Democratic Republic of the Congo—Letter of Intent, Memorandum on Economic and Financial Policies, and Technical Memorandum of Understanding

Kinshasa, July 3, 2003

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 second program review covering the period October 1, 2002 to March 31, 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, taking into account the reunification of the DRC. 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 and February 4, 2003.

2. We are pleased to note the broadly satisfactory implementation of the PEG during its first twelve months, in spite of a difficult international situation characterized in particular by a substantial rise in the prices of petroleum products. However, we are aware that further measures continue to be needed to better manage public expenditure and its composition. The government is determined to strengthen its current efforts aimed at achieving macroeconomic stability. The Central Bank of the Congo (BCC) will continue to pursue an independent monetary policy, as required by its charter, and which will remain focused on price stability. Furthermore, the government remains committed to implementing its on-going and far-reaching structural and sectoral reform program to create an outward-oriented environment conducive to sustainable economic growth and poverty reduction throughout our national territory.

3. The year 2003 has been a year of restoration of peace and reunification for our country, and this, in turn, poses new challenges for the government. The government will execute an amended budget for 2003, which will entail submission of a supplementary budget law to the first session of Parliament in July 2003. On the basis of a review of the situation in the reunified provinces, which is to be conducted as expeditiously as possible, the government will prepare a reunification and pro-poor 2004 budget in the coming months, which will cover the entire DRC. We are determined to prepare free and transparent elections after a two-year transition period, while vigorously pursuing our efforts toward economic and financial rehabilitation and adjustment with the support of the international community.

4. The review of the performance criteria as at end-March 2003 indicates that three quantitative performance criteria, one continuous performance criterion, and one structural performance criterion were not observed. The floor on the BCC's net foreign assets was missed by US$7 million. The ceilings on the net domestic assets of the BCC and on net bank credit to the government, adjusted for external foreign aid, were overshot by 0.6 percent of GDP and 0.2 percent of GDP, respectively. Finally, the continuous performance criterion prohibiting budgetary expenditure financed by the BCC without the prior authorization of the Ministry of Finance (effective as of March 24, 2003), was not observed at end-March 2003, although these outlays had been made in agreement with the Minister of Finance but without the required documentation. The structural performance criterion concerning the adoption of new procedures for public expenditure, reestablishing and rationalizing the expenditure chain, is being put in place with some delay. 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 these three quantitative performance criteria, the continuous performance criterion, and the structural performance criterion referred to above.

5. We hope that the government's firm determination and actions to ensure the rigorous implementation of our wide-ranging PGRF-supported program will help the DRC to benefit swiftly from further consolidation of its external debt under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative. We also hope that the external financing for priority investment programs and projects in the social and infrastructure sectors, designed in collaboration with World Bank staff, will materialize. Indeed, efforts to restore growth and reduce poverty are dependent not only on government actions but also on timely financing for the government's investment programs and projects.

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 third and fourth six-month reviews of its economic program supported by the PRGF, which are expected to be completed by January 15, 2004, and July 15, 2004, 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,

Memorandum on Economic and Financial Policies for 2003

Kinshasa, July 3, 2003

I. Introduction

1. The Democratic Republic of the Congo (DRC) is going through a critical period in its history, both politically and economically. On the political and institutional side, the new Transitional Constitution was enacted on April 4, 2003. His Excellency Major General Joseph Kabila was sworn in as President of the Republic on April 7, 2003 for a transitional period of two years, after which free and transparent elections are to be held. The four Vice-Presidents, Mr. Jean-Pierre Bemba (Mouvement de Libération du Congo), Mr. Azarias Ruberwa (Rassemblement Congolais pour la Démocratie-Goma), Mr. Yerodia Abdoulaye Ndombasi (Mouvance Présidentielle), and Mr. Zahidi Ngoma (unarmed political opposition), will be sworn in on July 14, 2003. The new Government of National Unity will take office on July 11, 2003 and the Council of Ministers will meet for the first time on July 15, 2003. On July16, 2003, the new government will formally and publicly state its intention to continue to implement the Government Economic Program (PEG) and its Interim Poverty Reduction Strategy Paper. It will also present this program to the new National Assembly and the Senate before end-July 2003. A new army of National Unity will be established. The country has now been reunified and peace has been restored, although tensions remain in some regions, particularly in the eastern part of the country. We call on the international community to continue to help us fill as soon as possible the security vacuum in some parts of our vast national territory. We welcome the decision of the United Nations (UN) to deploy an international force in Ituri to restore peace. Moreover, the third phase of operations of the United Nations Organization Mission (MONUC) in the DRC continues. We hope that the Multi-Country Demobilization and Reintegration Program (MDRP) for soldiers will be put into place as quickly as possible, with the assistance of the World Bank and the United Nations. We plan to take stock of the situation in all provinces as soon as possible, with the help of our international partners and especially the World Bank, so that we can better identify their needs and consolidate the reunification of the country without jeopardizing our macroeconomic stability. On this basis, and bearing in mind the objectives set out in our interim Poverty Reduction Strategy Paper (I-PRSP), we will be better able to prepare the government's pro-poor budget for 2004, which will cover the entire country for the first time since the restoration of peace. In the meantime, we will execute an amended 2003 budget, particularly to take account of expenditures relating to the installation of the Government of National Unity and the country's new institutions, as well as the revenue expected from the reunified provinces. Accordingly, a draft Supplementary Budget Law will be adopted by the government by end-June 2003 and submitted to the first session of Parliament in July 2003.

II. PEG Implementation During the Period October 2002-March 2003

2. We are pleased to note that implementation of the government economic program (PEG) was broadly satisfactory during the period October 2002-March 2003, despite the need to better manage public expenditure and its composition, and some delays in implementing structural and sectoral reforms since the start of 2003. Taking into account the less favorable international situation and the impact of reunification, we believe that the overall objectives for end-2003 can still be met. We are aware, however, that one of the major challenges facing the new Government of National Unity will be to maintain interministerial coordination. To this end, we plan in particular to strengthen the two interministerial committees responsible for monitoring the implementation of the PEG and the poverty reduction strategy, respectively, and to take into account the new composition of the government. With the help of the international community, we will continue to strengthen the administrative capacity of the central government and, gradually, the provincial and local governments as well.

3. Our estimates confirm the resumption of economic growth in 2002, which amounted to about 3 percent, as programmed (Table 1). Preliminary estimates for 2003 confirm this trend. According to the new National Investment Promotion Agency (ANAPI), which was created to simplify administrative procedures, more than forty investment applications from the domestic and foreign private sector covering the period 2003-07 and amounting to some US$1.3 billion have been approved. End-of-period inflation was 16 percent at end-December 2002, compared with the originally programmed rate of about 13 percent for 2002, down sharply from 135 percent at end-2001. At end-May 2003, end-of-period inflation stood at 4.6 percent, owing to the rise in the prices of petroleum products by 9 percent on February 15 and 10 percent on March 17. The rate adjusted for these two price increases was around 2.5 percent, in line with the inflation rate of 6 percent projected for the end of the year. The exchange rate depreciated by 23 percent in 2002, but has remained stable at around CGF 415 per US$1 since the beginning of 2003.

