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Democratic Republic of the Congo and the IMF Press Release: IMF Completes Third Review Under the Democratic Republic of the Congo's PRGF Arrangement and Approves US$39 Million Disbursement March 04, 2004 Country's Policy Intentions Documents Free Email Notification Receive emails when we post new
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Democratic Republic of the Congo—Letter
of Intent, Memorandum of Economic and Financial Policies, and Technical
Memorandum of Understanding
Use the free Adobe Acrobat Reader to view the Tables (71 kb PDF) Mr. Horst Köhler
1. On June 12, 2002, the IMF's Executive Board approved a three-year arrangement for the Democratic Republic of the Congo (DRC) under the Poverty Reduction and Growth Facility (PRGF). This arrangement was designed to support the Government Economic Program (PEG) for the period April 1, 2002 - July 31, 2005. In accordance with this arrangement, the government of the DRC has conducted discussions with an IMF mission on the third program review covering the period April 1, 2003 to September 30, 2003. These discussions examined program implementation during this period, as well as the outlook for, and the economic and financial measures to be implemented during, the remainder of 2003 and in 2004, taking into account our country's reunification. The government of the DRC remains determined to implement the policies and measures described in the interim poverty reduction strategy paper (I-PRSP), as well as in the memorandum on economic and financial policies (MEFP), which is attached to this letter and supplements its letters of April 13, 2002, February 4, 2003, and July 3, 2003. 2. We are pleased to note the broadly satisfactory implementation of the PEG during the first nine months of 2003, in spite of some difficulties encountered during the second quarter leading up to the appointment of the Government of National Unity in July 2003. Immediately upon its appointment, the new government implemented budgetary measures to address these difficulties. The government is determined to strengthen its current efforts aimed at preserving macroeconomic stability. The Central Bank of the Congo (BCC) will continue to pursue an independent monetary policy, as required by its charter, under which its primary objective remains price stability. Furthermore, the government undertakes to adopt and submit to parliament before end-January 2004 a reunification and "pro-poor" budget for 2004, and continue its far-reaching structural and sectoral reform program to consolidate the acceleration of outward-oriented economic growth and create an environment conducive to private sector activity and poverty reduction throughout our national territory. The government will redouble its efforts to fully establish the rule of law and ensure compliance with all the new relevant codes and related enactments, as well as good governance and transparency in the conduct of public affairs. The government intends to fight corruption at all levels and reduce bureaucratic "red tape". If necessary, we will prepare a draft supplementary budget, consistent with the objectives of our program for 2004, to take into account the implementation of our national plan for the disarmament, demobilization, and reintegration (DDR) of the armed forces, progress in the restructuring of public enterprises, the repayment schedule for the government's domestic arrears with the private sector, and an update of the effects of reunification and external aid. 3. The consolidation of the peace process culminated in the promulgation of the new Transitional Constitution on April 4, 2003. Article I of the constitution provides for free and transparent elections after a transitional period of two years. The Government of National Unity, and the National Assembly and the Senate, in which all political parties are represented, were installed in July and August 2003, respectively. A unified army command was appointed in September 2003, and a unified army will be created in the near future. We will ensure that military and security spending remains compatible with our pro-poor budget. The forces of the United Nations Observation Mission in the Democratic Republic of Congo (MONUC) have been strengthened, with a broadened mandate under Article 7 of the Charter of the United Nations. Several MONUC units have been deployed in Ituri, where the situation has not yet been fully stabilized. MONUC, the European Union, and bilateral partners will assist us in preparing for the elections under the best possible conditions throughout our vast country. The reunified country is thus moving from the macroeconomic stabilization phase to the reconstruction phase, as envisaged in our I-PRSP. Furthermore, we expect that parliament will pass the decentralization law (which will define the transfer of tax resources to the provinces) within the next few months. We will proceed to appoint or confirm government representatives and senior civil servants in all provinces as quickly as possible. With the support of the international community, we intend to gradually strengthen the administrative capacity of the provinces and of the decentralized administrative units. 4. The review of the performance criteria as at end-September 2003 indicates that three of the eleven quantitative performance criteria have not been observed, while the structural performance criterion relating to the completion of the audits of five commercial banks was observed. Furthermore, three of four structural benchmarks were observed. The structural benchmark concerning implementation of the complete expenditure chain will be observed by February 2004 at the latest. The floor on the BCC's net foreign assets was missed by US$34 million. The ceilings on the net domestic assets of the BCC and on net bank credit to the government, adjusted for external assistance, were overshot by 0.5 percent of GDP and 0.8 percent of GDP, respectively. Taking account of the corrective measures described in the attached memorandum, the government requests waivers from the IMF Executive Board with respect to the nonobservance of the three quantitative performance criteria referred to above. 5. We express our sincere gratitude to the international community, and to the International Monetary Fund in particular, for its support and for allowing our country, based on the broadly satisfactory implementation of our PRGF-supported program, to benefit from external debt relief under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative. We hope that the disbursements of external financing for priority investment programs and projects in the social and infrastructure sectors, designed in collaboration with World Bank staff, will accelerate. We also hope that these investments will be extended as quickly as possible to the entire national territory. Indeed, the peace dividends will benefit the entire population only with the resumption of economic growth and with poverty reduction, which, in turn, are not only dependent on government actions but also on the timely financing of the government's investment programs and projects. Finally, we hope that with the comprehensive measures already implemented to better control our budgetary expenditures—measures that we intend to deepen—we will be able to quickly benefit from direct budgetary assistance from our external partners, in addition to that of the World Bank. 6. The government will submit all information requested by the Fund on the progress in implementing its financial and economic policies, and the attainment of its program targets, as described in the attached technical memorandum of understanding (TMU). As in the past, the government authorizes the publication of this letter, the MEFP attached to this letter, and the associated IMF staff report. In addition, the DRC will undertake with the IMF the fourth and fifth six-month reviews of its economic program supported by the PRGF, which should be completed by July 15, 2004 and January 15, 2005, respectively. 7. The government of the DRC considers that the policies and measures set out in the attached memorandum are adequate to achieve its program objectives. The government is prepared to take any further measures that may be necessary toward this end. Moreover, the government pledges to consult the IMF, whether on its own initiative or upon your request, on the adoption of any measures that may prove necessary. Sincerely yours,
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Memorandum on Economic
and Financial Policies I. Introduction 1. With the return of peace, the Democratic Republic of the Congo (DRC) is now reunified. The primary goal of the Government of National Unity is rebuilding the country while preserving macroeconomic stability and extending across the whole nation the broad-based structural and sectoral reforms that are being implemented. The law on decentralization, which, inter alia, will specify the transfer of tax resources to the provinces, will soon be adopted by parliament. This law, in addition to the creation of a national army and a national police and the appointment of new provincial governors, as well as the gradual reopening of the provincial directorates of the government, and of the agencies of the Central Bank of the Congo (BCC) and the provincial governments, will result in the effective reunification of the DRC. We are aware of the urgent need to ensure security throughout the DRC and to organize free and transparent elections within two years, as envisaged in the Transitional Constitution. As we address these challenges, we welcome the support of the international community. In particular, we appreciate the international community's humanitarian and food aid, but we hope that the disbursement of financing for investment projects will gather momentum, along with direct budgetary assistance, to ensure that the peace dividends can finally reach the entire population. We also call upon the international community—and in particular the United Nations and the World Bank—to help us step up the implementation of the Multi-Country Demobilization and Reintegration Program (MDRP), which our nation so urgently needs to ensure genuine peace throughout the country, and without which armed groups will continue to terrorize the populations in certain parts of our country. Furthermore, enhanced and properly coordinated technical assistance will help us strengthen the institutional capacity of our central government and, gradually, that of the provincial and local governments as well. To ensure that external assistance is used effectively, we are implementing new expenditure and budget classification systems, which will enable us to better track expenditures and their composition, in particular pro-poor spending. The government is committed to ensuring that the central bank maintain full independence in the conduct of monetary policy as required by its statutes, so as to enable it to achieve its