DOCUMENT OF THE WORLD BANK

FOR OFFICIAL USE ONLY

REPORT No: 41474-ZR

INTERNATIONAL DEVELOPMENT ASSOCIATION

COUNTRY ASSISTANCE STRATEGY

FOR

THE DEMOCRATIC REPUBLIC OF CONGO

FOR THE PERIOD FYOS-FY11

VOLUME 1

NOVEMBER 16,2007

AFCCZ AFRICA REGION

This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not otherwise be disclosed without Wor ld Bank authorization

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

DATE OF LAST BOARD DISCUSSION: FEBRUARY 26,2004

AAP ABR ADB ANAPI APL ART BCECO CAF CAP CAS CDR CEEC CENI CFAA CG CIDA CMFK CNAEA COPIREP CPIA CPRCD DDR Dfl D DGI DGRAD DRC EC EFA EIR EITI EMIS EPI EPSP ESW FARDC FDI FEC FEDECAME FIAS GDP GEF GER GIBS HIM0

CURRENCY EQUIVALENTS CURRENCY UNIT = CONGOLESE FRANC

US$ = SDRl = US$1

FISCAL YEAR JANUARY1 - DECEMBER^^

ABBREVIATIONS AND ACRONYMS

Africa Action Plan Area-Based Recovery Afiican Development Bank National Investment Promotion Agency Adaptable Program Loan Anti Retro-Viral Treatment Bureau Central de Coordination Country Assistance Framework Complementary Activity Package Country Assistance Strategy Centrales de Distribution RBgionales Centre d’Evaluation, d’Expertise et de Certification La Commission Electorale Nationale Indkpendante Country Financial Accountability Assessment Consultative Group Canadian International Development Agency Chemin de Fer du Katanga ComitB National d’ Action de 1’Eau et de 1’Assainissement ComitB de Pilotage de la RBforme des Entreprises Publiques Country Policy and Institutional Analysis Commission Permanente de Reformes du Droit Congolais Disarmament, Demobilization and Reintegration Department for International Development Direction GBnBrale des Imp6ts Direction GBnBrale des Recettes Administratives et Domaniales Democratic Republic o f Congo European Commission Education For Al l Extractive Industries Review Extractive Industries Transparency Initiative Education Management Information System Equipement de Protection Individuelle Enseignement Primaire, Secondaire et Professionnel Economic and Sector Work Army o f the Democratic Republic o f Congo Foreign Direct Investment FBderation des Entreprises des Congo FBdBration des Centrales de Distribution des MBdicaments Essentiels Foreign Investment Advisory Service Gross National Product Global Environment Facility Gross Enrollment Rates Groupe Inter Bailleurs Santd Haute Intensit6 de Main-d‘ceuvre

HIPC HMIS HSSS IASC ICA ICAO IDA IFC IGF IMCI IMF INERA INT I T M LDF LLIN LNME MAP MDG MDRI MDRP MDTF M&E MEG MIBA MIGA MONUC MSME MTEF NGO NPV occ ODA OFIDA OHADA OMIKO ONATRA PALU PCPI PEFA PEP PER PETS PFM PHC PIU PLWHA PMTCT PNA PNC PPA PPG PPP PPRD PRGF PRSP

FOR OFFICIAL USE ONLY Heavily Indebted Poor Countries Health Management Information System Health Systems Strengthening Strategy Inter-Agency Standing Committee Investment Climate Assessment International Civil Aviation Authority International Development Association International Finance Corporation Inspection Gknkrale de Finances Integrated Management of Childhood I l lness International Monetary Fund Institut de 1'Environnement et de Recherches Agricoles Institutional Integrity Department (World Bank) Institut Technique Mkdical Local Development Fund Long Lasting Insecticide-Treated Mosquito Nets Liste Nationale de MCdicaments Essentiels Minimum Activity Package Millennium Development Goal Multilateral Debt Relief Initiative Multi-Country Demobilization and Reintegration Program Multi-Donor Trust Fund Monitoring and Evaluation MCdicaments Essentiels Gknkriques Minikre de Bakwanga Multilateral Investment Guarantee Agency Mission des Nations Unies en Rkpublique Dkmocratique du Congo (UN peacekeeping mission) Micro Small and Medium-Size Enterprises Medium Term Expenditure Framework Non-Governmental Organization Net Present Value Office Congolais de Control Official Development Aid Office des Douanes et Accises L'Organisation pour 1'Harmonisation en Afiique du Droit des Affaires Office des Mines d'Or de Kilo-Mot0 Office National de Transport Parti Lumumbiste Unifik Post-Conflict Performance Indicators Public Expenditure and Financial Accountability Post-Exposure Prophylaxis Public Expenditure Review Public Expenditure Tracking Surveys Public Financial Management Primary Health Care Project Implementation Unit People Living with HIViAIDS Prevention of Mother-to-Child Transmission Programme National Assainissement Police Nationale Congolaise Participatory Poverty Assessment Public and Publicly Guaranteed Public-Private Partnership Parti du Peuple pour la Reconstruction et la Dkmocratie Poverty Reduction Growth Facility Poverty Reduction Strategy Paper

This document has a restricted distribution and may be used by recipients only in the performance o f their off icial duties. I t s contents may not be otherwise disclosed without Wor ld Bank authorization.

PSIA REGIDESO RVA RVF RVM SALW SEA SEN ASEM SIDA SISA SME SMI SMIG SMP SNCC SNEL SNHR SOE SRS S STI SWAP TSS TTL TVET UDEMO UK UN USAID VCT WBG

Poverty and Social Impact Analysis Water Distribution Authority Regie des Voies ABriennes Regie des Voies Fluviales RBgie des Voies Maritimes Small A r m s and Light Weapons Superviseur de L’Eau et d’ Assainissement Service National des Semences Swedish International Development Agency Systkme d’Information SCcurite Alimentaire Small and Medium Size Enterprises Structure Militaire Intkgre Salaire Minimum Garanti Staff-Monitored Program (of the International Monetary Fund) Societe National de Control de Congo Societe National &Electricit& Societe National d’Hydraulique Rurale State-Owned Enterprise Systkme du Reseau de Soins de Sante Sexually Transmitted Infection Sector Wide Approach Transitional Support Strategy Task Team Leader (World Bank) Technical and Vocational Education Training Union des Democrates Mobutistes United Kingdom United Nations United States Agency for International Development Voluntary Counseling and Testing World Bank Group

Vice President: Obiageli K. Ezekwesili

Task Team Leaders: Marie-Chantal Uwanyiligira Acting Country Director: Judy M. O’Connor

Jean-Michel Happi

Xavier Devictor

Alain L. Labeau Jean-Pierre Manshande Angela Khaminwa John Elder Deborah Davis Keiko Kubota Craig B. Andrew Laurent Debroux Franck Bousquet Mahine Diop Franck Armand D. Douamba Natalie Ford Elena Kastlerova Philippe Charles Benoit Elizabeth Small Pierre Morin Elysee Kit i Pierre Pozzo di Borgo Emilie Mushobekwa Quentin T. Wodon Gilles Marie Veuillot Samuel A. O’Brien-Kumi Giuseppe Topa Susan Opper Guillemette Sidonie Jaffrin Thomas A. Vis Hinh T. Dinh Tony Verheijen Ivan Rossignol Victoria Gyllerup

Former Country Director: Pedro Alba Former Task Team Leader:

CAS Core Team: Abdou Salam Drabo Jean-Michel Happi

TABLE OF CONTENTS

PREFACE ....................................................................................................................................................... j

EXECUTIVE SUMMARY .......................................................................................................................... I1

PART A. THE COUNTRY ASSISTANCE FRAMEWORK ................................................................... 1

PART A. 1. COUNTRY CONTEXT .......................................................................................................... 3 A. Political Background B. Economic Background ....................................................................................................................... 5

D. Donor Activities .................................

A. Country Vision and Poverty Reduction Strategy Paper ................................................................... 13 ..... 14

C. Medium-Term Macroeconomic Outlook .......................................................................................... 22 PART A.3. MANAGING RISKS ............................................................................................................ 24

Overall Approach .................................................................................................................................. 24

PART B. WORLD BANK GROUP COUNTRY ASSISTANCE STRATEGY .................................... 25

PART B. 1. REVIEW OF PAST BANK ASSISTANCE .......................................................................... 25

.................................. 25

C. Social Background .............................

PART A.2. KEY CHALLENGES AND MEDIUM-TERM PROSPECTS .............................................. 13

A. The Second Transitional Support Strate B. Overall Assessment and Results of TSS C. Review of IDA Activities. D. Review of IFC Activities ...................... E. Review of MIGA Activities ............................................................................................................ 3 1 F. Lessons Learned and Recommendations for IFC and MIGA .......

E. Instruments for Bank Group Assistance

G. Expanding MIGA activities ................................................................. PART B.3. MANAGING RISKS - THE WORLD BANK GROUP ....................................................... 49

List o f Charts

Chart 1: Economic Growth & Inflation ............ ..:. ................................................................................. .7 11

Chart 3: DRC - Donor Activity: Share per Sector (fo .................................................... 12 Chart 4: Disbursement Rates for Bank Portfolio in DRC compared to Regional Average 28

Chart 2: DRC - Donor Activity - Trend 2003-2005 ... .......

List o f Boxes

Box 1: Targets and Current Status of MDGs in DRC ............................................................................... 10 Box 2: Managing Decentralization.. ................... Box 3: The Forest Reform Agenda ..................... .......................................... 16 Box 4: Reforming Public Enterprises .................. ........................................... 17 Box 5: The Post-Conflict Economic Rebound in DR Box 6: Challenging in the Health and Education Sectors ........................................................................... 20

...................... 21

...................... .27 Box 9: Early Results o f Ongoing Projects.. ............................................... Box 10: Supervision Difficulties in DRC ............................................................................................. 29

Box 7: Challenges in Combating HIV/AIDS .......................... Box 8: Key Features of the Ongoing Portfolio .......................

List o f Tables

Table 1 : Medium Term Macroeconomic Projections - Selected Indicators, 2006-201 1 ....................................... .23 Table 2: IDA'S Proposed Program of Analytic and Advisory Activities.. ....................................................... ..40 Table 3: Proposed IDA Operations.. ................................................................................................... 44 Table 4: Key Risks for Donors and the Bank Group in DRC, and Corresponding Risk Management Strategies., ....... .50

List of Annexes Annex 1 : Poverty Profile Analysis.. ........................................................................................... Annex 2: Progress Status of Triggers fo Annex 3: External and Public Sustainability Anal Annex 4: Achievements of the 2004-2006 TSS ... Annex 5: Results Framework and Monitoring ......................................................................................

Annex 7 : Map ofDRC ........................................................................................................................ 47 Annex 6: Country at Glance ..............

PREFACE

1. This document presents both the multi-donor Country Assistance Framework (CAF) and the World Bank Group’s Country Assistance Strategy (CAS) for the Democratic Republic o f Congo (DRC). The CAS i s derived from the broader CAF, which i s designed to harmonize donor support to DRC’s recovery effort and the Government’s Poverty Reduction Strategy Paper (PRSP). The other donors participating in the CAF’ are expected to present the CAF document as a framework for their respective assistance programs.

2. The CAF, derived from the Poverty Reduction Strategy Paper (PRSP) and presented in Part A, articulates donors’ common strategic approach to economic assistance for DRC in the post-election period (2007-2010). The CAF i s a first step toward harmonization o f donor assistance, which, as donors have agreed, i s important to rationalize their support for the recovery effort. Part A1 summarizes recent developments in DRC. Part A2 diagnoses the key challenges facing the country as outlined in the PRSP, and articulates how those challenges wil l be addressed under each PRSP pillar. Part A2 also presents the medium-term outlook for the country. Part A3 discusses seven key risks common to all donors operating in DRC, and the corresponding risk management strategies.

3. The CAS, presented in Part B, i s the World Bank Group’s program o f support for DRC. I t lays out a coordinated strategy for the Bank Group’s three key entities - the International Development Association (IDA), the International Finance Corporation (IFC), and the Multilateral Investment Guarantee Agency (MIGA). In a country with a strong potential for private sector development and where private investment i s key to complementing relatively meager flows o f Official Development Assistance (ODA), the articulation o f a coordinated strategy, including complementary actions by these three entities, i s critical. Part B1 reviews past assistance by IDA, IFC, and MIGA, including the Transitional Support Strategy (TSS), and summarizes lessons learned. Part B2 lays out the Bank Group’s strategy for FY07-FY11, and Part B3 discusses risks that are specific to the Bank Group, along with proposals for how they are to be managed within the context of the overall CAF risk management framework.

4. The CAS was prepared against the backdrop o f the Bank’s growing experience in post- conflict countries. The proposed strategic direction reflects recent analytical work by the Bank’s Development Economics Vice Presidency Group (DEC),* as well as lessons and good practices from the Africa Regi~n.~

The 17 CAF donors are the World Bank Group (WBG), the European Commission (EC), the International Monetary Fund (IMF), the African Development Bank (ADB), the United Nations (UN) system - and key bilaterals: Belgium (Belgian Cooperation), Canada (Canadian International Development Agency, CIDA), France (French Cooperation), Germany, Japan, China, the Netherlands, Italy, Spain, Sweden (Swedish International Development Agency, SIDA), the United Kingdom (Department for International Development, DFID), and the United States (US Agency for International Development, USAID).

See, in particular, Breaking the Conflict Trap: Civil War and Development Policy, Collier, Paul; Elliot, V. L. Hegre, Havard; Hoeffler, Anke; Reynal-Querol, Marta; Sambanis, Nicholas; A World Bank Policy Research Report, May 3 1,2003,

Kostner, Marcus; Devictor Xavier; Africa Region Working Paper series; no 30, April 30, 2002; and Fragile States: Good Practices in Country Assistance Strategies, World Bank, Decemberl9, 2005.

2

See, in particular, Post-conflict recovery in Africa: An Agenda for the Africa Region, Michailof, Serge;

DEMOCRATIC REPUBLIC OF CONGO: COUNTRY ASSISTANCE STRATEGY FYOS-FY 11

EXECUTIVE SUMMARY

1. With the gradual return to peace and a new, democratically elected Government in place, the Democratic Republic of Congo (DRC) has a strong opportunity to reduce poverty and promote broad-based, sustainable, and pro-poor growth, provided the authorities strengthen the institutional framework and improve governance. DRC i s endowed with a wealth o f natural resources which, if managed properly, can help the country recover from the devastation created by years o f conflict and mismanagement that have made it one o f the poorest countries in Africa. DRC’s Human Development Index declined by more than 10 percentage points in the last ten years - and DRC now ranks 167 out o f 177 rated countries, with the great majority o f the population without access to the most basic human services. About 70 percent lives below the poverty line, and in some parts o f the north and east, poverty levels are above 80 percent. Given their experiences over the past few decades, the Congolese people place renewed hope in the ability o f the new Government to improve their living conditions.

2. The Government strengthened policies and institutions over the period 2001-2006, leading to D R C attaining the HIPC Decision Point in 2003. Since 2001, with the support o f the Bretton Woods institutions and others, the Government has implemented a solid program o f economic reforms, including new investment, labor, mining, and forestry codes designed to make these traditionally opaque sectors more transparent, able to attract reputable foreign investors. DRC recently joined the Extractive Industries Transparency Initiative (EITI), as a further effort to increase transparency in the mining and forestry sectors. Private investment has been relatively high, mainly in the natural resource sector (about US$2.7 billion in new investments since 2003), and now constitutes a significant share o f the overall private capital flows to Sub-Saharan Africa. Better management o f public finance has helped break hyper-inflation and stabilize the exchange rate. As a result, economic growth returned in 2003, after a decade o f decline, and i s estimated to have been about 6 percent between 2003 and 2006.

3. The challenges ahead remain daunting. The Government recently adopted a Governance Compact with the people o f DRC, under which it promises to work on a broad front. In the short-term the focus i s on reforming the security sector, strengthening the judiciary, strengthening political governance (through decentralization and the increased role o f the women in public life), and improving economic governance (through public finance management and anti-corruption efforts). The key challenge wi l l be to implement this ambitious program - a long-term effort for which a substantial amount o f external support wil l be necessary.

4. Ensuring shared and sustainable growth. The country’s history suggests that economic growth alone wil l not necessarily translate into better living conditions for the majority o f the Congolese people. The country’s abundant natural resources make i t particularly important to ensure better governance o f these sectors. In the short term, DRC wil l also need to make further progress in economic management and maintaining key infrastructure. This wil l help to reestablish i t s credibility with i t s population, as well as externally, and allow it to negotiate a new Poverty Reduction Grant Facility (PRGF) with the IMF. Significant investments coupled with policy and institutional reforms are required to rehabilitate and expand key transport and energy infrastructure, and improve the

.. - 11 -

business environment. In addition, a significant increase in public spending in support o f key social sectors i s necessary to alleviate dismal social conditions. If these challenges are not met, DRC will have l i t t le chance o f even coming close to achieving the Millennium Development Goals (MDGs) by 2015.

Performance o f the Bank Group’s 2004 -2006 Transitional Support Strategy (TSS)

5. Performance under the 2004-2006 TSS is rated as moderately satisfactory. The TSS aimed at consolidating the transition and restoring the foundation for effective poverty alleviation efforts, in close collaboration with other donors. The TSS program was highly relevant to DRC’s needs and aligned with the Governments’ priorities, as expressed in the I-PRSP and the economic program. It had four strategic elements: security and social stability, high and shared growth, governance and institutional strengthening, and social development. The period was characterized by a strong dialogue between the Bank and Congolese authorities, as well as with non-government stakeholders. The Bank played a major role in donor coordination, and together with other donors initiated a move toward greater harmonization o f donor activity. Implementation was overall satisfactory; however, i t was hampered by mis-procurement and project management issues. Results, as measured against the TSS indicators, were mixed. The results framework consisted o f 19 performance indicators, o f which 11 were partially or completely achieved as elaborated in para. 48.

Planned Country Assistance Strategy (CAS)

6. This CAS aims to define the business plan for World Bank Group’s support to D R C and is part of the multi-donor Country Assistance Framework (CAF), an effort through which 17 donors have developed a common strategic approach for economic assistance to DRC. The CAF provides a framework for each donor’s assistance strategy for DRC. The Bank Group’s assistance strategy, the CAS, was designed through extensive consultation with the Government, civil society, and private sector actors. Building on Bank experience working in post-conflict and transitional countries, it proposes an agenda that includes: (i) effective management o f the existing World Bank Group portfolio; (ii) analytical work; (iii) IDA financing; (iv) scaling up the activities o f the International Finance Corporation (IFC); and (v) expansion o f the activities o f the Multilateral Investment Guarantee Agency (MIGA). The main anticipated outcomes - adherence to good governance principles and improved emphasis on poverty reduction - are expected to lead to improvements in governance, better management o f natural resources, better procurement o f public goods and services, improved health and education indicators, and improved rural incomes.

7. Reduction Strategy Paper (PRSP):

The CAS wil l focus mainly on three o f the five pillars o f the Government’s Poverty

Promotion of good governance and consolidation of peace. The Bank Group’s efforts in support of the Governance Contract wil l focus on natural resources management, public financial management, and public administration reform, through the full range o f i ts support - advisory and analytical work, technical assistance and capacity building, and financing.

Achievement of sustained and shared economic growth, through infrastructure rehabilitation and expansion; and private sector development to foster economic diverszjication. IDA also expects to provide the full range o f i ts support to this pillar, IFC wil l provide advisory services and financial support; and MIGA wil l provide advisory services and guarantees.

Improved implementation of poverty alleviation programs, with emphasis on health, education and HIV/AIDS; underserved communities, including indigenous communities; and the rural sector.

Other donors are expected to take the lead in supporting the remaining two PRSP pillars - combating HIV/AIDS and promoting community dynamics, although ongoing IDA activities wil l continue.

8. Theproposedprogram is complementary to the activities of other key donors and builds on the Bank’s strength in delivering advisory and analytical activities within the multi-donor assistance framework. The Bank expects to take the lead in:

0

0

0

0

Risks

9.

public expenditure management (together with the IMF); public administration and civil service reform, and local governance apd decentralization (together with EC); investment climate, public enterprise reform, and natural resources management (with increased support from IFC and MIGA, and with the IMF and EC); and Infrastructure sectors4 (together with EC and AfDB).

World Bank Group engagement in DRC has high risks. I t potentially has even higher returns not only for the Bank but also for other countries of the sub region. Research and experience have shown that external assistance can play a key role in promoting the type of governance reforms needed for consolidating economic growth and political stabilization, and hence for escaping the conflict trap. Through consultations with all stakeholders and donors, Bank staff have identified the following main risks: (i) political instability and resurgence o f armed conflict; (ii) fragile macro-economy; (iii) obstructed or slowed implementation o f critical economic and governance reforms; (iv) corruption; (v) centrifugal tendencies that could result from mismanagement o f the decentralization process; (vi) poor donor coordination; (vii) operational risks to the portfolio; and (viii) reputational risk. To help donors and the Bank manage these risks, the CAS focuses on improving governance, decentralization, public expenditure management, natural resources management, and the effective delivery o f shared growth and poverty-focused projects, including infrastructure and rural development.

