## _cr15280 ## Source details **Canonical URL:** [_cr15280](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15280.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15280.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15280.pdf.json) --- ### Outlook and projections - Real GDP: 8.4 percent in 2016–17 before stabilizing at around 6 percent in 2018–20. - Inflation: targeted at 2.5 percent. - Current account: despite a sustained projected increase in exports, the current account deficit would increase to double digits by 2018 due to rising dividend outflows and imports. - Overall balance: expected to remain in surplus. - International reserves: would remain at relatively low levels in the absence of interventions by the Central Bank of Congo. ### Key risks to the outlook - A prolonged decline in commodity prices. - A deterioration of the political situation. - Delays in implementing key revenue-raising measures. - Worsening of the energy situation, which would constrain the projected sustained growth in mining production. - Materialization of these risks could lead to slower growth, macroeconomic instability, and a significant drop in official foreign exchange reserves. ### Policy recommendations (authorities urged to) - Step up domestic revenue mobilization. - Accumulate more international reserves. - Remove bottlenecks to private sector activity. - Strengthen governance and enhance transparency in the management of natural resources. - Specific fiscal measures urged: - Broaden the tax base and enhance tax administration to step up domestic revenue mobilization. - Implement measures in the 2015 Finance Act and IMF February 2015 TA recommendations to improve VAT performance. - Accumulate international reserves to enhance shock-absorption capacity. - Strengthen the budgetary process, contain spending pressures (particularly with upcoming elections), and move toward adoption of a medium-term budget framework. - Central bank and financial sector measures urged: - Timely recapitalization and passage of the Central Bank Law to enshrine operational independence and accountability. - Prudent progress on de-dollarization. - Rationalization of operating costs and preserving financial sector stability. - Enhanced supervision and crisis management, effective on-site inspections, development of financial infrastructure, and addressing solvency problems in the microfinance sector. ### Executive Board Assessment — main messages - Directors agreed with the thrust of the staff appraisal and commended the authorities for prudent macroeconomic policies that supported robust economic growth and macroeconomic stability despite fragility and limited external financial assistance. - Directors noted persistent challenges: poverty and unemployment remain high; stronger efforts are needed to diversify the economy, promote inclusive growth, and improve social indicators. - To bolster private sector development and diversification, Directors urged improving the business and investment climate, easing political uncertainty, restoring lasting peace in the eastern provinces, and developing the agriculture sector. - Fiscal policy: Directors supported the authorities’ prudent fiscal stance to preserve macroeconomic stability but underscored the need to rebuild policy buffers given rising economic vulnerabilities. They called for: - Broadening the tax base and enhancing tax administration. - Accumulating international reserves. - Strengthening the budgetary process and moving toward a medium-term budget framework. - Natural resources and governance: welcomed accession to full compliance status with the Extractive Industries Transparency Initiative and encouraged: - Further improvements in transparency and governance in the natural resource sector. - Stronger oversight of state-owned enterprises. - Publication of contracts of all mining operations and sale of natural resource assets through competitive bidding. - Enactment of a new mining code in line with international best practices. - Statistics and surveillance: commended the authorities for providing data and encouraged allocating more resources to statistics. ### Selected indicators and key statistics (as reported) - Consumer prices, period average: 2.5 percent (projected 2016–20 period values around 2.5 percent). - Current account balance, incl. transfers: -7.5; -7.7; -9.4; -10.1; -10.1; -11.2 (annual entries shown in the table for 2013–20). - Gross official reserves (weeks of non-aid-related imports of goods and services): 7.1; 6.2; 6.2; 5.5; 4.6; 3.9; 3.5; 3.1; 3.2 (end-of-period trajectory shown in the table). - Gross official reserves (end-of-period, millions of U.S. dollars): 1,645; 1,695; 1,577; 1,534; 1,482; 1,418; 1,394; 1,344; 1,305. - Overall balance (annual series in table): 2.2; 0.2; 0.1; 0.3; 0.5; 0.6; 0.7; 0.5; 0.4. - Total external public debt (percent of GDP, series reported): 16.6; 13.6; 11.5; 13.5; 14.4; 16.5; 18.8; 20.2; 21.7. - Present value (PV) of debt (percent of GDP, series reported): 19.4; 13.5; 15.2; 11.0; 12.5; 13.9; 15.4; 16.0; 16.7. - PV of debt (percent of exports of goods and services): 54.3; 41.9; 44.2; 33.6; 36.9; 42.1; 45.6; 46.3; 48.5. - Scheduled debt service (memorandum item, millions of U.S. dollars): 181.7; 194.6; 89.0; 223.7; 245.4; 354.9; 317.2; 293.8; 286.6. - Nominal GDP (CDF billions): 25,344; 30,051; 33,224; 37,056; 40,774; 45,210; 49,818; 54,493; 58,931. - Nominal GDP (U.S. million): 27,566; 32,676; 35,918; 39,982; 43,665; 47,937; 52,300; 56,642; 60,648. ### Poverty, growth, and structural constraints - Real GDP growth in 2014: 9.2 percent (authorities’ estimate: 9.5 percent). - Year-on-year inflation: stabilized at 1.0 percent at end-December 2014. - Fiscal position: small surplus in 2014 despite a one percentage point of GDP increase in expenditures; government revenue (excluding grants) increased 0.4 percentage points of GDP. - External current account deficit: narrowed to 9.2 percent of GDP in 2014 from 10.6 percent of GDP in 2013. - International reserves fell by US$118 million in 2014 to US$1.6 billion, enough to cover only 1.6 months of next year’s projected imports compared with at least 11.5 months as estimated in the reserve adequacy assessment. - Unemployment (authorities’ data): declined from 60.8 in 2009 to 43 percent in 2014. - World Bank Doing Business 2015 Report rank: 184th out of 189 countries. - DRC has the highest percentage of its population living on less than $1.25 a day among its neighbors in the Great Lakes Region. - Policy emphasis: diversify the economy, promote inclusive growth, improve social indicators, and address electricity shortages that hinder activity, particularly mining. ### Fiscal position and domestic revenue mobilization - Revenue-to-GDP ratio: fell from 14.4 percent in 2012 to 13.3 percent in 2014. - VAT contribution: deteriorated from 4.5 percent of GDP in 2012 to 2.9 percent of GDP in 2014. - Main drivers of revenue weakness: taxes on goods and services fell most due to weak revenue administration and erosion of the tax base at customs; weak governance and noncompliance by some taxpayers. - Short-term spending pressures: elections in 2015–16 and infrastructure for new provinces may crowd out priority social programs and infrastructure; Independent National Electoral Commission (CENI) estimates funds needed for the elections in 2015 at $397 million against $247 million budgeted. - Staff-recommended revenue measures (Text Table 3: Cumulative Impact of Revenue Measures, 2014–19, Percent of GDP): - Elimination of tax expenditures: 1.0 - Tighter control of VAT base in non-resource sectors: 1.6 - Strengthening of border controls: 1.0 - Better control of natural resource tax base: 0.5 - Total: 4.1 ### Alternative scenario (assumptions and projected outcomes) - Main assumptions: Authorities adopt staff policy advice, implement TA recommendations, and accelerate stalled structural reforms, particularly central bank reforms expected to be completed by 2016. - Projected macro differences (2015–19) under the alternative scenario versus baseline: - Growth: averaging about 9 percent during 2015–19 compared to 8 percent in the baseline. - Inflation: targeted to average 2.9 percent against 2.2 percent in the baseline. - External current account: improves, averaging 8 percent of GDP during 2015–19 against 9 percent of GDP in the baseline. - Exchange rate: a gradual depreciation would allow reserves accumulation to increase resilience. - Revenue-to-GDP ratio under alternative: increases from 13.3 percent in 2014 to 17.4 percent by 2019. - Fiscal space: with prioritization and improved spending efficiency, fiscal space would allow covering the cost of financing the elections in the 2016 budget — $889 million — while devoting more resources to key infrastructure and priority social spending. - Downside risks to alternative scenario: - (i) Inaction by the authorities on key reforms and TA implementation ahead of the elections. - (ii) A higher-than-targeted inflation rate, given the history of hyperinflation. ### Central bank, financial sector stability, and financial inclusion - Constraints on monetary policy: high dollarization, weak financial position of the central bank (BCC), capacity constraints, lack of instruments, and absence of an active money market. - Financial intermediation: credit to the private sector well below SSA resource-rich countries’ average; credit and deposit levels: six and nine percent in terms of GDP, respectively. - Microfinance institutions: many suffer solvency problems and lack of capital, impairing SME access to finance. - Staff recommendations: - Finalize BCC recapitalization and adopt draft legislation on the statute of the BCC. - Apply the terms of the 2011 agreement on the rate of interest on securitized receivables of the state held by the BCC. - Continue BCC’s disengagement from the hospital before the end of 2015 and reduce operating costs. - Adopt the Commercial Bank Law; implement risk-based monitoring; strengthen supervision and crisis management; finalize guidelines for provisioning and classification of non-performing loans; develop payment systems and a credit registry; set up a credit bureau; reduce costs of opening/managing accounts; leverage ICT; implement the adopted insurance code. - Financial inclusion (Box 5) — key facts: - Progress: increase in access points, depositors, and borrowers; benchmarking shows DRC "in line with its potential." - Remaining gaps: lowest financial inclusion in