PROJECT INFORMATION DOCUMENT (PID)

CONCEPT STAGE

Report No.: AB4491

Project Name / DRC Emergency Response to Mitigate Financial Crisis Impact
Region / AFRICA
Sector / General finance sector (50%); General education sector (20%); General water, sanitation and flood protection sector (15%); Oil and gas (15%)
Project ID / P115642
Borrower(s) / GOVERNMENT OF DRC
Implementing Agency / Government of DRC
Environment Category / [ ] A [] B [X ] C [ ] FI [] TBD (to be determined)
Date PID Prepared / December 31, 2008
Estimated Date of Appraisal Authorization / January 23, 2009
Estimated Date of Board Approval / February 26, 2009
  1. Key development issues and rationale for Bank involvement

Following a decade of conflict, DRC has experienced important political and economic gains since 2001-02. On the political level, the 2006 general elections (legislative and presidential) took place through a process judged as largely free and fair. Since 2007, a broad coalition government has implemented policies following a set of five priorities underpinning the PRSP (good governance and peace consolidation, consolidation of macroeconomic stability and growth, access to social services, fight against HIV/AIDS, and promotion of community dynamics) in order to generate rapid growth and sustained development. As regards economic recovery, adequate monetary and fiscal policies addressed hyperinflation (500 percent in 2000) during 2001-04, and a PRGF program was implemented largely successfully during June 2002-March 2006. Although the PRGF program veered off track in mid-2006 during the period preceding 2006 the presidential election, the post-election government that took office in early 2007 implemented adequate macroeconomic policies under a Staff-Monitored Program of the IMF.

In spite of multiple challenges, growth has picked up significantly since 2002. During 2002-08 average annual GDP growth was 6.6 percent, compared to -5.2 percent over 1991-2001, owing to rapid development in the mining, construction and transportation sectors, which all experienced double digit annual growth rates. Since September 2008, DRC’s economic prospects have sharply deteriorated as a consequence of the changing international environment resulting from the financial crisis. In addition, the country had to face a security and humanitarian crisis in its North Kivu province. The rapid collapse of the mining sector has overwhelmed its ability to address the economic consequences without external support.

External sector and reserves. Rapidly deteriorating export revenues have had an immediate adverse impact on the balance of payments and forex reserves. Copper and cobalt prices declined significantly, and a Bank mission to Lubumbashi found that as a result copper mining output in Katanga has been cut dramatically since September 2008. Small artisanal mines are closing entirely, and larger mines are sharply reducing investment programs and production. As a result copper production is now estimated to be 25 percent lower in 2008 than previously projected, with production cuts of up to 50 percent projected for 2009.

As a result of the sharp decline in export revenues and expenditure pressures resulting from security spending and related humanitarian crisis for the Eastern part of the country, official gross foreign exchange reserves have declined from over US$200 million mid-year to US$60 million on December 23, 2008, the lowest level since 2001. The decline in export revenues has also led to a drop in forex-denominated bank deposits. Since its peak in July, these forex deposits have dropped by US$70 million which contributed to a decline in banks’ foreign assets by some US$100 million, raising further pressures on the Congolese franc. The latter has slipped from 503 franc to the US$ at end-2007 to 585 CF/US$ at end-November and 620 CF/US$ by end-December 2008.

Rationale for Proposed Bank Emergency Project. Without mitigation, the rapidly rising external and fiscal imbalances and lower growth above presented could have major economic and social impacts, threatening to overturn 7 years of progress in DRC. These impacts, which call for an emergency response, include:

·  Disruption of economic activity as a result of severe foreign exchange shortages, lack of essential imported goods, and rapid depreciation of the Congolese Franc. Recent reserve and exchange rate movements underscore the seriousness of this threat.

·  Severe cuts in basic social expenditure and investments if government is unable to mobilize support to fill the remaining financing needs and is forced to cut back spending under its cash budgeting system. The cuts could in particular affect wages and the transfers of resources to the provinces, in turn triggering teacher strikes (teachers comprise the majority of public servants) and force households to replace salary payments through high school fees.

·  Inability to maintain basic services (water, electricity) if government does not honor its payment obligations to the service providers and the latter run out of cash.

·  Serious economic and social dislocations resulting from the rapid rise in unemployment in the mining areas.

  1. Proposed objective(s)

The project has two major objectives: (a) ensure the availability of critical imported goods and (b) protect the functioning of essential social services (teacher wages) and prevent the deterioration of financial situation of basic utility services (water & electricity).

  1. Preliminary description

·  Component 1. Financing of imports of essential goods and commodities. This will include foodstuff, construction materials, telecommunication equipment, and oil products.

·  Component 2: Financing of primary and secondary school teachers salaries. The component has been designed to first reimburse up to 70% of the teachers' salaries under retroactive-financing and then release the balance upon conclusive audit of the eligibility of salaries paid by the Government.

·  Component 3. Financing of State water and electricity bills. State water and electricity consumption will be metered and certified before payment can take place, thus providing sufficient safeguard to control these payments.

  1. Safeguard policies that might apply

Environmental Category is rated C.

  1. Tentative financing

Source: / ($m.)
BORROWER/RECIPIENT / 0
International Development Association (IDA) / 100
Total / 100
  1. Contact point

Contact: Franck Bousquet

Title: Sr. Financial Specialist

Tel: (202) 473 0309

Email: