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July 08, 2013

Keeping Reform in the DRC on Track

Posted by Oscar Melhado Orellana

In this third article on the blog in which IMF area department staff express their views on PFM reforms in “their” country, Fiscal Affairs Department technical assistance advisor, Jean Pierre Nguenang, speaks with IMF Resident Representative for the Democratic Republic of Congo (DRC), Oscar Melhado Orellana, about the importance of PFM technical assistance in keeping the IMF program on track.

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What contribution are reforms of PFM, revenue administration and tax policy expected to make to improved economic and fiscal performance in the DRC?

The DRC is one of the poorest countries in the world in terms of nominal GDP, despite being considered one of the richest countries in terms of natural resources. It has more than 30 percent of the world’s diamond reserves and 70 percent of the world’s coltan. The DRC is also one of the lowest-ranked countries in the international Corruption Perception Index. The government is still struggling to bring order to the eastern part of the country where recurrent attacks on citizens are perpetrated by armed groups opposed to the regime.

Since 2001, development partners including the IMF have being assisting the DRC in reforming its public finances. Fiscal and budget institutions were seriously affected by the country’s long-running political instability. Persistent weaknesses in the DRC are poor revenue mobilization and the low quality of public spending. PFM and fiscal reforms more broadly are playing a crucial role in collecting the necessary resources and spending them well on public services such as health, education, energy and investments in roads, in line with the government’s medium-term development plan - “Program of Actions”.

While such reforms are part of the good macroeconomic management expected from any government, their potential for improving living standards in the DRC is substantial because widespread weaknesses in the budget system hamper efforts to reduce poverty and deliver basic public goods and services. Currently, revenues from the mining sector (e.g. nickel, coltan, and diamonds) account for less than 10 percent of government revenues, and the total tax yield is below the average for sub-Saharan Africa. Poor management of public finances has been one of the root causes of the development challenges facing the country. PFM and other fiscal reforms are critical for accelerating economic growth and reducing poverty.

What areas of public finance are receiving support from the Mineral Natural Resource Wealth – Topical Trust Fund (MNRW-TTF)? Why were these areas selected?

Technical assistance (TA) provided by the Fund under the MNRW – TTF focuses on revenue administration, tax policy in the mining sector, and strengthening macro-fiscal analysis and forecasting. On revenue administration, the TA aims to (i) streamline the government agency in charge of natural resources management; (ii) build the necessary capacity to adequately assess taxes due; and (iii) track taxes paid by the largest extractive industries that account for more than 90 percent of mining and oil revenues. On mining tax policy, the TA focuses on assessing the mining code and other tax laws applicable to the mining sector, and on adapting the fiscal analysis and resources industries (FARI) model to a large copper project. The FARI model provides the tax potential of the mining sector for each project over the medium term. The mining sector is the most significant taxable sector in the DRC.

The TA on macrofiscal functions covers the legal and regulatory framework, organizational arrangements, preparation and presentation of the annual budget, and training. This will enable the government to (i) make better forecasts of available budgetary resources; (ii) produce annual budgets using realistic projections of resources revenues; and (iii) insulate expenditure plans from unanticipated volatility in resource revenues. Thus, the government will establish a more credible budgetary process in which resources are better aligned with expenditure needs and priorities as defined in the national “Program of Action”. The TA will also lay the foundation for better budget execution in the future.

These three areas were selected to address weak revenue performance in the natural resources and mining sectors and to strengthen the budget process. The TA was coupled with several measures in the IMF-supported program to improve governance and transparency in the management of natural resources.

How much progress has been made in implementing the reforms? What remains to be done, and what are the main challenges that lie ahead?

Progress has been made in a number of areas. For example, The IMF has provided comments on the draft mining code, which would help optimize revenues from the mining sector. The Fund has also suggested (i) streamlining the operations of the tax collection agencies to improve their effectiveness and reduce operating costs; and (ii) the creation of an internal audit unit for the mining sector. A medium-term fiscal strategy paper for the period 2012–16 was discussed at the government level and was part of the documentation presented to the parliament with the 2013 budget. The government’s new macroeconomic and budgetary forecasting model generates projections of the production, exportation and revenues from natural resources. The use of this model together with the simplified medium-term expenditure framework applied for resource sector allocation should help improve the overall credibility and comprehensiveness of the annual budget.

Implementation of some TA recommendations, however, has been slow because of capacity constraints within the government. Similarly, the organization of short-term expert visits financed by the MNRW-TTF has been held back because of the DRC’s limited absorptive capacity. Another adverse factor is the deep governance problems that affect the agency responsible for managing natural resources.

What has been the contribution of FAD in providing support to the design and implementation of the reform strategy? What other TA providers are also involved?

FAD has provided a significant amount of TA to the DRC through 23 missions during fiscal years 2012 and 2013. It has contributed to reform initiatives such as the draft mining code and the proposed draft decree on budget governance. Other major TA providers include the World Bank, the European Union, Germany, France, and the UK’s DfID. Much of the TA provided from these sources also focuses on natural resources management.

Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy. 

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Comments

The DRC has many issues outside of the financial management of their system. Poor public accounting, instability in the East due to politics does not help it either. The number one problem with the DRC is and always will be a lack of infrastructure. There are not real rail links in the DRC or for that matter roads to bring the resources extracted to market. The port at Kinshasa was upgraded but not to the extend where one would expect it to be of real future use.

We are coming to the end of the resource cycle and I dont see to many people willing to invest in long term growth in the country. Its a bit of a shame as there is lots of potential in terms of agricultural development in the region.

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