SADC (2014 FinScope), distributional and firm-level exclusions (43 percent of enterprises had no checking/savings account in 2013; more than 90 percent had no loan or line of credit). - Barriers: financial literacy, income levels, lack of trust, financial infrastructure gap, weak judiciary. - Measures urged: fill information infrastructure gaps, flexible regulatory environment for technology-based financial services, restructure and strengthen oversight of MFIs, promote contractual savings, step up government payments and tax collections through financial institutions, fully exploit mobile banking. ### Debt sustainability, Sicomines exposures, and public DSA results - Debt sustainability rating: “moderate” risk of debt distress. - Sicomines highlights: - Original SCCA (April 2008): US$3.2 billion mining project and US$6 billion for public infrastructure; amended October 2009 to a single phase totaling US$3 billion over 2009–14. - By end-2014: US$478 million in infrastructure loans and US$1.3 billion in mining loans disbursed. - Sicomines expected to begin production in 2015 and start servicing debt in 2016; earnings forecast to completely pay off infrastructure loans by 2026 under current information and assumed disbursement profile. - Sicomines is exempt from taxes and customs duties until its debt has been repaid. - External DSA selected indicators (new DSA series, selected exact figures): - PPGE debt to GDP ratio — new DSA: 2013: 15.0; 2014: 12.7; 2015: 14.3; 2016: 14.7; 2017: 16.7; 2018: 19.0. - PPGE debt to exports ratio — new DSA: 2013: 46.5; 2014: 37.2; 2015: 43.5; 2016: 43.2; 2017: 50.5; 2018: 56.1. - PPGE debt to revenue ratio — new DSA: 2013: 116.6; 2014: 95.6; 2015: 104.3; 2016: 104.4; 2017: 115.7; 2018: 128.0. - Real GDP growth — new DSA: 2013: 8.5; 2014: 9.2; 2015: 9.2; 2016: 8.5; 2017: 8.3; 2018: 7.5. - Current account deficit (percent of GDP) — new DSA: 2013: 10.6; 2014: 9.2; 2015: 7.4; 2016: 7.6; 2017: 9.4; 2018: 10.1. - Public DSA shock results (selected): - Most extreme shock (export shock in 2016–17 equal to historical average minus one standard deviation) leads to breach of the debt-to-exports ratio: PV of debt-to-exports rises from 55 percent in 2015 to 111 percent in 2017 and remains above 100 percent through 2024. - One-time real depreciation by 30 percent in 2016: PV of debt-to-GDP rises from 18.5 percent to a maximum of 25 percent in 2016; PV of debt-to-revenue rises from 123 percent in 2015 to 150 percent in 2016. - Policy implications: - Maintain cautious approach to external borrowing. - Improve compilation and transparency of debt data, including Sicomines-related flows and contingent liabilities. - Strengthen debt management capacity and provide regular updates on projected disbursements and debt service for Sicomines. ### External sustainability, reserves adequacy, and competitiveness - 2014 current account deficit: 9.2 percent of GDP. - 2015 projected current account deficit (baseline): 7.6 percent of GDP. - DRC remains a net importer of services and records a negative primary income balance due to profit repatriation by foreign companies. - REER assessment: current REER broadly in line with fundamentals but interpretation cautious due to data limitations and high dollarization. - Reserve coverage: - Actual reserves (2015 baseline): 1.8 months of imports. - Optimal reserve coverage estimates vary by cost of holding reserves: 14.3 months (cost 2 percent); 11.5 months (cost 3 percent); 9.3 months (cost 4 percent); 7.7 months (cost 5 percent); 6.4 months (cost 6 percent). - Competitiveness constraints: administrative complexities, low access to finance, inefficient tax policy, electricity shortages, lack of progress on credit information, weak judiciary. - Human Development Index rank (2013): 186th out of 187 countries and territories listed. ### Growth, structural transformation, and export diversification (Box 2) - Natural resources have driven strong growth, but export diversification remains limited; exports concentrated on minerals. - Growth decomposition: contributions of capital and labor not significant; human capital contribution negligible; total factor productivity low and stable. - Estimated gains: a one standard deviation increase in LIC’s export diversification raises growth by about 0.8 percentage points; for the DRC this translates into estimated growth gains of 0.2 percentage points if export diversification matched comparators like Vietnam. - Policy measures to enhance diversification and productivity: - Develop human capital. - Improve infrastructure and trade networks. - Reduce barriers to entry for new products. - Deepen financial markets. ### Data, statistics, and IMF–World Bank cooperation - Data provision: broadly adequate (category B as per SM/13/155) for surveillance; upgrades to national accounts, balance of payments, and government finance statistics recommended. - National accounts: use of ERETES resumed in 2013 for compilation of 2010 definitive ANA; provisional ANA system to be based on 2010 ANA. - Price statistics: multiple producers of CPI; INS started compiling countrywide CPI in 2011 using 2005 household survey weights. - Government finance statistics: treasury produces two sets of monthly statistics; adoption of a simplified double-entry bookkeeping system recommended. - Monetary statistics: SRF migration completed in September 2013; remaining issues include financial institution coverage and reporting delays. - Balance of payments: compilation uses multiple sources and estimates; interministerial committee created in February 2012 to improve collection and validation. - Table of common indicators (selected timing/frequency entries, as of July 13, 2015): - Exchange Rates: Date of latest observation 7-Jul-15; Frequency of Data D. - International Reserve Assets and Liabilities of the Monetary Authorities: Date of latest observation 15-Jun; Frequency of Data M. - Central Government Revenue, Expenditure, and Financing: Date of latest observation 14-Dec; Date Received 15-Jun; Frequency M. - Stock of Central Government and Central Government-Guaranteed Debt: 2014; Date Received 15-Jun; Frequency A/A/I. ### Implementation of past IMF recommendations (Appendix I) - Overall: implementation broadly satisfactory for many recommendations, but key structural reforms lagging. - Not implemented / In Progress items include: - Recapitalization of the BCC — Status: Not implemented. - Passage of Central Bank Law — Status: Not implemented. - Enhance transparency and good governance in natural resource management — Status: Not implemented. - Increase domestic revenue mobilization and raise mining sector contribution — Status: In Progress. - Implement FSAP recommendations — Status: Partially implemented. - Promote inclusive growth and infrastructure to improve business environment — Status: Partially implemented. ### Staff appraisal — prioritized actions - Rebuild policy buffers and enhance domestic revenue mobilization: implement revenue-enhancing measures, build international reserves, and improve budget credibility. - Strengthen the central bank without delay: recapitalize the BCC and pass the Central Bank Law; cut operating costs and rationalize activities. - Promote financial sector stability, development, and inclusion: enhance supervision and crisis management, improve auditing and credit information, address solvency and capital problems of MFIs, and facilitate access to financial services. - Enhance transparency and governance in the mineral resource sector: strengthen oversight of SOEs, ensure publication of contracts, use competitive bidding, and enact a new mining code aligned with international best practices. - Improve data quality: allocate more resources to statistics and leverage Fund and development partner capacity-building assistance. - Procedural recommendation: next Article IV consultation with the Democratic Republic of the Congo expected on the standard 12-month cycle. *Source: IMF staff report for the 2015 Article IV consultation with the Democratic Republic of the Congo (selected excerpts and data as presented).* ### 8.4 percent in 2016–17 before stabilizing at around 6 percent in 2018–20. Inflation is targeted at ### _cr15280 - 8.4 percent in 2016–17 before stabilizing at around 6 percent in 2018–20. Inflation is targeted at ### Outlook and projections - Real GDP: 8.4 percent in 2016–17 before stabilizing at around 6 percent in 2018–20. - Inflation: targeted at 2.5 percent. - Current account: despite a sustained projected increase in exports, the current account deficit would increase to double digits by 2018 due to rising dividend outflows and imports. - Overall balance: expected to remain in surplus. - International reserves: would remain at relatively low levels in the absence of interventions by the Central Bank of Congo. ### Key risks to the outlook - A prolonged decline in commodity prices. - A deterioration of the political situation. - Delays in implementing key revenue-raising measures. - Worsening of the energy situation, which would constrain the projected sustained growth in mining production. ### Policy recommendations (authorities urged to) - (i) Step up domestic revenue mobilization. - (ii) Accumulate more international reserves. - (iii) Remove bottlenecks to private sector activity. - (iv) Strengthen governance and enhance transparency in the management of natural resources. ### Executive Board Assessment — main messages - Directors agreed with the thrust of the staff appraisal and commended the authorities for prudent macroeconomic policies that supported robust economic growth and macroeconomic stability despite fragility and limited external financial assistance. - Directors noted persistent challenges: poverty and unemployment remain high; stronger efforts are needed to diversify the economy, promote inclusive growth, and improve social indicators. - To bolster private sector development and diversification, Directors urged improving the business and investment climate, easing political uncertainty, restoring lasting peace in the eastern provinces, and developing the agriculture sector. - Fiscal policy: Directors supported the authorities’ prudent fiscal stance to preserve macroeconomic stability but underscored the need to rebuild policy buffers given rising economic vulnerabilities. They called for: - Broadening the tax base and enhancing tax administration to step up domestic revenue mobilization. - Accumulating international reserves to enhance