Emergency Programme to Mitigate the Impacts of the Financial Crisis Country: Democratic Republic of Congo

Transcription

1 AFRICAN DEVELOPMENT FUND Language: English Original: French Emergency Programme to Mitigate the Impacts of the Financial Crisis Country: Democratic Republic of Congo APPRAISAL REPORT April 2009 Appraisal Team e E Peer Reviewers E Design Team : Sector Director : Country Director : Division Manager: Resident Representative: S. Ba : S. N Guessan: L.C.Tawah : T. Diarra : C. Baumont: M. Diagne: R. Kane: B. Barry: M. H. Kouassi, Principal Macroeconomist OSGE.2 M. O. Diakité, Principal Country Economist ORCE G. Negatu, Director, OSGE J. M. Gharbi, Director ORCE M. Kanga, Division Manager, OSGE.2 M. Coulibaly, CDFO Chief Macroeconomist OSGE.2 Chief Procurement Officer, OSGE.1 Principal Economist, OREA Principal Economist, GAFO Chief Country Economist, OREB Senior Economist, ORCE Chief Economist, CMFO Senior Economist, ORCE

2 Table of Contents LIST OF TABLES-LIST OF BOXES-LIST OF CHARTS i LIST OF ANNEXES LIST OF TECHNICAL ANNEXES i FISCAL YEAR CURRENCY EQUIVALENTS i ACRONYMS AND ABBREVIATIONS i GRANT INFORMATION iii PROGRAMME SUMMARY iv PROGRAMME LOGICAL FRAMEWORK v I. THE PROPOSAL...1 II. COUNTRY AND PROGRAMME CONTEXT GOVERNMENT POLICY TO MITIGATE THE IMPACT OF THE INTERNATIONAL FINANCIAL CRISIS RECENT ECONOMIC DEVELOPMENTS... 2 III. JUSTIFICATION AND KEY DESIGN ELEMENTS LINKAGE WITH GOVERNMENT POLICY AND JUSTIFICATIONS ALIGNMENT WITH THE GUIDELINES OF THE BANK S RESPONSE TO THE IMPACT OF THE FINANCIAL CRISIS3 3.3 ANALYTICAL WORKS CONSULTED OUTCOMES AND LESSONS LEARNT FROM PREVIOUS SIMILAR OPERATIONS OPERATIONS BY OTHER DONORS AND COORDINATION RELATIONS WITH OTHER BANK OPERATIONS COMPLIANCE WITH GOOD PRACTICES PRINCIPLES REGARDING CONDITIONALITIES COMPLIANCE WITH THE NON-CONCESSIONAL DEBT NON-ACCUMULATION POLICY GUIDING PRINCIPLES... 5 IV. THE BANK S RESPONSE TO MITIGATE THE IMPACTS OF THE CRISIS GOAL, OBJECTIVES AND EXPECTED OUTCOMES DESCRIPTION OF PROGRAMME COMPONENTS AND EXPECTED OUTCOMES FINANCING REQUIREMENTS AND ARRANGEMENTS PROGRAMME BENEFICIARIES IMPACT ON GENDER ENVIRONMENTAL IMPACT V. IMPLEMENTATION, MONITORING AND EVALUATION IMPLEMENTATION ARRANGEMENTS: GENERAL ARRANGEMENTS SPECIFIC IMPLEMENTATION ARRANGEMENTS MONITORING AND EVALUATION ARRANGEMENTS VI. LEGAL DOCUMENTS AND AUTHORITY LEGAL DOCUMENTS CONDITIONS FOR BANK INTERVENTION COMPLIANCE WITH BANK GROUP POLICIES VII. RISK MANAGEMENT...16 VIII. RECOMMENDATION...17 This report was prepared by Mr. H. Kouassi, Principal Macroeconomist, OSGE.2 and Mr. O. Diakité, Principal Country Economist, ORCE following an appraisal mission to DRC from 22 March to 10 April It also received support from the DRC Regional Office, assistance from the group set up by the Congolese Government and presided over by the Technical Committee for Monitoring Reforms (CTR) to appraise the Programme, as well as exchanges with the Economists of the World Bank, IMF and the European Commission based in Kinshasa and Washington DC. Questions on this report should be referred to Mr. G. Negatu, Director, OSGE (Extension 2077), Mr. J. M. Gharbi, Director ORCE (Extension 2060) and Mrs. M. Kanga, Division Manager, OSGE.2 (Extension 2251).

3 List of Tables Table 1: Analytical Works Consulted Table 2: Categories of Urgent Public Expenditure Targeted and Indicative Costs Table 3: Financing Requirements and Sources Table 4: Risk Analysis and Mitigation Measures/Actions List of Boxes Box 1: Measures precedent to Presentation of the Programme to the Boards of Directors List of Charts Chart 1: Recent Import Trends Chart 2: Recent Trend of Gross Official Foreign Exchange Reserves List of Annexes Annex 1 Annex 2 Annex 3 Annex 4 Government Policy Letter to Mitigate the Impact of the International Financial Crisis (Refer to Technical Annex) List of Eligible Products for Import by the Private Sector ADF-11 Resource Allocations and Programming in Provisions of the document entitled The Bank s response to the Economic Impact of the Financial Crisis DRC- Key Macro-economic Indicators: Recent Trends and Outlook List of Technical Annexes Annex 1 Annex 2 Letter of Government Policy to Mitigate the Impact of the International Financial Crisis Presentation of the SNCC Fiscal Year January- December Currency Equivalents (April 2009) UA 1 = US$ USD 1 = CDF 742

