Press Release No. 02/27

The Executive Board of the International Monetary Fund (IMF) has approved a three-year SDR 580 million (about US$750 million) arrangement under the Poverty Reduction and Growth Facility (PRGF) for the Democratic Republic of the Congo (DRC). The DRC will be able to draw up to SDR 420 million (about US$543 million) under the arrangement immediately. The remaining SDR 160 million (about US$207 million) will be drawn in six equal installments following performance reviews.

The PRGF is the IMF's concessional facility for low income countries. It is intended that PRGF-supported programs will in time be based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners, and articulated in a Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that PRGF-supported programs are consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty.

PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5 ½-year grace period on principal payments.

After the Executive Board meeting on the Democratic Republic of the Congo, Horst Köhler, Managing Director and Chairman, stated:

"The Fund welcomes progress made by the authorities to strengthen the peace process and the inter-Congolese dialogue, which should lead to the reunification of the country, the formation of a government of national unity, a new constitution, and free and transparent elections. The cease-fire has generally held since early 2001 and the withdrawal of foreign troops has started with the help of the UN Organization Mission (MONUC). Clearly, the return of peace and stability to the entire country will be a key element in the resumption of economic growth and a reduction of poverty. The Fund strongly encourages the authorities and all interested Congolese parties to buttress the progress toward peace and to promote an all-inclusive inter-Congolese dialogue with the full support of the international community, including the United Nations and the Organization of African Unity.

"The Fund commends the authorities for the steadfast implementation of their bold and front-loaded interim economic and financial program that has been monitored by the staff (SMP). The SMP (covering June 2001-March 2002) has produced significant results. In particular, the vicious cycle of hyperinflation and currency depreciation has been broken, the rehabilitation of public finances has progressed steadily, major economic distortions have been eliminated, and fundamental improvements in the judiciary and in the regulatory environment are being made.

"The Fund welcomes the clearance of the DRC's arrears with the Fund and the forthcoming clearance of the DRC's arrears with the World Bank, and commends the authorities for their actions to restore normal relations with the international community. It expresses its appreciation to Belgium, France, South Africa, and Sweden for having contributed to the financing of a bridge loan to clear the DRC's arrears with the Fund and help pay the reserve asset portion of the increased quota subscription under the 11th General Review of Quotas. The Fund welcomes the treatment of the DRC's arrears to the African Development Bank Group through a partial payment/partial consolidation approach. Other multilateral creditors have agreed in principle to consolidate the DRC's arrears, and Paris Club creditors have agreed in principle to a comprehensive rescheduling on terms consistent with the program's assumptions.

"The Fund commends the authorities for completing an interim PRSP, which provides the context for a national dialogue on the poverty reduction strategy and which contains a coherent analytic and operational framework for the design and the implementation of poverty reduction policies. The Fund endorses the recommendations of the joint World Bank and Fund staff assessment of the interim PRSP, which provides a sound basis for the development of a participatory full PRSP. The implementation of the interim PRSP and the preparation of a full PRSP represent a challenge for the Government which will need to be supported by extensive technical and financial assistance from the donor community.

"The achievements under the staff-monitored program have created a solid basis for a PRGF-supported program and have paved the way for debt relief under the enhanced HIPC Initiative. The main objectives of the authorities' three-year program are realistic and consistent with the reconstruction phase outlined in their interim PRSP, which aims at creating an enabling environment to boost economic growth and begin reducing poverty.

"Achieving the program's targets will call for further fiscal consolidation, a prudent monetary policy consistent with maintaining price stability within the framework of a floating exchange rate system, and a deepening of structural and sectoral reforms.

"Fiscal consolidation remains one of the cornerstones of the program. Key aspects of fiscal policy will include the timely implementation of measures to enhance revenue mobilization, strengthening the monitoring and tracking of expenditure, strict adherence to a monthly treasury cash-flow plan, and a shift in the composition of expenditure toward the social sectors. The presidential decree that stipulates that all budgetary expenditures require prior authorization from the Minister of Finance is especially to be welcomed.

"The new statutes of the central bank enshrine its independence in the conduct of monetary policy, and the on-going financial audit of the central bank by an internationally recognized firm is an important step. However, effective monetary policy and financial re-intermediation call for a financially sound banking sector. The authorities are therefore urged to accelerate their effort to restructure the commercial banks.

"The Fund welcomes the deepening and the sequencing of structural and sectoral reforms envisaged in the program. The strengthening of administrative capacity, with the timely help of the international community, will play a crucial role in ensuring program success. The focus of the reforms of public enterprises is appropriate, as this sector has been a major drain on budgetary resources and a locus of resource misallocation. With the help of the World Bank, timely implementation of reforms in the mining, forestry, water and electricity sectors, and in rural infrastructure will also be important to ensure sustainable economic growth.

"The authorities are to be commended for their determination to promote good governance and transparency. An anti-corruption strategy will be finalized soon and an action plan is being developed with the help of the World Bank. The authorities also plan to audit expenditure execution statements for 2001 budget by end-2002, while the 2002 budget, including military expenditure, will be audited by end-2003.

