After last week concluding country surveillance consultations with the Democratic Republic of Congo (DRC), the International Monetary Fund (IMF) says that, while the African State continued to post strong economic growth in recent years – an average of 7% a year between 2010 and 2012 – poverty remains pervasive and the economy vulnerable.

Known as Article IV consultations, as they were required by Article IV of the IMF's Articles of Agreement, country surveillance is an ongoing process that culminates in regular comprehensive consultations with individual member countries.

During a consultation, an IMF team of economists visits a country to assess its economic and financial developments and discuss the country's economic and financial policies with government and central bank officials.

SUBDUED INFLATION
Recent surveillance by the IMF in the DRC revealed that mineral production and related investments had become the main drivers of robust growth in the country, although economic activity was strengthening in other areas, such as the agricultural sector, resulting in a real gross domestic product (GDP) growth rate of 8.5% in 2013.

Fiscal restraint and the absence of major external price shocks helped to further reduce inflation to a record low of 1% at the end of last year.

Higher mining exports and sustained inward foreign investment, meanwhile, contributed to an overall balance of payments surplus, but gross international reserves increases was only sufficient to keep the reserve coverage at 7.7 weeks of non-aid-related imports of goods and services.

The fund said in a statement that, notwithstanding the strong economic growth, limited fiscal space and shocks to revenues, often offset by expenditure adjustments, did not support pro-poor and critical investment spending necessary for inclusive growth, giving rise to mounting social demands to share in the benefits of the accelerating growth.

While commending the authorities for maintaining macroeconomic stability in the face of a challenging external and domestic environment, the IMF noted that, notwithstanding the recent strong economic growth, poverty remained widespread.

“The attainment of the Millennium Development Goals (MDGs) is at risk. [While we] welcome the recent positive developments on the security front, we encourage the authorities to use this window of opportunity to consolidate recent macroeconomic gains and step up the pace of structural reforms needed to promote diversified, sustainable and more inclusive growth,” the IMF noted.

STRUCTURAL REFORM
Moreover, it reported that progress in structural reforms had been “mixed”.

The government had implemented “important” reforms aimed at dedollarising the economy, deepening financial markets and improving public finance management (PFM).

In addition, the Central Bank of Congo (BCC) had successfully initiated the introduction of new denominations of the Congolese Franc and the government had expanded public salary payments through banks for most civil servants.

Reforms in PFM also progressed, with improvements in the expenditure chain and a reduction of the expenditure float.

In contrast, structural reforms to further the independence of the BCC, including through its recapitalisation, and to improve transparency and governance of State-owned enterprises (SOEs) in the mining sector, largely stalled.

MINING DRIVER
“Looking ahead, medium-term economic growth prospects remain favorable. The economy is projected to grow at 8.7% in 2014 and, on average, at 7.5% between 2015 and 2018.

“The mining sector is expected to remain the main driver of growth, including with the investment phase of the Sino-Congolese joint venture (Sicomines) accelerating,” said the fund.

Inflation was projected at 4% in 2014, which “appeared achievable” in light of the current low inflation, the BCC sterilising any excessive liquidity and the absence of foreign price shocks.

However, a drop in the international prices of the DRC’s main mineral exports represented the main risk to the country’s economic outlook.

‘FISCAL SPACE’
The IMF further emphasised the importance of creating “fiscal space” to increase priority social spending and support public investments for meeting the MDGs, through improvements in public financial management, better alignment of the budget with the Poverty Reduction Strategy Paper, and strengthened domestic revenue mobilisation.

In this regard, the fund called for improved tax administration, including by dealing with known value-added tax shortcomings, tighter control of the tax base, and greater efforts to raise the contribution of the mining sector to the budget.

Against this backdrop, IMF directors called for improved governance and transparency and strengthened oversight of SOEs in the mining sector.

“Corrective actions in this area could help pave the way for discussion of a possible successor arrangement and we recommended more effective management of tax mining assets to avoid SOE revenue losses in the natural resource sector,” it noted.

The IMF, meanwhile, also called for critical reforms at the BCC to bolster its operational independence and accountability, strengthen its capacity to conduct monetary policy, sustain price and financial sector stability, and instill market confidence.

“In this context, we welcome the DRC’s adoption of a three-year action plan incorporating the IMF’s Financial Sector Assessment Programme recommendations.

“We also advise swift implementation of key policy measures, including recapitalising the BCC, adopting the draft law of the statutes of the BCC and the Banking Law, and divestment of noncore activities.

"The analytical, regulatory and supervisory capacity of the BCC should also be strengthened,” it stated.

The IMF further called for enhanced exchange rate flexibility to “set the stage” for a more ambitious accumulation of international reserves, designed to bolster the economy’s resilience to exogenous shocks and further strengthen market confidence, especially given the authorities’ dedollarisation strategy.