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Democratic Republic of the Congo and the IMF

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Public Information Notice (PIN) No. 03/52
April 16, 2003
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Concludes 2003 Article IV Consultation with the Democratic Republic of the Congo

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board.

On March 24, 2003, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Democratic Republic of the Congo (DRC).1

Background

After years of war and civil strife, remarkable progress has been made in consolidating the peace process since 2001. Most countries have completed their troop withdrawal from the DRC and the inter-Congolese dialogue in Pretoria, South Africa, has resulted in the signing of an agreement on power sharing in an inclusive transition government; the adoption of an interim-constitution; a memorandum on the creation of a restructured and integrated army, and arrangements to ensure the safety of the members of the transitional institutions in Kinshasa. The inter-Congolese dialogue is expected to be concluded by end-March 2003, to be followed by the nomination of an all-inclusive government in the near future. Free elections are to be held in two years.

At the same time, the DRC has made significant progress in stabilizing the macroeconomic situation and initiating sustainable economic growth, first under the interim economic program (June 2001-March 2002) that was monitored by IMF staff, and then under the three-year Government Economic Program (PEG) that is supported by the Fund's Poverty Reduction and Growth Facility (PRGF), approved on June 12, 2002 (see Press Release No. 02/27). This marked a turnaround in economic policy that has already produced significant results, especially by breaking the vicious circle of hyperinflation and currency depreciation, and opening up the economy with the rest of the world. Important progress was made in strengthening public finances through a return to normal budgetary procedures, including the centralization of revenue and expenditure. A monthly treasury cash-flow plan was strictly implemented. New statutes of the central bank were adopted, enshrining its independence in the conduct of monetary policy. On September 22, 2002, Paris Club creditors granted exceptional debt relief beyond Naples terms.

Far-reaching structural measures were put in place, resulting in the removal of major economic distortions, notably through the unification of multiple exchange rates and the liberalization of prices. There was also a profound change in the judicial and regulatory environment so as to create an institutional framework propitious for private sector-led growth. In February 2003, the authorities accepted the obligations of Article VIII, Sections 2(a), 3, and 4.

Overall economic performance under the PRGF was broadly satisfactory in 2002. Economic growth resumed for the first time in thirteen years. The annual rate of inflation fell sharply to about 15 percent from 135 percent in 2001 and 511 percent in 2002. In public finances, fiscal revenue continued to increase, reaching 7.9 percent of GDP in 2002. Expenditure was contained at 8.9 percent of GDP. However, the projected shift to pro-poor spending did not materialize because of the unforeseen increase in security- and sovereignty-related expenditure arising mainly from the security vacuum associated with the withdrawal of foreign troops, and from a shortfall in foreign financed investment and social expenditure. The external current account balance, including grants and after debt relief, went from a deficit in 2001 into a small surplus in 2002, mainly as a result of an upturn in diamond exports following the abolition of the diamond export monopoly in 2001.

The DRC's main challenges for the future include (1) consolidating the recently achieved macroeconomic stability and deepening far-reaching structural reforms, consistent with the Government's interim poverty reduction strategy paper (I-PRSP); (2) continuing to improve governance and the business climate; and (3) ensuring a smooth reunification of the country. These efforts will be critically dependent on an appropriate mix of timely foreign assistance.

In 2003, economic growth is expected to accelerate to 5 percent, and the end-of-period rate of inflation to fall to 6 percent. Fiscal policy will aim at continuing consolidation while reorienting the budget toward pro-poor spending. Monetary policy will continue to aim at price stability in the context of a floating exchange rate system, which has so far been appropriate for the country's circumstances. The authorities intend to deepen their structural reform agenda, including strengthening good governance.

Executive Board Assessment

Directors commended the Democratic Republic of the Congo for the progress that has been made in consolidating the peace process. They looked forward to the planned conclusion of the inter-Congolese discussions by early April 2003 on the formation of an all-inclusive transitional Government of National Unity, the adoption of a new constitution, and the holding of free, fair, and transparent elections after two years. Directors emphasized that lasting peace is a crucial condition for the economic reconstruction and development of the DRC, and that it should provide further impetus to the impressive turnaround in economic performance observed in the last two years.

Directors considered that the major challenges facing the DRC will be to achieve reunification with macroeconomic stability, while strengthening the administrative capacity of the central and provincial governments. They stressed that successful reunification will require simultaneous and coordinated efforts to tackle political, economic, and security issues; that foreign assistance will need to be well-sequenced, properly coordinated, and provided in an appropriate mix; and that the regional demobilization and reintegration program will need to be implemented in a timely manner.

Directors commended the authorities for their sustained implementation of wide-ranging economic reforms, noting that the turnaround in economic policies, including the removal of major distortions and trade restrictions, has already yielded significant results: in 2002 economic growth was positive for the first time in thirteen years, and the vicious circle of hyperinflation and currency depreciation has been broken. Directors stressed that continued implementation of sound economic policies and structural reforms, in addition to the consolidation of peace, will be critical for macroeconomic stabilization and for attracting the resources needed for economic reconstruction and development. They urged the international community to support the DRC's reform and reconstruction efforts with predictable financial and technical assistance.

