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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

Design Team : Sector Director : Country Director : Division Manager: Resident Representative:

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

Peer Reviewers E

S. Ba : S. N’Guessan: L.C.Tawah : T. Diarra : C. Baumont: M. Diagne: R. Kane: B. Barry:

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

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 ...........................................................................................1

2.1 GOVERNMENT POLICY TO MITIGATE THE IMPACT OF THE INTERNATIONAL FINANCIAL CRISIS ................. 1 2.2 RECENT ECONOMIC DEVELOPMENTS ........................................................................................................... 2

III. JUSTIFICATION AND KEY DESIGN ELEMENTS ................................................................................3 3.1 LINKAGE WITH GOVERNMENT POLICY AND JUSTIFICATIONS ...................................................................... 3 3.2 ALIGNMENT WITH THE GUIDELINES OF THE BANK’S RESPONSE TO THE IMPACT OF THE FINANCIAL CRISIS3 3.3 ANALYTICAL WORKS CONSULTED............................................................................................................... 3 3.4 OUTCOMES AND LESSONS LEARNT FROM PREVIOUS SIMILAR OPERATIONS............................................... 4 3.5 OPERATIONS BY OTHER DONORS AND COORDINATION............................................................................... 4 3.6 RELATIONS WITH OTHER BANK OPERATIONS.............................................................................................. 5 3.7 COMPLIANCE WITH GOOD PRACTICES PRINCIPLES REGARDING CONDITIONALITIES .................................. 5 3.8 COMPLIANCE WITH THE NON-CONCESSIONAL DEBT NON-ACCUMULATION POLICY ................................. 5 3.9 GUIDING PRINCIPLES .................................................................................................................................... 5

IV. THE BANK’S RESPONSE TO MITIGATE THE IMPACTS OF THE CRISIS ...................................5 4.1 GOAL, OBJECTIVES AND EXPECTED OUTCOMES.......................................................................................... 5 4.2 DESCRIPTION OF PROGRAMME COMPONENTS AND EXPECTED OUTCOMES................................................. 6 4.3 FINANCING REQUIREMENTS AND ARRANGEMENTS ................................................................................... 11 4.4 PROGRAMME BENEFICIARIES ..................................................................................................................... 11 4.5 IMPACT ON GENDER ................................................................................................................................... 12 4.6 ENVIRONMENTAL IMPACT .......................................................................................................................... 12

V. IMPLEMENTATION, MONITORING AND EVALUATION...............................................................12 5.1 IMPLEMENTATION ARRANGEMENTS: GENERAL ARRANGEMENTS............................................................. 12 5.2 SPECIFIC IMPLEMENTATION ARRANGEMENTS ........................................................................................... 13 5.3 MONITORING AND EVALUATION ARRANGEMENTS .................................................................................... 15

VI. LEGAL DOCUMENTS AND AUTHORITY ............................................................................................15 6.1 LEGAL DOCUMENTS ................................................................................................................................... 15 6.2 CONDITIONS FOR BANK INTERVENTION .................................................................................................... 15 6.3 COMPLIANCE WITH BANK GROUP POLICIES.............................................................................................. 16

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 2009. 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).

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

Fiscal Year

January- December

Currency Equivalents (April 2009)

UA 1 = US$ 1.49507 USD 1 = CDF 742

Annex 1 Government Policy Letter to Mitigate the Impact of the International Financial Crisis (Refer to Technical Annex)

Annex 2 List of Eligible Products for Import by the Private Sector Annex 3 Annex 4

ADF-11 Resource Allocations and Programming in 2009- 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 Letter of Government Policy to Mitigate the Impact of the International Financial Crisis

Annex 2 Presentation of the SNCC

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Acronyms and Abbreviations

BCC : Central Bank of Congo DRC BP : Balance of Payments CDF : Congolese Franc CTR : Technical Committee for Monitoring Reforms DGE : Large Enterprises Department DGI : Directorate-General of Taxes DRC : Democratic Republic of Congo HIPCI : Heavily-Indebted Poor Countries Initiative INS : National Institute of Statistics MEPSP : Ministry of Primary and Secondary Education OFIDA : Customs and Excise Agency OGEDEP : Public Debt Management Agency PCU

: 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

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Information on the Grant Client Information DONEE: Democratic Republic of Congo EXECUTING AGENCY: 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)

Grant Currency

---

Commitment fee --- Other Charges ---

Indicative Time Frame

Activities Date 1. Negotiations on Grant Agreement 29 April 2009 2. Board Presentation 6 May 2009 3. Disbursement of the Single Tranche May 2009 4. Supervision July 2009 5. Mid-Term Review November 2009 6. Supervision March 2010 7. Completion Report May 2010

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Programme Summary

Programme Overview

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$ 97.18 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 2009.