Results

10. Expected results. The CAF and CAS provide a framework to assist the Government in creating the conditions for improved governance and shared growth. The main expected outcomes from the CAS are adherence to good governance principles, shared growth and access to improved social services.

The Bank Group’s assistance to the infrastructure sectors might need to be adjusted in view o f the recent protocol o f understanding that the Government o f DRC signed with the Government of China, reportedly up to $5 billion o f financing for transport infrastructure, mining concessions, and other investments.

- iv -

PART A. THE COUNTRY ASSISTANCE FRAMEWORK

1. The Country Assistance Framework (CAF) is a process by which a number of donors have developed a common strategic approach for economic assistance to Democratic Republic of the Congo (DRC) in the post-elections period. The CAF i s derived from the priorities articulated in the Poverty Reduction Strategy Paper (PRSP) and covers the period 2007 to 2010. It i s expected that it wil l provide a solid basis for harmonizing approaches and programs.

2. The CAF is born from the recognition that the issue of aid harmonization is at the core of the recovery challenge in DRC. Assistance to DRC i s characterized by the paradoxical combination o f a relatively large number o f donors (with more than 20 agencies providing assistance through a broad variety o f operational partners, both governmental and non-governmental), and a relatively limited total amount o f assistance (about US$SOO mill ion in annual disbursements). Aid i s inadequate given the scale o f challenges that DRC faces (about US$15 per capita per year). This situation carries significant risks with regard to the actual capacity o f aid agencies to effectively contribute to stability and recovery: (i) by absorbing limited Government capacities in the dialogue with a large number o f partners; (ii) by making the achievement o f synergies difficult, in a context where individual projects, even if each one i s successful, may not be enough to yield an impact at the countrywide level; and (iii) by disconnecting economic assistance from other international efforts (political, security, humanitarian) and hence limiting i ts potential impact on the overall stabilization agenda.

3. The CAF has generated intense interest among donors as an effort to coordinate and harmonize approaches. Starting from a small core group, participation has rapidly expanded to 17 members, including both multilateral organizations - the World Bank Group (WBG), the European Commission (EC), the International Monetary Fund (IMF), the African Development Bank (ADB), and the United Nations (UN) system - and key bilaterals: Belgium (Belgian Cooperation), Canada (Canadian International Development Agency, CIDA), France (French Cooperation), Germany, Japan, China, the Netherlands, Italy, Spain, Sweden (Swedish International Development Agency, SIDA), the United Kingdom (Department for International Development, DFID), and the United States (US Agency for International Development, USAID).

4. The CAF process aims to harmonize donor approaches and instruments at a minimum transaction cost. As in many harmonization efforts, the CAF challenge has been to overcome bureaucratic complexities and differences o f institutional cultures to reach a consensus around key priorities. Potential bureaucratic issues stem from the multiplicity o f review and approval mechanisms across institutions, which can easily result in adding layers upon layers o f complexity to any joint decision-making. Differences o f institutional cultures are sometimes as basic as different meanings for what an assistance strategy i s (e.g., for the World Bank Group it i s essentially a set o f decisions guiding the allocation o f existing resources, while for the United Nations it i s an effort aimed at mobilizing new financing - which calls for different approaches). The CAF hence consists o f a light and pragmatic process aimed at ensuring a consensus on the substance o f the strategy, while leaving ample flexibility to each participant on process issues.

5. The CAF has focused to date on building consensus around three key elements of any strategy: a joint diagnosis, coordinated programming, and a common results matrk. In practical terms, this has translated in the production o f a series o f “joint chapters” that will be incorporated into each donor strategy. CAF donors have committed to incorporate these chapters verbatim in their respective strategies, although it i s agreed that some participating agencies may add to these chapters complementary material (to meet their institutional requirements). The joint chapters are: (i) country

context; (ii) key challenges and medium-term prospects; (iii) risks; (iv) thematic annexes for each o f the five PRSP pillars (Governance, Growth, Basic Social Services, HIV/AIDS, and Community Dynamics); and (v) a results matrix.

6. The CAF was a complexprocess. The work has proceeded through a series o f several day long meetings, interspaced with regular and intense consultations among donors in Kinshasa. Working groups developed common chapter and common annexes after in-depth consultations with the Government. Discussions helped to sort out differences in approaches. Whi le challenging to manage, the process was quite successful, in that participants have remained enthusiastic (with new participants joining in) despite the number o f actors, institutional needs, and differences in operating modes, and in that a strong consensus has been forged on key pieces o f the CAF. The election o f the new Government has spurred consultations between the Government and the donors, and donor coordination has been added to the docket o f the Ministry o f Planning. The CAF was prepared through in-country joint consultation with the new authorities and other stakeholders (private sector and civil society) that took place in Kinshasa in September 2007.

7. Looking forward, next steps in the donor harmonization process include discussions regarding joint mechanisms for supporting project implementation (a joint monitoring and evaluation matrix), on the most effective way for further harmonization o f donors in DRC; and on strengthening o f the Government’s own coordination capacities.

- 2 -

PART A.1. COUNTRY CONTEXT

8. The situation in D R C exemplifies many of the challenges faced by post-conflict countries. DRC i s endowed with a bounty o f natural resources that give it the potential to grow quickly in a sustainable manner out o f i t s post-conflict state - provided that the resources are managed properly. Significant progress has been made over the last years, but the challenges remain daunting. Physical and social devastation caused by decades o f mismanagement and conflict in one o f the most richly- endowed African countries i s extreme. Living conditions for most o f the 58 mil l ion Congolese are extremely difficult, and the sharp deterioration o f social indicators jeopardizes the prospects for Africa as a whole to make decisive progress towards the Millennium Development Goals (MDGs) (see Annex 1). The contrasts are stark, in a country the size o f Western Europe, between districts where the situation i s comparable to other African countries and areas where extreme violence and urgent humanitarian needs persist. The political environment remains complex and fluid - and the regional stakes are high, with seven out o f DRC's nine neighbors having experienced a major conflict over the last decade.

A. Political Background

9. DRC is emerging from a dreadful period of mismanagement, political instability, and conflict. After about eighty years o f colonial rule, several secessionist conflicts in the post- independence period, and a long period o f corruption and mismanagement under President Mobutu Sese Seko, DRC entered the 1990s in a state o f quasi-collapse. That decade was marked by successive episodes o f increasing violence: looting by the armed forces in 1991 and again in 1993, a first conflict in 1997 (with the involvement o f seven foreign countries and a number o f militias), and a second conflict between 1998 and 2003 during which a reported 3.5 mil l ion people died, and many more were displaced.

10. The recent elections mark the culmination of the peace and reconciliation process. Since 2001, and the appointment o f President Joseph Kabila, considerable progress has been made, within the context o f the 1999 Lusaka ceasefire agreement and the inter-Congolese dialogue. Large-scale military activity ceased in early 200 1. Foreign forces formally withdrew in 2002. The United Nations (UN) peacekeeping mission (Mission des Nations Unies en Rkpublique De'mocratique du Congo, MONUC) has deployed more than 17,000 troops in the country. The pace o f progress accelerated after June 2003 and the establishment o f a Transitional Government (and a Parliament) o f national unity: communications were re-established between areas which had long been divided along frontlines, key technical institutions were re-unified, exchange rates were harmonized across the country, and a new constitution was approved by referendum in December 2005. Despite formidable logistical challenges (and localized episodes o f violence), general elections took place in a satisfactory manner on July 30, 2006 (f irst round o f Presidential election and Parliamentary elections) and October 29, 2006 (second round o f Presidential elections and local elections).

1 1. For thefirst time since 1960, the Government, Parliament, and local authorities have been selected through democratic elections, and new institutions are now in place. President Joseph Kabila won the presidential elections with 58 percent o f the vote against his challenger Jean-Pierre Bemba who obtained 42 percent o f the vote. President Kabila announced the composition o f his government on February 5, 2007. Led by Prime Minister Gizenga, this government comprises 60 members, including six ministers o f state, 34 ministers and 20 deputy ministers. I t i s a coalition representing the broad political platform which supported President Kabila during the 2006 elections and it includes the Presidents party (Parti du Peuple pour la Reconstruction et la De'mocratie,

- 3 -

PPRD), the Prime Minister’s party (Part i Lumumbiste Unifie‘, PALU), and the Union des De‘mocrates Mobutistes (UDEMO). The Parliament and Senate are in place as well as Provincial Assemblies.

12. Still, much remains to be done to further consolidate the peace and reconciliation process. There i s insecurity in the East due to remaining militia activity. In Ituri, approximately 4,500 militia members are s t i l l harassing the civilian population and fighting with the weak army and the over- stretched MONUC. In North Kivu, negotiations between rebel leader Laurent Nkunda and the Government o f DRC resulted in an agreement to mix brigades loyal to Nkunda with regular army brigades. Localized riots sporadically affect other parts o f the country (e.g., in Bas Congo, at the end o f January) and deadly clashes occurred in Kinshasa in March between Senator Bemba’s guards and government forces. While a major reversal o f the achievements o f recent years seems unlikely, major challenges remain ahead. Efforts will be needed to prevent the disenfranchisement of key constituencies and political leaders. Regional differences may have been crystallized by the elections process, including between the Western and Eastern parts o f the country. Violence that s t i l l affects several districts along the Eastern borders, including widespread human rights abuses, will need to be contained to avoid i t s spreading to neighboring countries, and eventually reduced. The demobilization and reintegration o f former combatants, the unification o f all armed forces, through the integration o f the Government’s and rebel armed forces into a restructured national military wil l be key to restoring stability throughout the country.

13. Overall, the political context i s fluid, and external partners will need to monitor the situation closely, to best adjust their programs to the evolving circumstances. The elections have transformed the environment in which assistance will be provided in many ways, but the new political landscape i s only starting to take shape. For donors, the key issue i s whether the new political context will be one where ambitious reforms can be implemented - or not. In this context, donors wil l pay particular attention to monitoring developments in the following four areas:

First, the Government’s commitment to reforms. Both the President and the Prime Minister have emphasized the importance o f good governance since the elections. In February 2007, the Prime Minister prepared and presented a government program to Parliament which included a Governance Contract between the authorities and the people o f DRC. This contract, which covers March-December 2007, i s an important f i rst step in outlining much-needed reforms in a broad range o f areas: security sector reform, transparency, public finance management, the management o f natural resources, public administration reform, local government, and the investment climate and public enterprise reform. The key challenge will be to implement this ambitious program - a task for which a substantial amount o f external support will be necessary. In i t s f irst few months in office, the Government took important steps towards the implementation o f the Contract, in particular in the area o f decentralization, but much remains to be done.

Second, the effectiveness of the decision-making structure. The years o f transition have been marked by complex decision-making arrangements. Whi le this has facilitated consensus around key decisions, it has also translated into delays and second-best compromises. The challenge w i l l be to find ways to strengthen the decision-making process, without losing the ability to reach broad support on key decisions.

Third, the Government’s actual authority over specific constituencies. The issue i s whether the Government will be in a position to break with the constant need for compromises that has characterized the last years and to take on powerful constituencies which may have vested interests in the status quo.

- 4 -

And fourth, the role of the opposition. As the political environment develops, the constitution o f political alliances (or the permanence o f divisions) between opposition groups, and their commitment to due process (e.g., challenging the Government in Parliament rather than in the streets), will be key factors to watch. The March 2007 clashes in Kinshasa are evidence that the social situation remains tense in many parts o f the country and the need for the Government to deliver peace dividends i s critical. Particular attention will also be needed to ensure the stability o f those areas which voted massively for the opposition. In addition, it will be important to watch the ways in which the political environment created by the Government fosters engagement with the opposition in the nascent democracy. In both the short and medium terms, it will be necessary to review the way in which the opposition functions, the space they have to operate, and the relationship they have with the Government.

B. Economic Background

14. DRC is one of the poorest countries in the world, with a Gross Domestic Product (GDP) per capita of at about US$139 in 2006. Despite i t s r ich endowments in natural resources and the dynamism and entrepreneurship o f i t s population, DRC has been affected by a series o f economic crises since independence, which were exasperated during the years o f conflict. GDP per capita dropped from US$380 in 1960 to US$224 in 1990 to the current US$139 (in constant dollars).

15. The decade of conflict, compounded by the legacy of sustained mismanagement, has had devastating effects. Prior to the conflict, the Congolese economy was dominated by extractive and export activities (mining, agriculture, forestry, energy), which fueled a system o f poor governance and large-scale corruption. The vast majority o f the population remained poor, and derived i t s income from traditional agriculture and informal activities. War and civi l disturbance have taken a high tol l on the country. Infrastructure has suffered from lack o f maintenance and considerable physical damage. Many institutions are in shambles. Millions o f people have lost their assets, including buildings, livestock, and tools. Many enterprises have lost assets, staff, and commercial networks. Overall, the economy has been transformed, and i s now centered on subsistence agriculture and informal activities, with a collapse o f export and value-adding activities.

16. Since April 2001, the Government has implemented a solid program of economic reforms, supported by the Bretton Woods Institutions. This program aims both to spur private-led economic growth and to tackle some o f the deep-rooted structural issues which have hampered DRC’s economic development in the past. International Monetary Fund (IMF) support was provided through a Staff Monitored Program (SMP), between June 2001 and March 2002; access to the Poverty Reduction and Growth Facility (PRGF) for the period April 2002 to March 2006; and a new SMP between April and December 2006, renewed until end June 2007. Bank support was provided through a series o f budget support and investment operations, as well as substantial analytical work and policy advice.

1 7. Overall, implementation was satisfactory until about mid-2005. I t deteriorated during the pre-election period, but recovered again in early 2007 following the appointment of the new Government. Four perioals can be distinguished

- 5 -

Throughout 2001, vigorous measures were taken to break hyper-inflation, stabilize the exchange rate (following the decision to float the Congolese Franc in April 2001), restart revenue collection, and launch key structural reforms.

From early 2002 to mid-2005, efforts succeeded in further stabilizing the macroeconomic situation - with 12-month inflation at about 12 percent; a relatively stable exchange (although with substantial short-term fluctuations, in a largely dollarized economy, where the monetary basis i s very small); and a gradual increase o f fiscal revenues, from about 5.9 percent o f GDP in 2001 to about 11.4 percent o f GDP in 2005. Parallel efforts were made on the structural side, with significant achievements in a broad range o f areas, including the strengthening o f the chain o f expenditure; the adoption o f new investment, mining, and forestry codes; and the completion o f public enterprise audits.

From mid-2005 to end-2006, performance deteriorated, largely as a result o f political uncertainties and the absence o f a functioning executive during the election period. End-of- year inflation reached 2 1.3 percent at the end o f 2005, and declined slightly to 18.2 percent at the end o f 2006. The Congolese Franc registered 17 percent depreciation during 2006. Stil l , significant efforts were made by the authorities to manage this difficult period, including enforcing a moratorium on key transactions by public companies.

Since early 2007, after the elections were held successfully and the new Government appointed, macroeconomic stability has been restored. The Government has prepared i t s program, including a Governance Contract, expressing i t s determination to fight corruption and implement strong governance policies. An IMF mission will visit Kinshasa during December 4-18 to initiate discussions on a three-year arrangement under the Poverty Reduction and Growth Facility (PRGF).

18. These actions have elicited a strong private sector response. About US$2.7 bil l ion in new investments (a significant share o f private capital flows to Sub-Saharan Africa) have been registered by the Government since early 2003, which reflects the private sector’s interest in the country’s immense natural resources and provides an indication o f i t s growth potential. Investment to date has been focused on rapid-return activities, mostly in Kinshasa and Katanga, in a broad range o f sectors (e.g., telecom, services, agro-business, construction, and natural resource exploitation).

19. As a result, economic growth returned in 2002 after ten years of contraction. While the available statistical data have limited reliability, all indicators give a convergent picture o f progress. Growth has been pulled by the resumption o f economic activity which followed the re-establishment o f security and the reunification o f the country (a pattern typical o f post-conflict countries), especially in the trade, transport, construction, and agriculture sectors; by a boom in selected manufacturing (agro-business, construction materials); and by the restart o f mining activities (from a very low basis).

- 6 -

Chart 1. D R C -Economic Growth & Inflation, as of September 23,2007 in %

8.0

6.0

4.0

2.0

0.0

-2.0

-4.0

-6.0

-8.0 2000 2001 2002 2003 2004 2005 2006 2007 I

600.0

500.0

400.0

300.0

200.0

100.0

0.0

20. DRC’s track record also facilitated the country’s access to the Highly Indebted Poor Countries (HIPC) initiative. In 2002, the Government cleared i t s arrears to key creditors (including to the Bank, the IMF, and the African Development Bank), and resumed timely service o f i t s debt, after almost ten years o f interruption. In September 2002 the Paris Club granted significant bilateral debt relief, and in July 2003 DRC reached i t s HIPC Decision Point - with total re l ie f estimated at US$6.3 bil l ion in N e t Present Value (NPV) terms (for a total stock o f outstanding external debt estimated at US$7.9 bil l ion in NPV terms and US$10.7 bil l ion in nominal terms at end-2002). The Boards o f the Bank and the IMF agreed on a floating Completion Point, with triggers related to: (i) completion o f a full PRSP and i t s satisfactory implementation for one year; (ii) satisfactory macro- economic performance; (iii) effective use o f budgetary savings resulting from debt re l ie f for poverty- related programs; (iv) improvements in public expenditure management; (v) enhanced service delivery and governance in priority sectors (health, education, rural development, and infrastructure); (vi) adoption o f satisfactory sectoral strategies and related implementation plans for health, education, and rural development; and (vii) improvements in public debt management. The date for reaching the Completion Point will depend on the new Government’s commitment to reform and i t s implementation performance. The debt relief effort will need to be completed by an agreement with the London Club for the about US$900 mill ion public debt from the private sector. A status o f implementation o f the HIPC Completion Triggers i s attached in Annex 2.

21. According to the recently completed Joint Debt Sustainability Analysis (Annex 3)’ the Democratic Republic of the Congo is in debt distress. At end 2006, all debt burden indicators exceeded their policy-based thresholds.’ Further, the DRC has not serviced any o f i t s debt service

’ The World Bank’s Country Policy and Institutional Assessment (CPIA) rates DRC as a low performer. Under the joint World BanW IMF debt sustainability framework, the corresponding thresholds are 30 percent for the NPV o f external PPG debt to GDP ratio, 100 percent for the NPV o f external PPG debt-to-export ratio, 200 percent for the NPV o f external PPG debt to revenue ratio, 15 percent for the external PPG debt service to

- 7 -

obligations to Paris Club creditors since July 2006. Even if the security situation stabilizes and macroeconomic and structural policies improve substantially, as assumed under the baseline scenario, external debt indicators wil l remain above these thresholds for many years to come and even worsen in the event o f adverse exogenous shocks. The country’s large rehabilitation and reconstruction needs necessitate considerable foreign capital inflows. Any such inflows should be managed judiciously, through either market forces or a transparent and participative public decision-making process, so that it i s allocated to the most productive purposes, the returns to which (financial, economic, and social, as applicable) justify the cost o f capital.2 D R C should strengthen i t s track record o f policy implementation with a v iew to reaching the Completion Point under the enhanced HIPC Initiative as soon as possible, which would allow it to benefit f rom substantial debt relief under this initiative as well as under the Multilateral Debt Reduction Initiative. DRC’s debt burden indicators are projected to fall below their thresholds if it benefits f rom these two initiatives. Even after the Completion Point i s reached, however, the DRC’s debt sustainability i s l ikely to remain vulnerable to adverse exogenous shocks.

22. Severe governance problems and corruption continue to hamper DRC’s development prospects. Corruption remains widespread and i s taking a heavy to l l on public service capacity to deliver key services. D R C i s ranked 158 o f 163 countries by Transparency International. Corruption in D R C i s largely a legacy o f the Mobutu era o f rapid enrichment and impunity. At the higher level, it has been aggravated by the conflict and polit ical transition, during which the lack o f a strong executive prevented the imposition o f effective sanctions while many high-level officials tried to rapidly take advantage o f their positions in a context fraught with uncertainties. At the lower level, the problem i s compounded by the extremely l o w level and s t i l l irregular payment o f salaries. There i s a consensus that unless decisive action i s taken in this area, the odds are l o w that D R C will be able to break the cycle o f poverty and conflict.

23. The deterioration of infrastructure has also reached proportions that make economic development almost impossible in many areas. In a country the size o f Western Europe, there are less than 600 km o f paved roads. Out o f ten provincial capitals, only one can be accessed by land from Kinshasa, three can be accessed from abroad, and six can only be accessed by plane. Electrification rates are the lowest in Africa. Short o f a major infrastructure reconstruction program, complemented by reform o f the dysfunctional operations and maintenance systems, the potential for economic growth and private sector activity may not materialize in most provinces.

