Democratic Republic of the Congo and the IMF
Country's Policy Intentions Documents
Democratic Republic of the Congo—Letter
Dear Mr. Köhler:
1. On July 13, 2001, the Executive Board of the International Monetary Fund considered the government's enhanced interim program (PIR), containing a critical mass of front-loaded adjustment measures aimed at breaking hyperinflation; liberalizing and opening up the economy; creating a more favorable environment for the restoration of economic growth, particularly private sector activity, the true engine of growth; and laying the groundwork for reconstruction and poverty reduction. The memorandum on economic and financial policies (MEFP), attached to our letter of June 20, 2001 and covering the period June 2001-March 2002, sets forth the policies and goals of this Fund staff-monitored program (SMP) for 2001. Implementation of, and performance under, the enhanced interim program are being closely monitored by the Interministerial Committee on Economy and Finances (ECOFIN), assisted by a technical committee made up of representatives of the ministries involved and the Central Bank of the Congo (BCC). We have now completed with the Fund staff the first review of developments under the enhanced interim program during the period June-September 2001. In this letter, we describe performance and progress in policy implementation under the program, taking into account the government's policy response to a number of new developments, including the strong gains made in the peace process and the inter-Congolese dialogue, as well as the impact of the less favorable international environment. This letter further establishes the quantitative indicators and structural benchmarks for the remainder of the period covered by the program, and the main elements of the 2002 budget. We hope that, with the full support of the international community, the year 2002 will see the culmination of our efforts to achieve lasting peace.
Developments under the program
2. The government is pleased to report that the political and security situation in the country has continued to improve. As indicated in the Ninth Report of the Secretary-General of the United Nations on the UN Observation Mission (MONUC) in the Democratic Republic of the Congo (DRC), the cease-fire has generally held, and the disengagement of foreign forces and their withdrawal has started. The government of the DRC will continue to work toward further and accelerated progress on this front. The inter-Congolese dialogue, which we view as an essential element of the peace process, is progressing toward the holding of free and transparent elections. We fully support the efforts of the United Nations and, in particular, those of MONUC, which is about to start Phase III of its operations, providing in particular for the disarmament, demobilization, repatriation, resettlement, and reintegration (DDRRR) of former combatants and refugees. In this connection, we join the U.N. Secretary-General in urging the international community to lend full support to our efforts to strengthen the peace process—an essential prerequisite for the development of our country and stability in the Great Lakes region.
3. We are also pleased to report that the macroeconomic situation has begun to stabilize and that as of September 30, 2001 all performance indicators—both quantitative and structural—have been met (Tables 1 and 2), except for the one on cumulative net credit to the government, which is adjusted downward for any excess of fiscal revenue over the programmed amount. However, the actual stock of net credit to the government was well below the programmed level. The new central bank statutes were approved by parliament in early January, a few months behind schedule owing to the need to amend the Constitution before promulgating them. As envisaged under the program, the government has adopted a cash-basis budget, adhering strictly to a monthly cash-flow plan under which expenditure is limited by actual revenue collection. The objective of monetary policy is to break hyperinflation. In this context, inflationary financing of the budget has ceased. The government has also implemented far-reaching and bold structural reforms that have led to the removal of some major economic distortions, notably through the unification of multiple exchange rates and the introduction of a floating exchange rate system last May, as well as the adoption of exchange regulations that completely liberalize current transactions, rendering them de facto compatible with Article VIII of the Fund's Articles of Agreement. Moreover, all prices have been liberalized, with the exception of water, electricity, and transportation rates, which are adjusted regularly to cover production costs. A transparent and automatic pricing mechanism for petroleum products has also been introduced. Lastly, steps have been taken to create a more transparent and predictable business environment, including the development of a plan to promote good governance, with the help of the World Bank.
