## _cr05373 ## Source details **Canonical URL:** [_cr05373](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05373.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05373.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05373.pdf.json) --- ### Financial system reforms and institutional developments - Authorities and the Central Bank of the Congo (BCC) implemented reforms to address banking-system weaknesses: lack of confidence in banks, high and rising dollarization, insufficient financial infrastructure, shortcomings in the judicial and legal framework, frequent garnishments by the tax administration, and weakened BCC independence due to operational losses and weak capacities. - Reforms and support: - Technical assistance from the Fund and bilateral donors; financial support from the World Bank. - BCC reform objectives included: (i) improving capacity to conduct monetary operations and liquidity management; (ii) enhancing foreign exchange policy and reserve management; (iii) strengthening accounting and information systems; (iv) improving banking supervision; and (v) setting up a mechanism to combat money laundering and the financing of terrorism. - An action plan was drawn up as part of the Government Economic Program (PEG) under a PRGF arrangement. - In August 2003 the BCC published a broad strategy for its development and that of the financial system. - Legal framework adopted in 2001–02: - Central bank law providing for BCC independence. - Banking law assigning the BCC full responsibility for supervision and frameworks for bank licensing, liquidation, and credit-union operations. - New legal framework for restructuring the banking system. - External auditors conducted an audit of BCC accounts for 2000–01. ### Monetary management framework, instruments, and outcomes - Institutional coordination and market-based approach: - September 2002: BCC created the Consultative Group on Monetary Policy (members from BCC and Ministry of Finance). - Adopted more flexible interest rate policy and unified multiple exchange rates by floating the Congo franc beginning in May 2001. - Monetary instruments and operational changes: - December 2002: introduction of central bank bills with maturities of 7 to 28 days; BCC fixes interest rates on bills weekly. - Pre-2003: foreign exchange sales and currency rationing used; currency rationing largely stopped since end-2002. - May 2005: central bank announced bank deposits were fully fungible and encouraged enterprises to invest surplus funds in central bank bills; reduced bill denomination to CGF 500,000 and launched information campaign. - Central bank financial position: - 2003 operating loss: CGF 49 billion, including a cash loss of CGF 18.4 billion. - End-2004 estimated net worth: minus CGF 408 billion (US$900 million). - Main reasons for losses: low level of earning assets, high personnel and administrative costs, limited net seignoriage because of low denomination currency notes and high production costs. - Restructuring being studied with assistance of the National Bank of Belgium; need for strict cash-flow plan, transparency, and cost-minimizing loss reduction. ### Monetary and credit developments (selected levels and changes) - General trends: - Rapid growth in base and broad money, including dollar deposits, through mid-2004; second half of 2004 saw continued money expansion and sharp depreciation. - Key figures (preserved verbatim where provided): - Broad money grew by 32 percent in 2003. - Velocity fell from 20.4 (end-2002) to 18.5 (end-2003). - Central bank refinancing rate: raised from 12 to 27 percent in January 2003, cut to 8 percent by end-2003. - Commercial bank lending rates remained about 25 percent at end-2003. - Dollar deposits accounted for more than 85 percent of bank deposits (general context). - Share of dollar deposits in total deposits rose from 81 percent to 85 percent in 2003. - Monetary Survey selected levels (M2, M1, currency, foreign currency deposits — values in billions of Congo francs preserved verbatim): - Broad money (M2): 22.0 (2001), 69.7 (2002), 94.1 (2003), 102.8 (Mar. 2004), 118.8 (June 2004), 113.1 (Sept. 2004), 124.5 (Dec. 2004), 141.0 (Mar. 2005), 162.1 (June 2005), 177.9 (Sept. 2005), 215.3 (Dec. 2005), 258.8 (Mar. 2005 table end). - Narrow money (M1): 18.6 (2001), 42.6 (2002), 57.9 (2003), 61.7 (Mar. 2004), 67.7 (June 2004), 65.1 (Sept. 2004), 72.1 (Dec. 2004), 72.8 (Mar. 2005), 88.1 (June 2005), 103.1 (Sept. 2005), 117.1 (Dec. 2005), 118.2 (Mar. 2005 table end). - Currency in circulation: 16.0 (2001), 31.9 (2002), 49.8 (2003), 52.5 (Mar. 2004), 56.9 (June 2004), 57.5 (Sept. 2004), 63.1 (Dec. 2004), 63.4 (Mar. 2005), 75.0 (June 2005), 87.8 (Sept. 2005), 101.5 (Dec. 2005), 102.3 (Mar. 2005 table end). - Foreign currency deposits: 3.4 (2001), 27.0 (2002), 36.0 (2003), 40.9 (Mar. 2004), 50.3 (June 2004), 47.3 (Sept. 2004), 52.1 (Dec. 2004), 67.6 (Mar. 2005), 73.8 (June 2005), 74.5 (Sept. 2005), 97.8 (Dec. 2005), 139.7 (Mar. 2005 table end). - Foreign currency deposits as percent of M2 (memorandum): 15.7 (2001), 38.8 (2002), 38.3 (2003), 39.7 (Mar. 2004), 42.3 (June 2004), 41.8 (Sept. 2004), 41.8 (Dec. 2004), 48.0 (Mar. 2005), 45.5 (June 2005), 41.9 (Sept. 2005), 45.4 (Dec. 2005), 54.0 (Mar. 2005 table end). - Foreign currency deposits as percent of total deposits (memorandum): 57.0 (2001), 71.5 (2002), 81.3 (2003), 81.2 (Mar. 2004), 81.3 (June 2004), 85.1 (Sept. 2004), 84.9 (Dec. 2004), 87.2 (Mar. 2005), 84.7 (June 2005), 82.7 (Sept. 2005), 86.0 (Dec. 2005), 89.3 (Mar. 2005 table end). ### Dollarization and constraints on monetary policy - Dollarization: more than 80 percent of deposits denominated in U.S. dollars; in 2004 share of dollar deposits in total deposits rose to 86 percent. - Key impediments: - Low level of financial intermediation in domestic currency and high dollarization. - Weak monetary programming tools and dearth of policy instruments. - Commercial banks largely act as financial agents of the government, hold foreign currency deposits, lend in dollars or keep deposits abroad, and contribute little to domestic-currency money creation. - Sources of broad money growth: central bank financing of the overall fiscal deficit (including central bank deficit) and accumulation of net foreign assets by the banking system (valuation effects and revaluation accounts noted). ### Monetary policy, exchange rate, and inflation developments (2004–2005) - 2004 policy chronology and outcomes: - BCC reduced refinancing rate to 6 percent in August 2004 as exchange rate was stable and inflation below 5 percent until June 2004. - Successive increases in interest rates to 14 percent by end-2004 were insufficient to prevent depreciation; second half of 2004: Congo franc depreciated by 12 percent and 12-month inflation rose from 4 percent to 9 percent. - 2005 developments: - Congo franc weakened by an additional 15 percent in the first four months of 2005. - 12-month inflation rose to a peak of 27 percent in May 2005. - June 2005: currency appreciated substantially and CPI dropped by 7 percent after tightening monetary policy, including increase in financing rate to 65 percent, and improved government control over expenditures. ### VAR analysis of money, exchange rate, and inflation (sample 2002–04) - Data and variables: - Sample period: 2002–04; monthly data. - Variables: monetary base, U.S. dollar bilateral exchange rate, end-of-month CPI. - Stylized monthly facts (sample 2002–04): - Average rate of growth of money: 3.3 percent a month; standard deviation 5.1. - Average rate of change of the exchange rate: 0.9 percent a month; standard deviation 4.1. - Average rate of change of inflation: 0.7 percent a month; standard deviation 1.2. - VAR impulse-response key magnitudes and timings: - One-standard-deviation innovation in monetary base (~ increase of about 4.4 percent) → exchange rate depreciation of 1.6 percent; adjustment complete in five months; about 85 percent completed within two months. - One-standard-deviation innovation in exchange rate (~ depreciation of about 4.1 percent) → inflation increase of 1.4 percent; adjustment complete in six months; about 85 percent within two months. - One-standard-deviation innovation in monetary base (~ increase of about 4.4 percent) → inflation increase of 0.3 percent; adjustment complete in less than six months; about 88 percent within three months. - One-standard-deviation innovation in exchange rate → monetary base increase of 0.1 percent (most adjustment in first two to three months, then dies out). - One-standard-deviation innovation in inflation (increase of 0.95 percent) → no change in monetary base initially; alternatively inflation innovation leads to reduction in monetary base of 1 percent with adjustment complete in about five months. - Tentative directional conclusions: - Monetary base affects the exchange rate; exchange rate does not affect the monetary base. - Exchange rate affects inflation rapidly; inflation does not affect exchange rate. - Inflation affects monetary base; monetary base does not significantly affect inflation directly. ### Variance decomposition and transmission interpretation - Variance decomposition (log variables entered in VAR): - Inflation variation: exchange rate depreciation accounts for about 54 percent; inflation disturbances account for 38.5 percent; changes in monetary base account for 7.5 percent. - Exchange rate variation: innovations affecting exchange rate account for 94.9 percent; monetary base innovations 4.8 percent; inflation innovations 0.3 percent. - Monetary base variation: monetary innovations account for about 83.6 percent; inflation innovations about 11.8 percent; exchange rate innovations 4.6 percent. - Interpretation: - "The transmission mechanism for monetary policy seems to work primarily through the exchange rate." - Exchange rate pass-through is "quite rapid"; many local-currency prices are first set in dollars so local-currency prices adjust soon after exchange rate changes. - Dollarization limits the effectiveness of monetary policy; lack of banking intermediation further constrains transmission. - Policy implications: - Controlling monetary base growth is important for exchange rate stability. - Exchange rate stability is important for containing CPI inflation given strong pass-through and short lag (most adjustment within two months for exchange rate → inflation). - Improved measures of domestic inflation and strengthened monetary credibility and operational framework could affect pass-through magnitude and monetary control effectiveness. - Caveats: - Sample period is short; data limitations and omitted channels (e.g., interest rate channel) may bias results. ### Banking system structure and supervision - System composition: - Central Bank of the Congo (BCC), nine commercial banks (including five implementing restructuring plans agreed with the BCC), and nine commercial banks being liquidated. - Nonbank financial sector: five public financial institutions and numerous credit cooperatives and microfinance institutions. - Supervision and systems improvements: - Computerization of supervision (Bank Supervision Application) soon to be completed. - Draft charter of accounts prepared with PCCA, expected to be implemented starting in January 2006. - IT Committee established April 2004; selected accounting and FX transaction applications; bidding for equipment/software; ambitious IT plan prepared for departments and branches. - Program to raise BCC accounting to international standards; selected accounting software to be implemented by late 2005. - Anti–money laundering and counterterrorist financing: - Law promulgated in July 2004; creates CENAREF (Cellule national de renseignement financier). - Implementation requires: instruction from governor of BCC specifying when payments > US$10,000 can be made in cash; a decree creating CENAREF; a circular from ministers of justice and finance for informal sector/localities without financial institutions. - Expected issuance of required documents by September 2005. - DRC must ratify international conventions: international convention of December 9, 1999 to repress the financing of terrorism; UN Palermo Convention of November 15, 2000; UN convention against corruption of October 31, 2003. - Implementation will require extensive staff training; potential providers: IMF, the World Bank, the United Nations, the European Union, bilateral donors. ### Fiscal, external, and macroeconomic context (selected indicators) - Basic data: - Area: 2,344,860 square kilometers. - Population total (2004 estimate): 54.7 million. - Annual growth rate: 3.0 percent. - GDP per capita (2004 estimate): US$118.9. - Real GDP (annual percentage change): -4.4 (1999), -6.9 (2000), -2.1 (2001), 3.5 (2002), 5.7 (2003), 6.8 (2004). - Nominal GDP (in billions of Congo francs): 522 (1999), 971 (2000), 1,407 (2001), 1,922 (2002), 2,299 (2003), 2,587 (2004). - Consumer prices, annual average: 284.9 (1999), 550.0 (2000), 357.3 (2001), 25.3 (2002), 12.9 (2003), 4.0 (2004). - Central government finance (millions of Congo francs, selected): - Revenue (excluding grants): 2,329 (1999), 15,091 (2000), 91,276 (2001), 152,193 (2003), 176,817 (2004), 248,003 (2004? table context). - Expenditure: 4,934 (1999), 32,988 (2000), 115,147 (2001), 198,406 (2003), 312,339 (2004), 397,833 (2004? table context). - Primary balance (commitment basis): -1,489 (1999), -11,723 (2000), -4,339 (2001), 22,391 (2002), -9,870 (2003), -12,768 (2004). - Overall balance (commitment basis): -2,605 (1999), -17,897 (2000), -23,871 (2001), -38,766 (2002), -89,016 (2003), -98,475 (2004). - External sector (millions of U.S. dollars, selected): - Current account, including transfers: -113 (1999), -199 (2000), -252 (2001), -152 (2002), -83 (2003), -355 (2004). - Exports, f.o.b.: 974 (1999), 892 (2000), 880 (2001), 1,076 (2002), 1,340 (2003), 1,813 (2004). - Imports, f.o.b.: -458 (1999), -676 (2000), -807 (2001), -1,093 (2002), -1,496 (2003), -2,056 (2004). - Gross official reserves (millions of U.S. dollars): 665 (1999), 122 (2000), 759 (2001), 823 (2002), 6 (2003?), figures shown across table; gross official reserves in weeks of non-aid-related imports: 4.8 (1999), 3.4 (2000), 1.1 (2001), 2.6 (2002), 2.4 (2003), 5.2 (2004). - External public debt (including IMF) (millions of U.S. dollars): 13,238 (1999), 12,609 (2000), 12,457 (2001), 10,709 (2002), 10,775 (2003), 10,542 (2004). - Scheduled debt service (percent of exports of goods and services): 77.5 (1999), 75.1 (2000), 75.8 (2001), 46.7 (2002), 29.5 (2003), 21.1 (2004). ### Civil service, payroll management, and wage policy - Payroll weaknesses: - Monthly payroll figured manually; signatures confirming receipt often not returned; provincial payrolls often cash-managed; military payroll effected in cash distributed by commanders. - Civil service reform objectives and institutional framework: - Objectives: enhance use of public resources; improve personnel management and remuneration; streamline organizational structures. - Reform elements: organizational audits (completed in 2002), civil service census to be completed in 2005, retirement of about 100,000 workers, payroll reform, creation of a school of national administration. - Commission interministérielle de pilotage de la réforme de l’administration publique (CIPRAP) established to guide and monitor implementation; assisted by technical committee (CITRAP) and secretariat. - Retirement program and payroll cleansing: - Approximately 100,000 civil servants—17 percent of public sector employees—have passed the retirement age but remain in service. - First stage: at an estimated cost of US$47.5 million funded through a World Bank loan, 10,000 civil servants would retire in 2005 and the remainder in early 2006. - Preliminary census results in Kinshasa indicated "more than 20 percent of the payroll went to unrecorded employees"; results incorporated in May 2005 payroll. - Payroll automation (PTS): - PTS implementation year: 2005. - PTS will automate payroll, enforce administrative and budgetary controls, centralize verification at ministries of budget and civil service. - Wage bill and scenarios (numeric facts preserved verbatim): - Current wage bill: "relatively low at 3.6 percent of GDP." - Wage bill amounted to 3.6 percent of GDP in 2004, having doubled since 2001. - Wage bill has increased relative to revenue from 26 percent to 38 percent since 2001. - Wage bill as proportion of recurrent expenditures: less than 30 percent. - Military and police payroll estimated to have increased by 83 percent since 2001 to 410,000 by end-2004; military and police payroll accounts for one-third of the wage bill. - Bottom-of-scale salaries: about US$25 a month in Kinshasa and US$4 a month in the provinces. - Compression ratio scenario: bringing the compression ratio back to 10 over the next five years would increase the civil service wage bill to 4.7 percent of GDP (assumptions: real GDP growth of 7 percent; no growth in real wages at the bottom of the scale in Kinshasa; one-fourth reduction in civil service size). - Estimated addition for teachers to wage bill: 2½ percent of GDP. - Salaries of institutions would add about another ½ of 1 percent of GDP; military and police would add about 1 percent of GDP. - Combined scenario: overall wage bill "could rise to 8–10 percent of GDP." - Revenue equivalent to 10 percent of GDP. - Measures to contain wage bill: remove ghost workers; staffing-needs assessments; prioritize hiring in social sectors while retrenching elsewhere. - Table III.6 selected figures (preserved verbatim): - "Total monthly wage 1/2/3/3,6002,8298,85414,45123,305" - "Total annual wage bill 43,19733,949106,248173,410279,658" - "Wages ( In percent of GDP) 4/1.31.01.82.94.7" - "Wages (In percent of total revenues)12.09.412.720.833.6" - Table notes preserved verbatim as in source. ### Mining sector structure, performance, and revenue potential - Natural resources: fertile land; hydropower; one of the largest tropical rain forests; Africa’s largest deposits of copper, cobalt and coltan; significant reserves of gold, diamonds, other minerals. - Historical trajectory: - Mid-1980s: mining ~25 percent of GDP, 25 percent of fiscal revenue, three-fourths of exports. - 1986–2001: formal mining collapsed. - By 2001 recorded mining contribution to GDP about 7 percent; by 2004 sector’s share estimated at 8.7–9 percent (different series). - Selected production figures (preserved verbatim): - Copper output (thousand metric tons): 1980 = 459.4; 1985 = 502.2; 1990 = 355.7; 1995 = 34.9; 2000 = 30.8; 2004 Est. = 19.7. - GECAMINES copper output: 1980 = 425.7; 1985 = 471.5; 1995 = 32.5; 2000 = 29.6; 2004 Est. = 7.7. - Cobalt (thousand metric tons): 1980 = 14.5; 1985 = 10.7; 1990 = 10.0; 1995 = 4.0; 2000 = 3.7; 2004 Est. = 8.9. - Diamonds (thousands of carats): 1980 = 10.2; 1985 = 19.9; 1990 = 19.5; 1995 = 22.0; 2000 = 21.7; 2004 Est. = 30.9. - Artisanal mining: - Artisanal diamond output rose to 13 million carats by 1985 and over 19 million carats by 1998. - Record declared artisanal output: 22.1 million carats by 2004. - Estimated 700,000 diggers active in 2003; CEEC estimates 100,000 middlemen. - Applying yardstick (each wage earner supports nine family members) implies about 8 million Congolese (15 percent of population) depend on artisanal diamond mining. - In total, artisanal mining employment estimate: 800,000 in artisanal diamond sector + at least another 150,000 in other artisanal mining activities = about 20 percent of the population dependent on artisanal mining. - Artisanal miners’ incomes cited: diamonds ~ US$1 a day; coltan miners US$10–50 a week; heterogenite miners about US$1 a day. - Contribution to government revenue: - Government revenue from mining rose from 0.18 percent of GDP in 2002 to 0.24 percent in 2004. - Sector’s contribution to total exports about 75 percent in 2002–04. - Employment in sector estimated at 985,000: about 950,000 informal, 35,000 formal (12,400 GECAMINES; 5,700 MIBA). - Potential revenue calculation (preserved verbatim summary, grand total): - Potential contribution to government revenue from copper, cobalt, industrial and artisanal diamonds amounted to US$154.7 million in 2004 (2.4 percent of GDP). - Box IV.1 2004 details: total government revenue from mining activities in 2004 = US$15.4 million; almost one-third (US$4.8 million) collected from mining companies; artisanal diamond sector export taxes US$9.2 million (1.5 percent of ad valorem exports of US$ 618 million). - Mining taxation and the Mining Code: - Mining Code promulgated in 2002; mining taxation aligned with Code in 2004. - Mining Code introduces area tax (taxe de superficie) and administrative fee (droit superficiaire par carré). - Revenue sharing under Code: 60 percent of mining royalties to central government; 25 percent to provinces; 15 percent to priority social projects in affected local communities (mechanism yet to be fully implemented). - Institutional and transparency reforms: - Mining Registry created June 2003 as one-stop window; suspended March 2004; reopened June 2005; restructuring expected completed by September 2005. - SAESSCAM created in 2003 to assist artisanal miners (technical skills, cooperatives, price information, micro credit). - DRC stated intention to join EITI in March 2005; recommendation that DRC become full participant and require externally audited accounts annually from mining companies. - Priority measures include regaining control over mining areas/borders, strengthening Customs Office (OFIDA), enforce Mining Code via Mining Validation Commission, renegotiate special agreements, create common database on concessions, conduct audits (MIBA scheduled third quarter 2005), and pursue restructuring (GECAMINES managing firm to prepare plan; work started June 2005). ### Taxation and public finance (selected tax schedules and rates) - Income and payroll taxes: - Professional income tax (profit tax CRP): 40 percent for taxpayers under ordinary law and category 1 SMEs; progressive/flat/quota regimes for other SME categories; minimum contribution 1/1000 of turnover. - Individual income tax (IPR) progressive brackets (amounts in Congo francs, rates preserved verbatim): - 0–72,000 3 - 72,001–126,000 5 - 126,001–208,800 10 - 208,801–330,000 15 - 330,001–498,000 20 - 498,001–788,400 25 - 798,401–1,200,000 30 - 1,200,001–1,686,000 35 - 1,686,001–2,091,600 40 - 2,091,601–2,331,600 45 - > 2,331,600 50 - Extraordinary tax on remuneration of expatriates: rate 25 percent. - Rental income tax (IRL): 22 percent of gross income. - Capital income tax (revenus mobiliers): 20 percent of gross amount. - Turnover tax (ICA) and excises: - Domestic ICA rates: 3 percent, 9 percent, 13 percent, 18 percent, 6 percent domestic flights, 15 percent international flights, 30 percent nonestablished providers. - ICA on imports: 3 percent for goods liable to customs duty of 5 percent; 13 percent for other imports. - Excise duties: eight rates — 3 percent, 5 percent, 10 percent, 15 percent, 20 percent, 25 percent, 30 percent, 40 percent (examples given by product). - Petroleum products: PMF fiscal unchanged since 1990; rates: 25 percent for gasoline; 15 percent for other products. - Customs and other import levies: - Import duty rates: 0 percent, 5 percent, 10 percent, 20 percent. - Other levies on imports: OCC 1.5 percent on f.o.b./c.i.f.; FPI 2 percent c.i.f.+ customs duties; OGEFREM 0.5 percent c.i.f. - Export duties: - 1.5 percent on artisanal gold and diamonds; 1 percent on coffee; 6 percent on logs; 3 percent on sawn wood; 5–10 percent on other mining products (7 percent for GECAMINES); 3 percent on industrial gold and diamonds; 5 percent on crude petroleum products (except production under convention). ### Selected macro and sectoral numeric facts (preserved verbatim) - Per capita GDP cited as US$100 in section on civil service; elsewhere GDP per capita (2004 estimate) US$118.9. - Mining sector potential revenue grand total: 154.7 (US$ million) and 2.4 percent of GDP. - Macroeconomic central government operations (2004, selected): - Revenue (millions of Congo francs): 248,003. - Expenditure (millions of Congo francs): 397,833. - Wages and salaries: 93,223. - Interest payments1/: 85,708. - Capital expenditure2/: 72,059. - Overall balance (commitment) 2004: -98,475. - Overall balance (cash) 2004: -107,501. - Financing (2004): 107,502 (Domestic financing (net) 2004: 215; External financing4/ 2004: 107,287; Debt relief 2004: 98,146). - Memorandum: Revenue / total expenditure 2004: 62.3; Wage bill / revenue 2004: 37.6. - Monetary aggregates (2004, in millions of Congo francs): Net foreign assets: -282,597; Net domestic assets: 504,824; Broad money (M2): 215,270; Narrow money (M1): 117,078; Currency in circulation: 101,467. - Central bank accounts (2004, in millions of Congo francs): Net foreign assets: -348,404; Foreign assets: 138,573; Foreign liabilities: 486,328; Monetary base: 122,681; Currency in circulation: 105,889. - Deposit money banks (2004, in millions of Congo francs): Assets = Liabilities: 118,063; Deposits: 107,485; Loans of commercial banks (2004): 43,198; Deposits of commercial banks (2004): 107,988. - Interest/lending rates (2004): Central Bank rediscount: 16.0 (percent per annum); Commercial banks short-term credit: 30.0 (percent per annum). - External sector (selected): Current account 2004: -355 (millions of U.S. dollars); Merchandise exports, f.o.b. 2004: 1,813 (millions of U.S. dollars); Merchandise imports, f.o.b. 2004: -2,056 (millions of U.S. dollars); Gross official reserves (2004): 236 (millions of U.S. dollars). ### Key policy recommendations and operational priorities (extracted) - Strengthen BCC capacity: improve liquidity management, foreign exchange policy, reserve management, accounting, information systems, and supervision. - Contain inflationary impact of central bank losses through improved fiscal–monetary coordination and consolidated net treasury deficit monitoring. - Control monetary base growth to stabilize exchange rate; use exchange rate stability to contain CPI inflation given rapid pass-through. - Reduce dollarization where feasible; enhance domestic-currency financial intermediation and instruments. - Implement anti–money laundering/counterterrorist-financing framework: issue governor’s instruction, decree creating CENAREF, circulars for informal sectors; ratify international conventions; provide extensive staff training. - Banking sector restructuring: implement approved restructuring plans; liquidate identified weak banks; finalize social plans for public banks in liquidation; reform tax and legal framework to increase transparency and align with international practice. - Mining sector priorities: regain control over mining areas and borders; strengthen Customs Office (OFIDA); enforce Mining Code via Mining Registry and Mining Validation Commission; require externally audited accounts; pursue GECAMINES restructuring; support artisanal miners via SAESSCAM and diagnostic studies; join EITI. - Civil service priorities: complete census to remove ghost workers; implement PTS payroll system; execute retirement program and sequence departures; prioritize revenue mobilization (broadening tax base, reducing exemptions, combating smuggling and corruption); secure donor support to improve social service delivery. *Italic: Source — IMF staff text and statistical tables from the Democratic Republic of the Congo country report (selected pages and tables as provided).* ### References.............................................................................................................. ### _cr05373 - References ### Financial system reforms and institutional developments - Authorities and the Central Bank of the Congo (BCC) implemented reforms to address banking-system weaknesses: lack of confidence in banks, high and rising dollarization, insufficient financial infrastructure, shortcomings in the judicial and legal framework, frequent garnishments by the tax administration, and weakened BCC independence due to operational losses and weak capacities. - Reforms and support: - Technical assistance from the Fund and bilateral donors; financial support from the World Bank. - BCC reform objectives included: (i) improving capacity to conduct monetary operations and liquidity management; (ii) enhancing foreign exchange policy and reserve management; (iii) strengthening accounting and information systems; (iv) improving banking supervision; and (v) setting up a mechanism to combat money laundering and the financing of terrorism. - An action plan was drawn up as part of the Government Economic Program (PEG) under a PRGF arrangement. - In August 2003 the BCC published a broad strategy for its development and that of the financial system. - Legal framework adopted in 2001–02: - Central bank law providing for BCC independence. - Banking law assigning the BCC full responsibility for supervision and frameworks for bank licensing, liquidation, and credit-union operations. - New legal framework for restructuring the banking system. - External auditors conducted an audit of BCC accounts for 2000–01. ### Monetary management framework and policy instruments - BCC strengthened monetary monitoring and forecasting of autonomous liquidity factors; consolidated net treasury deficit within government net indebtedness to the central bank to identify and contain inflationary impact of central bank losses. - Institutional coordination: - In September 2002 the BCC created the Consultative Group on Monetary Policy (members from BCC and Ministry of Finance) to facilitate fiscal–monetary coordination. - Market-based approach: - Adopted a more flexible interest rate policy reflecting price developments. - Unified multiple exchange rates by floating the Congo franc beginning in May 2001. - Outcomes asserted: - Measures implemented since 2001 aided in breaking the cycle of depreciation and hyperinflation, restoring macroeconomic stability, and accelerating growth. ### Monetary and credit developments (2002–05) — key findings - General trends: - Rapid growth in base and broad money, including dollar deposits, through mid-2004; this period saw declining inflation and relative exchange-rate stability versus the U.S. dollar. - In the second half of 2004, continued money expansion together with increased political and security tensions led to a sharp depreciation of the Congo franc. - Specific figures and changes: - Broad money grew by 32 percent in 2003. - Velocity fell from 20.4 (end-2002) to 18.5 (end-2003). - Central bank refinancing rate: raised from 12 to 27 percent in January 2003 (to dampen end-2002 inflation), cut to 8 percent by end-2003. - Commercial bank lending rates remained about 25 percent at end-2003. - Dollarization: - Dollar deposits accounted for more than 85 percent of bank deposits (general context). - Share of dollar deposits in total deposits rose from 81 percent to 85 percent in 2003. - Causes: limited confidence in the Congo franc and banking system; lack of large-denomination Congo franc notes (BCC issued CGF 200 and CGF 500 notes to supplement CGF 100); use of currency rationing by the BCC. - Monetary Survey (selected levels and percent changes as reported): - Broad money (M2) levels (in billions of Congo francs): 22.0 (2001), 69.7 (2002), 94.1 (2003), 102.8 (Mar. 2004), 118.8 (June 2004), 113.1 (Sept. 2004), 124.5 (Dec. 2004), 141.0 (Mar. 2005), 162.1 (June 2005), 177.9 (Sept. 2005), 215.3 (Dec. 2005), 258.8 (Mar. 2005 table end). - Narrow money (M1) levels (in billions of Congo francs): 18.6 (2001), 42.6 (2002), 57.9 (2003), 61.7 (Mar. 2004), 67.7 (June 2004), 65.1 (Sept. 2004), 72.1 (Dec. 2004), 72.8 (Mar. 2005), 88.1 (June 2005), 103.1 (Sept. 2005), 117.1 (Dec. 2005), 118.2 (Mar. 2005 table end). - Currency in circulation (in billions of Congo francs): 16.0 (2001), 31.9 (2002), 49.8 (2003), 52.5 (Mar. 2004), 56.9 (June 2004), 57.5 (Sept. 2004), 63.1 (Dec. 2004), 63.4 (Mar. 2005), 75.0 (June 2005), 87.8 (Sept. 2005), 101.5 (Dec. 2005), 102.3 (Mar. 2005 table end). - Foreign currency deposits (in billions of Congo francs): 3.4 (2001), 27.0 (2002), 36.0 (2003), 40.9 (Mar. 2004), 50.3 (June 2004), 47.3 (Sept. 2004), 52.1 (Dec. 2004), 67.6 (Mar. 2005), 73.8 (June 2005), 74.5 (Sept. 2005), 97.8 (Dec. 2005), 139.7 (Mar. 2005 table end). - Foreign currency deposits as percent of M2 (memorandum): 15.7 (2001), 38.8 (2002), 38.3 (2003), 39.7 (Mar. 2004), 42.3 (June 2004), 41.8 (Sept. 2004), 41.8 (Dec. 2004), 48.0 (Mar. 2005), 45.5 (June 2005), 41.9 (Sept. 2005), 45.4 (Dec. 2005), 54.0 (Mar. 2005 table end). - Foreign currency deposits as percent of total deposits (memorandum): 57.0 (2001), 71.5 (2002), 81.3 (2003), 81.2 (Mar. 2004), 81.3 (June 2004), 85.1 (Sept. 2004), 84.9 (Dec. 2004), 87.2 (Mar. 2005), 84.7 (June 2005), 82.7 (Sept. 2005), 86.0 (Dec. 2005), 89.3 (Mar. 2005 table end). ### Fiscal, external, and macroeconomic context (selected indicators) - Basic data highlights: - Area: 2,344,860 square kilometers. - Population total (2004 estimate): 54.7 million. - Annual growth rate: 3.0 percent. - GDP per capita (2004 estimate): US$118.9. - Real GDP (annual percentage change): -4.4 (1999), -6.9 (2000), -2.1 (2001), 3.5 (2002), 5.7 (2003), 6.8 (2004). - Nominal GDP (in billions of Congo francs): 522 (1999), 971 (2000), 1,407 (2001), 1,922 (2002), 2,299 (2003), 2,587 (2004). - Consumer prices, annual average: 284.9 (1999), 550.0 (2000), 357.3 (2001), 25.3 (2002), 12.9 (2003), 4.0 (2004). - Central government finance (in millions of Congo francs): - Revenue (excluding grants): 2,329 (1999), 15,091 (2000), 91,276 (2001), 152,193 (2003), 176,817 (2004), 248,003 (2004? table context). - Expenditure: 4,934 (1999), 32,988 (2000), 115,147 (2001), 198,406 (2003), 312,339 (2004), 397,833 (2004? table context). - Primary balance (commitment basis): -1,489 (1999), -11,723 (2000), -4,339 (2001), 22,391 (2002), -9,870 (2003), -12,768 (2004). - Overall balance (commitment basis): -2,605 (1999), -17,897 (2000), -23,871 (2001), -38,766 (2002), -89,016 (2003), -98,475 (2004). - External sector (in millions of U.S. dollars): - Current account, including transfers: -113 (1999), -199 (2000), -252 (2001), -152 (2002), -83 (2003), -355 (2004). - Exports, f.o.b.: 974 (1999), 892 (2000), 880 (2001), 1,076 (2002), 1,340 (2003), 1,813 (2004). - Imports, f.o.b.: -458 (1999), -676 (2000), -807 (2001), -1,093 (2002), -1,496 (2003), -2,056 (2004). - Gross official reserves (in millions of U.S. dollars): 665 (1999), 122 (2000), 759 (2001), 823 (2002), 6 (2003?), figures shown across table; gross official reserves in weeks of non-aid-related imports: 4.8 (1999), 3.4 (2000), 1.1 (2001), 2.6 (2002), 2.4 (2003), 5.2 (2004). - External public debt (including IMF) (in millions of U.S. dollars): 13,238 (1999), 12,609 (2000), 12,457 (2001), 10,709 (2002), 10,775 (2003), 10,542 (2004). - Scheduled debt service (percent of exports of goods and services): 77.5 (1999), 75.1 (2000), 75.8 (2001), 46.7 (2002), 29.5 (2003), 21.1 (2004). ### Practical implications and operational notes - The BCC used currency rationing as an instrument of monetary policy during the period described. - The increase in money demand after reunification in mid-2003 contributed to the rise in broad money and decline in income velocity. - Continued high dollarization (shares cited above) and limited confidence in the domestic currency remained binding constraints on monetary policy transmission and financial intermediation. - Reforms emphasized strengthening supervision, liquidity management, and coordination with fiscal policy to contain inflationary pressures from central bank losses and to support stability. *Italic: Source — IMF staff text and statistical tables from the Democratic Republic of the Congo country report (selected pages and tables as provided).* ### 10. The main factor contributing to the growth in broad money was the increase in ### 10. The main factor contributing to the growth in broad money was the increase in ### Broad money dynamics and composition (2003–2005) - Main contributor: increase in net central bank credit to the government, which, relative to beginning-of-period broad money, grew twice as fast as currency in circulation. - Bank credit to the private sector: - Grew by close to 50 percent in 2003 but had a limited impact on broad money growth given the very low base. - More than 80 percent of bank credit to the private sector is denominated in U.S. dollars. - 2004 broad money expansion: - Broad money expanded by 73 percent. - Foreign currency deposits increased at a faster rate than currency in circulation. - Share of dollar deposits in total deposits rose to 86 percent. - Drivers in 2004: - Improvement in net foreign assets of the banking sector (measured at constant exchange rate). - Increases in net bank credit to the private sector and in other items net of the central bank (excluding revaluation accounts), including payments of central bank domestic debt and movements in suspense and liaison accounts. - Valuation effect: - Depreciation of the Congo franc during 2004 and large net foreign liabilities of the central bank led to deterioration in the net foreign assets of the banking system when valued at end-of-period exchange rates and a large increase in the banking system’s other items net. ### Monetary policy, exchange rate, and inflation developments - 2004 policy stance and outcomes: - BCC reduced the refinancing rate to 6 percent in August 2004 because the exchange rate was stable and inflation was below 5 percent until June 2004. - Security and political tensions raised government spending and weakened market confidence. - Successive increases in interest rates to 14 percent by end-2004 and limited sales of foreign exchange were insufficient to prevent depreciation and rising inflation. - Second half of 2004: Congo franc depreciated by 12 percent and 12-month inflation rose from 4 percent to 9 percent. - Early 2005 developments: - Congo franc weakened by an additional 15 percent in the first four months of 2005. - 12-month inflation rose to a peak of 27 percent in May 2005. - June 2005: currency appreciated substantially and the consumer price index dropped by 7 percent. - Improvements attributed to tightening of monetary policy, including an increase in the financing rate to 65 percent, and improved government control over expenditures, which helped contain growth in base money. ### Banking system structure and nonbank sector - System composition: - Central Bank of the Congo (BCC), nine commercial banks (including five implementing restructuring plans agreed with the BCC), and nine commercial banks being liquidated. - Nonbank financial sector: five public financial institutions and numerous credit cooperatives and microfinance institutions. - BCC intentions: - Assess importance of microfinance institutions and establish legal framework for their supervision. ### Constraints on monetary policy and money creation - Key impediments: - Low level of financial intermediation in domestic currency and high dollarization. - Weak monetary programming tools and a dearth of policy instruments. - Commercial banks largely act as financial agents of the government, receive foreign currency deposits, lend in dollars or keep deposits abroad, and contribute little to money creation. - Sources of broad money growth: central bank financing of the overall fiscal deficit (including financing of the central bank deficit) and accumulation of net foreign assets by the banking system. ### Monetary operations and instruments - Pre-2003 practices: - Central bank used foreign exchange sales and currency rationing (staggering government check payments) to contain money growth; practice largely stopped since end-2002. - Improvements since 2002: - Strengthened programming of currency issues and liquidity forecasting. - December 2002: introduction of central bank bills with maturities of 7 to 28 days to absorb excess liquidity. - BCC fixes interest rates on bills weekly to ensure the real interest rate remains positive. - Behavioral constraints: - Banks reluctant to increase claims on the central bank beyond excess reserves due to conversion difficulties of central bank deposits into currency. - Nonbanks (mostly large enterprises) have not bought BCC bills directly until recently because of high denomination and lack of information. - March 2005: interest rate differentials widened when banks were slow to raise interest rates on deposits and loans after sharp central bank rate increases. - Policy measures: - May 2005: central bank announced bank deposits were fully fungible and encouraged enterprises to invest surplus funds in central bank bills. - BCC plans to issue higher denomination currency notes progressively and to launch an information campaign prior to issuance. - BCC recently reduced the denomination of bills to CGF 500,000 and launched an information campaign aimed at enterprises. ### Central bank financial position and restructuring - Financial metrics and causes of losses: - 2003 operating loss amounted to CGF 49 billion, including a cash loss of CGF 18.4 billion; remainder due to reevaluation of foreign exchange accounts and provisions and amortization. - End-2004 estimated net worth: minus CGF 408 billion (US$900 million). - Main reasons for losses: low level of earning assets, high personnel and administrative costs, and limited net seignoriage because of low denomination of currency notes and high production costs. - Reform actions: - Studying ways to restructure balance sheet and rebuild capital base with assistance of the National Bank of Belgium. - Studying measures to streamline and strengthen internal organization, meet staffing and training needs, and reduce central bank cash operating losses at a minimum cost to the government budget. - Must implement a strict cash-flow plan, increase transparency, adhere to transparent bidding procedures, and better prepare and monitor projects. ### Foreign exchange operations and reserves management - Exchange rate regime and objectives: - Floating foreign exchange system adopted in 2001. - Objective has been to meet international reserves target set in the Government Economic Program; interventions supposed to be limited to smoothing short-term movements. - Past interventions: - Authorities intervened to ease exchange rate pressures and acquire currency notes for government payments, which contributed to missing the net foreign asset target. - BCC used variations of Dutch auctions to sell foreign exchange to commercial banks; repeated changes and lack of transparent regulatory framework added to exchange rate volatility. - Institutional improvements: - February 2005 circular clarified main features of the Dutch auction for selling foreign exchange: - Banks can purchase foreign currency with cash or bank check in Kinshasa or at BCC provincial branches. - No one bank can buy more than 40 percent of the amount to be sold. - June 2005: similar guidelines issued for BCC purchase of foreign exchange. - BCC working to strengthen departments managing foreign exchange reserves, create a computerized trading room and back offices, and draft a manual of procedures. - BCC reduced foreign exchange deposits with local commercial banks to facilitate reserves management. ### Accounting, information systems, and supervision - Accounting improvements: - Program to raise BCC accounting to international standards with objective of external auditors approving accounts without reservation. - Charter defines roles and responsibilities of BCC departments in preparing accounts. - Selected accounting software to be implemented by late 2005 to allow integrated access across offices and branches. - Information systems: - IT Committee established April 2004; selected applications in accounting and foreign exchange transactions and started bidding process for equipment and software. - With Fund and bilateral assistance, prepared an ambitious IT plan for all departments and branches; authorities seeking financing. - Banking supervision: - Computerization of supervision (Bank Supervision Application) soon to be completed. - Draft charter of accounts prepared with PCCA, expected to be implemented starting in January 2006. - Assigned staff to off-site and on-site supervision; formalized off-site supervision mechanisms and framework for permanent files; strengthened on-site supervision with remote assistance. ### Anti–money laundering and counterterrorist financing - Law promulgated in July 2004 conforms to international norms and: - Specifies activities considered crimes. - Specifies preventive measures for financial institutions. - Specifies monitoring by bank supervisory authorities. - Provides for seizure of items resulting from illegal activities. - Facilitates international cooperation. - Creates a national unit responsible for collecting financial information (CENAREF, Cellule national de renseignement financier). *Source: Excerpt from IMF staff report (content unit _cr05373).* ### 35. To implement the law requires an instruction from the governor of the BCC ### 35. To implement the law requires an instruction from the governor of the BCC ### Implementation requirements and AML/CFT framework - Documents required to implement the law: - An instruction from the governor of the BCC specifying cases when payments of more than US$10,000 can be made in cash. - A decree creating the CENAREF. - A circular from the ministers of justice and of finance stipulating the rules to be applied for businesses operating in the informal sectors or in localities without financial institutions. - Timing expectation: - These documents are expected to be issued by September 2005. - Additional legal strengthening: - The DRC must also ratify international conventions concerning money laundering and the financing of terrorism, including: - the international convention of December 9, 1999 to repress the financing of terrorism; - the United Nations convention (the Palermo Convention) against organized transnational crime of November 15, 2000; - the United Nations convention against corruption of October 31, 2003. - Capacity-building: - Implementing the new law, regulations, and institutions responsible for combating ML/FT will require extensive staff training. - Potential training providers identified: IMF, the World Bank, the United Nations, the European Union, and bilateral donors. ### Reform of commercial banks — actions and outstanding items - Actions taken by BCC and authorities: - All banks submitted restructuring plans (based on audits completed in 2003) to the BCC in January 2004. - BCC identified nine banks to be liquidated or restructured and launched a call for bids to select liquidators. - Social plans for the three public banks in liquidation were finalized in September 2004; the World Bank has committed financing. - Liquidation is awaiting a decision on the benefit package to be granted laid off employees. - BCC approved restructuring plans of five other banks, which are currently being implemented. - Prudential, supervisory, and legal measures introduced: - Instructions on banks’ prudential ratios in July 2003. - Adoption of a formal framework for on-site and off-site audits. - Reform of the tax and legal framework for commercial banks to increase transparency and align with good international practice. - Adoption, in early 2004, of a decree amending the chart of accounts to facilitate the reconstitution of equity capital. - Proposed fiscal and regulatory changes submitted to the National Assembly in July 2004 (not yet discussed): - Draft laws introducing tax deductibility of statutory loan-loss provisions. - Reduction of the personal property tax from 6 percent to 1 percent. - A more attractive investment regime for the financial sector. - Taxation reform in 2005: - With the 2005 Finance Law, taxation of money transfers has been streamlined to ensure commercial banks can compete with nonbank financial institutions operating in that sector. ### The relationship between money, the exchange rate, and inflation — overview - Recent macro developments: - Inflation fell from 511 percent in 2000 to 4.8 percent at end-2003, before rising to 9.3 percent by end-2004. - Exchange rate behavior (Congo franc per US$1): - CGF 312 at end-2001 - CGF 373 at end-2003 - CGF 444.1 by end-2004 - CGF 515 by April 2005 - about CGF 490 by end-June (2005) - Monetary developments: - During 2002–03 broad money grew by an average of 34 percent a year; nominal GDP growth averaged 28 percent and inflation 10 percent. - In 2004 broad money grew by 73 percent while nominal GDP grew 13 percent. - Monetary base increased by 63 percent during 2004. - Main drivers of 2004 monetary surge: easing of fiscal policy due to increased military expenditure and increased outlays related to political institutions, and expansion in the BCC’s other items net. ### Analytical questions addressed - Does monetary policy affect the exchange rate, and with what lag? - Do exchange rate movements affect inflation (exchange rate pass-through), and with what magnitude and lag? - Does an increase in money growth lead to an increase in inflation, or is money growth endogenous to inflation? By how much and with what lag? ### Data and measurement - Sample period: 2002–04; monthly data. - Variables used: - Monetary base (defined as currency in circulation held by banks and outside banks, bank deposits, public enterprise deposits, and private deposits at the central bank; excludes foreign currency deposits and import deposits at the central bank). - U.S. dollar bilateral exchange rate. - Consumer price index (end-of-month CPI). - Rationale: - U.S. dollar used because of its prominence (dollar deposits account for more than 80 percent of total bank deposits) and because the central bank uses the U.S. dollar for foreign exchange intervention. - Monetary base used to gauge the role of monetary policy; results do not change substantially if M2 is used. ### Stylized facts (sample 2002–04) - Monthly averages and volatilities: - Average rate of growth of money: 3.3 percent a month; standard deviation 5.1. - Average rate of change of the exchange rate: 0.9 percent a month; standard deviation 4.1. - Average rate of change of inflation: 0.7 percent a month; standard deviation 1.2. - Observed relationships: - An increase in the monetary base is associated with depreciation of the exchange rate; until mid-2003 the depreciation rate tracked monetary base growth, but beginning mid-2003 depreciation was considerably less rapid than the monetary base increase. - Faster monetary base growth is associated with slightly higher inflation, but this relationship weakens beginning mid-2003. - Faster exchange rate depreciation is associated with higher inflation; lag between exchange rate movements and inflation appears short (evidence suggests less than two months). - Correlations and causality tests: - Strong contemporaneous correlation between price level and monetary base, and between price level and exchange rate; weaker contemporaneous correlation between exchange rate and monetary base. - Contemporaneous correlation among growth rates less substantial for exchange rate and price level. - Pairwise Granger causality tests largely accept the null of no Granger causality for most variables and lags tested; some evidence that the rate of depreciation Granger-causes an increase in inflation for lags 1–4. ### VAR analysis — model and identification - Model framework: - Three endogenous variables: monetary base, exchange rate, inflation. - Monetary shocks modeled as main source of aggregate demand fluctuations. - Aggregate demand shocks treated as exogenous to the exchange rate shock in period t. - No explicit central bank “rule” or interest rate variable included, due to lack of a well-functioning money market. - Estimation approach: - Vector autoregression (VAR) used to identify dynamic structure and impulse response functions. - Impulse responses computed using Cholesky orthogonalization. - Sample and variable selection chosen to avoid episodes of conflict and hyperinflation. ### VAR results — impulse responses and dynamics - Main impulse response magnitudes and adjustment speeds: - A one-standard-deviation innovation in the monetary base (equivalent to an increase in the monetary base of about 4.4 percent) leads to a depreciation of the exchange rate of 1.6 percent. - Adjustment complete in five months; about 85 percent completed within two months. - A one-standard-deviation innovation in the exchange rate (equivalent to a depreciation of about 4.1 percent) leads to an increase in inflation of 1.4 percent. - Adjustment complete in six months; about 85 percent of adjustment occurring within two months. - A one-standard-deviation innovation in the monetary base (equivalent to an increase of about 4.4 percent) leads to an increase in inflation of 0.3 percent. - Adjustment complete in less than six months; about 88 percent completed within three months. - Notable asymmetries and directional findings: - A one-standard-deviation innovation in the exchange rate (depreciation of about 4.1 percent) leads to an increase in the monetary base of only 0.1 percent; most adjustment occurs in the first two to three months and then dies out. - A one-standard-deviation innovation in the inflation rate (equivalent to an increase of 0.95 percent) leads to no change in the monetary base (no response evident from the outset). - Conversely, a one-standard-deviation innovation in the inflation rate (increase of 0.95 percent) leads to a reduction in the monetary base of 1 percent. - Adjustment complete in about five months, with stronger adjustment in the first two months. - Tentative directional conclusions from the VAR: - The monetary base affects the exchange rate, but the exchange rate does not affect the monetary base. - The exchange rate seems to affect inflation, but inflation does not have an impact on the exchange rate. - Inflation affects the monetary base, but the monetary base does not significantly affect inflation. ### Implications for policy and monetary management - Monetary policy transmission: - Monetary expansions have a clear and relatively quick effect on the exchange rate and a smaller, quicker-to-die-out effect on inflation. - Exchange rate depreciations transmit relatively quickly and substantially into inflation (pass-through evident). - Policy emphasis: - Controlling growth of the monetary base appears important for exchange rate stability. - Exchange rate stability is important for containing CPI inflation given the relatively strong pass-through and short lag (most adjustment within two months for exchange rate → inflation). - Institutional and data needs: - Improved measures of domestic inflation would better assess the impact of exchange rate movements on prices (authorities do not produce such a measure). - Strengthening monetary policy credibility and the central bank’s operational framework could affect the magnitude of pass-through and the effectiveness of monetary control. *Source: _cr05373 - 35. To implement the law requires an instruction from the governor of the BCC* ### 59. In addition to the impulse response functions, the study analyzes the variance ### _cr05373 - 59. In addition to the impulse response functions, the study analyzes the variance ### Variance decomposition: key quantitative findings - Inflation variation: - Depreciation of the exchange rate accounts for about 54 percent of the total variation of inflation. - Disturbances affecting inflation account for 38.5 percent of the variation. - Changes in the monetary base account for 7.5 percent of the variation. - Note: "The variance decomposition analysis refers to the log variables, as entered in the VAR." - Exchange rate variation: - Innovations affecting the exchange rate itself account for 94.9 percent of exchange rate variation. - Innovations affecting the monetary base account for 4.8 percent of exchange rate variation. - Innovations affecting inflation account for 0.3 percent of exchange rate variation. - Interpretation: "Fluctuations in the exchange rate are thus due to shocks affecting the demand for and supply of foreign exchange, rather than to price or money shocks." - Monetary base variation: - Innovations affecting the monetary base account for about 83.6 percent of its variation. - Innovations affecting inflation account for about 11.8 percent of monetary base variation. - Innovations affecting the exchange rate account for 4.6 percent of monetary base variation. ### Transmission mechanism and interpretation - Main conclusion on transmission: - "The transmission mechanism for monetary policy seems to work primarily through the exchange rate." - More specifically: an acceleration in the rate of growth of the monetary base leads to a depreciation of the currency (a change in the price of tradable relative to non-tradable), which then leads to higher inflation. - The apparently weak direct relationship between the monetary base and inflation is consistent with the dollarization of the Congolese economy. - Dollarization and pass-through: - "The exchange rate pass-through in the DRC is quite rapid." - The substantial and rapid response of inflation to the exchange rate suggests many local currency–denominated prices are first set in dollars, so local currency prices adjust soon after exchange rate changes. - Limits on monetary policy effectiveness: - In the presence of dollarization, "the effectiveness of monetary policy is limited." - Monetary policy is further limited by the lack of banking intermediation, partly due to difficulties faced by the banking system. - The result that the transmission works through the exchange rate "does not imply that monetary policy does not have an effect on prices. Rather, the impact on inflation is not independent of changes in the exchange rate." ### Additional policy implications and behavioral findings - Monetary policy responsiveness and endogeneity: - "Monetary policy does not seem to be responsive to changes in the exchange rate." This is consistent with a floating exchange rate regime where authorities do not target a particular exchange rate. - There is some evidence of money endogeneity: monetary authorities "seem to respond to inflation developments (by reducing money growth) rather than by actively controlling inflation." - The nonresponsiveness of the exchange rate to changes in inflation "could be consistent with the view that the nominal exchange rate is not influenced by considerations other than market fundamentals." - Caveats and data limitations: - "The time period covered by the study is too short to permit the drawing of accurate conclusions about the effects of monetary policy on the exchange rate and inflation." - Small sample size may reduce the power of estimation results. - Data limitations (for example, monthly data on output and the interest rate) could bias the results. - It is possible that monetary policy might have a substantial and independent effect on prices through an interest rate channel not captured by the model. - Other possible explanations for limited observed effects of monetary policy include lack of credibility, price index composition dominated by tradables, alternative channels (for example, interest rates) not in the model, rapidly increasing money demand, and too-short period to capture long-run relations. ### Civil service, wages, and fiscal context (selected quantitative and policy points) - Wage bill and payroll: - Wage bill amounted to 3.6 percent of GDP in 2004, having doubled since 2001. - The wage bill has increased relative to revenue from 26 percent to 38 percent since 2001. - As a proportion of recurrent expenditures, the wage bill accounts for less than 30 percent. - Personnel and security sector: - The size of the military and police is estimated to have increased by 83 percent since 2001 to 410,000 by end-2004. - The military and police payroll accounts for one-third of the wage bill. - Low pay, compression, and allowances: - Bottom-of-scale salaries: about US$25 a month in Kinshasa and US$4 a month in the provinces. - Salary compression ratios: less than 2 in Kinshasa and about 5 in the provinces (prior to some 2004 allowances). - After 2004 measures (doubling of lump-sum transport allowance in Kinshasa and Lubumbashi and further 2005 budget allowances), compression ratios fell to 1.6:1 in Kinshasa and to 5:1 in the provinces. - Large disparities remain: example given that parliamentarians receive as much as US$1,500 a month. - Some agencies formally retain 5–10 percent of collected revenues as retention (retained revenues total ½ of 1 percent of GDP). - Civil service reform objectives and immediate measures: - Reforms aim to improve quality and capacity of service delivery, payroll management, and organizational structure. - Authorities conducted audits of ministries and started a census of civil and military personnel; preliminary census results in Kinshasa indicate payroll reductions of more than 20 percent by removing ghost workers. - Key reform challenges: keep the wage bill consistent with macroeconomic stability while raising salaries (especially at the bottom), widening salary compression ratios between highest and lowest paid, hiring additional personnel in the social sectors to achieve the Millennium Development Goals (MDGs), and strengthening civil service management and payroll control. - Assessment purpose: - "The paper assesses the scope for increasing salaries, the salary compression ratio, and recruitment for the social sectors while keeping the wage bill at a manageable level." *Source: IMF staff analysis excerpt (variance decomposition, policy implications, and civil service reform sections).* ### 76. The payroll, which is managed by the Payroll Department of the Ministry of ### _cr05373 - 76. The payroll, which is managed by the Payroll Department of the Ministry of ### Payroll management weaknesses - The monthly payroll is figured manually, which "can give rise to abuse, because verification of payments is difficult." - Signatures confirming receipt of payment are frequently not returned to the Payroll Department, preventing accurate reconciliation and effective budget control. - In the provinces, the absence of a payment system effected by commercial banks results in a cash-managed payroll. - The military payroll is effected in cash and distributed by commanders who manage the list of payees—making the process subject to discretion. ### Recruitment, staffing distribution, and service delivery - Public sector employees are recruited on the basis of exams; grade and salary are based on candidates’ years of schooling and professional training. - Some ministries (health and agriculture) hire contractual employees, generally paid a lump sum. - Owing to paucity of skilled personnel, highly trained individuals tend to be in leadership positions performing as both managers and technicians. - Until recently, one-third of civil servants were based in Kinshasa (historic centralization). - Many provincial administrations are adequately staffed; areas plagued by armed conflict are too unstable to ensure service delivery. - In many areas churches and nongovernmental organizations provide fee-based health and education services, imposing a significant burden on the poor given that per capita GDP is only US$100. ### Civil service reform: objectives and institutional framework - Main objectives: - enhance the use of public resources. - improve personnel management and remuneration by conducting a census of the civil service, the military, and the police, and by strengthening the management of the payroll. - streamline and rationalize organizational structures. - Reform elements: - (i) organizational audit of all ministries and review of services delivered by the social and justice ministries (completed in 2002); - (ii) a census of the civil service, to be completed in 2005, to remove ghost workers; - (iii) the retirement of some 100,000 workers (past the normal retirement age) to facilitate reorganization; - (iv) reform of the payroll to strengthen control over the wage bill; - (v) creation of a school of national administration to assist in training personnel. - Institutional arrangements: - Commission interministérielle de pilotage de la réforme de l’administration publique (CIPRAP) established to guide and monitor implementation. - CIPRAP is assisted by a technical committee (CITRAP) and a secretariat. - Technical commission responsibilities: monitor (i) preparation of legal texts and statutes, (ii) military and civil service census, (iii) implementation of new organizational structures and professionalization of civil service, (iv) improvement of working environment, (v) publication of studies related to reform. - Difficulties in making operational the CJPRAP and CTRAP have delayed implementation. ### Retirement program details - Estimated approximately 100,000 civil servants—17 percent of public sector employees—have passed the retirement age but remain in the civil service because retirement benefits are low. - First stage: at an estimated cost of US$47.5 million funded through a World Bank loan, 10,000 civil servants would retire in 2005 and the remainder in early 2006. - Authorities adopted an action plan establishing (i) legal and administrative steps, (ii) sequencing of departures and cut-off date of eligibility, (iii) mechanism for paying retirees. ### Civil service census and payroll cleansing - Census completed in Kinshasa and being carried out in provinces. - Preliminary results showed "more than 20 percent of the payroll went to unrecorded employees"; these results were incorporated in the May 2005 payroll. - Military census started in Kinshasa; results to be implemented soon. ### Payroll reform and automation (PTS) - Implementation of a simplified electronic procedure (PTS) in 2005: - PTS will encompass administrative control to ensure statutory regulations justify payments. - PTS will encompass budgetary control to ensure payments are consistent with approved positions. - Payroll information will be automated and managed electronically to eliminate manual interventions and will be based on new personnel lists derived from the census. - Payroll list will be controlled administratively to prevent unauthorized recruitment of personnel. - PTS will be centralized at the ministries of the budget and the civil service, which will verify signatures against the payroll list. - PTS will reinforce audits of payroll procedures conducted in 2004. ### Institutional audits - Institutional audit underway under CIPRAP with support from Belgium and UNDP: - Phase one: pilot audit of the Ministries of Budget, Planning, and Agriculture, and the Ministry of Finance regarding mission and organizational/legal frameworks (Food and Agriculture Organization supported audit of Ministry of Agriculture). - Two subsequent phases envisaged: one for education, health, and justice ministries; another for remaining ministries. ### Wage policy challenges, scenarios, and numeric implications - Current wage bill: "relatively low at 3.6 percent of GDP." - To achieve MDGs, hiring needs could be large: - Estimated that having enough teachers for all school-age children could add the equivalent of 2½ percent of GDP to the wage bill, assuming no increase in the current pay scale. - Comparison: projected increases in teachers’ wage bill of 4 percent of GDP for Ghana and Tanzania to meet education MDGs (Sachs and others, 2004). - Compression ratio scenario: - Bringing the compression ratio back to 10 over the next five years would increase the civil service wage bill to 4.7 percent of GDP, assuming real GDP growth of 7 percent, no growth in real wages at the bottom of the scale in Kinshasa (currently US$25), and a one-fourth reduction in the size of the civil service through the census and the retirement scheme. - Additional wage components: - Salaries of institutions would add about another ½ of 1 percent of GDP. - Military and police would add about 1 percent of GDP. - Combined scenario: - Overall, taking into account the cost of hiring additional teachers and health workers, the wage bill "could rise to 8–10 percent of GDP." - Financing the wage bill at that level would be feasible only if external grants were increased substantially, "which is highly uncertain." - Measures to contain the wage bill: - Removal of ghost workers (civil service and military) is the government’s first priority. - Ministries’ staffing needs assessment to hire new personnel in social