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Democratic Republic of the Congo: An optimist’s agenda for economic revival and poverty alleviation

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
September 2003
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During much of its existence as a sovereign state, the Democratic Republic of the Congo has suffered poor economic performance and widespread poverty. In the 1990s and 2000, the country experienced large macroeconomic imbalances and negative economic growth. Its gross domestic product contracted by about 50 percent over the period, while its population grew by 3 percent a year. With per capita annual income of less than $100, the Democratic Republic of the Congo is one of the poorest countries in the world.

As the country’s expenditures—essentially to maintain the political elite under Mobutu Sese Seko and sustain the war effort in the late 1990s—mounted, its revenues plummeted. The government systematically monetized the resulting fiscal deficits, causing the money supply to balloon and triggering hyperinflation. With the real effective exchange rate appreciating, especially in the late 1990s, and large external interest payments falling due, the external current account deficit rose as well. With several of its key export commodities hit hard (see table this page), the country accumulated sizable external payments arrears, including, by the end of 2001, $503.4 million to the IMF and $317.6 million to the World Bank in unpaid debt service.

By the mid-1990s, the country had alienated virtually all of its major external partners, and relations with the international financial community, including the IMF, the World Bank, and the African Development Bank, had been severed.

Reforms stabilize economy

To address the country’s deteriorating economic and social conditions and bring the Democratic Republic of the Congo back into the fold of the international community, the government negotiated a staff-monitored program with the IMF in May 2001. The goals were to stamp out raging hyperinflation, stabilize the macroeconomic framework, and lay the foundation for a strong and durable revival of economic growth. Several critical measures were introduced, most in the budgetary and monetary areas:

In public finance, the authorities put in place a tightly executed treasury plan to ensure that monthly spending would not exceed actual revenues; assigned ambitious revenue targets to the fiscal agencies, with performance monitored on a weekly basis; and adopted budget laws for fiscal years 2001 and 2002, signaling their determination to put public finances back in order.

Monetary measures included liberalization of interest rates and better liquidity regulation, with a view to preserving macroeconomic stability. To correct a huge exchange rate misalignment, the authorities devalued the nominal official exchange rate from 50 Congolese francs (CFr) per dollar to CFr 313.5 per dollar, effective May 26, 2001. Concurrently, the foreign exchange market was liberalized and the exchange rate, floated. Since then, the external value of the national currency has been determined by supply and demand in the foreign exchange market.

Together with these measures, the government instituted a comprehensive structural reform program that called for, among other measures, liberalizing all key sectors of the economy, from the distribution and pricing of petroleum products to public transportation and diamond exports.

Production of key commodities plunged in the 1990s(output in metric tons, unless otherwise indicated)
19892000
Copper442,00031,000
Cobalt9,3003,600
Gold (kilograms)2,500100
Coffee95,00011,000
Timber (cubic meters)361,12316,478
Cement454,000161,000
Water (cubic meters)203,000182,000
Data: Congolese authorities; and IMF staff estimates
Data: Congolese authorities; and IMF staff estimates

Under this program, the Democratic Republic of the Congo has achieved surprisingly good results:

  • Monthly inflation declined initially to less than 1 percent, from a preprogram monthly average of 18 percent during January-April 2001. For 2001 as a whole, year-end inflation was held to 135 percent, compared with 511 percent in 2000. But GDP growth remained negative, at -2 percent in 2001.
  • The budget deficit (on a cash basis) was effectively eliminated by 2001, contributing to a hefty reduction in net bank credit to the government.
  • The reform measures also helped stabilize the external value of the national currency.
  • Finally, with prices liberalized, petroleum products became readily available, ending lengthy waits at filling stations.

The IMF and the World Bank deemed the staff-monitored program broadly satisfactory. This led the country to negotiate its first three-year program under the IMF’s Poverty Reduction and Growth Facility (PRGF) in April 2002, ending nearly a decade of isolation from the Bretton Woods institutions and the African Development Bank. (As a prerequisite, the country successfully cleared its arrears to the IMF, which amounted to SDR 403.9 million, or about $522 million, as of March 31,2002.)