24. Overall, the situation remains very fragile: assuming a 6 percent economic growth, on average, it would take until 2029 for the country to reach the level o f GDP per capita it had in 1990. The

exports ratio, and 25 percent for the external PPG debt service to revenue ratio. (Operational Framework for Debt Sustainability Assessments in Low-Income Countries - Further Considerations, SM/05/109, 3/29/05 and IDAlR2005-0056). Assuming that DRC reaches the HIPC Completion Point by mid-2008 and benefits from debt re l ie f under enhanced HIPC and the MDR initiatives, debt burden indicators would fall below policy-based thresholds. * The authorities o f DRC announced their intention to enter into an arrangement with China involving loans and equity investments, o f a magnitude o f US$ 5 billion or more. At the time o f writing, the details o f the arrangements were not known, including the concessionality o f the loan. As long as the borrowing i s on highly concessional terms, the funds are used for productive purposes in line with the Government’s priorities, and the disbursements are in line with the country’s absorptive capacity, this arrangement could be beneficial to the country, triggering a higher growth rate and accelerating export growth, at least initially.

- 8 -

Government should strive to contain inflation and avoid exchange rate depreciation, and generally maintain macroeconomic stability through prudent monetary and fiscal policy. I t could help revive economic activities by improving the security situation, and by providing a stable and transparent regulatory and legal environment to encourage private investors to come in. The mining sector i s expected to be the engine o f growth in the near future, but providing a nurturing environment for the agricultural sector development i s likely to be critical in the medium term.

C. Social Background

25. Progress toward peace and recovery is taking place within the context of an acute social crisis, which constitutes a major risk for the country’s recovery. While political progress, economic reforms, and the return o f growth have produced some visible results, the social situation remains appalling. A large number o f Congolese communities have been forced into autarky and are living in dreadful conditions, due to the collapse o f the transport system and widespread insecurity. Women and girls have been disproportionately affected by violence and poverty and their numbers among the poor have increased. Although detailed data are missing, specialized agencies report a large number o f victims o f sexual violence and a growing number o f orphans and street children. Overall, an estimated 16 mill ion people have critical food needs, and the vast majority o f the population consumes less than two thirds o f the daily calories needed to maintain good health - with 71 percent o f the people living on less than one dollar a day.

26. Part of the impact of the conflict is not directly visible, but nonetheless devastating. Large-scale displacements, violence, and human rights abuses, as well as impoverishment have caused tremendous psychological suffering and a deterioration o f the social fabric, breaking up families and other solidarity networks. As a result, many traditional safety nets are no longer functioning effectively, and some o f the social networks which are key for economic recovery have been severely disrupted. The deterioration o f education and health services during the war years have dealt a powerful and lasting blow to the well-being o f the population and i t s capacity to recover.

27. Overall, DRC is likely to miss most of the Millennium Development Goals by 2015 (see Box 1). Whi le detailed statistical information i s lacking, available indicators suggest that the conflict has caused “development in reverse” in the social sectors. L i f e expectancy stands at 43 years, under-5 mortality above 205 per thousand. DRC’s Human Development Index declined by more than 10 percentage points in the last ten years - and DRC now ranks 167 out o f 177 rated countries. Progress made between independence and the early 1990s has largely vanished.

- 9 -

Box 1. Targets and Current Status o f MDGs in DRC

- 10-

D. Donor Activities

28. The main donors (see Chart 2 and Chart 3) are the World Bank, European Commission, the UN Agencies, IMF, AfDB and some key bilaterals (the UK, the United States, Belgium, and the Netherlands). Other bilaterals intervening in DRC are Canada, Sweden, France, South Africa, Japan, Germany, Italy, Switzerland, China, and Spain.

29. Since 2001, DRC has received a growing inflow of external economic aid - with annual disbursements increasing from less than US$200 mill ion in 2001, to about US$SOO mill ion a year in 2004 and 2005 each. This i s only a fraction o f international assistance to DRC - which also includes the financing o f a sizable peacekeeping force (over US$3 bil l ion a year), support to the political process (the 2006 elections cost over US$450 million), as well as humanitarian assistance (about US$300 mill ion a year).

400 350 300 250 200 150 100

50 0

Belgium ADB

2003 2004

n 2005

Source: World Bank.

30. External assistance, however, has been concentrated only in a few sectors and has left wide gaps. Support has been directed towards emergency (non-humanitarian) aid (25 percent), health and other social services (14 percent), budget support (12 percent), community development (1 1 percent), demobilization and reintegration (9 percent), democracy (8 percent), and capacity building (7 percent). Support to infrastructure and the productive sectors has been negligible compared to the needs. Looking forward, indications are that a significant portion o f funding wil l be channeled to growth-related activities (e.g., the extractive industries) and to areas that will support growth such as power and roads.

- 11 -

Chart 3. DRC Donor Activity: Share per Sector 2003-2005

Others5Yo r

Agriculture i r 2%

Transport I I f 2%

Hum./ i j 1 infrastructure

EO/. u 1-

Capacity ,- building

Emg.aid 25%

i 7% ) p- Dernocraa

14%

Budget support

12%

CDD 1 1 %

Source: World Bank.

3 1. The Bank represents a significant share of donor support in some key economic sectors. The Bank i s the main donor in al l infrastructure sectors (transport, energy, and water). Until now, it has provided a large proportion o f budget support (although the relative share o f the Bank’s contribution in this area has been decreasing as other donors moved to this area), and it plays an important role in capacity building.

32. Aid harmonization remains a challenge. Donor coordination has significantly increased since 2002. The scale o f needs in DRC and the challenges o f fulfilling those needs have necessitated an increased level o f coordination in funding and programming to ensure the best use o f available resources. Consultative Group meetings organized under the leadership o f the Government and the Bank (five since 2002) have helped to mobilize funds and create a consensus within the international community. Coordination has been further enhanced through the preparation o f the joint CAF. Within the coordination framework that the CAF represents, the Bank will continue playing a leading role in building stronger partnerships with donors and working towards the harmonization principles o f the Paris Declaration, including identifying joint projects and project implementation arrangements, joint analytical work, and joint monitoring structures.

- 12-

PART A.2. KEY CHALLENGES AND MEDIUM-TERM PROSPECTS

A. Country Vision and Poverty Reduction Strategy Paper

33. The Congolese leadership has set out an ambitious vision for the country’s development. This vision i s articulated in the PRSP, which was presented in July 2006. It emphasizes the need to break with past practices and to ensure a dramatic improvement o f living conditions throughout the country, as a condition for sustained peace and eventual economic recovery. The PRSP builds on the 2001 Interim PRSP, and like the Interim PRSP (which was endorsed by al l Congolese political forces at the onset o f the peace process) it enjoys broad support among all key constituencies.

34. The PRSP was prepared through a genuine and extensive consultation process. Each district prepared a district-level PRSP through an extensive grassroots consultation process managed by specialized non governmental organizations (NGOs). These documents were consolidated into provincial-level PRSPs, and eventually into the national PRSP. Civ i l society (including faith-based organizations, labor unions, NGOs, women groups, youth associations, and community representatives), the private sector, public institutions (national and local), and political representatives - in total, about 35,000 people - participated in this exercise. This process increased ownership o f the reform agenda by a broad part o f the population.

35. I n a post-conflict environment, this process has provided a framework for refocusing the national dialogue toward a forward-looking agenda. The breadth o f the PRSP consultation process made it possible not only to develop ownership o f the poverty reduction agenda among all key constituencies, but also to mobilize the country’s energy in support o f a socially oriented, fonvard- looking agenda - which i s essential as the country moves away from the years o f conflict and mismanagement which have le f t a legacy o f acute political and social tensions.

36. I n the face of a formidable set of constraints, the Congolese have articulatedpriorities around five strategic pillars: (i) promoting good governance and consolidating peace; (ii) consolidating macroeconomic stability and economic growth; (iii) improving access to social services and reducing vulnerability; (iv) combating HIV/AIDS; and (v) promoting community dynamics. These pillars are closely related and inter-dependent, and progress in one area i s conditional to advances in others - e.g., between growth and state reform; among social services delivery, state reform, and community dynamics. While the articulation o f key priorities around these themes provides a usefu l analytical framework, they need to be understood as complementary parts o f a single, holistic strategy.

37. The PRSP sets an ambitious development policy agenda, to be implemented with public capital and pro-poor spending estimated at US$3.4 bil l ion for the f i rst three-year period (2006-08). Public investment i s projected to increase from US$236 mill ion (3 percent o f GDP) in 2005 to US$1.3 billion (13 percent o f GDP) in 2008. Even with financing o f this magnitude, however, it i s not clear that the country has the capacity to absorb such a rapid expansion in public investment. The Government now needs to develop a working plan with specific prioritized actions, costing, timing, and definition o f the entity in charge at least for the f i rst year, and preferably for the first few years. The plan should be developed by the existing entities for planning and budgeting, so as to integrate the poverty reduction process into the country’s national and local systems. This plan should: (i) take into account the realistic amount o f financial and human resources available, which means that the reform agenda included in the PRSP should be prioritized and properly sequenced; (ii) assign priorities even among the actions included in this plan, so that less urgent programs can be postponed, should the available financing fall short (the Government has already started this prioritizing exercise); (iii) clarify the links among the overall goals, proposed programs, macroeconomic

- 13 -

framework, and progress indicators; (iv) develop a matrix o f goals, programs, progress indicators, and the entity in charge, which the PRSP does not have currently; and (v) include an external debt management strategy in anticipation o f potential additional space for borrowing post- HIPCMultilateral Debt Rel ief Initiative (MDRI). Preparing the working plan wil l also help prioritize the needed capacity reinforcement program.

B. Key Challenges

The five pillars set out in the PRSP together articulate most o f the major challenges facing DRC:

3 8. Pillar 1. Promoting Good Governance and Consolidating Peace

Achieving the goals of Pillar 1 involvesjlve major sets of challenges:

Reforming the security sector (militayy, police, justice system), by: - completing the integration o f al l armed forces (former regulars and rebels), and the

demobilizationheintegration process; ensuring a regular payroll, strengthening professionalism and discipline o f both the military and the police, and initiating civilian oversight; Strengthening the organizational and institutional capacity and professionalism o f the judiciary, including through pay reform.

-

-

Improving the management ofpublic resources, by: - improving the transparency o f budgeting and contracting, strengthening watchdog

entities, building mechanisms for public participation, and sanctioning fraud through judicial action; increasing government revenues, focusing on revenue sources such as the mining sector and customs, broadening the tax base, and reinforcing the tax administration for small and medium enterprises; enhancing the composition and execution o f public expenditure, by decisively increasing pro-poor budget allocations; improving execution o f the budget; and strengthening public financial management systems and the capacity o f the second t ier o f government, in light o f decentralization.

-

-

Reforming the public administration, by: - beginning the long-term process o f rebuilding an effective public service, to include the

creation o f a civi l service register, a functioning payroll management system, and a high- level civi l service;

- managing the decentralization process, with priority focus on improving the implementation and monitoring capacity o f local governments (see Box 2).

- 14-

Box 2. Managing Decentralization

The new Constitution allocates 40 percent o f domestic fiscal revenues collected in each province to provincial authorities, and also defines the responsibilities o f provincial and other sub-national authorities, including major service aspects o f public service delivery in primary and secondary education and primary health care. However, the PRSP does not reflect these fiscal transfers in the macroeconomic framework or discuss how the devolution o f responsibilities would be carried out. Whereas key legal acts regulating fiscal and administrative decentralization had been scheduled for adaptation before the 2006 Presidential and Parliamentary elections, this proved to be impossible due to a lack o f political consensus. This subsequently led to a situation in which provincial assemblies and governors were elected in early 2007 in the absence o f the necessary legal framework for the operation o f provincial institutions.

Risk mitigation measures introduced by the central government around the provincial elections reduced fiscal transfers to the provinces from a previous level o f 15 percent to 6 percent. Democratically elected provincial institutions were therefore expected to function without the necessary legal framework or fiscal resources, generating political tensions between provincial and central government authorities.

The urgency brought about by the rapid implementation o f political decentralization created a highly politicized decentralization debate in the f i rst hal f o f 2007, focused around the issue o f fiscal resource allocation, pitting elected governors and heads o f provincial assemblies against the central government. The former insisted on the immediate and direct application o f constitutional principles while the latter argued that more technical work i s required to ensure the equitabIe allocation o f resources as well the effective management o f competency transfers.

The debate finally culminated in a compromise between central and provincial authorities, c o n f m e d at the National Decentralization Forum, held from 3-5 October 2007, which brought together al l stakeholders in the process. It has been agreed that January 2008 i s the target date for the implementation o f constitutional provisions on decentralization, in particular those regarding the provinces. However, technical arrangements, notably the broad architecture o f intergovernmental relations, including clear revenue and expenditure assignments and fiscal transfers, as wel l as key legislation remain to be adopted, putting this target date at risk.

With the compromise reached on the implementation o f constitutional provisions, the next immediate objective i s to ensure that the decentralization process does not further weaken public expenditure management and services delivery. The Government w i l l therefore need to rapidly formulate an action plan to build personnel and financial management capacity at provincial level, which w i l l require significant donor support.

Furthermore, it i s important to note that the decentralization o f functions and finances to provincial level i s only the f rs t step in the decentralization process. Elections for decentralized authorities to be established at sub- provincial level are scheduled for 2008. Administrative-territorial reforms to divide the existing 1 1 provinces into 26, mostly new provinces are to be implemented in 2010, following constitutional provisions. Decentralization i s therefore a theme that w i l l affect reforms in al l key sectors throughout the CAS period. Whereas in principle the process could generate significant benefits in improved public service delivery, as well as in enhanced political accountability, the process also poses serious risks (fiduciary as well as political) in view o f the capacity constraints and provincial and local level.

Reforming the management of natural resources (both mining and forestry), by: - in the mining sector, developing and implementing an Extractive Industr ies Transparency

Ini t iat ive (EITI) action plan; strengthening oversight o f the sector; ensuring due process fo r the award o f minera l rights, consistent with the n e w M i n e Law; addressing pressing issues relat ive to artisanal and small-scale mining; re fo rming pub l ic enterprises ( including GECAMINES); and transferring exploitat ion responsibilities t o the private sector;

- 1 5 -

- in the forestry sector, implementing the more equitable policies in the new Forest Code; building basic institutional capacity; securing forest people’s traditional user rights; fostering public participation; enforcing forest management plans; rehabilitating key protected areas; engaging in emerging markets that reward carbon storage and forest protection; enforcing the moratorium on new forestry concessions and canceling those that are invalid; and curbing illegal logging (see Box 3).

Box 3. The Forest Reform Agenda

The DRC harbors the second largest rainforest in the world. These forests are a vital source o f food, income, medicine, fuel, and shelter, and they fulfill cultural needs for millions o f rural poor, including indigenous peoples. They harbor unique biodiversity and store large amounts o f carbon, and provide valuable ecologicial services.

In 2002, 43 million hectares, i.e. half the country’s rainforest had been awarded irreguraly and without due process with no local consultation, no environmental measures, and no consideration for alternative uses. The risk o f an unregulated expansion o f logging with the return o f peace and improved infrastructure, in a context o f institutional collapse needed to be addressed uregtnly and forcefully. Under the TSS, the Government addressed this legacy o f mismanagement to lay the foundation o f more equitable and sustainable models. Since 2002, with support from the international community, the government has:

1

1

1

1

Cancelled 25 million hectares o f non-compliant logging concessions, in 2002; Established a moratorium on new concessions in 2002, raised at Presidential level in 2005; Increased the annual area fee to dissuade further speculation on forests lands, in 2004; Launched a legal review o f all concessions including those awarded in breach o f the moratorium, engaged an international independent observer with the active participation o f local community representation - ongoing; Established an independent logging monitoring system to help fight illegal logging, in 2007. Adopted a Forest Code that replaces the 1949 colonial rule, protects local peoples’ traditional rights, and introduces the principles o f benefit-sharing, management plans, and environmental services.

1

1

Although this reform agenda faced resistance from many vested interests, the area under concessions dropped fiom 43 million hectares in 2002, to 21 in 2007. This work helped restore forest people’s rights, and fieed up space to implement community-based management, create new protect areas, and develop innovative models that reward the DRC for carbon storage, biodiversity conservation, and other services their forests provide to the global community. Since 2004, public debate about forest management in DRC has intensified with broad and lively stakeholder participation. The consensus that emerged around this forest agenda i s reflected in the Brussels Declaration o f February 2007 and in a report “Forest in Post-Conflict DRC” coauthored with 14 civil society and research organizations.

Looking forward, the priority wi l l be to consolidate the initial achievements and provide continued support to reformers. The Bank will: (a) continue to support the reform agenda especially the moratorium and the legal review as core-elements to any effort to reduce poverty and improve governance in DRC; (b) continue to help develop innovative forest management and protected area models; and (c) help strengthen the capacities of public institutions, civil society, and local communities to implement, enforce, and monitor the new policies in the field. These progressive policies have attracted international support from a wide range o f donors including the Bank in the context o f country as well as regional intiatives such as the Congo Basin Forest Partnership, through two IDA and GEF grants and a Multi-Donor Forest Trust Fund that i s being established with the European Union, Belgium, France, United Kingdom, Germany and Luxembourg and innovate ve landscape management planning processes supported by the U S and NGO partners.

Reforming public enterprises (see Box 4) by: designing a strategy for the management o f the public enterprises’ social liabilities (Le. retrenchment plans);

- 1 6 -

establishing an adequate legal and regulatory system (Le., privatization law, investment protection law, regulatory agencies etc.), - settling public debts and negotiating commercial debts, - establishing a professional and independent management structure ahead o f the privatization, - undertaking inventories o f public enterprises' assets and other liabilities, - identifying the most suited methods o f state disengagement for each public enterprises commercial activities, or alternative options where private sector involvement does not appear as a viable option.

Box 4. Reforming Public Enterprises

Public enterprises are the cornerstone o f the DRC economy: in particular, they dominate the mining sector (GECAMINES, MIBA), they control the transport (airports, railways, ports), water and power sectors. They represent the vast majority o f formal employment in DRC. In the transport sector alone they employ 33,000 persons and st i l l generate in excess o f U S $ 250 milliodyear in revenues despite an outdated and derelict infrastructure. Likewise, they are responsible for providing a very large portion o f the health and education services o f the country.

As public monopolies, they have not been subjected to adequate oversight for many decades resulting in huge losses to the community at large both in terms o f misdirected investment, s k y high tariffs, revenues leakages, etc. SNCC (the railway company) provides an illustration o f the conditions o f the public enterprise sector: SNCC counts over 13,000 employees, only 500 km o f railways are operational (out o f 3,600 km) and - on average - one out o f three trains derail.

As o f today, public enterprises represent both a burden and a liability to the State and potentially important tools for economic development as they are active in the areas that are the most likely to attract investments and/or generate revenues in the foreseeable hture (including power, extractive industries and transport).

Since re-engaging in DRC, the World Bank came to the conclusion that public enterprise reform i s a critical element to ensuring sustainable and equitable economic development. As such, assistance to these enterprises has been tied to a clear reform agenda whereby investment i s subordinated to reform steps to ultimately allow for private sector participation.

Pillar 2, Consolidating Macroeconomic Stabilitv and Economic Growth

Pillar 2 encompasses four major sets of challenges:

Sustaining the economic rebound and achieving macroeconomic stabiliiy, by bringing down inflation, building up international reserves, and exercising tighter fiscal discipline and better control o f budget execution (see B o x 5).

Ensuring sustained growth in the agriculture sector, by improving security in rural areas; and deploying a large-scale investment program to, among other things, reopen roads (in

- 17 -

particular, between provincial capitals and surrounding rural areas) and help reconstitute farmers' assetsa3

Restoring pre-war production levels in the mining sector, and improving management of revenue stream^,^ by attracting major private investment, which in turn i s conditional on improved governance; the repair o f transport infrastructure; ensuring that artisanal miners are taken into account in plans to develop the sector; and increasing transparency o f the budget, as a way to ensure that revenues from the sector are fairly distributed.

Laying the groundwork for divers9cation of the economy through private-led growth, by significantly improving the business environment; making massive investments in the transport and energy sectors; restoring access to credit; and reforming public enterprises that are an obstacle to growth.

Box 5. The Post-Conflict Economic Rebound in DRC

An economic rebound i s typical in post-conflict countries, and i s linked to the resumption o f economic activity, improved security, access to services, and renewed confidence. In most countries, the rebound translates into an average growth rate o f 6 percent a year for a period o f 7 years, before starting to subside. In DRC, though the medium-tern macroeconomic objectives in the PRSP are based on this average, they may be overly ambitious, since real GDP grew by only about 5 percent in 2006, and i s projected to grow by 6.5 percent i s 2007. As a result, the average growth rate for 2006-08 i s unlikely to be more than 6.5 percent. The Government needs to put greater emphasis on stabilizing the macroeconomic situation in the short term, to lay the foundation for growth.

5 Pillar 3, Imvrovina Access to Social Services and Reducing Vulnerabilitv

Pillar 3 involves three sets of challenges:

In the education sector: achieving universal primary education, aligning secondary and higher education with the country's workforce needs, and strengthening the institutional and financial capacity o f the sector (see Box 6) by:

Promoting universal primary education by: sequentially removing a l l fees for primary education services.

Improving strategic and operational management, by: o supporting the implementation o f critical reforms to revamp the sector's legal

framework;

Agriculture, at about 42 percent o f GDP, has the potential to be a key engine o f poverty reduction, as well as a source o f well-distributed growth across provinces. Extractive industries, which currently represent about 13 percent o f GDP, have the potential to be a key source o f both fiscal revenues and foreign exchange. The PRSP identifies four categories o f population which should be primary targets o f social protection programs: vulnerable women and children; disabled persons; the elderly; and the displaced. A series of targeted social protection measures wi l l be introduced for these groups aimed at reducing risk and promoting their economic and social integration into society.