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.

Expected Project Outputs

(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.

Needs Assessment and Relevance

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.

Institutional Development and Knowledge Accumulation

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.

Risk Management

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.

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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 2009

1. 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 -13.9% in 2009 and 11.4% in 2010

-------------------------------------

Description of Risk /Assumption

Risk : Worsening of the international crisis in 2009 Assumption: average risk

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Assumptions/Risks

the Enhanced HIPCI are established and the completion point reached; (iii) The SNCC crisis exit emergency plan is implemented (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

(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

iii) The resumption of work and activities at SNCC.


(iv) Number of months in 2009 when teachers’ salaries are paid


(v) Number of months in 2009 when bills are paid


(ii) The two benchmarks backed by the programme are established by end 2009 and the Enhanced HIPCI completion point reached by end 2009 (iii) Resumption of work and activities at the SNCC is effective as from June 2009. (iv) Primary and secondary school teachers are regularly paid throughout the second half of 2009. (v) The electricity and water bills of public entities are paid for the months of July to October 2009

Mitigation measures: (i) Many recovery plans in industrialized and emerging countries; (ii) Weak integration of the Congolese financial sector;

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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), 2006 2007 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

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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 2009.

4) 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

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$ 97.18 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 weaknesses1 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 2009. 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

2.1.1 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).

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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 Developments2 2.2.1 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 2008. 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%. 2.2.2 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$ 320.4 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

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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 779.55 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 3. 3.3 Analytical Works Consulted 3 USD 1 = CDF 742 (2009 average rate)

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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 international financial crisis

Government – March 2009 Completed

The Bank’s Response to the Economic Impact of the Financial Crisis

ADB- February 2009 Completed

Assistance Programme under the Exogenous Shocks Facility IMF – March 2009 Completed Memorandum on Economic and Financial Policies for 2009-2011 Government/IMF - March

2009 Not completed

Component 1 Emergency project to mitigate the impacts of the financial crisis World Bank

February 2009 Completed

Study on commercial practices of the private sector in DRC as regards imports

World Bank January 2009

Completed

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 2009. The Government and the IMF are currently negotiating a PRGF-backed programme, which could be concluded in June 2009. 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

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imports over the 2009-2011 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 2009. 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 2008. 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

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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

4.2.1 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.

4.2.2 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. 4.2.3 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

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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 market5. 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 2010. 4.2.4 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 4.2.5 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 pro-poor spending)

1.2

Delivery of Urgent Public Services 87.98 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 Mechanism

3.0

Total 97.18 Source: Congolese Authorities

5 The monthly objective for foreign exchange sales by BCC auction for 2009 is US$ 10 million

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Sub-component 2A/ Commitments to Establish Triggers of the Enhanced HIPCI Completion Point 4.2.6 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 2008. 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. 4.2.7 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. 4.2.8 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. 4.2.9 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. 4.2.10 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.

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Sub-component 2B/Commitments to Deliver Urgent Public Services 2. B.1/ Financing of the SNCC Crisis Exit Emergency Plan 4.2.11 Context and Challenges: The Government has adopted a new transport policy framework and its 2002-2015 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 Bank7) 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. 4.2.12 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. 4.2.13 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 4.2.14 Context and Challenges: The Government has set itself the objective of one million new school enrolments in 2009. 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 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.

7 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 2010. (Refer to Technical Annex 2 : Situation of SNCC)

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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 2009. 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. 4.2.15 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 2008. 4.2.16 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 2009-2010 school year is guaranteed.

2.B.3 / Payment of Water and Electricity Bills

4.2.17 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 provided8. 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 2009. 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. 4.2.18 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 2009. It is important to point out that the World Bank has advanced the funds to cover the first half of 2009. 4.2.19 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. 4.2.20 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

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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 4.2.21 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$ 223.2 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 2009.