4. We are especially grateful to the Fund for its timely technical assistance, which has helped us in buttressing our administrative capacity to implement and monitor our program, notably in the areas of public finance, monetary and exchange rate policies, and macroeconomic statistics. In this regard, we look forward to the arrival in the near future of four Fund resident experts on customs administration, tax administration, public expenditure management, and monetary policy, respectively. We are also very appreciative of the imminent opening of IMF and World Bank resident representative offices in Kinshasa.
5. It is gratifying that the main objective of the enhanced interim program, i.e. to break hyperinflation, is being achieved in conjunction with stabilization of the exchange rate, despite a decline in output that was steeper and a rate of inflation that was higher than anticipated in the five months preceding the launch of the enhanced interim program. Owing to the lack of road maintenance, the steady deterioration of production capacity, a less favorable environment since the events of September 11 in the United States, and the systematic plundering of natural resources in the occupied provinces, real GDP could fall by 4.1 percent in 2001 instead of the zero growth envisaged in the program. In this regard, it should be noted that the implementation of strategic investment projects, identified with World Bank staff to remove major supply bottlenecks, is behind schedule owing to delays in the mobilization of external financing. Nevertheless, preliminary indications point to a recovery of exports and imports in the second half of the year with a shift, albeit limited, toward capital goods and raw materials.
6. As anticipated, following the implementation of a floating exchange rate system on May 26, 2001—or about one month earlier than originally planned—the exchange rate experienced a high degree of volatility in the first few months, fluctuating between CGF 355 and CGF 210 per U.S. dollar before stabilizing at around CGF 315 per U.S. dollar in September. As envisaged under the program, inflation decelerated markedly from a monthly average rate of 18 percent in the five months preceding program implementation (as compared to a projected rate of 13 percent), to 0.76 percent (June-November) or somewhat below the programmed monthly rate of one percent. With the December consumer price index showing a drop of 2.1 percent, the end-2001 inflation rate is 135 percent, instead of the 99 percent projected in the program, but well below the rate of 511 percent posted at end-December 2000.
7. On the fiscal side, budgetary performance exceeded program expectations, thanks to a sharp upturn in revenue and steadily improving control of public expenditure. Most of the revenue measures envisaged in the program have been implemented and expenditure management is being strengthened (Table 4). The latter is being achieved through the gradual reintroduction of normal budget execution and accounting procedures, the restoration of a recording and monitoring capacity at the treasury, the implementation of reconciliation procedures at all levels, and a preliminary audit of civil servants. Despite these improvements in the comprehensiveness of budget operations, we recognize that further progress in this area is essential.
8. Cumulative fiscal revenue (January-September 2001) largely exceeded the program target—by almost 42 percent more than originally programmed (Table 3a). This improved performance occurred across all revenue items. However, petroleum receipts and GECAMINES revenue continued to be collected through extrabudgetary channels. Also, receipts of other state-owned enterprises continued to be deposited in commercial bank accounts, and their transfer to the general account of the treasury did not take place systematically.
9. Total cumulative expenditure at end-September 2001 was about 16 percent more than envisaged in the program. This overrun is mainly attributable to the fact that from June through September the central bank continued to finance budgetary expenditures without the prior authorization of the Minister of Finance. Although under the program the use of extrabudgetary channels has decreased, some 40 percent of total expenditure continued to occur off budget between June and September. These expenditures, which mainly originated in the Office of the Presidency, the Ministry Attached to the Presidency, and the Ministry of Defense, were largely related to sovereignty, security, the peace process, and the inter-Congolese dialogue. Concerning wages, and contrary to the program, the onetime bonus granted to the military in May was made permanent and the government granted salary increases to members of parliament (100 percent) and to the cabinet staffs of ministries (150 percent). In addition, the pay scale of teachers and health care workers was adjusted upward by 30 percent. However, the cumulative overall wage bill at end-September was slightly smaller than originally programmed because of the progressive removal of ghost workers from the payrolls. The wage bill continued to decline in real terms, and the performance indicator on the nonaccumulation of wage arrears was met.