Fiscal policy

4. Through end-2002, fiscal performance was better than originally programmed and largely in line with the estimates made with Fund staff during the first program review. Revenue (excluding grants) was higher than expected thanks to oil revenue, while total expenditure was lower. However, current expenditure, particularly on goods and services, was higher than anticipated despite the measures adopted by year's end to freeze operating expenditure with the exception of certain minimum allocations (dotations minimales), while capital expenditure, particularly externally financed capital expenditure, was far lower than programmed, as project-related disbursements were much smaller than anticipated. As a result, the planned shift in the composition of expenditure in favor of social and infrastructure expenditure was not achieved. Expenditures of the Institutions politiques (including the Presidency) and on security and defense continued to rise, including during the last quarter, and amounted to 48 percent of primary expenditure for the year (3.3 percent of GDP). In addition, arrears estimated at 0.6 percent of GDP were accumulated on utility outlays. The domestic primary balance (cash basis) nonetheless showed a surplus representing 1.4 percent of annual GDP, compared with the 0.9 percent initially programmed, and the overall unconsolidated balance a surplus of 0.6 percent instead of the projected deficit of 0.3 percent of GDP (Table 2A). Despite the BCC's higher-than-anticipated cash deficit, the consolidated overall balance (cash basis) was balanced, compared with the programmed deficit of 0.4 percent. Taking account of net foreign disbursements, unadjusted net bank credit to the government was much lower than programmed.

5. The government's 2003 budget was adopted by Parliament on March 2, 2003, and follows the new functional, administrative and economic classification system. In addition, the budget provides for the elimination of 153 budgets annexes. The monthly cash-flow plan (cash basis) continues to be implemented. However, the BCC, in agreement with the Minister of Finance, but without the required documentation, has financed extrabudgetary expenditure in violation of the presidential decree of April 12, 2002. Consequently, the applicable continuous performance criterionperformance criterion—in effect since March 24, 2003—was missed byin effect since March 24, 2003—was missed by roughly US$1.2 million. During the first two months of the year, expenditure was executed by renewing the monthly appropriations for 2002. The budget execution instructions that are about to be published will initiate implementation of the new expenditure chain, from the commitment to the payment phase.

6. Although revenues were on track during the first three months of 2003, we realize that measures need to be taken to limit exemptions and to eliminate the offsetting of revenue. Total expenditure was 0.5 percent of GDP lower than projected, owing in particular to externally financed project expenditure and external debt service, which were lower than projected. Domestic primary expenditure, however, was 0.4 percent of GDP higher than programmed. Despite a larger than programmed increase in military and police salaries and the delay in eliminating "ghost workers" from the government payroll, wage expenditure was lower than expected, mainly as a result of the postponement of the planned increase in civil service wages. There were no wage arrears at end-March 2003. The census of civil servants, which was to have been conducted with assistance from Belgium and the UNDP, was delayed. Military and security expenditure, as well as expenditure by the Institutions politiques (including the Presidency), continued to rise, owing to the Intercongolese Dialogue and the security vacuum in some parts of the country. The domestic primary balance (cash basis) shows a surplus of 0.1 percent of GDP as opposed to the 0.5 percent programmed, the overall unconsolidated balance (on a cash basis) a surplus of 0.1 percent of GDP instead of a 0.1 percent deficit, and the consolidated balance a deficit of 0.1 percent of GDP instead of 0.2 percent. All certificates of deposit were paid off, as provided for in the program. Net bank credit to the government, before adjustment to account for net external disbursements, was much lower than expected.

7. Temporary cash-flow difficulties led the government to have recourse to interest-bearing advances from oil-producing companies in the amount of US$9.5 million in January and February 2003. However, these advances were fully repaid by end-March 2003, and the expenditure financed with these advances—which were included in the government cash–flow plan—were duly executed with the prior approval of the Minister of Finance.

8. There was a slight delay in the implementation of the planned tax measures and reforms owing to administrative constraints. Cash-flow management benefited from the regular updating of the expenditure commitment plan that defines ministerial appropriations, and the elimination in February 2003 of the mechanism for offsetting revenues from the quasi-taxation of petroleum against fuel expenditure by the armed forces and the Presidency. However, the balances of the budgets pour ordre (special budgets) have not yet been transferred to the general treasury account, and tax payments owed by GECAMINES are still being made through offsetting, as well as part of the taxes owed by the diamond company (MIBA).

9. The reforms to modernize the tax and customs administrations have continued. In particular, in March 2003 the Large Enterprises Directorate was established within the General Directorate of Taxes and is now operational. The enterprises covered by this directorate have been identified, and new audit procedures defined by decree in March 2003 will become operational upon publication of the implementing regulation, scheduled for end-June 2003. A new tax code is being drafted. The program to reform and modernize the Customs and Excise Office (OFIDA) was approved in March 2003, and the one-stop window in the port of Matadi will start its operations at end-June 2003. Also, by end-June, OFIDA's operations will be fully computerized. In addition, the 2003 budget was adopted together with a set of laws reforming customs tariffs and indirect taxation. The new tariff law establishes a simplified tariff comprising three rates (5, 10, and 20 percent), while eliminating the surtax and preferential treatment options, and the sales tax (ICA) has been streamlined and extended to products subject to excises with a view to introduce the VAT. Petroleum taxation has been simplified by eliminating quasi-fiscal levies, increasing excise taxes and subjecting them to the turnover tax. Various implementing regulations are currently being finalized. Finally, the General Directorate of Administrative and State Revenues (DGRAD) has prepared a new harmonized revenue classification scheme providing for the elimination of some of the taxes it administers.

10. On the expenditure side, and as provided for in the program, the government has continued to emphasize: (a) the strengthening of fiscal management; (b) enhancing the transparency of budget procedures; and (c) increasing the capacity to track execution of public expenditure, with particular emphasis on poverty-reducing expenditure.

11. To this end, efforts undertaken in the area of public expenditure management have continued, although at a slower pace than anticipated. Thus, while the 2003 budget has been presented using the new classification system, the new expenditure execution and recording system has not yet been implemented, although it has already been approved. However, it will become operational in mid-June 2003, at the same time as the reorganization of the key directorates responsible for the expenditure chain. A training plan will be prepared shortly and a computerized expenditure execution system will be finalized by end-July 2003. The computer link between the central bank and the treasury, which is intended to expedite and increase the security of data sharing between these two institutions, should be installed by end-July 2003. Finally, execution of the 2001 and 2002 budgets will be audited by the General Accounting Office (Cour des Comptes).

12. Work to reform the public procurement system was begun with the help of the World Bank in February 2003 with a view to conducting a full audit of the public contracting system by end-December 2003, which will include institutional and legal issues.

Monetary policy

13. To take account of the acceleration of inflation in the final quarter of 2002, the BCC increased its refinancing rate. The rate went from 12 percent to 26 percent in December 2002 and then to 25 percent in May 2003, thus keeping the rate positive in real terms. To regulate liquidity, the BCC launched a new financial instrument in mid-December 2002, the billet de trésorerie, with maturities of between 1 and 4 weeks. As of March 31, 2003, the rate on this paper was 26 percent. Since May 2003, the rate has been in the 20-25 percent range, depending on maturity.