primary objective of price stability in the context of the floating exchange rate system. Finally, we are determined to reinforce good governance and enhance transparency in our management of public affairs, including procurement, in order to create an environment conducive to private sector activity and poverty reduction. II. Implementation of the Government Economic Program During the Period April-September 2003 and Outlook for End-2003 2. We are pleased to note that program implementation was broadly satisfactory during the period April-September 2003, with a notable deepening of the ongoing structural and sectoral reforms. We believe that, notwithstanding the problems encountered during the second quarter of the year leading up to installation of the new government, the overall objectives for end-2003 remain achievable. We have set up four committees, chaired by the Vice Presidents concerned, with the aim of ensuring the consistency and effectiveness of government actions. The Economic and Financial Committee, chaired by Vice President Jean-Pierre Bemba, is monitoring the implementation of the government's economic program supported by the IMF's PRGF. 3. Our estimates confirm that economic growth in 2003 may reach the programmed target of 5 percent (Appendix I, Table 1). According to the new Investment Promotion Agency (ANAPI), created to provide a range of services to investors and simplify administrative procedures, over 100 investment applications from domestic as well as foreign private investors were approved in 2002-03, amounting to about US$2.3 billion. For the first time in many years, the output of all sectors in the economy is rising, with particularly good performance in the mining sector on account of both a gradual shift of diamond production to the formal sector following the implementation of the Kimberley certification process and an increase in crude oil production. The improvement in agricultural activity mainly stems from the steadily increasing accessibility of agricultural regions (including forests) thanks to the restoration of peace and the resumption of river traffic. The end-of-period inflation rate decreased to 4.4 percent at end-October 2003, or well below the 8 percent programmed for 2003 and the 16 percent recorded in 2002 and 135 percent in 2001. Furthermore, the exchange rate appreciated by approximately 2 percent, to reach CGF 375 per US$1 by mid-November 2003, compared with CGF 382 per US$1 at end-December 2002. The guaranteed minimum wage (SMIG) was instituted for the private sector at the beginning of 2003, bringing it to CGF 335 a day (about US$1). GDP in nominal terms is expected to increase by 18 percent in 2003 instead of the 20 percent programmed, on account of a decrease in the GDP deflator. A. Government Finances 4. The overall fiscal objectives for end-September 2003 were not fully met, despite the government's efforts since July 2003 to counteract the difficulties encountered during the second quarter. Accordingly, the domestic primary balance (on a cash basis) showed a deficit of 0.3 percent of annual GDP, against a programmed surplus of 0.8 percent at end-September 2003, whereas the consolidated general balance (on a cash basis) showed a deficit of 1.7 percent of GDP instead of the programmed 1.2 percent (Appendix I, Table 2A). Net credit to the government was 0.1 percent of GDP higher than programmed before adjustment for net foreign nonproject disbursements, and 0.8 percent of GDP higher than programmed after this adjustment. 5. Total revenues (excluding grants) are slightly lower than anticipated (0.2 percent of GDP), reflecting the delays in implementing the tariff and tax reforms adopted in March 2003, as well as tax evasion, which continues to be significant, particularly concerning imports of food and petroleum products in the south of the country. The additional measures decided upon in July 2003—in particular the decision to accelerate the transfer to the treasury of the revenues legally due from the reunified provinces and to make GECAMINES and MIBA subject to regular tax treatment—are beginning to slowly produce results. This is due to the limited administrative capacity at the provincial level, delays in appointing the new provincial authorities, and the tax exemption agreement (convention) between the government and MIBA. 6. Total expenditure, including the BCC's treasury deficit, was 0.1 percent of GDP below the programmed level for end-September 2003. However, the composition of expenditure was not in line with program objectives. The implementation of the emergency measures decided upon in July (including the recall of outstanding payment orders, the freeze of nonessential expenditures, and the rationalization of fuel outlays) did not fully offset the slippages of the second quarter, namely the overrun in current primary expenditure (0.7 percent of GDP), the unanticipated repayment of domestic arrears and the larger BCC treasury deficit. Although the 10 percent across-the-board wage increase planned for 2003 was not implemented, the wage bill target was slightly exceeded because of the adoption of specific measures in favor of certain categories of government employees. In addition, there was a buildup of arrears on centralized payments—which are still difficult to measure because of the lack of meters for water and power consumption. Conversely, capital expenditure was 0.4 percent of GDP lower than programmed, reflecting the slower disbursement of external financing. 7. The fiscal policy measures planned for 2003 have been implemented, albeit with some slight delays. The enactments of the March 2003 tax and tariff reforms have only recently been issued and the related legislation (eliminating excise taxes on sugar, cement, and matches, abolishing the proportionality principle for the turnover tax (ICA) deductibility and confining it to large enterprises, and eliminating the ICA on exports) was adopted by the government in November 2003 and is expected to be adopted by parliament by end-January 2004. A number of agreements (conventions) authorizing unjustified tax or customs exemptions have been revised. The new revenue classification for the General Directorate of Administrative and State Revenues (DGRAD) is expected to be adopted by parliament in February 2004. At the same time, the Customs and Excise Office (OFIDA) has continued to implement its modernization program, with technical assistance from the IMF. It focuses primarily on the reorganization of the provincial directorate of the Bas-Congo Province, together with the establishment of the Matadi one-stop window. In a crackdown on tax evasion in the southern part of the country, a number of unlawful customs clearance operations in Kasumbalesa have been suspended. Slightly behind schedule, the new customs code is expected to be submitted to the ministerial steering committee by end-January 2004 and adopted by end-March 2004. Legislation on the Large Enterprises Directorate (DGE) and the decree governing specific taxation and the introduction of tax stickers (vignettes) on tobacco were adopted in November 2003, and the draft decree on the systematic use of tax identification numbers will be adopted by end-January 2004. However, the DGE's activities are hampered by the absence of a complete list of large enterprises, problems concerning the transfer of relevant records (including the status of tax credits handled by the DGE), and its still inadequate operating budget. 8. Concerning expenditure, the BCC is no longer financing expenditures that have not been authorized by the Minister of Finance (a continuous performance criterion under the program). A subaccount for depositing the resources generated by the HIPC Initiative has been opened at the BCC. New procedures for executing expenditures and the computer links between the BCC and the Treasury are being implemented and are expected to become fully operational by end-February 2004 with the daily electronic transfer of debit/credit memoranda and account statements. The agreement (convention) with the BCC concerning its function of government cashier will be adopted by the government by end-January 2004. The 2003 supplementary budget was adopted by parliament in November 2003 in accordance with the new expenditure classification system, which will enable us to track poverty-reducing expenditures. The 21,333 "ghost workers" in the civil service that were identified in June 2003 have been removed from the payroll. To enhance transparency, the 2001 budget execution was audited by the General Accounting Office (Cour des comptes) and submitted to parliament in December 2003, to be subsequently published in the official gazette (Journal Officiel). The 2002 audit has been completed and will be submitted to parliament by end-January. 9. The estimated budget outcome for 2003 has been revised on the basis of the results for end-September. Revenue for the year as a whole is expected to be very close to the program target, despite a more appreciated currency than anticipated. This is on account of an improvement in oil revenues and the anticipated MIBA payment. The efforts to curb the government's operating outlays and limit the treasury deficit of the BCC will continue during the fourth quarter. On the basis of a preliminary census of government employees in the reunified territories, we will initiate wage payments in December 2003. The delivery of food rations to the armed forces throughout the DRC began in October 2003 and wage payments began in November 2003. Thus, for the whole of 2003, domestic primary expenditures are expected to be 1 percent of GDP higher than programmed and the nonconsolidated domestic primary surplus (cash basis) lower by 1.2 percent of GDP. The consolidated general balance (cash basis) is expected to be close to the initial target. On account of the slippages observed during the second quarter, security and sovereignty expenditures are expected to reach 2.1 percent of GDP and 1.4 percent of GDP, respectively, compared with the programmed 1.6 percent and 1.1 percent. Poverty-reducing expenditures, the definition of which has been broadened in line with our interim PRSP to include infrastructure expenditures, are expected to reach 1.2 percent of GDP. B. Monetary Policy 10. Concerning monetary policy, the BCC has gradually decreased its refinancing rate to take account of the deceleration of inflation. Thus, the rediscount rate moved from 24 percent at end-December 2002 to 15 percent as of September 30, 2003. The interbank market rate moved from 27 percent to 20 percent over the same period, while a modest pickup in activity was observed at the rediscount window. In spite of this decline, the average lending rate of commercial banks has stayed fairly high (50 percent on average per year), reflecting a still substantial risk premium. In order to manage the liquidity in the banking system, the BCC launched a new short-term financial instrument (billet de trésorerie) with maturities of 7, 14, and 28 days in December 2002. Their yields have fallen in parallel with the decline in the rediscount rate, while their outstanding stock has decreased significantly. The latter was due to the higher liquidity needs of the commercial banks as a result of a drop in public sector transfers through the banking system, and to the implementation of reserve requirements on foreign currency deposits. 