Table 3: Financing Requirements and Arrangement

2009 BPOverall Balance -1293Financing 74 Net change in arrears net of IMF 0 Change in net reserves (- = increase) 74 Central Bank (including net IMF credit) -86 Commercial banks 160Financing Gap before exceptional assistance -1219 Debt Relief (EHIPCI) 626Financing Gap after exceptional assistance -593 -562 Financing Gap External Financing identifed 97.18 369.8 of which World Bank 100 100 of which European Union 62.4 62.4 Of which ADB 97.18 97.18Residual Financing Gap 62.4 -192.2Source : IMF, Congolese Authorities; Exchange Rate: US $1 = CDF 742

2009 Cash Flow Plan*

4.4 Programme Beneficiaries The intermediate beneficiaries of the programme are the private sector and the Congolese public administration. The ultimate beneficiary is the Congolese population.

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4.5 Impact on Gender The female population represents about 52% of the total population. Women are active in business circles, especially in the import-export sector. They also account for a large number of primary and secondary school teachers. By mitigating the impacts of the international financial crisis in the short term on the Congolese economy through facilitation of continued supply of essential imported goods and commodities and financing of urgent targeted public expenditures, including the payment of the salaries of primary and secondary school teachers, the emergency programme will have an impact on the female population.

4.6 Environmental Impact The proposed programme is a BP support coupled with budget support. It will have no environmental impact, and has been classified in Category III.

V. IMPLEMENTATION, MONITORING AND EVALUATION

5.1 Implementation Arrangements: General Arrangements 5.1.1 Responsible Institutions: In view of the urgency of the operation and the need for rapid results, the programme will use the same implementation arrangements as the World Bank’s emergency project, in particular the Project Coordination Unit (PCU). This approach is in keeping with the provisions of the Paris Declaration on aid effectiveness. This Unit has also accumulated relevant experience in the satisfactory management of similar operations financed by the World Bank. The PCU is adequately staffed with persons whose qualifications and experience are deemed satisfactory, and has credible financial management and procurement systems9. The PCU is under the oversight of the Ministry of Planning. It will be responsible for: (i) implementation of the programme; (ii) coordination with the Ministries and other institutions involved in the implementation of the Programme, and (iii) the programme financial management activities. An Inter-Ministerial Programme Steering Committee, chaired by the representative of the Minister of Finance, will be established to: (i) supervise the activities of the PCU, with particular attention paid to efficacy and transparency; (ii) provide guidelines; (iii) facilitate the coordination of activities. This committee will be assisted by the following technical entities: CTR, OFIDA, SECOPE, REGIDESO, SNEL, CNCC, and DGI. 5.1.2 Disbursement: The UA 65 million grant will be disbursed in a single tranche to the Government and transferred to a BCC account opened with a correspondent acceptable to the Bank, subject to fulfillment by the beneficiary of the conditions in Section 6.2. The BCC will open a cash account in its books designated ‘PUAICF/ADB Account’ acceptable to the Bank, which will be a sub-account of the Treasury General Account intended solely for operations relating to CDF categories of expenditure of Component 2 of the Programme (Local currency counterpart account). This assigned account will receive the local currency equivalent of the foreign exchange transferred to the BCC. Another special account in the name of the SNCC, designated ‘PUAICF/ADB/SNCC’, will be opened to receive the CDF equivalent of US$ 14.2 million. The use of funds in these accounts will be authorized by the Minister of Finance at the request of the PCU. In

9 The World Bank carried out an assessment of the PCU’s capacities during the preparation of its project. World Bank

procedures are harmonized with those of the Bank.

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the case of funds earmarked for the financing of operating costs of the programme implementation and monitoring mechanism, the PCU will open in a local bank, on terms acceptable to the Bank, an account designated ‘Special PUAICF/PCU/ADB Operating Account’. This account will be used for expenditures for implementation, monitoring-evaluation and audit of the programme. The Minister of Finance will authorize the opening of this account, and will delegate the authority to activate the account to PCU, with the knowledge that the account will be audited.