- 1 8 -

o

o

o o

improving public finance mechanisms including validation o f the teachers payroll and introducing a simplified, more equitable and transparent pay system; developing a realistic and costed long-germ strategic plan for the education sector; undertaking a school mapping exercise to ensure equitable overage; improving accountability at all levels o f the education systems.

Increasing the levels ofpublicjnancing for the education sector, by: o

o

o

developing an education financing strategy and aligning budget allocations with sector priorities; increasing the share o f the state budget to education to 10 percent immediately and at least 20 percent within three years; developing budget monitoring systems to ensure that public funds reach intended beneficiaries.

Formulating proposals to reform secondary education, including vocational training, and for rationalizing and revamping tertiary education.

In the health sector (see Box 6):

0 Increasing access to effective health services by progressively reducing barriers that inhibit poor and vulnerable people from accessing services, notablyJinancia1 barriers;

Improving the coverage and quality of services, by: o Rationalizing the existing health facilities network on the basis o f Government's

Health Systems Strengthening Strategy (HSSS), particularly in rural and poor urban areas, where most o f the poor live; Rationalizing and developing health human resources. Implementing measures to ensure acceptable and consistent standards o f service delivery, both by state and non-state partners; Ensuring drug supply and investing in infrastructure rehabilitation and equipment in order to extend coverage o f the packages o f health services provided by Health Zones at both health center and general referral hospital levels. Developing management capacities o f the central and intermediary levels o f health administration taking into account the upcoming decentralization;

o o

o

o

Mobilizing adequate jnancing, both internal and external, for all Health Zones within the context of a medium-term expenditure framework, including those not currently supported, through results-based service contracts.

I n the water sector: Improving strategic and operational management,, by:

o

o o

Preparation o f REGIDESO institutional reform and a road map for the sector reform; developing national standards for water quality; Development o f an action plan to reduce and control water consumption by public institutions

- 19-

o strengthening the capacity o f Government ministry in charge o f water, in the area o f management contract planning, regulation, and monitoring, as well as the development o f a financing and rate adjustment strategy

Expanding the national rural water and sanitation programme throughout the country; Establishing a specific national budget for a national rural water and sanitation program; Implementing a national training program o f Health Zone-based water and sanitation supervisors; Developing a national standard for the organizational structure o f community-run water systems and a standard tariff system that targets access for all (life-line tariffs);

Providing REGIDESO with management and technical training.

Expanding access to water and sanitation in rural and urban areas, by: o

o

o

o

o Rehabilitating REGIDESO-managed water systems; o

Box 6. Challenges in the Health and Education Sectors

Health The crisis o f the past decades have severely affected the health status o f the population and degraded the health system. More than 1,200 people dying per day, most from preventable diseases such as malaria and respiratory diseases. In 2001, under-five mortality was estimated at over 200 per 1,000 live births, and maternal mortality at greater than 1,200 per 100,000 live births, among the highest in the world. Such rates, combined with the country’s population o f 64 million which i s the third largest in Sub-Saharan Africa, means that DRC represents a significant proportion o f the burden o f illness and mortality on the continent. While overall health status and service utilization i s poor, there are also significant disparities between the poor and better-off. Barriers to health service utilization include lack o f geographic access, poor functionality and quality o f services, and the cost to households. The focus o f health service development has been on the Health Zone system, which integrates a network o f primary health services with a referral facility. Based on a history o f public-private partnership with church-based providers, non- governmental organizations have a significant role in sector development. Since 2002, combined with greater social and economic stability in most parts o f the country, significant improvement in health sector financing levels, both domestic and international, are expected to have improved the health status o f the population. However, many areas remain with low or no external supports, so that adequate financing for all Health Zones, from domestic and international sources, i s needed to expand coverage o f service and reduce barriers to care. With limited government capacity, particularly at the provincial level, this could be achieved through the financing and supervision o f results- based contracts with governmental and non-governmental providers, as well as support for basic high-impact preventive interventions such as family planning and anti-malaria bednets. Measures for ensuring acceptable standards o f service delivery and the consistency o f standards in diagnosis and treatment -particularly by non-state partners - also need to be implemented.

Education A key objective in the education sector i s to move systematically and as rapidly as i s feasible towaid achieving the constitutional commitment to universal, quality primary education. At the same time, the higher education system also needs to be developed, to produce the professional class that DRC needs for its future development. During the PRSP cycle, the Government i s expected to decide on a financing plan and align the budget allocation.with sector priorities; and also to adopt measures to ensure that allocated funds reach their intended recipients. External partners are prepared to step up their support to meet the financing gap in the sector, provided that the financing plan i s credible and that there i s evidence o f improved efficiency. The recently completed Education Sector Review, and ongoing analyses o f teacher financing and the elimination o f school fees, wi l l provide guidance on how to prioritize among the many objectives.

- 20 -

Pillar 4, Combating HIV/AIDS

Pillar 4 addresses four sets of challenges:

Reducing the transmission rates of HIV/AIDS and Sexually Transmitted Infections (STI), particularly among women and youth, by promoting behavior change; and adopting a national strategy to make anti-retroviral therapy universally available;

Speeding up treatment and improving the quality of life ofpersons living with HIV/AIDS;

Attenuating the negative socioeconomic impact of HIV/AIDS on individuals, families, and communities; and

Strengthening the mechanisms for coordinating all stakeholders and partners working on HIV/AIDS, and for monitoring and evaluation o f activities (see Box 7).

Box 7. Challenges in Combating HIV/AIDS

With prevalence estimated at 4 percent and less than 3 percent of men and women (age 15-24) knowing how HIV/AIDS i s transmitted and what can be done to avoid exposure, the HIV/AIDS epidemic poses a huge public health problem. Prevalence among pregnant women i s particularly high in urban areas (5.2 percent) and in conflict-affected areas where specific studies indicate that infection rates o f victims of sexual violence can reach 20 percent. The number of persons infected i s estimated at 1.23 million in 2006, and the number of those affected, including orphans and other vulnerable children i s relentlessly rising, creating more social distortions. Counseling and testing i s s t i l l llimited to a few hundred sites, and anti-retroviral therapy (ART), provided f iee of charge through several donor-financed projects, i s only available to 10 percent o f the 220,000 who are eligible for treatment. Further, there i s no national policy to make ART universally accessible.

Pillar 5. Promoting Communi& Dvnamics6

Pillar 5 encompasses four sets of challenges:

Facilitating the effective involvement of communities in preparation, implementation, and monitoring that may affect them;

Consolidating peace and laying the groundwork for recovery, through community-level projects focused on income generation, local governance, community security, infrastructure and reconciliation.

Promoting area-based development in impoverished communities, in order to jump-start micro- economies and build social capital; compensate for insufficient public goods; empower the poor and vulnerable, particularly women; and strengthen democratic practices; and

Over the last 40 years, strong grassroots organizations have emerged in many communities, largely as a response to the absence of a functioning public sector; but successive Governments have not included them in the dialogue and decisionmaking on key development priorities. The current Government aims to harness the collective contributions o f these organizations to help implement poverty-reduction activities at the local level.

- 2 1 -

Ensuring the efJicient dispersion and use of scarce resources, by developing criteria for community activities, including ownership, sustainability, efficiency, and complementarity with country-wide programs; and for allocating external resources to community activities.

C. Medium-Term Macroeconomic Outlook

3 9. The baseline scenario? assumes that prudent macroeconomic policies and structural reforms will continue to attract strong foreign-direct investment and financial support from the international community. As a result, real GDP growth i s expected to increase from 6 percent p.a. between 2002-2006 to 7.3 percent p.a. on average over the 2bO7-2011 period (see Table l), fueled by strong private investment driven by FDI. High FDI growth o f about 25 percent, mostly to the mining sector, i s expected to be sustained over the same period. These high FDI growth projections are plausible, given that DRC has Africa’s largest deposits o f copper, cobalt, and coltan, as well as significant reserves o f diamonds and petroleum. The long years o f mismanagement and insecurity caused mining sector activities to grind to a halt, reducing the share o f the mining sector in GDP from 25 percent o f GDP in the mid-1980s to less than 10 percent in the early 2000s. However, with the stabilization o f the security and macroeconomic conditions, the recent successful transition to democracy, and high commodity prices, investors have already began to flock back to DRC. The authorities estimate that total investments in copper and cobalt projects could reach US$3 billion through 2012, allowing output to return to levels not recorded since the 1980s.

40. Under this scenario, the current account deficit including official transfers is expected to increase from lpercent of GDP in 2006 to 10 percent of GDP in 2011, reflecting DRC’s need for external capital. DRC i s expected to reach the HIPC Completion Point in 2008. Accordingly, it i s assumed to benefit from debt re l ie f under the HIPC and MDR initiatives, leading to a significant decline in i t s debt-to-GDP ratio, from 120 percent in 2007 to 38 percent in 201 1. Debt service i s also expected to decline as a result o f these initiatives. I t i s assumed that the Government will use the fiscal space gained through debt re l ie f and improved revenues for pro-poor programs, which could take the form o f reduced fees for school and basic health care. Even with these transfers, the fiscal balance i s projected to reaching a deficit o f only 1 percent o f GDP on average between 2007 and 201 1. Government’s recurrent spending i s projected to increase from 16 percent o f GDP in 2007 to 18 percent in 2011 as public consumption increases, while capital spending i s expected to more than double from 3 percent o f GDP in 2006 to 8 percent as the share o f GDP over the same period.

’ The macroeconomic analysis presented here uses a dynamic general equilibrium model (MAMS) to explore the effects o f different scenarios on debt burden and other macroeconomic indicators.

- 22 -

Table 1. Medium-Term Macroeconomic Projections - Selected Indicators, 2006-2011 actual Droiections

Real GDP growth (%) Inflation (end-of-period, %) Growth o f exports (US$ terms, %, constant prices) Growth of imports (US$ terms, %, constant prices) Current account balance (including grants, % o f GDP) Revenues (excluding grants, % o f GDP) Total expenditure (% o f GDP) Overall fiscal balance (% GDP)

2006 5.1 18.2 12.0 10.8 -7.0 13.2 22.1 -0.7

2007 6.7 12.0 8.4 10.7 -7.5 14.9 19.4 -0.6

2008 6.8 8.0 9.0 10.3 -8.1 15.6 21.6 -0.2

2009 2010 7.7 7.7 8.0 8.0 9.7 9.5 8.2 6.5 -8.7 -9.5 16.1 17.4 22.5 24.6 -0.4 -1.4

201 1 7.7 8.0 9.4 6.7 -10.4 18.0 26.4 -2.4

Source: World Bank, International Monetary Fund.

4 1. Alternative scenarios have been analyzed to assess the risk of adverse circumstances. These projected scenarios have been produced using MAMS. Under the no reform scenario, average real GDP growth i s assumed to be i t s historic average (1 percent), FDI inflow wil l be much lower (growing at about 10 percent), and debt relief will not be attained. The government will not gain any fiscal space, and the scope for implementing poverty-reducing programs i s severely compromised. DRC will run into a debt crisis, as i t s public access to external financing i s severely limited and i t s debt-to-GDP ratio reaches an unsustainably high level (141 percent). Moreover, under this scenario, private consumption in real terms wil l be about half o f the corresponding amounts under the baseline at the end o f the projection period; even if the government manages to pay i t s employees, there will be discontent among the population at large.

42. Another scenario assumes borrowing on less concessional terms. This scenario obviously leads to a substantial deterioration in DRC’s public debt indicators. Debt service payments to the rest would increase, leading to an increase in recurrent spending, which would need to be financed by additional new borrowing. Unless the return on the investments financed with less concessional foreign loans i s high, this strategy risks that the government wil l allocate more resources to servicing i t s debt rather than on i t s priority programs

43. Finally, an alternative scenario assumes large borrowing on concessional terms (China scenario). Under this scenario, a $3 bil l ion borrowing on concessional terms accompanied by a $2 bil l ion FDI (‘joint venture) i s assumed, in line with the recent announcement by the authorities o f their intension to enter into such an arrangement. As long as the borrowing i s on highly concessional terms, the funds are used for productive purposes in line with the government’s priorities, and disbursements are in line with the country’s absorptive capacity, this arrangement could be beneficial to the country, triggering a higher growth rate, accelerating export growth, and larger fiscal space, at least initially. In the medium term, the government saving would decline substantially as the increase in net interest payments on foreign debt outpaces the increase in recurrent receipts. I t should also be noted that DRC’s debt stock would increase substantially reaching 94 percent o f GDP by 2026 even if the loan i s concessional.

- 23 -

PART A.3. MANAGING R I S K S - CAF DONOR GROUP

Overall Approach

44. Engagement in apost-conflict context is a high-risk, high-gain enterprise, but the risks of non- engagement exceed the risks of engagement. The situation in DRC remains difficult, but experience has shown that external assistance can yield disproportionate benefits in post-conflict countries, provided it i s well targeted and efficiently provided. Consistent with the donor strategies since 2001, the approach suggested here is based on pro-active risk management rather than risk avoidance. The risk management strategy i s three-fold: (i) warning mechanisms, to detect problems at an early stage; (ii) response mechanisms, to mitigate their immediate impact; and (iii) risk reduction mechanisms, to gradually reduce their likelihood and potential impact over time. I t should be emphasized, however, that in a post-conflict environment such as DRC, external assistance is aimed first and foremost at addressing the broader risk of renewed conflict and instability. Risks should not be seen as external factors that may affect performance o f donor programs, but rather as the justification for and the focus o f such programs. In other words, reducing risk i s not only a way to improve performance; it i s the main objective of donor support. I t should also be emphasized that the key to effectively managing risk i s a constructive relationship between donors and the Government.

45. Donors participating in the CAF will be responsible for managing the risks to their own assistance programs. While the CAF provides a joint analysis of key risks and a coordinated definition of the risk management strategies, each donor will implement i t s own risk management strategy, in terms o f defining what events or conditions may trigger a response and what exactly such a response would entail. CAF donors would engage in extensive consultations prior to making major decisions; however, the option of a joint action by a l l CAF donors has been deemed impractical in view o f their different decision-making and reporting arrangements. Table 4 in Part B.3 lays out the risks, response actions, and risk reduction mechanisms common to a l l donors under the CAF, as well as those specific to the World Bank Group under the CAS.

- 24 -

PART B. WORLD BANK GROUP COUNTRY ASSISTANCE STRATEGY

PART B.l. REVIEW OF PAST BANK ASSISTANCE

A. The Second Transitional Support Strategy

46. Since reengaging with DRC in 2001, the Bank has provided assistance within the framework of two successive Transitional Support Strategies (TSS). The first, covering the period 200 1-2003, focused on stabilizing the fragile peace.8 The second strategy, which directly preceded the CAS, supported four key areas o f the Government’s program to consolidate peace and economy recovery: (i) security and social stability, (ii) job creation through economic growth and diversification; (iii) governance and institutional strengthening; and (iv) social development. While the program originally covers FY04-06, due to elections, which slowed down donor funding, the TSS effectively extended to also cover FY07.

B. Overall Assessment and Results o f TSS (Annex 4 for a detailed evaluation)

47. Implementation o f the second TSS was rated moderately satisfactory. The program was highly relevant to DRC’s needs and aligned with the Government’s priorities, as expressed in i t s I-PRSP and economic program (see Annex 4.1). The Bank completed 11 out o f 13 Analytic and Advisory Activities (AAA) during the period (see Annex 4.2), covering a broad range o f sectors. Out o f 10 projects, 2 are already closed and 8 are ongoing. The planned FY06 program was postponed beyond the TSS horizon because o f the elections. The current portfolio stands at US$1.7 billion, o f which US$891 mill ion has yet to be disbursed. The second TSS was also characterized by strong dialogue between the Bank and the Congolese authorities, as well as with civi l society and private sector stakeholders. The Bank also played a major role in donor coordination, and together with other donors initiated a move toward harmonization.

48. With regard to results, performance against the TSS indicators was mixed (see Annex 4.3). The TSS proposed a results framework consisting o f 19 performance indicators. Results were achieved partially or completely for 11 o f them. In the absence o f reliable statistical data, most indicators were defined in such as way that made quantification difficult, many results are nevertheless noteworthy, including macroeconomic stability throughout the period; a substantial level o f private investment; a moratorium on forestry concessions and a legal review o f those awarded in the past; the reopening o f key roads; and successful HIV activities. These results are likely to be sustainable, but their eventual impact will depend on the success o f the peace process and the commitment o f the new Government.

49. The Bank Group’s engagement has also had significant indirect results. As in other post- conflict countries, the return o f donors and the launch o f large-scale assistance programs have sent a strong signal to the private sector about investment opportunities, to the protagonists in the conflict about possible peace dividends, and to the population at large about the possibility to hope again. These developments have contributed to the stabilization o f the social situation and to the resurgence o f economic activity.

See the 2004-2006 TSS for an evaluation o f the f i r s t TSS (2001-2003).

- 25 -

50. Particular efforts have been devoted to livelihood and cultural issues facing people living in DRC forests, including Pygmies. The Bank began outreach efforts in 2004 and has expanded them since then. The Bank team regularly: (i) meets with Pygmy groups to exchange information and seek their advice; (ii) invites Pygmy representatives to events in which issues that affect their social and cultural situation are discussed; and (iii) promotes the inclusion o f Pygmy groups in relevant forest regulations, institutions and decision-making bodies. Starting in 2005, Bank teams visited Pygmy communities in Beni, Mutsora, Epulu and Rumangabo in the newly reunified eastern provinces, in an effort to establish direct lines o f communication. In 2006, the Bank facilitated the collaboration o f DRC Pygmy representatives in a forest sector review in neighboring Republic o f Congo. In April 2007, the Bank helped organize the First International Central African Indigenous Peoples Meeting, in Brazzaville, Congo, and facilitated the participation o f Pygmy representatives from DRC at this event. As part o f the Bank’s enhanced engagement with Pygmy communities, a special study was undertaken in 2007 that will support integration o f these concerns into the overall program o f the Bank.

5 1. The Bank has worked closely with the Government to ensure that the new Forest Code recognizes and protects traditional rights o f local communities, including the Pygmies, in all production forests. With the encouragement o f the Bank, the Government has included Pygmy representatives in the Inter-ministerial Committee in charge o f the legal review o f concessions. This participation aims to help guarantee preservation o f the rights o f Pygmies in production forests and ensure that boundaries and management plans take into account their social, economic, and cultural needs. Bank efforts are intended to defend the interests and rights o f the Congolese people, including Pygmy populations, by canceling illegal concessions, strengthening the moratorium, supporting the services o f independent observers in the legal review and in field controls, and promoting the participation o f Pygmy representatives in the legal review. This i s particularly important in a country with serious institutional and policy weaknesses.

C. Review of IDA Activities

Major Achievements of the TSS

52. The IDA program has had three objectives - reconstitute the country’s knowledge base, support the preparation of key sector reforms, and provide the analytic underpinning for financing. The Bank has delivered most o f the lending and AAA program proposed in 2004. Some delays were caused by problems typical o f a post-conflict environment, including capacity constraints on the Borrower’s side, the formidable logistical challenges associated with the size o f the country, and the slow-down o f activities in the political environment leading up to the 2006 elections. Delays have also been caused by IDA allocations constraints, especially in FY05.

- 26 -

53. The program has been satisfactory in strategic relevance (clear objectives, good alignment with TSS); internal quality (good analytic quality); coherence and integration (strong integration with lending); likely impact (effective reconstitution o f the knowledge base and ownership of recommendations by the authorities); dialogue (strong engagement with clients); and dissemination (with substantive managerial attention).

54. The preparation of new projects has been satisfactory overall. QAG reviews have been positive, and projects have been generally more ready for implementation at the time of Board approval than the average Bank-funded emergency project or Africa Region project.

5 5 . Overall, the quality of the portfolio during the TSS period has been moderately satisfactory (see Box 8 and Annex 4.1). However, Bank performance for the project closed during the TSS period (Post-reunification Economic Recovery Credit) has been rated unsatisfactory, with poor prioritization and weak assessments o f the environment, among other cited reasons.

~~

Box 8. K e y Features o f the Ongoing Portfolio

The ongoing portfolio includes 10 projects (as o f end September 2007: total commitment: $1, 7 billion, undisbursed:$89 1 million), o f which 7 are rated satisfactory or moderately satisfactory on implementation performance and development objectives. However, the remaining 3 projects are problem projects: the Emergency Demobilization and Reintegration Project has been weakened by procurement and project management difficulties'; the HIV/AIDS project has had some misprocurement and ineligible expenditures'; and the Health Sector Rehabilitation Project has had management difficulties3

Projects have resulted in improved economic and social conditions. Road rehabilitation in both rural and urban areas has served to reduce congestion, reduce the cost o f transport o f goods and food supplies, and has played a critical role in fostering national integration. Quality in agriculture production has increased, Health and education services have improved and resulted in increased enrollment in schools and increased access to safe drinking water Major economic reforms have been embarked on which are improving business laws and reforming the legal, administrative, and judiciary environment. Major steps towards security have been taken with the demobilization o f over 100,000 ex-combatants having occurred. ' Remedial actions are being taken, and the project i s rated satisfactory on

implementation. Reimbursement has occurred and the project i s currently rated satisfactory. Project management issues have been resolved, about 80 percent o f the project i s committed, and the project i s likely to be upgraded.