10. All in all, the cumulative primary balance (cash basis) through end-September is better than projected and is estimated at a surplus equivalent to 0.2 percent of annual GDP, as compared with a deficit of 0.5 percent of GDP envisaged under the program. The cumulative overall cash surplus at the same date is also estimated at 0.2 percent of annual GDP compared with a programmed deficit of 0.6 percent of GDP. However, if the central bank's quasi-fiscal losses (about 0.7 percent of GDP) are included—information that was not available when the program was launched—the cumulative overall cash balance shows a deficit equivalent to 0.5 percent of GDP. In 2002, the outcome of the central bank's financial operations will be explicitly included in the budget and in the government's consolidated monthly cash-flow plan.
11. As envisaged in the program, monetary policy was restrictive, as indicated by the substantial increase in the velocity of circulation. The rediscount rate was kept at 140 percent, which, in real terms, represents a very high level given the marked decline of the inflation rate during the course of the program. Thus, by end-September 2001 total domestic credit had expanded by 30 percent relative to the beginning-of-period money supply, compared with the 63 percent programmed. This difference is accounted for, primarily, by a significantly reduced stock of net credit to the government. Credit to the private sector expanded by approximately 25 percent in relation to the beginning-of-period money stock, against an envisaged increase of 24 percent. Lastly, net foreign assets were somewhat larger than projected. Overall, money supply grew by 179 percent, owing to major changes in "other items net" associated with valuation changes and the central bank's losses. As provided for in the program, from June 2001 onwards the BCC stopped granting credit to the private sector and to public enterprises.
12. In the foreign exchange market, there was a sharp increase in interbank transactions, and exchange rates have been markedly stable in recent months with the difference between the official rate (reference rate) and the parallel rate remaining less than 1 percent. However, some differences persist between the exchange rates in the occupied and non-occupied areas, owing primarily to the segmentation of markets.
13. External public debt is being documented on a loan-by-loan basis with the help of the IMF, World Bank, and other creditors of the DRC. At end-December 2001, total public debt is estimated at US$12.7 billion ( 283 percent of GDP), 80 percent of which relates to arrears. A debt sustainability analysis and a medium-term macroeconomic framework are expected to be completed in early 2002. A preliminary analysis shows that the DRC will require a substantial rescheduling of its debt. In observance of the applicable indicator, the government of the DRC has not contracted or guaranteed any nonconcessional loans since June 2001. As agreed under the enhanced interim program, and pending the decision of the IMF concerning their use, the government has been making monthly deposits of SDR 100,000 in its account with the Bank for International Settlements (BIS) since June 2001.
14. On the structural side, far-reaching measures have been implemented, as envisaged in the program. As mentioned above, all prices have been liberalized except those of certain utilities. Thus, petroleum product prices, which had been kept well below international prices, were increased by about 300 percent on May 28, 2001. This increase effectively eliminated heavy subsidies and smuggling to neighboring countries. Imports of petroleum products have also been liberalized. Taken together, these measures have led to a sharp improvement in product delivery and the availability of transportation services. These changes have resulted, inter alia, in a better supply of basic foodstuffs from the producing regions to the cities, although further progress has been hampered by the lack of road maintenance.
15. The government is engaged in determined efforts to address governance issues. Accordingly, a good governance/anticorruption action plan is being prepared and a code of conduct, which will apply to all levels of the civil service, will be published by March 2002. Preliminary financial audits of the tax and customs departments, as well as of most public enterprises, have been conducted. In addition, most of the general managers of financial administrations and public enterprises have been dismissed and replaced. In the case of public enterprises, they were replaced by temporary administrators, pending the restructuring, privatization, or liquidation of these enterprises. The reform of the civil service financed by Belgium will start soon. In the meantime, the government has conducted a preliminary audit of civil servants. As a result, 21,652 ghost workers are being removed from the payrolls, leading to monthly savings of US$600,000 in the wage bill. Lastly, the governors of the provinces have been replaced, and their successors have attended a seminar on the proper management of public affairs.