"Overall, the Fund considers that the PRGF-supported program represents an important step by the authorities to reconstruct the economy and revive growth, thus laying the basis for reducing widespread poverty. The authorities' efforts deserve the timely support of the international community, technical assistance and highly concessional financial aid. The projections made in the preliminary HIPC Initiative document indicate that the NPV of debt-to-exports ratio would remain significantly above 150 percent during the interim period. The Fund considers that with continued strong performance under the PRGF arrangement, a decision point could be envisaged at the time of the first review of the program, expected in January 2003, and that the completion point could be reached in early 2006," Mr. Köhler said.

ANNEX

Recent Political and Economic Developments

To address the DRC's alarming political and socio-economic situation, President Joseph Kabila has formulated three main objectives: to achieve peace through reactivation of the Lusaka peace accord; to buttress the inter-Congolese dialogue; to resume normal relations with the international community, and stabilize the macroeconomic situation and liberalize the economy.

The authorities have implemented a staff-monitored program (SMP) covering June 2001-March 2002, which aimed principally at stabilizing the economy, and laying the foundation for the restoration of growth and reconstruction. Under the SMP, the authorities took bold and front-loaded measures, including the introduction of a floating exchange rate system in May 2001. The SMP has already produced significant results, particularly the breaking of the vicious circle of hyperinflation and currency depreciation, and the rehabilitation of public finances, including a return to normal budgetary process, the centralization of revenue and expenditure, and a reduction in the use of extra budgetary channels.

Progress in the structural area includes the removal of major economic distortions, notably through the unification of multiple exchange rates and liberalization of the prices of goods, including a transparent and automatic mechanism for the prices of petroleum products, and profound changes in the regulatory environment and the judiciary.

Program summary

Consistent with the medium-term scenario, the program for 2002 aims at an acceleration of economic growth to 3 percent; an increase in investment from 5 percent of GDP in 2001 to about 10 percent as a result of the resumption of externally financed investment; an increase in national savings to 11 percent of GDP in 2002 from about 3 percent of GDP in 2001, reflecting a rise in government savings and net transfers from abroad, a decline in the average inflation rate to 25 percent from 357 percent over the same period; and an improvement in the external account to a surplus of about 1 percent of GDP in 2002 compared with a deficit of about 2 percent of GDP in 2001.

Achievement of the 2002 fiscal objectives will be based on a strengthening of revenue mobilization and expenditure control. During 2002, the government will continue to strictly execute its monthly treasury cash-flow plan, effectively limiting expenditure to available resources. The 2002 budget covers only those provinces that are currently under government control. To limit expenditure to the targeted ratio of 11 percent of GDP, measures aimed at strengthening expenditure control are being implemented and will be deepened.

Monetary policy will continue to be prudent and will aim at achieving the overriding objective of price stability within the framework of a floating exchange rate system. The authorities are preparing, with the help of the IMF and the World Bank, a comprehensive reform of the banking sector.

The process of improving the business climate through the implementation of structural and sectoral reforms, which was initiated under the SMP, will be intensified. The role of the government is being modified to facilitate and support, rather than compete with, the private sector. In particular, the Government is determined to promote good governance and fiscal transparency. In this regard, an anti-corruption strategy will be finalized and an action plan will be developed with the help of the World Bank. The government has also, with World Bank support, begun a reform of the mining and forestry sectors, including the restructuring of the state mining company (GECAMINES).

The interim Poverty Reduction Strategy Paper (I-PRSP) proposes a strategic framework for future poverty reduction policies and measures. In this context, action will be needed to further develop sectoral strategies and to ensure consistency between the composition of fiscal expenditure and the PRSP. A full PRSP is expected to be completed in early 2005.

As a prerequisite for Board consideration of the new PRGF arrangement, the DRC successfully cleared its arrears to the IMF for SDR 403.9 million (about US$522 million). The arrears clearance was made possible through bridge loans provided by four member countries including France, Belgium, South Africa and Sweden. Following the clearance of arrears, the IMF Executive Board took decisions to lift all remedial measures that had been imposed under the IMF's arrears strategy and restored the country's eligibility to use IMF resources and its voting and related rights in the IMF.

The Democratic Republic of Congo joined the Fund on September 28, 1963. The country's new quota in the IMF amounts to SDR 533 million (about US$689 million).