Directors welcomed the 2003 budget's emphasis on continued fiscal consolidation. They emphasized that sovereignty and security-related expenditures should be closely monitored and their share reduced, in order to permit an increase in social and infrastructure-related spending. Noting the need to raise revenue collection from its current low level relative to GDP, Directors encouraged the authorities to quickly implement their plan to expand the tax base and enhance collection efficiency, especially through the creation of a Large Taxpayers Unit and the modernization of customs administration. They commended the passage of legislation on indirect tax and tariff reform, and recommended that the tariff reform required under the DRC's regional commitments be implemented in a broadly revenue-neutral way.

Directors stressed the importance of strengthening public expenditure management in the context of a medium-term expenditure framework. In this regard, they commended the authorities for taking action in the 2003 budget to increase transparency in the expenditure process, and to improve the tracking of poverty-related expenditures. They called for improved monitoring of utility outlays and urged the elimination of ghost workers from the public payroll. They agreed that the fiscal impact of the reunification will need to be monitored carefully to avoid jeopardizing macroeconomic stability.

Directors welcomed the abolition of central bank's lending to the government; but expressed concern that the central bank has continued to finance government expenditure that has not been authorized by the Ministry of Finance, in violation of the April 2002 presidential decree, and that domestic arrears have accumulated. They encouraged the authorities to push ahead quickly to implement the monthly treasury cash-flow plan.

Directors noted that the safeguards assessment of the central bank revealed serious risks of misuse of Fund resources and misreporting to the Fund. They welcomed the authorities' determination to quickly implement their action plan for correcting the institutional and operational lapses detected, particularly with regard to accounting procedures, the management of international reserves, internal audit procedures, and the control and supervision of the banking system. They encouraged the central bank to implement its monthly cash-flow plan as quickly as possible.

Directors welcomed the central bank's commitment to price stability in the context of the existing floating exchange rate system, and encouraged the central bank to continue to develop indirect monetary policy instruments to control domestic liquidity. Directors underscored that a sound banking system is a prerequisite for financial re-intermediation and effective monetary policy; and hence they strongly encouraged a timely restructuring of the banking system and efforts to strengthen banking supervision.

Directors welcomed the deepening of structural and sectoral reforms, which has led to a marked improvement in the business climate. They noted, however, that the large body of recently enacted legislation still needs to be put into effect through implementation decrees, particularly in the areas of governance, mining, forestry, and energy. Directors stressed the importance of persevering with bold reforms to improve governance and intensify the fight against corruption, money laundering, and the financing of terrorism. They believed that a key challenge will be to create a culture of accountability and respect for the rule of law, in order to combat corruption and mismanagement and to attract private investment.

Directors supported the three-phase approach of the DRC's Interim Poverty Reduction Strategy Paper-stabilization, reconstruction, and development. They saw the preparation of a high quality PRSP through a broad-based participatory process as a key element in consolidating the government's medium-term strategy for poverty reduction and growth. In this regard, they welcomed the plans for a National Survey on Poverty, and called for poverty assessments in future reviews. Directors encouraged the authorities to incorporate in the PRSP a strategy for enabling private sector growth.

Directors welcomed the authorities' acceptance of the obligations under Article VIII, Sections 2 (a), 3, and 4 of the Fund's Articles of Agreement, and encouraged them to eliminate the few remaining restrictions on external transactions.

Directors encouraged the authorities to take steps to secure early signature of bilateral agreements with Paris Club creditors, to pave the way for additional debt relief under the HIPC Initiative. A few Directors, however, also stressed the need to establish a convincing track record in monitoring and controlling public expenditure, in order to ensure an effective implementation of social programs, before a decision point under the HIPC Initiative should be considered.

Directors observed that the DRC's statistical systems remain weak, especially with regard to the national accounts. They encouraged the authorities to complete the remaining steps necessary for participation in the General Data Dissemination System, which would bolster their efforts to build statistical capacity and help secure technical assistance.


Democratic Republic of the Congo: Selected Economic and Financial Indicators, 1998-2002


 

1998

1999

2000

2001

2002

     

Est.

Est.

Prel. Est.


           
 

(Annual percentage change)

Domestic Economy

         

Real GDP growth

-2

-4

-7

-2

3

End-of-period CPI inflation

135

484

511

135

15

Average CPI inflation

107

270

550

357

25

           
 

(In percent of GDP, unless otherwise indicated)

Financial variables

         

Total fiscal revenue (excluding grants)

5.9

4.5

5.1

6.2

7.9

Total expenditure 1/

12.3

9.5

11.1

7.9

8.9

Overall balance (commitment basis)

-6.4

-5.0

-6.0

-1.6

-0.6

Overall balance (cash basis)

-2.7

-3.4

-4.1

0.5

-0.1

Broad money (change in percent)

160

382

493

217

22

           
 

(In millions of U.S. dollars, unless otherwise indicated)

External sector

         

Exports of goods and nonfactor services

1,285

1,021

963

961

1,109

Imports of goods and nonfactor services

1,340

758

920

1,067

1,405

External current account (in percent of GDP) 2/

-9.0

-2.6

-4.6

-4.7

0.1

Real effective exchange rate 3/

4

169

-18

-6

-58

 

 

 

 

 

 


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

 
           

1/ Including interest due on external debt.

         

2/ Including grants, after debt relief.

         

3/ Change in annual average based on official rates. Minus sign indicates depreciation.


1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.




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