definition: Revenues of the central government are defined in line with the Government Finance Statistics Manual (GFSM 2001) but on a cash accounting basis, excluding grants. Revenue is an increase in net worth of the central government (including its units in the provinces and agencies) resulting from a transaction.

  • Revenues of the central government include taxes and other compulsory transfers imposed by central government units, property income derived from the ownership of assets, sales of goods and services, social contributions (excluding pensions contributions received by the central government), interest, fines, penalties and forfeits and voluntary transfers received from nongovernment other than grants. The definition, for program monitoring, excludes grants and other noncompulsory contributions received from foreign governments and international organizations; such transfers between central government units would be eliminated in the consolidation of the fiscal reports and not recorded as revenue. Receipts from the sale of nonfinancial assets (e.g., privatization and signature bonuses from natural resource contracts), and transactions in financial assets and liabilities, such as borrowing but excepting interest payments, are also excluded from the definition of revenue. Transfer of profits from BCC to the Treasury is also excluded from the definition of revenue. The revenue of special accounts and budgets are also excluded

  • Revenues should be recognized on a cash basis and flows should be recorded when cash is received. Exceptional advanced payments will be treated as if received on the normal due date.

Floor on Social Spending

24. Definition: The government expenditure monitored for the purpose of the IT on a floor on social spending will exclude wages and be defined as the sum of:

  • Reproductive, Maternal, Neonatal, Child and Adolescent Health (RMNCAH) and primary health care spending

  • Disbursement of Gavi-supported vaccine co-financing and traditional vaccines procurement

  • Disbursement of TB/Malaria/HIV/AIDS co-financing

Text Table 1.

Democratic Republic of the Congo: Indicative Target for Social Spending

(in Billion Congolese Francs)

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The World Bank is covering the financing of traditional vaccines in 2021.

Accumulation of Wage Arrears

25. Definition: Wage arrears are defined as approved personnel wages and salaries that have not been paid for 60 days. Wages and salaries include the total compensation paid to central government employees, including permanent benefits. These arrears will be valued on a cumulative basis from July 1, 2021.

26. Definition: Public employees are defined as civil, police, and military personnel either statutory civil servants or under contract of the central government.

Data to be Reported for Program Monitoring Purposes

27. The authorities of the DRC will provide IMF staff with the data needed to monitor the program within the prescribed time limits, as indicated in the following table.

Table 1.

Democratic Republic of the Congo: Overview of Data to be Transmitted by the Authorities

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1

Dollar-indexed T-bills should be attractive for investors as they hedge exchange rate depreciation risks while maintaining issuance in local currency.

2

A new BCC guarantee was also given on April 30, 2020, which was not identified in the external auditor’s validation report.

3

The allocation of additional increases in domestic revenue mobilization will need to strike a balance between fulfilling large development needs and reconstituting Treasury deposits.

1

The Management Implementation Plan that followed the 2018 IEO evaluation of Fund engagement in fragile and conflict-affected states envisaged that country teams would prepare “a succinct country engagement strategy that discusses country fragility, surveillance and CD priorities and, if applicable, the complementary role for Fund financial support as part of staff reports for Article IV and new programs.”

2

See Tables 3, 4, 5, and 7 of the Governance report.

3

Further, the obligation to disclose assets should extend beyond the current very limited remit of Article 99, which covers only the President of the DRC and members of government. In cases of non-compliance, the country must enforce the sanctions that are envisaged by the constitution.

1

Source: The World Bank.

1

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly. The conjunctural shocks and scenario highlight risks that may materialize over a shorter horizon (between 12 to 18 months) given the current baseline. Structural risks are those that are likely to remain salient over a longer horizon.

1

Only GECAMINES, SNEL, and MIBA are included in the QPC.

2

The calculation of concessionality will take into account all aspects of the loan agreement, including maturity, grace period, payment schedule, upfront commissions, and management fees.

3

A financing arrangement for imports is considered to be “normal” when the credit is self-liquidating.

