I. Recent Developments, Outlook and Risks

Economic activity remained robust in 2022 despite high inflation and the deterioration of the security situation in the eastern part of the country. Growth is forecast at 6.6 percent in 2022, up from 6.2 percent in 2021, driven by the extractive sector. Inflation is projected at 12.3 percent by end-2022, due mainly to higher food and energy prices. The current account deficit will widen from 1 percent of GDP in 2021 to 2.2 percent of GDP in 2022, as a result of declining mining prices. Credit to the private sector grew by 38 percent y-o-y in September 2022. Gross international reserves reached US$4.1 billion at end-October 2022 (2 months of imports), against $2.8 billion at end-2021, in line with the objectives of the program. The effective exchange rate appreciated by 10 and 14 percent in nominal and real terms respectively, by October 2022.

Fiscal performance in 2022 has been better than projected. The domestic fiscal balance target registered a surplus at end-June 2022 helped by higher mining prices and profits in 2021 and strong revenue mobilization, despite higher than projected spending. High commodity prices drove the revenue overperformance, a part of which was used notably for additional security spending, fuel subsidies and payments of domestic debt arrears including VAT arrears due to mining companies. Data on budget execution in the second half of 2022 points to continued strong fiscal performance, with the domestic fiscal balance at end-2022 expected to be in line with the program’s objective. As anticipated, the wage bill has increased from 4.8 percent of GDP to a projected 5.2 percent of GDP, reflecting increased basic salaries for certain civil servants in response to long-standing government commitments. Other contributing factors were higher bonuses in the health, education, and security sectors. Public debt will remain low at around 16 percent of GDP in 2022 with a moderate risk of debt distress over the medium-term.

Implementation of the ambitious fiscal reform agenda advanced. A major milestone was reached with the adoption in August 2022 of the operational action plan for the public financial management reform strategy. The plan focuses on budget reform, tax policy and administration, public expenditure reform, public accounts and cash management and digitalization of the public financial management system. Progress was also made in the revenue administration in October 2022, with further advances in the digitalization of revenue collection, the adoption of a tax expenditure rationalization plan which aims to reform exceptional tax regimes, as well as the introduction of plans to rationalize non-tax charges.

A comprehensive reform of the fuel subsidy system was initiated. In this context, retail fuel prices have been gradually increased since the beginning of 2022; and the fuel purchase subsidy for international airlines eliminated. In addition, an international consulting firm has been selected for the audit of the fuel price structure and is expected to deliver its report by-end 2022. The authorities will continue the prudent adjustment of prices at the pump with targeted compensating transfers to vulnerable households. Given the anticipated moderation in oil prices next year, and following the increases in fuel prices in 2022, no fuel subsidies are expected in 2023.

Monetary policy was tightened to contain inflationary pressures in 2022. To avoid a de-anchoring of inflation or exchange rate expectations, the central bank (Banque Centrale du Congo (BCC)) increased the policy rate by 75 basis points to 8,25 percent in November 2022. Opportunistic foreign exchange interventions together with high mining exports have contributed to support substantial reserve accumulation in 2022. Reforms at the central bank advanced; its Management adopted a cost analysis of the BCC’s recapitalization program. Implementation will support a further strengthening of the institution’s autonomy and enhance the effectiveness of monetary policy operations. The BCC also adopted its plan for the introduction of the IFRS accounting framework, in line with the 2020 safeguards assessment recommendations.

Notable progress is being made in improving transparency and governance and combatting corruption. The Court of Auditors’ leaders and new magistrates were appointed and sworn in before the President of the Republic on August 31, 2022; and the National Justice Reform Policy (PNRJ) and the National Anti-Corruption Strategy have been finalized and adopted. Also, the EITI International Secretariat’s validation process of the DRC has been completed and the EITI Board announced on October 13, 2022, that the DRC has achieved a high overall score, showing a satisfactory response to most of the requirements. In August 2022, the national mining company, Gécamines, published its 2021 financial statements, pursuing the good practice it resumed in 2021 with the publication of the 2020 statements.

The medium-term outlook is favorable but subject to higher uncertainties from the global economy and the still unsettled security situation in the eastern provinces. Growth is projected to remain robust at more than 6 percent, mainly supported by strong activity in the mining sector. Inflation is expected to decline gradually towards the 7-percent target as global inflation subsides. After a further increase in 2023 due to lower commodity prices, the current account deficit would also decline in the period ahead on the back of higher mining exports as additional projects come on stream. The authorities recognize that a prolonged war in Ukraine and a decline in global growth, notably in China, could have a negative impact on the demand and price of minerals. Another major risk to the outlook pertains to the security situation in the East. Failure to stop the conflict would weigh on public finances and delay progress in building domestic and external buffers. At the same time, the authorities are hopeful about upside risks stemming from stronger domestic demand or better-than-expected external demand which would support a further strengthening of external reserves.