16. The new investment code was approved by parliament in June 2000 and will be published by end-February 2002, while the new mining code is expected to be adopted by parliament shortly. Regarding the creation of a more transparent and predictable business environment, the law creating commercial courts was adopted by parliament in early July 2001, and the judicial system is being strengthened, notably with the support of the European Union (EU). The drawing up of the enabling decrees for the new law and the cost of enforcing them are to be financed by the EU. A draft labor code is being written, and the authorities plan to solicit comments from the International Labor Organization (ILO) and the World Bank before finalizing it.
17. The main poverty indicators continue to be very alarming. To respond to this crisis, the government has begun the task of devising a national strategy to reduce poverty. In this context, it is finalizing the interim poverty reduction strategy paper (I-PRSP), which should become a cornerstone of the three-year program that the government hopes will be supported by the Fund under the Poverty Reduction and Growth Facility (PRGF). This strategy, in terms of its preparation and implementation, is predicated upon wide-ranging consultation with, and participation of, representatives of civil society.
Policies envisaged for the remainder of the enhanced interim program
18. As already mentioned, real GDP is now estimated to fall by 4.1 percent in 2001, while the inflation rate is estimated at 135 percent at end-December. We project an overall fiscal deficit—on a commitment basis and excluding net losses of the BCC—of 0.8 percent of GDP instead of the programmed figure of 1.9 percent of GDP. On a cash basis, the surplus will be 0.6 percent of GDP, compared with a projected deficit of 0.3 percent of GDP. The external current account deficit, excluding grants, is expected to amount to 8.7 percent of GDP instead of the estimated 18.1 percent of GDP (a major downward adjustment was made for imports in the 1996-2001 period, based on new information, particularly from customs services; this adjustment largely explains the significant deviation from the program). Lastly, the targeted floor of net foreign assets remains unchanged at minus US$481 million.
19. As the results of the enhanced interim program thus far are generally satisfactory, the government has concluded that the policies set forth in its MEFP of June 20, 2000, remain appropriate. In addition, targets for 2002 have been established including an economic growth rate of 3 percent with an average annual inflation rate of 28 percent and a year-end rate of 13 percent. The government is determined to break hyperinflation once and for all and to create a more stable economic environment. To that end, it intends to further strengthen its fiscal and monetary policies. The government will intensify its efforts to improve the budgeting process. Thus, it will continue to strictly adhere to a monthly cash-flow plan and do everything necessary to ensure consolidated budget management and the centralization of all budget revenue and expenditure with the treasury. As of January 1, 2002 all expenditure financed by the BCC will have prior authorization from the Ministry of Finance, and all extrabudgetary transactions will be eliminated. The government is fully aware that the move to a three-year program possibly supported by the Fund under the PRGF will necessitate gaining full control of the expenditure system, so as to ensure that all transactions can be traced. To that end, the government intends to implement the recommendations of the various IMF technical assistance missions concerning the generation of revenue and the rehabilitation of expenditure management.
20. The rehabilitation of government finances will continue to be one of the cornerstones of fiscal policy in 2002. The consolidated overall balance (including the net financial position of the BCC) is expected to show a deficit (on a cash basis) of 1.1 percent of GDP, which is consistent with a reduction in net credit to the government. The domestic primary balance is expected to show a surplus of 2.9 percent of GDP—an outcome that would, in particular, free up the funds necessary for investment financed with the DRC's own resources.
21. The government has set a revenue target, excluding grants, of CGF 148.3 billion (9.3 percent of GDP) for 2002. The measures described in Table 4 will continue to be implemented. Starting in 2002, the performance indicator on cumulative net credit to the government will be adjusted downward by 25 percent of the total surplus over and above the revenue programmed in the monthly cash-flow plan, net of transfers to revenue-collecting agencies (régies financières).