sectors while retrenching elsewhere. - Fiscal constraints: - Nondiscretionary spending, proxied by wages and interest payments, accounts for two-thirds of recurrent expenditure. - Revenue is equivalent to 10 percent of GDP and "is generally lower than in neighboring postconflict countries." - Scope to expand revenue by broadening tax base, reducing exemptions (especially in mining sector), and combating smuggling and corruption. - Decentralization risks: - Draft new constitution grants provinces large autonomy, including full responsibility for their budgets, limited central oversight, and provinces will receive 40 percent of government revenue collected locally. - An investment fund is to receive 10 percent of total government revenue to invest in the provinces. - Transfer of responsibilities and resources to provinces will necessitate transfer of personnel; method not yet decided. - A too rapid increase in public sector personnel and the overall wage bill will require coordination between provinces and central government and a coherent macroeconomic framework. ### Key numeric facts and projections (preserved verbatim) - Per capita GDP: US$100. - Approximately 100,000 civil servants—17 percent of public sector employees—have passed retirement age. - Retirement program first-stage cost: US$47.5 million (World Bank loan). - 10,000 civil servants to retire in 2005 and the remainder in early 2006. - Preliminary census finding: "more than 20 percent of the payroll went to unrecorded employees." - PTS implementation year: 2005. - Current minimum pay at bottom of scale in Kinshasa: US$25. - Estimated addition for teachers to wage bill: 2½ percent of GDP. - Compression ratio scenario result: civil service wage bill to 4.7 percent of GDP (assumptions: real GDP growth of 7 percent; no growth in real wages at the bottom of the scale in Kinshasa; one-fourth reduction in civil service size). - Salaries of institutions add about another ½ of 1 percent of GDP; military and police add about 1 percent of GDP. - Overall wage bill could rise to 8–10 percent of GDP under certain measures. - Revenue equivalent to 10 percent of GDP. - Provinces will receive 40 percent of government revenue collected locally. - Investment fund to receive 10 percent of total government revenue. - Current wage bill level: 3.6 percent of GDP. ### Selected figures from Table III.6 (preserved verbatim) - "Total monthly wage 1/2/3/3,6002,8298,85414,45123,305" - "Total annual wage bill 43,19733,949106,248173,410279,658" - "Wages ( In percent of GDP) 4/1.31.01.82.94.7" - "Wages (In percent of total revenues)12.09.412.720.833.6" - Memorandum items: - "GDP 5/3,380,000...5,957,267......" - "Total revenue360,226...833,508......" - Table notes (preserved verbatim): - "1/ Based on preliminary census results of April 2005 for Kinshasa, 108,573 civil servants." - "2/ Assumes 20 percent reduction in civil servants in the provinces owing to census and retirement program. Assumes 351,918 civil servants in the provinces. Assumes provincial salary scale is 60 percent that of Kinshasa." - "3/ This assumes that the base salary scale remains constant in real terms." - "4/ Excludes the wages of military and police, which, if included, would add 1 percent of GDP to the wage bill in 2005 and in 2010." - "5/ Nominal GDP assumed to grow 12 percent annually." ### Conclusions and policy priorities - Government faces medium-term challenge to keep the overall wage bill manageable while improving pay and increasing social service delivery; current wage bill is 3.6 percent of GDP but making pay adequate and hiring social sector personnel "could double the wage bill relative to GDP." - Measures highlighted as priorities: - Complete the civil service census to remove ghost workers. - Introduce the simplified electronic payroll system (PTS) to eliminate manual interventions and strengthen controls. - Implement the retirement program and sequence departures per the action plan. - Emphasize revenue mobilization (broaden tax base, reduce exemptions, combat smuggling and corruption) to create fiscal room. - Continue and obtain substantial technical and financial assistance from donors to rapidly improve social service delivery and provide incentives to social-sector employees. *Source: IMF staff report excerpt (content unit _cr05373 - 76).* ### 93. The Democratic Republic of the Congo (DRC) is rich in natural resources: fertile land; ### The Democratic Republic of the Congo (DRC) is rich in natural resources: fertile land; hydropower; one of the largest tropical rain forests in the world; Africa’s largest deposits of copper, cobalt and coltan; and significant reserves of gold, diamonds, and other minerals. ### Historical perspective and structure of the mining sector - Mining divided into: - Formal sector: large, capital-intensive, public and private enterprises operating under government-issued concessions. - Informal/artisanal sector: small-scale activities often without government-issued licenses; not systematically recorded. - Diamond deposit types and associated activity: - Kimberlite deposits → large, capital-intensive enterprises. - Alluvial deposits → small-scale artisanal extraction using rudimentary equipment. - Colonial and postcolonial developments: - In the colonial era, a few large private enterprises dominated; artisanal activities existed in parallel. - In 1967, the government nationalized major mining companies. ### Decline and partial recovery of formal mining - Peak and collapse: - In the mid-1980s mining accounted for about 25 percent of GDP, 25 percent of fiscal revenue, and three-fourths of exports; the DRC was the world’s largest exporter of cobalt. - During 1986–2001 the formal mining sector collapsed. - Drivers of decline: - Large financial losses from mismanagement and heavy tax burden. - Economic environment hostile to private mining operations. - Low world prices for copper and other minerals in the first half of the 1980s. - Poor management (including expulsion of non-Katangese staff in 1992/93). - Weak or nonexistent regulatory framework; high tax rates and arbitrary levies. - Deteriorating infrastructure and equipment; burden of providing social services. - Political and ethnic strife, corruption, lawlessness, and outright war. - Output trajectory (selected figures from Table IV.1): - Copper: 1980 = 459.4 (thousand metric tons); 1985 = 502.2; 1990 = 355.7; 1995 = 34.9; 2000 = 30.8; 2004 Est. = 19.7. - GECAMINES copper output: 1980 = 425.7; 1985 = 471.5; 1995 = 32.5; 2000 = 29.6; 2004 Est. = 7.7. - Cobalt: 1980 = 14.5; 1985 = 10.7; 1990 = 10.0; 1995 = 4.0; 2000 = 3.7; 2004 Est. = 8.9. - Diamonds (thousands of carats): 1980 = 10.2; 1985 = 19.9; 1990 = 19.5; 1995 = 22.0; 2000 = 21.7; 2004 Est. = 30.9. - Mining sector's share in nominal GDP: 1980 = 21.7; 1985 = 24.6; 1990 = 12.9; 1995 = 12.1; 2000 = 10.2; 2004 Est. = 8.7. - Real GDP growth (selected): 1980 = 2.4; 1985 = 0.5; 1990 = -6.6; 1995 = 0.7; 2000 = -2.1; 2004 Est. = 6.8. - Sector contribution: - By 2001 recorded mining contribution to GDP had shrunk to about 7 percent. - By 2004 the sector’s share in GDP had recovered to an estimated 9 percent. ### Informal and artisanal diamond mining - Early-1980s context: - Artisanal diamond mining contributed about one fifth (about two million carats) of total diamond output. - La Société Minière de Bakwanga (MIBA) provided most of the rest. - Liberalization and growth: - 1982 liberalization of precious metals trade increased artisanal activity. - Artisanal diamond output rose to 13 million carats by 1985 and over 19 million carats by 1998. - Policy shifts and effects: - 1999: comptoirs’ contracts cancelled, foreigners banned from mining areas, diamond trade moved to Kinshasa. - 2000: diamond export monopoly granted to International Diamond Industries (IDI), leading to lower domestic purchase prices and increased smuggling. - February 2001: diamond monopoly eliminated; comptoirs allowed to export again; recorded output and exports increased. - Early 2003 participation in the Kimberley process coincided with declared output rising to a record 22.1 million carats by 2004. - Employment and livelihoods: - Global Witness and Partnership Africa Canada estimate artisanal diamond miners earn about US$1 a day. - Estimated 700,000 diggers active in 2003; CEEC estimates 100,000 middlemen. - Applying a yardstick that each wage earner supports on average nine family members implies about 8 million Congolese (or 15 percent of the population) depend on artisanal diamond mining. - Quality mix: - CEEC notes the increase in artisanal output in 2004 occurred exclusively in low-value industrial diamonds, partly explaining why mining’s share in nominal GDP remained at 8.7 percent in 2004. ### Other informal mining activities and conflict links - Expansion in late 1990s, especially eastern and northeastern provinces outside central government control. - Minerals implicated in conflict financing: - Diamonds, gold, and coltan are reported to have financed rebel groups and perpetuated armed conflicts. - Gold: - Mined industrially and artisanally in the northeast; militias reportedly control exports and impose taxes on artisanal producers. - Official gold output numbers are likely underestimated. - Coltan: - Artisanal mining since mid-1980s after SOMINKI collapse. - Uses: steel alloys and electronic equipment. - Price trajectory: US$365 per pound in 2000; later fell to US$100-120 per pound with increased supplies. - Global Witness reports coltan miners make US$10–50 a week. - Cassiterite (tin): - Mined in same areas as coltan; production declined during 1989–2003. - Price: reached US$9600 a ton in May 2004; since then hovered around US$8000 a ton. - Heterogenite: - Used to produce cobalt; DRC (mainly Katanga province) holds one-third of world’s heterogenite reserves. - World market prices rose to US$25 per pound in 2004. - An estimated 60,000 artisanal miners gathering mineral soil for about $1 a day. - GECAMINES reportedly receives some royalty payments; only a minor part of heterogenite is refined domestically. - Other minerals: - Silver, cadmium, magnesium, coal, and zinc continued artisanally on a substantially reduced scale. - Output statistics for coltan, heterogenite, cassiterite and others ceased in 1990 due to informal nature and weakened statistical apparatus. - Employment estimate: - In addition to an estimated 800,000 people in the artisanal diamond sector, at least another 150,000 are involved in other artisanal mining activities. - Hence, about 20 percent of the population is dependent on artisanal mining. ### Contribution of the mining sector to government revenue and economy - Government revenue from mining: - Rose from 0.18 percent of GDP in 2002 to 0.24 percent in 2004. - Sector’s contribution to total exports was about 75 percent in each of those years. - Employment in the sector: - Estimated at 985,000: about 950,000 in the informal sector and 35,000 in the formal sector (of which 12,400 GECAMINES and 5,700 MIBA). - Cross-country comparison (illustrative performances): - Sierra Leone: mining ~11 percent of GDP and contributed 0.27 percent of GDP to fiscal revenue in 2004. - Botswana: mining ~one third of GDP and government revenue from mining amounted to 22 percent of GDP in 2004. - Namibia: 2003 figures — mining 7 percent of GDP and government revenue from mining 1.5 percent of GDP. - Potential revenue estimate: - Potential contribution to government revenue from copper, cobalt, and industrial and artisanal diamonds amounted to US$154.7 million in 2004 (2.4 percent of GDP). - Estimate based on recorded output and export values and, for artisanal diamonds, estimated number of diggers and middlemen. - Actual potential would be higher if profit taxes, taxation of other mining products, and understatement of declared values were taken into account. ### Government revenue from mining activities (2002–04) — key figures - Table IV.2 summary (In millions of U.S. dollars, unless otherwise indicated): - Export taxes: 2002 = 7.5; 2003 = 8.5; 2004 = 10.1. - Of which: artisanal diamonds: 2002 = 6.9; 2003 = 7.9; 2004 = 9.2. - Income tax: 2002 = 1.0; 2003 = 1.2; 2004 = 2.5. - Royalties: 2002 = 1.0; 2003 = 2.1; 2004 = 2.0. - Administrative fees: 2002 = 0.5; 2003 = 1.0; 2004 = 0.8. - Total: 2002 = 10.0; 2003 = 12.8; 2004 = 15.4. - In percent of government revenue: 2002 = 2.3; 2003 = 2.9; 2004 = 2.5. - In percent of GDP: 2002 = 0.18; 2003 = 0.22; 2004 = 0.24. - Box IV.1 specific 2004 details: - Total government revenue from mining activities in 2004 = US$15.4 million. - Almost one-third (US$4.8 million) collected from mining companies; most of the remainder from the artisanal diamond sector. - MIBA paid US$1.1 million in income and other taxes under a special agreement (Convention) signed in 1996 and amended in 2003; tax payments reduced further by tax credits obtained for advances to the treasury during the civil war. - SENGAMINES paid US$0.3 million in corporate income and other taxes in 2004, and US$0.18 million in export taxes; obligations stipulated in an agreement signed in 2000 and amended in 2003. - GECAMINES tax payments were US$0.45 million in 2004 under a special agreement; exemption from customs duties lifted in 2004 but customs duties not yet paid. - Other mining companies (mostly joint ventures with GECAMINES) paid income taxes of about US$0.4 million. - Artisanal diamond sector paid export taxes of US$9.2 million (1.5 percent of ad valorem exports of US$ 618 million) in 2004. - Export taxes from other mining activities were almost US$1 million. - Royalties and administrative fees from all mining activities brought in US$2.8 million in 2004, mostly from the formal sector. ### Reform of the mining sector and institutional changes - Authorities view mining as key to achieving high and sustainable economic growth. - Reforms to date: - Restoration of macroeconomic stability since 2001/02 and measures to improve the general business climate. - Institutional and administrative steps to strengthen the mining sector. - The Mining Code: - Promulgated in 2002; most implementing decrees and a list of concessions awaiting validation issued in 2003. - A moratorium on new concessions came into effect pending creation of a new public Mining Registry (Cadastre Minier). - The Code: - Incorporates international best practice. - Significantly reduces government intervention in the sector. - Strengthens government capacity to act as facilitator and regulator of exploration and exploitation for large-scale and small-scale operations through the Mining Registry, responsible for enforcing the Code. - Levels the playing field for private investment and allows State participation in mining companies of up to 10 percent. *Prepared by Jacob Gons; content extracted from the source unit.