5.2 Specific Implementation Arrangements Component 1 5.2.1 Responsible Institutions: The PCU will be responsible for implementing this component in liaison with the technical structures, in particular the BCC and OFIDA. 5.2.2 Procurement: The Programme grant resources (UA 65 million) will be used to finance the costs of private sector imports on the list of eligible products. A maximum of 100% of component 1 could be used to finance all types of eligible goods from every origin without being submitted to the Bank for prior approval. In accordance with the approach adopted by the World Bank, contracts below US$ 3 million will be based on the established commercial practice and monitored by a private organization, whose performance has been considered satisfactory (refer to § 4.2.2) and are not subject to prior review. Contracts in amounts equal to or above US$ 3 million will be awarded on the basis of international competitive bidding procedure, and will be submitted to the Bank for prior review. 5.2.3 Audit: The Government will provide ex-post evidence at programme mid-term and on completion (April 2010) that goods and products on the eligible list to the value of US$ 97.18 million have been imported over the programme period10. The Ministry of Finance, through OFIDA, the BCC and probably commercial banks, will provide the necessary supporting documents, which will detail the quantities and values of the eligible imports made. These are: (i) the following documents: Import License; Inspection Certificate; Final Import Invoice; Final Import Declaration or the Exemption Declaration (EI) or the Conditional Import License (IC) or the E Declaration; Bill of Lading; and (ii) documents certified by the BCC detailing payments made by importers for eligible imports acceptable to the Bank namely: import payment orders by the importer’s commercial bank: IB import declarations, Swift messages concerning payments of these imports and suppliers invoices. All these documents will be communicated by OFIDA and BCC to the PCU. An independent auditor will be recruited by the PCU on the national currency financing to carry out the audit of operations at mid-term and at programme completion. 5.2.4 Implementation Schedule: This programme component will be implemented over the May 2009 to April 2010 period to which should be added a 3-month audit period.

Component 2 (Preliminary Arrangements)

5.2.5 The Government has undertaken to communicate to the PCU a detailed implementation plan for this component as soon as the Programme is adopted by the Boards. Below are some of the preliminary arrangements.

5.2.6 Responsible Institutions: The PCU is responsible for the implementation of this component in liaison with the following respective key technical structures: Sub-component 2A 10 It was agreed to use the documents of the years 2008, 2009 and 2010 in view of the time required to close

import operations.

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(enhanced HIPCI completion point benchmark): CTR, INS, PRSP Committee, COGEDEP, the Ministries of Health, Education, Rural Development and Infrastructure and the BCC. Sub-component 2B1 (SNCC): CTR, SNCC, Portfolio Ministry, COPIREP and BCC. Sub-component 2B2 (teachers’ salaries: CTR, Ministries of Finance through public accountants, the EPSP through the teachers’ salaries control service (SECOPE), MEPSP, and BCC. Sub-component 2B3 (water and electricity bills): Ministry of Finance (DGI-CC), Ministry of the Budget, REGIDESO, and SNEL. 5.2.7 Disbursement: Sub-component 2A (enhanced HIPCI completion point trigger). Total disbursements of CDF equivalent of US$ 6.2 million will be made to finance the procurement of goods and services; the details (expected costs and outputs) will be given to PCU by the Government. 5.2.8 Sub-component 2B1 (SNCC): Total disbursements of CDF equivalent of US$ 14.2million will be made to clear salary arrears, and ensure the payment of salaries in 2009, as well as the financing in local currency of the replenishment of strategic stocks of fuel, lubricants and consumables. Details will be given by the SNCC to the PCU. 5.2.9 Sub-component 2B2 (teacher’s salaries): To mitigate the risks of payment of non-eligible expenditures, the financing will be retroactive in the CDF equivalent of US$ 48 million, and will concern eligible teachers registered on the payroll for December 2008, January and February 2009. The above-mentioned principal implementation structures will be responsible for communicating to the PCU the following supporting documents as justification for the settlement of teachers’ salaries : (i) computerized payment order P sent by the Treasury to the BCC (responsible entity: BCC); (ii) payroll sent by the MEPSP to the Salaries Department of the Ministry of the Budget (responsible entity: MEPSP and SECOPE); (iii) transfer order sent by the BCC to CaisCongo (responsible entity: BCC); (iv) order to remit funds (responsible : provincial delegated payment authorization officers); (v) receipt for remittance of funds (responsible entity BCC) ; (vi) discharge receipt (responsible entity: Ministry of Finance). The payment order will be transmitted to the BCC by the PCU once the documentation has been gathered and validated. There is only a limited risk that this component will finance non-eligible expenditures for it will finance confirmed salaries. The World Bank has reimbursed the salaries for November 2008. 5.2.10 Sub-component 2B3 (water and electricity bills): The programme will finance the water and electricity bills for four months (July to October 2009) i.e. US$ 18 million. The above-mentioned principal technical implementation structures will be in charge of communicating the supporting documents to the PCU. The latter will verify the eligibility of the bills, validate the request for payment, and authorize the BCC to effect the payment on behalf of REGIDESO and SNEL on the basis of the following: (i) payment order of the Ministry of Finance and supporting documents (summary tables of issuance of certified bills), and (ii) REGIDESO and SNEL receipts 5.2.11 Procurement: Only sub-components 2A (enhanced HIPCI completion point triggers) and 2B1 (SNCC) are concerned with the award of contracts. For these activities, an implementation plan (detailed costs, procurement plan, implementation period and expected outputs) will be communicated to the PCU and the Bank. The PCU will be in charge of procurement. 5.2.12 Financial Reporting and Audits: The PCU will submit to the Government, on a quarterly basis and with a copy to the Bank, unaudited financial reports within 45 days of the end of each quarter. On completion of the Programme, the PCU will present financial statements of the Programme. An external auditor approved by the Government will be recruited by the PCU to audit the financial statements prepared during implementation of the Programme within 3 months of the closure date of operations. The auditor’s report will be prepared in accordance with accepted