11. Based on the monetary survey at end-December 2002, which reflects the changes recommended by the external audit of the BCC's accounts, broad money increased by 23 percent at end-September 2003, compared with the programmed 15 percent. The share of currency in circulation declined in favor of quasi money and, in particular, of foreign currency deposits, which would suggest some increase in the dollarization of the economy. The increase in the demand for money denominated in Congo francs following the resumption of growth and the reunification of the country was not met by the issuing of currency by the BCC. Under pressure from the government, which feared a rekindling of inflationary expectations, the BCC met the treasury's liquidity needs in Congo francs by selling foreign exchange in the market rather than issuing new larger-denomination banknotes it already had at its disposal. This policy led to a shortage of Congo francs, an appreciation of the exchange rate, and a larger-than-anticipated decline in the inflation rate, and contributed to the nonobservance of the performance criterion on the net foreign assets of the BCC at end-September 2003. The counterparts of money supply, relative to the beginning-of-period money stock, show a decline in the share of net foreign assets and an increase in the shares of net credit to the government and credit to the private sector (with over 90 percent of the latter in foreign currency). 12. On the basis of the end-September 2003 results, the money supply is expected to increase by 31 percent in 2003, compared with the 20 percent originally programmed (Appendix I, Table 1). Net credit to the government is expected to increase by 11 percent of the beginning-of-period money stock, as opposed to the initially programmed zero percent. Credit to the private sector is expected to increase by 8 percent, as expected, while credit to public enterprises is projected to diminish slightly. The net foreign assets of the BCC are expected to increase during the final quarter to minus US$618 million, compared to minus US$678 million at end-September 2003, taking account of the resumption of currency issue to meet the liquidity needs of the treasury, the gradual purchase of foreign exchange in the market by the BCC, and the anticipated net external financing. 13. During 2003, the BCC has implemented an ambitious action plan to strengthen its institutional capacity (Appendix I, Table 3A). This plan had been designed with technical assistance from the IMF on the basis of an external audit. The progress achieved in implementing the plan has helped overcome a number of shortcomings in the accounting system, and the BCC accounts now more closely reflect the monetary situation and the foreign exchange position of the BCC. The work done in this area by the Accounts Consolidation Committee has been key. However, the BCC's 2002 financial statements—which were audited by a reputable international firm—do not yet fully meet international standards. To achieve that objective, the BCC plans to take additional steps identified in conjunction with the recent IMF technical assistance mission, as described below. 14. As for the financial system and financial intermediation, the adoption of the corrective fiscal measures as envisaged in the program has successfully eliminated the nonfungibility of base money and the resulting premium of currency in circulation over bank money. The BCC has launched its own liquidity management instrument (billet de trésorerie), and fine-tuned the issuing of Congo franc notes, its techniques for intervening in the foreign exchange market, and the management of its foreign reserves. The BCC is, however, aware that additional efforts will be required in these areas—specifically, to conduct a more fine-tuned monetary policy to respond in a timely fashion to monetary and exchange rate pressures without going against the fundamentals of the economy. Finally, with financial assistance from the World Bank, external audits of nine operating commercial banks were completed, and the liquidation of five other banks has begun. The audits have identified weaknesses in the financial structure of a number of commercial banks. However, we are pleased to note that the situation of the banking sector appears to have improved somewhat over the past 12 months. Indeed, as of October 31, 2003, seven banks recorded a preliminary operating surplus, against just two in 2002. On the basis of action plans that will be finalized by the commercial banks by end-January 2004, the BCC will prepare by end-March 2004 a list of banks to be liquidated or restructured. C. Balance of Payments and External Debt 15. On the external front, the current account balance for 2003 (including grants) is expected to show a deficit of 2 percent of GDP, about half the programmed deficit. The estimate has been revised to take into account developments through end-December 2003, the decision of the Paris Club in November 2003 to consolidate external debt service in the context of the enhanced HIPC Initiative, and the updating of foreign aid. The overall balance of payments is expected to show a deficit of US$263 million. External debt service after rescheduling under the HIPC Initiative is projected at 10 percent of exports of goods and nonfactor services. The government signed bilateral agreements with all its Paris Club member creditors (except Japan) and with all its multilateral creditors, and it is currently negotiating with its creditors to have these agreements reflect the debt relief under the enhanced HIPC Initiative that the DRC obtained when it reached the decision point in July 2003. The government is contacting its non-Paris Club bilateral creditors, as well as its London Club creditors, with a view to reaching similar agreements. 16. In the area of international trade, the government has maintained
the temporary quantitative restrictions that were implemented to address
the dumping of certain textile products (printed fabrics) on the informal
market. In addition, the government has accepted the obligations under
Article VIII, Sections 2(a), 3 and 4 of the IMF Articles of Agreement.
The government is discussing with Zimbabwe to end the bilateral payments
agreement with that country, and it plans to hold similar discussions
in connection with the regional (CEPGL) payment agreement with Rwanda
and Burundi, when circumstances permit. D. Structural and Sectoral Reforms 17. In the area of governance and the fight against corruption, the government has pursued the implementation of the strategy and action plan adopted by the Council of Ministers in February 2003. The strategy focuses on four main areas: (i) establishing a legal, regulatory, and institutional framework against corruption; (ii) designing and implementing effective sanctions against corruption; (iii) reforming public institutions, particularly the civil service, the judiciary, and fiscal management; and (iv) strengthening effective partnerships among the public sector, civil society, and the international community. 18. In the fight against corruption, the draft law on money laundering and the financing of transnational organized crime and the draft anticorruption law have been prepared with a view to their submission to parliament by end-November 2003 and their adoption by end-January 2004. These draft laws reflect comments made by the IMF and the World Bank. The information campaign concerning the decree-law establishing the Code of Conduct for Civil Servants promulgated in November 2002 was launched in March 2003 in Mbuji Mayi, but had to be temporarily suspended for lack of external financing. The contents of the citizens' vade mecum (compendium of citizens' rights and obligations) have been prepared and will be approved by the government shortly. 19. Civil service reform has progressed more slowly than anticipated. However, we believe that the delays can be made up in 2004. The audit of the payroll system, to be undertaken with technical and financial assistance from France, will be completed by end-April 2004 with a slight delay. The methodology for the census of government employees, which has been drawn up with technical and financial assistance from Belgium and other donors, was adopted by the government in September 2003. However, the census will not begin in January 2004 as planned because the financing from Belgium, the European Union (EU), and the African Development Bank (AfDB) was delayed until November 2003. We had hoped to launch the retirement program (10,000 people) by end-December 2003, but this objective may not be achievable as program preparation and the mobilization of financial assistance from the World Bank have taken longer than anticipated. 20. Concerning the judiciary, an audit of the entire judicial system began in October 2003 with support from the EU and other donors. A preliminary report is expected to be available by end-December 2003. This audit, which covers the entire country, will take stock of the judicial system and propose a plan for its strengthening. 21. In the area of government finance, a comprehensive review of the government procurement system was initiated in July 2003 with World Bank assistance, and the final report will be submitted by end-April 2004. On the basis of this report, a strategy for establishing a modern regulatory and institutional framework for government procurement will be established, together with an implementation timetable. 22. Development of the private sector and reform of public enterprises. The government's goal is to improve the legal, regulatory, and social environment for enterprises, whether private or public, and thereby speed up economic growth by boosting competitiveness. 23. Investment climate. The National Arbitration Center was created by Ministerial Order of June 18, 2003, its offices were inaugurated, and about 30 arbitrators have been registered. The one-stop customs window in Matadi has been operational since June 2003. The Regulatory Authority for the Congo Post and Telecommunications Service (ARPTC) was created in 2002. Its work on sectoral policy design is ongoing and focuses particularly on the pricing of interconnections. 24. Taxation. The government has temporarily suspended the imposition of a number of levies, pending the preparation of a comprehensive action plan for the reform of taxation and quasi taxation of enterprises, which will be drawn up with World Bank assistance. In this context, the selection of a consultant has been initiated, and the work will be carried out during the first half of 2004, whereas the original timetable provided for its completion, and for the reforms to begin, on January 1, 2004. It is further anticipated that the study on the "red tape" facing enterprises will be completed by April 2004. 