4 ii Acronyms and Abbreviations BCC BP CDF CTR DGE DGI DRC HIPCI INS MEPSP OFIDA OGEDEP PCU : Central Bank of Congo DRC : Balance of Payments : Congolese Franc : Technical Committee for Monitoring Reforms : Large Enterprises Department : Directorate-General of Taxes : Democratic Republic of Congo : Heavily-Indebted Poor Countries Initiative : National Institute of Statistics : Ministry of Primary and Secondary Education : Customs and Excise Agency : Public Debt Management Agency : Project Coordination Unit PRGF : Poverty Reduction and Growth Facility REGIDESO : Congo National Water Corporation SECOPE : Service for Control of Primary and Secondary School Teachers Salaries SNCC : National Railway Corporation of Congo

5 iii Information on the Grant Client Information DONEE: EXECUTING AGENCY: Democratic Republic of Congo PCU under the oversight of the Ministry of the Plan Financing Plan Source Amount (UA) Instrument ADF UA 65.0 million ADF Grant Information on ADF Financing (to be specified in the Grant Agreement) Indicative Time Frame Grant Currency --- Commitment fee --- Other Charges --- Activities Date 1. Negotiations on Grant Agreement 29 April Board Presentation 6 May Disbursement of the Single Tranche May Supervision July Mid-Term Review November Supervision March Completion Report May 2010

6 iv Programme Summary Programme Overview Expected Project Outputs Needs Assessment and Relevance Institutional Development and Knowledge Accumulation Risk Management Name of Programme: Support Programme to mitigate the Impacts of the International Financial Crisis Geographic Scope: Countrywide Time frame: 10 months Programme Cost : UA 65 million (US$ million) (ADF) ; Type of Programme: Balance of Payments (BP) Support Programme coupled with, at the Government s request, the commitment to use the local currency equivalent of the foreign exchange to finance urgent public expenditures in The Bank s financing will be disbursed in a single tranche in 2009 subject to fulfillment of the conditions precedent to presentation of the Programme to the Boards, the effective establishment of the programme management system, and confirmation by the Government of commitments to ensure smooth implementation of the project. (i) Strengthening of the international reserves of the Central Bank of Congo (BCC) and availability of essential imported commodities; (ii) establishment of some key benchmarks or triggers for reaching the Enhanced HIPCI completion point by the end of 2009; (iii) implementation of the crisis exit emergency plan of the Congo National Railway Corporation (SNCC), which is a strategic public enterprise for economic recovery; (iv) more regular payment of the salaries of primary and secondary school teachers; (v) and more regular payment of water and electricity bills by public entities. In the absence of emergency aid to the country, the scarcity of international reserves could seriously affect private import capacities with the risk of shortages of essential imported goods, increased inflationary pressure, as well as deterioration of the population s living conditions. The steady decline of budgetary revenue could increase the already perceptible pressure on public expenditure and diminish the Government s capacity to maintain delivery of certain key public services. This situation could, in turn, deepen the financial and social impact of the crisis and delay the conclusion of a medium-term programme with the IMF and attainment of the Enhanced HIPCI completion point. The Emergency Programme will contribute to the development of the private sector by making available the necessary foreign exchange for imports. Support for the payment of teachers salaries and the water and electricity bills of public enterprises, as well as support for the SNCC crisis exit emergency plan will contribute to improving delivery of public services and the development of these institutions. Following preparation of the completion report, it will contribute to knowledge accumulation on emergency BP support operations and to the budget in fragile States. Implementation and achievement of the impacts of the programme entail risks which are both endogenous and exogenous to the programme. These concern political and social risks (average), macroeconomic risks (high), risks related to the implementation of the BP support programme (low), risks of Government reneging on its commitments (low), and fiduciary risks (average) for which mitigation measures have been identified. These risks must be compared with the risk of not providing assistance to the country in this difficult situation due mainly to the impacts of the international financial crisis on the economy and the fragile social, political and security stability.

7 v DRC: Logical Framework Matrix of the Emergency Programme to Mitigate the Impacts of the 2009 International Financial Crisis Hierarchy of Objectives Expected Outcomes Target Performance Indicators Timeframe and Indicative Goals Assumptions/Risks 1. Goal Contribute to maintaining the country s economic and social stability. 1. Impact Economic and social stability is maintained 1. Beneficiaries Congolese population 1. Impact indicators Average inflation rate (CPI) Number of strikes by public sector workers Source of data: PCU programme mid-term review and completion reports Data Collection Method : Supervision 1. Expected long-term progress The average inflation rate falls from 28% in 2008 to 12% in 2009 and 11.5% in 2010 The number of strikes by public sector workers falls from 4 in 2008 to 0 in Description of Risk/Assumption 2. Programme Objective Mitigate the impact of the international financial crisis on the Congolese economy Outputs Continuity of supply of essential goods and products is improved. i) The international reserves of the BCC are strengthened and the supply of essential imported commodities is effective; The financing of urgent public expenditure is facilitated (ii) The benchmarks to reach Beneficiaries Congolese population Private Sector Output Indicators (i) Gross official reserves in months of imports (i) Growth rate of imports Source of Data: PCU Programme mid-term review and completion reports Data Collection Method: Supervision Expected medium-term progress/ Timeframe (i) Gross official reserves in terms of months of imports increases from 0.1 week in March 2009 to 2.6 weeks in 2009 and 3.2 weeks in 2010 (i) Growth rate of imports falls from 12.1% in 2008 to % in 2009 and 11.4% in Description of Risk /Assumption Risk : Worsening of the international crisis in 2009 Assumption: average risk