shock-absorption capacity. - Strengthening the budgetary process to enhance credibility, containing spending pressures (particularly with upcoming elections), and moving toward adoption of a medium-term budget framework. - Central bank and financial sector: Directors called for timely recapitalization and passage of the Central Bank Law to enshrine operational independence and accountability, supporting credibility and effectiveness of monetary policy; prudent progress on de-dollarization; rationalization of operating costs; preserving financial sector stability and deepening financial intermediation; enhanced supervision and crisis management; effective on-site inspections; development of financial infrastructure; and addressing solvency problems in the microfinance sector to improve SME financing access. - Natural resources and governance: Directors welcomed accession to full compliance status with the Extractive Industries Transparency Initiative and encouraged further improvements in transparency and governance in the natural resource sector, stronger oversight of state-owned enterprises, publication of contracts of all mining operations, and sale of natural resource assets through competitive bidding. They emphasized enactment of a new mining code in line with international best practices. - Statistics and surveillance: Directors commended the authorities for providing data and encouraged allocating more resources to statistics to leverage capacity-building assistance from the Fund and development partners. - Consultation cycle: It is expected that the next Article IV consultation with the Democratic Republic of the Congo will be held on the standard 12-month cycle. ### Selected indicators and key statistics (as reported) - Consumer prices, period average: 2.5 percent (projected 2016–20 period values around 2.5 percent). - Current account balance, incl. transfers: series includes -7.5, -7.7, -9.4, -10.1, -10.1, -11.2 (annual entries shown in the table for 2013–20). - Gross official reserves (weeks of non-aid-related imports of goods and services): 7.1; 6.2; 6.2; 5.5; 4.6; 3.9; 3.5; 3.1; 3.2 (end-of-period trajectory shown in the table). - Gross official reserves (end-of-period, millions of U.S. dollars): 1,645; 1,695; 1,577; 1,534; 1,482; 1,418; 1,394; 1,344; 1,305 (annual series shown in the table). - Overall balance (annual series in table): 2.2; 0.2; 0.1; 0.3; 0.5; 0.6; 0.7; 0.5; 0.4. - Total external public debt (percent of GDP, series reported): 16.6; 13.6; 11.5; 13.5; 14.4; 16.5; 18.8; 20.2; 21.7. - Present value (PV) of debt (percent of GDP, series reported): 19.4; 13.5; 15.2; 11.0; 12.5; 13.9; 15.4; 16.0; 16.7. - PV of debt (percent of exports of goods and services): 54.3; 41.9; 44.2; 33.6; 36.9; 42.1; 45.6; 46.3; 48.5. - Scheduled debt service (memorandum item): 181.7; 194.6; 89.0; 223.7; 245.4; 354.9; 317.2; 293.8; 286.6 (millions of U.S. dollars series shown). - Nominal GDP (CDF billions): 25,344; 30,051; 33,224; 37,056; 40,774; 45,210; 49,818; 54,493; 58,931. - Nominal GDP (U.S. million): 27,566; 32,676; 35,918; 39,982; 43,665; 47,937; 52,300; 56,642; 60,648. ### Key challenges and priorities (summary from staff report) - Address competing demands given limited budget resources in 2015–16. - Build more buffers to withstand possible shocks from external and domestic sources. - Diversify the economy and make it more inclusive. - Maximize the benefits to the population from natural resource exploitation. - Implement measures identified in the 2014 Financial Sector Assessment Program (FSAP) to promote soundness and inclusiveness of the financial system. *Source: IMF staff report for the 2015 Article IV consultation with the Democratic Republic of the Congo (selected excerpts and data as presented).* ### 1. Poverty in the Democratic Republic of the Congo _____________________________________________ 18 ### 1. Poverty in the Democratic Republic of the Congo ### Strong macroeconomic performance, but high vulnerabilities - Real GDP growth in 2014 is estimated at 9.2 percent (authorities’ estimate: 9.5 percent), driven by copper production and the service sector (telecommunications, trade, and transport). - Year-on-year inflation stabilized at 1.0 percent at end-December 2014. - Fiscal position recorded a small surplus in 2014 despite a one percentage point of GDP increase in expenditures; government revenue (excluding grants) increased only marginally (0.4 percentage points of GDP). - External current account deficit narrowed to 9.2 percent of GDP in 2014 from 10.6 percent of GDP in 2013, reflecting improved terms of trade and strong mineral export volumes. - Sustained FDI inflows contributed to an overall balance of payments surplus, despite decreasing official capital transfers; international reserves fell in U.S. dollar terms. - Exchange rate remained relatively stable since 2010, despite a de-jure floating arrangement. Banking and financial sector indicators - Average regulatory capital-to-risk-weighted assets improved slightly in 2014; profitability and liquidity ratios improved. - Non-performing loans to total gross loans increased to 6.9 percent in 2014 from 5.4 percent in 2013. - The financial position of the Central Bank of Congo (BCC) remained precarious; insurance and pension systems and many MFIs are in dire financial positions. Key vulnerabilities highlighted - Weak competitiveness due to structural bottlenecks and challenging business climate; electricity shortages hindering activity, particularly mining. - Low official reserves: official reserves declined by US$118 million in 2014 to US$1.6 billion, enough to cover only 1.6 months of next year’s projected imports compared with at least 11.5 months as estimated in the reserve adequacy assessment (see Appendix III). - Political fragility and uncertainty: fractious political setting after disputed 2011 elections; seven elections at a total cost of $1.1 billion to be held between October 2015 and November 2016. - Residual security risks: rebel activities in eastern provinces and delays in security sector reform. Other factual points - In 2014, copper production and exports crossed the 1 million tons threshold, making DRC the world’s 6th largest copper exporter; gold production more than doubled. ### A promising but risky outlook - Staff projections: Real GDP growth projected at 9.2 percent in 2015 and averaging 8.4 percent in 2016–17 before stabilizing at around 6 percent in 2018–20. - Inflation is targeted at 2.5 percent. - Despite increased exports from new copper mines (Sicomines) and gold, the current account deficit is expected to increase to double digits by 2018 due to rising dividend outflows and imports. - Overall balance expected to remain in surplus but international reserves would decline in the absence of BCC interventions. Downside risks identified - Prolonged decline in commodity prices (including risks from a significant slowdown in China affecting copper prices). - Deterioration of the political situation. - Delays in implementing revenue-raising measures combined with failure to contain spending pressures in the electoral context. - Materialization of these risks could lead to slower growth, macroeconomic instability, and a significant drop in official foreign exchange reserves. Elections financing specifics - The Independent National Electoral Commission (CENI) estimates funds needed for the elections in 2015 at $397 million against $247 million budgeted. ### Poverty, inequality, and structural constraints - Strong growth has not been inclusive: poverty remains pervasive and unemployment is high, particularly among youth. - Authorities’ recent data: unemployment declined from a high of 60.8 in 2009 to 43 percent in 2014. - Social indicators (education, health, access to water, infant mortality) have improved but DRC will likely not achieve any of the MDGs by 2015. - World Bank Doing Business 2015 Report ranks DRC 184th out of 189 countries. - DRC has the highest percentage of its population living on less than $1.25 a day among its neighbors in the Great Lakes Region. Need for diversification and private sector development - Economic diversification lags behind other sub-Saharan African economies. - Structural bottlenecks and challenging business climate hinder development of non-mining activities and job creation. ### Policy recommendations and authorities’ views Resilience, reserves, and monetary policy - Staff recommended faster reserve accumulation through active interventions in the foreign exchange market, with preparedness to sterilize purchases to limit pass-through to inflation. - Recommended rapid recapitalization of the BCC. - Endorsed the medium-term de-dollarization strategy adopted by the authorities to extend monetary policy reach and effectiveness and strengthen lender-of-last-resort functions; noted de-dollarization is a long-term process requiring stable macro environment, credible central bank, effective supervision, and developed financial infrastructure. - Highlighted that high dollarization constrains monetary policy effectiveness and hampers banks’ liquidity management. Fiscal policy and budget credibility - Fiscal policy should remain prudent throughout the projection period. - Staff stressed need to implement revenue-raising measures underpinning revenue projections in the 2015 Finance Act and IMF February 2015 TA recommendations to improve VAT performance. - Government expenditures should be prioritized toward basic infrastructure, the agriculture sector (labor intensive), and improving human capital. Structural reforms to promote inclusion and diversification - Accelerate reforms to promote economic diversification and sustain structural transformation. - Improve business climate by simplifying: - the tax system to support higher non-mineral activity, - regulation for granting construction permits and transfer of ownership, - facilitation of access to credit while enforcing contracts. Authorities’ views and policy stance - Authorities broadly agreed with the outlook and risks; projected near-term growth in line with staff but more optimistic about medium term. - Expressed concern about impact of gradual depreciation on inflation given memories of hyperinflation. - Recognized need to build buffers and acknowledged energy sector bottlenecks. - Noted progress in areas of starting a business and dealing with construction permits and recent legislation: a new Insurance Code and a law on leasing were adopted in March 2015, and the