IMF program aims to consolidate growth

The PRGF-supported program seeks to consolidate macroeconomic stability and further improve the business climate. IMF and World Bank financial support for the program amounts to the equivalent of some $750 million and over $904 million, respectively.

The program calls for continued prudent budgetary and monetary policies, with a view to consolidating the gains made under the staff-monitored program, especially the preservation of macroeconomic stability. The three-year arrangement also includes ambitious fiscal, monetary, financial, and structural reform initiatives:

  • The creation of a large taxpayers’ unit within the tax department is helping to improve private sector dealings with the tax administration, combat fiscal fraud, and make revenue collection more efficient. In early 2003, the import tariff structure was overhauled. The number of import duty rates was reduced from five to three, and the highest import duty rate was brought down to 20 percent.
  • Total independence has been granted to the central bank to conduct monetary policy; government borrowing from the central bank has been phased out; and a comprehensive restructuring program for the central and commercial banks has been launched under which three bankrupt state-owned financial institutions are being liquidated.
  • The investment, mining, and labor codes have been made more investor-friendly, and the government revenue and expenditure management services have been computerized. In late 2002, a code of ethics and good conduct for public servants was introduced, and, with World Bank support, ambitious programs were introduced to reform public enterprises and develop the private sector. A test case isGecamines, the collapsed state-owned mining giant, which is being restructured to trim its workforce by more than 40 percent, at a cost of $45 million in retrenchment benefits.

Performance under the PRGF-supported program has been broadly satisfactory. Year-end inflation plummeted to 16 percent in 2002, and throughout much of the first half of 2003, the annualized rate of inflation was held to around 10 percent. Activity in all major sectors of the economy, with the notable exception of manufacturing, rebounded in 2002—especially mining, telecommunications, and construction. For the first time in more than a decade, real GDP growth turned positive (3 percent) in 2002 (see table this page). As a result of the authorities’ efforts, on July 23-24, 2003, the country reached its decision point under the enhanced Heavily Indebted Poor Countries Initiative. Over time, the country will qualify for debt-service relief from all creditors of about $10 billion in nominal terms.

The Congolese economy began to turn around in 2002
19961997199819992000200120022003
(annual percent change)
Real GDP-1.1-5.4-1.7-4.3-7.0-2.03.05.0
Inflation (end of year)69314135484511135168
Broad money growth523711603824932172620
Credit to government131154104392272-7-170
(percent of broad money,
beginning of year)
(ratio in percent)
Overall fiscal balance/GDP-1.6-3.5-2.7-3.4-4.10.50-1.4
Current account balance/GDP -3.1-9.0-2.6-5.7-4.6-4.7-2.9-3.8
Data: Congolese authorities; and IMF staff estimates and projections
Data: Congolese authorities; and IMF staff estimates and projections

The way forward

Over the past two years, the Democratic Republic of the Congo, against great odds, has restored macroeconomic stability and put in place key structural reforms. If maintained and reinforced, these reforms should help revive the economy and, in time, make it possible to reduce poverty. Toward this end, the authorities are focusing on several deepened reform initiatives in tax administration, the judiciary, and the financial and public enterprise sectors. To improve the country’s chances of realizing its ambitious growth objectives, it needs substantial inflows of financial resources. With foreign private investors expected to return only slowly, the country must maintain good relations with the donor community, in particular by remaining on track with the implementation of its PRGF-supported program.

Its continued success with economic reforms may, however, be hampered by risks associated with, notably, the public’s pressing demands for rapid improvements in living standards and difficulties in securing lasting peace in the context of the political normalization that is under way. While the Congolese people are well aware of the harmful impact of political instability and war on growth, there has been little public debate of the risk to long-term growth of delayed reforms.

Indeed, in the face of the country’s extreme poverty, the government’s ability to respond effectively to pressing social demands while maintaining macroeconomic stability will be limited over the next several years. Broad recognition of this reality is essential if the authorities are to maintain reform momentum and program ownership.

Over the last three decades, the Congolese authorities have historically favored inflation-prone financial policy responses when faced with difficult policy choices. This has prevented the country from generating strong, private sector-led economic growth and allowed poverty to expand steadily. But the past two years have proved that the country can successfully deal with the difficult demands it is facing, and it should commit itself to doing so.

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