15

international audit standards, and will provide the auditor’s opinion on: (i) the programme financial statements; (ii) the supporting documents for imports financed, (iii) the conformity, quality and impact of expenses financed with regard to meeting the triggers of the enhanced HIPC completion point, the payment of teachers’ salaries, and the delivery of water and electricity services. 5.2.13 Implementation Schedule: This programme component will be implemented over the May 2009 to March 2010 period to which should be added 3 months for the conduct of the audit. The component should be completed (including the audit) no later than June 2010. Component 3: Programme Implementation, Monitoring-Evaluation and Audit 5.2.14 The national currency equivalent of the grant will be used to finance additional implementation, monitoring-evaluation and audit costs of the two programme components and the PCU management. The estimated cost is about US$ 3 million. The details will be provided by the Government. The PCU management will also be audited.

5.3 Monitoring and Evaluation Arrangements The Programme logical framework matrix on page v will serve as the programme monitoring evaluation reference framework. For Component 2, the logical framework matrix could then be reviewed following submission by the Government of the detailed implementation plan for this component. The PCU will see to the collection of data, and will be responsible for the monitoring-evaluation of the programme, as well as preparation of quarterly monitoring evaluation reports, including a mid-term review report on the implementation status of the two components. These unaudited reports must be submitted within 45 days of the end of each quarter. Consultants will be recruited to prepare these monitoring-evaluation reports. The PCU will propose a report format acceptable to the Bank.

VI. LEGAL DOCUMENTS AND AUTHORITY

6.1 Legal Documents The legal document, which will be used for the Programme, is the Grant Agreement. The parties to this Agreement are the African Development Fund and the Congolese Government.

6.2 Conditions for Bank Intervention A/Conditions precedent to Grant Effectiveness Effectiveness of the grant will be subject to the signing of the Grant Agreement.

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B/Conditions precedent to Grant Disbursement B1- The Government has agreed to implement the measures precedent to presentation of the Programme to the Boards of Directors of the Bank Group. These conditions are set out in Box 1. The Grant disbursement shall be subject to the following other conditions: B2- (i) provide the Bank with evidence of the issue of an order to extend the mandate of the PCU to this Programme; (ii) provide the Bank with evidence of the adoption of the decree establishing the programme’s Inter-Ministerial Steering Committee B3- Provide the Bank with evidence of the written confirmation of the following undertakings: (i) the non-contraction of non-concessional debts during implementation of the Programme; (ii) implementation of Component 2 of the Programme as planned, and provision of the PCU, not more than 30 days after disbursement of the grant, with a detailed implementation plan for this component to facilitate its implementation, as well as monitoring-evaluation; (iii) pursuance of efforts to conclude a medium-term programme with the IMF in 2009.

6.3 Compliance with Bank Group Policies

The main references for the preparation of this report were the following Bank Group Guidelines: (i) Guidelines on Reform Support Operations, in particular Balance of Payments Support Operations (2008); and (ii) The Bank’s response to the Impact of the International Financial Crisis (2009).

VII. RISK MANAGEMENT The impacts of the programme are subject to risks which are both endogenous and exogenous to the Programme. These risks must be compared to the risk of not providing assistance to the country in this difficult situation which is primarily due to the impacts of the international financial crisis on the economy and the fragile social, political and security stability. The risk situation and the mitigation actions and measures are summarized below.