Hydrocarbon Law in June 2015. - Have liberalized the energy sector to allow production by independent power producers and are seeking financing for investments in power generation and transmission. - Expressed concern that lack of progress in de-dollarizing the economy could intensify financial sector vulnerabilities. - Security risks remain and could weigh on regional economic activity. ### Implementation and structural reform gaps - Implementation of past IMF recommendations was broadly satisfactory, but key structural reforms continued to lag, notably: - Central Bank and Commercial Bank Laws, - the Mining Code, - recapitalization of the BCC, - measures to enhance transparency in natural resource management and strengthen corporate governance and accountability of major SOEs. - Little progress in reforms to strengthen financial stability, banking supervision, and resolution of financial crises. *DEMOCRATIC REPUBLIC OF THE CONGO — INTERNATIONAL MONETARY FUND* ### 14. Despite robust GDP growth and abundant natural resources, fiscal space remains ### _cr15280 - 14. Despite robust GDP growth and abundant natural resources, fiscal space remains ### Fiscal position and domestic revenue mobilization - DRC has one of the lowest revenue-to-GDP ratios in SSA; natural resource sector, particularly mining, "has not contributed its fair share through 2014." - Domestic revenue mobilization weakened over the past two years: - Revenue-to-GDP ratio fell from 14.4 percent in 2012 to 13.3 percent in 2014. - VAT contribution deteriorated from 4.5 percent of GDP in 2012 to 2.9 percent of GDP in 2014. - Main drivers of revenue weakness: - Taxes on goods and services fell the most due to weak revenue administration and erosion of the tax base at customs. - Weak governance and noncompliance by some taxpayers impede revenue collection. - Short-term spending pressures: - Costs associated with elections in 2015–16 and infrastructure for new provinces may crowd out spending on priority social programs and infrastructure. - Spending pressures for electoral politicking may affect the quality of public spending. - Staff recommendations to boost revenues and fiscal space: - Improve VAT performance by effective application of existing standard procedural rules and modernization/simplification of procedures. - Implement risk-based tax audits to better control VAT credits and accelerate legitimate refunds. - Adhere to the fiscal anchor (with further discussion of an anchor that excludes mineral resources in the next Article IV). - Implement measures in the 2015 Finance Act to align current taxable customs values of petroleum products with market values. - Swift passage of a new mining code. - Strengthen oversight of SOEs. - Implement targeted anti-money laundering measures to optimize revenues from the natural resources sector. - Text Table 3: Cumulative Impact of Revenue Measures, 2014–19 (Percent of GDP) - Elimination of tax expenditures: 1.0 - Tighter control of VAT base in non-resource sectors: 1.6 - Strengthening of border controls: 1.0 - Better control of natural resource tax base: 0.5 - Total: 4.1 ### Budget credibility and resource projection - Budget credibility is low due to a large gap between actual and forecasted revenue and expenditures. - Frequent budget overruns and revenue shortfalls have led to ad-hoc spending adjustments and significant fluctuations in budget execution rates. - Reprioritization of expenditures by the executive without supplementary budgets undermines the legislative role as provided by Public Finance Law. - Staff recommendations to strengthen credibility: - Use past outturns as a basis for budget projections. - Use supplementary budgets to formalize adjustments. - Tax measures attached to the draft budget must be adopted simultaneously with the budget law or have related resources deducted from the draft budget. - Include annual budgets in a medium-term budget framework (MTBF) aligned with PRSP priorities. - Improve information sharing with donors to reduce discrepancies between budgeted external resources and outturns. ### Alternative scenario and macroeconomic outcomes - Main assumptions under the alternative (better outcomes) scenario: - Authorities adopt staff policy advice, implement TA recommendations, and accelerate stalled structural reforms, particularly central bank reforms expected to be completed by 2016. - Projected macroeconomic differences (2015–19) under the alternative scenario versus baseline: - Growth: averaging about 9 percent during 2015–19 compared to 8 percent in the baseline. - Inflation: targeted to average 2.9 percent against 2.2 percent in the baseline. - External current account: improves, averaging 8 percent of GDP during 2015–19 against 9 percent of GDP in the baseline. - Exchange rate: a gradual depreciation would allow reserves accumulation to increase resilience. - Revenue improvements under the scenario depend on steadfast implementation of FAD TA recommendations, notably: - Broadening the tax base. - Introducing e-procedures beginning with the VAT at the large taxpayer office. - Developing risk-based compliance programs for large- and medium-sized businesses. ### Strengthening the central bank and financial sector stability and inclusion - Constraints on monetary policy: - High dollarization of the economy. - Weak financial position of the central bank (BCC). - Capacity constraints and lack of instruments; absence of active money market in both dollar and domestic currency. - Staff urged authorities to: - Finalize the BCC recapitalization process as soon as possible. - Adopt draft legislation on the statute of the BCC to enshrine independence while strengthening accountability. - Apply the terms of the 2011 agreement on the rate of interest on securitized receivables of the state held by the BCC. - Continue the BCC’s disengagement from the hospital before the end of 2015 and reduce operating costs. - Financial intermediation and access: - Limited access, market depth, and financial intermediation; credit to the private sector is well below the average for SSA’s resource-rich countries despite recent acceleration. - Low aggregate credit and deposit levels: six and nine percent in terms of GDP, respectively. - Microfinance institutions: limited role, many suffer from solvency problems and lack of capital—impairing SME access to finance. - Recommendations to deepen finance and inclusion: - Adopt the Commercial Bank Law. - Implement risk-based monitoring and strengthen supervision and crisis management practices. - Strengthen workforce and training of supervisors. - Finalize guidelines for provisioning and classification of non-performing loans. - Develop financial infrastructure: payment systems; make operational the new credit registry; set up a credit bureau. - Reduce costs of opening and managing accounts; leverage new information and communications technology. - Implement the adopted insurance code in a timely manner to promote access to credit. - Authorities’ actions noted: - New foreign exchange swap facility arranged with the International Finance Corporation. - Focus on enhancing consumer protection and mobile banking; de-dollarization efforts and banking supervision improvements. ### Debt, data, and other issues - Debt: Risk of debt distress remains moderate as in the 2014 DSA; DRC should continue prudent policy and borrow mainly on concessional terms while strengthening debt management capacity. - Data quality: - DRC’s data has shortcomings but is broadly adequate for surveillance purposes. - Staff urged authorities to strengthen capacity in data compilation, handling, and statistical analysis, and to provide greater financial autonomy to the National Statistical Agency (INS). - Authorities noted plans to improve collaboration across ministries and with BCC and INS and welcomed Fund TA on national accounts statistics. ### Staff appraisal — key messages and policy priorities - Macroeconomic context: - After years of high growth and a stable macroeconomic environment, DRC faces looming vulnerabilities and unsettled political and security situation. - Pervasive poverty and high inequality call for stronger efforts to diversify the economy, promote inclusive growth, and improve social indicators. - Priority policy actions: - Rebuild policy buffers and enhance domestic revenue mobilization: implement revenue-enhancing measures identified by Fund TA, build up international reserves, and improve budget credibility. - Strengthen the central bank without delay: recapitalize the BCC and pass the Central Bank Law to enable the BCC to fulfill its mandate, increase accountability, and improve monetary policy effectiveness; accompany recapitalization with plans to cut operating costs and rationalize activities (e.g., divestiture from the hospital). - Promote financial sector stability, development, and inclusion: enhance supervision and crisis management, improve auditing and credit information availability, address solvency and capital problems of MFIs, reinforce regulatory implementation with effective on-site inspections, and facilitate access to financial services. - Enhance transparency and governance in the mineral resource sector: strengthen oversight of SOEs, ensure publication of contracts for all mining operations, resort to competitive biddings for natural resource asset sales, and enact a new mining code aligned with international best practices to raise mining sector contributions to revenue. - Improve data quality: allocate more resources to statistics and leverage capacity building assistance from the Fund and development partners. - Procedural recommendation: - Staff recommends the next Article IV consultation with the DRC be held on the standard 12-month consultation cycle. *Source: IMF staff report excerpt for the Democratic Republic of the Congo (content unit _cr15280).* ### Box 2. Growth, Structural Transformation, and Export Diversification ### Box 2. Growth, Structural Transformation, and Export Diversification ### Export diversification and structural transformation - Natural resources have delivered strong economic growth over recent years, but the DRC faces challenges regarding export diversification. - Manufacturing—mainly, mining activities—is of great significance to the development of the country, while the value added of the service sector is essential to promote higher growth. - The leading component of the service sector is trade and commerce, which are indirectly linked to the mining activities mainly in the copper and zinc industries. - DRC has maintained a steady sectoral share in the last decade, but has lagged behind the average of SSA countries in terms of its manufacturing and services as a share of GDP. - Structural changes after 2004 gradually brought the country to a much more favorable position today. - DRC’s diversification has lagged vis-à-vis comparators in SSA because exports are concentrated on minerals, even though overall export diversification and product exports moved slightly upwards, based on exports of new minerals in the last decade. ### Factor productivity, human capital, and growth decomposition - Growth decomposition shows that the contributions of capital and labor have not been significant in DRC. - Human capital has shown a negligible contribution to economic growth. - Total factor productivity has been low and stable. - Hence, prioritizing human capital development becomes critical to promote further inclusion and economic diversification. ### Estimated gains from product diversification and human capital - Based on the estimates in IMF (2014a), a one standard deviation increase in LIC’s export diversification raises the growth rate by about 0.8 percentage points. - For the DRC, this translates into estimated growth gains of 0.2 percentage points if export diversification was raised to levels observed in comparators like Vietnam. ### Policy measures to enhance diversification and productivity - Develop human capital to increase the contribution of labor quality to growth. - Improve infrastructure and trade networks. - Reduce barriers to entry for new products. - Deepen financial markets. - These measures would accelerate economic diversification and enhance factor productivity. *Source: Box 2. Growth, Structural Transformation, and Export Diversification (content as provided).* ### Box 5. Financial Inclusion—Progress and Challenges ### Box 5. Financial Inclusion—Progress and Challenges ### Progress and driving factors - The Democratic Republic of the Congo (DRC) has made some headway toward financial inclusion over the past decade. - Evidence of progress: - Increase in the number of access points for financial services. - Increase in the number of depositors and borrowers (Figure 1). - A benchmarking analysis reveals that DRC performed "in line with its potential." - Main driving forces behind progress: - Better macroeconomic and political environment. - The “bancarisation” policy implemented from 2011 (i.e., the policy of paying civil servant employees through bank accounts). ### Remaining gaps and comparative performance - Financial inclusion in DRC remains low compared to regional peers in the Southern African Development Community (SADC). - According to the 2014 FinScope Survey, the DRC has the lowest inclusion financial levels in the SADC region. - Distributional exclusions: - Individuals at the bottom of the income distribution are the most financially excluded, in particular people making a living in farming activities. - Firm-level exclusion (World Bank Enterprise Survey, 2013): - About 43 percent of enterprises in the DRC do not have a checking or savings account in 2013 as compared to an average of 13 percent for sub-Saharan Africa (SSA). - More than 90 percent of enterprises in the DRC do not have a loan or line of credit, against 77 percent in SSA. ### Main barriers to inclusion - Households: - Financial literacy. - Income levels. - Lack of trust in financial institutions. - Firms: - Financial infrastructure gap. - Weak judiciary and legal systems. ### Policy measures recommended for fostering financial inclusion in the DRC - Specific measures include, among others: - Filling the infrastructure information gap. - Providing a flexible regulatory environment to encourage the development of technology-based financial services. - Restructuring and strengthening the oversight of the MFIs. - Promoting contractual savings. - Additional policy actions urged: - Step up efforts to make government payments and collect taxes through financial institutions. - Fully exploit the mobile banking potential. *International Monetary Fund — Box 5. Financial Inclusion—Progress and Challenges* ### Appendix I. Implementation of Past IMF Recommendations ### Appendix I. Implementation of Past IMF Recommendations ### Implementation summary - Implementation of past policy recommendations was broadly satisfactory. - Authorities steadfastly adhered to the fiscal anchor, which has been instrumental in keeping inflation low. - Continued allocation of more budgetary resources to education, health, infrastructure, and agriculture. - Measures were taken to improve the business climate, but these did not translate into an improvement in DRC’s ranking in the 2015 doing business ranking; the business climate remains challenging. - Progress continued to lag in the implementation of structural reforms, including in the natural resource sector, recapitalizing the Central Bank of Congo (BCC), and passing key economic bills. ### Summary of key policy recommendations and status - MDGs - Step up pace of reforms to promote diversified, sustainable and inclusive growth — Status: In Progress - Increase priority social spending and support pro-MDG public investments — Status: Implemented - Fiscal Sector - Maintain the fiscal anchor consisting of zero central bank financing of the fiscal deficit apart from the use of counterpart funds from the HIPC initiative and MDRI — Status: Implemented - Increase domestic revenue mobilization by addressing known shortcomings and raising the contribution of the mining sector to the budget — Status: In Progress - Monetary and Financial Sectors - Maintain a flexible exchange rate to be able to deal with exogenous shocks — Status: Not implemented - Recapitalize the central bank and bolster its operational independence and accountability — Status: Not implemented - Ensure swift passage of the central bank law to strengthen the BCC’s independence and governance — Status: Not implemented - Implement FSAP recommendations to promote financial sector stability and development — Status: Partially implemented - Governance and Transparency - Enhance transparency and good governance in the management of natural resources — Status: Not implemented - Strengthen oversight of SOEs to avoid revenue losses, including from the sale of assets — Status: -- - Adopt a mining code and petroleum law aligned with international best practices — Status: In Progress - Strengthen the anti-money laundering framework to address the illegal exploitation of natural resources — Status: -- - Promote Inclusive Growth - Increase social spending and investment in labor intensive sectors such as agriculture — Status: Partially implemented - Improve the business environment, including through infrastructure development to promote private sector participation in employment creation — Status: Partially implemented *Appendix II. Alternative Scenario* ### Alternative scenario: assumptions and projected outcomes - Main assumptions - Authorities adopt staff policy advice, implement technical assistance recommendations, and accelerate the stalled structural reforms, particularly reforms of the central bank (expected to be completed by 2016). - Projected macro outcomes (alternative vs baseline) - Growth: higher and relatively more inclusive with relatively stronger contribution from the non-mining sector. - Inflation: targeted to average 2.9 percent over the medium term against 2.2 percent in the baseline. - Exchange rate: to depreciate gradually. - Revenue-to-GDP ratio: increases from 13.3 percent in 2014 to 17.4 percent by 2019. - External current account deficit (including grants): narrows to single digit by 2019 — 7.5 percent of GDP against 10.1 percent of GDP in the baseline. - International reserves: gradual depreciation would allow some build up of international reserves, making the economy more resilient to external shocks. - Fiscal space and expenditure priorities - Improvement in revenue-to-GDP ratio predicated on steadfast implementation of recent FAD TA recommendations: broadening the tax base, introducing e-procedures beginning with the VAT at the large taxpayer office, and developing risk-based compliance program for large and medium-sized businesses. - With prioritization of expenditures and improved spending efficiency, fiscal space would allow covering the cost of financing the elections in the 2016 budget — $889 million — while devoting more resources to key infrastructure projects and priority social spending in health and education. - Downside risks to the alternative scenario - (i) Inaction by the authorities on the key reforms and on the implementation of the TA recommendations ahead of the elections. - (ii) A higher-than-targeted inflation rate, given the history of hyperinflation. *Appendix III. External Sustainability Assessment* ### Current account and REER assessment - Developments in the balance of payments position remain consistent with external stability. - The real effective exchange rate (REER) is broadly in line with macroeconomic fundamentals, but interpretation should be cautious due to data limitations and high dollarization of the economy. - Competitiveness suffers from institutional constraints, lack of basic infrastructure, and a weak business environment; international reserves could be strengthened to protect against potential shocks. - Current account developments - Spurred by increasing mineral exports, the current account has been improving in recent years. - 2014 current account deficit: 9.2 percent of GDP. - 2015 projected current account deficit (baseline): 7.6 percent of GDP. - Balance of goods: continuously positive since 2009. - DRC remains a net importer of services and records a negative primary income balance due to profit repatriation by foreign companies in the natural resources sector. - CGER methodology results (two approaches) - Macroeconomic balance approach - Current account norm estimated to lie between -5.8 and -8.2 percent of GDP based on coefficients estimated by Vitek (2013). - Assuming an elasticity of the trade balance with respect to the real exchange rate of 0.7, the difference between the underlying current account and the current account norm indicates a REER negligible misalignment between 0.6 and 0 percent. - Using the CGER elasticity of the current account would imply a REER misalignment between 1.4 and 0.1 percent of GDP. - External sustainability approach - Current account balance necessary to stabilize the DRC’s NFA-to-GDP ratio at its 2020 level is estimated to be -6.8 percent compared with an underlying current account of -7.8 percent, implying an overvaluation of 0.2 percent. ### Competitiveness and structural bottlenecks - 2015 Doing Business report rank: 184th out of 189 countries. - Key constraints: administrative complexities, low access to finance, inefficient tax policy, electricity shortages, lack of progress on credit information, weak judiciary system. - 2013 Human Development Index rank: 186th out of 187 countries and territories listed. ### International reserves: adequacy and optimal levels - Current reserve coverage - Actual reserves: 1.8 months of imports (baseline). - Optimal reserve coverage estimates - DRC should hold gross reserves equivalent to at least 7.7 months of imports for a cost of holding reserves of 5 percent. - The reserve coverage should represent up to 14.3 months of next year imports for a cost of holding reserves of 2 percent. - Methodological note - The methodology balances risk-reducing effects of reserves against carrying costs, estimating likelihood and scale of a drop in domestic demand and comparing benefits of holding additional reserves with costs (revenues foregone on lower-yield foreign assets). - Reserve coverage time series and cost sensitivity (summary) - Optimal months of imports vary by assumed cost of holding reserves: 14.3 (2 percent), 11.5 (3 percent), 9.3 (4 percent), 7.7 (5 percent), 6.4 (6 percent). - Reserve holdings in 2015 (baseline): corresponds to 1.8 months of imports. *Debt sustainability and background (selected findings)* - Risk of debt distress: assessed as “moderate” given stable macroeconomic fundamentals, prudent fiscal policy, and strong export performance despite falling commodity prices; DRC remains highly vulnerable to shocks, particularly export revenues. - External debt stock and composition - PPGE (public and publicly-guaranteed external debt) to GDP: reduced from 75 percent at end-2009 to 22 percent in 2010 and 13 percent in 2014. - Private external debt: increased from 2.0 percent of GDP in 2012 to 3.8 percent in 2014. - New disbursements to central government during 2014: US$115 million. - At end-2014: 60 percent of external public debt owed to multilateral creditors, 4 percent to bilateral official creditors, and 36 percent to commercial creditors. - Sicomines (Sino-Congolese Joint Venture) highlights - Original SCCA (April 2008): US$3.2 billion mining project and US$6 billion for public infrastructure; amended October 2009 to a single phase totaling US$3 billion over 2009–14 and limited government guarantee to financing of infrastructure projects. - By end-2014: US$478 million in infrastructure loans and US$1.3 billion in mining loans had been disbursed. - Sicomines expected to begin production in 2015 and start servicing debt in 2016; earnings forecast to completely pay off infrastructure loans by 2026 under current information and assumed disbursement profile. - Repayments could extend beyond 2034 if Sicomines’ earnings drop by more than 22 percent each year. - Sicomines is exempt from taxes and customs duties until its debt has been repaid. - Changes since 2014 DSA and underlying assumptions - Sharp drop in international commodity prices affects projected debt-to-exports trajectory; short-term price shock offset by upward revision of projected export volumes as Sicomines starts operations earlier than expected. - Strong growth over the medium term supported by large investments in mining and public infrastructure; FDI expected to remain the main source of external financing. - Comparative DSA indicators (selected exact figures) - PPGE debt to GDP ratio — new DSA: 2013: 15.0; 2014: 12.7; 2015: 14.3; 2016: 14.7; 2017: 16.7; 2018: 19.0. - PPGE debt to exports ratio — new DSA: 2013: 46.5; 2014: 37.2; 2015: 43.5; 2016: 43.2; 2017: 50.5; 2018: 56.1. - PPGE debt to revenue ratio — new DSA: 2013: 116.6; 2014: 95.6; 2015: 104.3; 2016: 104.4; 2017: 115.7; 2018: 128.0. - Real GDP growth — new DSA: 2013: 8.5; 2014: 9.2; 2015: 9.2; 2016: 8.5; 2017: 8.3; 2018: 7.5. - Revenues (excluding grants) growth — new DSA: 2013: 6.4; 2014: 13.6; 2015: 14.3; 2016: 12.3; 2017: 12.9; 2018: 12.0. - Overall fiscal deficit (percent of GDP) — new DSA: 2013: -1.8; 2014: -0.2; 2015: -0.8; 2016: -0.2; 2017: -0.2; 2018: -0.3. - Exports of goods and services growth — new DSA: 2013: 7.5; 2014: 16.6; 2015: 6.5; 2016: 13.2; 2017: 12.9; 2018: 11.6. - Imports of goods and services growth — new DSA: 2013: 12.7; 2014: 20.8; 2015: -0.7; 2016: 6.6; 2017: 12.9; 2018: 11.5. - Current account deficit (percent of GDP) — new DSA: 2013: 10.6; 2014: 9.2; 2015: 7.4; 2016: 7.6; 2017: 9.4; 2018: 10.1. *Prepared by IMF staff; staff assessment and projections as presented in the Appendix I–III content unit.* ### Box 2. Macroeconomic Assumptions for 2015–35 ### Box 2. Macroeconomic Assumptions for 2015–35 ### Macroeconomic framework and projections (2015–35) - Medium term (2015–20) projections are consistent with the macroeconomic framework of the 2015 Article IV Consultation. - Long-term (2021–35) projections assume macroeconomic stability, moderate growth, and a more rapid development of the domestic economy as bottlenecks to private sector activity become less stringent. - Consequence for structure: - The share of mining activities in GDP is projected to become less important; exports, FDI, and mining revenue outflows gradually decline as a share of GDP. - Real GDP growth: - 9.2 percent in 2015. - Gradually declining to 5.4 percent in 2020. - Reaching an average rate of 3.8 percent for the period 2021–35. - Inflation (GDP deflator in dollars): - 0.7 percent in 2014. - Expected to remain at around 1 percent in the medium-long run. - Primary fiscal balance: - Displayed a surplus of 0.4 percent of GDP in 2014. - Expected to remain positive in the medium term. - Long-run average primary surplus is 0.3 percent. - Current account (non-interest) deficit: - Projected to remain high in the medium term at an average of about 9 percent of GDP, reflecting equipment imports and dividend outflows of the mining sector. - Expected to narrow to 3.3 percent of GDP by 2035 as the mineral sector’s share declines. - Financing assumptions: - FDI expected to decrease from 5.4 percent of GDP in the medium term to 4.7 percent on average in the long run, while remaining the main financing source of the current account deficit. - Aid flows were 4.6 percent of GDP in 2014; long-term average expected to decline to around 2 percent. ### External debt sustainability results - Timing and present value effects: - Earlier-than-expected repayments (Sicomines starting operations in 2015 instead of 2016) revised upward the present value (PV) of debt for the short to medium term. - Delays in disbursements of infrastructure loans under the SCCA did not reduce the PV of debt because contracted debt amounts remain unchanged. - Earnings of the mining operation will be used to repay priority infrastructure loans from 2016 on, two years ahead of the estimate underlying the 2014 DSA. - Given the concessionality of the infrastructure loans, earlier repayment raises the PV of debt in the short term, with a steeper decline thereafter. - Shock analysis: - The most extreme shock (an export shock in 2016–17 equal to the historical average of export growth minus one standard deviation) leads to a breach of the debt-to-exports ratio; all other external debt indicators remain below thresholds in all scenarios. - With the shock to exports, the PV of debt-to-export ratio rises from 55 percent in 2015 to 111 percent in 2017 and remains above the 100 percent threshold through 2024. - Under a one-time depreciation shock, the debt service-to-revenue ratio experiences a near breach of its threshold. - Risk assessment: - Compared with the 2014 DSA, the DRC’s risk of debt distress remains moderate. - In the baseline scenario all indicators remain far below their respective critical thresholds, reflecting the authorities’ prudent fiscal stance despite a downward revision of commodity prices since the 2014 DSA. - A further drop in export prices could put debt ratios above their respective thresholds. - The probabilistic approach validates the overall risk assessment. - Caveats: - The DSA methodology cannot fully capture the modalities of the SCCA with its variable repayment. - Early amortization raises debt indicators in the short and medium term, even though it significantly reduces government exposure. - The Public Debt Management Agency (DGDP) does not monitor disbursements under the SCCA. - A further shock to copper prices would slow amortization and raise the government’s exposure. ### Public DSA results (domestic debt and shocks) - Domestic debt composition and arrears: - Estimated domestic debt primarily consists of domestic arrears, most incurred prior to 2007. - Arrears include amounts owed to domestic creditors, “social debts” (e.g., wages owed to past government employees), arrears owed to state-owned enterprises (SOEs), arrears owed to suppliers and contractors, and unpaid monetary awards from judicial decisions. - No new arrears were reported since the 2014 DSA. - DGDP’s estimate for arrears is based on an audit with a two-year lag in reporting; not all arrears identified have been certified and many claims may be partly offset by liabilities owed to the government. - Information on interest rates is missing. - Potential domestic government debt outstanding at end-2014 remained at US$1.4 billion (3.9 percent of GDP). - Baseline includes expected clearance of all arrears by 2028. - Public debt under extreme shock: - The most extreme shock considered is a one-time real depreciation by 30 percent in 2016. - Under this shock, PV of the debt-to-GDP ratio rises from 18.5 percent to a maximum of 25 percent in 2016, below the benchmark for public debt ratios of 38 percent. - PV of the debt-to-revenue ratio rises from 123 percent of GDP in 2015 to 150 percent in 2016 and declines gradually thereafter. - All other scenarios closely follow the baseline in a gradual decline of debt ratios. - Overall public debt assessment: - Public debt remains sustainable even under the most extreme shock scenario. ### Authorities’ views - The authorities concurred with the overall assessment of DRC’s debt sustainability. - They reiterated commitment to a cautious fiscal policy stance and to seeking a high degree of concessionality for new borrowing. *IMF staff summary based on "Box 2. Macroeconomic Assumptions for 2015–35" from the provided source content.