56. Disbursements are in line with projections. Active and ongoing project during the period FY04- 07 were $1.7 b i l l i ~ n , ~ of which $891 billion i s undisbursed. Disbursements in DRC are significantly higher than the Africa regional average (see Chart 4 and Box 9), and are comparable with Bank- funded emergency projects worldwide.

This amount does not include Regional Power Sector operations for DRC (totaling about $475 million). 9

- 27 -

Chart 4. Disburseineiit Rates for Bank Portfolio in DRC Compared to Regional Average

0 Budget Health & social 4 Infrastructure support Services

I-I?.,

Source:

57. There has been significant interest from civil society organizat.,ns o n issues related to natural resource management. Civil society supported the reform agenda in the forestry sector, especially the moratorium and the legal review; but some groups have raised concerns about the strength o f the moratorium, the legal review process, and opportunities for local communities (especially indigenous communities) t o participate in decision-making, These concerns have generated continuing engagement among the Government, the Bank, other donors, and c iv i l society organizations.

Box 9. Early Results of Ongoing Projects

O f the 10 ongoing projects in the portfolio, one i s yet to become effective, and the remaining 9 have an average age o f 3.2 years. O f those 9 projects, one - the Emergency Demobilization and Reintegration Project - i s 99 percent disbursed, and 3 others - the Emergency Multisector Rehabilitation and Reconstruction Project, the Private Sector Development and Competitiveness Project, and the Emergency Reunification Project - are more than 70 percent disbursed.

These projects, based on monitoring and supervision reports, have had the following early impacts:

Infrastructure - rehabilitation o f the main road, feeder roads, schools, and water treatment facilities; improved quality and coverage o f health services; reduction in environmental impacts fiom soil erosion. Private sector development - reform o f legal, administrative, and judicial environment; adopting o f Investment Code and establishment o f commercial courts. HZV/AZDS - capacity development for the preparation and implementation o f projects by public, private, faith-based, NGOs, and community organizations. Demobilization and reintegration - , more than 92,000 o f the targeted 150,000 ex-combatants demobilized since January 2006. Social action - more than 40 micro-projects by poor communities have been approved.

- 2 8 -

58. The Bank has worked closely with other donors to ensure coordination in assistance. Toward the end o f the period, this coordination transitioned to harmonization, with the development o f a joint strategy and programming document, the CAF, the basis o f donor funding in DRC for the coming years. The Bank has also worked collaboratively on the project level - on demobilization and reintegration under the Multi-Country Demobilization and Reintegration Framework; and forestry sector reform under the Multi-Donor Trust Fund framework. This pooling o f resources and expertise has proven essential in complex projects.

59. Based on its increasing knowledge of operational issues in conflict-affected countries, the Bank has put in place a number of mechanisms to scale up assistance in countries in recovering from conflict. DRC has benefited, in particular, from the Bank’s alternative set o f indicators for measuring the performance o f conflict-affected countries (Post-Conflict Performance Indicators - PCPI); i t s mechanisms for arrears clearance; pre-arrears grants; and from access to the enhanced HIPC initiative. IFC and MIGA are also developing instruments to scale up their activities in conflict- affected countries. These have been highly effective in DRC. Continued engagement i s necessary, especially as DRC moves into a post-conflict stabilization period.

Difficulties and Challenges under the TSS

60. Despite these achievements, 70 percent of the portfolio is assessed as “at risk. ” All projects in DRC automatically have two flags (for country environment and country record), and it only takes a single project-specific flag for that project to be assessed as “at risk.” One project has no project-specific flags; two projects have one project-specific flag; and four have more than two project- specific flags, with the result that more than 50 percent o f the active portfolio has three or more flags (country environment and record, plus fiduciary risks and/or weak capacity for monitoring and evaluation; see Box 10 and Annex 4.3).

61. Fiduciary risks are high. Although special efforts have been made to manage fiduciary risks, ensuring adequate fiduciary oversight in DRC remains a major concern. All investment projects are implemented through ring-fenced mechanisms with relatively low thresholds for procurement prior reviews, and stringent financial management and audit arrangements. They

Box 10. Implementation Support is a challenge in DRC

Project implementation support, particularly outside the Capital, Kinshasa, is difficult.

The Country Office has increased staff and capacity to support implementation, although further strengthening i s essential, particularly on fiduciary matters and infrastructure. The main focus i s on Kinshasa-based work, due to relatively weak national institutions, leaving limited time for additional field missions. Oversight o f the portfolio receives normal Bank Budget resources. On average, there are two implementation support missions per year per project, which i s within the average for the region. Field missions are complicated by high logistical costs in such a vast country, with very few paved roads, no safe air transport, and security issues.

There is a dearth of reliable statistics and statistical capacity. Collecting data i s problematic because of logistical and security constraints. This has led to weak M&E systems in which baseline data are weak or not available, This has led to a focus on easily measurable output performance indicators rather than measurements o f outcomes and the long-term impact o f a project.

are subjected to annual audits by reputable external auditors, reviews o f Statement o f Expenditures by Bank financial management specialists, and procurement post-reviews, in addition to the traditional Bank oversight. These mechanisms are understandably piece-meal rather than focused on building

- 29 -

strong and sustainable government systems and procedures, and while they have been somewhat effective, a number o f issues have been brought to light by a May 2007 report by the World Bank’s Institutional Integrity Department (INT) o f a project implementation agency (Bureau Central de Coordination, BCECO). As a result, the authorities have already taken steps to strengthen BCECO, and further efforts are expected from a management audit o f this institution, being carried out by the authorities on the advice o f INT. A portfolio review i s planned in early 2008 to ensure that the transition i s being made from emergency to more streamlined and sustainable implementation arrangements -the unintended result o f donor efforts to provide assistance to DRC during a period o f institutional fragility has been to create a multiplicity o f implementation arrangements that have, in retrospect, not provided the intended benefits on the governance and implementation front, and at the same time not focused on building the necessary long term institutional capacity. Discussions with the authorities on both the planned BCECO management audit and the draft Public Expenditure Review are expected to focus on how to further improve management and oversight o f public finances. In addition, the portfolio review will address the systematic country-related risks.

62. The evaluation of the three projects closed during the TSSperiod was mixed One project (the Post-Reunification Economic Recovery Credit) was rated unsatisfactory for quality at entry, Bank performance, and Borrower performance. The Emergency Early Recovery Project was rated satisfactory across the board; and the Transitional Support for Economic Recovery was rated unsatisfactory.

63. A number of projects have come under scrutiny from the Bank’s Inspection Panel. An inspection was carried between 2005-2007 with regard to compliance with safeguards related to indigenous peoples and emergency projects. Environmental and social safeguards guidelines have been developed for the existing portfolio.’o

64. The sensitive nature of certain sectors in DRC - particularly forestry and mining - have created reputational risks for the Bank, and brought heavy scrutiny from outside stakeholders. In the mining sector, IDA and IFC have been encouraged to be much more forceful with regard to transparency. In MIGA, there have been two internal investigations. After a rebellion against DRC authorities in the town o f K i lwa (in Katanga Province), during which about 100 Congolese were killed, several NGOs alleged that Anvi l Mining S.A. - the beneficiary o f a MIGA guarantee - was complicit in these deaths by allowing the use o f mining vehicles by the FARDC (DRC’s army) to help put down the rebellion. Two internal investigations took place to consider MIGA’s involvement in the project; one investigation found no wrongdoing by MIGA, and the other investigation has not yet been closed.

D. Review of IFC Activities

65. IFC’s reengagement in DRC has been in line with its Strategic Initiative for Africa, with a particular focus on mining, financial markets, improvement o f the business climate, and initiatives to support small and medium-size enterprise development. As o f September 30, 2007, IFC’s cumulative

lo An Inspection Panel was carried out for the following two operations funded by IDA in DRC: Emergency Economic and Social Reunification Support Project (CR 3824-DRC and GR H064-DRC), approved in September 2003; and Transitional Support for Economic Recovery Grant, approved in December 2005.

- 30 -

commitments in DRC totaled US$83.58 million. In addition, IFC has been providing support to ANAPI, the national investment promotion agency.

E. Review of M I G A Activities

66. MIGA’s engagement in DRC has been relatively limited, but this will likely change in the near term. Since 200 1, MIGA has supported only one project, with US$15 mill ion in guarantee support to Anvi l Mining SA, a copper-cobalt facility in Katanga province. With the project’s commercial success, MIGA now has a strong pipeline o f mining projects going forward. MIGA has also been asked to support projects in the IT, real estate, and heavy equipment sectors. In addition, MIGA through FIAS (which now includes the ex-MIGA technical assistance team) has been complementing IDA’S financial support to ANAPI, DRC’s investment promotion agency.

F. Lessons Learned and Recommendation for IFC and MIGA

67. The lessons learned through the implementation of the TSS program point to a series of recommendations, which have been discussed extensively by the country team and are incorporated in the proposed strategy. These recommendations are:

Early engagement is critical. The Bank’s quick engagement in 200 1 sent a strong message to the Government, responsible investors, and to the Congolese population at large that there i s hope for a better future. The speed with which the first Emergency project was prepared (two months) was essential to ensuring stability. That project showed that progress can be made even in the early stages o f engagement. Engagement must be sustained. Consistent engagement at the sector level provides support to reformers, necessary to overcome inertia and prevent policy reversal. In-and-out interventions may inadvertently send a message that a critical sector is, in fact, not an important priority for the Bank and thus need not be a priority for the country. Bank support o f governance reforms has been critical, especially in naturaVpublic resources management. However, reforms in these areas take time, vested interests are strong, and progress in a post-conflict context i s fragile. Implementation is possible. Despite significant challenges, projects can be implemented in a difficult post-conflict environment. Strong dialogue with Government is vital. Bank-Government dialogue has been vital to launching the reform agenda. Hands-on policy advice has been essential in helping Congolese authorities to define and implement in-depth economic and governance reforms despite their low administrative capacity. Having staff present in-country i s important to solidify the relationship. Donor collaboration and coordination are imperative. Due to the wide range o f pressing concerns and the vast amount o f resources required, it i s necessary to work closely with other development actors on strategic planning, to ensure that resources are consolidated and that donors provide support in areas in which they have a comparative advantage. There needs to a gradual shiftfiom donor coordination to harmonization, in order to improve aid effectiveness in an environment where administrative capacity i s limited. Collaboration with civil society is important. Civi l society and local communities are the ultimate beneficiaries o f Bank interventions. Engagement with civi l society can be very productive, and often civi l society has expertise and access that the Bank does not have. In DRC, it has been important to tap into this knowledge base in complicated sectors such as mining and forestry to

counterbalance vested interests and strengthen the political determination for reforms. It i s also critical that information on the Bank’s processes be shared among and well-understood by different stakeholders. A proactive communication strategy i s key, especially in complex and sensitive sectors. In post-conflict countries, MIGA should deploy resources earlier, in order to contribute to the peace dividend. IFC should also coordinate more closely with IDA and M G A , especially as private sector activity increases over the coming years. Special efforts are needed to manage fiduciary risks in a post-conflict environment. Except in the very early stages, the Bank needs to begin to use and strengthen the key government financial management, procurement and oversight systems needed for the longer term. Wh i le there will always be projects requiring stand alone fiduciary arrangements, most projects need to have an agreed plan o f action to mainstream these arrangements for successor activities and programs. As the amount o f resources deployed on the ground increases, Bank capacity to provide implementation support outside Kinshasa also needs to keep pace, recognizing the special logistical and security challenges this presents. Focus on results is always useful, but not always as easy to predict in apost conflict environment. While the Bank team has consistently demonstrated a strong commitment to results, these results have been somewhat disconnected from the performance indicators against which TSS implementation has been measured. The CAS Results Matrix has been designed to more closely reflect the expected results from our combined analytical work and financing and as a means o f monitoring progress. Capacity constraints remain a major barrier to development in DRC. To maximize the effective use o f scarce government capacity, a review o f the portfolio i s planned in early 2008, and any necessary adjustments and related capacity development and technical support will be proposed as a result. Donor harmonization around sector wide approaches and strategies will also help make more effective use o f government’s institutional capacity. Better data gathering capacity is required. Efforts must be made to increase data-gathering capacity across implementing agencies, to facilitate policy making and program implementation. The World Bank Group intends to enhance i t s focus on results by supporting development o f a National Strategy for the Development o f Statistics with a Trust Fund for Statistical Capacity Building. This wil l be coordinated with other Bank Group efforts (e.g. technical assistance, both freestanding and through projects) and with other donors (e.g. African Development Bank. Joint implementation support together with other donors is being explored This i s particularly important for resumption o f budget support, and also for key sector programs - where bilaterals or other development partners may have greater access or capacity. This can help also increase the leverage from bank staff and budget resources.

0

- 32 -

PART B.2. BANK STRATEGY FOR FYOS-FY11

A. Objective and Expected Results

68. The overall objective of the proposed Bank Group’s program is to lav the foundation for a medium-term Dover& reduction effort, with a strong focus on governance and shared growth.

69. The CAS has been articulated around a results framework derived from the joint CAF results framework (see Vol. 2, Annex 5). The results-based approach i s designed to help focus the Bank Group’s efforts and i t s dialogue with the authorities and other partners on a clear set o f measurable objectives. A major challenge i s to select adequate performance indicators in a country where there i s no reliable statistical system. In this context, the CAS proposes a set o f second-best indicators selected on the basis o f their simplicity and easy measurability, combining outcome and output measures. Progress against these indicators will be assessed on a regular basis through consultations with the Government, key Congolese stakeholders, and donors, to ensure that Bank Group programs are managed for results and focused on making a measurable difference on the ground.

B. Key Principles

70. The CAS is derived from the PRSP, and actions proposed under the CAS are closely aligned with PRSP priorities. The CAS proposes to focus on activities with the highest potential impact in areas in which the Bank Group has a mandate and expertise.

71. The CAS is part of the multi-donor Country Assistance Framework, a broader international effort that has clear objectives and monitoring indicators. This wil l provide increased leverage for the Bank effort, allow for the efficient use o f limited resources, and help mitigate the risks to the Bank.

72. The CAS is based on an assessment of the Bank Group’s comparative advantage in DRC, which consists o f a combination o f analytic strength, financing capacity, and convening power.

73. Finally, the CAS is prepared in the broader context of the Africa Action Plan (AAP), which defines an outcome-base strategic framework built around three principles - improve governance and build capable states; accelerate economic growth; and ensure that the poor and women are able to participate in and benefit from growth. CAS i s based on these same three principles.

C. Planned Activities by Other Donors

74. Not all donors have confirmed their funding for the CAF. However, it appears that the Bank, together with the African Development bank, the European Commission, the Republic of China and the UK will be key donors. India and South Africa may provide support to the forestry, mining, energy and infrastructure sectors. Humanitarian assistance i s expected to continue at least through part o f this period from the Netherlands, Sweden, the UK, and the United States.

75. Funding estimates are about US$3 billion over the CAF period, including some ongoing projects. This assistance s t i l l falls short o f the country’s needs, but with increased coordination,

- 33 -

available funds are likely to be used more cost effectively in a more efficient and cost-effective manner."

D. Strategic Elements of the Bank Group Program

76. Given its comparative advantages, the Bank Group will play a lead role, jointly with other donors, in three of the five core areas outlined in the CAF - good governance, shared and sustainable growth, and improved social services. On governance, this will be together with the EC and UNDP; on the macro-economy, together with the IMF; and on facilitating private sector development (investments in transport and energy, access to credit, institutional and regulatory reforms), this will be together with EC and ADB. The Bank Group will play a supportive role in other areas, such as basic social services, HIV/AIDS, and community dynamics, although help lead and coordinate donor efforts toward development o f sector wide approaches (SWAps) in education and health.

77. Although the Bank will focus mainly on three pillars, we have outlined Bank Group assistance aroundfive strategic elements that reflect the five pillars of the PRSP. Al l five areas are closely inter-related, so that progress in one area depends closely on progress in the others. While the Bank's ongoing portfolio covers all five pillars, the new program will focus more selectively on three pillars going forward.

Strategic element I: Promote good governance and consolidate peace.

78. The Bank Group will support implementation of the Governance Contract, by helping to improve transparency, strengthen public finance management, reform the public service and assist the government in the decentralization process.

Help improve transparency. IDA will focus on: (i) enhancing transparency in public financial management, through regular publication o f budget execution data; (ii) building open and inclusive systems o f provincial level governance, through capacity building, and advisory support; and as an element of public sector enterprise reform; (iii) financing a series of audits (e.g. of public enterprises) and surveys; and (iv) assist in developing and implementing the EITI action plan for DRC.

Strengthen public finance management. IDA i s expected to share the lead with the IMF, focusing in implementing the recommendations o f the 2007 Public Expenditure Review, especially: (i) strengthening the expenditure chain; (ii) introducing a Medium Term Budget Planning system, including capacity building in line ministries; (iii) building systems and strengthening capacity for public financial management at provincial level; (iv) strengthening the capacity of revenue agencies, and; (v) completing the ongoing procurement reform. In this area activities will be implemented in close cooperation with DfID and the French Cooperation.

Support public service reform. IDA, together with the Belgian Cooperation and South Africa, intends to focus on: (i) supporting wage system reform, to enhance transparency and predictability of public sector wages; (ii) creating a roster of civil and public servants; (iii)

l1 The Bank Group's assistance to the infiastructure sectors might need to be adjusted in view o f the recent protocol o f understanding that the Government o f DRC signed with the Government o f China, reportedly up to $5 billion o f fmancing for transport infiastructure, mining concessions, and other investments.

- 34 -

implementing and rolling out the new payroll system, including in the provinces; (iv) redefining the roles, mandates, and organizational structures o f selected key public institutions; (v) assisting with development of mechanisms and systems for the transfer o f public servants to provincial and sub-provincial level, and; (vi) developing effective personnel management systems at provincial level.

Help manage the decentralization process. IDA in close collaboration with the EC, UNDP and bilateral donors wi l l focus on: (i) helping to develop the legal, financial and regulatory framework for a successful decentralization process, including for the planned administrative- territorial reorganization process; (ii) building capacity at provincial level, especially as regards public expenditure management; (iii) creating a professional and effective public service system at the provincial and local levels, and (iv); supporting provinces in the design and implementation of development projects at provincial level, under financing by the Caisse Nationale de Pe're'quation.

79. The Bank Group will continue to support demobilization of ex-combatants and their successful reintegration into civilian life.

Strategic element 2: Help consolidate macroeconomic stability and economic growth.

80. The Bank Group will support efforts to achieve high, sustained, and shared economic growth, by helping to:

Improve debt, inflation andfiscal management. IDA working closely with the IMF, wil l focus on increasing revenues and strengthening fiscal discipline in spending ministries; Ensure that the ground is laid for medium-term growth in the agriculture sector. The African Development Bank i s taking the lead in this area. IDA'S assistance wi l l focus on (i) reducing insecurity (through reintegration of former combatants); (ii) providing targeted support to farmers, including inputs and assets, to help increase production and productivity; and (iii) the delivery o f key agricultural services. IFC may also provide investments in agro- business. Improve natural resource management - in the forestry sector, through support to government policies and agencies for enforcement of strong environmental standards for logging and the involvement o f communities in monitoring forestry activities; and in the mining sector, by support for implementation of a sound regulatory framework, improving transparency, reform of GECAMINES, and defining a strategy and implementing a pilot program to deal with artisanal mining. Ensure that economic growth is not achieved at the expense of the long term environment damage. IDA wi l l manage a multi-donor trust fund to support forest governance, and support Government in i t s implementation of the Forest and Nature Conservation Sector Program, in order to bring more transparency and public participation to forest management and ensure more equitable sharing of benefits. Rehabilitate transport infrastructure. IDA wi l l focus f i rs t on the physical rehabilitation of roads to major urban centers, and on export corridofs from mining areas; and then on reforming the transport state-owned enterprises (SOEs), in coordination with ADB, AFD, the Belgian Cooperation, as well IFC, MIGA, and the Republic o f China.

- 35 -

Increase the availability of electricpower. The Bank Group will play a prominent role in the rehabilitation and expansion of generation, transmission and distribution systems and the reform o f the state-owned power company. IDA will also support central DRC’s role within the development o f regional networks, and IFC and MIGA will support private investment in the sector. Increaseprivate investment. IDA, with advisory support from IFC and MIGA, will focus on modernization of the legal and regulatory framework, and working with business associations to identify and remove regulatory or enforcement bottlenecks. Increase access to financial services. IDA will support completion of the ongoing financial sector reform; and will also set up transitional mechanisms to provide credit to the private sector in the interim period. IFC and MIGA will provide support to private banks interested in investing in DRC. Support private sector-led growth in manufacturing and services. The Bank Group i s expected to play a prominent role, to help leverage private finance for the massive investments needed. IDA will focus on key infrastructure and regulatory constraints to private sector activity; IFC will continue to provide financial support to reputable private investors, with a view to significantly scaling up its interventions; and MIGA will continue to offer guarantees to reputable private investors. Reform of public sector enterprises. Many o f these enterprises have not been subject to adequate oversight for many decades and a well designed and implemented public enterprise reform program i s central to ensuring sustainable and equitable economic development, and for crowding in the necessary private investment. As such, Bank Group assistance to this reform, including to individual enterprises, would be tied to a clear reform agenda whereby investment i s subordinated to reform steps that introduce commercial practices, and envisage, if possible, public private partnership.