8 vi Hierarchy of Objectives Expected Outcomes Target Performance Indicators Timeframe and Indicative Goals Assumptions/Risks the Enhanced HIPCI are established and the completion point reached; (iii) The SNCC crisis exit emergency plan is implemented (ii) The two benchmarks backed by the programme are established and the completion point reached Source of Data: PCU Programme mid-term review and completion reports Data Collection Method: Supervision (ii) The two benchmarks backed by the programme are established by end 2009 and the Enhanced HIPCI completion point reached by end 2009 Mitigation measures: (i) Many recovery plans in industrialized and emerging countries; (ii) Weak integration of the Congolese financial sector; (iv) More regular payment of salaries of primary and secondary school teachers is effective following the reimbursement of 3 months salary. (v) More regular payment of water and electricity bills of public entities is effective iii) The resumption of work and activities at SNCC. Source of Data: PCU Programme mid-term review and completion reports Data Collection Method: Supervision (iv) Number of months in 2009 when teachers salaries are paid Source of Data: PCU Programme mid-term review and completion reports Data Collection Method: Supervision (v) Number of months in 2009 when bills are paid Source of Data: PCU Programme mid-term review and completion reports Data Collection Method: Supervision (iii) Resumption of work and activities at the SNCC is effective as from June (iv) Primary and secondary school teachers are regularly paid throughout the second half of (v) The electricity and water bills of public entities are paid for the months of July to October 2009

9 vii Hierarchy of Objectives Expected Outcomes Target Performance Indicators Timeframe and Indicative Goals Assumptions/Risks 3. Resources Financial Resources ADF grant for a total amount of UA 65 million Revenue (i) The expected foreign exchange resources are transferred to the BCC to replenish its reserves (ii) Increase in the sale of foreign exchange by auction on the foreign exchange market (ii) The total equivalent of the foreign exchange in CDF is used to finance the expenditures required for financing: (iia) the establishment of benchmarks for the Enhanced HIPCI completion point, (iib) the SNCC crisis exit emergency plan, and (iic) the payment of teachers salaries and Beneficiaries Government BCC Commercial banks Output Indicators (i) % of foreign exchange resources transferred to the BCC to replenish its reserves (ii) Change in monthly volume of foreign exchange auctions on the exchange market Source of Data: PCU Programme mid-term review and completion reports Data Collection Method: Supervision (iia) The SUT and IEAT tables for 2005 (base year), and 2008; price index report for 2008 and 2009; 2008 monitoring report on the execution of pro-poor expenditures (health, education, rural development and infrastructure sectors) ; beneficiaries 2008 assessment report; service providers 2008 Expected Short-Term Progress Timeframe (i) 100% of the resources are transferred to the BCC to replenish its reserves from May 2009 to December 2009 (i) The monthly volume of auctions on the exchange market increases from US$ 6.5 million to US$ 8 million from May 2009 to December 2009 (iia) The 8 tables and 4 reports required to establish the PRSP completion benchmark are available in 2009 and 2010 Description of Risks/Assumptions: 1) Political and Social Risks Assumption: high risks Mitigation Measures/End of conflicts in the East of the country Climate of confidence recently restored between Governments of Congo, Rwanda and Uganda 2) Macroeconomic Risks Assumption: high risk Mitigation measures: Commitments for short-term macroeconomic stability could be jeopardized by the worsening of the international crisis Possibility of concluding a PRGF-backed programme in 2009 and receiving support from other donors 3) Risk of Government reneging on its commitments Assumption : low risks

10 viii Hierarchy of Objectives Expected Outcomes Target Performance Indicators Timeframe and Indicative Goals Assumptions/Risks electricity and water bills (refer to details of Bank assistance in the body of the report) assessment report. (iib) Number of months of salary arrears paid and regularity of payment of salaries as from June 2009; value of fuel and lubricants bought; value of operating materials and consumables purchased. (iic) months for which salaries of eligible teachers are reimbursed; number of months during second half of 2009 when salaries are paid. Source of Data: PCU Programme mid-term review and completion reports Data Collection Method: Supervision (iib) One and a half months of salary arrears are paid, and salaries paid regularly from June 2009; US$ 4 million paid for fuel and lubricants in May 2009 ; US$ 2.2 million paid for operating materials and consumables in June 2009 (iic) Salaries of eligible teachers are reimbursed for the months of December 2008, January 2009 and February 2009; the salaries are paid regularly throughout the second half of ) Fiduciary Risks Assumption: average risks Mitigation measures: (i) Agreement on the list of eligible imports and urgent public expenditures Programme management by PCU. Credible financial management and procurement system Agreement with the Government on detailed procedures and documentation Mid-term and completion audits for each component