* ### 115. The Mining Code stipulates that the Minister of Mines is responsible for the mining ### The Mining Code stipulates that the Minister of Mines is responsible for the mining ### Governance, institutional arrangements, and Mining Registry - The Mining Code assigns the Minister of Mines responsibility for the mining sector, in particular overall policy formulation. - Day-to-day operations, such as processing mining exploration and exploitation applications, and (re)issuing permits were delegated to the Mining Registry, created as a one-stop window in June 2003. - The government suspended the Mining Registry’s activities in March 2004 because of governance issues. - Following recommendations of financial and organizational audits, the Mining Registry was reopened in June 2005, with restructuring expected to be completed by September 2005. - The Mining Registry is to work through the Mining Validation Commission (Commission de Validation des Titres Miniers) to bring outstanding mining concessions in line with the new Mining Code. ### Artisanal mining support: SAESSCAM - With government and donor assistance, the public agency Service d’Assistance et d’Encadrement du Small Scale Mining (SAESSCAM) was created in 2003. - SAESSCAM assists artisanal miners by: - improving technical skills, - setting up miners’ cooperatives, - providing price information (facilitated by the proliferation of cell phones), - establishing micro credit facilities. - Objective: make miners less dependent on middlemen so they can obtain higher prices. - SAESSCAM activities currently focus only on the diamond sector and have drawn international attention; other countries reportedly are considering similar entities. - A diagnostic study of informal diamond mining, with an international consultant, is intended to be initiated by end 2005 to formulate an action plan to improve artisanal diamond sector efficiency; similar studies are recommended for other informal mining activities. ### Transparency, verification, and EITI - To combat fraudulent declarations of mining exports from Katanga, the government contracted a company to verify their volume and ore content (but not their value). - In March 2005, the DRC stated its intention to join the Extractive Industries Transparency Initiative (EITI); the country is in the initial stages of adopting EITI’s criteria. - Recommendation: the DRC should become a full participant in EITI. - Recommendation: require all mining companies to produce externally audited accounts each year. - The financial audit of MIBA scheduled for the third quarter of 2005 is highlighted as an important step and should be followed by an audit of SENGAMINES. - Anti-corruption and governance instruments adopted that should reduce corruption include: - the Code d’Ethique for the civil service adopted in 2002; - the anti-money-laundering legislation promulgated in July 2004; - the anti-corruption law adopted in March 2005. ### Mining tax regime and revenue sharing - In 2004, the DRC’s mining taxation regime was brought in line with the new Mining Code. - Mining enterprises are subject to the provisions of the general tax regime and those of the Mining Code, which specifies royalties, mining taxes and administrative fees, while exempting the mining sector, with some limitations, from import duties, as well as the sales tax on imports and certain domestic inputs. - The Mining Code introduces two mining-specific levies: - an area tax (taxe de superficie), - an administrative fee (droit superficiaire par carré), - these aim at a transparent and efficient use of mining concessions and strengthening tenure. - Revenue sharing under the new Mining Code: - 60 percent of mining royalties accrue to the central government budget, - 25 percent to the provinces, - 15 percent to priority social projects in affected local communities. - Note: this sharing mechanism is yet to be fully implemented. ### Further steps and priorities for sector development - Continued technical assistance from the donor community is required to implement most measures. - Priority measures (enumerated): 1. Regain full control over mining areas and the country’s borders to reduce smuggling and ensure mining revenue is not diverted by militias and rebel groups. - Improve security and strengthen the Customs Office (OFIDA), especially at the eastern and southern borders. - Establish a one-stop window (guichet unique) for mineral exports. - Possibly increase involvement of a private entity in customs declarations. 2. Strengthen institutional and administrative capacity to enforce the new Mining Code to ensure transparent and responsible management of natural resource revenue. - Have the Mining Registry, through the Mining Validation Commission, bring all outstanding mining concessions in line with the new Mining Code. - Renegotiate special agreements granted to large mining companies. - Strengthen collaboration between the Mining Registry and tax departments by creating a common database on concessions and activities of all mining operators. 3. Improve transparency to reduce corruption. - Require externally audited accounts from all mining companies annually. - Conduct financial audits (MIBA in third quarter of 2005; follow with audit of SENGAMINES). - Apply legislation adopted in 2002, July 2004, and March 2005 (see above). - Become a full participant in EITI. 4. Pursue restructuring of the sector. - GECAMINES: after reducing staffing by one half to 12,700 in 2003, the managing firm selected to run the company for 18 months is to prepare a restructuring plan and review the company’s relationship with joint venture partners. The managing firm started work in June 2005. - Improve knowledge about informal mining in the diamond sector; initiate diagnostic study by end 2005 with international consultant; conduct similar studies for other informal mining activities. 5. Develop downstream operations to increase the mining sector’s contribution to economic growth and poverty reduction. - First steps could involve full processing of copper ore, heterogenite, and raw coltan. - In June 2005, a small firm was inaugurated in the city of Kananga to cut and polish diamonds. ### Selected mining taxation notes (as presented) - The new Mining Code aligns taxation and introduces specific levies and exemptions (see earlier bullets on levies and exemptions). - Comparative notes (excerpted headings in source): Income Taxes, Turnover taxes, Royalties — specific country comparisons are presented in the source material. *IMF staff report content as provided in the source PDF.* ### 0.5 percent. ### _cr05373 - 0.5 percent. ### Mining sector: Potential revenue from mining in 2004 - Copper - Output (tons): 19,700 - Value: 60.0 - Export tax (5 percent): 3.0 - Royalties (2.5 percent of (value minus 25 percent))1/: 1.1 - Total copper: 4.1 - Cobalt - Output (tons): 8,900 - Value: 250.0 - Export tax (5 percent): 12.5 - Royalties (2.5 percent of (value minus 25 percent))1/: 4.7 - Total cobalt: 17.2 - Diamonds (industrial) - Output (million of carats): 8.8 - Value: 111 - Export tax (3 percent): 3.3 - Royalties (4 percent of (value minus 25 percent))1/: 3.3 - Total industrial diamonds: 6.6 - Diamonds (artisanal) - Output (millions of carats): 22.1 - Value: 618 - Export tax 1.5 percent: 9.3 - Royalties: (4 percent of (value minus 25 percent))1/: 18.5 - Total artisanal diamonds: 27.8 - Licensing fees (artisanal sector assumptions) - 15 trading houses at $200,000 each: 3.0 - 100,000 middlemen at $500 each: 50.0 - 700,000 diggers2/ at $25 each: 17.5 - Total licensing fees: 70.5 - Total artisanal diamond sector: 98.3 - Total diamonds (industrial + artisanal + licensing): 104.9 - Authorization of mining exploitation and exploration - Area (millions of ha): 34.6 - Exploitation: 3.5 - Exploration: 31.0 - Titles (Unit): 1,117 - Area tax $0.06/ha and $0.03/ha3/: 1.1 - Area duties $0.31/ha and $5/ha4/: 27.4 - Licensing fees $25/unit5/: 0.0 - Total Authorization of exploitation: 28.5 - Grand total potential revenue from mining in 2004: 154.7 - As a percent of GDP: 2.4 - Ancillary mining fiscal/administrative charges and exemptions (rates as presented) - Import duties: Exempt / Not exempt / Not exempt / Exempt for importation of machinery and equipment for prospecting and exploration (layout indicates variation by mineral/type) - Tax on mining concessions (taxe de superficie): US$0.02/ha (exploration); US$0.04/ha (exploitation) - Administrative fee (droit superficiaire par carré), between US$0.3 and US$8./ha - Export duty structure (ad valorem examples): 10 percent (ad valorem); 7 percent (ad valorem); Of ad valorem exports: diamonds 5 percent, precious metals: 4 percent; other: 3 percent (rutile 0.5 percent) - Licensing fees: Mining licenses (listed across categories) - Notes provided in source: - 1/ To take into account expenses, such as transportation and insurance. - 2/ The actual number of diggers in the books of the DGRAD, which is responsible for collecting these fees, is 600. - 3/ The rate for second year exploitation or exploration is used. - 4/ The rate of the exploitation license and the rate for second year exploration are used. - 5/ US$28,000. ### Macroeconomic and sectoral GDP indicators (selected) - GDP at market prices (in billions of Congo francs): - 1999: 51.8 - 2000: 297.1 - 2001: 1,407.0 - 2002: 1,922.2 - 2003: 2,298.7 - 2004: 2,587.5 - GDP at factor cost (in billions of Congo francs): - 1999: 51.5; 2004: 2,535.1 - Primary sector value (1999–2004, in billions of Congo francs): 31.7, 177.2, 293.0, 1,128.3, 1,349.2, 1,489.2 - Mining (component of primary sector, in current prices): - 1999: 4.6; 2004: 262.4 - Distribution of GDP by sector at 2000 prices (percent of GDP) - Primary sector: 1999: 59.4; 2004: 55.6 - Mining 1/: 1999: 7.4; 2004: 13.1 - Tertiary sector: 1999: 28.7; 2004: 30.4 - GDP at market prices (annual percentage change): 1999: 4,18.8; 2000: 47.3; 2001: 37.3; 2002: 36.6; 2003: 19.6; 2004: 12.6 ### Output and production indicators (selected) - Mineral production (thousands of tons, or other units) - Copper (2004): 19.7 (thousands of tons) - Cobalt (2004): 8.9 (thousands of tons) - Diamonds (millions of carats) total 2004: 30,880.0 - Industrial 2004: 8,752.3 - Artisanal 2004: 22,127.6 - Crude oil (millions of barrels) 2004: 10.1 - Gold (kilograms) 2004: 657.4 - Electricity (millions of kilowatt-hours) - Total production 2004: 6,904 - Hydroelectric plants 2004: 6,896 - Net domestic consumption 2004: 4,656 - Electricity subscribers 2004: 353,720 - Average monthly consumption (in kilowatt-hours) 2004: 917 ### Prices and inflation (selected) - Consumer Price Index for Kinshasa (Index, August 1995 = 100) - 2003: annual index 425,187; 2004: 434,306 - 2005 May: Index 549,039 - Year-to-date and year-on-year inflation indicators for 2005: - May 2005 Y-o-y (twelve-month inflation): 26.6 - May 2005 Y-t-d (year-to-date): 18.9 - Retail prices of petroleum products (Congo francs per liter, selected) - Premium Gasoline February 2005: 365.0 (West region) - Kerosene February 2005: 360.0 (West region) - Diesel Oil February 2005: 362.0 (West region) ### Central government operations and public finances (2004, selected) - Revenue (in millions of Congo francs): 248,003 (2004) - Income and profit taxes: 75,157 - Taxes on goods and services: 60,580 - Taxes on international trade: 63,504 - Other revenue: 48,761 - Expenditure (in millions of Congo francs): 397,833 (2004) - Wages and salaries: 93,223 - Goods and services (incl. off-budget): 120,253 - Interest payments1/: 85,708 - Capital expenditure2/: 72,059 - Overall balance (commitment) 2004: -98,475 - Overall balance (cash) 2004: -107,501 - Financing (2004): 107,502 - Domestic financing (net) 2004: 215 - External financing4/ 2004: 107,287 - Debt relief 2004: 98,146 - Memorandum items (percent) - Revenue / total expenditure 2004: 62.3 - Wage bill / revenue 2004: 37.6 - Notes: - 1/ Scheduled interest payments excluding interest on arrears. - 2/ Including net lending. - 4/ In 2002, due to clearance of both principal and interest arrears. ### Central government revenue and expenditure structures (selected shares and levels) - Total budget revenue (millions of Congo francs) 2004: 248,003 - Tax revenue: 199,242 - Taxes on income and profits: 75,157 - Taxes on goods and services: 60,580 - Taxes on international trade: 63,504 - Nontax revenue (including administrative receipts): 48,761 - Total budget expenditure (millions of Congo francs) 2004: 397,833 - Wages and salaries: 93,223 (23.4 percent of total expenditure) - Other goods and services (incl. off-budget): 120,253 (30.2 percent) - Interest on external debt: 78,116 ### Monetary and banking sector (selected) - Monetary aggregates (2004, in millions of Congo francs) - Net foreign assets: -282,597 - Net domestic assets: 504,824 - Broad money (M2): 215,270 - Narrow money (M1): 117,078 - Currency in circulation: 101,467 - Central bank accounts (2004, in millions of Congo francs) - Net foreign assets: -348,404 - Foreign assets: 138,573 - Foreign liabilities: 486,328 - Monetary base: 122,681 - Currency in circulation: 105,889 - Deposit money banks (2004, in millions of Congo francs) - Assets = Liabilities: 118,063 - Deposits: 107,485 - Loans of commercial banks (2004): 43,198 - Deposits of commercial banks (2004): 107,988 - Selected interest/lending rates (reported) - Central Bank rediscount: 16.0 (percent per annum, 2004) - Commercial banks short-term credit: 30.0 (percent per annum, 2004) ### External sector and balance of payments (selected) - Current account (millions of U.S. dollars) - 1999: -113 - 2000: -199 - 2001: -252 - 2002: -152 - 2003: -83 - 2004: -355 - Merchandise exports, f.o.b. (millions of U.S. dollars) - 1999: 974; 2004: 1,813 - Of which: diamonds (1999: 579; 2004: 857) - Merchandise imports, f.o.b. (millions of U.S. dollars) - 1999: -458; 2004: -2,056 - Balance before errors and omissions (millions of U.S. dollars) 2004: -467 - Overall balance (millions of U.S. dollars) 2004: -277 - Gross official reserves (in millions of U.S. dollars) 2004: 236 - In weeks of non-aid-related imports of goods and services: 4.8 - External public debt outstanding (millions of U.S. dollars): 2004: 10,542 - Multilateral institutions (2004): 3,925 - IMF (2004): 716 - Official bilateral creditors (2004): 6,499 - Paris Club (2004): 6,056 ### Trade composition (selected export and import composition, 1999–2004) - Total exports, f.o.b. (millions of U.S. dollars) - 1999: 974; 2004: 1,813 - Selected export commodity values (2004, millions of U.S. dollars) - Copper: 484 (volume and unit value series provided) - Cobalt: 809 - Diamonds: 579 (1999) rising to 828 (2004) in reported table series (includes parallel-market exports) - Crude oil: 116 (1999) to 360 (2004) - Imports, total (millions of U.S. dollars) - 1999: 458; 2004: 2,056 - Aid-related imports (2004): 306 - Non-aid-related imports (2004): 1,750 ### Public sector employment and wage bill (selected) - Total number of government employees (2004): 599,553 - Civil servants 2004: 599,553 - Army 2004: 318,227 - Police 2004: 92,318 - Wage bill (in billions of Congo francs) - 1999: 2.1; 2004: 93.2 - Annual change in the wage bill (percent): 1999–2004 series shows large increases, e.g., 2004: 63.3 ### Other institutional and statistical listings included in source - Lists of state-owned enterprises by sector (mining, energy, agriculture, transport, post & telecommunications, financial and social security, other) with enterprise names and acronyms (e.g., GECAMINES, SNELE, REGIDESO, ONATRALAC, SNCC, OCPT, BCDC, etc.). - Detailed statistical appendices covering manufacturing output, retail petroleum prices, CPI series for Kinshasa, electricity and water production/consumption, monetary aggregates, central bank and banking system balance sheets, commercial bank credit distribution by sector, balance of payments summary, composition of commodity exports and imports, foreign trade indicators, and external public debt and debt service tables. *Source: _cr05373 - 0.5 percent.* ### 1. Professional income tax ### 1. Professional income tax ### a. Profit tax (impôt sur les revenus professionnels (CRP)) - Nature and scope: - Levied on profits of industrial, commercial, artisanal, farming, or real estate enterprises and associations. - Also levied on profits from the sale, transfer, or assignment of patents, trademarks, manufacturing processes or methods; on profits from the realization of assets and on the transfer of firms, practices, or offices. - Exemptions: - The central government, provinces, towns, and religious, scientific, or philanthropic institutions are exempt. - Definitions: - Enterprises having less than 200 employees and assets of less than CGF 11,200,000 are considered small enterprises (SMEs). - Rates and regimes: - 40 percent of net profits for taxpayers under ordinary law and category 1 SMEs (annual turnover in excess of CGF 300,000); - progressive schedule for category 2 SMEs (turnover of CGF 150,000–300,000); - flat rate for category 3 SMEs (turnover of CGF 75,000–150,000); - quarterly quotas for category 4 SMEs (turnover below CGF 75,000). - minimum contribution 1/1000 of turnover. - Withholding taxes: - A withholding tax applies to imports (1 percent for registered enterprises and 5 percent for others) and wholesale purchases (at a rate of 2 percent). - The withholding tax is deductible from the IRP upon payment of the tax installments and balance. ### b. Individual income tax (impôt professionnel sur les rémunérations (IPR)) - Nature and scope: - Levied on the remuneration of individuals paid by third parties (wages, various remunerations, pensions, etc.). - The tax is withheld at the source by the employer and paid to the tax collecting agency before the tenth day of the month following payment of remunerations. - Deductions and exemptions: - Family allowances, social security, retirement pension, and unemployment insurance contributions are deducted from the tax base. - Retirement, disability, and military pensions are IPR-exempt, as is the remuneration of employees of international organizations and diplomatic missions. - 20 percent reduction for each dependent for incomes below the 8th bracket. - 20 percent reduction without exceeding 35 percent of taxable income. - Progressive rates (amounts are expressed in Congo francs): - 0–72,000 3 - 72,001–126,000 5 - 126,001–208,800 10 - 208,801–330,000 15 - 330,001–498,000 20 - 498,001–788,400 25 - 798,401–1,200,000 30 - 1,200,001–1,686,000 35 - 1,686,001–2,091,600 40 - 2,091,601–2,331,600 45 - > 2,331,600 50 ### 2. Extraordinary tax on remuneration of expatriates - Nature and scope: - Levied on the gross amount of remuneration paid by employers to their expatriate staff. - Exemptions: - The government, nonprofit organizations, international organizations, and embassies are exempted. - Rate: - 25 percent. ### 3. Rental income tax (impôt sur les revenus locatifs (IRL)) - Nature and scope: - Levied on gross annual income from the leasing and subleasing of buildings and land. - The owner shall submit an annual return before March 31 of the year following that in which the income was realized. - Exemptions: - The central government, towns, provinces, public utility companies, religious, philanthropic, and scientific institutions, and diplomatic missions. - Rate: - 22 percent of gross income. ### 4. Capital income tax (Import sur les revenus mobiliers) - Nature and scope: - Levied on gross amount of interest payments and dividends received by shareholders and associates. - Rate: - 20 percent of gross amount. --- ### II. Turnover Tax (impôt sur le chiffre d’affaires (ICA)) ### 1. Domestic ICA - Nature and scope: - General tax on sales by producers on local markets, services provided or used in the DRC, and construction work. - Levied on gross invoice amounts, except for construction work (base set at ¾ of the value of the work). - Payment schedule: first installment before the 20th of the month in which the transactions were effected, and the balance before the 15th of the following month. - Exemptions: - ICA-exempt: retail sales; sales of handcraft works of national interest; medical and paramedical activities; goods transport; funeral services; hotel charges for national and international civil servants. - Rates by category: - 3 percent: local products similar to those imported with a 5 percent customs duty; - 9 percent: bank services; - 13 percent: other products; - 18 percent: provision of services and construction work; - 6 percent domestic: flights; - 15 percent: international flights; - 30 percent: provision of assistance when the provider is not established in the DRC. ### 2. ICA on imports - Nature and scope: - Levied on the c.i.f. value of imports plus import duties. Tax levied by the customs and excise office (OFIDA). - Exemptions: - Imports expressly exempted. - Rates: - 3 percent for goods liable to customs duty of 5 percent and 13 percent for other imports. --- ### III. Nonpersonal Property Taxes ### 1. Land tax - Nature and scope: - Lump-sum tax calculated on the type of real estate, its location, and the standing of the owner. - Exemptions: - The central government, towns, provinces, public utility companies, religious, philanthropic and scientific institutions, and diplomatic missions; permanent exemption for small farms. - Exemption of older tax payers (55 years) and widower. - Rates: - Built properties: from US$1.5–75/floor according to location; - Nonbuilt properties: from US$1.5–30, according to location. - Residential: from US$0.3–1.5/m2 according to a classification of four ranks. ### 2. Tax on mining and petroleum concessions - Nature and scope: - Tax owed by holders of concessions granted by the government for mining and petroleum research and/or exploration. - Rates: - US$0.02/ha for research concessions; - US$0.03/ha in the 2nd year, US$0.035/ha in the 3rd year and US$0.04/ha in the 4th year; - US$0.04/ha for exploitation concessions, US$0.06/ha in the 2nd year; US$0.07 in the 3rd year; and US$0.08/ha in the 4th year. ### 3. Vehicle tax and special tax on highway use (toll fee—TSCR) - Nature and scope: - The vehicle tax is based on the weight and horsepower of motor vehicles. The TSCR is a tax on road use. - Exemptions: - Vehicles owned by the central government, international organizations, the diplomatic corps, utility companies, mopeds, and ambulances. - Rates: - Vehicle tax: tax sticker price ranges between US$5–44 according to horsepower; - TSCR: annual sticker price between US$6–45 per vehicle. --- ### IV. Excise Duties ### 1. Selected products - Nature and scope: - Excise duties are levied on a large number of locally manufactured or imported consumer goods. - Base: for imports: c.i.f. value + import duty. For locally manufactured products: ex-factory price. - Examples of rates: - 3 percent on flavored beverages and other nonalcoholic drinks; - 5 percent on sugar, cement, and matches; - 10 percent on mineral and sparkling waters, ethyl alcohol, and eau de vie; perfumes and eaux de toilette; - 15 percent on beer under 6° proof and sparkling wines; and wines under 15° proof; - 20 percent on vermouths; - 25 percent on wines more than 15° proof; - 30 percent on other alcoholic drinks (whiskies, rum, gin, vodka, etc.); - 40 percent on cigars, cigarettes, and cigarillos. - Summary: - Eight rates: 3 percent, 5 percent, 10 percent, 15 percent, 20 percent, 25 percent, 30 percent, and 40 percent. ### 2. Petroleum products - Nature and scope: - Petroleum products (including gasoline, kerosene, diesel oil and fuel oil, and liquefied petroleum gas) are taxed on the basis of the average price at the border (prix moyen frontière (PMF) fiscal) plus customs duties. - The PMF fiscal expressed in U.S. dollars has not been modified since 1990. - Rates: - 25 percent for gasoline; - 15 percent for other products. --- ### V. Customs Duties ### 1. Import duties - Nature and scope: - Levied on the c.i.f. value of imports, except for petroleum products, for which customs duties are applied to the “PMF fiscal”. - Exemptions and special provisions: - Various exemptions or reduced rates (e.g., 5 percent instead of 10 percent or 20 percent for inputs designated as not available in the DRC) under the customs code, the investment and mining codes, and international agreements. - Rates: - 4 rates: 0 percent, 5 percent, 10 percent, and 20 percent. - Examples: 0 percent on farm inputs, banknotes, and stamps; 5 percent on capital goods, fuel oil, and industrial flours; 10 percent on widely consumed food products, pharmaceutical products, flours for direct consumption, spare parts and petroleum products; 20 percent on finished products. ### 4. Other levies on imports - Agencies and levies: - Direction Générale des Recettes Administratives, Judiciaires, Domaniales et de participations (DGRAD): various, at fixed rates or ad valorem; - Office congolais de contrôle (OCC): 1.5 percent on the f.o.b./c.i.f. value of which 0.85 percent for Société Générale de Surveillance (SGS) on the f.o.b. value at the market rate and 0.6 percent for OCC on the c.i.f. value at the official rate; - Fonds pour la Promotion de l’Industrie (FPI): 2 percent value c.i.f. + customs duties; - Office de Gestion du Frêt Maritime (OGEFREM): 0.5 percent of the c.i.f. value. - Rate types: - Various ad valorem rates (DGI, OCC, OGEFREM) and fixed (DGRAD). ### 5. Export duties - Nature and scope: - Levied on certain basic exports. - Rates: - 1.5 percent on artisanal gold and diamonds; - 1 percent on coffee; - 6 percent on logs; - 3 percent on sawn wood; - 5–10 percent on other mining products; (7 percent for GECAMINES); - 3 percent on industrial gold and diamonds; - 5 percent on crude petroleum products, except for production under convention). - Note: - None (context indicates some exports may have no export duty). --- ### VI. Administrative Charges and Licenses ### 1. Environment - Licenses (fishing, hunting, and logging). - Exemptions: None. - Rates: Specific rates. ### 2. Real estate - Recording fees, transaction fees, stamp duties. - Exemptions: None. - Rates: Specific rates. ### 3. Mines - Prospecting fees; mining operations permit (individuals and companies); purchasing office licenses (gold, diamonds, etc.). - Exemptions: None. - Rates: Specific rates. *Source: Congolese authorities.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05373.pdf_