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Assessment of the Heavily Indebted Poor Countries Initiative in the DRC

January 2013

Lapole Kanga, J.-C. 2013. Assessment of the Heavily Indebted Poor Countries Initiative in the Democratic Republic of Congo. GREAT Insights, Volume 2, Issue 1. January 2013. Maastricht: ECDPM

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At its independence, the Democratic Republic of Congo (DRC) inherited a tarnished slate. However, the country’s debt increased rapidly after the political regime of the time introduced an economic system favouring the accumulation of debt following loans contracted to finance unsustainable or poorly managed projects. In addition, debt management was weak (irregular payment of the debt service). These two factors contributed to pushing the country’s level of debt through the ceiling. 

Between 1990 and 2001, public management tools were affected by the socio-political instability facing the country. Several attempts were made to save the country from the depths of debt insolvency, ranging from debt restructurings to debt cancellation in the framework of the Heavily Indebted Poor Countries (HIPC) initiative. 

To its credit, the Heavily Indebted Poor Countries (HIPC) initiative (HIPC-I) reduced the scale of debt for the Congolese economy in the long term. It enabled the DRC to save its international reserves. The decision to join the initiative and the granting of related cancellations also led to structural reforms. Indeed, significant debt service relief helped to cope with the rapid increase in social spending and the pressure on public spending as a result of insecurity and the organisation of elections. 

It took Congo seven years to reach the completion point (July 2010) of the HIPC process (see Box 1). This long interim period can be explained by two key factors: (i) the need for political conciliation for peace and (ii) questions of governance. All in all, the HIPC initiative helped to relieve the DRC’s external debt stock, improve the management of the country’s macro-economic policies and reduce poverty. Its impact is detailed below. 

Impact of HIPC-I relief in the DRC 

The HIPC-I was beneficial for the DRC in several respects. In order to fully understand these, it is necessary to consider the channels through which this initiative influenced the conduct of public affairs in the country. 

(i) Through the provision of liquidity: Contrary to popular thinking, the HIPC-I did not inject ready cash to help finance public spending. The relief obtained was only virtual, since, overall, the country had not honoured its financial commitments (payment of the debt service). However, when the country reached the completion point and was able to benefit from debt relief in the frame of the Multilateral Debt Relief Initiative (MDRI), sums corresponding to the IMF’s cancelled debts were accounted for in the Treasury Account and used to finance social projects in 2011 and 2012 (mainly in education and health). 

(ii) Through conditionalities: In order to comply with the requirements for reaching the completion point, the Congolese state made concrete commitments to implement economic measures and structural reforms, so called “triggers” (see box 1). The DRC was aware of the relevance of these reforms, but the HIPC-I speeded them up and reinforced their coherence.

(iii) Through renewed solvency after the debt’s cancellation: The improvement of the debt stock situation is a sign for foreign investors.

It was planned that the Treasury would pay instalments corresponding to the cancelled debts into a specific bank account, something the country was unable to do because of its weak cash flow situation. Instead, it adopted a budgetary approach through an adapted classification (“HIPC” funds), which enabled it to monitor the relevant funds and to increase social spending, especially teachers’ salaries.

Impacts on the DRC’s economic policy

The HIPC-I has had an impact on how economic policy is managed in the DRC, mainly through the seven major completion point triggers (conditionalities), and as a result of their structuring effect on the economy (1). 

Impact on the State’s planning capacity

The drafting of the Poverty Reduction Strategy Paper (PRSP) in the frame of trigger 1 proved to be a very rewarding process for the DRC. Thanks to its participative nature, this exercise helped the country to develop capacities and expertise in planning techniques (2)The State also devoted itself to drafting sectoral strategies in the frame of triggers 5 and 6, in the three sectors selected as priority for 2003: Education, Health and Rural Development. 

However, the drafting of general and sectoral strategies has not yet produced tangible results. The State’s budget credibility and efficiency still leaves a lot to be desired. 

Impact on the coordination of macro-economic policies

In accordance with the IMF’s conditionalities, the efforts made by the Congolese government have focused on maintaining macro-economic stability (trigger 2) and creating a favourable climate for business. The Troika (Finance Minister, Budget Minister and Governor of the Central Bank, and their experts) regularly monitors these questions by holding weekly meetings to assess the country’s macro-economic situation and mobilise resources needed to achieve these criteria. 

This macro-economic policy, focused on a very restrictive budgetary policy, has helped to obtain encouraging results. The continued tightening of budgetary policy, accompanied by a careful monetary policy, has contributed to stabilising the Congolese franc and slowing down the inflation rate. Since 2010, the national currency has barely depreciated more than 1% against the American dollar and the inflation rate is under control and is now below the programmed rate (3)Growth, after the effects of the 2008-2009 international financial crisis, has continued its upward trend. It reached successively 5.4% in 2010 and 6.5% in 2011. Forecasts for 2012 are in the region of 7.2%.

Therefore, trigger 2 has reinforced the coordination of macro-economic policies in the country and increased Congolese decision-makers’ awareness of the macro-economic goals to be pursued. The Government has also devoted itself to dealing with unemployment and underdevelopment in general. 

Impact on public finance management

The HIPC-I has helped to restore healthy budgetary practices in the country. Indeed, triggers 3 and 4 have helped the DRC to launch a major public finance reform programme, resulting in a Strategic Plan. This plan has already helped to produce results, such as, for example: restoring the budgetary cycle – from the Government’s drafting of the budget, including its adoption in Parliament, to its promulgation by the Head of State – the adoption of a classification and a modern budgetary presentation which conforms with international standards, improved budgetary monitoring with regular budgetary reports, the modernisation of the public contracts system, the modernisation and simplification of the tax and customs system and the modernisation and simplification of the legal and regulatory framework for public finance. 

The most recent increases in public spending (organisation of the fiftieth anniversary festivities, infrastructure modernisation works, SADC summit, organisation of 2011 elections, management of insecurity in the east of the country) have not led to budgetary slippages, unlike in previous years. 

Impact on the DRC’s debt policy

Granted, the burden of debt was written off after the completion point was reached. But it remains to be seen whether there is not a risk of the sovereign debt increasing again and returning to an unsustainable situation. As a reminder, in 2000, the debt stood at $13 billion ($10 billion of which representing interest and arrears, namely 78.2% of the debt stock). 

In response to this problem, the DRC adopted (in the frame of trigger 7) a prudent and responsible debt policy based on three lines:

(i) whenever possible, to resort to grants rather than loans; 

(ii) to only indebt itself on concessional terms, with a minimum rate of 35% of grants, and this only for the implementation of projects which are profitable, integrating or which have high growth potential; 

(iii) to effectively manage public debt, by seeking advice from the Finance Ministry for all public borrowing projects and centralising all public debt management by the General Directorate of Public Debt.

Impacts on the policy to fight poverty: the case of the education sector

It is very difficult to assess the impact of HIPC-I relief on poverty indicators. Nevertheless, the completion point has made room for budgetary savings used to finance pro-poor spending (see above). This increase in public spending in priority sectors, although limited in terms of the scale of needs, is accompanied by a certain improvement in social indicators (4)Let us examine the case of the education sector.

The main indicators for the education sector improved after the completion point had been reached (5). The school enrolment rate remained almost stable for the 2010/2011 school year compared to the previous year (3.6% compared to 3.2%). However, the Gross Admission Rate (GAR) rose in relation to the previous year, from 107.7% to 117.3%, namely an increase of about 10 points. And the Gross School Enrolment Rate (GSR) progressed slightly compared to the previous year, from 90.8% to 92.7%. An increase of 3.5% in the number of classes was also observed between 2010 and 2011 and, in comparison to the previous year, the number of students also increased at all levels of education. 

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Triggers and Completion Points in the HIPC Initiative 

Debt relief from participating creditors becomes irrevocable at the completion point. Earlier in the process, the country agrees on a list of completion point triggers, measurable objectives upon achievement of which the country will “graduate” from the HIPC Initiative. These include a continued track record of satisfactory performance in an IMF program and the implementation for at least one year of the Poverty Reduction Strategy. Some triggers may relate to progress in social areas such as health and education, while others may relate to improving governance or fighting corruption to ensure that debt relief assistance will be well-used.

In the Democratic Republic of Congo, the seven triggers to reach the completion points were:

  1. Poverty Reduction Strategy Paper. Completion of a full PRSP through a participatory process and its implementation for one year.

  2. Macroeconomic stability. Continued maintenance of macroeconomic stability after reaching the decision point.

  3. Use of budgetary savings. Use of budgetary savings resulting from enhanced HIPC Initiative-related debt service relief during the interim period for poverty-related expenditures.

  4. Public expenditure management. a) Implementation of a modernized budget execution system; b) adoption and implementation of a double-entry government accounting system and a new chart of accounts; and c) production of quarterly budget execution reports (…).

  5. Governance and service delivery in priority sectors. (a) Completion of a budget-tracking exercise on health, education, rural development and infrastructure expenditure(…); and (b) Adoption and implementation of a new procurement code and key implementing decrees.

  6. Social and rural sectors. Adoption of satisfactory sectoral development strategies and related implementation plans for health, education and rural development.

  7. Debt management. Installation and full activation of a computerized debt recording system, covering all public and publicly guaranteed debt, as well as public enterprise debt not carrying the guarantee of the State (…).

Source: IDA/IMF: DRC – Enhanced Heavily Indebted Poor Countries (HIPC) Initiative: Completion Point Document; Multilateral Debt Relief Initiative (MDRI), June 15, 2010; and Debt Relief and Development at a glance, World Bank.

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The situation is certainly far from perfect. The students/class ratio progressed by 1 percentage point compared to the previous year, namely 39 compared to 38 in 2010 (nevertheless remaining below the official maximum of 50 students per class). And school fees paid by households remain too high and prevent access to schooling for many students. 

The improvements observed are probably a result of the increase in spending in this sector. Indeed, it rose to 3.2% of GDP in 2011, from 2.4% of GDP in 2010, mainly for staff spending. In parallel to the number of students enrolled, the number of teachers, classes and students has also increased. 

Conclusion

The HIPC-I has contributed to improving the management of the DRC’s macro-economic policy and to freeing budgetary resources for social sectors. However, questions of governance have been an obstacle to an injection of ready cash from technical and financial partners after reaching the completion point. We can only suppose that, if financial governance had been better, budgetary support would have increased and enabled projects in social sectors to be financed. This would have legitimised the HIPC-I for the Congolese population. The fact that debt relief is not materialised by new financial flows leads some Congolese to conclude that “Before or after reaching the HIPC-I’s completion point is the same thing.” 

Jean Claude Lapole Kanga is Directeur de Cabinet Adjoint at the Ministère du Budget in the Democratic Republic of Congo

Footnotes
1. http://www.imf.org/external/pubs/ft/scr/2010/cr10360.pdf 
2. e.g.: setting up of the PRSP Draft Coordination Unit
3. The exchange rate fluctuates around 920 FC per American dollar. The inflation rate fell from 53.4% in 2009 to less than 4% in 2012, with 9.8% in 2010.
4. The lack of reliable statistics does, however, hamper the reliability of any form of interpretation.
5. See Annuaire statistique de l’Enseignement Primaire, Secondaire et Professionnel, Année scolaire 2010-2011 (Statistical Directory for Primary, Secondary and Professional Education, school year 2010-2011), August 2012

This article was published in Great Insights Volume 2, Issue 1 (January 2013)

Economic Transformation and TradeDebt relief

External authors

Jean-Claude Lapole Kanga