11 REPORT AND RECOMMENDATION BY THE MANAGEMENT OF THE AFRICAN DEVELOPMENT BANK GROUP TO THE BOARD OF DIRECTORS CONCERNING THE PROPOSAL OF A GRANT TO THE DEMOCRATIC REPUBLIC OF CONGO FOR THE PROGRAME TO MITIGATE THE IMPACTS OF THE INTERNATIONAL FINANCIAL CRISIS I. THE PROPOSAL 1.1 Management hereby submits the following report and recommendation relating to a proposed grant of UA 65 million (US$ million) to the Democratic Republic of Congo (DRC) to finance the Emergency Programme to Mitigate the Impacts of the International Financial Crisis (PUAICF). The proposal primarily concerns a balance of payments (BP) support programme. In view of the weaknesses 1 of the public financial management system, including difficulties for expenditure to reach its final destination, at the Government s request, the operation was accompanied by a commitment on the part of the Authorities to allocate the equivalent in national currency to urgent expenditure items in the 2009 Budget. The Programme will be implemented over a maximum one year period from May It was appraised in March following a request submitted by the Government in March 2009, and it supports the Government s Policy Letter to mitigate the impacts of the financial crisis sent to the Bank that same month. The programme was formulated in close cooperation with some donors, including the IMF and the World Bank. The programme design took into account the guidelines of the Bank s response to the economic impact of the financial crisis. 1.2 The ultimate goal of the emergency programme is to maintain economic stability and social peace and order. Its specific objective is to mitigate in the short-term the impacts of the international financial crisis on the Congolese economy. The operational objectives are: (i) facilitation of the supply of essential imported goods and products; and (ii) facilitation of the financing of top priority expenditures of the 2009 Budget. The expected outcomes are: (i) strengthening of the international reserves of the Central Bank of Congo (BCC) and availability of essential imported commodities; (ii) establishment of some key benchmarks for reaching the enhanced HIPCI completion point by end 2009; (iii) implementation in 2009 of the crisis exit emergency plan of the National Railway Corporation of Congo (SNCC), which a strategic public enterprise for economic recovery and social stability; (iv) more regular payment in 2009 of the salaries of primary and secondary school teachers; and (v) more regular payment in 2009 of the water and electricity bills of public entities. II. COUNTRY AND PROGRAMME CONTEXT 2.1 Government Policy to Mitigate the Impact of the International Financial Crisis The Government Policy Letter (refer to Technical Annex 1) to mitigate the impact of the international financial crisis indicates that the Government intends to intervene in the short term through budgetary and monetary policies. The three objectives of budgetary policy are to: (i) contribute to macroeconomic stability by avoiding recourse to monetary financing; (ii) ensure debt servicing; and (iii) ensure delivery of social services, including in the water, electricity, education and transport sectors. Budget management will be based on rigorous harmonization of the implementation of the cash flow and expenditure commitment plans. With regard to monetary policy, the BCC has taken measures aimed at restricting liquidity in the economy so as to contain inflationary pressures. This policy aims at ensuring the country s regular and stable supply of imported products such as oil products, construction materials and food products which are 1 These weaknesses are currently discussed in the context of the World Bank s Emergency Technical Assistance Project (EMTAP).

12 2 necessary for strengthening economic activity and improving the well-being of the population. The Government is in a transitional period during which it is negotiating with the IMF so as to sign, as soon as possible, a PRGF-backed programme which would enable it to access other donors resources. A vast programme of structural reforms has been defined. The Government intends to take all appropriate measures to reach the enhanced HIPCI completion point by end 2009 so as to benefit from significant external public debt relief. At the institutional level, the Government has set up a crisis unit chaired by the Prime Minister. This crisis unit meets regularly to review the economic situation. 2.2 Recent Economic Developments Developments in 2008: The economic outlook in DRC has deteriorated considerably since September 2008 because of two exogenous shocks, namely: (i) the international financial crisis, coupled with an acute economic crisis, and (ii) the resurgence of conflicts in the East of the country, which has led to a humanitarian crisis with the displacement of 250,000 inhabitants and pressure on public finance and international exchange reserves. The contraction of global demand in the wake of the crisis has cause a sharp downturn in the growth rate of export revenue (35.1% as against 109.6% in 2007). Exchange reserves have plummeted by 400% from US$ 253 million (1.1 weeks of imports) in May 2008 to US$ 83 million (0.3 weeks of imports) at end The growth rate in real terms in 2008 is estimated at 6% instead of the initially forecast 10%, and over 200,000 job losses have been reported as a result of the fall in the prices of the major commodities (copper, cobalt, and diamond), a reduction in mining production and the cessation of activities in the mining sector. The Congolese franc has depreciated by 27% against the US dollar. The inflation rate at end 2008 was 28% instead of the estimated 23% Outlook for 2009: 2009 began with a general awareness of the need to carry out urgent BP support actions to mitigate the impact of the crisis on the Congolese economy, and to support the country in reaching the enhanced HIPCI completion point so as to obtain significant debt relief (80% to 90% of the stock of US$ 12 billion) and create fiscal space. The World Bank and the IMF reacted in February and March 2009 respectively (see Section 3.5). The available provisional data indicate alarming prospects. Indeed: The economic growth rate is expected to continue declining as a result of the strong contraction of exports (-56%). The terms of trade are expected to deteriorate further (-3.5% as against -2.1% in 2008). The real growth rate is projected to stand at 2.7% instead of 4.5% as initially estimated because of the decline in the mining sector and a sharp reduction in FDI (US$ 623 million as against the expected US$ 2 billion). These trends will lead, in particular to a significant drop in per capita income. The external financing residual gap (after IMF financing) is projected at US$ million; BCC s level of foreign exchange reserves is expected to be below the optimal level (at least three months of imports) and that of banks will reduce significantly. First, a 224% increase in gross official exchange reserves is projected (US$ 269 million at end 2009 or 2.6 weeks of imports as against US$ 83 million at end 2008 or 0.3 weeks of imports). The objective of replenishing BCC s international reserves to US$ 269 million by end 2009 will not be easily achieved. Indeed, the IMF s financial assistance of US$ 195 million will be used to the tune of US$ 70 million to meet the debt service payments owed to the Institution. Furthermore, the 2 Refer to Annex 4

13 3 level of gross official reserves continued to decline by mid-march 2009 to US$ 27 million (0.1 week of imports) i.e. a deterioration of over 18% in comparison to its February 2009 level. Lastly, the rate of decline in exports is higher (56.3%) than initially estimated (46.8%). These trends are expected to significantly affect the volume of reserves held by the banks, which had already fallen sharply in 2008; Partly as a result of the shortage of foreign exchange, the contraction of imports is expected to be stronger than forecast (27% instead of 19.6%). This should also lead to a significant depreciation of the national currency and a sharp increase in inflation. Indeed, as at mid-march 2009, the dollar was exchanged at CDF on the official market (an appreciation of 21% compared to 2008) and at CDF 807 on the free market. The inflation rate should be around 25%; In 2009 the pre-external-financing public finance gap is higher than expected. Indeed, the gap is CDF 417 billion (US$ 562 million) 3 or 5% of GDP, instead of CDF 222 billion (US$ 299 million) forecast. III. JUSTIFICATION AND KEY DESIGN ELEMENTS 3.1 Linkage with Government Policy and Justifications The formulation of the programme refers to the Government s policy to mitigate the impact of the international financial crisis in the short-term as described above. It would appear that if the Bank does not provide the country with emergency aid, the shortage of international reserves could seriously diminish the private sector s import capacities with the risk of shortages of essential imported goods, increased inflationary pressure and deterioration of the population s living conditions. The steady fall in budgetary revenue could heighten the already perceptible pressure on government expenditure and diminish the Government s capacities to deliver certain key public services. This situation would, in turn, impact negatively on the country s growth prospects, exacerbate the financial and social impact of the crisis, and delay the conclusion of a medium-term programme with the IMF and attainment of the enhanced HIPC Initiative completion point. This emergency operation should be considered as a bridging operation aimed at economic, financial and social stabilization so as to facilitate the implementation of ongoing operations and conclusion of future reform programmes. 3.2 Alignment with the Guidelines of the Bank s Response to the Impact of the Financial Crisis This emergency programme is consistent with the five provisions of the February 2009 Guidelines concerning the Bank s Response to the Impact of the Financial Crisis. Consultations were held with the Government and internally. This made it possible to reschedule this operation and increase the financing to UA 65 million instead of the UA 50 million provided for in the Bank s strategy paper. There was coordination with the major donors operating in the country during the appraisal mission (refer to Section 3.5). The involvement of the private sector in the Congolese economy is promoted through targeted support to imports. Details on this alignment are provided in Annex Analytical Works Consulted 3 USD 1 = CDF 742 (2009 average rate)

14 4 The following table indicates the analytical works consulted during the programme appraisal. Table 1: Analytical Works Consulted Areas/Documents Consulted Institutions/Date Status Strategy-Background Government Policy Letter to mitigate the impact of the Government March 2009 Completed international financial crisis The Bank s Response to the Economic Impact of the Financial ADB- February 2009 Completed Crisis Assistance Programme under the Exogenous Shocks Facility IMF March 2009 Completed Memorandum on Economic and Financial Policies for Government/IMF - March Not 2009 completed Component 1 Emergency project to mitigate the impacts of the financial crisis World Bank Completed February 2009 Study on commercial practices of the private sector in DRC as World Bank Completed regards imports January 2009 Component 2 Emergency project to mitigate the impacts of the financial crisis World Bank February 2009 Completed 3.4 Outcomes and Lessons Learnt from Previous Similar Operations The formulation of the PUAICF was based on the programme component of the PARER4, an almost identical Bank operation completed in 2008, and the World Bank s ongoing emergency support project targeting balance of payments (BP) and the budget. The main lessons learnt from these operations are reflected in the guiding principles of this programme (see Section 3.9). In addition, disbursement will be in a single tranche as in the case of the PARER. Furthermore, unlike the PARER, the PUAICF does not contain conditions precedent to disbursement but, like the World Bank project, commitments by the Government to ensure smooth implementation of the programme and conditions precedent to presentation of the Programme to the Boards. To intervene rapidly and build on the World Bank s current experience, the PUAICF will be implemented through the same institutional mechanism. 3.5 Operations by Other Donors and Coordination The PUAICF is part of a coordinated effort by the development partners of DRC to assist the Government during this period of crisis. Indeed, in February 2009, the World Bank concluded an emergency financial crisis alleviation project in an amount of US$ 100 million. This Programme has three components, namely: (i) the financing of imports of essential goods and commodities; (ii) payment of primary and secondary school teachers salaries; and (iii) financing of the Government s arrears in respect of water and electricity bills. This operation has been partially disbursed. The Bank s operation strengthens component (i) of the World Bank project and extends the support of components (ii) and (iii). In March 2009, the IMF also provided assistance under the exogenous shocks facility in an amount of US$ 195 million. The financing was fully disbursed in March The Government and the IMF are currently negotiating a PRGF-backed programme, which could be concluded in June The medium-term programme aims to achieve a 6% growth rate, while bringing inflation down to less than 10% and increasing gross international reserves to 5 weeks of 4 Economic Recovery and Reunification Support Project

