Public Information Notice No. 01/70

Public Information Notice: IMF Concludes Article IV Consultation with the Democratic Republic of the Congo

July 20, 2001

On July 13, 2001, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Democratic Republic of the Congo (DRC).¹

Background

Economic mismanagement, political turmoil, and a prolonged rundown in the economic and social infrastructure since the early 1990s, combined with the effects of the war that erupted in August 1998, have created a vicious circle of hyperinflation, continued depreciation of the currency, increasing dollarization, financial disintermediation, lack of saving, falling output, and generalized impoverishment of the population with the concomitant spread of diseases like HIV/AIDS.

In this context, output is well below 1990 levels and per capita real GDP has plummeted from US$224 in 1990 to US$85 in 2000 (or 23 cents a day). Over the past three years alone, real GDP has fallen by 5 percent per year on average, while consumer prices rose at an annual average rate of 107 percent in 1998, 270 percent in 1999, and 554 percent in 2000. In the first four months of 2001, consumer prices rose by another cumulative 68 percent. The gap between the official and parallel exchange rates widened from 44 percent at end 1998 to 545 percent in mid-May 2001. Gross international reserves stood at the equivalent of only 2.2 weeks of imports of goods and nonfactor services at end-2000. External debt rose to 280 percent (or almost US$13 billion) of GDP at end-2000, with arrears accounting for about 75 percent of the total. Multiple exchange rates and controls on prices have resulted in significant distortions in relative prices, and in shortages of basic items as well as petroleum products. The regulatory framework has become heavy, lacks transparency, and has been applied arbitrarily, which has resulted in a climate of suspicion and economic insecurity that has discouraged investment. Poor maintenance has led to rundown infrastructure and productive capacity.

Under the new President, Joseph Kabila, the political and security situation in the DRC has been improving since early 2001, thanks to the reactivation of the Lusaka cease fire agreement, involvement of the United Nations, and the enhancement of the inter-Congolese dialogue. A new reform-minded government was appointed on April 14, 2001, and on May 18, 2001, a presidential decree was signed liberalizing political activities.

In addition, the authorities have started the process of liberalizing, restructuring, and revitalizing the Congolese economy, especially the private sector. In this context, understandings have been reached on an economic program covering the period June 2001-March 2002 that will be monitored by the staff of the IMF.

To address the alarming economic, financial and social situation, the authorities' program contains a critical mass of bold and front-loaded adjustment measures, aiming principally at breaking hyperinflation, stabilizing the economic situation, laying the foundation for a restoration of growth and reconstruction, and reducing poverty. To achieve these objectives, the macroeconomic policies envisaged in the program include, inter alia:

· A restrained budgetary policy, centered around strict adherence to a monthly treasury cash plan;

· A prudent monetary policy consistent with the objective of breaking hyperinflation. Central to the successful implementation of monetary policy will be the restoration of the independence of the Central Bank of the Congo (BCC);

· The implementation of a floating exchange rate system. On May 26, 2001, the new system was put in place, thereby unifying the existing official and parallel market rates.

Far reaching reforms in the structural area would significantly reduce price distortions, strengthen the banking sector, restore economic security, and liberalize the economy.

Executive Board Assessment

Executive Directors welcomed the improvement in the political and security situation since early 2001 as a result of the reactivation of the Lusaka cease-fire agreement, the involvement of the United Nations, and the enhancement of inter-Congolese dialogue. Directors considered that the resumption of economic growth will depend critically on continued progress toward peace. In that regard, they called on all parties involved to strongly and fully implement the Lusaka agreement with the assistance of the international community.

Directors acknowledged the gravity of the DRC's situation, which is characterized by a vicious circle of hyperinflation, currency depreciation, financial disintermediation, falling production, and deteriorating infrastructure. Also, there is an alarming spread of epidemics, such as HIV/AIDS, and poverty is widespread.

Directors were of the view that the primary source of hyperinflation has been the monetization of uncontrolled budgetary deficits, stemming from the collapse of expenditure control and of fiscal revenues. Problems of governance, numerous tax exemptions, and significant extrabudgetary spending have contributed to this situation.

Directors commended the new authorities' interim program of bold and front-loaded adjustment measures to address this difficult situation, and welcomed its monitoring by the Fund staff. The program aims to break hyperinflation, liberalize the economy, and lay the foundation for reconstruction and growth. Directors considered that, if adhered to, the program will represent a clear break with the past, although they recognized that its implementation would represent a very great challenge.

Directors stressed that achieving the program's targets calls for strong fiscal adjustment, tight monetary policy, and well-sequenced structural and sectoral reforms. Successful implementation will depend on the timely strengthening of administrative capacity, for which the DRC will need support, including well-coordinated technical assistance, from the international community. Directors commended the authorities for the measures taken to date. These include the adoption of a floating exchange rate regime, the introduction of a monthly treasury cash flow plan, and strengthened coordination of government actions through the inter-ministerial committee (ECOFIN).

Directors urged the authorities to strictly implement the treasury cash flow plan, to centralize all receipts and expenditures at the treasury, and eliminate off-budget transactions. They encouraged making full use of the recommendations of the Fund's technical assistance on revenue and expenditure management. Directors also looked forward to the census that will review the size and structure of the civil service, as containment of the wage bill will be key to restoring a viable budget.

Directors agreed that strict limitation on advances by the BCC to the government will be crucial to achieving price stability. They stressed the need for the BCC to regain its independence in the conduct of monetary policy, and in this regard welcomed its forthcoming new statutes, as well as the intention to have its accounts audited by an internationally recognized firm.

Directors also welcomed the forthcoming new banking law that will strengthen the supervision of the banking system. They encouraged the authorities to pursue the audits of all commercial banks in a timely manner with the help of the international community and, in particular, the World Bank.

Directors noted that the new exchange rate system has de facto eliminated multiple exchange rate practices, and looked forward to the authorities' acceptance of the obligations of Article VIII in 2002. Directors also welcomed the liberalization of the diamond sector and the introduction of certification of diamonds to establish their origin.

Directors commended the authorities for their commitment to price liberalization, their implementation of a transparent and automatic mechanism for setting the prices of petroleum products, and having raised these prices to market levels. They looked forward to the mining and investment codes and the reform of the public enterprises, which will be prepared with World Bank assistance.

Directors stressed that the economic recovery calls for a transparent legal and regulatory environment, as well as economic security and good governance. They welcomed plans to empower commercial courts with the sole authority to settle disputes involving economic and financial matters. Directors also looked forward to the action plan to tackle pervasive corruption in the public sector. They encouraged the authorities to improve, with the help of the international community, macroeconomic and social statistics.

Overall, Directors considered that the Fund staff-monitored program (SMP) represents an ambitious effort by the authorities to address the difficult economic and social situation in the DRC. It deserves the timely support of the international community, through technical assistance and through highly concessional aid to finance, in particular, strategic projects selected with the help of the World Bank to relieve supply bottlenecks and social hardship. Early indications from donors in this respect were warmly welcomed.

Directors were of the view that the SMP, if implemented forcefully, will create the basis for a normalization of relations with the Fund and other international creditors. They considered that a strong track record under the SMP would help lay the foundation for a successor program supported by a PRGF arrangement, and pave the way for debt relief under the enhanced HIPC Initiative. In order to establish the basis for a successful PRGF-supported program, Directors noted the need to develop a poverty reduction strategy, improve governance, build institutional capacity, and garner the support of the international community. Many Directors noted that, given the size of the tasks and the DRC's unpropitious circumstances, it could take some time to satisfy these conditions.