Democratic Republic of the Congo: Selected Economic and Financial Indicators, 2000-05                   2000 2001 2001 2002 2003 2004 2005   Act. Prog. Est. Prog. Proj. Proj. Proj.                                   (Annual percentage changes, unless otherwise indicated) Output and prices               Real GDP -6.2 0 -4.4 3 5 6 7 Nongovernment consumption per capita (in U.S. dollars) 77 92 92 97 101 107 115 Nominal GDP per capita (in U.S. dollars) 94 107 107 109 116 125 137 GDP deflator 589 260 386 23 9 6 6 Consumer prices, annual average 554 299 357 25 9 6 5 Consumer prices, end of period 511 99 135 13 6 6 5 External sector               Exports, f.o.b. (in U.S. dollar terms) -8 1 5 8 11 18 23 Imports, f.o.b. (in U.S. dollar terms) 46 -16 5 36 42 24 8 Export volume -4 12 2 8 11 13 12 Import volume 48 -18 10 37 40 22 6 Terms of trade 10 -11 -12 3 8 4 4 Nominal effective exchange rate 1/ -91 ... -77 ... ... ... ... Real effective exchange rate 1/ -37 ... 11 ... ... ... ...   (Annual change in percent of beginning-of-period   broad money, unless otherwise indicated) Money and credit               Broad money 493 53 102 35 .... .... .... Net foreign assets -710 0 6 36 .... .... .... Net domestic credit 343 55 16 2 .... .... .... Net credit to the government 272 15 -11 -6 .... .... .... Credit to the private sector 61 39 25 7 .... .... .... Credit to the parastatals 10 2 2 1 .... .... .... Central bank refinance rate (level in percent) 2/ 120 ... 140 39 .... .... ....   (In percent of GDP) Central government finances     Revenue (excluding grants) 4.5 5.2 5.9 7.3 8.4 9.6 11.1 Grants (including relief aid) 0.0 0.0 0.0 1.2 4.7 6.4 5.2 Expenditure 3/ 9.8 7.1 6.6 11.0 18.1 21.1 18.2 Domestic primary cash balance 4/ -3.5 -0.2 0.5 0.9 2.4 3.8 5.4 Overall balance (commitment basis) -5.3 -1.9 -0.8 -2.5 -5.0 -5.1 -2.0 Overall consolidated cash balance -3.6 -0.3 0.5 -0.4 -1.7 -2.3 -1.0 Investment and saving               Gross national savings 0.4 ... 2.9 11.0 15.9 16.9 16.1 Government -4.9 -1.6 -0.7 2.8 6.9 8.7 7.8 Nongovernment 5.3 ... 3.6 8.3 9.1 8.2 8.3 Gross domestic savings 5.6 ... 6.2 6.8 8.2 9.9 11.7 Government -3.2 ... 0.6 1.9 2.7 4.1 5.7 Nongovernment 8.8 ... 5.6 4.9 5.4 5.8 6.0 Investment 4.4 ... 5.1 9.9 16.5 19.9 18.8 Government 5/ 0.4 0.3 0.1 2.9 8.5 10.9 8.8 Nongovernment 6/ 4.0 ... 5.0 7.0 8.0 9.0 10.0   (In millions of U.S. dollars, unless otherwise indicated) Balance of payments               Exports of goods and nonfactor services 963 839 1,016 1,101 1,226 1,431 1,741 Imports of goods and nonfactor services 7/ 905 1,104 953 1,286 1,769 2,158 2,322 External current account, including grants, before debt relief (in percent of GDP) 7/ -4.0 -14.0 -2.2 -3.7 -4.7 -7.7 -7.3 External current account, excluding grants, before debt relief (in percent of GDP) 7/ -8.1 -18.1 -6.7 -9.1 -12.2 -14.9 -11.6 External current account, including grants, after debt relief (in percent of GDP) 7/ 8/ -4.0 -14.0 -2.2 1.1 -0.5 -3.0 -2.6 Gross official reserves (end of period) 51 52 64 111 216 260 321 Gross official reserves (weeks of non aid imports of goods and nonfactor services) 3.8 2.4 4.7 6.2 10.0 9.3 9.6 External public debt               Total, including IMF 9/ 12,609 12,957 12,880 8,890 9,159 9,415 9,430 Of which: arrears 9,604 10,027 10,082 0 0 0 0 Net present value (NPV) of debt 10/ 11,888 ... 12,129 ... ... ... ... Scheduled debt service (incl. interest on arrears) 11/ 724 757 728 56 178 319 357 In percent of exports of goods and nonfactor services 75 90 72 5 15 22 21 In percent of government revenue 331 333 217 50 21 27 27 Exchange rate               Units of local currency per U.S. dollar (end of period) 50 ... 312 ... ... ... ...                 Sources: Congolese authorities; and IMF estimates and projections. 1/ Annual averages based on official rates. Minus sign indicates depreciation. 2/ For 2002, as of May 6. 3/ Including interest due on external debt and, from 2003 onward, expenditure financed by resources released under the HIPC Initiative. 4/ Revenue (excluding grants) minus expenditure (excluding interest on debt and foreign-financed expenditure) 5/ From 2003 onward, includes investment financed by resources released under the HIPC Initiative. 6/ From 2003 onward, includes capital projects financed through nongovernmental organizations (NGOs). 7/ Based on revised customs data, a major downward adjustment was made for 1996-2001 imports. 8/ After possible debt relief on interest and HIPC Initiative-related resources. 9/ End-of-period debt stock, including arrears and before HIPC Initiative-related resources. 10/ The net present value of external public debt is 94 percent of the nominal value, reflecting the significant stock of arrears.   11/ From 2002 onward, after possible debt relief.