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Cover IMF Staff Country Reports
Democratic Republic of the Congo: Request for a Three-Year Arrangement Under the Extended Credit Facility; Review of Performance Under the Staff Monitored Program-Press Release; Staff Report; and Statement by the Executive Director for the Democratic Republic of Congo
Author:
International Monetary Fund. African Dept.
Volume/Issue:
Volume 2021: Issue 168
Publisher:
International Monetary Fund
ISBN:
9781513588735
ISSN:
1934-7685
Pages:
118
DOI:
https://doi.org/10.5089/9781513588735.002
  • <sup><xref rid="RA001fig01" ref-type="fig">Figure 1.</xref></sup>
    View in gallery
    Figure 1.

    Democratic Republic of the Congo: Fragility-Selected Indicators

  • View in gallery

    DRC Copper Production and Prices: 1957–2020

  • View in gallery

    Total Cash Cost Curve: Copper

    (USD/lb of payable copper)

  • View in gallery

    Kamoa-Kakula: Phases of Development

    (in million metric tons of copper ore)

  • View in gallery

    Paid Copper Production

    (in kilotonnes per annum)

  • <sup><xref rid="RA001fig02" ref-type="fig">Figure 2.</xref></sup>
    View in gallery
    Figure 2.

    Democratic Republic of the Congo: Treasury Bills Issuance: October 2019-March 2021

  • <sup><xref rid="RA001fig03" ref-type="fig">Figure 3.</xref></sup>
    View in gallery
    Figure 3.

    Publication of Mining Contracts

    In addition to transparency commitments made as part of EITI membership, a May 2011 decree provides the legal basis for the required publication of all mining, oil, and forestry contracts by the Government. The 2021 EITI-DRC condensed report for the 2018–2020H1 period provides information on recent developments in this area.

    Between August and December 2020, a list of 162 contracts was jointly prepared by EITI-DRC and other NGOs, of which 146 have already been published, and 16 additional contracts are in the process of being obtained and/or verified from mining companies. The list is publicly available in the EITI-DRC website. Among the contracts published in 2021, at least 21 contracts were signed prior to 2012, according to the list provided by EITI.

  • <sup>Figure 4.</sup>
    View in gallery
    Figure 4.

    Democratic Republic of the Congo: External Indicators, 2015–21

  • <sup>Figure 5.</sup>
    View in gallery
    Figure 5.

    Democratic Republic of the Congo: Real and Fiscal Indicators, 2013–21

  • <sup>Figure 6.</sup>
    View in gallery
    Figure 6.

    Democratic Republic of the Congo: Monetary and Financial Indicators, 2015–21

Figure 1.

Democratic Republic of the Congo: Fragility-Selected Indicators

DRC Copper Production and Prices: 1957–2020

Total Cash Cost Curve: Copper

(USD/lb of payable copper)

Kamoa-Kakula: Phases of Development

(in million metric tons of copper ore)

Paid Copper Production

(in kilotonnes per annum)
Figure 2.

Democratic Republic of the Congo: Treasury Bills Issuance: October 2019-March 2021
Figure 3.

Publication of Mining Contracts

In addition to transparency commitments made as part of EITI membership, a May 2011 decree provides the legal basis for the required publication of all mining, oil, and forestry contracts by the Government. The 2021 EITI-DRC condensed report for the 2018–2020H1 period provides information on recent developments in this area.

Between August and December 2020, a list of 162 contracts was jointly prepared by EITI-DRC and other NGOs, of which 146 have already been published, and 16 additional contracts are in the process of being obtained and/or verified from mining companies. The list is publicly available in the EITI-DRC website. Among the contracts published in 2021, at least 21 contracts were signed prior to 2012, according to the list provided by EITI.
Figure 4.

Democratic Republic of the Congo: External Indicators, 2015–21
Figure 5.

Democratic Republic of the Congo: Real and Fiscal Indicators, 2013–21
Figure 6.

Democratic Republic of the Congo: Monetary and Financial Indicators, 2015–21