## 1codea2019002

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---

### Governance and Corruption Challenges — Overview
- Focus: macro-critical issues related to governance and corruption in DRC, in line with the IMF’s revised policy on governance.
- Third-party indicators suggest governance has been poor and corruption widespread.
- Key reform levers identified:
  - Audit of the civil service.
  - Transparency of remuneration.
  - Simplifying tax payment processes.
  - Merging activities of numerous revenue agencies.
  - Insulating courts from external influence to improve contract enforcement and property rights.

Findings on fiscal management and PFM
- International Budget Partnership Open Budget Index rose from a zero rating in 2006 to a rating comparable to the regional average in 2015.
- Government publishes a budget summary and updates on budget revenue and expenditure execution; Cours de Comptes (Court of Auditors) does not publish its annual report.
- PFM responsibilities split among: Ministry of Budget, Ministry of Planning, Ministry of Finance, and the Central Bank of Congo (BCC).
- Public participation: government engages donors and civil society through 15 thematic groups (including public finances), but meetings are irregular.
- Parliamentary oversight: weak. Court of Auditors assists National Assembly but has no independent budget, lacks adequate financing; reports are listed but not published on its website. Court recommendations are not followed and sanctions are not enforced.
- Court of Auditors Law establishing independence (including financial) has been enacted. Office of the Inspector General of Finance (IGF) can audit executive accounts and impose administrative sanctions; reports to Ministry of Finance but is located in the Presidency.
- Budget credibility undermined by optimistic revenue/expenditure projections and political pressure; Medium-Term Fiscal and Expenditure Sector Frameworks and transition to program budgeting by 2018 were delayed. Troika (Office of the Prime Minister, Ministries of Finance and Budget, and the Central Bank) monitors budget implementation.
- Budget annexes and special accounts: together represented about 15 percent of the overall 2018 budget; annexes cover some 800 institutions (mostly health and tertiary education) that are legally separate from central government; special accounts cover nine special funds (e.g., Road Fund, Industrial Development Fund).

Non-resource revenue and revenue administration
- Non-resource revenues form the bulk of budget revenues but are low compared to other SSA countries—causes include administrative capacity constraints, inappropriate tax policies, governance issues.
- FAD TA report identified 140 exemptions (mostly in mining) and estimated foregone revenues from exemptions at 1.7 percent of GDP. Exemptions granted under 13 legislations, special mining conventions, and administrative discretion.
- Long, porous borders facilitate tax and customs evasion.
- Multiplicity of special taxes/fees: over 300 taxes and fees levied by many agencies, some accruing to special accounts outside the Treasury.
- Central government single Treasury account at the BCC intended to facilitate monitoring, but central government also holds accounts in commercial banks; provincial governments are required by law to hold accounts at BCC but also hold accounts and receive loans from commercial banks that are not identifiable in monetary statistics.

Public financial management execution issues
- Reforms: formalized four stages of the expenditure chain and introduced budget commitment plans to align expenditures with revenues.
- Execution problems: fund transfers generally match budget appropriations, but expenditure validation and payment orders are problematic and overdue payments are common.
- Exceptional procedures: widely used and often not regularized within required 48 hours.
- Causes of poor execution:
  1. Redundant and lengthy steps in budget execution; political interventions in approval of commitments and payments.
  2. Abuse in use of exceptional or emergency procedures.
  3. Excessive centralization of budget execution authority in Ministry of Finance and Ministry of Budget.
  4. Inefficient public procurement procedures and entities; procurement units not fully operational.
- Public procurement: overhauled in 2010; Public Procurement Regulatory Authority established; law requires tendering except in special circumstances, but in practice procurement is managed by Central Control Office and tender requests/results required to be published are not in practice. Penalties exist but have failed to curb corruption.
- Procurement practices statistics: direct purchases increased from 3 percent to 60 percent between 2013 and 2016; until recently about 60 percent of general budget spending passed through procurement channels but only a small proportion used standard procedures.
- Civil service: low remuneration and weak institutional capacity; currency depreciation and inflation have eroded 80 percent of the purchasing power of salaries and pensions of civil servants since 2015. Remuneration system opaque; exact number of civil servants unknown; many retirees continue to work.
- Public services: health, education, water, and electricity underfunded; sectors rely heavily on user fees though central government pays bulk of salaries.

Central bank governance and market regulation
- BCC independence: nominally independent but has relied on budget transfers from central government, undermining independence; Treasury has obtained direct advances from BCC contrary to law.
- Central Bank Law (December 2018) aims to reinforce BCC independence (including through a recapitalization) and improve accountability and transparency.
- Banking supervision: capacity enhanced with Fund TA; regulations impose high penalties for non-compliance but not applied consistently. Banking system generally immune to overt political interference, though some politically-connected banks receive preferential treatment.
- Informality and regulation: economy largely informalized and moderately regulated; key sectors (mining, banking, telecommunication, transport, beverages) are subject to tighter controls.
- Rule of law: weak; Worldwide Governance Indicators rate rule of law well below regional peers. Judiciary perceived as particularly corrupt by Transparency International’s Corruption Barometer and World Bank Doing Business and Enterprise surveys.

Combatting corruption
- Despite “zero tolerance” campaign since 2009 and anti-corruption laws, corruption remains rampant; petty corruption widespread and often deemed necessary for survival by public administration employees.
- DRC signatory to 2004 UN Convention Against Corruption (UNCAC) in 2010 but yet to undergo a review of implementation; ratified 2007 SADC protocol on Fighting Corruption.
- Domestic initiatives: Observatory of the Code of Professional Ethics and inclusive Anti-Corruption Pact launched in 2013; Special Advisor position established in 2015 reporting directly to the President but no strategy formulated yet.
- Asset declaration: Constitution requires President and political appointees to declare assets to the Constitutional Court on entering and leaving office and authorizes criminal prosecution for failure. Disclosure is not made public; declarations not required for members of legislature, judiciary, and other senior officials at risk.
- Prosecution capacity: no office dedicated with sufficient autonomy to investigate and prosecute high-level corruption; newly established office and special advisor lack independence and operational means; enforcement level low.
- AML/CFT framework: progress made but framework has system-wide strategic deficiencies per 2014 draft World Bank assessment against 2012 FATF standard. DRC became a GABAC member in late 2017 and a mutual evaluation by GABAC is being finalized.

Selected governance recommendations
- Budget process:
  - Improve budget credibility by preparing supplementary budgets.
  - Provide more information on budget annexes and special annexes in the budget.
  - Strengthen institutional oversight by granting Court of Auditors and Office of the Inspector General of Finance greater operational independence and adequate financial resources.
- Revenue management:
  - Rationalize and merge revenue agencies.
  - Evaluate tax exemptions.
- Public financial management:
  - Restore normal public procurement and expenditure procedures.
  - Expedite transition to Medium-Term Fiscal Framework, Medium-Term Sector Expenditure Framework, and Program Budgeting.
- Business environment and rule of law:
  - Simplify tax payment procedures.
  - Improve contract enforcement and rule of law by insulating courts from external influence.
- State-owned enterprises:
  - Require all state-owned enterprises, including commercial entities, to publish their financial statements.