14. Based on the monetary survey at end-December 2002, which incorporates the recommendations of the external audit of the BCC accounts, broad money increased by 26 percent, compared with the programmed 35 percent. Net domestic credit declined by 16 percent in relation to the beginning-of-period money stock, mainly owing to the fact that net credit to the government fell by 17 percent relative to the beginning-of-period money stock, compared with 6 percent in the program. Net credit to the private sector and to public enterprises only grew slightly, compared with a programmed increase of 8 percent. After several years of steady decline, net foreign assets of the banking system increased, although less than expected.

15. During the first quarter of 2003, based on the BCC accounts that incorporate the recommendations of the external audit, money supply increased by 6 percent, as compared with the programmed 4 percent. Net credit to the government declined by 6 percent of the beginning-of-period money stock, compared with 1 percent in the program. Credit to the private sector expanded 1 percent instead of the projected 2 percent, while credit to public enterprises was slightly higher. Net foreign assets of the banking system continued to increase, but more slowly than anticipated, amounting to 2 percent instead of 3 percent of the beginning-of-period money stock. However, taking account of the larger-than-anticipated amount of net nonproject external assistance, the performance criteria for end-March 2003 regarding net domestic assets of the BCC and net credit to the government were exceeded by 0.6 percent and 0.2 percent of GDP, respectively. Compliance with the floor on net foreign assets of the BCC fell short by US$7 million.

16. Mindful of the financial sector's key role in economic development, during the first quarter of 2003, the government continued to implement various measures aimed at overhauling and strengthening the legal, institutional, regulatory, and operational framework of the financial system. On March 28, 2003, the Board of Directors of the BCC was appointed by presidential decree, and the same decree reappointed the Governor and Deputy Governor for terms of five and four years, respectively. A steering committee was created in February 2003 to coordinate and assess the implementation of financial sector reforms. The BCC has adopted several important measures of its action plan (Table 3), which takes account of the recommendations of the internal and external auditors, IMF technical assistance missions, and the IMF safeguards assessment mission. As a result, with the support of the Accounts Review Committee, significant progress has been made in cleaning up the accounts of the BCC and drafting a roadmap toward the adoption of international accounting standards. The Bank Restructuring Committee (COREBAC) has been integrated into the Banking Supervision Directorate, which, in turn, has been reorganized. The BCC also issued anti-money laundering instructions. These instructions, which are under discussion with financial institutions, will benefit from IMF technical assistance and should be finalized when the anti-money laundering legal framework is put in place by end-2003. Furthermore, audits of the commercial banks have begun and should be completed by end-August 2003, and the government decided in March 2003 to liquidate the Banque Congolaise du Commerce Extérieur (BCCE) in its present form and structure.

Balance of payments and external debt

17. In light of developments through end-December 2002 and an update of external assistance, the current account balance for 2002 (including grants and before debt relief) is expected to show a deficit of 2.9 percent of GDP, less than the 3.7 percent programmed. The overall balance of payments is expected to show a deficit of US$161 million (3 percent of GDP). Total external debt was estimated at US$13.3 billion at end-December 2001. External debt service after Paris Club rescheduling is estimated at 2.9 percent of exports of goods and services in 2002 and 14.2 percent in 2003. A comprehensive debt sustainability analysis has been prepared based on the reconciliation of the external debt statistics with Paris Club creditors. On this basis, the external-debt service estimates of the first program review with IMF staff were revised upward. Consequently, for 2003 external debt service prior to the enhanced HIPC Initiative has increased by approximately US$13 million relative to the program. The government has concluded bilateral agreements with all its Paris Club creditors except Japan, and arrears clearance procedures with all of its multilateral creditors, except the European Investment Bank (EIB) and the Banque de Développement des États des Grands Lacs (BDEGL). The government has contacted its non-Paris Club bilateral creditors to reach similar agreements. As for its commercial bank creditors, the government has contacted the Bank of Tokyo, which assists the London Club in obtaining the required statistical data on outstanding debt. In addition, the DRC hopes to obtain external debt-service relief as quickly as possible under the enhanced HIPC Initiative.

Structural and sectoral reforms

18. As provided for in the program, the government has continued to implement wide-ranging structural reforms with a view to creating an environment conducive to private sector activity and economic recovery. With assistance from the IMF, and especially the World Bank, the reforms encompass: good governance and the fight against corruption, institutional capacity building, the business environment, public enterprises, the financial sector, natural resources (mining and forestry), the rehabilitation of key infrastructure (transportation, water and electricity, the sanitation system, urban and rural development, and the environment), the social sectors (education, health, social protection, and community development), and agriculture.

19. Governance and combating corruption. The government has continued to emphasize the promotion of good governance and anticorruption efforts. A strategy and action plan for combating corruption were adopted by the Interministerial Committee for the Implementation of the Poverty Reduction Strategy and approved by the Council of Ministers in February 2003. The strategy has a four-pronged approach: (a) creation of a legal, regulatory, and institutional framework for combating corruption; (b) reform of public institutions, including the civil service; (c) design and implementation of effective penalties for corruption; and (d) strengthening of effective partnerships between the public sector, civil society, and the international community. In the legal area, the Code of Good Conduct for Civil Servants was enacted in November 2002 and a campaign to explain the code was launched in Mbuji Mayi in March 2003. The decree on the organization and operations of the Observatoire du Code Ethique et Professionnel (OCEP) was published in April 2003, and OCEP will become operational in September 2003. Finally, the anticorruption commission was created in August 2002.

20. The strategy adopted by the government for institutional reform focuses on three priority areas: the civil service, the legal system, and fiscal management. The government is introducing the following priority measures for the reform of the civil service: (a) elimination of previously identified "ghost workers" from the government payroll; (b) with assistance from Belgium, the UNDP, and the World Bank, the preparation of a methodology for a census of the civil service; and (c) with World Bank support, preparation of a methodology for the departure of employees eligible for retirement. In addition, an external audit to prepare for the reorganization of payroll management will begin shortly with assistance from France.

21. Private sector development and public enterprise reform. The government's objective is to improve the environment for both public and private enterprises, in order to strengthen the foundations for sustainable economic growth.

22. For the private sector, a status report on the taxation of enterprises was submitted to the government in January 2003 in preparation for the streamlining of the tax system. In addition, the National Investment Promotion Agency (ANAPI) was established in December 2002 and, with World Bank assistance, will shortly launch a study of the administrative barriers to private sector development. The "Cadre Permanent de Concertation Economique"—a forum for dialogue between the private sector and the government—has been established. The audit of cross-arrears between the government and public enterprises should be completed by end-September 2003, implying a brief delay. Based on the results of this audit, a timetable for the clearance of these arrears will be established by end-2003. In the area of business law, the government intends to join the Organization for the Harmonization of Business Law in Africa (OHADA) shortly.

23. The diagnostic study concerning accounting practices and the functioning and operations of public enterprises was submitted to the government in April 2003. In addition, environmental audits of the Société Nationale des Chemins de Fer du Congo (SNCC), Citytrain, Régie des Voies Aériennes (RVA), Lignes Aériennes Congolaises (LAC), Office Congolais des Postes et Télécommunications (OCPT), and Société Nationale de l'Electricité (SNEL) have been conducted. However, the drafting of restructuring plans for these enterprises has been delayed because the Steering Committee on the Reform of Public Enterprises (COPIREP), established in October 2002, is not yet operational. The appointment of its chairman, general secretary, and two deputy-general secretaries, initially set for January 2003, will now take place before end-June 2003. Studies have also been conducted to determine payments arrears, and the compensation needed for the possible separation of some staff of OCPT in the context of its reorganization, as well as of the employees of the NBK, BCCE, and BCA in the context of the liquidation of these institutions.

24. Banking sector. As part of the overall reform of the banking sector, the government, with World Bank assistance, is taking the following steps: (a) the updating, by July 2003, of the previously completed audits of four banks, namely, Banque Commerciale du Congo (BCDC), Union des Banques Congolaises (UBC), Banque Internationale de Crédit (BIC), and Stanbic Bank; (b) the completion, by August 2003, of audits of the five commercial banks that have not yet been audited, namely, Banque de Commerce et de Développement (BCD), Citibank, Banque Internationale pour l'Afrique au Congo (BIAC), Banque Congolaise, and First Banking Corporation; (c) the closing of credit institutions considered bankrupt and beyond recovery, such as Nouvelle Banque de Kinshasa (NBK) and Banque de Crédit Agricole (BCA), which will be closed by December 2003. The Banque Congolaise du Commerce Extérieur (BCCE), which has also been declared bankrupt and excluded from the clearinghouse, was placed in liquidation in its current form in March 2003; and (d) the drawing-up by end-December 2003 of appropriate recovery plans for those banks considered viable on the basis of the above-mentioned audits.

25. Forestry sector. The reforms under way aim at clarifying the rules on access to and the management of forestry resources, as well as the rules governing participation in the profits generated by forestry resources. To this end, as provided for in the program, in April 2003 the government initiated a sectoral economic review, the recommendations of which (expected in October 2003) will be taken into account in the 2004 budget law and in the implementing regulations for the new forestry code. These recommendations will aim at simplifying the tax structure for the forestry sector, making collection procedures more reliable, and introducing market mechanisms and incentives to encourage high-value added industrialization, equitable sharing of forestry revenues, and sustainable development. The recommendations will also seek to define the mechanisms for transferring the 40 percent share of the area tax (taxe de superficie) to local communities.

26. However, we are aware that the introduction of the planned measures to protect the national forests against the practices used in the past has been delayed. Consequently, although the new forestry code was published in August 2002, publication by ministerial order of the 117 concessions that have been declared valid did not occur until May 24, 2003, and the publication by interministerial order of the collection methods and accompanying policies for the area tax, which has been increased from US$0.0014 to US$0.25 per hectare, was postponed to end-June 2003.

27. Mining sector. We are pleased to report that the reform of the legal framework for the mining sector was completed in April 2003 with the publication by decree of the new mining regulations, the mining registry, and the mineral title validation commission. The new mining registry became operational in June 2003.

28. The government has approved the voluntary separation program at GECAMINES, and two memorandums of understanding establishing the terms and conditions of the program were signed by the Ministry of Finance, the central bank, and the commercial bank responsible for making the payments. The Central Coordination Office (BCECO) will be responsible for supervising the program on behalf of the Ministry of Finance. The decree creating the standing committee for the restructuring of GECAMINES was signed in March 2003 and its members were appointed in early June 2003. Also, the diagnostic portion of the strategic audit was approved by the government in May 2003. Finally, the strategy for restructuring GECAMINES is being prepared and should be adopted by the government before end-December 2003.

29. Poverty reduction strategy. Since October 2002, the standing committee responsible for monitoring the implementation of our poverty reduction strategy has been preparing a national survey on poverty, including a pilot program at end-2002. Also, a timetable to prepare a full PRSP by the third quarter of 2005 was defined and adopted by the government in June 2003, following discussions with all domestic stakeholders and external partners.

30. This timetable includes specifically: (a) capacity building for the various entities¹ and definition of the roles of the various domestic stakeholders involved in the process of preparing the PRSP;² (b) the preparation and implementation of participatory consultations at all levels (national, provincial, local, and community); (c) the contribution of thematic groups and technical ministries; (d) the implementation of the poverty survey; (e) the preparation of the PRSP based on the abovementioned contributions; and (f) ownership of the process by all participants in the process of preparing the final PRSP.

III. Policies and Measures for the Rest of 2003

31. The medium-term macroeconomic framework was revised to reflect the updated estimates of the impact of the new international environment (including oil prices), the reunification of the country, and the external debt sustainability analysis with 2001 as the reference year. This analysis took account of the terms of the bilateral agreements concluded in the context of the September 2002 Paris Club agreement, the expected external assistance, and the delay in reaching the enhanced HIPC Initiative decision point. We have set the following objectives for 2003, which remain generally in line with the preliminary objectives set out during the first review of our program with Fund staff: (a) a real GDP growth rate of 5 percent; (b) an average annual inflation rate of 14 percent; and (c) an external current account deficit (including grants and before debt-service relief) of 3.8 percent of GDP, associated with an increase in anticipated investment financed by international aid, although not as strong as originally expected. To achieve these objectives, we will continue to strengthen our macroeconomic framework by pursuing a prudent fiscal policy and an independent monetary policy, the main objective of which will remain price stability in the context of a floating exchange rate system. We are determined to improve the economic environment and our economy's competitiveness by deepening the structural and sectoral reforms under way, with a view to achieving a sustainable growth rate and poverty reduction consistent with the objectives set out in our interim PRSP. The government undertakes to resolutely put in place good governance and transparency in the management of government affairs and to combat corruption and money laundering, as well as the financing of terrorism.

32. Fiscal policy. Consolidation will continue to be the focus of the government's fiscal policy, with strict adherence to our monthly cash-flow plan and a clear resolve to combat poverty. The 2003 budget, approved by Parliament in February 2003, contained only revenue and expenditure relating to the territories under the control of the government. To take account of the immediate effects of reunification on both revenue and expenditure, the government adopted in June 2003 a supplementary 2003 budget which, based on the new budget classification system, will be submitted to Parliament in its first session in July 2003. By end-2003, we plan to take stock of the situation in the reunified provinces, conduct a thorough census of civil service and military personnel, and prepare a reunification, reconstruction, and pro-poor budget for 2004. Until this reunification budget is approved, we plan to control expenditure strictly in the reunified territories through the end of the year. All stakeholders in the government will undertake the necessary efforts to ensure that revenue collected in the reunified provinces is transferred to the general treasury account as quickly as possible.

33. With the continued implementation of revenue mobilization measures and better control of expenditures, total revenue (excluding grants) should grow to 8.3 percent of GDP (a 25 percent increase over 2002), while total expenditure before debt-service rescheduling is expected to reach 15.2 percent of GDP (an increase of 76 percent). The domestic primary balance (cash basis) should show a surplus of 1.7 percent of GDP, and consolidated government operations, including the net balance of BCC operations, are expected to post a deficit (cash basis) of 1.4 percent of GDP (Table 2B).

34. The tax revenue target takes account of the implementation in May 2003 of the customs tariff and indirect taxation (turnover tax and excises) reforms. Its revenue impact is estimated at 0.2 percent of GDP in 2003, or 0.5 percent on an annual basis. In response to the report on the taxation of enterprises submitted to the government in January 2003, discussions will be held with public and private enterprises to simplify the tax system, including for the financial sector. In the meantime, no new measures affecting corporate income tax are planned for 2003. However, in the case of quasi-taxes (the report indicated their complexity and the red tape they can create for companies), a number of taxes administered by DGRAD for which there is no legal basis will be eliminated by end-July 2003 with the publication of a new harmonized classification of the taxes collected by DGRAD. The main agencies receiving various duties and taxes not collected by DGRAD (OCC, ONATRA, OGEFREM, Industrial Promotion Fund, etc.) are currently being audited.

35. To ensure effective implementation of the legislation on fiscal revenue reform in the FY 2003 Budget Law, the government will take the following steps by end-June: (a) elimination of the quasi-taxation of petroleum products; (b) adoption of the implementing regulations for the turnover tax to provide for the deductibility of taxes on raw materials and intermediate goods, and to clearly delineate the applicability of the turnover tax; (c) elimination of excises on sugar, cement, and matches; (d) elimination of unjustified exemptions and all offsetting, except with respect to the collection of excess taxes; and (e) elimination of all advance tax payments.

36. The efforts to increase the effectiveness of the tax collection agencies will continue and taxpayers' paperwork will be reduced with technical assistance of Fund staff. In this context, the one-stop window in Matadi, which will be computerized and apply streamlined procedures, will become fully operational by end-September 2003, and the OFIDA directorate for the Bas Congo province will be reorganized at the same time. In the context of the OFIDA reform and modernization program, efforts to simplify procedures and reorganize units will continue in the rest of the country, starting before year's end with the offices and provincial directorate for Kinshasa (Kin Est and Kin Aéro). The new customs code will be enacted in September 2003. The verification of exemptions will be stepped up and ad hoc exemptions as well as exemptions not included in the new tariff law, and all offsetting of revenues, will be eliminated by end-June 2003 to ensure greater transparency and promote consolidated fiscal management. Finally, a unit responsible for ex-post audits will be created and an audit plan will be adopted by end-2003. The program to modernize the General Directorate of Taxes will be finalized and approved by September 2003. In 2003, the implementation of this program (for which IMF technical assistance has been requested) will focus on strengthening the Large Enterprises Directorate, ensuring the generalized use of the taxpayer identification number pursuant to a decree to be published by end-June 2003, simplifying the taxation of small and medium-sized enterprises, and preparing for the creation in 2004 of a pilot tax center for medium-sized enterprises in Kinshasa. The implementation of these administrative reforms should make it possible to consider introducing a VAT around 2005. Furthermore, the government is committed to ensuring that all forms of taxes, duties and levies (national and regional) can only be created with the approval of the Minister of Finance. A decree to this effect will be published by end-July 2003. Finally, as indicated in the program, the government undertakes to limit the number of taxpayer audits, particularly those concerning enterprises, and to increase the transparency of its tax audit procedures.

37. On the expenditure side, the BCC firmly commits itself to refrain from financing any expenditure not previously authorized by the Minister of Finance. A joint commission comprising the Office of the President, the Ministries of Finance and Budget, and the BCC will be created for this purpose, to ensure weekly monitoring. The wage bill (excluding the cost of retiring people) will be, on average, 19 percent higher than in 2002. We do not envisage any wage payments in the reunified provinces until the employees who are to receive them have been identified and a procedure is in place to ensure that wage payments are made to the intended recipients. The growth of the wage bill reflects a wage increase solely for the civil service (the military and the police having already received an increase at the start of the year) of 10 percent in July, the elimination from the government payroll of 26,000 previously identified "ghost workers" by end-July 2003, the retirement of 10,000 civil servants by year's end, for which financial assistance from the World Bank has been solicited, the establishment of new institutions, and the payment of wages in the reunified provinces to about 102,000 workers. The civil service reform will be undertaken, with priority given to: (a) the removal from the government payroll by end-July 2003 of previously identified "ghost workers"; (b) a complete audit of payroll procedures by end-December 2003, with assistance from France, with a view to reforming these procedures by end-June 2004; (c) approval of the methodology for managing the retirement program, with help from the World Bank, by end-August 2003, with a view to its adoption by the government by end-October 2003; (d) the effective start of retirements by end-December 2003 with the financial support from the World Bank; and (e) approval of the methodology for the civil service census, its adoption by the government by end-July 2003, and the selection of consultants to begin the census in early January 2004 and complete it by end-August 2004. The procedures for the treatment of cross-arrears of domestic debt and a timetable for their clearance, as well as an action plan to improve the control of utility outlays, will be prepared by end-2003, following completion of the audit of government domestic debt financed by the World Bank, scheduled for end-September 2003.

38. With the restoration of peace, the increase in disbursements of foreign aid to finance investment projects, and external debt-service relief under the enhanced HIPC Initiative, the execution of the amended 2003 budget should involve a significant shift in the composition of expenditure toward pro-poor spending in accordance with the public expenditure review undertaken with World Bank staff. Thus, the share of military and security spending and the share of sovereignty expenditure are not expected to exceed 1.6 percent and 1.1 percent of GDP, respectively, in 2003, while the share of pro-poor spending, as defined in the new classification system based on the priorities in our interim PRSP, which will be extended to the entire territory, is expected to reach 2 percent of GDP. These expenditures include spending financed with resources released under the HIPC Initiative, which are expected to amount to 0.4 percent of GDP. The main sectors covered are: agriculture, health, education, and social protection. The share of infrastructure expenditure not included in pro-poor spending should total 1.6 percent of GDP. The tracking of poverty-reducing expenditures will be made easier by the special code included in the new budget classification to identify these expenditures separately upon execution. The advisory committee on tracking poverty-reducing expenditure will be established by end-July 2003. Finally, a special subaccount will be opened at the BCC by end-June 2003 to deposit resources released under the HIPC Initiative.

39. The government is firmly committed to pursuing reforms aimed at improving the control and tracking of public expenditure as well as the transparency of fiscal management. Accordingly, particular attention will be given to the implementation of the new expenditure chain, which is intended to restore control over commitments while ensuring greater transparency of execution. Effective implementation includes government approval of the new procedures manual and of the reorganization of the four directorates involved by end-June 2003, introduction of the commitment voucher (bon d'engagement) by end-June 2003, and putting in service the new computer system that will record all stages of the expenditure chain. This reform allows for a quick improvement of the quality of the tracking of expenditure execution at the different stages in the process and on the basis of the various classification systems in the new nomenclature (see table on budgetary tracking statements attached to the technical memorandum of understanding). Data sharing between the Budget, Finance, and Planning Ministries, the BCECO and the BCC will be formalized to ensure better tracking and proper integration of externally financed expenditure. The work on establishing a government accounting system, including the preparation of a chart of accounts based on double-entry bookkeeping, is about to begin with World Bank support and 2005 has been targeted for its implementation. A comprehensive audit of the public procurement system will be completed with assistance of the World Bank by end-December 2003. Special budgets will be eliminated in the 2004 budget and the funds involved will be transferred to the general treasury account. Finally, execution of the 2001 and 2002 budgets will be audited by the General Accounting Office (Cour des Comptes) by end-July 2003 and end-September 2003, respectively. The audits will be presented to Parliament before end-2003. The preparation of the 2004 budget will include the further rationalization of the management and number of budgets annexes.