22. Fiscal and quasi-fiscal taxes will no longer be collected through extrabudgetary channels. To that end, commercial bank accounts in which extrabudgetary receipts are deposited will be closed and their balances transferred to government subaccounts with the BCC, while the existing procedure for offsetting receipts from, and payments to, oil companies will be replaced by the simultaneous issuance of payment orders and receipt confirmations. Special budgets (budgets pour ordre) will be eliminated under the 2002 Budget Law, and the revenue associated with them will be placed in the treasury general account, under the control of the entity in charge (DGRAD). Moreover, with a view to simplifying and harmonizing the structure of regional import duties and taxes (COMESA), technical assistance in the area of customs and excise policy will be sought in 2002.
23. In 2002, the government intends to strictly limit total expenditure to CGF 199.3 billion (12.5 percent of GDP), including CGF 89.9 billion in current expenditure (excluding interest obligations), and CGF 59.5 billion for investment. The wage bill will continue to be tightly controlled, and the government intends, with assistance from Belgium, to conduct a comprehensive audit of civil servants and of the structure of the civil service. Pending the finalization of that study, the wage bill currently only includes staff in provinces under government control and is capped at CGF 42.7 billion (2.7 percent of GDP). During 2002, no wage increases beyond the ones incorporated in the 2002 budget will be granted. A supplementary budget will be prepared as reunification draws nearer, covering both revenue and expenditure but without compromising the balances targeted for 2002. The composition of expenditure, including investment expenditure financed with external assistance, will be consistent with the poverty reduction strategy set forth in the I-PRSP. Allocations for social expenditure and infrastructure will increase significantly with a simultaneous decrease in the share accounted for by sovereignty and security expenses. A ceiling will also be placed on expenditure on official travel.
24. Externally financed capital expenditure is projected at CGF 50.4 billion (3.2 percent of GDP) for 2002. This amount reflects the list of urgent strategic investment projects (including administrative and institutional capacity building) identified in June 2001 with the World Bank and presented at the donors' meeting held in Paris in July 2001. Capital expenditure financed with the DRC's own resources is expected to reach CGF 8.0 billion (0.5 percent of GDP) and consists primarily of urgent social projects.
25. To ensure the BCC's neutrality and to strengthen the treasury's role in the expenditure chain, a monthly report will be published by the Directorate of the Treasury concerning all expenditure items in suspense (dépenses à régulariser), specifying the amount, source, and executing agency. Moreover, a comprehensive survey of bank accounts in the government's name will be undertaken, focusing both on banking institutions and on the various government departments and institutions.
26. The government plans to continue implementing its monetary policy with a view to definitively breaking hyperinflation. Given the sharp decline in inflation in recent months, the BCC will gradually lower its rediscount and CD rates in such a way that its annualized rediscount rate will exceed the annualized CD rate. The BCC will strengthen the operational framework of monetary programming and reexamine its monetary instruments in light of the recommendations of the IMF technical assistance mission.
27. To reestablish the independence of the BCC in the conduct of monetary and exchange rate policy, the government will publish the BCC statutes by end-January 2002. The new law on the activities and supervision of credit institutions will also be published by end-January 2002. The BCC will set interest rates—including CD rates—without prior approval from the Ministry of Finance.
28. The government recognizes the need to strengthen the BCC's financial position. The BCC's net financial position will henceforth be incorporated in the government budget, based on the monthly cash-flow plan developed for the BCC's 2002 financial operations. In addition, an external financial audit will be completed by end-April 2002 by a firm of international reputation, which will be selected shortly in cooperation with the World Bank. Moreover, based on a management audit that has already been completed, the BCC will be reorganized, with a view to enhancing its efficiency. Mindful of the fact that commercial bank restructuring is a prerequisite for financial reintermediation and effective monetary policy, the government will, with World Bank assistance, prepare an action plan by end-March 2002 to rehabilitate the banking system.