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Table 4: Risk Analysis and Mitigation Measures/Actions

Risks Level of

Severity of Risk Mitigation Measures/Actions

Political and Social Risks

Average Cessation of conflicts in the East of the Country Climate of confidence recently restored between the

Governments of Congo, Rwanda and Uganda Macroeconomic Risks High Commitments towards short term macroeconomic

stability. This stability may, however, be jeopardized by the worsening of the international crisis

Possibility of concluding a PRGF-backed programme in June 2009 and benefiting from the support of other donors

Implementation Risks Component 1 Component 2

Average Low

Agreement on lists of eligible imports and urgent public expenditures

Project management by PCU experienced in the management of emergency operations and donor procedures. Credible financial management and procurement systems.

Agreement with Government on detailed procedures and documentation

Audits at mid-term and on completion of each component

Risks of the Government reneging on its commitments

Low The Government has made commitments to be fulfilled under this programme

Fiduciary Risks Average Agreement on lists of eligible imports and urgent public expenditures

Project management by the PCU. Credible financial management and procurement systems

Agreement with the Government on detailed procedures and documentation

Audits at mid-term and on completion of each component

PCU Audit

VIII. RECOMMENDATION It is recommended that the Board of Directors should approve an ADF Grant not exceeding UA 65 million to the Government of DRC, subject to the conditions stipulated in this report.

Annex 1 Democratic Republic of Congo

Emergency Programme to Mitigate the Impacts of the Financial Crisis Appraisal Report

GOVERNMENT POLICY LETTER TO MITIGATE THE IMPACTS OF THE INTERNATIONAL FINANCIAL CRISIS

Refer to Technical Annex 1



LIST OF ELIGIBLE ESSENTIAL IMPORTS

Oil and fuel products Food products

Construction materials

Telecommunications equipment



Allocations of ADF-11 and Programming in 2009- Provisions of the Document entitled

‘The Bank’s Response to the Economic Impact of the Financial Crisis The provisions of the document for ADF countries Have the conditions been met under this

operation? Immediate consultations with RMC governments to examine the agreed operational programme, assess the existing priorities and pipeline, and consider whether adjustments would be appropriate. This could include reprogramming across agreed investment operations, introduction or enlargement of fast-disbursing operations.

Yes. The Bank’s Executive Directors and the Vice-President, OSVP, as well as the economist and programme officer have consulted the Congolese Authorities who have expressed their desire to implement a BP emergency support and an increase in the amount to be allocated to the operation. It was decided to reprogramme activities at the level of the Country Team.

Closer coordination with other sister institutions for a leveraged response and impact on the ground.

Yes. Consultations have been held on the ground with the IMF, World Bank and EU and resulted in this proposal for coordinated operations.

Internal consultations with Sector Departments to ensure consistency of the prospective operational programme both with the available resources and with potentially changed priorities in light of the crisis.

Yes. Consultations have been held within the Country Team.

Creative efforts to identify possible opportunities to catalyze or deepen private sector engagement will be given particular emphasis.

Yes. The Programme provides for the provision of exchange reserves for private sector imports.

In close collaboration with Sector Departments, intensified outreach to and consultations with external partners to identify opportunities to consolidate activities for increased speed and impact, leverage up existing resources through additional co-financing, and/or to ensure more prioritization and effective division of labor at the country level.

Yes. There has been coordination with IMF, the World Bank and EU. Complementarity is sought with the World Bank’s operations. The operation stabilizes the environment with a view to implementation of the PRGF.

Source: ADB (2009): The Bank’s Response to the Economic Impact of the Financial Crisis - Reference ADB/BD/WP/2009/27 and ADB/BD/WP/2009/27/Add.1



RDC- KEY MACROECONOMCI INDICATORS: RECENT TRENDS AND OUTLOOK

2006 2007 2008 2009 2010 Est. Rev. SMP. Est. Projections (Percentage change unless otherwise indicated) Production and Prices

Real GDP 5.6 6.3 10.0 8.2 4.4 6.4 GDP Deflator 13.6 17.9 17.4 19.7 11.5 15.4 Consumer Prices, annual average 13.2 16.7 17.5 18.0 16.4 11.8 Consumer Prices, end-of-period 18.2 10.0 23.5 27.6 12.0 11.5