*International Monetary Fund — Democratic Republic of the Congo staff note (August 1, 2019) — Prepared by Victor Davies based on work of Nick Staines; governance assessment exercise planned later in the year.*

---

### Natural Resource Management — Overview, contributions, and the 2018 revised Mining Code
Key resource facts and socioeconomic context
- DRC is the world’s fifth largest copper producer and produces some sixty percent of the global output of cobalt.
- DRC is the fourth largest producer of diamonds in the world, and the largest tin producer. Gold, crude petroleum, zinc, and tin are also produced.
- Oil is produced but the country remains a net importer.
- In 2014, 77 percent of the population lived below the poverty line of US$1.90 (in purchasing power parity).
- The country ranked 176th out of 189 countries on the UNDP 2018 Human Development Index.
- Rebellion currently affects the eastern and central regions, with about 5 million internally displaced persons.

Economic contribution of natural resources (exact figures)
- Contribution of natural resource extraction to GDP:
  - 11 percent in 2005-08
  - 24 percent in 2012-13
  - 25-26 percent in 2014-17
- Natural resources generate 95 percent of export earnings.
- Copper has accounted for over half of export earnings to date; cobalt now accounts for about a third.
- Natural resources account for about a third of government revenue (excluding revenues generated by state-owned enterprises that do not pass through the Treasury).
- Fiscal revenue from natural resources:
  - Averaged 8.9 percent of commodity exports in DRC in 2014-17.
  - Compared with 17.5 percent among resource-intensive SSA countries.
- Aggregate domestic revenue-to-GDP ratio:
  - Averaged 14 percent in 2012-15 in DRC.
  - Compared with 20 percent in SSA as a whole.
- Employment:
  - Mining sector accounted for 10 percent of total employment in 2014.
  - About a million artisanal miners estimated to be employed in the mining of diamonds and gold (US Geological Survey 2014).
  - Artisanal and small-scale miners also involved in copper and cobalt production.

2018 revised Mining Code — specific changes (June 2018)
- Royalties on copper, cobalt, and gold increase from 2 to 3.5 percent.
- A new 10 percent royalty is imposed on “strategic minerals”; designation determined by government decree based on “economic context” and “critical” or “geostrategic” considerations.
- Base for computing royalty changes from net to gross revenue.
- Allocation of free shares to the state on new projects increases from 5 to 10 percent, with an additional 5 percent increase each time a license is renewed.
- Income tax remains unchanged at 30 percent.
- Elimination of the option for accelerated depreciation of 60 percent.
- A tax of 0.3 percent of business turnover is imposed as contribution to local development.
- A new 50 percent tax on so-called windfall profit (defined as profits realized when the price of the mineral resource is more than 25 percent higher than envisaged in the feasibility study).
- Changes take immediate effect, breaching and eliminating the stability clause under the 2002 Mining Code that protected existing mining companies for 10 subsequent years.
- Domestic content provisions:
  - At least 10 percent of the equity of any project must belong to Congolese nationals.
  - Subcontractors must be Congolese, unless no local subcontractor can provide the good or service.
- Foreign exchange and financing rules:
  - All export earnings in foreign currency should be repatriated to local banks once the investment is amortized (60 percent of earnings should be repatriated before the investment is amortized).
  - Permit holders not to exceed a debt-to-equity ratio of 1.5.

Assessment and concerns
- Royalties (except strategic minerals) and elimination of accelerated depreciation align with standard practice.
- Terminating bilateral mining agreements outside the Mining Code could reduce rent-seeking.
- Concerns:
  - Windfall profit tax is ambiguous; distinction from normal profit unclear.
  - Discretionary “strategic” classification (10 percent royalty) increases investment risk and potential cost.
  - Repeated increases in free shares to the state could result in excessive state ownership over time, deterring investment or license renewal.
  - Requirement to repatriate all foreign currency earnings once amortized would hinder profit repatriation and discourage investment.
  - Removal of the ten-year stability clause raises legality and policy credibility issues.
- Industry reaction: mining companies claim the revised code could deter investment, reduce fiscal revenues, and threaten jobs, social programs, and infrastructure projects; companies assert they were not consulted and are particularly concerned about termination of the ten-year stability clause; threatened international litigation.
- Political endorsement: President Tshisekedi, inaugurated January 2019, has endorsed the revised Mining Code and stated the Government will enforce the code while remaining open to dialogue with mining companies.

Transparency, accountability, and institutions
- Compliance uncertainties with 2011 decree requiring publication of all mining, oil, and forestry contracts remain unclear.
- IMF-supported Extended Credit Facility was suspended in 2012, and discontinued, over authorities’ failure to publish a mining contract.
- Environmental and social impact studies for mining projects have not been published.
- DRC signed EITI in 2008. The last published report for the DRC was for 2016, published in 2018. EITI reports show only a minor divergence between tax revenues paid by the resource sector and amounts received by the Treasury.
- Subsequent stages of revenue management remain weak, particularly at provincial and local levels.
- Public enterprises generate substantial revenues not passed to the public treasury; these are outside EITI reconciliation exercises.
- Law requires disclosure of legal owners, not beneficial owners. 2015 EITI report states more than half of private mining companies disclosed their beneficial owners.
- Gécamines governance concerns: civil society alleges undervalued asset sales, failure to account for revenues, failure to publish contracts, political interference, and conflicts of interest. Gécamines has refuted some allegations.

Revenue management weaknesses and notable cases
- Revenue agencies lack skilled human and informational resources to monitor mining companies and manage complex natural resource taxation involving multinationals.
- Penalty regime: revenue agencies permitted by law to issue penalties and keep a portion of fines for their own funding, creating incentives for predatory behavior; fines can run into hundreds of millions of dollars.
- SICOMINES project:
  - Operates as a parallel revenue and spending structure, bypassing the budget.
  - Involves a multi-billion dollar loan from a consortium of Chinese firms for infrastructure and a signature bonus.
  - Loan disbursement made into SICOMINES’ accounts; SICOMINES directly disburses money for specific infrastructure projects.
  - Loan repayable with future copper and cobalt output.
- Revenue sharing with mining provinces (2018 Mining Code stipulation):
  - Central government keeps 50 percent of royalties.
  - 25 percent to the provincial administration where the project is located.
  - 15 percent to the area where the mining takes place.
  - Remaining 10 percent to a mineral fund for future generations.
- 2018 Mining Code requires mining companies to pay revenues directly to provinces.

Peacebuilding and conflict prevention
- DRC joined the Kimberley Process Certification Scheme in 2003. KPCS requires members to meet minimum requirements, put in place national legislation and institutions, export/import/internal controls, and commit to transparency and exchange of statistical data.

Recommended policy actions for natural resources
- Increased transparency to reduce corruption and improve resource governance:
  - Full publication of all future mining contracts, and contracts signed since 2012; and timely publication of all future EITI reports.
  - Active involvement of civil society in the management of natural resources.
- Gécamines:
  - Urgent review of management to enhance transparency and make the company commercially viable.
  - Measurable milestone: timely publication of annual audited financial statements.
  - Investigation into revenues that have not been properly accounted is warranted.
- SICOMINES:
  - Review the SICOMINES model to reinforce transparency and parliamentary oversight.
- Taxation and revenue administration:
  - Simplification of taxation and rationalization of revenue agencies to improve efficiency, oversight, and transparency.
  - Eliminate parallel state structures and centralize revenue collection.
  - Discontinue the practice of allowing revenue institutions to keep a share of the fines they levy to remove incentives for abuse.
- Fiscal policy:
  - Adopt a fiscal guideline or rule based on the non-mineral balance to help shield expenditures from fluctuations in natural resource prices and facilitate the building of buffers.

