IMF Executive Board Concludes Article IV Consultation with the
Democratic Republic of the CongoPublic Information Notice (PIN) No. 09/136
December 16, 2009
Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.
On December 11, 2009, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Democratic Republic of the Congo (DRC). 1
The DRC has made considerable progress on the social, political and economic fronts since 2001. In 2003–06, a transitional government implemented prudent macroeconomic policies that restored confidence and brought hyperinflation under control. These and structural reforms to make the economy more flexible supported an economic recovery. On the political front, the country held its first democratic elections in four decades that led to the installation of a broad-based government in early 2007.
However, the pace of economic reforms proved difficult to sustain. In 2007, the onset of elections, lingering conflict in the country’s eastern provinces, and weak public financial management led to significant fiscal slippages, resulting in an upsurge in inflation and exchange depreciation. Although the firming of commodity export prices helped strong recovery of the mining sector and supported robust economic growth, full economic recovery from years of conflict continued to be constrained by dilapidated infrastructure and weak regulatory environment.
In 2008, economic conditions were complicated by the onset of the global financial crisis and lingering conflict in the eastern provinces. A significant drop in the country’s terms of trade following the global financial crisis and supply bottlenecks (especially shortages in cement and electricity) limited real gross domestic product (GDP) growth to 6 percent instead of a projected 10 percent. An acceleration of security-related spending late in the year in the context of weak public financial management led also to fiscal slippages. This resulted in a significant increase in government recourse to central bank financing, an increase in excess liquidity in the economy, an upsurge in inflation and exchange rate depreciation. The 2008 current account deficit widened by 14½ percentage points of GDP to about 16 percent of GDP on the back of buoyant imports and decline in export prices in the second half of 2008. Gross official reserves reached a historically low level of US$30 million by February 2009, down from US$180 million at end-2007.
In response, macroeconomic policies were tightened during 2009. The government tightened fiscal policy and reduced the fiscal deficit. Further, the central bank raised its rediscount rate in two steps from 40 percent to 65 percent and stepped up sales of central bank bills. Nevertheless, lack of adequate coordination between the central bank and the Treasury in the third quarter of 2009 led to an increase in excess liquidity in the economy. Under these circumstances, year-on-year inflation, which declined from 55 percent in April to 36 percent in June, rose to 53 percent in October. However, official gross international reserves increased to US$894 at end-September 2009 due to the disbursement of emergency assistance from the Fund and other development partners, the arrival of the first tranche of the signing bonus of the Sino-Congolese Cooperation Agreement, and the general and special SDR (special drawing rights) allocation (SDR 424.5 million). Economic growth is estimated at 2.7 percent in 2009. The external current account deficit is estimated to have widened to 16.4 percent of GDP, in view of weaker export commodity prices.
The Democratic Republic of the Congo remains in debt distress. The stock of external debt is about US$13.1 billion. At end 2008, the present value of public and publicly guaranteed external debt is estimated at 93 percent of GDP, 150 percent of exports, and 502 percent of government revenue (excluding grants), well above the policy-based threshold levels. In addition to prudent policies and reforms, attaining debt sustainability hinges on the country receiving debt relief under the enhanced Heavily Indebted Poor Countries Initiative and Multilateral Debt Relief Initiative. In this context, the authorities have revised with their counterparts the Sino-Congolese Cooperation agreement to make it consistent with the objective of achieving debt sustainability while addressing the country’s infrastructure gap.
Executive Board Assessment
Executive Directors noted that prudent economic policies and structural reforms, in the context of the Democratic Republic of the Congo’s peaceful transition to a democratically-elected government, have helped support economic recovery and tame hyperinflation. Nonetheless, the country still faces daunting development challenges, demonstrated by the slow progress in achieving the objectives of the authorities’ poverty reduction and growth strategy. While the medium-term economic growth outlook is positive, sound policies and reforms remain crucial to help strengthen the foundations for growth, diversify the economy, and improve the country’s social conditions. Directors supported the authorities’ economic reform strategy aimed at enhancing macroeconomic stability, increasing fiscal space for pro-poor and pro-growth spending, improving the business climate, and strengthening institutional capacity.
Directors emphasized that prudent and credible fiscal policy is key to making progress toward fiscal sustainability. They encouraged the authorities to expeditiously advance reforms to mobilize revenues, including by streamlining and simplifying the tax system, increasing tax collection from the mining sector, and introducing a value added tax. They underscored the need to improve public financial management by rationalizing expenditure procedures, ensuring better tracking of pro-poor spending, and enhancing spending transparency and accountability. The ongoing fiscal decentralization should take into account institutional capacity constraints at the provincial level. Directors also called for a prudent wage policy. They supported the authorities’ intention to cap the fiscal deficit based on the availability of concessional foreign assistance and welcomed the authorities’ commitment to zero government borrowing from the banking system over the medium-term.
Directors stressed that monetary policy should continue to focus on reducing inflation. They encouraged the authorities to improve liquidity forecasting in close collaboration with the Treasury. They supported completion of the ongoing restructuring of the central bank and its recapitalization to enhance the central bank’s credibility and independence. Directors noted that the floating exchange rate regime is appropriate for the DRC, given that the economy is relatively open and subject to large exogenous shocks. They encouraged the authorities to limit interventions in the foreign exchange market to smoothing short-term fluctuations and achieving the central bank’s gross official reserves target.
Directors noted that the DRC’s external debt would be unsustainable without substantial debt relief. They encouraged the authorities to implement steadfastly their economic policy and structural reform agenda, and to strengthen external debt management, with the objective of reaching completion point under the enhanced Heavily Indebted Poor Countries Initiative and obtaining debt relief under the Multilateral Debt Relief Initiative as early as possible. Going forward, the authorities should rely on grants and highly concessional debt. Directors welcomed the recent amendment of an important cooperation agreement in the mining and infrastructure sectors, which limited the government guarantee to the infrastructure financing.
Directors underscored the need to implement structural reforms to improve the business environment and foster strong and sustained economic growth. They encouraged the authorities to reform public enterprises, streamline the regulatory environment, and press ahead with reforms to address weaknesses in the financial system and deepen financial intermediation. Progress on these fronts will require improved coordination between government institutions. Directors welcomed the authorities’ intention to set up an independent anti-corruption agency. Rebuilding the country’s infrastructure will also be important.