Monetary policy

40. The BCC intends to pursue a monetary policy aimed at price stability in the context of a floating exchange rate system. Accordingly, broad money will increase by 20 percent in 2003, in line with the rate of nominal GDP growth. The BCC will make no new advances to the government (in observance of its charter), and net banking system credit to the government will not increase. Credit to the private sector is expected to grow by 8 percent of the beginning-of-period money stock. The net foreign assets of the BCC are expected to increase.

41. Despite the entry into force of the new Transitional Constitution of the DRC, the government reaffirms that the BCC will retain its independence as set out in its new charter. The government is committed to obtaining parliamentary approval for an amendment of Article 168 of this Transitional Constitution. The BCC will thus continue to enjoy full independence regarding the formulation and conduct of monetary policy and the determination of interest rates, with its main objective being price stability. The BCC is committed to stepping up the implementation of its action plan (Table 3). Although some key measures in this plan have already been taken, full implementation of the plan should be completed as soon as possible, as it is crucial to the recovery of the BCC.

42. The BCC will continue to strengthen the operational framework of its monetary program, as recommended by the IMF's technical assistance missions. The recent introduction of billets de trésorerie has given the bank a monetary policy instrument to regulate liquidity. The BCC will ensure that its refinancing rate remains positive in real terms. It will also ensure that the repatriation of export proceeds occurs within 60 days of the shipment of merchandise, as provided for in the new exchange regulations. Finally, to ensure greater budgetary transparency, the BCC, together with the Ministry of Finance, will finalize the list of government accounts in the banking system (including the accounts of the special budgets). These accounts will be closed and the funds transferred to the general treasury account pursuant to the 2004 budget.

43. In addition, the monthly cash-flow plans for the government and BCC will be strictly applied in the context of the monetary program. To this end, the BCC will continue to improve its financial management, reduce its operating costs, and limit its cash deficit to CGF 10 billion in 2003 (0.4 percent of GDP). The BCC reaffirms its commitment to abide by the presidential decree of April 2002 and no longer finance expenditure that has not received prior authorization from the Minister of Finance (a continuous performance criterion). In October 2002, the BCC ceased purchasing domestic and foreign currency banknotes in the market at a premium against payment in bank money, and undertakes not to engage in such operations in the future (a continuous performance criterion). A study on the recapitalization of the BCC will be undertaken with World Bank assistance by end-2003.

44. Concerning its internal management, the BCC will accelerate the key measures of its action plan that fall under the remit of the new Board of Directors: (a) adoption of the by-laws on the creation of the Audit Committee, the adoption of international accounting standards and systematic audits conforming to international standards (by end-September 2003); and (b) adoption of instructions on foreign exchange management (by end-September 2003). In addition, the BCC will give priority to: (a) adoption of the procedures and accounting manuals of the Foreign Directorate (by end-September 2003); (b) introduction and use of the "Standards and Procedures Manual" for internal control, including the strengthening of the role and responsibility of first-level operations auditors at the directorates (by end-September 2003); and (c) definition of the objectives of the Audit Committee (by end-September 2003).

45. With the reunification of the DRC, the BCC will face a significant challenge in facilitating the return to normal and unified operation of the payment system without jeopardizing the newly restored macroeconomic stability. A pressing problem related to reunification is the issuance of banknotes of small denominations (CGF 10, 20, and 50) in the reunified territories to facilitate the resumption of transactions among the poorest segments of the population. The BCC will incorporate these banknote issues and any issue costs not covered by potential external financing in its monetary program.

46. External policies. In February 2003 the government accepted the obligations of Article VIII, sections 2(a), 3, and 4. The government will continue its efforts to eliminate the few remaining restrictions contrary to the Article VIII obligations concerning the DRC's obligation under the bilateral payments agreement with the Economic Community of the Great Lakes Countries and the fixed exchange rate under the bilateral agreement with Zimbabwe. In the area of international trade, the government has maintained the temporary quantitative restrictions established to deal with the alleged dumping of certain textile products (printed fabrics). The modernization of OFIDA by gradually extending customs control to all provinces is expected to strengthen the fight against the plundering of the DRC's natural resources. We will continue to deepen the customs reforms in a consistent manner through our participation in the Common Market for Eastern and Southern Africa (COMESA). Moreover, to encourage foreign direct investment, we have completed our subscription to MIGA.

47. External debt management. As provided for in the program, no arrears on external debt service will be accumulated and the government will do its utmost to conclude rescheduling agreements with its non-Paris Club bilateral creditors and commercial creditors on terms comparable to those obtained in the context of the Paris Club. We have received assistance from Debt Relief International to identify OGEDEP's capacity building needs. In this context, the government will ask the international community for assistance, including in the form of technical assistance, to strengthen our external debt management, particularly through the use of appropriate software programs.

48. Sectoral and structural reforms. In the period through December 2003, the government will emphasize effective monitoring of the introduction of measures to combat corruption, particularly the clear assignment of responsibilities within the government. At the same time, the legal and regulatory framework for the anticorruption and ethics measures will be supplemented by: (a) the dissemination to the public of information about the Code of Good Conduct by end-2003; and (b) submission of the draft law on corruption, money laundering, and transnational organized crime to Parliament by end-October 2003 for approval by end-2003. The same holds for the citizen's vade mecum (compendium of citizen's rights and obligations). Concerning the judicial system, the European Union, at the request of the authorities, will undertake an audit with a view to preparing a report on the status of the legal system.

49. Concerning private sector development, in the period through end-October 2003 the focus will be on completing an action plan and timetable for the implementation of the reform of the direct and indirect taxation of enterprises, to be phased in starting in January 2004. The 10 main implementing regulations for the new Labor Code will be published by end-December 2003, after they have been examined by the Tripartite Commission (government, unions, and employers), and following consultation with the World Bank and ILO. The development of strategies for the reform of public enterprises, including COHYDRO, will begin once the COPIREP team is in place. COHYDRO will continue to refrain from using public resources to import petroleum products until it has been restructured. Finally, a draft law on public enterprise reform, allowing, in particular, divestment by the state and/or the effective participation of private capital, will be prepared for adoption by the government in 2004.

50. Financial sector. As part of the process of strengthening the financial system, the BCC plans to take the following steps: (a) introduction of new instructions for prudential ratios by end-July 2003; (b) the development of plans for the restructuring of commercial banks based on audits by end-December 2003; and (c) after consultation with banks, adoption of a formal framework for on-site and off-site audits, by end-August 2003. As for the tax treatment of statutory loan loss provisions, partial deductibility will be instituted in the context of the 2004 budget.

51. Natural resources. The procedures for collection of the area tax (taxe de superficie) for 2003 will be published by end-June 2003. The government will publish a report on the actual collection of this tax by end-December 2003, and the concessions of delinquent taxpayers will be revoked. In the mining sector, the government will focus on finalizing the strategy for restructuring GECAMINES by July 2003 and adoption of the strategy by end-November 2003. The program of voluntary separations at GECAMINES will begin in July 2003 and is expected to be completed by end-December 2003. For the mining registry, the government will introduce financial management, audit, and performance monitoring and assessment mechanisms by end-November 2003. The objective of the latter is to have 85 percent of the existing disputes regarding the legal status of mining permits resolved by end-November 2003.