---

### Poverty, Vulnerability, Social Spending, and Human Development

Poverty and social indicators (exact figures)
- Last household income and consumption survey: 2012 (main source of available data).
- Population and poverty:
  - Out of the 83 million Congolese, 77 percent live below the poverty line of PPP$1.9 a day (the SSA average is 43 percent).
  - 90 percent of workers make less than PPP$3.10 a day and are therefore working poor.
  - 42 percent of the population is in severe multidimensional poverty.
  - The number of Congolese vulnerable to multidimensional poverty is almost 18 percent.
  - More than six million Congolese are either refugees or internally displaced.
- Socio-political drivers:
  - Ebola outbreak in the North-East shows no sign of abating; lethality rate is picking up as efforts are thwarted by armed groups who routinely attack Ebola screening and treatment facilities.
  - Cholera killed more people than Ebola in 2018.
  - Hundreds of armed groups around the eastern border disrupt economic activities and contribute to poverty and vulnerability.
  - Millions of internally displaced and deported refugees are living in squalor under temporary shelters.
- Inequality and gender:
  - Gini coefficient: 42 percent.
  - Gender Inequality Index (GII): 0.652.
  - Human Development Index (HDI): female 0.420; male 0.493.
  - Sexual violence in conflict-afflicted eastern regions has reached epidemic proportions.

Selected health and education indicators (exact figures)
- Child malnutrition, stunting (% under age 5): 42.7
- Mortality rate, infant (per 1,000 live births): 72
- Mortality rate, under-five (per 1,000 live births): 94.3
- Malaria incidence (per 1,000 people at risk): 291.9
- Mortality rate attributed to household and ambient air pollution (per 100,000 population): 163.9
- Mortality rate attributed to unsafe water, sanitation and hygiene services (per 100,000 population): 59.8
- Expected years of schooling (years): 9.8
- Literacy rate, adult (% ages 15 and older): 77
- Population with at least some secondary education (% ages 25 and older): 50.7

Social protection and programs
- National Social Protection Policy (SPP) focuses on four dimensions:
  1. Access to health care through universal health coverage.
  2. Early childhood (nutrition, health, education).
  3. Income security for people in difficult circumstances, especially the most vulnerable.
  4. Old age support for indigent elderly.
- Operationalization: Not all dimensions have been operationalized; only a few concrete programs implemented.
- Social assistance mechanisms:
  - Social insurance: covers work-related risks, pensions for disability, old-age, survivors, and family allowances for Katanga province.
  - Social safety nets: non-contributory transfer programs (conditional or not).
  - Social assistance programs: promote investment in human capital and support populations affected by shocks.
- Targeting and reach:
  - “Certificate of indigence” exemptions: in 2013, the program covered around 5,604 people, 69 percent in Kinshasa.
  - Administrative cost to obtain certificate: US$25 to US$50.
  - DFID-funded, UNICEF-administered cash transfer program: over 17 months, assisted 23,534 families (117,670 people).
- Coordination: Multiple coordination bodies exist but redundancy remains; coordination of social protection activities needs strengthening.

Government spending and efficiency (exact figures)
- Between 2004 and 2016, spending in DRC increased by 4.4 percent of GDP; majority went to current spending.
- 2016: current spending represented 65 percent of all spending; capital expenditures amounted to 19 percent (SSA averages: 73 percent and 27 percent, respectively).
- Stock of public capital as percent of GDP is just a little more than half the average of LIDCs.
- Wage bill:
  - Grew from less than 1 percent of GDP in 2000 to around 5 percent of GDP in 2014.
  - Compensation of government employees represents over one third of expenditures, against 28 percent in LICs.
- Education spending:
  - Government devotes around 17 percent of its spending to education, but in percent of GDP spends only around 2.5 percent of GDP against around 4.5 percent for reference groups.
  - Government spending per student in PPP terms: just a few dollars in primary and secondary; a little less than US$500 in tertiary.
- Health outcomes and efficiency:
  - Infant deaths per 1,000 people in DRC: 72 (around 45 in LIDCs).
  - DRC is located on the Southwest end of the efficiency frontier—low spending and low outcomes—implying some degree of efficiency in using scarce resources.
- Budgetary allocations rarely reach reference hospitals; hospitals resort to service fees that price out the poorest.

Poverty reduction conclusions and policy priorities
- Peace and stability: bringing peace to conflict-afflicted parts of the country is a prerequisite to reducing poverty and vulnerability by boosting economic activity and employment.
- Fiscal and spending priorities: urgent need to increase government spending for social outlays, requiring both mobilizing more revenue and prioritizing spending in social sectors. Given scarce resources, focus on improving spending efficiency.
- Protection of civil society and gender equality: support efforts by civil society and social activists; protect activists. The example of Dr. Mukwege underscores the need to decisively combat violence against women and promote gender equality.
- Data and targeting: improve data quality and availability to design and implement social programs effectively; refresh household consumption and income surveys to obtain updated data and improve targeting.

*Prepared by Victor Davies.*

---

### Macro-Financial Linkages and Financial Sector Overview

Financial sector structure and key magnitudes
- 17 active licensed banks (including BIAC under BCC administration) with total assets of US$5.3 billion (or 7 percent of GDP at end-2018).
- Bank classification and concentration:
  - 3 large banks (Rawbank, BCDC, and TMB) dominate: 49 percent of total assets, 53 percent of deposits, and 49 percent of loans.
  - 4 medium-size banks (Equity Bank, Ecobank, Afriland FB, and FBNBANK DRC): 48 percent of total assets, 32 percent of deposits, and 31 percent of loans.
  - 10 small banks.
- Capital requirements: 10 out of 17 banks have met the capital requirements of US$30 million; remaining 7 should comply before the end of the year. Minimum capital requirements will increase to US$50 million at end-2020.
- Geographic concentration: Over 85 percent of loans and deposits concentrated in Haut-Katanga and Kinshasa.

Dollarization and funding structure (exact figures)
- At end-2018, 90 percent of deposits were in US dollars.
- 94 percent of loans are denominated in US dollars.
- Banks’ funding mainly sight deposits: companies and households hold, respectively, 37 and 54 percent of total deposits.

Non-bank financial institutions and markets
- Non-bank financial institutions represent only 5 percent of the banking system’s assets: SONAs, INSS, 4 private insurance companies, 2 insurance brokers, 5 specialized institutions, 98 microfinance intermediaries, 83 financial messaging companies, and 32 forex exchange bureaus.
- There are no stock or debt capital markets in the DRC.
- Correspondent banking: about 70 percent of the banking system’s operations are with correspondent banks abroad. Citibank is the only effective operator among three banks serving as correspondent banks in principle.

Exposure to commodity shocks and macro implications
- Mining represented about 10 percent of GDP and 94 percent of exports and contributed to 40 percent of GDP growth in 2018.
- Industrial and artisanal mining: officially employ around 4 percent of Congolese workers; estimated 10 million people depend directly or indirectly on artisanal mining, or 12.5 percent of the total population.
- The sector is entirely dollarized.
- 2018 Mining Code changes: taxes and royalties increased; mandatory repatriation of export revenues raised to 60 percent from 40 percent previously.
- Copper—accounting for 50 percent of exports—lost 45 percent of its value compared to 2011.
- Currency depreciated by a cumulative 71 percent.
- Inflation rose by 42 percent between 2015 and 2017.
- Fiscal revenues dropped by more than 2 percentage points of GDP.
- Government deposits at the BCC were depleted; rule of no BCC financing of the budget was breached; domestic arrears accumulated.
- Foreign reserves dropped below 3 weeks of imports.

Financial soundness indicators (selected, 2014–Mar-19) (exact series)
- Adequacy: Regulatory capital to risk-weighted assets: 2014: 23.7% / 2015: 20.4% / 2016: 9.0% / 2017: 16.0% / 2018: 14.2% / Mar-19: 14.8%
- Asset quality: NPLs to gross loans: 2014: 7.9% / 2015: 18.3% / 2016: 18.1% / 2017: 16.1% / 2018: 16.8% / Mar-19: 16.0%
- Earnings and profitability:
  - Return on assets (net income/total assets): 2014: 1.8% / 2015: 1.5% / 2016: -1.4% / 2017: -0.1% / 2018: 1.1% / Mar-19: 0.3%
  - Interest margin to gross income: 2014: 37.6% / 2015: 37.6% / 2016: 35.8% / 2017: 35.4% / 2018: 31.3% / Mar-19: 43.9%
- Liquidity: Liquid assets/total deposits to short-term liabilities: 2014: 127.8% / 2015: 117.7% / 2016: 119.0% / 2017: 125.6% / 2018: 153.9% / Mar-19: 159.3%
- Sensitivity to market risk: Foreign currency-denominated loans to total loans: 2014: 81.9% / 2015: 85.6% / 2016: 85.1% / 2017: 93.7% / 2018: 93.5% / Mar-19: 93.8%
- Key observations:
  - Loans are mostly denominated in foreign currency: 94 percent in 2018.
  - NPLs reached almost 17 percent of total loans in 2018 (reported as 16.8%).
  - Return on assets became negative during the crisis (2016: -1.4%; 2017: -0.1%).
  - Capital adequacy ratios worsened; an increase in capital requirements, to be completed by 2020, is expected to reverse this.
  - Liquidity ratios strengthened over the period, reflecting a more prudent attitude by banks.

Financial inclusion and microfinance
- Financial inclusion penetration rate: 6 percent (versus the SSA average of around 25 percent).
- Account ownership progress: from less than 4 percent to a quarter of the population between 2011 and 2017.
- Microfinance sector:
  - Grew from US$230 million in assets in 2013 to US$262 million in 2018.
  - Composed of 20 MFIs and 78 cooperatives; concentrated in North and South Kivu and Kinshasa.
  - Deposits and loans in 2018: deposits US$217 million; loans US$127 million (compared to deposits US$162 million and loans US$118 million in 2013).
  - Three leading institutions account for 44.2 percent of the microfinance sector.

Monetary policy and central bank capacity
- Monetary policy transmission channels are weak due to dollarization and limited share of local currency transactions in the banking system.
- Efforts to reduce dollarization stopped during the crisis; authorities asked mining companies to pay taxes in foreign currency.
- Banks have ample liquidity in both local and foreign currency; BCC has tried to mop up excess liquidity without much success.
- Increases in the policy rate and in mandatory reserve requirement ratios had limited results.
- Issuance of BCC bonds would be a more effective instrument of monetary policy.
- The BCC is undercapitalized, weakening its operational position and ability to conduct effective monetary policy.

Conclusions and policy recommendations (financial stability focus)
a. Fiscal policy
- Strengthen the fiscal position and create fiscal space by increasing low revenue mobilization levels.
- The new Mining Code should help, accompanied by reforms in public financial management (PFM).
- Develop financing tools, such as bond issuance in the domestic market to avoid accessing BCC credit.

b. Monetary policy
- Recapitalize and rationalize the BCC to restore confidence in the local currency and ensure operational effectiveness.

c. Financial sector
- Approve the new Banking Law promptly to provide the BCC with the needed toolkit to supervise and resolve banks with problems.
- Continue strengthening the preventive supervisory function and introduce a general framework for crisis prevention and management.

*Source: Democratic Republic of the Congo — IMF country report content (excerpt).*

### References __________________________________________________________________________ 16

### References

### Governance and Corruption Challenges — Overview
- Focus: macro-critical issues related to governance and corruption in DRC, in line with the IMF’s revised policy on governance.
- Third-party indicators suggest governance has been poor and corruption widespread.
- Key reform levers identified: audit of the civil service; transparency of remuneration; simplifying tax payment processes; merging activities of numerous revenue agencies; insulating courts from external influence to improve contract enforcement and property rights.

### A. Fiscal Management — The Budget Process
- Transparency improvements: International Budget Partnership Open Budget Index rose from a zero rating in 2006 to a rating comparable to the regional average in 2015.
- Current disclosures: government publishes a budget summary and updates on budget revenue and expenditure execution; Cours de Comptes (Court of Auditors) does not publish its annual report.
- PFM responsibilities split among: Ministry of Budget, Ministry of Planning, Ministry of Finance, and the Central Bank of Congo (BCC).
- Public participation: government engages donors and civil society through 15 thematic groups (including public finances), but meetings are irregular.
- Parliamentary oversight: weak. Court of Auditors assists National Assembly but has no independent budget, lacks adequate financing, and its reports are listed but not published on its website. Court recommendations are not followed and sanctions are not enforced.
- Court of Auditors Law establishing independence (including financial) has been enacted. Office of the Inspector General of Finance (IGF) can audit executive accounts and impose administrative sanctions; reports to Ministry of Finance but is located in the Presidency.
- Budget credibility: undermined by optimistic revenue/expenditure projections and political pressure; Medium-Term Fiscal and Expenditure Sector Frameworks and transition to program budgeting by 2018 were delayed. Troika (Office of the Prime Minister, Ministries of Finance and Budget, and the Central Bank) monitors budget implementation.
- Budget annexes and special accounts: together represented about 15 percent of the overall 2018 budget; annexes cover some 800 institutions (mostly health and tertiary education) that are legally separate from central government; special accounts cover nine special funds (e.g., Road Fund, Industrial Development Fund).

### B. Non-Resource Revenue Management
- Non-resource revenues: form the bulk of budget revenues but are low compared to other SSA countries — causes include administrative capacity constraints, inappropriate tax policies, governance issues.
- Tax exemptions and revenue loss: FAD TA report identified 140 exemptions (mostly in mining) and estimated foregone revenues from exemptions at 1.7 percent of GDP. Exemptions granted under 13 legislations, special mining conventions, and administrative discretion.
- Borders and evasion: long, porous borders facilitate tax and customs evasion.
- Multiplicity of special taxes/fees: over 300 taxes and fees levied by many agencies, some accruing to special accounts outside the Treasury, creating opportunities for corruption and informalization.
- Treasury accounts: central government single Treasury account at the BCC intended to facilitate monitoring, but central government also holds accounts in commercial banks; provincial governments are required by law to hold accounts at BCC but also hold accounts and receive loans from commercial banks that are not identifiable in monetary statistics.

### C. Public Financial Management
- Reforms: formalized four stages of the expenditure chain and introduced budget commitment plans to align expenditures with revenues.
- Execution issues: fund transfers generally match budget appropriations, but expenditure validation and payment orders are problematic and overdue payments are common.
- Exceptional procedures: widely used and often not regularized within required 48 hours.
- Causes of poor execution:
  1. Redundant and lengthy steps in budget execution; political interventions in approval of commitments and payments.
  2. Abuse in use of exceptional or emergency procedures.
  3. Excessive centralization of budget execution authority in Ministry of Finance and Ministry of Budget.
  4. Inefficient public procurement procedures and entities; procurement units not fully operational.
- Public procurement: overhauled in 2010; Public Procurement Regulatory Authority established; law requires tendering except in special circumstances, but in practice procurement is managed by Central Control Office and tender requests/results required to be published are not in practice. Penalties exist but have failed to curb corruption.
- Procurement practices statistics: direct purchases increased from 3 percent to 60 percent between 2013 and 2016; until recently about 60 percent of general budget spending passed through procurement channels but only a small proportion used standard procedures.
- Civil service: low remuneration and weak institutional capacity; currency depreciation and inflation have eroded 80 percent of the purchasing power of salaries and pensions of civil servants since 2015. Remuneration system opaque; exact number of civil servants unknown; many retirees continue to work.
- Public services: health, education, water, and electricity underfunded; sectors rely heavily on user fees though central government pays bulk of salaries.

### D. Central Bank Governance
- BCC independence: nominally independent but has relied on budget transfers from central government, undermining independence; Treasury has obtained direct advances from BCC contrary to law.
- Central Bank Law: recently approved Central Bank Law (December 2018) aims to reinforce BCC independence (including through a recapitalization) and improve accountability and transparency.
- Banking supervision: capacity enhanced with Fund TA; regulations impose high penalties for non-compliance but not applied consistently. Banking system generally immune to overt political interference, though some politically-connected banks receive preferential treatment.

### E. Market Regulation
- Informality and regulation: economy largely informalized and moderately regulated; key sectors (mining, banking, telecommunication, transport, beverages) are subject to tighter controls.
- Regulatory improvements: 2015 World Bank Doing Business Report cited DRC among ten countries with biggest advances, but implementation gaps remain.
- Cost of doing business: regulation still heavy; DRC scores well on starting a business, dealing with construction permits, and registering property, but poorly on protecting minority interests, paying taxes, trading across borders, and contract enforcement.
- Rule of law: weak; Worldwide Governance Indicators rate rule of law well below regional peers. Judiciary perceived as particularly corrupt by Transparency International’s Corruption Barometer and World Bank Doing Business and Enterprise surveys. Private sector highlights problems in contract enforcement and property rights and lack of court independence.

### F. Combatting Corruption
- Persistent problem: despite “zero tolerance” campaign since 2009 and anti-corruption laws, corruption remains rampant; petty corruption widespread and often deemed necessary for survival by public administration employees.
- International commitments: signatory to 2004 UN Convention Against Corruption (UNCAC) in 2010 but yet to undergo a review of implementation; ratified 2007 SADC protocol on Fighting Corruption.
- Domestic initiatives: Observatory of the Code of Professional Ethics and inclusive Anti-Corruption Pact launched in 2013; Special Advisor position established in 2015 reporting directly to the President but no strategy formulated yet.
- Asset declaration: Constitution requires President and political appointees to declare assets to the Constitutional Court on entering and leaving office and authorizes criminal prosecution for failure. Disclosure is not made public; declarations not required for members of legislature, judiciary, and other senior officials at risk. Unclear if verification and sanctions are properly conducted.
- Prosecution capacity: no office dedicated with sufficient autonomy to investigate and prosecute high-level corruption; newly established office and special advisor lack independence and operational means; enforcement level low.
- AML/CFT framework: progress made but framework has system-wide strategic deficiencies per 2014 draft World Bank assessment against 2012 FATF standard. DRC became a GABAC member in late 2017 and a mutual evaluation by GABAC is being finalized; outcome will inform priorities to mobilize AML framework, including measures on politically exposed persons.

### G. Recommendations (Selected)
- Budget process:
  - Improve budget credibility by preparing supplementary budgets.
  - Provide more information on budget annexes and special annexes in the budget.
  - Strengthen institutional oversight by granting Court of Auditors and Office of the Inspector General of Finance greater operational independence and adequate financial resources.
- Revenue management:
  - Rationalize and merge revenue agencies.
  - Evaluate tax exemptions.
- Public financial management:
  - Restore normal public procurement and expenditure procedures.
  - Expedite transition to Medium-Term Fiscal Framework, Medium-Term Sector Expenditure Framework, and Program Budgeting.
- Business environment and rule of law:
  - Simplify tax payment procedures.
  - Improve contract enforcement and rule of law by insulating courts from external influence.
- State-owned enterprises:
  - Require all state-owned enterprises, including commercial entities, to publish their financial statements.

### Natural Resource Management — Introductory Note
- Context: DRC remains one of the poorest countries despite a large endowment of natural resources and a history of violent conflict.
- Institutional gap: country lacks critical institutions needed to ensure natural resources promote sustainable inclusive growth.
- Reform emphasis: increased transparency in resource management and competitive bidding for sale of assets and exploitation rights of state-owned enterprises to reduce corruption and ensure the state secures a fair share of benefits.

_International Monetary Fund — Democratic Republic of the Congo staff note (August 1, 2019) — Prepared by Victor Davies based on work of Nick Staines; governance assessment exercise planned later in the year._

### 1.      DRC has a rich and diverse endowment of natural resources but remains poor and

### DRC has a rich and diverse endowment of natural resources but remains poor and prone to conflict.

### Overview and historical context
- DRC is the world’s fifth largest copper producer and produces some sixty percent of the global output of cobalt.
- DRC is the fourth largest producer of diamonds in the world, and the largest tin producer. Gold, crude petroleum, zinc, and tin are also produced.
- Oil is produced but the country remains a net importer.
- In 2014, 77 percent of the population lived below the poverty line of US$1.90 (in purchasing power parity).
- The country ranked 176th out of 189 countries on the UNDP 2018 Human Development Index.
- State collapse in the 1990s culminated in civil war from 1996 to 1997, and from 1998 to 2003; the two wars were fueled by natural resources and drew in neighboring countries.
- Rebellion currently affects the eastern and central regions, with about 5 million internally displaced persons.

### Natural resource curse risks and governance challenges
- Identified problems consistent with the natural resource curse thesis:
  - Corruption in resource management arising from large rents.
  - Overblown public expectations and political pressure to spend revenues rather than save or invest.
  - Disputes over revenue allocation and incentives to appropriate resources that can trigger violent conflict.
  - Lack of technical capacity to manage resources; multinationals often have advantage in expertise and information.
- DRC’s large size (as large as Western Europe), nine bordering countries, and resource diversity increase management and policing challenges, including smuggling.

### Economic contribution of natural resources
- Contribution of natural resource extraction to GDP:
  - 11 percent in 2005-08
  - 24 percent in 2012-13
  - 25-26 percent in 2014-17
- Natural resources generate 95 percent of export earnings.
- Copper has accounted for over half of export earnings to date; cobalt now accounts for about a third.
- Natural resources account for about a third of government revenue (excluding revenues generated by state-owned enterprises that do not pass through the Treasury).
- Fiscal revenue from natural resources:
  - Averaged 8.9 percent of commodity exports in DRC in 2014-17.
  - Compared with 17.5 percent among resource-intensive SSA countries (defined as countries for which natural resource exports make up at least 25 percent of commodity exports).
- Aggregate domestic revenue-to-GDP ratio:
  - Averaged 14 percent in 2012-15 in DRC.
  - Compared with 20 percent in SSA as a whole.
- Employment:
  - Mining sector accounted for 10 percent of total employment in 2014.
  - About a million artisanal miners estimated to be employed in the mining of diamonds and gold (US Geological Survey 2014).
  - Artisanal and small-scale miners also involved in copper and cobalt production.
- Other benefits: mining companies provide roads, schools, and hospitals to mining regions and communities.

### Rules and regulations and recent changes (2018 revised Mining Code)
- Historical regime:
  - Prior to mid-1990s, exploitation of copper and cobalt monopolized by state-owned Gécamines.
  - Disorder during 1996-97 civil war led to asset sales and awarding of exploitation rights to private investors.
  - 2002 Mining Code enacted to attract foreign investment; in practice Gécamines became private gatekeeper and is a junior partner in over 20 joint ventures; production now by nearly thirty companies.
  - Gold and diamonds mined by industrial and artisanal miners; substantial proportion smuggled.
- Key elements of the June 2018 revised Mining Code:
  - Higher taxes and royalties:
    - Royalties on copper, cobalt, and gold increase from 2 to 3.5 percent.
    - A new 10 percent royalty is imposed on “strategic minerals”; designation determined by government decree based on “economic context” and “critical” or “geostrategic” considerations.
    - Base for computing royalty changes from net to gross revenue.
    - Allocation of free shares to the state on new projects increases from 5 to 10 percent, with an additional 5 percent increase each time a license is renewed.
    - Income tax remains unchanged at 30 percent.
    - Elimination of the option for accelerated depreciation of 60 percent.
    - A tax of 0.3 percent of business turnover is imposed as contribution to local development.
  - A new 50 percent tax on so-called windfall profit (defined as profits realized when the price of the mineral resource is more than 25 percent higher than envisaged in the feasibility study).
  - Changes take immediate effect, breaching and eliminating the stability clause under the 2002 Mining Code that protected existing mining companies for 10 subsequent years.
  - Domestic content provisions:
    - At least 10 percent of the equity of any project must belong to Congolese nationals.
    - Subcontractors must be Congolese, unless no local subcontractor can provide the good or service.
  - Foreign exchange and financing rules:
    - All export earnings in foreign currency should be repatriated to local banks once the investment is amortized (60 percent of earnings should be repatriated before the investment is amortized).
    - Permit holders not to exceed a debt-to-equity ratio of 1.5.
- Assessment of the revised code:
  - Royalties (except strategic minerals) and elimination of accelerated depreciation align with standard practice.
  - Terminating bilateral mining agreements outside the Mining Code could reduce rent-seeking.
  - Concerns and potential drawbacks:
    - Windfall profit tax is ambiguous; distinction from normal profit unclear.
    - Discretionary “strategic” classification (10 percent royalty) increases investment risk and potential cost.
    - Repeated increases in free shares to the state could result in excessive state ownership over time, deterring investment or license renewal.
    - Requirement to repatriate all foreign currency earnings once amortized would hinder profit repatriation and discourage investment.
    - Removal of the ten-year stability clause raises legality and policy credibility issues.
- Industry reaction:
  - Mining companies claim the revised code could deter investment, reduce fiscal revenues, and threaten jobs, social programs, and infrastructure projects.
  - Companies assert they were not consulted and are particularly concerned about termination of the ten-year stability clause; threatened international litigation.
- Political endorsement:
  - President Tshisekedi, inaugurated January 2019, has endorsed the revised Mining Code and stated the Government will enforce the code while remaining open to dialogue with mining companies.

### Transparency and accountability
- Compliance uncertainties:
  - Degree of compliance with a 2011 decree requiring publication of all mining, oil, and forestry contracts remains unclear.
  - An IMF-supported Extended Credit Facility was suspended in 2012, and discontinued, over authorities’ failure to publish a mining contract.
  - Environmental and social impact studies for mining projects have not been published.
- Extractive Industries Transparency Initiative (EITI):
  - DRC signed EITI in 2008.
  - The last published report for the DRC was for 2016, published in 2018.
  - EITI reports show only a minor divergence between tax revenues paid by the resource sector and amounts received by the Treasury.
  - Subsequent stages of revenue management remain weak, particularly at provincial and local levels.
  - Public enterprises generate substantial revenues not passed to the public treasury; these are outside EITI reconciliation exercises.
  - EITI does not establish whether the government is receiving a fair share of resource revenue.
- Beneficial ownership disclosure:
  - Law requires disclosure of legal owners, not beneficial owners.
  - 2015 EITI report states more than half of private mining companies disclosed their beneficial owners.
- Gécamines governance concerns:
  - Civil society alleges undervalued asset sales, failure to account for revenues, failure to publish contracts, political interference, and conflicts of interest.
  - Gécamines has refuted some allegations, highlighting need for increased transparency and accountability.

### Revenue management weaknesses and specific cases
- Institutional capacity:
  - Revenue agencies lack skilled human and informational resources to monitor mining companies and manage complex natural resource taxation involving multinationals.
- Penalty regime:
  - Revenue agencies are permitted by law to issue penalties and keep a portion of fines for their own funding, creating incentives for predatory behavior.
  - Penalties are sometimes imposed on spurious grounds; fines can run into hundreds of millions of dollars.
- SICOMINES project:
  - SICOMINES joint-venture operates as a parallel revenue and spending structure, bypassing the budget.
  - Involves a multi-billion dollar loan from a consortium of Chinese firms for infrastructure and a signature bonus.
  - Loan disbursement made into SICOMINES’ accounts; SICOMINES directly disburses money for specific infrastructure projects.
  - Loan repayable with future copper and cobalt output.
- Revenue sharing with mining provinces:
  - 2018 Mining Code stipulates royalty allocation:
    - Central government keeps 50 percent of royalties.
    - 25 percent to the provincial administration where the project is located.
    - 15 percent to the area where the mining takes place.
    - Remaining 10 percent to a mineral fund for future generations.
  - Civil society stated under the 2002 Mining Code provinces received much less than stipulated, prompting provinces to impose their own taxes and charges.
  - 2018 Mining Code requires mining companies to pay revenues directly to provinces.

### Peacebuilding and conflict prevention initiatives
- Kimberley Process Certification Scheme (KPCS):
  - DRC joined the Kimberley diamond certification scheme in 2003.
  - KPCS requires members to meet minimum requirements, put in place national legislation and institutions, export/import/internal controls, and commit to transparency and exchange of statistical data.
  - Participants can only legally trade with other participants who have met minimum requirements; international shipments of rough diamonds must be accompanied by a Kimberley Process certificate guaranteeing they are conflict-free.

### Recommendations (policy actions emphasized)
- Increased transparency to reduce corruption and improve resource governance:
  - Full publication of all future mining contracts, and contracts signed since 2012; and timely publication of all future EITI reports.
  - Active involvement of civil society in the management of natural resources.
- Gécamines:
  - Urgent review of management to enhance transparency and make the company commercially viable.
  - Measurable milestone: timely publication of annual audited financial statements.
  - Investigation into revenues that have not been properly accounted is warranted.
- SICOMINES:
  - Review the SICOMINES model to reinforce transparency and parliamentary oversight.
- Taxation and revenue administration:
  - Simplification of taxation and rationalization of revenue agencies to improve efficiency, oversight, and transparency.
  - Eliminate parallel state structures and centralize revenue collection.
  - Discontinue the practice of allowing revenue institutions to keep a share of the fines they levy to remove incentives for abuse.
- Fiscal policy:
  - Adopt a fiscal guideline or rule based on the non-mineral balance to help shield expenditures from fluctuations in natural resource prices and facilitate the building of buffers.

### Poverty and government social spending — Update on poverty and vulnerability
- Data and prevalence:
  - Last household income and consumption survey took place in 2012; it remains the main source of available data.
  - Out of the 83 million Congolese, 77 percent live below the poverty line of PPP$1.9 a day (the SSA average is 43 percent).
  - 90 percent of workers make less than PPP$3.10 a day and are therefore working poor.
  - 42 percent of the population is in severe multidimensional poverty.
  - These indicators are significantly worse than most countries in a group of peers.
- Vulnerability:
  - The number of Congolese vulnerable to multidimensional poverty is almost 18 percent.
  - More than six million Congolese are either refugees or internally displaced and many are either poor or facing the risk of falling into poverty.
- Risk factors include armed conflict, political crises, natural disasters, disagreements with neighbors (example: deportation of hundreds of thousands of Congolese from Angola), and epidemics.

*Prepared by Victor Davies.*

### 3.      The socio-political situation in the DRC contributes to creating more poverty. The

### 1codea2019002 - 3.      The socio-political situation in the DRC contributes to creating more poverty. The

### Socio-political drivers of poverty
- Ebola outbreak in the North-East shows no sign of abating; lethality rate is picking up as efforts are thwarted by armed groups who routinely attack Ebola screening and treatment facilities.
- Cholera, endemic in many parts of the country, killed more people than Ebola in 2018.
- Hundreds of armed groups around the eastern border disrupt economic activities and contribute to increased poverty and vulnerability in affected communities.
- Millions of internally displaced and deported refugees are living in squalor under temporary shelters, increasing poverty and vulnerability.

### Inequality, gender issues, and social indicators
- Income inequality: Gini coefficient is 42 percent.
- Gender inequality: Gender Inequality Index (GII) is 0.652 (highest among peers cited).
- Human Development Index (HDI): female 0.420; male 0.493.
- Sexual violence in conflict-afflicted eastern regions has reached epidemic proportions.
- Key health and social outcomes (selected):
  - Child malnutrition, stunting (% under age 5): 42.7.
  - Mortality rate, infant (per 1,000 live births): 72.
  - Mortality rate, under-five (per 1,000 live births): 94.3.
  - Malaria incidence (per 1,000 people at risk): 291.9.
  - Mortality rate attributed to household and ambient air pollution (per 100,000 population): 163.9.
  - Mortality rate attributed to unsafe water, sanitation and hygiene services (per 100,000 population): 59.8.
- Education indicators:
  - Expected years of schooling (years): 9.8.
  - Literacy rate, adult (% ages 15 and older): 77.
  - Population with at least some secondary education (% ages 25 and older): 50.7.

### Government strategies and social protection programs
- National Social Protection Policy (SPP) focuses on four dimensions:
  1. Access to health care through universal health coverage.
  2. Early childhood (nutrition, health, education).
  3. Income security for people in difficult circumstances, especially the most vulnerable.
  4. Old age support for indigent elderly.
- Operationalization: Not all dimensions have been operationalized; only a few concrete programs implemented.
- Social assistance mechanisms in place:
  - Social insurance: covers work-related risks, pensions for disability, old-age, survivors, and family allowances for Katanga province.
  - Social safety nets: non-contributory transfer programs (conditional or not) to support consumption and access to essential social services.
  - Social assistance programs: promote investment in human capital and support populations affected by shocks.
- Targeting and reach:
  - “Certificate of indigence” exemptions: in 2013, the program covered around 5,604 people, 69 percent in Kinshasa.
  - Administrative cost to obtain certificate: US$25 to US$50, which has essentially eliminated many vulnerable populations from accessing it.
  - DFID-funded, UNICEF-administered cash transfer program: over 17 months, assisted 23,534 families (117,670 people).
- Coordination: Multiple coordination bodies exist but redundancy remains; coordination of social protection activities needs strengthening.

### Assessment of government expenditures and social spending
- Overall spending trends:
  - Between 2004 and 2016, spending in DRC increased by 4.4 percent of GDP; majority went to current spending.
  - 2016: current spending represented 65 percent of all spending; capital expenditures amounted to 19 percent (SSA averages: 73 percent and 27 percent, respectively).
  - Stock of public capital as percent of GDP is just a little more than half the average of LIDCs.
- Wage bill:
  - Grew from less than 1 percent of GDP in 2000 to around 5 percent of GDP in 2014.
  - Compensation of government employees represents over one third of expenditures, against 28 percent in LICs.
- Social spending specifics:
  - Health public spending measured across a broad range of indicators is lower than the average for LICs; out-of-pocket payments by households are higher than in other LICs.
  - Education: government devotes around 17 percent of its spending to education, but in percent of GDP spends only around 2.5 percent of GDP against around 4.5 percent for reference groups.
  - Government spending per student in PPP terms: just a few dollars in primary and secondary; a little less than US$500 in tertiary—several multiples lower than LIC averages.
- Health outcomes and efficiency:
  - Infant deaths per 1,000 people in DRC: 72 (around 45 in LIDCs).
  - DRC is located on the Southwest end of the efficiency frontier—low spending and low outcomes—implying some degree of efficiency in using scarce resources.
  - Budgetary allocations rarely reach reference hospitals; hospitals resort to service fees that price out the poorest.
  - Lack of government oversight in medical education exposes patients to poor medical services and exaggerated drug prescriptions.

### Macro-financial linkages and financial sector overview
- Financial sector structure:
  - 17 active licensed banks (including BIAC under BCC administration) with total assets of US$5.3 billion (or 7 percent of GDP at end-2018).
  - Bank classification:
    - 3 large banks (Rawbank, BCDC, and TMB) dominate: 49 percent of total assets, 53 percent of deposits, and 49 percent of loans.
    - 4 medium-size banks (Equity Bank, Ecobank, Afriland FB, and FBNBANK DRC): 48 percent of total assets, 32 percent of deposits, and 31 percent of loans.
    - 10 small banks.
  - Capital requirements: 10 out of 17 banks have met the capital requirements of US$30 million; remaining 7 should comply before the end of the year. Minimum capital requirements will increase to US$50 million at end-2020.
  - Geographic concentration: Over 85 percent of loans and deposits concentrated in Haut-Katanga and Kinshasa.
- Dollarization and funding:
  - At end-2018, 90 percent of deposits were in US dollars.
  - 94 percent of loans are denominated in US dollars.
  - Banks’ funding mainly sight deposits: companies and households hold, respectively, 37 and 54 percent of total deposits.
- Non-bank financial institutions:
  - Represent only 5 percent of the banking system’s assets: SONAs, INSS, 4 private insurance companies, 2 insurance brokers, 5 specialized institutions, 98 microfinance intermediaries, 83 financial messaging companies, and 32 forex exchange bureaus.
  - There are no stock or debt capital markets in the DRC.
- Correspondent banking and vulnerabilities:
  - About 70 percent of the banking system’s operations are with correspondent banks abroad.
  - Correspondent holdings of dollars in correspondent accounts are expensive for depositors (not remunerated and subject to high transaction costs).
  - Three banks serve as correspondent banks in principle; Citibank is the only effective operator.
  - Sanctions on some prominent Congolese nationals by the USA and the EU have negatively affected the country’s image.
  - Completing AML/CFT framework and adopting anti-corruption laws are crucial to avoid disruptions, limit transaction costs, and protect bank ratings.
- Regulatory developments:
  - New Central Bank Law entered into force in January 2019, enhancing BCC functional and financial autonomy and strengthening governance, transparency, and accountability.
  - Banking Law governing all credit institutions is being revised.
- Mining sector and macro-financial linkages:
  - Mining represented about 10 percent of GDP and 94 percent of exports and contributed to 40 percent of GDP growth in 2018.
  - Industrial and artisanal mining: officially employ around 4 percent of Congolese workers; estimated 10 million people depend directly or indirectly on artisanal mining, or 12.5 percent of the total population.
  - The sector is entirely dollarized.
  - 2018 Mining Code changes: taxes and royalties increased; mandatory repatriation of export revenues raised to 60 percent from 40 percent previously.
- Exposure to commodity price and production shocks:
  - Copper—accounting for 50 percent of exports—lost 45 percent of its value compared to 2011.
  - Currency depreciated by a cumulative 71 percent.
  - Inflation rose by 42 percent between 2015 and 2017.
  - Fiscal revenues dropped by more than 2 percentage points of GDP.
  - Government deposits at the BCC were depleted; rule of no BCC financing of the budget was breached; domestic arrears accumulated.
  - Foreign reserves dropped below 3 weeks of imports.