15 5 imports over the three-year period. The programme draws particularly on the mobilization of domestic revenue, the strengthening of public finance management and reform of the Central Bank. The Government has put in place a vast programme of structural reforms to support the achievement of the programme objectives. By contributing to macroeconomic and social stability, the PUAICF will facilitate the conclusion of such a programme. The European Commission (EC) intends to contribute EUR 48 million of emergency assistance in the second half of Financing food security is the priority of this EC assistance. 3.6 Relations with Other Bank Operations This programme will contribute to maintaining the country s economic and social stability, a key factor for the satisfactory implementation of the Bank s ongoing operations in the DRC and the appraisal of new operations identified during the general identification mission in November- December It should facilitate attainment of the enhanced HIPCI completion point, and pave the way for Bank support under the initiative and the MDRI 3.7 Compliance with Good Practices Principles regarding Conditionalities The lists of eligible products and urgent public expenditure items, the implementation and monitoring arrangements, as well as the outcomes framework have been discussed with the Congolese Authorities. This emergency operation does not contain any structural disbursement conditions. However, commitments will be made by the Government to ensure satisfactory implementation and monitoring of the Programme. 3.8 Compliance with the Non-Concessional Debt Non-Accumulation Policy The DRC is a poor country benefiting from interim relief under the Enhanced HIPC Initiative. The Grant Agreement will therefore contain a specific clause indicating that the country will not receive any supplementary interim debt relief, if it contracts non-concessional debts during the period. 3.9 Guiding Principles In a context where it is difficult to establish priorities, the programme appraisal was directed by the following guiding principles: Emphasis on urgent priority operations to alleviate constraints on the Government s emergency programme; Possibility of obtaining rapid results (simplicity of design and use of existing structures for implementation) ; Ensure balance between flexibility and risk reduction; and Need to implement the emergency programme over a maximum period of one year. IV. THE BANK S RESPONSE TO MITIGATE THE IMPACTS OF THE CRISIS 4.1 Goal, Objectives and Expected Outcomes

16 6 This is a support programme targeting the BP with commitments by the Government to use the national currency equivalent of the foreign exchange to shore up the 2009 Budget. Its ultimate goal is to contribute to maintaining the country s economic and social stability. Its specific objective is to mitigate, in the short term, the impacts of the international financial crisis on the Congolese economy. There are two operational objectives: (i) facilitate the steady supply of imports of essential goods and commodities; (ii) facilitate the financing of urgent targeted expenditures. The expected outcomes are: (i) strengthening of the BCC s international reserves and availability of imported essential goods; (ii) the establishment of some key benchmarks or triggers for reaching the enhanced HIPCI completion point by end 2009; (iii) the implementation in 2009 of the crisis exit emergency plan of the SNCC, which is a strategic public enterprise for social stability and economic recovery; (iv) more regular payment in 2009 of primary and secondary school teachers salaries; and (v) the more regular payment in 2009 of water and electricity bills of public entities. 4.2 Description of Programme Components and Expected Outcomes COMPONENT 1: FACILITATE THE SUPPLY OF IMPORTED ESSENTIAL GOODS AND COMMODITIES Context and Challenge: As previously indicated, all other things being equal, the scarcity of foreign exchange is expected to worsen in 2009 with a sharper than anticipated fall in exports (56% instead of 46%). BCC s level of exchange reserves should continue to be below the optimal level (at least 3 months of imports) and the reserve objectives of the BCC will remain difficult to achieve. Since 2009, the BCC is careful about selling foreign exchange so as to improve its dwindling stock of international reserves. If nothing is done, the shortage of foreign exchange reserves could worsen the decline in imports already observed and lead to risks of shortages of imported goods which are essential for growth and improving the population s living conditions The World Bank s analysis of the commercial supplies practices shows that the main importers of the categories of products in the list of eligible products (below) apply competitive procurement procedures and that they have purchasing agencies (reduced fiduciary risk). Imports are verified by BIVAC International, a subsidiary of the Bureau Veritas Group. Adequate documentation is available to determine whether the goods have been imported and the foreign suppliers paid Assistance under the Programme: The Government has defined a list of eligible products required to maintain a minimum level of economic activities and supplies of goods and representing the historically most important imports, namely: (i) oil and fuel products, (ii) food products, (iii) construction materials, and (iv) telecommunications equipment (see Annex 2). They are essential for achieving the Government s short-term objectives. Subject to fulfillment of the conditions mentioned in Section 6.2, the programme will make the grant of US$ 97.18

17 7 million available to the Congolese State in foreign exchange, which will be transferred to the BCC. The strengthening of BCC s exchange reserves will increase the volume of its foreign exchange auction sales to commercial banks on the foreign exchange market 5. These banks will therefore be in a better position to finance products on the list of eligible imports (thereby curbing the decline in imports in 2009) and support the economic recovery and the estimated 11.4% increase in imports in Expected Outcomes: (i) the level of gross official exchange reserves is improved by end 2009 compared to the March 2009 level; (ii) imports in 2010 are higher than their 2008 level. Details of the outcome indicators are given in the logical framework matrix. COMPONENT 2: COMMITMENT BY THE GOVERNMENT TO USE THE LOCAL CURRENCY EQUIVALENT OF THE FOREIGN EXCHANGE TO FINANCE URGENT TARGETED PUBLIC EXPENDITURES The national currency equivalent of the foreign exchange transferred to the BCC will be used to finance the 2009 cash flow gap. In its Policy Letter, the Government has undertaken to use these resources to finance urgent targeted public expenditures duly included in the expenditure commitment plan harmonized with the cash flow plan. In view of the weaknesses of the Congolese public financial management system as shown by various studies (CPAR, CFAA and PEFA) from 2002 to 2007, including the difficulty for expenditures to reach their final destinations, a list of eligible urgent targeted expenditures has been drawn up by the Government to achieve two objectives: (i) establishment of triggers for the enhanced HIPCI completion point; and (ii) delivery of urgent public services. These objectives and expenditure categories are summarized below. Table 1: Urgent Targeted Public Expenditure Categories and Indicative Costs Expenditure Category Indicative Costs USD Million Establishment of Triggers for the Enhanced HIPCI Completion Point 6.2 PRSP benchmark (PRSP formulation, monitoring and evaluation) 5 Benchmark on governance and service delivery in priority sectors (Monitoring of 1.2 pro-poor spending) Delivery of Urgent Public Services SNCC crisis exit emergency plan 14.2 Salaries of primary and secondary school teachers (3 months) 48 SNEL and REGIDESO bills ( 4 months) 18 Strengthening of tax and customs administration procedures 7.78 Operating costs of the Programme Implementation, Monitoring and Audit 3.0 Mechanism Total Source: Congolese Authorities 5 The monthly objective for foreign exchange sales by BCC auction for 2009 is US$ 10 million

18 8 Sub-component 2A/ Commitments to Establish Triggers of the Enhanced HIPCI Completion Point Context and Challenges: An analysis of the viability of DRC s external public debt shows that the country is not in a position to meet the external debt service burden and at the same time implement its national poverty reduction strategy. The public debt stock was US$ 12 billion as at end It is therefore vital for the country to reach the enhanced HIPCI completion point planned for end December 2009 so as to benefit from substantial external debt relief. Five triggers have been determined as benchmarks to monitor progress towards reaching the completion point. In March 2009, the situation indicated an urgent need for budget support to speed up the actions, particularly for the triggers relating to: (i) completion of the PRSP, and (ii) governance and delivery of services in the priority sectors, failing which it will be difficult to achieve the completion point by year end PRSP completion trigger: In July 2006, the Government adopted its PRSP, the monitoring and evaluation of the implementation of which requires the availability of high quality statistics. To evaluate the macroeconomic framework, the lack of national accounts and the national price index in compliance with international standards weakens the estimates of some indicators for steering the national economy. It is vital to support the Government in the timely production of reliable statistics Trigger concerning governance and delivery of services in the priority sectors: Meeting the benchmark on governance and delivery of services in the priority sectors requires annual monitoring, by the Government, of the execution of health, education, rural development and infrastructure expenditures, an assessment by the beneficiaries of the quality of service delivery, as well as an assessment by service providers of constraints on effective and efficient service delivery. Support is necessary for this action Commitments by the Government: The Government intends to use an amount of local currency equivalent to US$ 6.2 million (indicative amount), comprising US$ 1.2 million and US$ 5 million respectively to finance the costs of establishing benchmarks for the assessment of pro-poor and governance expenditures and delivery of services in the priority sectors. Budget lines corresponding to these expenditures are given in the 2009 budget commitment plan in line with the 2009 cash flow plan Expected Outcomes: PRSP Completion Trigger: (i) the 8 accounts (Sources and Uses Tables (SUT) and Integrated Economic Accounts Tables (IEAT) are produced on the basis of methods that comply with SNC 93 for 2005 (base year) and projections for 2006, 2007 and 2008; (ii) the consumer price indices for 2008 and 2009 are produced. Trigger for governance and delivery of public services in the priority sectors; the 2008 monitoring reports on the execution of pro-poor spending, as well as the 2008 reports on the assessment by the beneficiaries of the quality of service delivery and by the suppliers of the constraints encountered have been prepared. Details of the outcome indicators are given in the logical framework matrix.

19 9 Sub-component 2B/Commitments to Deliver Urgent Public Services 2. B.1/ Financing of the SNCC Crisis Exit Emergency Plan Context and Challenges: The Government has adopted a new transport policy framework and its Action Plan, the goal of which is to provide the population and the economy with a new transport system. A public enterprise reform programme has also been adopted, and the transport sector occupies an important position in it. 6. The SNCC, which is the backbone of the country in terms of developmental transport, is experiencing financial difficulties and has been paralyzed for several weeks by a strike and is one of the enterprises to be reformed. SNCC s situation, exacerbated by the crisis, is affecting imports (mining and industrial inputs, manufactured products), exports (mining products) and domestic trade (agricultural products), as well as its servicing of the country s Centre, South and East Provinces. A plan to manage staffing levels is currently being financed with a US$ 20 million World Bank Grant. A memorandum of understanding on a three-stage restructuring programme was signed on 6 March between the Government and the SNCC Trade Union delegation: (i) an emergency crisis exit plan (US$ 14.2 million); (ii) an interim plan to support the stabilization of activities (US$ 210 million, including US$ 180 million to be financed by the World Bank 7 ) and (iii) a Railway Activities Recovery and Revival Plan, which should lead to privatization. There is a risk that activities will cease in the absence of intervention Commitments by the Government: Because of SNCC s difficulties, exacerbated by the international financial crisis, and in view of its economic and social importance, the Government has decided to provide it with aid in CDF equivalent to US$ 14.2 million to finance its crisis exit emergency plan. The Government has undertaken to pursue its efforts to mobilize additional financing, including the transfer of shares in some parastatals, which is underway, so as to meet all the requirements of the SNCC. Budget lines corresponding to this expenditure are included in the 2009 budget commitment plan in line with the 2009 cash flow plan Major Expected Outcomes: (i) payment of salary arrears and regular payment of salaries, as a result of the resumption of operations throughout the SNCC network; (ii) monthly coverage of fuel consumption for the remainder of the 2009 financial year; and (iii) procurement of the necessary operating consumables for the immediate resumption of activities. Details of the outcome indicators are given in the logical framework matrix. 2. B.2/ Financing of Primary and Secondary School Teachers Salaries Context and Challenges: The Government has set itself the objective of one million new school enrolments in The bulk of DRC s education budget is allocated to the salaries of teachers, and the Government is making efforts to pay their salaries regularly. The levels of monthly salaries are very low (US$ 55 for provincial teachers and US$ 85 for those in Kinshasa). The teachers are poorly motivated, and have often gone on strike when the Government is unable to pay them. This has led to the closure of schools for long periods. The deterioration in the country s financial situation following the international crisis could prevent the Government from being able 6 7 It concerns the modernization of the transport sector by (i) modifying the State s intervention and establishing Regulatory Agencies; (ii) State divestiture in favour of the private sector and (iii) adoption of regulations which will liberalize the sector. The SNCC is the sole beneficiary of the US$ 180 million Multimodal Transport Programme financed by the World Bank following elimination of the maritime, river transport companies etc. The start-up of this programme is planned for the second quarter of (Refer to Technical Annex 2 : Situation of SNCC)

20 10 to continue to pay teachers salaries and consequently, ensuring the continued presence of teachers in the classrooms both in the capital and in the provinces. The regular presence of teachers in the classrooms is a vital factor to maintain basic education service delivery and ensure a successful school year in Government support in this difficult period is therefore appropriate. The Government s 2009 Commitment Plan has allocated 12 months salaries to teachers, and the Government has decided to implement this plan Commitments by the Government: The Government has undertaken to use the CDF equivalent of US$ 48 million (representing 3 months of salaries) to ensure, in 2009, continued payment of the salaries of teachers of seated and standing classes in primary and secondary schools in the public sector (in Kinshasa and in some provinces) and already recorded in the payroll. The total number of teachers is estimated at 248,713. The World Bank has paid the equivalent of one month s salary in 2009 by way of reimbursement of the salaries for November Expected Outcomes: (i) There is no break in the payment of eligible teachers salaries in Kinshasa and in certain provinces in 2009; (ii) the new school year is guaranteed. 2.B.3 / Payment of Water and Electricity Bills Context and Challenges: The public entities (official authorities and eligible parties) whose water and electricity bills are paid by the Government represent 40% of sales by volume and 43% of all REGIDESO bills and 25% sales in KW and 43% of SNEL s total bills in KW and 43% of SNEL s total bills. Since 2005, the collection rate for the bills of the above-mentioned public entities is slightly less than 3%. This is a contributory factor to the deterioration of the financial situations of these two public enterprises, as well as the services provided 8. The ongoing reforms include an undertaking by the Government to regularly pay its water and electricity bills. The billing of water consumption on a meter basis is already effective. The current impact of the financial crisis on the 2009 cash flow plan shows that additional resources are required to ensure the Government s ability to pay these bills for the remainder of The non-payment of bills could deteriorate the financial situations of both REGIDESO and SNEL, the quality and development of their services, and jeopardize the start up of reforms embarked upon by the Government to revive the water and electricity sectors which are critical for improving the living conditions of the population and for competitiveness Commitments by the Government: The Government intends to use the CDF equivalent of US$ 18 million to pay the water and electricity bills of public entities (official authorities and eligible parties) for 4 months, particularly from June to October It is important to point out that the World Bank has advanced the funds to cover the first half of Expected Outcomes: (i) The water and electricity bills of public entities to be paid by the State are paid from July to October 2009; (ii) REGIDESO and SNEL s cash flows will not be under pressure from arrears owed by the Government The Government has agreed to implement the following measures prior to presentation of the Programme to the Boards of Directors of the Bank Group: 8 The World Bank is financing a project entitled Urban Water Supply Project for REGIDESO the objective of which is to improve the billing and payment of the water bills of public enterprises

21 11 Box 1 : Measures precedent to presentation of the Programme to the Boards of Directors Measure 1 : The designation of a BCC account acceptable to the Bank to receive the foreign exchange funds Measure 2 : The opening of a special account of the Treasury General Account with the BCC to receive the local currency equivalent of the foreign exchange transferred Measure 3: The opening of a special SNCC account with BCC acceptable to the Bank to receive the funds in local currency allocated to this public enterprise. Measure 4 : The opening of a special account in a commercial bank acceptable to the Bank to receive the funds in local currency allocated to the operating costs of the programme implementation and audit mechanism The objective of these measures is to ensure rapid disbursement of the grant. 4.3 Financing Requirements and Arrangements As shown in the table below, the residual financing gap in respect of external payments after the Bank s financing is US$ million, including a residual budget gap of US$ 12.2 million. This public financing gap does not take into account internal expenditure adjustment measures under discussion between the Government and IMF in negotiations on the PRGF-backed programme. The Bank s assistance represents 26% of external financing identified in Table 3: Financing Requirements and Arrangement 2009 BP 2009 Cash Flow Plan* Overall Balance Financing 74 Net change in arrears net of IMF 0 Change in net reserves (- = increase) 74 Central Bank (including net IMF credit) -86 Commercial banks 160 Financing Gap before exceptional assistance Debt Relief (EHIPCI) 626 Financing Gap after exceptional assistance Financing Gap External Financing identifed of which World Bank of which European Union Of which ADB Residual Financing Gap Source : IMF, Congolese Authorities; Exchange Rate: US $1 = CDF Programme Beneficiaries The intermediate beneficiaries of the programme are the private sector and the Congolese public administration. The ultimate beneficiary is the Congolese population.