29. The policies envisaged for the first quarter of 2002 will be consistent with the above-mentioned objectives. To that end, monthly quantitative performance indicators for March 2002 (Table 1) and a monthly cash flow plan for consolidated government operations have been defined, as well as a monthly monetary survey. All new external borrowing (as defined in our letter of June 20, 2001) contracted or guaranteed by the government is to be reviewed in advance by the Minister of Finance (OGEDEP) to ensure that the terms are concessional.
Structural and sectoral policies
30. With assistance from the World Bank, the African Development Bank (AfDB), and other donors and lenders, the government plans to broaden and deepen structural and sectoral reform. These reforms, which also encompass the mining sector, will be supported by the World Bank through two loans currently under preparation (Economic Recovery Credit, and the Multisector Emergency Reconstruction and Rehabilitation Credit). In this context, the government plans to initiate the rehabilitation of key infrastructure (transportation, water, sanitation, electric power, urban, and the environment); the social sectors (education, health, welfare, and community development); agriculture and institutional capacity. In addition, the government intends to finalize the I-PRSP shortly.
31. In the context of the dialogue between the government of the DRC and the World Bank on reforming the regulatory framework for the mining sector, a draft of a new mining code was prepared with the help of Congolese and international legal and tax experts. The major provisions of the draft mining code have already been approved by ECOFIN and by the Office of the Presidency. The new mining code, which is expected to reach parliament by end-January 2002, will allow for the creation of a framework of incentives conducive to private investment and will help reduce the immense distortions hampering the growth of the mining sector in the DRC. The major innovations introduced in the new mining code include: (i) a change in the government's role from mining operator to mining regulator; (ii) the creation of a single mining regime without investment agreements negotiated on a case-by-case basis; (iii) the introduction of a special tax regime for the mining sector, which is fair and equitable and without exemptions; and (iv) the option, under a clear and straightforward system, of issuing mining titles on a first-come-first-served basis, transparently managed by an automated mining register to minimize discretionary action by the government. Pending approval of the new code by parliament and its subsequent publication, the government will no longer sign investment agreements for mining projects governed by tax and investment regimes other than those established in the new code. Finally, certification of the origin of diamonds under the applicable UN resolution will begin no later than end-March 2002.
32. In accordance with the ongoing public enterprise reform, audits of most public enterprises were conducted. Based on the results of these audits, and as mentioned in paragraph 15 above, most of the general managers were replaced by temporary administrators. In addition, in September 2001, with financial and technical support from the World Bank, the Office of the Presidency organized a seminar and workshop to consider and develop a reform strategy and action plan. The key measures for 2002 are the following:
(i) establishment, by end-March 2002, of a steering unit responsible for preparing and implementing the public enterprise reform following its approval by a high-level entity (interministerial committee), which is also to be established;
(ii) creation, by March 2002, of working groups responsible for identifying reform options for enterprises in the telecommunications, energy, and transportation sectors. These technical groups will work under the supervision and control of the steering unit and with the support of international experts, recruited in accordance with the appropriate procedures, by March 2002; and
(iii) preparation and adoption by end-2002 of: (a) a strategy to reform state-run enterprises; and (b) legal, regulatory, and institutional frameworks governing the operations and control of enterprises remaining in the public domain.
33. The government believes that the above-described policies and measures will enable it to respond adequately to both the domestic and the external problems encountered in the course of implementing its program, and will allow for attainment of the objectives established for 2002. Given the satisfactory results at end-September 2001 and good performance through end-December, we believe a strong basis is being laid to move toward a three-year program that could be supported by the Fund under the PRGF, by the World Bank, by the AfDB, and by the international community as a whole. To that end, we are preparing a medium-term macroeconomic framework and an external debt sustainability analysis. We also hope that our heavy debt burden can then be reduced, to make its servicing sustainable over the medium-term.
34. We would like to take this opportunity to thank you once more for the interest you have shown in our efforts to restore peace and create a growth-friendly environment that, with the full support of the international community, will benefit not only all the Congolese people but also all the peoples of the Great Lakes region.