Strategic element 3: Help improve the provision of social services and reduce vulnerability.

8 1. The Bank Group will support the social development priorities articulated in the PRSP, by helping to increase public spending in support o f key social sectors. In particular, IDA will help to:

Improve the overall education system in Congo, with support to Government to articulate its overall education strategy, and to identijy efforts in secondary, technical and tertiary education that complement the continued focus on primary education quality and coverage by strengthening the institutional and financial capacity of the sector and designing a results- oriented and fundable strategy for sector development. Increase access to health care by contracting independent service providers to oversee the delivery o f essential health services in targeted health zones; and developing a system to monitor and evaluate the performance of service providers. IDA will also help to identify financing options for the health system, strengthen the capacity of provincial and district health authorities, support malaria control interventions in coordination with the Global Fund, and help the Government promote family planning. Increase access to clean water and sanitation in urban areas, by supporting reforms to strengthen the performance, accountability, and financial viability of the state-owned water company; and by financing the rehabilitation o f damaged systems in selected cities.

- 36 -

0 Stabilize the social situation and improve the lives of vulnerable populations in urban areas, by financing the rehabilitation, development, and upgrading o f key municipal infrastructure; enhancing the delivery o f basic services in the poorest urban areas; supporting improvements in municipal management; and providing employment opportunities for urban poor through labor-intensive activities.

Strategic element 4: Help combat HIWAIDS.

82. Other donors will take the lead in this area I D A will work closely with the Global Fund to ensure effective implementation o f i ts operations, with a focus on supporting prevention efforts; improving the quality o f l i f e o f infected persons; and mitigating the impact o f the epidemic on vulnerable populations. Bank support will be provided through the ongoing IDA-funded HIV/AIDS Project.

Strategic element 5: Help promote community dynamics.

83. The Bank Group will support the work of other institutions with more experience in this area, such as the UN agencies. The Bank Group, through the ongoing IDA-funded Social Fund Project, will focus on ensuring the effective involvement o f communities in the preparation and implementation o f Bank Group activities that may affect them; and on helping to prevent the dispersion o f donor efforts, through active IDA participation in donor coordination mechanisms.

84. The Bank group is giving special attention to Indigenous Peoples.'2 As part o f this broader effort to reach Pygmy populations, the Congolese authorities, together with the Bank, have been analyzing the Emergency Social Action Project's experience in providing access o f poor and vulnerable groups to social and economic services - this i s being implemented through the Social Fund. During the f i rst phase o f the project (2002-2006) it had become clear that Indigenous Peoples were hardly benefiting from these investments. Consultations were undertaken with 655 Indigenous Peoples and representatives from NGOs in the context o f 19 workshops all over the country. The project i s now putting in place an outreach and capacity-building program to assist Indigenous Peoples' communities access and utilize project funds to obtain schools, health clinics, rural roads, and water points, based on their demands. I t i s also analyzing ways in which the project can strengthen the voice and participation o f Pygmy communities.

85. The forthcoming IDA-financed Forest Project, GEF Grant for National Parks, and the MDTF will seek to ensure that Pygmies enjoy equal access to rights and socio-economic opportunities resulting from the new Forest Code, such as the right to manage community forests and to benefit from social responsibility contracts. The forthcoming Agriculture Project i s expected to include similar provisions with regard to agriculture rehabilitation, while the new Road Sector Rehabilitation Project i s expected

l2 This i s in line with the Management Action Plan set forth in the November 5,2007 Management Report and Recommendation in Response to the Inspection Panel Investigation Report No. 40746-ZR, dated August 3 1, 2007. The Action Plan includes ongoing and future efforts for addressing Indigenous Peoples issues in the Congo Basin; remaining engaged in the forest sector o f the DRC; and continuing outreach about Bank sectoral work and lending.

- 37 -

to include an Indigenous Peoples Framework that builds on and expands work initiated under the Emergency Recovery Project.

E. Instruments for Bank Group Assistance

Managing the existing IDA portfolio

86. Achieving better synergies with the existing Bank porifolio. Most o f the ongoing projects are multisector emergency operations prepared under OP 8.00 (Rapid Response to Crises and Emergencies). Under this CAS, IDA expects to fully transition from emergency to more standard financing and institutional arrangements. In this context, early on in the CAS period, IDA staff will work with the authorities to restructure the portfolio, with the objective of strengthening capacity utilization, putting in place fiduciary controls that increasingly rely on government systems and institutions. This should help streamline project and program implementation, and free up both government and Bank resources to support new analytical activities and operations, and intensify IDA’S advice and technical support to mainstreamed government institution^,'^ in order to build more sustainable capacity for effective implementation.

87. Support for implementation of ongoing activities will remain the first and foremost priority for IDA. With about US$1.7 billion in commitments, the DRC program i s the third largest in Africa, and i t s effective implementation i s critical to getting results in the CAS period (projects already underway provide the most scope to translate into results on the ground in the coming years). As for other post- conflict countries in Africa and elsewhere, the portfolio i s being implemented in an environment where intense hands-on implementation support i s essential to achieve results and ensure transparency. Efforts will focus on improving overall portfolio performance and helping turn-around problem projects. While efforts to coordinate this work with other donors may lead to reduced IDA administrative costs over time, donor collaboration i s not expected to produce any net savings over the CAS period.

88. Particular attention will continue to be paid to fiduciary issues, including during the planned portfolio restructuring exercise. Bank management will highlight governance and corruption in its dialogue with the authorities, including ensuring that agreed recommendations from both the draft Public Expenditure Review and the INT report and the planned management audit o f BCECO are implemented in a timely fashion. The Bank takes a zero tolerance approach to misuse of i t s resources, and would ask the Congolese authorities to severely sanction cases of fraud.

89. I n this context, during the porifolio restructuring exercise I D A expects to review how best to mainstream project implementation, while safeguarding fiduciary oversight. To date, all IDA- financed projects are implemented through PIUs. One of these, the Bureau Central de Coordination (BCECO), has played a major role in implementation and in providing project implementation advice to other units. Line ministries have been involved in the design phase and as beneficiaries, but so far have been granted very limited fiduciary responsibilities during implementation. While the transfer o f responsibilities to line ministries i s desirable in principle, their current capacity i s generally

We will be experimenting, in some o f the new projects (e.g., Pro-Routes, Education), with the use o f PIUs integrated within the ministries.

13

- 38 -

inadequate to provide sufficient comfort on fiduciary issues. In an environment where the overwhelming priority i s to maintain fiduciary integrity, the CAS recommends a continued reliance on skilled and ring-fenced structures for all fiduciary matters. To the extent possible, line ministries should benefit from capacity building programs and gradually play a stronger role (e.g., for technical aspects of design or supervision, on a case-by-case basis) - but no fiduciary responsibility should be transferred before sufficient capacity i s in place.

90. IDA also intends to increase its implementation support in DRC, especially outside of Kinshasa. With a growing number of activities underway in the provinces, regular field visits are critical to ensure proper oversight o f IDA-financed activities. This is, however, no minor endeavor in a country with formidable logistical constraints. As indicated above, while direct Bank oversight i s feasible of large contracts (typically road works), it i s much less practical for either central government or financing agencies to oversee implementation of a multiplicity o f relatively small contracts (e.g., rebuilding a school in a rural district). Therefore, IDA wi l l leverage oversight in a number of ways, including agreement with the authorities on financing independent technical audits; mobilizing the provincial authorities’ support in making sure projects in their provinces deliver results; reaching out to other donors for joint oversight and providing support to networks such as religious organizations capable o f channeling feedback from beneficiaries.

9 1. I n parallel, IDA will strengthen its Monitoring and Evaluation (M&E) systems. In line with the AAP recommendations, IDA intends to update the M&E frameworks for ongoing projects during the planned portfolio restructuring exercise in 2008, with a view to making use o f new information, processes and performance measurement, since their approval. IDA wi l l continue to pay attention to improving the reliability o f the results framework of new operations, bearing in mind that data and data gathering are not optimal and system wide improvements wi l l take time.

92. Effective portfolio management requires a strong presence in the jield. The Country Office i s playing a key role in this respect. Finding the right internationally- and locally- recruited professional staff for the workprogram, based in Kinshasa, has proven difficult. While there has been progress, more can be done to get more high qualified staff, and ensure they have the authority and the support to do their work. IDA i s committed to a three-tier approach: locating in Kinshasa the Country Director, along with additional experienced technical staff, eg in infrastructure, portfolio management, financial management, share technical staff already in the region within easy travel distance from DRC, and maintain a strong support capacity at Headquarters. The CAS evisages that the DRC office staffing wi l l grow gradually along these lines and with due attention to maintaining the quality o f the team.

Carrying out IDA analytical work

93. As recommended in the AAP, IDA will deepen its analytical and advisory work in DRC, together with development partners, to support strengthened, result-oriented national strategies.

- 39 -

94. The CAS proposes a shvt in the focus of IDA’s analytical work. In the immediate re- engagement period, the focus was rightly placed on rebuilding a knowledge base and agreeing with the authorities on broad strategic approaches for each sector. A key focus of IDA’s analytical resources wil l be devoted to governance-related work in FY08, specifically finance public management and decentralization (see Table 2). Starting also in FY08, IDA wi l l broaden the analytical focus to general economic work, to help the country update i t s medium-term development strategy, with an average of three deliverables per year, comparable to the average o f three for past three years.

Fiscal Year FY08

FY09

FYI0

FYI1

Proposed Program Financial Sector Assessment Program (FSAP) Public Expenditure Review (PER)I4 Programmatic Governance: Phase 1 Youth Education Study Country Financial Accountability Assessment (CFAA) Programmatic Governance: Phase 2 Public Enterprise Review Risk and Vulnerability Assessment Study Country Economic Memorandum

Infrastructure Review

Health Country Status Report

Export Crops Study

Poverty Assessment

95. An indicative list of the proposed AAA is provided in Table 2. This l i s t may be adjusted during the CAS implementation period, especially for the outer years, to respond to evolving Government priorities and needs, in a rapidly-changing environment:

Rebuilding the knowledge base: The Youth Education Study (FY08) i s f i rst phase of a study on education and ski l ls training opportunities for youth in DRC. This f irst phase consists o f an analysis of statistics on formal secondary schooling, together with discussions with key informants on the education and ski l ls requirements of new entrants to the labor force. The Health Country Status Report (FY09) wil l examine changes in health indicators and determinants since 2000, with a view to forging consensus on a sector wide approach to support for the sector. HIV prevalence data wil l be closely examined to inform programming in that sector. Risk and Vulnerability Assessment Study (FY09) wi l l analyze the constraints - social, geographic, economic, and legal - that hinder the participation of vulnerable groups (including pygmies, women who experience violence and the handicapped) in economic growth and make recommendations on how best to address them.

~~

l4 A Public Expenditure and Financial Accountability (PEFA) wi l l be repeated yearly.

- 40 -

Supporting governance reforms: Public Expenditure Review (FY08). This i s designed to engage the authorities in a substantive dialogue o n ways to improve the use o f Government’s resources to finance poverty reduction programs and ensure effective use o f potential future budget support’’. Governance (Phase I) (FY08). This i s designed to assist the Government build a governance system to deliver key public services effectively. This wil l be an input to implementation o f the Governance Contract by providing analytical input on the four priority cross-cutting governance issues - public service reform, decentralization, transparency, and public financial management. Financial Sector Assessment Program (FY09). This wil l take stock o f progress in implementing early reforms in the sector and chart a course o f action to re-establish effective financial intermediation in at least some parts o f the country. Country Financial Accountability Assessment (FY09). This will look at progress since the FY05 report and identify areas for priority action. Governance and Public Service Delivery (Phase I . (FY09). It will continue to assist the Government in addressing key challenges to building a governance system in line with their Governance Contract.

General economic work: 0 Poverty Assessment 11 (FYI 1) aims to provide a detailed overview and understanding o f

poverty in DRC and a solid statistical baseline and trends over the CAS period. Public Enterprise Review (FY09). This wil l take stock o f recent public enterprise reforms, and recommend further action, as necessary. This wil l address questions posed in the ESW published in 2003. Country Economic Memorandum (FY 10). This will focus o n shared growth challenges and opportunities for DRC as it moves farther f rom the post-conflict period. Infrastructure Review Report (FY 10). This wil l review infrastructure services, evaluate performance and institutional arrangements, and recommend pol icy changes to help improve infrastructure services. Sub-sectors that may be included: telecommunications, electricity, water and sanitation, roads, airports, aviation, ports and shipping. The Export Crops Study (FY 1 1). This will provide a diagnosis o f key elements o f the DRC’s efforts to enhance agriculture performance.

0

IDA financing

96. The preferred strategic choice is to continue to provide a high level offinancial assistance to DRC consistent with IDA rules. Alternative options could emerge as a result o f backsliding on governance or o n economic management, or an alternative development strategy pursued by

l5 Timing o f budget support operation depends on authorities’ progress in improving fiduciary controls and strengthening public fmancial management, as demonstrated by concrete reform results. The draft PER (08) provides useful milestones over an 18 - 24 month period for this purpose: (i) compliance with budget calendar and preparation o f realistic budget reflecting sector priorities; (ii) removing manual steps to expenditure circuit (la chaine de la dkpense) to reduce the processing time for normal expenditures; and (iii) limiting the use of emergency procedures to true emergencies.

- 4 1 -

mortgaging i t s future natural resource revenues. Depending on the seriousness o f the backsliding, this could result in the WBGroup’s partial or full disengagement. Absent significant backsliding, partial disengagement i s not a recommended option, as it would reduce IDA’S leverage and impact, without substantially reducing i t s exposure in the short-term (since there i s a large portfolio under implementation). It could be seen to contribute to weakening the peace process and regional stability. Full disengagement would send a strong signal o f disconnect between the authorities and the Bank on i t s development strategy and performance, something not warranted by the economic reforms and - albeit limited - progress, and also unnecessarily weaken a yet untested Government. I t would likely have a significant impact on private sector behavior and on other international partners who would be hard pressed to understand such action. It would significantly weaken what has been an internationally-supported and relatively successful political process at a critical moment. The risks associated with this approach are very high for DRC as well as for the Bank’s reputation. Neither option i s recommended.

97. As recommended in the CAS, the appropriate level o f IDA support during this period would strictly adhere to the IDA allocation rules. As a post-conflict country, DRC receives exceptional financial support from IDA, above what it would receive under IDA’S Performance Based Allocation System. Beginning in FY07, however, exceptional support started to be phased out. In FY08, IDA i s providing around SDR 148.5 mil l ion to DRC, after accounting for some front-loading o f resources under IDA 14. Going forward, IDA post-conflict supplemental allocation to DRC will continue to be phased out, to reach normal performance-based allocations during the CAS period. l6 Finally, since DRC i s in debt distress, it wil l receive i t s allocation in the form o f grants. To the extent DRC became eligible for additional forms o f IDA financing under IDA 16, the financing envelope would be adjusted accordingly.

98. A second strategic choice is to adjust thefinancing instruments used in DRCgoing forward, on the basis o f lessons learned and changes in the overall environment. Firstly, all new IDA-financed programs and projects i s expected to incorporate a strong reform component (beyond reconstruction activities). As a consequence, it i s expected to have few or no multi-sector operations beyond the possibility o f general budget support, and focus on sector specific programs and projects. Secondly, there appears to be no foreseeable rationale for new emergency projects processed under OP8.0 (on rapid response to crises and emergencies), unless the situation in eastern Congo deteriorates significantly. Adaptable Program Loans (APLs) may be used, with care taken to avoid major implicit commitments for the post-CAS period when the IDA allocation wil l be reduced. Also, to build on success, additional financing will be systematically considered for well-performing operations in need o f follow up. Thirdly, in order to focus limited Bank administrative resources, it i s unlikely that small grants (under the Post-Conflict Fund or the Institutional Development Fund) w i l l be used. And finally, project and program design will make full use o f the flexibility allowed under the new Country Financing Parameters, and place a strong emphasis on promoting transparency and accountability.

99. Overall, IDA expects to finance a series of operations in the years FYO8-FYI1 in support of the CAS strategic objectives. A l i s t o f these operations i s provided in Table 3, which may be adjusted

Under IDA 15, the post-conflict phase-out period may be extended from the current three to six years. If this happens, DRC may receive exceptional support fiom IDA for another three years, in l ine with i t s performance. 16

- 42 -

during the CAS implementation period, especially in the outer years, in order to respond to evolving Government priorities and needs.

A series of sector investment and Development Policy operations will focus on key sectors and economic policies in areas o f major Bank engagement. In addition to a strong economic and sector policy component, each o f these projects i s expected to incorporate governance concerns, as relevant. Planned operations include the following:

Governance Capacity Enhancement (FY08). This will support the Government in addressing four cross-cutting governance issues by: (i) enhancing accountability at central and provincial government level, (ii) strengthening public financial management and public service management at central government level; and (iii) establishing functioning public financial management and public service management systems at the provincial government level. Roads Rehabilitation and Maintenance (FY08). This complements a large Dfl D-funded, Bank-administered Trust Fund. I t supports re-establishment o f viable road maintenance systems, and re-opening o f sections o f the primary road network.

- Additional financing/Repeaters (FY08): Disarmament, Demobilization, and Reintegration (DDR); Electricity (notably to increase access and generation capacity); private sector development; and South Power Pool Project. Forest Sector (FY09). This expects to finance technical assistance and capacity building efforts to support effective implementation o f reforms, and sustainable forest use, and seek to ensure Pygmies enjoy equal access to rights and socio-economic opportunities resulting from the new Forest Code, including the right to manage community forests and to benefit from social responsibility contracts. Water Sector Rehabilitation (FY09). This supports reform o f the water company (R6gid6so) and finances key investments required to improve clean water access rates. Mining Sector (FY09). This supports technical assistance and capacity building efforts to ensure effective implementation o f reforms, and i t s design will benefit from the Economic Sector Work on the Mining Sector completed in FY08.

- Economic Management Technical Assistance (FY09). This i s designed to help strengthen capacity o f the Central Government to manage the economy. This capacity, low in DRC prior to the war, was further eroded by years o f conflict and neglect. Specifically, the project aims at strengthening the Central Government capacity to: i) collect and manage statistical systems on national income accounts and provincial data on poverty and consumption patterns; ii) undertake studies on macroeconomic management and structural reforms; iii) manage public finances and administrative system; and iv) undertake public procurement reform. Multi-modal Transport (FY 10). US$180 mill ion to support restructuring o f key public sector transport enterprises, to reduce obstacles to economic activity (including ONATRA, which needs to significantly improve management o f DRC’s only sea port, Matadi; and SNCC, which operates vital rail links in the southeastern part o f the country). This operation i s expected to be coordinated with other donors such as the ADB (SNCC) and’the AFD (N’djili airport), and could undergo significant adjustment also in light o f planned Chinese investments in the transport sector. Agriculture (FY10). This i s designed to a) help restart production in selected areas, mainly hinterlands o f major cities, and b) prepare for medium-term reform o f the sector.

-

-

-

-

-

-

-

- 43 -

Urban Rehabilitation and Development (FY 10). This aims to improve living conditions and access to services in key urban areas.

Budget Support (FY 10) i s expected to support implementation o f the two key pillars o f the PRSP with which the World Bank Group i s engaged - governance and shared growth. Prior to an assessment o f the status o f public expenditure management reforms recommended in the draft PER, provision o f budget support would entail significant fiduciary risk for the WB, notwithstanding clear financial needs. Power Expansion Project (FY 11) will be a follow-up to the Regional and Domestic Power Market Development. An Education SWAP (FY 11) to further improve the performance o f the sector while enhancing harmonization among donors. The Bank contribution will mainly focus on vocational and tertiary education. A Health SWAP (FY 11) to improve performance o f the sector while enhancing donor harmonization and the capacity o f government institutions. A series of additionally financed activities (FY 11) in critical sectors, tentatively in governance and Social Fund, subject to the performance o f the corresponding projects.

Table 3. Proposed IDA Operations FYOS-FY11

*Tentative amounts for IDA 16period (FY09 -FY11), to be adjusted on basis ofIDA allocations.

F. Scaling Up IFC activities

100. IFC’s new growth strategy in Sub-Saharan Africa is to increase significant@ the Corporation’s reach and sustained impact in more frontier countries where the private sector can perform a crucial role in job creation, restoration o f infrastructure, stabilization and economic growth. IFC i s well-placed to be a catalyst for accelerating private sector involvement in the critical early years following conflict, by introducing innovative ways to mitigate risk, helping improve the

- 44 -

investment climate, building micro, small and medium enterprises (MSME) capacity and mobilizing local and foreign investors. To this end, IFC, after funding approval by the Board in June 2006, i s launching a pilot post-conflict initiative in the DRC following joint WBG diagnostic missions. The outcome i s an action plan for increased IFC involvement through combined advisory, technical assistance and investment operations. The DRC post-conflict initiative encompasses all three pillars o f the IFC Strategic Initiative for Sub-Saharan Africa approved by the board in August 2003, namely: (i) improving the investment climate, (ii) pro-active project mobilization, and (iii) enhanced support for micro, small, and medium-sized enterprises (MSMEs). I t s main features are as follows: (i) launching quickly, but staying for the longer term; (ii) improving access to finance through MSMEs and Trade Finance Programs; (iii) working through partnerships and collaboration with donors, NGOs and other partners to build synergies and minimize overlaps, to attract investors.