25. Labor code. We still expect to finalize and adopt the 20 main implementing decrees for the Labor code by end-December 2003 as planned, taking account of the conclusions of the tripartite discussions among the government, trade unions, and employers. 26. Domestic debt. An audit of government payments arrears to the private sector was completed in September 2003 for claims that had accumulated between July 1, 1997 and December 31, 2001. The total amount of the certified debt was established at US$209 million. Similar work on claims accumulated prior to June 30, 1997 is expected to be completed by end-December 2003. The Domestic Debt Committee is being created and, on the basis of these audits, will proceed to reach agreement with private creditors regarding the amounts, terms and conditions of repayment, which will be financed by the World Bank. An audit of cross arrears between public enterprises and the government was completed in October 2003. The government has decided to cancel these arrears but to pay for its utility consumption and any services rendered starting January 1, 2004, and to no longer accumulate arrears. In connection with the possible departure of certain post office (OCPT) employees in the context of its planned restructuring, wage payments arrears as well as required severance payments, have been determined. Once an agreement has been reached on the social cost of the separations, it will be financed by the World Bank's Private Sector Development Credit. The Steering Committee on the Reform of Public Enterprises (COPIREP) has been operational since July 2003. 27. Forestry sector. Forestry reform—and in particular, the new forestry code—intends to enhance transparency and equitable access to forest resources. All forestry contracts have been reviewed, and a list of contracts deemed to be valid was published in May 2003. In addition, the survey of the logging sector was completed, and its recommendations will soon be considered by the government. These recommendations are designed to simplify the structure of forestry taxation, to ease the overall tax burden, and to make collection procedures more efficient. The rebalancing of forestry taxation consists of eliminating quasi taxation while steadily increasing the area tax (taxe de superficie), so as to encourage optimal use of forest space. In the 2003 budget, the government took the decision to raise the area tax from US$0.00143 per hectare per year to US$0.50 per hectare per year. However, it has not been possible to implement the new rate because of delays in the adoption of accompanying measures. An interim rate of US$0.0625 was negotiated for 2003 with the sector. 28. Mining sector. The new mining regulations were approved in March 2003 and the new mining registry (CAMI) became operational in June 2003. However, the new mining code is still not being fully implemented because its dissemination has been essentially limited to Kinshasa. Furthermore, the mining registry's management needs improvement; we intend to achieve this in a transparent fashion in order not to jeopardize the goals of the reform. Also, although the decree establishing the Commission for the Validation of Mining Titles was approved in August 2003, its members have yet to be appointed, thus leaving a void in the implementation of the new mining code. 29. Restructuring of GECAMINES. The program of voluntary separations for 10,500 employees of GECAMINES, which began on August 11, 2003, is proceeding satisfactorily and is expected to be completed by January 2004. The diagnostic part of the external audit concerning the restructuring of GECAMINES was approved by the government in June 2003. The proposed strategy comprises the following: (i) establishing a new company—a wholly owned subsidiary of GECAMINES—which would receive the key assets of GECAMINES; the existing GECAMINES would focus on the orderly settlement of the remaining net liabilities; (ii) reviewing the partnership agreements signed in the past; and (iii) establishing a strengthened and independent management team. The experts responsible for preparing the technical studies needed to implement this strategy will be recruited in the coming months and measures concerning GECAMINES' management should be considered by the government by end-November 2003. 30. Agriculture. For the 2002/03 crop year, the government has begun (with the support of the Emergency Multisectoral Rehabilitation and Reconstruction Program-EMRRP) to implement a seed multiplication program (cassava, corn, and vegetables). In addition, a pilot program for the rehabilitation of 32 hectares of rice-growing areas is in progress with assistance from China, and the goal is to rehabilitate 850 hectares by 2005. Finally, preparations are under way for a program to improve poultry farming and the breeding of small ruminants, as well as to revitalize fish farming and artisanal fishing. These programs are expected to get under way in early 2004. Social Sectors 31. In the context of the EMRRP, eight contracts were signed with the authorities (Maîtres d'Ouvrages Délégués (MOD)) representing a total of US$41.8 million in assistance for the 67 health regions targeted by the project. The Ministry of Health's proposals regarding the provincial and national capacity-building component of the EMRRP are being finalized. As planned, a poverty/health status report (RESP) was initiated in September 2003 with the aim of preparing an assessment of the health sector. 32. Education. The government is refurbishing 140 schools, which were selected in the context of the EMRRP. The status report on the national education system (RESEN) is being drawn up, and the preliminary recommendations are expected to be disseminated shortly. The report will serve as a basis for preparing a sectoral strategy and action plan for meeting the objectives of the "Education for All" (Education pour Tous) program. 33. Social safety net. Studies on the vulnerability of the poor and the disabled and on the risks they face have been carried out and are being published. A social fund is being considered. Finally, the implementation manual for the "vulnerable groups" subcomponent of the EMRRP has been adopted, and an initial set of eight microprojects has been selected for IDA financing. 34. Poverty reduction strategy paper (PRSP). By end-December 2003, arrangements had been made for the following: (i) a workshop to launch the PRSP formulation process; (ii) an information and education campaign on the process of preparing the full PRSP; (iii) finalization of the questionnaire and the methodology for the participatory consultations to be organized at all levels (national, provincial, local, and community); and (iv) finalization and implementation of the poverty survey, to be launched in January 2004 with a view to its completion one year later. III. Policies and Measures for 2004 35. We have defined the objectives for 2004, consistent with the medium-term macroeconomic framework. The latter has been revised to reflect the updated estimates of the impact of the changing international environment, the reunification of the country, and the external debt sustainability analysis, taking account of the additional debt relief obtained in the context of the enhanced HIPC Initiative and the anticipated external assistance. The objectives for 2004 remain broadly in line with the preliminary objectives of the second review of our program: (i) a growth rate of 6 percent, (ii) an average annual inflation rate of 6 percent, and (iii) an external current account deficit (including grants and before debt service relief) of 6 percent of GDP, associated with a substantial increase in investment financed by international assistance. To achieve these objectives, we will continue to strengthen our macroeconomic framework by pursuing a prudent fiscal policy and an independent monetary policy focusing on price stability in the context of the floating exchange rate regime. We are determined to improve the economic environment and to enhance the competitiveness of our economy by deepening the wide-ranging structural and sectoral reforms, which will be expanded to encompass our entire country, with the aim of achieving sustainable growth and reducing poverty, in line with the objectives set out in our interim PRSP. The government reaffirms its commitment to implement good governance and transparency in matters concerning public affairs, as well as to combat corruption, money laundering, and the financing of terrorism. A. Fiscal Policy 36. Fiscal policy in 2004 is designed to consolidate the macroeconomic stabilization efforts, while taking full account of the effects of reunification and harnessing the peace dividends to refocus public spending on poverty reduction. Fiscal consolidation and transparency achieved through the use of the new expenditure chain will constitute the essential elements of the government's economic and financial policy in 2004. The 2004 budget, to be adopted by the government by end-January 2004, will be submitted in accordance with the new classification system and adopted by parliament by end-March 2004; it will reflect the objectives agreed with Fund staff. A supplementary budget law will be prepared, if necessary, with due regard for the goals we have set in our economic program, to take account of the establishment of our national DDR plan, the ongoing restructuring of public enterprises, and the timetable for the settlement of domestic cross arrears with the private sector (to be discussed first with IMF and World Bank staffs), as well as an update of the effects of reunification and foreign aid. 37. For 2004, the domestic primary balance (on a cash basis) is targeted to show a surplus of 2.1 percent of GDP, while consolidated government operations—including the treasury deficit of the BCC (limited to 0.6 percent of GDP)—are expected to record a consolidated overall deficit (on a cash basis, after debt rescheduling) of 3 percent of GDP (Appendix I, Table 2B). Total revenues (excluding grants) are expected to reach 9 percent of GDP, and total expenditures (on a commitments basis) are projected to amount to 17.6 percent of GDP, mainly associated with the increase in externally financed investment. 38. The revenue target takes account of the full-year impact of the tax and tariff reform undertaken in 2003, the centralization at the treasury of the revenues collected in the reunified provinces (valued at CGF 12 billion), and the continued reform of the tax and customs administrations with IMF technical assistance. We do not envisage large-scale tax reforms for 2004, but we will focus our efforts on ensuring the uniform implementation of the tax and customs laws throughout the country, including Boma and the reunified territories. Steps will be taken to disseminate the laws and procedures governing the revenue-collecting agencies (régies financières), as well as to launch an information campaign. The tax regime for small enterprises will be reformed by June 2004. A study of the taxes and duties collected outside the DGRAD will be finalized by end-June 2004. In addition, the reform of forestry sector taxation will be continued, inter alia, by increasing the area tax (taxe de superficie) from US$0.0625 per hectare to US$0.15 per hectare, by lowering quasi taxation (ONATRA in particular), and by modifying export taxes, stumpage fees, and the reforestation tax by January 1, 2004. 