### Conclusions and policy recommendations
- Peace and stability:
  - Bringing peace to conflict-afflicted parts of the country is a prerequisite to reducing poverty and vulnerability by boosting economic activity and employment; no intervention can succeed without peace and stability.
- Fiscal and spending priorities:
  - Urgent need to increase government spending for social outlays, requiring both mobilizing more revenue and prioritizing spending in social sectors.
  - Given scarce resources, focus on improving spending efficiency.
- Protection of civil society and gender equality:
  - Support efforts by civil society and social activists; protect activists. The example of Dr. Mukwege underscores the need to decisively combat violence against women and promote gender equality.
- Data and targeting:
  - Improve data quality and availability to design and implement social programs effectively.
  - Refresh household consumption and income surveys to obtain updated data and improve targeting of government programs.

*Prepared by IMF staff as presented in the source document.*

### 9.      Given limited buffers and access to external financing, the government response to

### 9.      Given limited buffers and access to external financing, the government response to

### Impact on the banking system and macro-financial linkages
- Lower public spending hit the non-mining sector through economic agents depending on public contracts, triggering:
  - Lower growth in the non-mining sector.
  - An increase in NPLs as public contracts did not materialize or obligations were not honored while the government accumulated domestic arrears.
- Net credit to the government by the banking system increased due to limited government financing options, leading to crowding out of credit to the private sector.
- The fiscal deficit was monetized by the BCC, which:
  - Fueled inflation.
  - Led to a depreciation of the local currency.
  - Reduced purchasing power of domestic economic agents and their capacity to repay bank loans.
  - Exposed banks to currency risks from mismatches between assets and liabilities in foreign currency.
- The compounded increase in NPLs weakened bank balance sheets.
- Macro-financial linkages emphasized (as in Figure 1): mining sector ↔ non-mining sector ↔ financial sector ↔ fiscal sector ↔ external sector, with channels including revenues, expenditure/deficit, financing needs, growth, NPLs, government net credit, monetization of deficit ⇒ Inflation, international reserves, private sector credit, commodity prices, external financing (global liquidity), repatriation of export proceeds, deposits, reserves.

### Financial soundness indicators (selected, 2014–Mar-19)
- Source: Central Bank of the Democratic Republic of the Congo (BCC).
- Adequacy
  - Regulatory capital to risk-weighted assets: 2014: 23.7% / 2015: 20.4% / 2016: 9.0% / 2017: 16.0% / 2018: 14.2% / Mar-19: 14.8%
- Asset quality
  - NPLs to gross loans: 2014: 7.9% / 2015: 18.3% / 2016: 18.1% / 2017: 16.1% / 2018: 16.8% / Mar-19: 16.0%
- Earnings and profitability
  - Return on assets (net income/total assets): 2014: 1.8% / 2015: 1.5% / 2016: -1.4% / 2017: -0.1% / 2018: 1.1% / Mar-19: 0.3%
  - Interest margin to gross income: 2014: 37.6% / 2015: 37.6% / 2016: 35.8% / 2017: 35.4% / 2018: 31.3% / Mar-19: 43.9%
- Liquidity
  - Liquid assets/total deposits to short-term liabilities: 2014: 127.8% / 2015: 117.7% / 2016: 119.0% / 2017: 125.6% / 2018: 153.9% / Mar-19: 159.3%
- Sensitivity to market risk
  - Foreign currency-denominated loans to total loans: 2014: 81.9% / 2015: 85.6% / 2016: 85.1% / 2017: 93.7% / 2018: 93.5% / Mar-19: 93.8%
- Key observations:
  - Loans are mostly denominated in foreign currency: 94 percent in 2018.
  - NPLs reached almost 17 percent of total loans in 2018 (reported as 16.8% in table).
  - Return on assets became negative during the crisis (2016: -1.4%; 2017: -0.1%).
  - Capital adequacy ratios worsened; an increase in capital requirements, to be completed by 2020, is expected to reverse this.
  - Liquidity ratios strengthened over the period, reflecting a more prudent attitude by banks.

### Sectoral exposures and correlations
- Direct credit risk to the mining sector appears limited:
  - Loans from extractive industries represented only 8 percent of total loans as of January 2019 (likely from the artisanal mining sector).
- Credit growth is correlated to the non-mining sector; most loans are concentrated in the trade sector.
- There is a strong correlation between the increase in NPLs and the fall in copper prices (Figure 2), suggesting strong spillovers from the mining industry to the rest of the economy and the banking system.

### Monetary policy, dollarization, and central bank capacity
- Monetary policy transmission channels are weak:
  - The share of transactions in local currency in the banking system is limited.
  - Efforts to reduce dollarization stopped during the crisis; authorities asked mining companies to pay taxes in foreign currency.
- Banks have ample liquidity in both local and foreign currency; the BCC has tried to mop up excess liquidity without much success.
- Increases in the policy rate and in mandatory reserve requirement ratios had limited results.
- Issuance of BCC bonds would be a more effective instrument of monetary policy.
- The BCC is undercapitalized, weakening its operational position and ability to conduct effective monetary policy.

### Financial inclusion and the microfinance sector
- Financial inclusion is weak: penetration rate of 6 percent, versus the SSA average of around 25 percent.
- Progress in account ownership:
  - From less than 4 percent to a quarter of the population between 2011 and 2017.
  - The DRC lags peers with 40 percent less account ownership than the SSA average.
  - Gender gap in account ownership largely eliminated; the DRC performs better than the region in reducing the gender gap.
- Microfinance sector:
  - Grew from US$230 million in assets in 2013 to US$262 million in 2018.
  - Composed of 20 MFIs and 78 cooperatives; concentrated in North and South Kivu and Kinshasa.
  - Deposits and loans in 2018: deposits US$217 million; loans US$127 million (compared to deposits US$162 million and loans US$118 million in 2013).
  - Highly concentrated and unprofitable: three leading institutions specializing in loans to micro, small, and medium enterprises account for 44.2 percent of the microfinance sector.

### Conclusions and Policy Recommendations
- Financial stability depends on building buffers against external shocks and an appropriate regulatory framework, requiring a combination of policies:
  a. Fiscal policy
    - Strengthen the fiscal position and create fiscal space by increasing low revenue mobilization levels.
    - The new Mining Code should help, accompanied by reforms in public financial management (PFM).
    - Develop financing tools, such as bond issuance in the domestic market to avoid accessing BCC credit.
  b. Monetary policy
    - Recapitalize and rationalize the BCC to restore confidence in the local currency and ensure operational effectiveness.
  c. Financial sector
    - Approve the new Banking Law promptly to provide the BCC with the needed toolkit to supervise and resolve banks with problems.
    - Continue strengthening the preventive supervisory function and introduce a general framework for crisis prevention and management.

*Source: Democratic Republic of the Congo — IMF country report content (excerpt).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1codea2019002.pdf_