101. The post-conflict initiative has three phases. Phase I, which i s completed, consisted o f identifying short, medium and longer term priorities and actions to rebuild the private sector with joint scoping missions undertaken by sector teams in infrastructure, financial markets, mining, general manufacturing, MSME development, investment climate and advisory services. Phase 2 has begun with the formation o f a new government and will involve, security permitting, a small IFC team located in W B offices in Kinshasa with the primary objective o f refining the proposed initiative and judging timing to move into the next phase. Phase 3 will involve the actual posting o f an IFC team to fully implement programs resulting from opportunities identified in Phase 2.

102. programs are currently at an advance stage o f preparation and/or being implemented:

A number of opportunities have been identified by joint scoping missions and the following

An airport advisory project has been approved by IFC’s corporate investment committee, paving the way for IFC to seek an advisory mandate for private-public partnership (PPP) in management o f Kinshasa’s airport facilities. This will form part o f broader Bank Group support to the sector, particularly the IDA-financed Multi-modal Transport Operation, which aims to renovate the country’s transport infrastructure through public-private partnerships (PPPs). IFC’s advisory team,’ drawing on specialist expertise from the World Bank as needed, will provide advice on transaction structuring issues, while at the same time coordinating with donors and consultants working on related areas such as regulatory reform and physical rehabilitation o f the facilities.

0 An MSME development project consisting o f capacity building, access to information and advisory services aimed at supporting micro, small and medium size enterprises has been approved for launch by IFC and i s awaiting recruitment o f staff before implementation.

0 A trade finance facility to support the operations o f Rawbank, a local Congolese bank, has been approved by IFC, committed and i s being implemented.

0 A subordinated facility (Tier I1 Capital) currently being committed, has been approved to enhance the networth o f Stan bic (local subsidiary o f standrard Bank o f South Africa)

103. I n the implementation of this initiative, IFC anticipates synergies as well as cooperation to enhance Bank Group assistance to DRC in a number o f areas, including: (i) pursuit o f joint World

-45 -

Bank, IFC and MIGA collaboration to support the energy sector; (ii) consolidation o f work being undertaken by the World Bank, IFC PEP-Africa, FIAS and MIGA with ANAPI and to expand WBG scope with a joint effort to help improve the business environment; (iii) coordination in the financial sector and MSME development assistance by consolidating work undertaken under IDA’S private sector enterprise support project and IFC’s PEP Africa and Financial Markets operations to support investment and non investment activities in the two sectors; (iv) consolidation of joint IDA and IFC support to the mining sector with focus on implementation of the mining code and the EITI initiative, and the development of a supply chain program; and (v) pursuit of,joint IFC and MIGA promotion in the telecommunications and mining sectors to support planned investments by mobile phone operators and mining companies.

G. Expanding MIGA activities

104. I n the 2008-2OI1 Period MIGA will need to step up its activities in the areas of both guarantees and technical assistance. In terms of guarantees, MIGA has spent much o f the last year putting together a growing pipeline o f potential future projects. Prominent sectors o f likely guarantee support are infrastructure (power, telecommunications), mining, agribusiness, manufacturing, and services. MIGA hopes to supports i t s f i rst project in the infrastructure sector (power, telecommunications) in FY08. The largest part of MIGA’s growing pipeline is, however, in the extractive area (specifically mining). Experience to date in this sector i s mixed. Going forward, MIGA will be working very closely with the Bank and IFC on mining projects to ensure that all aspects o f the Extractive Industries Review (EIR) and EITI initiatives are met before bringing such projects to Board for consideration. On the technical assistance front, MIGA will be stepping up i t s engagement with ANAPI to increase foreign investment in the country. MIGA will do this through working with ANAPI to expand i t s capacity as well as improve i t s on-line services to potential investors.

H. Strengthening Donor Coordination

105. The CAS proposes that IDA continues to play a leading role in efforts aimed at donor mobilization and harmonization. Such efforts are key to ensuring adequate financing can be provided to face the challenges o f economic recovery, and deployed in ways that make synergies possible, and hence enhance effectiveness. IDA’S role includes organization and co-chairmanship of annual Consultative Group meetings, participation in various donor groups (including sector and thematic groups) in Kinshasa, as well as contributing to the institutional mechanisms that may be put in place by the Government to follow up on implementation o f the Governance Contract.

106. The CAS envisages IDA support to the Government to strengthen its capacity to coordinate donors. The shift o f coordination responsibilities from external partners to the Government i s an objective o f the overall assistance program, and i s critical to the eventual success o f the recovery process - in this context the mainstreaming of PIUs i s a necessary if insufficient step. Additional efforts are needed to strengthen and consolidate the Government’s policy analysis, program design, budget implementation and monitoring and evaluation capacity. IDA support, while expected to remain modest in size, i s designed to help build the necessary skills and institutional mechanisms for the Government to take over the coordination of external partners in a professional and effective manner.

- 46 -

107. Finally, the CASproposes that IDA make a determined effort to harmonize activities at both the general budget and sector levels. At the strategic level, this could be realized by building on the CAF process to help deepen the definition of Government-led, common strategy around which donors would align their sector support, as well as eventually and potentially, general budget support. At the operational level, it could be achieved through development and generalized use o f SWAPS, joint financing mechanisms, including Trust Funds (as i s already the case in the forestry sector, and i s expected to be developed also in the roads sector), joint implementation and oversight activities and joint reporting mechanisms. In addition, the joint CAF results matrices will be used as a monitoring tool throughout the CAF period. The specifics o f the monitoring processes are expected to be decided, collaboratively, in coming months.

I. Monitoring and Evaluation: The Results Agenda

108. The focus of this CAS on governance reforms should result in significant improvements in the management and transparency o f natural resources and other public revenues. The focus on shared growth and poverty reduction should lead to enhanced income opportunities and access of disadvantaged groups to social services. As i s usual in post-conflict countries, time inconsistencies and lags, and the lack o f a strong monitoring and statistical framework, make the choice of quantitative outcome indicators quite difficult.

109. period will be monitored as follows:

Taking these factors into account, progress in these two strategic elements during the CAS

Improving Governance. Improvements in the management and transparency o f natural resources will be measured by the increase o f revenues from the natural resources, improvement o f transparency in the management o f natural resources (e.g. publication of mining/forestry concessions titles), a restructured public service (delivers public services in key sectors), increase o f functioning decentralized entities, functioning of public enterprises. Progress on public expenditure management will be evaluated by yearly Public Expenditure and Financial Accountability (PEFA) assessments, using the review completed in 2007 as the baseline.

0 Shared growth. Progress in this area will be measured through a combination o f output and outcome indicators. Among the most important will be the proportion of government resources used for pro-poor programs, using 2008 budget execution figures as a baseline; access to health services in targeted areas; primary school enrollment and completion rates, using 2005 data as the baseline; and data on access to services in rural and urban areas, using the 2006 Poverty Note as baseline. Progress will also be assessed on the basis of functioning infrastructure systems (e.g., roads, ports), increased in the level o f investment from the private sector (including in the mining and forestry sectors)

110. Tracking these results indicators will depend on the existence of a robust monitoring and evaluation system in the key ministries and sectors responsible for implementing the development interventions. The monitoring framework of the PRSP i s being strengthened and Bank support to improve the country’s currently weak statistical capacity i s envisaged. The CAS results framework i s

- 47 -

closely aligned with the PRSP objectives and indicates the C A F outcomes that the Bank intends to contribute to. The CAS results framework (see Annex 4) has been designed bearing in mind the difficulties in obtaining reliable data. At the CAS progress report stage, the results framework will be reviewed to ensure that it remains relevant and that the indicators selected are indeed effective in monitoring progress.

- 48 -

PART B.3. MANAGING R I S K S - THE WORLD BANK GROUP

PART B.3. MANAGING R I S K S - THE WORLD BANK GROUP

1 1 1. As noted in Part A.3, engagement in DRC is a high-risk, high-reward strategy, and though the same set of risks is common to all donors under the CAF, each donor will manage the specific risks to its own assistance program In the case o f the Bank Group, risk management w i l l be proactive and integrated into the design o f every operation. Risks will be mitigated through strong supervision and fiduciary controls; an increased presence o f Bank Group staff on the ground, intensive and ongoing dialogue with stakeholders; participatory decision-making in project design and implementation; and attention to the needs traditionally marginalized groups that could be a source o f social unrest, including small-scale operators in forestry and mining. Table 4 shows the Bank’s risk management approach in relation to that o f other donors.

- 49 -

s . & .I

t

l-

L

B g .- Y

0 *

I

I

m IA

I

I '

I

d IA

I

ANNEX 1: POVERTY PROFILE ANALYSIS - Summary

POVERTY IN THE DEMOCRATIC REPUBLIC OF CONGO @RC) .

1. This summarizes a report by Bank staff as a contribution to the Poverty Reduction Strategv of the DRC government. The DRC authorities have made a substantial effort over the last few years to collect data at household level in order to provide information on poverty and other MDG-related indicators and thereby inform the PRSP. The Bank has prepared a poverty diagnostic building on those data. Five key findings emerge from this analysis.

2. First, the report confirms that poverty is massive in DRC. Poverty measures based on the 123 survey implemented in 2004-2005 indicate that close to three fourth o f the population i s poor (Table 1). International comparisons also show that the DRC i s one o f the poorest countries in the world, with most people in rural areas not only poor, but also likely to suffer from low levels o f education and high health risks. Data on food consumption circa 2000 are strikingly low, even if one would expect the situation to have improved somewhat in recent years, at least outside conflict-prone areas. Another indication o f mass poverty i s the fact that health and education indicators have been fairly flat across the bottom three or four quintiles, particularly in rural areas, suggesting a similarly bad socio-economic situation for the overwhelming majority o f the population. Even some indicators in the highest quintile are s t i l l low by any international standard. Given that poverty i s much more likely if heads o f household or spouses are working in agriculture (versus self-employment or salaried work), one cannot escape the conclusion that rural poverty i s highly generalized.

Table 1 : Poverty Measures at the National Level and by Area, 2004-2005 Population Headcount

share index (YO) (%)

National 100 71 Urban Rural

31 69

61 75

Source: World Bank, Afristat and UPPE, based on 123 survey for 2004-2005.

3. Secondly, although poverty is massive, there are differences between geographic areas in terms of its intensity. Regional differences in indicators are presented in several places in the report. The analysis o f wealth conducted with the 2001 MICS2 survey suggests that households residing in Kinshasa and Bas-Congo were better-off than the rest o f the country , which i s in line with most perceptions and other data. Rural areas o f the Kivus in the MICS2 survey also seem to be better-off than at least some other rural areas.

4. Thirdly, lack of education and employment are key determinants of poverty. Employment and education are two main determinants o f the wages or earnings o f individuals, and o f the overall consumption level o f households. However, the returns to education appear to be low, especially in rural areas. In addition, most o f the population i s self-employed, due to the weaknesses o f the formal sector, both in public administration and in private f irms. Unemployment i s high, especially in urban areas and among young workers, and i s a source o f concern both for poverty and social stability.

5 . Fourthly, the impact of the conflict (and of the prolonged economic decline of the last few decades and the lack of security) has been large. As expected, the population has been severely affected by the war, both in terms o f past economic, social, and health effects, but also in terms o f

current psychological wellbeing and perceptions of the future. Ending the war i s one of the most frequently-cited ways poverty can be reduced, and increasing security i s one of the more frequently cited priorities for the state.

6. Fifihly, both the high private cost of education and health services and the lack of quality warrant government intervention. The private costs of education and health are high, especially for the poor. Affordability repeatedly comes up as the main reason for not sending children to school, not maintaining them in school regularly, or having them drop out. This does not mean that affordability i s the only issue as important questions are raised about quality as well. The findings for health are similar: affordability comes up as the main reason for not seeking care, or not following up on prescribed medical treatment. Again, there are also quality issues, but improving affordability i s essential for households in poor areas. Better affordability could also yield large externalities in terms o f other benefits, given the negative impact o f bad health on a range of other outcomes.

7. Future analytical work and monitoring and evaluation of PRSP implementation will need continued efforts in terms of data collection and analysis. The Bank’s report on poverty provides a basic diagnostic and an analysis o f the perceptions and priorities of the poor that has been used in the PRSP. The analysis remains limited however. While the available sources of data provide clear pointers, additional efforts need to be implemented to improve the information base on poverty, vulnerability, and the social and productive sectors. Two Poverty Assessments are planned over the CAS period, one to be published in FY09, the other in FY 1 1.

- 2 -

ANNEX 2: PROGRESS STATUS OF TRIGGERS FOR REACHING

THE FLOATING COMPLETION POINT (As o f November 2007)

Triggers

1. PRSP Completion o f a full PRSP through a participatory process and i ts implementation for one year, duly documented in the DRC’s annual progress report, and confirmed as satisfactory by a joint staff advisory note (JS AN).

2. Macroeconomic stability Continued maintenance o f macroeconomic stability after reaching the decision point, as evidenced by satisfactory performance under a program supported by an arrangement under the IMF’s PRGF.

3. Use of budgetary savings resulting fiom enhanced HIPC Initiative- related debt service re l i e f during the interim period for poverty-related expenditures in accordance with the I- PRSP, with supporting documentation satisfactory to the staffs o f IDA and the IMF. 4. Public expenditure management (a) Implementation o f a modernized budget-execution system, providing information fiom commitment to payment, and allowing for the monitoring of arrears:

Progress status

Ongoing. The full PRSP was completed through a participatory process, and was adopted by the government in July 2006. The PRSP and the JSAN were presented to the Bank Board in May 2007 and the Fund Board in September 2007. The document i s being disseminated: flyers in four local languages are being prepared; dissemination workshops were held. The implementation plan for the strategy was endorsed by sectoral ministries, NGOs, and civil society. A priority action program (PAP) 2007- 08 was developed in collaboration with development partners and sectoral ministers. to start imdementing the PRSP.

Improving. Macroeconomic stability deteriorated during the period leading up to and after the elections. After the duly-elected government took office in early 2007, macroeconomic indicators improved as the new government tightened the fiscal discipline. However, the State Budget 2007 (promulgated mid-2007) used unrealistically high revenue projections to justify higher expenditures, notably for Parliamentarians’ salaries. Even though the government announced i t s intensions to stick to the more realistic budget that was agreed with the IMF, the fiscal discipline started to weaken in the second half o f 2007 as social pressure mounted. The government i s working to improve the situation, and i s discussing the 2008 budget with the Fund team, with the possibility o f starting negotiations for a new PRGF arrangement as earlv as December 2007.

Satisfactory. The use o f budgetary savings fiom the enhanced HIPC Initiative i s aligned with the priorities expressed in I-PRSP and PRSP. The government continues i t s efforts to use HIPC savings to finance spending in the areas o f health and education. These social sectors have received a large share o f the pro-poor spending since 2003 : the budget executed for these sectors has increased from 0.7% o f GDP in 2003 to 2.6% in 2006. An external audit o f the HIPC account was completed recently.

Ongoing. (a) The budget-execution system i s improving. A modernized budget execution system capable o f providing information from commitment to payment i s in place. Monitoring for arrears wi l l be possible once the accounting system i s f i l l y functional, and Treasury accounts, describing the financial flows and account balance, are produced automatically in real time. Currently, the Treasury accounts are produced monthly but s t i l l manually, and are not yet exhaustive or reliable. Ministry o f Finance needs to redouble the efforts meet this trigger.

(b) The double-entry system i s being implemented. The staff have

- 3 -

Triggers

(b) adoption and implementation o f a double-entry government accounting system and a new chart o f accounts; and (c) Production o f quarterly budget execution reports using economic, administrative, and functional classifications.

~ ~ ~~~

5. Governance and service delivery in priority sectors

0 (a) Completion o f a budget-tracking exercise on health, education, rural development and infrastructure expenditure, consisting o f (i) monitoring the execution o f poverty-related public expenditure; (ii) evaluation by user groups o f the quality o f related public services, and (iii) evaluation by service- providers of constraints to effective provisioq; and

(b) Adoption and implementation o f a new procurement code and key implementing decrees.

6. Social and rural sectors Adoption o f sectoral development strategies and related implementation plans for health, education and rural development, which are satisfactory to IDA. 7. Debt management Installation and full activation o f a computerized debt-recording system, covering public and publicly-guaranteed debt that can (a) produce monthly debt- service projections, and incorporate actual disbursement and debt-service payment execution data; (b) produce advance monthly debt-service projections that wi l l be published quarterly; and (c) support the centralization o f debt information into a single center.

Progress status

been trained, equipment purchased, and software developed. Ministry o f Finance, Central Bank, and the Tax agencies need to redouble their efforts to make the system fully operational.

quarterly budget execution reports are produced using economic, administrative, and functional classifications. However, l ine ministries do not prepare sectoral budget execution reports systematically. Ministry o f Budget prepares the general budget execution reports @tats de suivi budgetaire, or ESBs) automatically using the Budget-Treasury's unique database. For this reason, and because the accounting system i s still not fully operational, the production o f ESBs remains irregular and o f uneven a ualitv .