39. At the same time, the Customs and Excise Office (OFIDA) will continue its modernization program adopted in March 2003, including efforts to combat tax evasion by freight forwarders at Kinshasa airport, computerize the East Kinshasa customs office by end-June 2004, and establish a computerized customs office in Kasumbalesa by December 2004. This will ensure a strict control over exemptions, and unjustified exemptions for petroleum products and foodstuffs will be eliminated as of January 2004. The plan to modernize the General Directorate of Taxes (DGI), covering the entire country, will be adopted by end-December 2003. The DGI will ensure the optimal functioning of the DGE as of January 1, 2004 by (i) providing it with an adequate operating budget; (ii) adopting objective criteria for the selection of enterprises, and enhancing and ensuring the DGE's sole authority over such firms; and (iii) giving it the operational independence it needs for its functioning, including auditing tasks. Finally, further steps will be taken to set up a pilot tax center for medium-sized enterprises in Kinshasa in June 2004. An inventory of the office facilities of the Ministries of Finance and of the Budget, and of the three revenue-collecting agencies in the reunified provinces will be undertaken in the first quarter of 2004, with a view to preparing an action plan for the gradual rehabilitation of these offices. In order to reduce "red tape" for enterprises operating in the formal sector, the laws allowing the authorities to prosecute third parties in lieu of debtors for tax collection purposes will be enforced only in cases of strict necessity and as a last resort; meanwhile the laws authorizing the General Inspectorate of Finance (IGF) to conduct tax audits of firms will be abolished. The IGF will again be brought under the auspices of the Ministry of Finance and its role will be reviewed. Pending an external audit of MIBA, we will ensure that its dividends are regularly paid to the government. 40. On the expenditure side, the increase in the wage bill in 2004 will be about 27 percent, excluding the cost of retirement allowances, reflecting the impact of (i) a 10 percent salary adjustment for all civil servants and military in January 2004; (ii) a reduction of 10,000 active staff through implementation of the retirement plan for employees above retirement age; (iii) inclusion, following the government's stocktaking mission in the reunified provinces, of 135,000 civil servants (including pensionable employees) and 15,000 national police officers; and (iv) the cost of the merged army, assumed since October 2003 and to be continued until the start of the effective implementation of our national DDR program, which, we hope, will be financed by the international community. The reform of the civil service will gain momentum after completion of the nationwide civil service census in 2004. 41. Following certification of the government's domestic debt owed to private creditors, a repayment schedule will be drawn up by end-June 2004 and implemented starting in 2005. The government undertakes to pay for its centralized expenditures on the basis of billed consumption or, in the case of water and power outlays and pending the installation of meters, on the basis of monthly lump-sum allocations. An action plan for controlling centralized payments—to be adopted by end-December 2003—will be implemented in 2004, and it will include a comprehensive survey of delivery points, the installation of electricity and water meters by end-June 2004 with World Bank assistance, regular monitoring of the billing process, and greater accountability of consuming entities. 42. The efforts to control operating expenditures that have been in progress since July 2003 will be continued, focusing particularly on official travel, which will be monitored to ensure that it takes place in the public interest and not for election purposes. 43. With the restoration of peace, current expenditures will be contained, although increases in external financing will enable our country to raise the level of poverty-reducing expenditures and investments. Military and security-related expenditure and spending by institutions will be limited to 2 percent and 1.1 percent of GDP, respectively, whereas pro-poor expenditures should reach 6.3 percent (as opposed to 1.2 percent in 2003), including 3.3 percent externally funded (grants and project loans) and 1.7 percent financed through resources mobilized under the enhanced HIPC Initiative. The monitoring of these expenditures, based on the new functional classification system, is expected to be facilitated by the establishment of new expenditure execution procedures, which will also be applied to externally funded capital expenditures. 44. To improve the public expenditure management system, the government intends to pursue the implementation of the new expenditure execution procedures and the periodic production of budget-tracking statements at various stages in the expenditure cycle and in accordance with the various classifications. To ensure optimal monitoring of externally funded expenditure, monthly information on the execution and financing of EMRRP and Central Coordination Office (BCECO) projects will be reported to the Ministry of Budget and the Ministry of Finance, beginning in January 2004, to ensure its inclusion in the government flow-of-funds table (TOFE). All externally funded expenditures will be classified in accordance with the new classification system and included in the budget-tracking statements starting July 1, 2004. In addition, the following reforms will be implemented during 2004: (i) elimination of the special budgets (budgets pour ordre) and some of the budgets annexes, and the adoption by March 2004 of regulations governing the eligibility and management of the budgets annexes; (ii) reorganization by end-June 2004 of the work units in charge of government accounts within the BCC to ensure consistency in its operations as government cashier and enhance the quality of the exchange of information between the treasury and the BCC; (iii) improvements in the treasury's liquidity management by having it permanently monitor the full set of government bank accounts with a view to their rationalization and possible closure of certain accounts as of March 31, 2004; (iv) adoption of a double entry government accounting framework before June 30, 2004, with a view to its implementation as of January 2005; and (v) a comprehensive audit of the payroll system by end-April 2004 and its reorganization by end-2004. Pending this reorganization, salary payments will continue to be handled through the banking system. B. Monetary Policy 45. In 2004, the BCC intends to pursue a monetary policy focusing on price stability in the context of the floating exchange rate system. For this purpose, broad money will rise by 25 percent—a rate exceeding the rate of growth in nominal GDP—to take account of the gradual return of confidence in the Congo franc in an environment of economic recovery and reunification. There will be no further advances from the BCC to the government (pursuant to the BCC charter), and net credit from the banking system to the government will not increase. Credit to the private sector is expected to rise by 36 percent. The net foreign assets of the BCC are forecast to improve, reaching minus US$569 million at end-2004. 46. The government reaffirms the BCC's independence as enshrined in its new charter. Cognizant of the fact that a central bank's credibility is not determined solely by its independence, but also requires transparency in its operations and performance, the monetary authorities have undertaken to carry out a self-assessment of the extent to which Congolese practices conform to the IMF Code of Good Practices on Transparency in Monetary and Financial Policies, in accordance with the recommendations of the recent IMF technical assistance mission. Although the BCC has already taken a number of key steps in accordance with its action plan, it should complete the plan's implementation as soon as possible, as it is the linchpin of the BCC's rehabilitation exercise (Appendix I, Table 3B). 47. With the reunification of the country, the BCC will face the challenge of facilitating a return to normal and unified operations of the payment systems, without jeopardizing the newly acquired macroeconomic stability. Accordingly, the BCC will develop and implement a strategy to ensure efficient payment services in Congo francs throughout the DRC. In the immediate future, the BCC must restore the functionality of its branch network in coordination with the redeployment of commercial banks' branches. Also, the BCC will study the complementary role to be played by microfinance institutions and credit unions in providing payment services, especially in those communities lacking access to the banking system. 48. The BCC undertakes to further reinforce its operating framework for monetary programming in accordance with the recommendations of IMF technical assistance missions. It will adopt a number of key measures during 2004 to strengthen the conduct of monetary policy and foreign exchange operations. Accordingly, to safeguard the security of refinancing operations, the BCC's short-term refinancing facilities will be collateralized in foreign exchange. In order to improve the management of currency in circulation, the BCC will take steps to build up a stock of banknotes that will enable it to make payments without depending exclusively on banknote reflows at its teller windows. Furthermore, it will be advisable to speed up the introduction of CGF 200 and CGF 500 banknotes, which are already available, and to provide for the introduction of even larger denominations, so as to ensure that the composition of currency in circulation more closely reflects the needs of economic agents. This introduction of banknotes should be carried out in the context of the BCC's monetary programming efforts. To enhance the transparency of its foreign exchange transactions, the BCC undertakes to use single-price auctions for the sale of foreign exchange. 