52. Social sectors. A sectoral review of the health sector will be launched with assistance of the World Bank, with a view to preparing a comprehensive assessment to serve as the starting point for development of the sectoral strategy by end-2004. Preparation of the social protection strategy will be the first stage in the preparation of a program by end-2004 that clearly sets out: (a) the government's actions in the area of social protection; (b) the actions of the partners in the area of social protection; and (c) the budget and sources of financing for these activities. For the education sector, an action plan for fulfillment of the criteria of the "Education for All" program should be completed by end-October 2003, and the sectoral strategy by end-2004.

53. For the agricultural sector, the first phase of the program to rehabilitate 1,200 km of rural roads should be completed between July 2003 and March 2004. At the same time, a market-price information system will be instituted by end-March 2004. Four subsector studies (palm oil, cotton, coffee, and cocoa), as well as a study on the regulatory and tax environment for agribusinesses, will be launched by end-December 2004. The results of these studies will be used to prepare the rural development section of the PRSP.

54. Infrastructure sector. To provide impetus to the long-term process of economic rehabilitation and reconstruction, invitations to bid have been issued for about 1,500 km of roads and work on approximately 1,000 km has begun. In early 2004, a legal and regulatory framework and a regulatory authority will be established for the electricity sector.

55. A Water Code will be finalized in 2004 as well as a new Energy Code. Rehabilitation of the electrical power system in the south of the DRC with assistance from the World Bank should enable us to increase our country's exports to Southern Africa.

56. Poverty Reduction Strategy. By end-August 2003, a campaign will be carried out with World Bank assistance to provide information, education, and communication on: (a) the process of drafting the full PRSP; (b) the organization of participatory consultations at the national, provincial, local, and community levels; and (c) the final preparations for the poverty survey, to be launched in July 2003 and completed in July 2004. Reports on the sector and community consultations will be submitted to the technical ministries and local communities by end-October 2003. These reports will then be used by thematic groups and technical ministries to prepare their contributions to the full PRSP by end-June 2004. It is essential that the consultations and the work of the thematic groups be completed in a timely manner to allow for the return and consolidation of the various reports as well as the drafting of the PRSP itself by August 2004, with a view to its adoption by stakeholders and authorities in the third quarter of 2005.

Program Monitoring, Prior Actions, and Performance Criteria and Indicators

57. The two interministerial committees—the first responsible for monitoring the three-year program supported by the Bretton Woods institutions and chaired by the Minister of Finance, and the second responsible for drawing up the poverty reduction strategy and chaired by the Minister of Planning—will continue to monitor closely the implementation of the PEG and the poverty reduction strategy. In addition, as described above, data sharing between the BCC and the Ministry of Finance has been improved, and a computer link for data transmission will be established between the two institutions shortly to facilitate daily monitoring of the cash-flow plans of the government and the BCC.

58. To ensure the success of the program, the government will implement the following prior actions by end-June 2003:

(a) elimination of the quasi taxation of petroleum products in the new price structure;

(b) government approval of the procedures manual for the new public expenditure chain and of the reorganization of the four affected directorates in the Ministry of Finance and the Ministry of the Budget; and

(c) finalization of the list of names of "ghost workers," signed by the Ministers of the Civil Service and Finance.

59. Program implementation in 2003 will continue to be monitored by means of semiannual reviews, semiannual quantitative performance criteria (September 2003), and quarterly benchmarks (June and December 2003). As shown in Table 4 and defined in the TMU, this involves: (a) a floor on the net foreign assets of the BCC; (b) a ceiling on the net domestic assets of the BCC; (c) a ceiling on net bank credit to the government; (d) a ceiling on BCC credit to nonfinancial public sector enterprises; (e) a ceiling on BCC credit to the nonfinancial private sector; (f) a ceiling on new nonconcessional external debt contracted or guaranteed by the government or the BCC with maturities of more than one year (excluding IMF credit); (g) 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 (h) no accumulation of wage arrears. The program will include three continuous performance criteria: (a) the BCC will not finance any budgetary expenditure not previously authorized by the Ministry of Finance; (b) the BCC will not purchase domestic and foreign currency banknotes in the market at a premium against bank money payments; and (c) 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 a sufficient amount in its accounts with the IMF to ensure the regular payment of its obligations to the Fund.

60. The program also includes a structural performance criterion for end-September 2003, namely, the completion of the audits of five commercial banks (BCD, Citibank, BIAC, Banque Congolaise, and First Banking Corporation). The structural benchmarks for the remainder of the year are:

(a) preparation of a draft reunification and pro-poor 2004 budget (end-September);

(b) Effective implementation of the new expenditure procedures, reinstating and rationalizing the full expenditure chain, including commitment, liquidation, payment order, and payment (end-September);

(c) Elimination of identified "ghost workers" from the government payroll (end-September);

(d) Issuance of a circular clarifying that external debt contracted without the approval and signature of the Minister of Finance does not carry the state's guarantee (end-September);

(e) finalization of the plans for the reorganization of banks considered viable on the basis of external audits (end-December);

(f) preparation of a COHYDRO reorganization plan (end-December);

(g) adoption by Parliament of the Law on Corruption, Money Laundering, and Transnational Organized Crime (end-December 2003); and

(h) submission to Parliament of the General Accounting Office's audit of the execution of the 2001 and 2002 budgets (end-December 2003).

 

DEMOCRATIC REPUBLIC OF THE CONGO

Kinshasa, July 3, 2003

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 July 3, 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 49 and 50 and Tables 4 and 5 of the MEFP of July 3, 2003.

B. Definition of Quantitative Performance Criteria and Indicators

3. The quantitative performance criteria and benchmarks described in Table 4 of the MEFP are as follows:

(a) floor on net foreign assets of the central bank (BCC);

(b) ceiling on net domestic assets of the BCC;

(c) ceiling on net bank credit to the Government;

(d) ceiling on BCC credit to nonfinancial public sector enterprises;

(e) ceiling on BCC credit to the nonfinancial private sector;

(f) ceiling on new nonconcessional external debt contracted or guaranteed by the government or the BCC, with maturities of more than one year, except borrowing for debt rescheduling purposes, and IMF credit;

(g) ceiling on new nonconcessional external debt contracted or guaranteed by the Government or the BCC, with maturities of one year or less, except borrowing for debt rescheduling purposes, IMF credit, and normal import credits (suppliers' credits) excluding petroleum imports;

(h) ceiling on wage arrears (including all forms of compensation) by the civil service (civilian and military) and the BCC;

The following criteria will be monitored on a continuous basis:

(a) the BCC will not finance government expenditure that has not been authorized in advance by the Minister of Finance;

(b) the BCC will make no purchase of Congo franc banknotes or foreign currency in the market at a premium against payment in bank money; and

(c) the Government will not accumulate external payments arrears on debt service for which a debt rescheduling agreement has been concluded with the government's creditors, or on any new borrowing.