* ### 12. The DRC’s debt sustainability rating remains at “moderate” risk of debt distress. ### The DRC’s debt sustainability rating remains at “moderate” risk of debt distress ### Assessment and overall rating - Debt sustainability rating: “moderate” risk of debt distress. - Main basis: sound macroeconomic fundamentals. - Key vulnerability: exposure to commodity price shocks that could reduce growth and drive the PV of debt-to-export ratio above its threshold. ### Sicomines-related exposures and contingent risks - A significant portion of the public debt stock and repayment profile is attributable to publicly-guaranteed infrastructure loans under the Sicomines agreement. - A sufficiently large price shock could undermine the economics of the Sicomines mining project and its ability to generate earnings necessary to pay off the infrastructure loans, potentially transferring repayment burden for much or all of those loans to the central government. - Recommendation: regular updates on projected disbursements and debt service for Sicomines are crucial to provide a valid assessment of debt sustainability. ### Data, capacity, and borrowing guidance - Urgent need: improve compilation of debt data, including Sicomines data, and strengthen debt management capacity. - Interim guidance: given uncertainties, the DRC should continue a cautious approach to external borrowing. ### Stress tests and scenario characterization - Most extreme stress test definition: the stress test that yields the highest ratio on or before 2025. - In Figure 1 and Figure 3 notes: the most extreme shock corresponds in various panels to One-time depreciation shock and to Exports shock (panel-specific as indicated). - Stress scenarios shown: Baseline; Historical scenario; Most extreme shock; and several bound tests (e.g., one-time 30 percent nominal depreciation; exports shock). - Figures cover indicators over 2015–35 for: - Debt accumulation, PV of debt-to-GDP, PV of debt-to-exports, PV of debt-to-revenue, debt service-to-exports, debt service-to-revenue, debt service-to-revenue ratio, rate of debt accumulation, grant-equivalent financing, grant element of new borrowing. ### Selected baseline indicators and projections (external/publicly guaranteed debt; from External Debt Sustainability Framework, Baseline Scenario, 2012–35) - External debt (nominal): 20.3 (2012); 17.5 (2013); 16.6 (2014); 19.7 (2015). - Of which: public and publicly guaranteed (PPG): 18.3 (2012); 15.1 (2013); 12.7 (2014); 14.3 (2015). - Change in external debt: -1.6 (2012); -2.8 (2013); -0.9 (2014); 3.1 (2015). - Identified net debt-creating flows (selected): 0.3 (2012); 2.3 (2013); 2.8 (2014); 1.4 (2015). - Non-interest current account deficit: 6.8 (2012); 10.6 (2013); 9.1 (2014); 5.5 (2015). - Exports (percent of GDP): 35.6 (2012); 32.3 (2013); 34.3 (2014); 32.8 (2015). - Imports (percent of GDP): 40.0 (2012); 38.0 (2013); 41.8 (2014); 37.2 (2015). - PV of external debt (selected projection series): 22.8; 23.8; 23.6; 23.9; 23.4; 21.7; 20.3; 15.1; 13.4 (panel values in table for projection years). - PV of PPG external debt (percent of GDP, selected): 19.0 (2015); 18.4; 17.4; 17.4; 17.8; 17.8; 17.9; 15.1; 13.4 (table series). - PV of PPG external debt (in percent of exports, selected): 55.4; 56.1; 51.1; 52.4; 52.4; 51.3; 51.9; 48.5; 47.5. - PV of PPG external debt (in percent of government revenues, selected): 142.7; 134.6; 123.6; 120.1; 119.6; 117.5; 116.2; 78.2; 69.6. - Debt service-to-exports ratio (in percent, selected): 1.8; 1.8; 1.5; 2.5; 4.8; 5.4; 5.6; 7.2; 6.9; 7.0; 4.6 (series in table). - PPG debt service-to-exports ratio (in percent, selected): 1.8; 1.8; 1.5; 2.2; 4.6; 3.6; 2.7; 2.4; 2.5; 6.8; 4.4. - PPG debt service-to-revenue ratio (in percent, selected): 4.6; 4.6; 4.0; 5.3; 11.2; 8.2; 6.2; 5.5; 5.5; 11.0; 6.4. - Total gross financing need (Billions of U.S. dollars, selected): 0.9; 2.0; 1.7; 1.3; 1.9; 2.7; 3.0; 3.4; 3.8; 2.9; 1.3. - Non-interest current account deficit that stabilizes debt ratio (selected): 8.4; 13.3; 10.0; 4.1; 6.0; 6.5; 8.0; 10.0; 11.0; 7.5; 3.8. ### Selected macroeconomic assumptions used in projections (table entries preserved exactly) - Real GDP growth (in percent): 7.1; 8.5; 9.2; 6.6; 1.7; 9.2; 8.5; 8.3; 7.5; 6.7; 5.4; 7.6; 4.1; 3.6; 3.8. - GDP deflator in US dollar terms (change in percent): 4.7; 9.3; 0.7; 6.5; 6.0; 2.0; 0.6; 1.3; 1.5; 1.5; 1.6; 1.4; 0.9; 1.0; 0.9. - Effective interest rate (percent): 0.5; 0.5; 0.3; 2.1; 1.8; 1.2; 1.6; 3.0; 3.0; 2.5; 2.4; 2.3; 1.9; 1.4; 1.8. - Growth of exports of G&S (US dollar terms, in percent): -9.5; 7.5; 16.6; 25.7; 42.5; 6.5; 13.2; 7.0; 11.6; 10.8; 6.8; 9.3; 3.3; 2.6; 3.3. - Growth of imports of G&S (US dollar terms, in percent): -11.4; 12.7; 20.8; 24.7; 32.9; -0.7; 6.6; 12.9; 11.5; 9.9; 9.8; 8.3; 2.6; 0.4; 2.3. - Grant element of new public sector borrowing (in percent, selected): 27.1; 32.6; 34.1; 34.5; 34.1; 34.4; 32.8; 42.3; 40.9; 41.4 (series in table). - Government revenues (excluding grants, in percent of GDP): 14.4; 12.9; 13.3; 13.7; 14.1; 14.5; 14.8; 15.1; 15.4; 19.3; 19.3; 18.9. ### Sensitivity analysis highlights (Table 2 and Table 4 summaries) - PV of debt-to-GDP, PV of debt-to-exports, PV of debt-to-revenue, debt service-to-revenue and debt service-to-exports are provided across Baseline, Alternative Scenarios (A1, A2), and Bound Tests (B1–B6) for 2015–35. - Example bound test results (selected entries preserved exactly): - B6. One-time 30 percent nominal depreciation relative to the baseline in 2016: PV of debt-to-GDP values include spikes such as 25 (2016–2020 in Table 2 panel for PV of debt-to-GDP); PV of debt-to-exports and PV of debt-to-revenue show larger increases under export shocks in B2 scenarios (e.g., 113, 111, 107 series in PV of debt-to-exports panel). - B2. Export value growth at historical average minus one standard deviation in 2016-2017 produces elevated ratios (e.g., PV of debt-to-exports: 76; 113; 111; 107; 107; 99; 93 in Table 2 panel). - Memorandum: Grant element assumed on residual financing is 82 (applies to stress scenarios except A2). ### Policy implications and prioritized actions - Maintain cautious approach to external borrowing given uncertainties and contingent exposures from Sicomines. - Prioritize: - Improved compilation and transparency of debt data, including Sicomines-related flows and contingent liabilities. - Strengthening of debt management capacity to monitor and manage repayment profiles and risks. - Regular updates of projected disbursements and debt service to ensure valid and timely DSA adjustments. *Source: IMF staff report text and accompanying debt sustainability framework tables and figures.* ### 2. The Fund and World Bank teams liaise to support the joint managerial action plan (JMAP) ### 2. The Fund and World Bank teams liaise to support the joint managerial action plan (JMAP) ### Joint programs and modalities - The World Bank’s FY15–17 work program entails projects directed at strengthening the poverty reduction efforts being implemented by the authorities and improving governance. - The Fund’s work program entails Article IV consultations. - Both institutions provide technical assistance to help in the implementation of FSAP recommendations. ### World Bank indicative FY15–FY17 non-lending program (Activities) - Skills for Agriculture and Mining (FY15–16) - Congo Basin Timber (FY15–16) - Review of the Forest Sector of the DRC (FY15–16) - DRC Spatial Development (FY14–16) - DRC-ASA Sub-National Governance (FY16–17) - Support to DRC Gov in the Procurement-UCS (FY16) - DRC - Economic Update (FY16/17 each) - DRC-PEMFAR Dissemination/Implementation. Model (FY15–16) - DRC-Sub-National Economic Analysis Program (FY16–FY17) - DRC- Poverty Assessment (FY15–16) - DRC-Jobs( FY16–17) - National Social Protection Strategy (FY15–16) - Support to the Land Sector Review (FY15–16) - DRC-Urbanization Review (FY16) - DRC-Promoting Investment. in agriculture (FY16) - DRC-Doing Business Reforms Coordination (FY16–17) - TA on domestic revenue GAP Assessment (FY16–17) - TA on Provincial PEFA (FY16) MDTF - TA on Public Investment Efficiency (FY16–17) – MDTF ### World Bank indicative FY15–FY17 financing program (IDA, Grants, and Regional Programs) — selected entries and totals - FY15 key projects and amounts (US$ million): - Health System Strengthening 220 - Education Quality – Secondary 200 - Goma Airport 52 - Great Lakes CAB Project 33 - 4-Great Lakes Trade Facilitation Program – phase 1 11 - IDA Total (US$m) 520 - FY16 key projects and amounts (US$ million): - Statistics Development 45 - Rural Electrification 100 - Expansion of Eastern Recovery and Regional Displacement Project* 79 - AF to Urban Water Supply 150 - AF to expansion of HD systems 30 - Public sector strengthening in decentralized env. (PFM/PRCGAP) 100 - AF to AG Rehab 50 - Great Lakes Trade Facilitation Program – phase 1 entries continuing (regional) - IDA Total (US$m) 535 - FY17 key projects and amounts (US$ million): - Rural Electrification follow-on/basic education ($100m from GPE) - Inga 3 BC development ($350 natl/ $650 regional) - AF to Pro-Routes (national with regional component)* 70 - Great Lakes Ag Program (regional with national component)* 100 - Great Lakes Cross-border Trade Facilitation– Phase 2 8 - IDA Total (US$m) 215 - Notes: AF: Additional Financing; * Combined national and regional allocation. ### Statistical issues — Assessment of data adequacy for surveillance - General: - Data provision to the Fund is broadly adequate (category B as per SM/13/155) for surveillance and program monitoring purposes. - Upgrades to national accounts, balance of payments, and government finance statistics would be helpful. - Authorities continue to produce an array of economic and financial statistics, most published in the annual report of the Central Bank of the Congo (BCC) or its monthly statistical bulletin. - National accounts: - Annual national accounts (ANA) are compiled in constant and current prices by National Institute of Statistics (INS) under the Ministry of Plan with TA from IMF/AFC. - Compilation methodology change since 2006 with use of ERETES software and compilation of definitive ANA for 2005 and 2006 in compliance with the System of National Accounts 1993 (1993 SNA) (implying an upward revision of GDP by about 60 percent). - INS suspended ERETES use due to insufficient human resources and