49. In addition, the monthly cash-flow plans of the government and the BCC will be strictly implemented in the context of the monetary programming. In this respect, the BCC will continue to strengthen its financial management, reduce its operating costs, and limit its treasury deficit to CGF 16 billion in 2004 (0.6 percent of GDP). The BCC reaffirms its commitment to abide by the April 2002 Presidential Decree and, accordingly, will continue to refrain from financing government expenditures not first authorized by the Minister of Finance (a continuous performance criterion). 50. The government is aware of the need to strengthen the financial position of the BCC so that it can ensure the full implementation of monetary policy. Accordingly, a study on the recapitalization of the BCC will be undertaken by end-January 2004. The purpose of this study will be to determine the stock of interest-bearing government securities that the state will make available to the BCC in order to endow it with sufficient resources to cover its operating expenditures as well as its outlays to conduct monetary policy and issue currency. 51. In the area of banking supervision, although a number of key measures have already been adopted with assistance from an IMF expert, the BCC intends to follow up on the recommendations of the recent IMF technical assistance mission: (i) the explicit assignment of supervisory personnel to one of the two functions (on-site inspection or off-site supervision); (ii) computerization of supervision; (iii) strengthening of the capacity for off-site supervision through a complete modernization of the existing tools; (iv) implementation of an audit plan for on-site inspections; and (v) adoption of a new chart of accounts and the electronic transmission of periodic statements by commercial banks. 52. Concerning the restructuring of commercial banks, by end-June 2004 the BCC will conclude restructuring agreements based on the plans that would be finalized by end-January 2004 by those commercial banks deemed to be viable on the basis of the audits, with an implementation timetable, as well as performance indicators. Moreover, the BCC will revoke the licenses of those banks deemed to be nonviable. Independent liquidators, financed by the World Bank, will be appointed for the Banque Concolaise du Commerce Extérieur (BCCE), the Banque du Crédit Agricole (BCA) and the Nouvelle Banque de Kinshasa (NBK) before end-March 2004, subject to completion of the recruitment process by BCECO, to promptly carry out the liquidation. Moreover, we sincerely hope that the program for the separation of the staff of these three banks will be completed with World Bank financing. C. Structural and Sectoral Reforms Governance, combating corruption, and institutional reform 53. The audit of the payroll system, which is expected to take three to four months, will begin in January 2004 and should be completed by end-April 2004. The purpose of the audit will be to establish a new, secure, and closed system, which is expected to become operational—at least in its initial, temporary, configuration—on January 1, 2005. 54. Concerning the civil servants' census, the main technical partner plans to launch an international call for bids to recruit the firm responsible for conducting the census, with a view to starting the work on June 1, 2004. The fieldwork is scheduled for September-November 2004. Based on the results of the nationwide census, a new effort will be made to eliminate "ghost workers," a list will be compiled of active personnel eligible for retirement, new personnel and payroll files will be created, and an in-depth civil service reform will be prepared. 55. The retirement program will be carried out in two phases. Initially, severance payments will have to be made to the approximately 10,000 employees who have already retired but who, owing to a lack of financing, have not yet received their severance pay. We expect to disburse these payments no later than April 1, 2004, subject to obtaining World Bank financial assistance. In the second phase, which can begin only by the end of 2004, the retirement of employees identified in the census will begin. This phase will require the definition and adoption of a methodology for managing the retirement program, including separation procedures and, possibly, a phased approach to ensure the proper functioning of departments, at least insofar as key managerial positions and the social sectors are concerned. The retirement program will start with the departure of line staff. Private sector development and public enterprise reform 56. Private sector development. Efforts will continue to focus on improving the business and investment climate. In the area of the judiciary, a training program for judges, assistant judges (assesseurs), and court clerks will be undertaken between January and May 2004, with World Bank financing. The government is committed to quickly establishing commercial courts and finding the office space necessary for their proper functioning. The work related to the reform and modernization of the legal framework will continue, given the DRC's intention to join the Organization for the Harmonization of Business Law in Africa (OHADA) in the near future. In the area of taxation, the emphasis will be on the finalization, by end-June 2004, of an action plan for the reform of direct and indirect corporate taxation, to be implemented in stages, beginning July 1, 2004. 57. Public enterprise reform comprises four main objectives in 2004. First, the submission by end-December 2004 to parliament of a reform of the legal and regulatory framework governing public enterprises (general provisions applicable to public enterprises, the law on public institutions, and the law governing divestment by the state of public enterprises and the various forms of private sector participation in, and/or partnerships with, public enterprises). Second, the sectoral groups to develop the public enterprise reform process in priority sectors should become operational shortly. Third, action plans will be prepared in 2004 for a number of key enterprises, particularly GECAMINES, the Régie des Voies Aériennes (RVA), the Société Nationale des Chemins de Fer (SNCC), the Lignes Aériennes Congolaises (LAC), Cititrain, the Office Congolais des Postes et Télécommunications (OCPT) and the Société Nationale d'Electricité (SNEL). In this regard, the work related to GECAMINES and the RVA is already well advanced. Moreover, a plan to restructure and reorganize COHYDRO will be prepared by end-June 2004. Fourth, we plan to launch a call for bids to conduct a strategic audit of the Public Enterprise Council (Conseil Supérieur du Portefeuille) by end-March 2004, which would be completed by end-June 2004 and would aim at restructuring the council and strengthening the government's capacity to monitor and supervise public enterprises. We also expect to make severance payments by June 2004, with World Bank financing, in order to facilitate voluntary departures during the restructuring of the OCPT and the separation of employees during the liquidation of the NBK, BCCE and BCA banks. 58. The government plans to request assistance from the international community to define a sectoral approach to combat fraud in the diamond sector. The tax agreements (conventions) between the government on the one hand, and MIBA and Sengamines on the other, will be revised, as well as a contract between MIBA and a foreign private corporation. Financial support will also be requested for the selection by end-March 2004 of an international firm to conduct an external audit of MIBA. 59. Forestry sector. Three types of action are envisaged by end-June 2004. First, it is expected that the preparatory work for adjusting the area tax (taxe de superficie) and for reducing export duties as well as quasi taxation in the timber transportation system will be completed shortly, followed by implementation of the relevant measures in early January 2004. Second, we intend, by end-March 2004, to publish a report on the collection of the area tax in 2003 and to strictly enforce the contractual provisions requiring cancellation of contracts of those companies that have not paid that tax. Third, we plan to launch a program for converting recently canceled contracts into "sustainable-management concessions", in accordance with the new forestry code. This program will be carried out with the help of an independent observer and completed within the next 12 months. Expired or noncomplying contracts will be canceled, and the new list of concessions will be published. The government will continue to apply the moratorium on all concessions allocated by mutual agreement (allocation de gré à gré). It will also launch the Program to Secure Forestry Revenue, to be managed jointly by the Ministry of Finance and the Ministry of the Environment. Forty percent of the area tax collections will be transferred to local government entities. Regulations implementing the new forestry code (awarding of concessions, management and development, and combating illegal operations) will be adopted. Finally, the draft Law on the Conservation of Nature will be submitted to parliament. 60. Mining sector. The reform of the legal and institutional framework of the mining sector will focus on (i) widespread dissemination of the mining code; (ii) restructuring of the mining registry; and (iii) creation of the new GECAMINES. Concerning the first point, the government will give wide publicity to the legal texts and provide training concerning the new procedures by end-March 2004. Second, by end-March 2004 the government will begin restructuring the management of the mining registry and introduce financial management and audit procedures, as well as procedures to monitor and assess registry performance, with a view to preserving the credibility of the new legal framework for the mining sector and the integrity of the mining administration. Also, a Commission for the Validation of Mining Titles will be established in January 2004 to analyze mining property disputes. Its first task will be to regularize existing mining titles, the objective being to resolve at least 85 percent of existing disputes by end-June 2004. 61. Restructuring of GECAMINES. The experts selected to examine the partnership agreements and prepare the by-laws of the new company are scheduled to begin their work in January 2004 and to present their final reports by end-June 2004. This should allow for the finalization of the government's restructuring strategy sometime between July and September 2004 and for submission of the strategy to parliament by end-December 2004, in the context of a law on the restructuring of GECAMINES. This law will define the action plan, as well as the implementing institutions, and would also authorize the sale or partnership holding of the company's assets. We believe that this approach, including the adoption of a special law, is the best way to ensure the successful restructuring of GECAMINES. 