ECONOMIC HEALTH CHECK
The Democratic Republic of the Congo Scores High on Growth, Lags in Poverty Reduction
October 13, 2015
- Growth remains strong but poverty pervasive
- Generous mining code and weak governance limit government revenues from sector
- Falling commodity prices and general elections add pressure on limited budget
The Democratic Republic of the Congo exemplifies the difficulty that many developing countries have in transforming mineral wealth into inclusive growth.
The IMF’s latest annual economic assessment indicates that while growth rates for 2014 were as high as 9.2 percent, poverty rates in the DRC are still among the highest in the world. And while the report notes some social improvements, like better access to education, it’s unlikely the DRC will achieve any of the Millennium Development goals.
In an interview with IMF Survey, Norbert Toé, IMF mission chief for the Democratic Republic of the Congo, discusses how the authorities are working towards increasing and better distributing government revenues from the mining sector.
IMF Survey: What struck me while reading this report is how the country has managed to maintain one of the highest growth rates in the world while, at the same time, having one of the worst business environments, according to the United Nations. How can that be?
Toé: One thing to keep in mind, is that the high growth over the past several years is mostly driven by the mining sector, or broadly speaking the natural resource sector, because in addition to mining copper, diamonds, gold, and so forth, the DRC also exports oil. So the economic growth is by and large driven by the mining sector, which is an enclave industry and it’s highly capital-intensive. So they don’t really employ a lot of people in the formal sector.
IMF Survey: So they’re separate from the actual domestic business environment?
Toé: Yes, absolutely. The government adopted a mining code, what we call the 2002 Mining Code, which many people agree is overly generous towards the industry in terms of tax provision and security of the tax regime. So when foreign investors bring in capital, the environment is stabilized for them. This is what has attracted substantial foreign direct investments to the country.
IMF Survey: So it seems that a lot of the wealth and the profits that were made in the commodity industry have not trickled down over the years to the general population. Poverty rates are still extremely high. And even with some advancement in terms of access to education, for example, in the last 10 years the report indicates that has almost doubled. Why can’t people lift themselves out of poverty?
Toé: One thing… and as I said before, the mining sector in particular and the natural resource sector in general act as an enclave industry. Capital comes in, they exploit the natural resource, take it out as exports, and the profits get repatriated. So basically what is left in the country is the taxation that the government gets. But again, the 2002 Mining Code is overly generous, so in terms of what the government is getting, it’s not that much.
And to make matters worse, you have the issue of transparency in the management of the natural resources. But as you pointed out, some of the government revenues from the mining sector have been used to bolster education, as well as the health sector. So there has been progress, but it’s not enough. And as you said, poverty rates are still high.
IMF Survey: So the report shows that the falling commodity prices globally is a risk to the country’s growth rate, but it also suggests that the upcoming general elections in the country will put added pressure on a budget that’s very limited. Is the general election really financial liability?
Toé: Yes, you said the words, limited budget. For a big country like the DRC, the budget hovers around $5 billion U.S. dollars per annum, and the cost of the election, as put out by the National Independent Electoral Commission, is $1.1 billion U.S. dollars; about one-fifth of the budget of $5 billion. So you can imagine the pressure that it’s had on the limited government resources.
IMF Survey: So, again, the falling commodity prices—especially copper in the DRC is very important—how dramatic an impact will that have on the country? Because as you know, most Congolese would say that they’ve never benefited from high commodity prices anyway. What would it take to turn the abundant natural resources that the DRC has into something that would benefit most Congolese?
Toé: Two things come to mind. The new mining code, because, like I said before, the 2002 Mining Code was overly generous, so the government is discussing a new mining code. And we, as an institution, have advised the government to ensure that the new mining code is aligned with international best practices, and embraces transparency. Because one of the key issues the Congolese authorities have been facing is the issue of governance and transparency in the management of its resources.
We think that even beyond the generosity of the 2002 Mining Code, the government could have had more resources had it strengthened governance in the sector and had more transparency in the management of the natural resources; and that’s the second thing. So the falling commodity price will obviously take away part of the government revenue because of the price effect of this. However, if the government were to ensure that the new mining code is transparent and aligned on best international practices, then they could get more resources and transform this vast wealth into development for the benefit of the population at large.