compiled ANA for 2007 to 2009 on a light system with Microsoft Excel. - Use of ERETES resumed in 2013 for compilation of 2010 definitive ANA which are ongoing. - Once 2010 definitive ANA are achieved, a provisional ANA system is supposed to be based on that 2010 ANA to compile 2011, 2012, 2013 etc. accounts. - Price statistics: - Consumer price indices (CPI) are calculated for Kinshasa by the INS, the BCC, the Institute of Economic and Social Research (IESR), and the Economics Section of the U.S. Embassy in Kinshasa. - In 2011, the INS started to compile CPI data Country wide using weights calculated on the basis of the 2005 household survey. - The BCC in 2013 began compilation of a similar CPI using a slightly different basket and different weights and based on prices in 5 provinces. - Government finance statistics: - The BCC produces aggregated monthly statistics on a cash basis based on its own accounting for government cash operations. - The treasury produces two sets of monthly statistics: one for transactions executed through the BCC, another attempting to consolidate operations through commercial bank accounts and off-budget operations. - Statistics do not rely on an integrated double-entry public accounting system and do not provide sufficient details about the nature of expenditures owing to problems in the expenditure chain. - The treasury has started to produce quarterly expenditure data reports by ministry and institution. - Current work on tax administration and expenditure control is expected to improve quality and timeliness of fiscal statistics. - STA multisector statistics advisor has been advising on government finance statistics, producing improvements in quality. - Adoption of a simplified double-entry bookkeeping system should significantly improve availability of data on government financial operations. - In 2003 the DRC reported annual data up to 2002 for the IMF’s Government Finance Statistics Yearbook in the format of the Government Finance Statistics Manual 2001 but has not reported subsequently; work is underway to resume submission beginning with data for 2010. - Monetary statistics: - Monetary and financial statistics (MFS) are compiled and reported to the Fund by the BCC Directorate of Statistics. - These statistics are now generally reliable but institutional coverage, source data, and timeliness issues remain. - BCC adopted new charts of accounts in 2007 and commercial banks in 2011; sectorization and asset classification broadly in line with the Fund’s Monetary and Financial Statistics Manual methodology. - In September 2013, the BCC completed migration to the Standardized Report Forms (SRFs) for submission of its MFS to the Fund; SRF-based monetary statistics have been reported to STA for publication in IFS. - Remaining issues: financial institution coverage (non-bank deposit taking institutions not included), source data reliability (respondents not fully mastering the new sectoral chart of accounts), and reporting delays of up to five months in a package that include several months; data submission often requires reminders from STA. - Balance of payments: - Annual balance of payments statistics are compiled with information on exports and imports of large public and semipublic enterprises, BCC payment records, and a survey of the foreign operations of residents. - Estimates take account of information on the informal sector and foreign aid flows provided by the World Bank and the local UN Development Program office. - Statistics are compiled using data from different sources, supplemented by estimates. - In February 2012, an interministerial committee, led by the central bank and including customs, the National Statistics Institute and key sectors, was created to improve collection and validation of balance of payment data and ensure its regular publication. ### Data standards and quality - The DRC participates in the General Data Dissemination System since April 24, 2004. - The metadata needs to be updated. ### Table of Common Indicators Required for Surveillance (as of July 13, 2015) — selected timing/frequency entries - Exchange Rates: Date of latest observation 7-Jul-15; Date Received 7-Jul-15; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D - International Reserve Assets and Liabilities of the Monetary Authorities: Date of latest observation 15-Jun; Date Received 15-Jun; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M - Reserve/Base money: 15-Jun; 15-Jun; M/M/M - Broad money: 15-Jun; 15-Jun; M/M/M - Central Bank Balance Sheet: 15-Jun; 15-Jun; M/M/M - Consolidated Balance Sheet of the Banking System: 15-Jun; 15-Jun; M/M/M - Interest Rates: 15-Jun; 15-Jun; M/M/M - Consumer Price Index: 15-Jun; 15-Jun; M/M/M - Central Government Revenue, Expenditure, and Financing: Date of latest observation 14-Dec; Date Received 15-Jun; Frequency M/M/M - Stock of Central Government and Central Government-Guaranteed Debt: 2014; 15-Jun; A/A/I - External Current Account Balance: 2014; 15-Jun; A/A/I - Exports and Imports of Goods and Services: 2014; 15-Jun; A/A/I - GDP/GNP: 2014; 15-Jun; A/A/I - Gross External Debt: 2014; 15-Jun; A/A/I - International Investment Position: NA entries ### Statement by Mr. Yambaye and Mr. Allé (Authorities’ views) — key points Recent developments and outlook - 2014: - Real GDP growth is estimated to have recorded a solid 9.2 percent owing to high copper production and performing telecommunications, trade and transport sectors. - Inflation is subdued at 1 percent, falling sharply from double digits territories in three years. - The government budget is in balance with a low debt ratio. - Medium term outlook: - Growth projected to remain strong, at 9.2 percent in 2015 and around 8.4 percent in 2016-17, essentially driven by the mineral and service sectors. Macroeconomic policies going forward — Fiscal policy - Priority: enhancing fiscal policy with particular emphasis on domestic revenue mobilization. - Specific actions: - Bring the VAT back to its performance path; enhance the VAT administration through measures to modernize and simplify procedures. - Increase significantly the contribution of the natural resource sector to fiscal revenue, implementing conclusions of the National Conference on Mineral Resources Management. - Enacting a new mining code aligned with international best practice is under discussion. - Revenue-enhancing measures identified by Fund TA will be part of the overall action plan. - Spending side: - Authorities committed to keep outlays under control; a decree on Fiscal Governance is being finalized and will be adopted soon as a major anchor for fiscal policy to strengthen the medium-term expenditure framework. - Authorities share staff’s recommendations for enhancing budget credibility, including the need to improve resource forecasts. - Debt: - Authorities welcome staff assessment indicating that DRC’s risk of debt distress remains “moderate”. - Committed to maintain a prudent borrowing strategy and to enhance debt management capacity to preserve long-term debt sustainability. Macroeconomic policies going forward — Monetary policy and financial sector development - Objectives: - Enhance effectiveness of monetary policy and develop the financial sector to support private sector activity. - Measures: - Strengthen the central bank – BCC, including BCC’s recapitalization, cutting operating costs by focusing on core activities, improving governance, and enhancing staff capacity. - Passage of the Central Bank Law expected to help strengthen the BCC’s credibility. - Implement structural reforms to improve financial intermediation and financial inclusion. - New financing instruments being devised such as a foreign exchange swap facility arranged with the International Finance Corporation. - Other reforms underway: enhance consumer protection and mobile banking, further de-dollarization, reinforce banking supervision. Natural resource management - Authorities acknowledge natural resources as a major asset; sound management is critical to growth, government revenue, and overall development. - Progress: implementing Extractive Industries Transparency Initiative (EITI) recommendations. - Authorities support additional measures to strengthen government oversight of SOEs and ensure compliance with obligations to publish contracts and resort to competitive biddings when natural resource assets are sold. - New mining code under discussion to replace the current 2002 code; main proposed changes include: - (i) increase in the royalty rate; - (ii) alignment of the corporate income tax (30 percent) to the general regime (35 percent); - (iii) introduction of super profit tax; - (iv) provisions to secure corporate tax basis. Structural reforms for economic diversification and job creation - Authorities recognize need for bold structural reforms to bolster economic diversification and structural transformation for job creation and poverty reduction. - Reform priorities and measures highlighted: - Enhance productivity in the agriculture sector while enlarging the industrial and export bases. - Improve the overall business climate, including: - (i) simplifying the tax system to support higher non-mineral activity and promote inclusive growth, - (ii) streamlining regulation for granting construction permits and transferring ownership, - (iii) facilitating access to credit while enforcing contracts. - Sustain efforts to address bottlenecks such as electricity shortages and the infrastructure gap. - Use financial sector reforms to support service sector dynamism and avail credit to help reduce informality in commerce activities. - Improve general security situation and political environment to enhance investor confidence; address factors of fragility and implement agreed institutional reforms aimed at entrenching democracy. Conclusion - The DRC has made important strides in macroeconomic performance and poverty reduction; growth has been strong in a stable environment and the outlook is promising owing to positive prospects on mining activity. - Unemployment and poverty remain acute despite progress. - Authorities are committed to step up macroeconomic policies to enhance buffers and ring-fence against shocks while transforming the economic landscape and harnessing natural resource endowment for overall development. *Source: Democratic Republic of the Congo — IMF staff report content provided in the supplied PDF excerpt.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15280.pdf_