62. Agriculture and rural development. The main rural development objectives for the 2004-05 period include improving food security for rural populations and formulating a medium- and long-term rural development strategy aimed at sustaining the growth of agricultural production and incomes. This strategy is a benchmark for the HIPC Initiative completion point and will encompass the two main goals of the development of a rural strategy: (i) revival of the main agro-industrial sectors (palm oil, cotton, cocoa, café robusta and café arabica, and rubber), and (ii) development of small and medium-sized private enterprises. It is expected that the relevant studies will be launched with World Bank assistance in the first quarter of 2004, together with a study on the regulatory and fiscal environment in which agro-industries operate. The results of these studies, as well as the experience gleaned from activities related to the revival of production and the improvement of community infrastructures, will serve as the basis for the formulation of a rural development strategy. 63. In addition, the program to rehabilitate nearly 5,000 kilometers of rural roads by June 2005 will contribute to the development of productive areas and facilitate the marketing of agricultural products. The first phase of the program, which is supported by the World Bank and covers approximately 1,200 kilometers, is scheduled to begin by February 2004, a few months behind schedule. The civil engineering work (rebuilding of bridges) will continue. The authorities also plan to establish a market price information system for agricultural products, which should be operational by end-June 2004. 64. Infrastructure (roads, energy, electricity, and water). For the EMRRP, the work plan through 2005 can be summarized as follows. Concerning roads, work on approximately 3,000 kilometers of roads is expected to begin in July 2004, following the selection of contractors in an international bidding procedure, and should be completed two years later. Work in other transport sectors (ports, rivers, airports, and railroads) could begin as early as April 1, 2004 and should be completed within two years. In the electricity sector, an important study on the equipment of SNEL facilities is already under way and will last 11 months. Emergency work to ensure a reliable production capacity of 600 megawatts could begin in the first half of 2004, but the major tasks involved in rehabilitating the system will begin only in 2005 and will end in 2008. Concerning drinking water, invitations to bid have been launched for various projects. Work will start in April 2004, following the selection of the relevant enterprises, and is expected to continue for approximately two years. Finally, in the urban sector, the renewal of Kasa-Vubu and the work to combat erosion in Selembao is scheduled to begin in early 2004 and be completed by end-2005. 65. In 2004, the legal and regulatory framework governing activities in the energy sector (oil, electricity, and water) will be revised. To that end, we have already held a round table on water and plan to do the same for the electricity sector in January 2004. Working from these bases, various codes will be submitted to parliament by end-2004. Social Sectors 66. With World Bank assistance, major reforms in the social sectors (health, education, and welfare) are planned between now and 2005, encompassing the following: (i) sectoral studies and the preparation of quantified sectoral strategies aimed at progressing toward achievement of the Millennium Development Goals (MDGs) by 2015; and (ii) the rehabilitation of infrastructure. 67. Health. By March 2004, the stepped-up implementation of eight MOD contracts is expected to improve perceptibly the delivery of basic services to the population. The final version of the RESP, to be prepared with World Bank assistance, will be available in October 2004 and will serve as the basis for discussions on the sectoral strategy, which is a benchmark for the HIPC Initiative completion point. 68. Education. The action plan for the Education for All program will be presented to the international community in March 2004. The final version of the RESEN should be available by August 2004 and will be used to prepare a sectoral strategy (also a benchmark for the HIPC Initiative completion point). 69. Welfare. A sectoral welfare strategy will be defined by end-June 2004. An audit of the National Social Security Institute will be undertaken with assistance from the international community. 70. Poverty reduction strategy. The action plan has been changed to ensure completion of the final PRSP by the established deadline (August 2005). The participatory consultations will take place from January through May 2004. The reports and feedback for technical ministries and communities on sectoral and community consultations will be drafted in June and July 2004. Concurrently with the qualitative poverty survey, to be organized on a participatory basis, the authorities plan to conduct a survey on household budgets, employment, and the informal sector (applying the 1-2-3 model) in both urban and rural environments. The survey will be carried out jointly by the Poverty Reduction Strategy Technical Committee (CTSRP) and the National Statistics Institute (INS) in order to give the latter a pivotal role in the collection, analysis, and dissemination of data on poverty. The thematic groups and sectoral ministries will prepare their contributions to the PRSP by end-September 2004. Based on the poverty survey, to be completed in December 2004, the report will be finalized by end-February 2005 and then sent back for comments to the sectoral ministries, provinces, communities, and other partners by May 2005. A preliminary version of the PRSP should be available in April 2005. It could be sent for comments to the national and international partners as early as June 2005. This schedule would allow for the completion of the final version sometime between July and August 2005, before it is submitted to the government in August 2005. It is expected that the final document will be adopted by end-October 2005. 71. Statistical apparatus. The government will strengthen its statistical apparatus, particularly the INS. It will follow the recommendations of the last IMF technical assistance mission. In particular: (i) the government will adopt a law on statistical information, including the role of the INS, in all its aspects; (ii) to strengthen and enhance the efficiency of the agencies responsible for the supervision and the implementation of fiscal reforms, the government will take the necessary steps to ensure effective coordination between the work of the Commission on the Government Flow-of-Funds Table (TOFE) and the Technical Committee for Reform Monitoring, and will ensure more regular cooperation among the Public Debt Management Office (OGEDEP), the Treasury Management and Payment Authorization Directorate (DTO), and the BCC in order to facilitate the preparation of financial and monetary statistics; (iii) for monetary statistics, the central bank and commercial banks will finish preparing the new charts of account, which, when completed, will be used to classify monetary data according to the criteria of residence, economic sector, and type of financial instrument; (iv) to resume the production of reliable foreign trade statistics on a regular basis, the central bank will assume responsibility for initiating the work of the Technical Committee for Foreign Trade Statistics Management (CTSC) envisaged in the interministerial decree of February 16, 2001; and (v) in view of the future importance of sociodemographic statistics, especially in the context of developing and monitoring the poverty reduction strategy, the government will issue a decree creating a Sociodemographic Statistics Coordination and Monitoring Committee, the work of which will be supervised by the INS with the participation of the social ministries and other interested national institutions, particularly the permanent secretariat responsible for preparing the PRSP. IV. Program Monitoring, Prior Actions, and Performance Criteria and Indicators 72. The interministerial committee in charge of monitoring the programs agreed with the Bretton Woods institutions (CISPI), which is chaired by the Minister of Finance, and the interministerial committee responsible for implementing the poverty reduction strategy, which is chaired by the Minister of Planning, will continue to implement the Government Economic Program and the poverty reduction strategy. The two interministerial committees will continue to report to the Economic and Financial Committee, which is responsible for the coordination of the two programs. The latter will, in particular, ensure establishment of the rule of law, including the strict enforcement of all applicable codes and related legislative texts, and will ensure that any new agreement or contract with the government (or bearing its guarantee), including public enterprises, is consistent with them. The same will be true for any loan contracted (or guaranteed) by the government, the terms of which will incorporate the concessionality defined in the technical memorandum of understanding. The circular stipulating that any new external borrowing must be approved in advance by the Minister of Finance (with prior notice to the BCC and the OGEDEP) will be widely disseminated, particularly among the sectoral ministries and public enterprises. All new external debt contracted (or guaranteed) by the government will be recorded by OGEDEP and the BCC. 73. To ensure the success of the program, the government will implement the following prior action: submission to parliament of the draft 2004 budget law, reflecting the broad aggregates agreed with IMF staff and presented according to the new budget classification (January 2004) (Appendix I, Table 5B). 74. Program implementation in 2004 will continue to be monitored by means of semiannual reviews, semiannual quantitative performance criteria (March and September 2004), and quarterly benchmarks (for December 2003 and 2004). As shown in Table 4B of this Appendix and defined in the technical memorandum of understanding, this involves the following: (i) a floor on the net foreign assets of the BCC; (ii) a ceiling on the net domestic assets of the BCC; (iii) a ceiling on net bank credit to the government; (iv) a ceiling on BCC credit to nonfinancial public enterprises; (v) a ceiling on BCC credit to the nonfinancial private sector; (vi) a ceiling on new nonconcessional external debt (with a grant element of less than 35 percent) contracted or guaranteed by the government with maturities of more than one year (excluding IMF credit); (vii) a ceiling on new nonconcessional external debt with an initial maturity of less than one year, with the exception of normal import credits contracted or guaranteed by the government; and (viii) no accumulation of civil service, military, or BCC arrears on wages (including all forms of compensation). The program will include three continuous performance criteria: (i) the BCC will not finance any budgetary expenditure not previously authorized by the Ministry of Finance; (ii) the BCC will not purchase domestic and foreign currency banknotes on the market at a premium against bank money payments; and (iii) the government will not accumulate external arrears on debt service for which a rescheduling agreement has been concluded with its creditors or on any new borrowing. Finally, the BCC will continuously maintain SDR 8 million in its accounts with the IMF to ensure the regular payment of its obligations to the Fund. 75. The program also includes a structural performance criterion for end-March 2004 (Table 5B), namely, adoption by the BCC of the list of commercial banks to be liquidated or restructured. The structural benchmarks for 2004 include the following:
Technical Memorandum of Understanding 1. This memorandum covers the agreements on monitoring implementation of the program supported by the Poverty Reduction and Growth Facility (PRGF) of the International Monetary Fund (IMF). It establishes the information to be reported and the deadlines for its submission to the IMF staff for program monitoring. It defines the quantitative performance criteria and benchmarks, as well as the structural performance criteria and benchmarks presented in the Memorandum on Economic and Financial Policies (MEFP) of the government of the Democratic Republic of the Congo (DRC), which is attached to the letter of December10, 2003 to the Managing Director of the International Monetary Fund. A. Monitoring Program Implementation 2. Implementation of the program covering the period April 1, 2002-July 31, 2005 will be monitored on the basis of the performance criteria and benchmarks described in paragraphs 74 and 75 and Tables 4B and 5B of the MEFP of December 10, 2003. B. Definition of Quantitative Performance Criteria and Indicators 3. The quantitative performance criteria and benchmarks described in Table 4B of the MEFP are as follows:
Definitions 4. Net foreign assets of the BCC are defined as the difference between the BCC's gross foreign assets and all its external obligations, as shown in the "Integrated Monetary Survey" prepared by the BCC. The net foreign assets and all the foreign currency accounts of the BCC, as well as the Integrated Monetary Survey, will be valued at the program exchange rates, which are as follows: SDR 1 = US$1.26537; US$l = CGF313.6; and 1 Euro = CGF357.62. 5. The net domestic assets of the BCC are equal to the sum of the following line items, as they appear in the BCC balance sheet:
6. Net banking system credit to the government is defined as the sum of net claims of the central bank and of deposit money banks on the government, as defined in the "Integrated Monetary Survey" prepared by the BCC (excluding deposits linked to project-related assistance), plus the BCC's net cash deficit. 7. Fifty percent of any surplus (shortfall) over (under) the programmed amount of external budgetary assistance (excluding project assistance), net of debt service and including external debt service rescheduling, that has not been used to finance poverty-reducing expenditure, public enterprise restructuring, and domestic debt repayment (limited to cross-arrears certified by the World Bank staff) will be used to reduce (increase) net banking system credit to the government, and the corresponding performance criterion will be adjusted downward (upward) accordingly. The criteria on net foreign assets and net domestic assets will be adjusted upward (downward) and downward (upward), respectively, by the same amount. However, the criterion regarding net foreign assets will be adjusted downward without letting the stock of net foreign assets fall below the level achieved at end-December 2002. This adjustment does not apply to HIPC resources, which will be deposited in a special account at the BCC. The procedure for using this account is described in the Fund staff report on the decision point under the HIPC Initiative. 8. BCC credit to nonfinancial public sector enterprises is equal to BCC claims on nonfinancial public enterprises, as defined in the "Integrated Monetary Survey" prepared by the BCC. 9. BCC credit to nonfinancial private sector enterprises (excluding loans to BCC personnel and advances on orders of goods and services) is equal to BCC claims on nonfinancial private enterprises, as defined in the "Integrated Monetary Survey" prepared by the BCC. 10. Wage arrears are defined as validated personnel expenses not paid for more than 30 days. Wages include all compensation paid to employees (civil service personnel, including the military, national police, members of Cabinet, and BCC staff), including bonuses and allowances. Under the program, these arrears will be assessed cumulatively and partly based on the balances of the accounts of the provincial delegated payment authorization officers (ODs) in the Treasury's general account at the BCC. 11. The government will not accumulate any payments arrears on external debt, except on debt being rescheduled with creditors. 12. The definition of external debt can be found in Decision No. 6230-(79/140), para. 9, amended on August 24, 2000 (Annex I). 13. The grant element of borrowing will be calculated on the basis of currency-specific rates based on the OECD commercial interest reference rates (CIRR) on the disbursement date, as specified in the Annex. A loan is defined as concessional if, on the date of the initial disbursement, the ratio of the present value of the loan, calculated on the basis of the reference interest rate to its nominal value, is less than 65 percent (i.e., including a grant element of at least 35 percent). 14. Base money is defined as the sum of the following:
Note: "Base money" excludes all billets de trésorerie issued by the BCC. 15. The following concepts are used in the letter of intent and the Memorandum on Economic and Financial Policies:
C. Structural Performance Criteria and Benchmarks 16. The structural performance criteria and benchmarks are described in Table 5B of the Memorandum on Economic and Financial Policies. D. Reporting 17. The authorities will forward to the IMF's African Department, as soon as possible and preferably by e-mail or fax, the data and information needed to monitor program implementation. These data and information must be duly reconciled so as to ensure their internal consistency. Following are the data or documents to be submitted: 1. Exchange system
Note: The above information is to be submitted with a time lag of one day. 2. Banking system
Note: The above monthly information is to be submitted not later than three weeks after the end of each month. 3. Public sector
Note: The above information is to be submitted not later than three weeks after the end of each month. Starting in January 2004, and following implementation of the new expenditure procedures, the budget tracking statements mentioned in Annex III will also be forwarded. 4. Real sector Report as soon as possible indicators on recent economic developments and other related data, such as the consumer price index, once a week; merchandise exports (in value and volume) of crude oil, copper, cobalt and zinc, and industrial and artisanal diamonds; imports in value and volume, if possible by principal product and showing petroleum products separately; and output indicators of the manufacturing, mining, and services sectors, published in the BCC's monthly reports on economic activity. Monthly tax base (imports) prepared by the Customs and Exercise Office (OFIDA). 5. External debt
Note: The above monthly information is to be provided three weeks after the end of each month. 6. Miscellaneous A progress report on implementation of the structural reforms will be submitted to Fund staff each month. In addition, information on the legal and regulatory environment as it affects the business environment (new decrees, circulars, and laws) and price policy, as well as the official gazette, will also be reported to Fund staff.
Definition of External Debt The definitions of "debt" and "concessional borrowing" for the purposes of this memorandum of understanding are as follows:
Definitions of Poverty-Reducing Spending 1. The concept Poverty-reducing spending comprises all actions by the government for the good and well-being of the people, in the spirit of the priorities set out in the Interim Poverty Reduction Strategy Paper. 2. Criteria To identify poverty-reducing spending in the budget, the government has based its choices on the classification by the general functions of government defined as targets in favor of the people. From this point of view, spending on the following functions and sub-functions shall be considered to be poverty-reducing spending:
Budget-Tracking Statements Statement 1: Main budget-tracking statement. Monthly, starting in January 2004. This statement describes expenditures according to the four phases of the expenditure chain (commitment, verification, payment order, payment), on the one hand, and by type of expenditure, on the other, and cumulatively from the start of the fiscal year. This statement should also have two intermediate columns for payment authorizations sent to the BCC and payment authorizations pending transmission to the BCC. A specific column for automatic payments (décaissements d'office) will also be placed next to the column for payment orders. The last column of the main budget tracking statement is the "Balances Outstanding" column, which is the difference between payment orders signed by the responsible payment authorizing officer and actual payments by the BCC (not the difference between payment authorizations sent to the BCC and actual payments by the BCC). Statement 2: Main budget-tracking statement by administrative classification. Monthly, starting in January 2004. Based on the main statement, this document will present expenditures by administrative classification (2003 revised nomenclature rather than classification by type). Additionally, the statement will keep expenditures initiated by, and earmarked for, the Offices of Ministers (Cabinets) separate from those initiated by, and earmarked for, the administrations. Statement 3: Main budget-tracking statement by geographical distribution. Monthly, starting in January 2004. Based on the balances of the main statement, this document will present expenditures by type, distinguishing between expenditures in Kinshasa and those in the provinces. Computer tools and training permitting, separate service codes will be assigned for Kinshasa and for each province; this will permit tracking of the distribution of expenditures among the ten provinces and Kinshasa. Statement 4: Main budget-tracking statement, "Poverty-Reducing Expenditures." Monthly, starting in January 2004. Based on Statement 2, expenditures will be presented by type, with one line indicating the share of expenditures identified as poverty-reducing expenditures. Statement 5: Main budget-tracking statement, "Major Government Functions." Monthly, starting in January 2004. Based on Statement 2, this document will present expenditures by major government functions (as defined in the 2002 revised nomenclature). |