External Sector Exports, fob (US dollar) 41.5 109.6 35.1 11.3 -46.8 13.7 Imports, fob (US dollar) 16.9 81.8 29.7 27.6 -19.9 14.4 Export Volume 28.3 72.7 23.1 -0.2 -25.3 5.8 Import Volume 15.0 69.9 15.2 12.1 -13.9 11.4 Terms of Trade 8.5 13.4 -2.6 -2.1 -23.5 4.6 Nominal Effective Exchange Rate 1/ 1.3 -15.5 … -11.0 … … Real Effective Exchange Rate 11.6 2.6 … 0.8 … … (Annual change in percent of beginning-of-period broad money ; unless otherwise indicated) Money and Credit

Broad Money 60.4 49.5 30.2 54.9 16.4 … Net Foreign Assets -11.5 30.8 14.9 -5.5 -9.3 … Net Domestic Assets 72.6 20.2 16.4 64.6 26.7 … Of which: Net Credit to Government 17.8 10.3 -7.9 10.4 0.0 … Credit to the Private Sector (annual percent change) 78.4 73.6 73.0 144.8 26.2 …

(percent of GDP) Central Government Finance

Total Revenue 12.9 14.8 16.3 18.1 17.9 18.4 Grants 8.0 3.5 4.5 3.6 7.5 7.4 Total Expenditure 2/ 21.5 18.8 19.2 22.2 29.0 35.0

Underlying Fiscal Balance (cash basis) 0.5 0.8 1.9 0.8 0.2 -0.5 Overall balance (payment order basis, including grants) -0.7 -0.6 1.6 -0.4 -3.6 -9.2

Overall balance (cash basis, including grants) 3/ -0.8 -1.2 1.0 -1.2 -4.2 -9.3 Investment and Savings Gross Domestic Savings 11.2 16.7 15.2 10.5 2.8 8.1

Government -0.4 -1.1 2.7 -0.5 -1.2 -1.3 Non-Government 11.6 17.8 12.5 11.0 4.1 9.4

Gross Investment 13.3 18.2 20.4 22.8 26.7 35.9 Government 4/ 3.3 2.3 3.4 3.6 9.6 17.7 Non-Government 10.0 15.9 17.0 19.2 17.1 18.1

Balance of Payments Exports of Goods and Services 37.8 65.4 49.2 62.1 37.9 39.5 Imports of Goods and Services 42.6 68.8 53.4 74.8 65.4 68.7 External Current Account, including grants -2.1 -1.5 -5.2 -12.3 -23.9 -27.8 Current account, excluding grants -9.9 -8.9 -7.7 -21.0 -32.5 -34.6 gross official reserves (end-of-period) millions

de dollars des E.U. 154.5 180.6 200.0 83.0 270.0 416.0 Gross Official Reserves (end-of-period) in

Weeks of imports of goods and services 1.5 1.5 1.1 0.9 2.6 3.2 (Millions of US dollars ; unless otherwise indicated) External public debt Total including IMF 5/ 10.813 10.524 10.353 10.353 10.172 2.685

Net Present Value 6/ 7.831 7.986 7.856 7.856 7.719 1.758 Net Present Value (as percent of exports of goods and services

6/ 339.4 195.2 166.0 136.9 27.6 32.3 Debt Service 251.6 370.5 291.4 291.4 257.3 154.5

Percent of exports of goods and services 7.6 5.7 4.6 4.0 6.1 3.3 Percent of government revenue 13.7 20.3 11.0 11.3 9.1 5.0 Exchange Rate Average 468.3 516.0 … 563.2 … … End-of- Period 503.4 503.0 … 639.3 … … Memorandum Item Nominal GDP (billions of Congolese francs) 4,114 5,153 6,942 6,671 7,764 9,528 Sources: Data communicate by the Congolese Authorities; and IMF staff estimates and projections. 1/ Change in annual average. Minus sign indicates depreciation 2/ Includes interest due before debt relief and expenditure financed by HIPC resources. 3/ Cash balance after debt relief on interest payments 4/ Includes investment financed by resources released under the HIPCI 5/ Excludes most of London Club debt (US$ 1.0 billion in 2007) which is expected to be bought back with deep discount on IDA resources but includes accumulated arrears and reflects the arrears clearance arrangements concluded at the completion point 6/ Estimates and projections based on the sensitivity analysis of the debt at end 2007 and after HIPC interim relief assistance under Cologne terms. Includes assistance beyond the HIPC Initiative granted by some Paris Club creditors. Exports are on a three-year moving average.