I. Introduction

1. On March 3, 2004, the IMF Executive Board completed the third semiannual review of the program under the Poverty Reduction and Growth Facility (PRGF). This 3-year program had been approved by the IMF in June 2002 and comprises financial assistance in the amount of SDR 580 million (approximately US$780 million), of which SDR 420 million were disbursed on that date. On March 24, 2003, the IMF completed the first semiannual program review and the DRC obtained a tranche of SDR 26.7 million (approximately US$36 million). The second review was completed on July 23, 2003 (for the same disbursement amount).

2. In July 2003, the DRC also became eligible for relief of its foreign debt under the Heavily Indebted Poor Countries Initiative (HIPC Initiative). The external debt service relief obtained by the DRC on that date (the "decision point") amounts to approximately US$10 billion in nominal terms (US$6.3 billion in NPV terms). Since July 2003, the DRC has obtained a reduction in its external debt service—as though 90 percent of its debt had been cancelled—which is estimated at approximately US$50 million in 2003 and which may reach US$120 million in 2004 and exceed US$300 million on average per year during the period that follows. Under the HIPC Initiative, the resources freed up by the debt relief are allocated for "pro-poor" spending. The final elimination of the external debt from the government's books will take effect on the "completion point" scheduled for 2006, provided that the government's economic program, supported by the IMF-PRGF, continues to yield satisfactory results and certain other conditions are met—in particular, optimal utilization of resources freed up for pro-poor spending as a result of the debt relief exercise.

3. With respect to the third review, the IMF recently made a favorable assessment of the implementation of the government's program thus far, as well as of the macroeconomic and structural policies for 2004. The government of the DRC is to be congratulated on its efforts and the results achieved in implementing its program. The DRC will immediately benefit from a disbursement from the IMF of the fourth tranche amounting to SDR 26.7 million (approximately US$40 million). At the same time, the completion of this review will facilitate disbursements by other donors.

4. The government's macroeconomic and structural policies are described in its Letter of Intent (signed December 10, 2003, by the Head of State) and its Memorandum on Economic and Financial Policies (signed on the same date by the Governor of the BCC, the Minister of Finance, and the Minister of Budget). These documents complement and update the commitments set forth in the preceding documents of April 2002, February 2003, and July 2003.

5. These government documents as well as Fund staff reports submitted to the Executive Board will, at the government's request, soon be published on the IMF's website, http://www.imf.org/external/country/cod/index.htm.

II. Background (see Annex)

III. Third review

6. The third review, which has just been completed by the IMF Executive Board, noted the significant progress achieved in strengthening the peace and reunification process, culminating in the inauguration of the Government of National Unity and the Parliament in July/August 2003. This marked the beginning of the 2-year transition period which has entailed numerous challenges, namely the disarmament, demobilization, and reintegration (DDR) of ex-combatants; establishing an appropriately sized and integrated national army and police force; rehabilitating administrative capacity at the provincial level; adopting and implementing a law on decentralization; and paving the way for free and transparent elections.

7. The authorities are further called upon to maintain macroeconomic stability, deepen the structural reforms, and continue their efforts to reduce widespread poverty and promote good governance. If it is to meet these many challenges, the DRC will require further support from the international community, particularly in the form of financial assistance which should be well-coordinated, timely, cover the entire country, and include direct budget assistance grants.

8. Thus far, implementation of the PRGF-supported program has been broadly satisfactory; favorable results have been achieved from the structural point of view. The growth in real GDP (positive) has accelerated for the second consecutive year, and inflation has slowed down more significantly than expected. At the budgetary level, corrective measures were adopted in July 2003 to address a number of slippages during the second quarter, particularly with respect to security and sovereignty expenditures. However, these measures were not sufficient to fully compensate—over the rest of the year—for the slippages encountered.

9. Budget policy in 2004 must pursue fiscal consolidation and redirect expenditure toward pro-poor spending while reducing nonpriority outlays. Accordingly, it is expected that the 2004 budget will quadruple pro-poor expenditures—defined in detail in the new budget classification—in relation to their 2003 level, and these will come to account for about one third of total expenditure. These pro-poor expenditures include capital and operating expenditures on health, education, the social safety net, basic infrastructure, and the reintegration of demobilized soldiers. In this context, it is essential for the "expenditure chain" (as it is known) to be utilized fully. The establishment of this computerized system should make it possible to track from month to month the execution of the budget—for each budget item—to ensure that expenditures go to their intended recipients while assuring the transparency of the budget as a whole.

10. On the revenue side, it will be essential to pursue the tax reforms, abolish tax exemptions that are not in alignment with the new codes, simplify procedures and eliminate red tape, redeploy the revenue-collecting agencies throughout the country, and combat tax evasion and tax-related corruption. In this context, and as part of the process of preparing the law on decentralization, it is important to design a balanced system for sharing revenues and expenditures with the provinces.