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 end-2001 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:

• net claims on the government;
  
• claims on nonfinancial public enterprises;
  
• claims on the nonfinancial private sector;
  
• claims on banks (net of "Billets de Trésorerie" obtained by deposit money banks);
  
• claims on other banking and nonbank institutions; and
  
• "other items, net," defined as other assets minus other liabilities (including capital and valuation accounts, and "Billets de Trésorerie" obtained by the public).
  

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 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 pertinent 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:

• currency in circulation (in and outside banks);
  
• deposits of banks with the BCC;
  
• deposits of public enterprises with the BCC;
  
• deposits of private enterprises and individuals with the BCC;and
  
• deposits of other financial institutions, other than deposit money banks, with the BCC.
  

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 MEFP:

(a) Budget: annual law authorizing the government's financial operations. Transfers to the provinces are included, but the provinces' own revenues are not covered. The social security system is not consolidated in the budget;

(b) Special budgets (budgets pour ordre): autonomous agencies and entities receiving earmarked revenues that, like their expenditure, are covered in the budget;

(c) Extrabudgetary accounts: accounts receiving government revenue not tracked by the Treasury Management and Payment Authorization Directorate. The consolidation of these accounts with those that are regularly monitored by the Treasury Management and Payment Authorization Directorate is necessary for a complete view of budget execution; and

(d) Poverty-reduction expenditure: "pro-poor" spending as defined in the new nomenclature on the basis of the priorities set forth in the PRSP-I.

C. Structural Performance Criteria and Benchmarks

16. The structural performance criteria and benchmarks are described in Table 5 of the MEFP.

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

(a) Volume of purchases and sales of foreign exchange on the interbank market, between commercial banks and their customers, and by exchange bureaus;

(b) Volume of purchases and sales (interventions) by the BCC on the interbank market;

(c) Average Congo franc/U.S. dollar reference exchange rate of the BCC (indicative rate);

(d) Average Congo franc/U.S. dollar exchange rate on the interbank market;

(e) Average Congo franc/U.S. dollar exchange rate offered by commercial banks to their customers; and,

(f) Average Congo franc/U.S. dollar exchange rate used by exchange bureaus.

Note: The above information is to be submitted with a time lag of one day.

2. Banking system

(a) Integrated monetary survey, with a breakdown into domestic currency and foreign currency;

(b) Monetary survey of the BCC, with a breakdown into domestic currency and foreign currency;

(c) BCC operating account;

(d) BCC investment budget;

(e) Implementation of the BCC's cash flow plan;

(f) Statement of wage arrears owed to BCC staff;

(g) Monetary survey of deposit money banks, with a breakdown into domestic currency and foreign currency;

(h) Net banking system credit to the government;

(i) Net banking system credit to public sector enterprises;

(j) Structure of nominal and real interest rates of deposit money banks;

(k) Reserves (voluntary and required) of deposit money banks;

(l) Structure of BCC interest rates;

(m) Structure of certificate of deposit (CD) rates; and

(n) Premium on Congo franc banknotes purchased in the market against bank money.

Note: The above monthly information is to be submitted not later than three weeks after the end of each month.

3. Public sector

(a) Implementation of Treasury cash flow plan;

(b) Expenditure execution by type and by ministry/institution;

(c) Validated wage bill by category of payee, region (Kinshasa/provinces), and activity status (active/retired);

(d) Wage bill debited from the Treasury General Account by category of payee, region, and activity status;

(e) Paid wage bill by category of payee, region, and activity status;

(f) Paid employees, by category of payee, region, and activity status;

(g) Civil service pay scale (if changed);

(h) Issues, redemptions, and stocks of billets de trésorerie (including maturity and interest charges), by category of creditor (commercial banks, public enterprises, and other);

(i) Public sector domestic debt, by category of creditor (commercial banks, private entities, etc): collect and report data related to domestic public debt as soon as they are available; and

(j) Payments arrears on utility outlays.

Note: The above information is to be submitted not later than three weeks after the end of each month.

Starting in September 2003, and following implementation of the new expenditure procedures, the budgetary tracking statements mentioned in Annex II 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

(a) Actual disbursements of external assistance, whether or not to finance projects, including those associated with new contracted loans (on a monthly basis, with a lag of three weeks);

(b) Monthly breakdown by interest and principal, and classification by creditor, of debt service payments made;

(c) Composition of monthly external debt-service obligations, by maturity (including after debt rescheduling by the Paris Club, other bilateral creditors, and multilateral creditors, commercial debt, and short-term debt), and the stock of external arrears, taking into account actual payments, with a breakdown by principal and interest, and classification by creditor (to be provided quarterly by the Public Debt Management Office (OGEDEP)); and

(d) Copies of the debt rescheduling agreements with the Paris Club, non-Paris Club bilateral creditors, commercial creditors, and multilateral creditors, as soon as such agreements have been concluded. Also, all individual loan information is required without delay, for the debt sustainability analysis in the context of the HIPC Initiative, and also for debt management purposes during the interim period.

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 business (new decrees, circulars, and laws) and pricing policy, as well as the official gazette, will also be reported to Fund staff.

Definition of External Debt

4. The definitions of "debt" and "concessional borrowing" for the purposes of this memorandum of understanding are as follows:

(a) As set out in Point 9 of the Guidelines on Performance Criteria with Respect to Foreign Borrowing adopted by the IMF's Executive Board on August 24, 2000, debt is understood to mean a current, that is, not contingent, liability created under a contractual agreement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services at some future points in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. Debt can take a number of forms, the primary ones being as follows: (i) loans, that is, advances of money to the obligor by the lender on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans, and buyers' credits) and temporary exchanges of assets that are equivalent to fully collateralized loans, under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements); (ii) suppliers' credits, that is, contracts where the supplier permits the obligor to defer payment until some time after the date on which the goods are delivered or services are provided; and (iii) leases, that is, arrangements under which property is provided that the lessee has the right to use for one or more specified period(s) of time, which are usually shorter than the total expected service life of the property, while the lessor retains the title to the property. For the purpose of this guideline, the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the arrangement, excluding those payments that cover the operation, repair, or maintenance of the property. Under the definition of debt set out above, arrears, penalties, and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are debt. Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.

(b) A loan is considered concessional if, on the date the contract is signed, the ratio of the present value of the loan, based on the reference interest rates to the nominal value of the loan is less than 65 percent (i.e., a grant element exceeding 35 percent). The reference interest rates used in this assessment are the commercial interest reference rates (CIRRs) established by the Organization for Economic Cooperation and Development (OECD). For debts with a maturity exceeding 15 years, the ten-year reference interest rate published by the OECD is used to calculate the grant element. For shorter maturities, the six-month market reference rate is used.

Budget-Tracking Statements

Statement 1: Main budget-tracking statement. Monthly, starting in August 2003.

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 August 2003.

Based on the main statement, this document will present expenditures by administrative classification (2002 revised nomenclature rather than classification by type). Additionally, the statement will keep expenditures initiated by, and earmarked for, the Office 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 September 2003.

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 distribution of expenditures among the eleven provinces.

Statement 4: Main budget-tracking statement, "Poverty-Reducing Expenditures." Monthly, starting in October 2003.

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 October 2003.

Based on Statement 2, this document will present expenditures by major government functions (as defined in the 2002 revised nomenclature).