II. Program performance

Implementation of the program remains satisfactory. All quantitative performance criteria at end-June 2022 were met; and all but two indicative targets were met. Indeed, health expenditures were lower than programmed due to delays in related procurement actions, and the reduction in central bank deposits used as guarantee for central government loans was not fully realized. Five of six structural benchmarks were also met; the sixth on the excise tax revenue traceability system was not fully implemented due to domestic capacity challenges. Measures are being taken to strengthen the institutional monitoring mechanism for health spending and accelerate the related procurement process with the view to addressing delays in procurement. In addition, a renegotiated mining contract was published in early December 2022 in accordance with the relevant provisions of the mining code and pertinent EITI standards. The new contract allows the return to the State of mining assets sold earlier below market price.

III. Policies for 2023 and beyond

The Congolese authorities remain committed to the program objectives. Key priorities include, increasing fiscal space, maintaining macroeconomic stability, and promoting long-term sustainable, and private sector-led, growth. Improving governance and transparency and fighting corruption remain at the heart of the government’s strategy. Preserving the ecosystem, adapting to climate change, and integrating climate change parameters into public investments in accordance with the national climate policy are also top components of the reform agenda. Additional resources are also being devoted to reducing acute food insecurity in some regions of the country. Going forward, the authorities are committed to accelerating ongoing food security projects, including new and more ambitious programs to increase food supply and availability as part of the Agricultural Transformation Agenda.

Growth-supporting fiscal consolidation will continue in 2023. The budget law for 2023 has been adopted in December 2022. The authorities expect mining-driven revenue to overperform again in 2023. Together with continued prudent spending, this will provide greater fiscal space for higher priority security, infrastructure, and social spending; and help pursue debt reduction and contribute to strengthen fiscal sustainability further. Revenue mobilization efforts will focus on broadening the tax base, improving tax compliance and refraining from granting new VAT exemptions. On the expenditure side, the authorities will continue efforts to contain the wage bill growth. To that end, a recruitment freeze will be enacted and the retirement age for eligible civil servants strictly enforced. Furthermore, the authorities will continue to advance their comprehensive civil service reform program. The fiscal consolidation program takes nevertheless account of increased spending under the government’s Local Development Program of the 145 Territories (PDL-145T) to be funded with residual resources from the 2021 special SDR allocation to the budget. The additional spending under PDL-145T focuses on rural electrification projects.

Enhanced fiscal performance will also be supported by further progress in the implementation of planned fiscal reforms. Key measures aim to strengthen revenue mobilization, improve public financial management, better control fiscal risks from public debt and SOEs, and considerably improve the quality of spending. Efforts to modernize revenue administration will notably further advance computerization of tax systems. Reforms of public investment management will continue, based on the 2022 PIMA recommendations. Given the importance of the PDL-145T, the authorities intend to closely monitor implementation and strengthen compliance with public financial management and public procurement procedures. Strengthening management of the Bureau Central de Coordination (BCECO), one of the implementing agencies of the PDL-145T, will remain a top priority in this regard.

The central bank will remain attentive and responsive to economic developments, consistent with its price stability mandate, while pursuing reserve accumulation to further strengthen external buffers. In this regard, if necessary, it will further tighten monetary policy and absorb excess bank liquidity. As may be needed, additional policy rate and/or required reserve ratio changes could be considered. Operational and governance reforms at the central bank will be sustained, notably based on the 2020 Safeguards recommendations. As regards financial sector policy, the new banking law has been adopted by Parliament in December 2022, which will underpin advances in reforms to strengthen banking and financial sector supervision. The financial inclusion strategy is being finalized with technical assistance from the World Bank.

More fundamentally, the authorities intend to stay the course with critical structural reforms to improve competitiveness, move economic diversification forward, and strengthen growth inclusiveness. Key areas of focus include: (i) enhancing human capital development through determined improvements in the education and health systems; (ii) improving the business environment and governance; and (iii) strengthening DRC’s connectivity through road infrastructure developments and trade integration with the rest of the world. With improved competitiveness, a more enabling business environment should help attract more foreign direct investment and further boost resilience to external shocks.

Prospects for stronger growth and faster gains in poverty alleviation could however be compromised in the face of severe vulnerabilities to climate change. In the capital city of Kinshasa, heavy rains and flooding resulted this month in nearly 150 deaths and extensive damages to personal property and public infrastructure. To achieve its development and climate-related goals and appropriately assume its leadership role in the preservation of the Congo Basin, the DRC will need substantially higher international support to finance needed investments. To that end, the authorities plan to submit a request for IMF assistance under the Resilience and Sustainability Trust (RST) in due course.

The authorities are committed to addressing the shortcomings in the AML/CFT framework following the placement of the DRC under increased monitoring by the Financial Action Task Force (FATF) in October 2022. Following the FATF recommendations to improve the AML/CFT framework, Parliament adopted a new AML/CFT law in December 2022. Going forward, the authorities will finalize the national risk assessment (NRA) framework currently being developed with World Bank assistance and adopt a national AML/CFT strategy by end-May 2023.

IV. Conclusion

Despite the tense security situation in the eastern provinces, the ECF-supported program remains on track. Progress is being made in strengthening domestic and external buffers to increase resilience to shocks. Furthermore, the Congolese authorities have made strides in advancing critical reforms. Going forward, they remain strongly committed to the program objectives. In light of their satisfactory program performance and continuing strong commitment to reforms, the authorities are requesting the completion of the third ECF review and the approval of related decisions. Directors’ favorable consideration of this request will be highly appreciated.