11. In 2004, the government's monetary policy should continue to focus on the priority goal of achieving price stability in the context of the floating exchange rate system-a policy which has performed well for the DRC thus far. The Central Bank of the Congo (BCC) should persevere in implementing its multidimensional action plan to improve its accounting system, its operations, and its management. The BCC should also pursue timely efforts to restructure the banking system and make its own branches operational in all of the provinces.

12. Strengthened structural reforms that extend to the reunified provinces—in particular as regards the promotion of good governance and the fight against corruption—remain one of the cornerstones of the program; this is also the key to building sustainable and pro-poor economic growth. In this context, draft laws against corruption, money-laundering, and cross-border crimes are being prepared which will shortly be submitted to Parliament. These will send clear signals regarding the DRC's determination to combat these scourges. In the same way, the planned audit of the diamond sector and the continued reform of the mining sector (including the mining register) are aimed at combating fraudulent activity and promoting transparency.

13. The DRC's implementation of its economic and financial policies thus far has proven to be broadly satisfactory and this, with the economic program for 2004 and the medium term, has allowed for the completion of the third review by the IMF Executive Board, which, moreover, has granted waivers for nonobservance of three quantitative performance criteria. The next program review mission is scheduled for the second half of May.

IV. Conclusion

14. The third (midterm) review of the DRC's three-year economic program is a milestone on the road to the country's economic and social revitalization. The efforts to implement macroeconomic and structural reforms in difficult circumstances continue to bear fruit. The Government of National Unity and the DRC should be congratulated for these encouraging results. However, they must press ahead with the reforms: complete the economic and administrative reunification of the country and ensure the freedom of movement of individuals and goods; shift government expenditure toward "pro-poor" spending and ensure the transparency of the entire budget; implement and firmly establish good governance within the government and institutions; and thus build a favorable economic and social environment for the entire population. The IMF—with the World Bank and the DRC's other external partners—will continue to support the DRC in its efforts and in implementing its economic program.

II. Background

1. Since early 2001, the Enhanced Interim Program of the DRC had yielded tangible results in the area of macroeconomic stabilization; in particular, it broke the vicious circle of hyperinflation and depreciation of the national currency, unified the exchange rates, and eliminated the principal distortions. This program, along with the introduction of structural reforms (in particular, improved government finance and far-reaching reforms of the regulatory framework for the private sector), had laid the groundwork for the resumption of growth.

2. In April 2002, the Enhanced Interim Program was replaced with the Government Economic Program (PEG)—supported, since June 2002, by the IMF Poverty Reduction and Growth Facility. The approval of this economic reform program marked an impressive reversal of past trends and ushered in a return to sound monetary and fiscal policy. The key elements of the 2002-2005 program under the PRGF have been as follows:

• Strengthen the improvement in government finance, particularly through establishing an expenditure management and control system, ensuring the strict implementation of a monthly cash-flow plan, and redirecting expenditures toward the social sectors;

• Pursue a prudent monetary policy in the context of the floating exchange rate regime and restructure the banking system; and,

• Build an environment conducive to developing the private sector while establishing good governance and transparency.

3. The first review, completed in March 2003, had evaluated the economic performance of the DRC in 2002 as broadly satisfactory. That year saw an impressive reduction in inflation (down from 135 percent in 2001 to 16 percent in 2002), the return to positive growth, and no bank financing for the budget. The structural reforms had also made considerable headway. Key elements of this process included the preparation of the expenditure chain, establishment of the Large Taxpayers' Unit within the new Directorate General of Taxes (DGI), tariff reform and reform of the turnover tax (ICA), completion of an external audit of the BCC for the years 2000-2002, and adoption of an action plan for the BCC, and finally, the introduction of several new codes regulating private economic activity.

4. The second review, completed in July 2003, coincided with the DRC's access to relief for its external debt under the HIPC Initiative. It also coincided with the updating of the timetable for the preparation by the DRC—in a participatory process-of its poverty reduction strategy paper (PRSP). This strategy—which, moreover, served as the foundation for the economic programs and support of the IMF, the World Bank, and other donors—is expected to take the form of a final PRSP by October 2005. The second review noted the progress in strengthening the peace process, installing the transition government and other institutions, and stabilizing the security situation, with the support of the international community. Moreover, it pointed out that the authorities had implemented the program under difficult circumstances, with fiscal consolidation and general progress in structural reforms. Nonetheless, military and sovereignty expenditures had been higher than anticipated, reflecting the withdrawal of all the foreign armed forces that had taken part in the conflict in the DRC as well as the enhancement of the Inter-Congolese Dialogue in the first half of 2003. Under these conditions, the refocusing of expenditures on "pro-poor" spending-a goal of the program since early 2002—had not materialized. The fact that these fiscal results were not met led to the nonobservance of a number of quantitative performance criteria for which the IMF granted waivers.