0 (c) International standard classifications have been adopted. The

~~~~ ~~

0 Partially done, possible problems. (a) An evaluation by user groups o f the quality o f public services on health and education has been conducted (World Bank: IGR 2005), and found (i) user fees (ii) poor quality o f the service (iii) inaccessibility due to lack o f roads and distance to the nearest facility as major problems. In particular, user fees were found to cover not just the service providers (e.g. schools and clinics), but also to subsidize the (extremely low) remunerations and operating costs o f local administrations. A budget tracking exercise for these two sectors are planned to be completed in 2008. However, neither the user surveys nor budget tracking exercise has been conducted or even planned for rural development and infrastructure sectors: possible need to review what exactly would be useful and feasible for these sectors.

(b) The draft procurement code was adopted in April 2006. The application laws were validated in October 2006. The fmal version o f the code and the laws need to be adopted by the Council o f Ministers, then by Parliament. After adoption, the last step i s to put in place institutions compatible with the new code, and to make them operational.

implementation plans are adopted for health and education. An agriculture sector review was completed in May 2006. The rural development strategy i s under preparation.

0 Almost complete. Sectoral development strategies and related

Partially done. A computerized debt-recording system covering public and publicly guaranteed debt (DMFAS) was installed, and relevant staff has been trained. The database o f public debt compiled using the system st i l l contains errors (as o f September 2007), and it does not cover publicly- guaranteed debt. The debt management agency (OGEDEP) does not yet publish the debt service projections. OGEDEP also does not play the role o f the single debt information center. Ministry o f Finance must exert further efforts to sensitize all parties involved in any matters concerning public and publicly guaranteed debt to treat OGEDEP as the single information center (or to designate another entity to fulfill this task).

- 4 -

ANNEX 3: EXTERNAL AND PUBLIC SUSTAINABILITY ANALYSES (DSA)

INTERNATIONAL MONETARY FUND AND INTERNATIONAL DEVELOPMENT ASSOCIATION

DEMOCRATIC REPUBLIC OF THE CONGO

Joint FundNorld Bank Debt Sustainability Analysis 2007l

Prepared by the staffs o f the International Monetary Fund and the International Development Association

Approved by Robert Corker and Mark Plant (IMF), and Sudhir Shetty and Vikram Nehru (IDA)

August 2007

1. The Democratic Republic of the Congo (DRC) is in debt distress. At end 2006, debt service on public and publicly guaranteed (PPG) external debt amounted to 26 percent o f exports while the net present value (NPV) o f PPG external debt exceeded 300 percent o f exports, 90 percent of GDP, and 700 percent o f government revenue. As a result, most debt burden indicators substantially exceed their policy-based thresholds under the baseline scenario.2 Further, the DRC has not serviced any o f i t s debt service obligations to Paris Club creditors since July2006. Even if the security situation stabilizes and macroeconomic and structural policies improve substantially as assumed under the baseline scenario, external debt indicators will remain above the relevant policy-based thresholds for many years to come and even worsen in the event o f adverse exogenous shocks. Accordingly, the DRC should seek external financing mainly in the form o f grants. It should strengthen i t s track record o f policy implementation with a view to reaching the completion point under the enhanced HIPC initiative as soon as possible, which would allow it to benefit from substantial stock-of-debt relief under this initiative as well as the Multilateral Debt Reduction Initiative (MDRI).

This i s the first debt sustainability analysis for the DRC prepared under the joint World Bank/IMF Debt Sustainability Framework for Low Income Countries. Bank and Fund staffs also completed a HIPC DSA jointly in July 2003 when the DRC reached i t s decision point under the enhanced HIPC Initiative. (“Democratic Republic of the Congo - Decision Point Document for the Enhanced Heavily Indebted Poor Countries (HIPC) Initiative ’I, EBSl031267 and IDA/R 2003-0059) This is, however, the f i rst DSA that establishes a debt distress rating for the DRC.

* The World Bank’s Country Policy and Institutional Assessment (CPIA) rates the DRC as a low performer. Under the joint World Bank/ IMF debt sustainability framework, the corresponding thresholds are 30 percent for the NPV of external PPG debt to GDP ratio, 100 percent for the NPV of external PPG debt to exports ratio, 200 percent for the NPV of external PPG debt to revenue ratio, 15 percent for the external PPG debt service to exports ratio, and 25 percent for the external PPG debt service to revenue ratio. (“OperationalFramework for Debt Sustainability Assessments in Low-Income Countries - Further Considerations”, SMl05/109,3/29/05 and IDNR2005-0056). Assuming the DRC reaches the HIPC completion point by mid-2008 and benefits from debt re l ie f under enhanced HIPC and the MDR initiatives, debt burden indicators would fall below policy-based thresholds.

1

- 5 -

Background

2. Three decades of economic mismanagement, culminating in civil strye, led to the accumulation of a large stock of external arrears3 At end-2001, the DRC’s arrears on PPG external debt amounted to US$10.6 billion. Clearance of close to US$2 billion of arrears to multilateral institutions and progress in stabilizing the macroeconomic situation, followed by the approval of a PRGF arrangement in July 2002, paved the way for the HIPC decision point in 2003. At the decision point and based on the outstanding stock of debt at end-2002 o f US$8.4 billion in NPV term^,^ HIPC debt rel ief to the DRC was estimated at US$6.3 billion in NPV terms.

3. At the time of the decision point, it was assumed that the DRC would reach the completion point shortly afier the end of the PRGF arrangement, in the third quarter of 2006. However, substantial policy slippages towards the final phase of the democratic transition prevented the completion of the last review under the PRGF arrangement, which had been extended to end- March 2006. Since then, Fund staff has helped the authorities design and monitor two Staff Monitored Programs (SMPs) ’ , with a view to strengthening economic policy implementation and allowing for the development of a credible medium-term program to be supported under a successor PRGF arrangement. The DRC also completed and adopted officially a full PRSP in July 2006 and has made progress towards meeting the HIPC completion point triggers. Completing the first review under a new PRGF and satisfying the HIPC completion point triggers would pave the way for the DRC to reach the completion point, possibly by mid-2008, and hence the delivery of the remaining HIPC and MDRI debt relief.

~~

The DRC faced negative growth rates over 13 consecutive years, leading to a dramatic decline o f GDP per capita (in constant 2000 U S dollars) from US$400 at independence in 1960 to US$lOO in 2001. “Democratic Republic of the Congo - Decision Point Document for the Enhanced Heavily Indebted Poor Countries (HIPC) Initiative”, EBS/03/267 and IDA/R2003-0059. Detailed information on clearance o f arrears to multilaterals i s also provided in this document.

4

’ Covering the periods April-December 2006 and January-December 2007, respectively.

- 6 -

4. At end-2006, the DRC’s public and I Fieure 1: Nominal Debt Stock as o f end 2006 bv Creditor publicly guaranteed debt is estimated at US$11.5 billion, including US$4.6 b i l l ion to multilateral institutions and more than US$6.0 bi l l ion to Paris Club creditors (see Figure 1).6 During the interim period, the D R C i s benefiting f rom substantial interim HIPC debt rel ief provided by major multilateral creditors. While IDA continues to disburse interim HIPC debt relief,’ interim assistance from the Fund was disbursed until June 2006,

ther Multllaterals

based on the decision taken upon the completion o f the fifth review under the PRGF arrangement. Further interim assistance from the Fund would require approval o f a new PRGF arrangement. The D R C has signed debt relief agreements with a number o f commercial creditors. I t has also benefited from a f low rescheduling o n Cologne terms and debt relief beyond HIPC assistance by Paris Club creditors. However, the D R C has been unable to meet i t s debt service obligations to Paris Club creditors since July 2006. The Chairman o f the Paris Club indicated to the authorities that the treatment o f the resulting arrears would have to await an agreement o n a new PRGF arrangement.

External Debt Sustainability Analysis

5 . The baseline scenario of this DSA assumes the stabilization of the security situation and adoption of prudent macroeconomic policies and structural reforms- especially those aimed at strengthening governance. These include enhancing transparency in the mining sector, reducing the costs o f doing business, strengthening tax collection, improving budget preparation and execution, and reforming the c i v i l service. The implementation o f prudent policies and reforms, together with a recovery o f the mining sector, i s projected to lead to strong economic growth through 2012 (see Box l).9

6. Consistent with current guidelines,’o the baseline scenario assumes only HIPC interim relie$ Multilateral creditors provide interim HIPC debt relief according to the debt relief agreements. For the Paris Club, debt service in the interim period i s calculated assuming a Cologne f l ow treatment

These estimates exclude amounts o f penalties and late interest due to London Club creditors. The DRC i s working on a World Bank financed buy-back operation for i t s debt to London Club creditors.

The external debt sustainability analysis provides information only on the NPV o f PPG external debt, as information on private external debt i s not available. For the NPV calculation, a 5 percent discount rate i s used. Debt service payments are converted to U S dollars using WE0 exchange rate projections consistent with the requirements o f the joint World Bank/IMF LIC Debt Sustainability Framework. (“Operational Framework for Debt Sustainability Assessments in Low-Income Countries - Further Considerations”,

’The baseline i s consistent with the macroeconomic framework envisaged for the period 2007-2012 in the context o f the 2007 consultation under the Art ic le I V o f the IMF articles o f agreement. However, the latter reflects the impact o f the debt stock reductions under the enhanced HIPC and MDIU initiatives that would result ftom the DRC reaching the completion under the enhanced HIPC Initiative.

lo “Staff Guidance Note on the Application of the Joint Fund-Bank Debt Sustainability Framework for Low- Income Countries”, April 2007, SM/O7/131,4/17/07 and IDA/No. 39748.

6

’ The DRC would reach i t s one-third limit o f IDA interim debt re l ie f in August 2009.

SM/05/109, 3/29/05 and IDA/R2005-0056).

- 7 -

and debt relief beyond H IPC assistance. For non-Paris Club creditors or commercial creditors comparable treatment to the Paris Club has been assumed, unless debt rel ief agreements have already been signed.”

7. Under the baseline scenario, all external debt burden indicators breach their thresholds (Table la). In 2006, a l l debt stock indicators, Le., the NPV ratios o f debt to GDP, export and revenue, markedly exceed the policy-based thresholds, and are projected to converge towards their thresholds only at the end o f the 20-year projection period. The gradual decline o f these ratios largely reflects the projected rebound o f exports and real GDP growth, together with the assumption that external financial support mainly takes the form o f grants, with new loans contracted o n highly concessional terms. A broadly similar trend applies if principal macroeconomic variables assume their 1 0-year historical average, as captured in the historical average scenario.

8. While the long-term macroeconomic projections in this DSA are in line with the decision point DSA,” the medium-term growth prospects have improved. The recent polit ical transition and high commodity prices have sparked investor interest in the mining sector. N e w investments in the sector are expected to significantly increase, boosting mineral production, especially copper and cobalt, over the medium term. This i s expected to raise real GDP and export growth rates for 2008-12 relative to projections in past DSAs.13 Imports related to the investment in the mining sector also lead to a relative widening o f the current account deficit during the same period, largely financed through foreign direct investment.

9. These baseline macroeconomic projections are subject to significant risks. Poor governance, unresolved security issues, weak implementation capacity and lower than envisaged donor support may hinder the consistent implementation o f sound policies and reforms as wel l as the impacts o f these measures. Moreover, given the DRC’s high dependence o n mining exports, it remains vulnerable to adverse terms o f trade shocks. Finally, the current security tension especially in the eastern provinces could escalate.

10. All debt burden indicators are projected to exceed their thresholds under the stress tests (Table lb). If the DRC contracts loans o n less concessional terms i t s debt stock indicators would deteriorate substantially. The NPV o f debt to GDP ratio and NPV o f debt to revenue ratio, for

The NPV o f debt in this DSA also differs fkom decision point data as a result o f methodological differences between the joint Bank-Fund LIC DSA framework and the HIPC methodology. These are using: a) a fixed 5 percent discount rate instead o f currency-specific discount rates under HIPC; b) WE0 exchange rate projections instead o f fixed exchange rates as o f end-of the base date; and c) annual exports instead o f a three- year average o f exports in the NPV o f debt to exports ratio. Moreover, debt re l ie f simulations in the current DSA have been updated reflecting the change in the expected HIPC completion point date and updated information on commercial debt.

l2 “Democratic Republic of the Congo - Decision Point Document for the Enhanced Heavily Indebted Poor Countries (HIPC) Initiative”, EBSl031267 and IDA/R2003-0059

l3 The decision point DSA assumed an average real GDP growth o f 6 percent during 2008-2012, while the current baseline has an average growth rate o f 8.2 percent. The IMF published a DSA for the DRC in 2005 (EBS05/374), which projected an average real GDP growth o f 6.7 percent during 2008 - 2012. The improved growth projection in the current DSA i s based on more recent information on commodity prices and mining sector output projections. However, the long-term projections in both DSAs are in l ine with the current LIC DSA.

11

- 8 -

example, would reach 56 percent and 285 percent, in 2017, respectively. Similarly, a slump in export growth in 2008 and 2009 would significantly and adversely affect the DRC’s debt to export indicators, raising i t s N P V o f debt to exports ratio to 3 10 percent and i t s debt service to exports ratio to 23 percent in 2017.

1 1. The DRC’s debt burden indicators are projected to fall below their thresholds if it benefits from debt relief under the enhanced HIPC and the MDRZ initiatives. Under an alternative scenario, which assumes the DRC reaches the HIPC completion point in mid-2008, the NPV o f government and government-guaranteed external debt would fall to the equivalent o f 16.0 percent o f GDP, 48 percent o f exports, and 114 percent o f government revenue by 2008.

12. Even after the completion point is reached, the DRC’s debt sustainability is likely to remain vulnerable to adverse exogenous shocks. Applying the stahdardized stress tests to the post- completion point scenario, it can be shown that under the most extreme stress tests all debt stock indicators would breach their thresholds, two o f them over sustained period o f time.14

Public Debt Sustainability Analysis

13. The DRC’s domestic debt is estimated to be relatively low following its restructuring in 2005. Identified government domestic debt15 was equivalent to 0.5 percent o f GDP at end 2006 and i s expected to be paid o f f by end-2007. Thereafter, the baseline fiscal framework assumes zero net domestic borrowing.

14. As a result, the above sustainability analysis for external debt broadly applies for total government and government-guaranteed debt (Tables 2a and 2b). Under the baseline scenario, the NPV o f public debt to GDP ratio decreases only gradually to the relevant policy thresholds towards the end o f the 20-year projection period.

Conclusions

15. The DRC is currently in debt distress. Even if the security situation stabilizes and macroeconomic and structural policies lead to robust recovery, as assumed under the baseline scenario, the external debt indicators would breach policy-based thresholds. Moreover, even after reaching the HIPC completion point and benefiting from debt relief under the enhanced HIPC and MDRI initiatives, the DRC remains vulnerable to shocks that could lead to lower exports and economic growth. It i s therefore essential that the DRC adheres to prudent macroeconomic policies and implement significant structural reforms far reaching structural reforms, while seeking external financing mostly in the form o f grants or loans on highly concessional terms. I t should also strengthen i t s track record o f policy implementation with a view to quickly reaching the completion point under the enhanced HIPC Initiative.

A combination o f different shocks leads to the largest increase in NPV of debt to GDP and NPV o f debt to exports ratio. The most extreme shock for the NPV o f debt to exports ratio i s the shock on export growth.

14

Excluding debt vis-&vis the central bank.

- 9 -

Box 1: Democratic Republic o f the Congo - Macroeconomic Assumptions Underlying the Baseline

Since 2002, real GDP growth has averaged 5.5 percent. Construction and telecommunications contributed significantly to growth, reflecting a recovery of economic activity after years o f civil strife. Aggregate demand rebounded on the back o f large international support for reconstruction and the political transition and favorable terms of trade.

Assuming that the DRC maintains security and strengthens its record of policy implementation, including major improvements in governance, real GDP growth i s projected to increase to 8 percent a year during 2007-12 led by a mining rebound and a continuation o f the reconstruction efforts of the past years. Large investments in copper and cobalt are expected to increase their output to historical production levels by 2012. Consequently, the mining sector i s expected to grow at on average 17 percent between 2008 and 2012 in real terms.u Over the long run, real GDP i s projected to stabilize at around 5 percent a year as the strong recovery tapers off over time.

Inflation i s projected to decrease from 18 percent at end 2006 to 8 percent in 2008 and i s projected to remain at that rate over the long run. With a view to reducing the DRC’s vulnerability to external shocks, gross international reserves are projected to be gradually rebuilt from the equivalent of 3 weeks o f non- aid related imports in 2006 to about 9 weeks in 2012. The nominal exchange rate relative to the US dollar i s assumed to depreciate in line with the inflation differential between the DRC and the United States. However, potentially large capital inflows that the DRC could attract if the security situation and governance improve, could lead to a real appreciation of the currency, which in turn could lead to lower than projected debt burden indicators.

Exports o f goods and services are projected to increase on average by 11.4 percent per year in 2007-12 and by 6.0 percent over the long run. The initial export boom reflects the coming on stream o f important projects to rehabilitate the DRC’s large mining sector. The rehabilitation of the DRC’s infrastructure could also contribute to the development of other exports, including agricultural products. Imports are expected to increase sharply in 2008 related to large mining and infrastructure projects, continuing to grow at 10 percent til l 2012 before assuming a long-term growth rate of 5 percent.

The non-interest current account deficit was estimated to be equivalent to 4.9 percent of GDP in 2006 and projected to peak at about 9.0 percent o f GDP in 201 1. The fluctuations o f the current account balance reflect the lumpiness of imports related to mining projects. Thereafter, it will gradually narrow as exports pick up and imports decline. The widening current account deficit during the 2008-12 period i s assumed to be financed mainly by foreign direct investment, with net FDI inflows averaging 9 percent of GDP between 2008 and 2012.

The overall fiscal deficit (including grants) i s projected to shift from near balance in 2006 to a deficit o f some 2.8 percent of GDP by 2012. This assumes the execution of reforms to widen the tax base, strengthen tax and customs administration, which would help raise revenue by some 3 percentage points o f GDP over the next five years. On that basis, public expenditure could increase by 7 percentage points, particularly to help address the DRC’s substantial social and infrastructure rehabilitation needs, on a non-inflationary and sustainable basis.

Donor support i s assumed to increase subject to significant improvement in governance and macroeconomic policies. Under the baseline, external grants would increase, as a share of GDP, from 2 percent in 2004 to 6 percent in 2012 and remain at around this level going forward.

Achieving the macroeconomic objectives will, however, be a challenge. Beyond the fragile security and political situation, risks include: (i) fiscal slippages that could destabilize a fragile economy; (ii) significant adverse terms of trade shocks; (iii) slower than projected private-sector led growth; (iv) lower-than- anticipated donor support if governance does not improve markedly; and (v) slow progress in structural reforms, possibly due to limited implementation capacity.

1/ The DRC has Africa’s largest deposits o f copper, cobalt and coltan, and significant reserves of diamonds and oil. After years o f economic mismanagement, poor governance and conflict, the contribution of the mining sector to GDP declined from 25 percent of GDP in the mid-l980s, to less than 10 percent of GDP in the early 2000s.

. - 10-

. . . . . . . . . . . .

. . . . . . . . . . . .

12

120 -

100 -

80 - 60 -

40 - 20 -

Figure 1. Democratic Republic of the Congo: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios,

(Percent, unless otherwise indicated) 2007-2027

1000 900 -

800 - 700 - 600 - 500 - 400 - 300 - 200 - 100 -

~ a6 Debt Accumulation i n , . -

(right scale)

55

45

35

4 25

2

0

Rate of debt accumulation :: 1 I \ (Percent change of NPVI GDP) I l5

-6 -5 2007 2012 2017 2022 2027

(left scale) 5

600

500

400

300

200

100

0

NPV of debt-to-exDorts ratio

.......... ......... ............ :.-. ci. ..... - - _ . ................

2007 2012 2017 2022 2027

Debt-service-to-exports ratio 50 I i

...... ........... ..................... " 8

2007 2012 2017 2022 2027

Baseline - - Most extreme shock: Combination . . I . . After HlPC and MDRl

q 7 I

Sources: World Bank and IMF Staff projections and simulations:

NPV of debt-to-GDP ratio 140 ,

. .......... .......... -. - 0 4

2007 201 2 2017 2022 2027

2007 2012 2017 2022 2027

Debt-service-to-revenue ratio 90

70 - 60 - 50 -

40 - 30 -

20 - .... ................ 10 ...... ...........

0 2007 2012 2017 2022 2027

Historical scenario Threshold

- - -

' Assumes that DRC reaches its HlPC Completion Point in June 2WB. Includes additional bilateral debt relief provided by Paris Club creditors on a voluntaly basis Historical average scenario is based on past 5 yean, covering the DRC's post-conflict period

Tabla 1 b Dmosnec R.pMk of Uw Congo Sonslb*tfAnalyus for Key Indimtom of Publk snd Publicly GuamnUld Exurnel Debt, 2037-27 (P.rrmt)

P,oj.caon. XQ7 2MB 2W9 2010 2011 2012 2011 2Q27

3m 3w 303

8 8 8

21 21 21

21 21 21

?a

82

sa 83 16

104 ea

IC4 101 118 I28

274

2% 276 4a

274 4 w 274 3M 358 274

649

e97 8 U 114

737 693 761 710 532 81 1

18

14 12 5

12 17 12 12 15 12

43

32 28 14

3 a 34 a 35 41

?a

51

82 82 15

105 87

107 1W 133 114

242

274 246

46

242 497 242 287 380 242

e56

829 583 104

717 884 734 582 91 1 760

24

29 25

5

25 44 25 26 36 25

55

67 58 11

75 69 77 59 62 51

30

74

67 76 15

85 89 96 92

122 104

21 3

251 215 43

213 u 3 21 3 266 347 21 3

49%

548 475 93

Bw 561 615 578 n o 654

16

21 17 4

17 31 17 18 25 17

36

46 38 5

46 40 49 40 56 52

30

57

79 70 15

87 62 09 86

112 95

158

222 195 42

169 396 159 237 309 158

417

.Iw 430 93

537 507 e51 522 884 585

15

20 15 3

15 28 15 17 22 16

32

44 36 7

44 39 45 37 50 49

30

82

75 65 15

50 75 82 79

104 87

1-

XI1 176 43

155 353 165 212 278 165

376

450 392

96

485 480 496 474 829 526

12

18 13 3

13 24 13 14 19 13

28

39 29

7

38 31 39 31 43 41

30

51

49 56 22

e5 Bo 67 82 82 71

I52

1 4 <€a e5

152 310 152 185 244 I52

257

2% 285 110

332 305 310 313 418 361

10

13 11 4

10 23 10 14 16 10

16

22 18 6

22 23 23 23 31 24

30

32

13 43 24

41 34 42 34 47 49

%

3s 126 71

% 171 85

1w 1% E5

145

58 193 1oQ

187 153 182 154 212 204

10

9 13 7

11 21 11 13 17 I t

16

14 2Q 11

21 19 22 18 28 23

30

- 13 -

14

Y r

k r

15

Figure 2. Democratic Republic of the Congo: Indicators of Public Debt Under Alternative Scenarios, 2007-27 ' (Percent)

140

120

100

80

60

40

20

160 NPV of debt-to-GDP ratio -

- - - - - -

600

500

400

300

200

100

0

/

-Baseline -Most extreme stress test

NPV of Debt-to-Revenue Ratio - - -

- Baseline -

-Most extreme stress test -

2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027

2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027

I "

60

50

40

30

20

10

Debt Service-to-Revenue Ratio

Baseline - \ - -Most extreme stress test

2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027

Sources: World Bank and IMF Staff projections and simulations.

' Most extreme stress test is test that yields highest ratio in 2017; the no reform scenario projects debt burden indicators on the basis of the estimated 2007 primary balance; since this a surplus, the scenario implies a

decline in debt burden indicators. Revenue including grants.

Table 26. Democratic Republic of the Congo: Sensitivity Analysis for Key indicators of Public Debt 2007-2027

Projections 2007 2008 2009 2010 2011 2012 2017 2027

NPV of Debt-to-GDP Ratio Baseline

A. Altematlve scenarlo'

Al . Permanently lower GDP growth

B. Bound tesls

81. Real GDP growth is at historical average minus one standard deviations in 2006-2009 82. Primary balance is at historical average minus one standard deviations in 2008-2009 83. Combination of 81-82 using one half standard deviation shocks 84. One-time 30 percent real depreciation in 2008 85. 10 percent of GDP increase in other debt-creating flows in 2008

NPV of Debt-to-Revenue Ratio'

Baseline

A. Alternative scenario'

A l , Permanently lower GDP growth2

B. Bound tests

81, Real GDP growth is at historical average minus one standard deviations in 2008-2009 82. Primary balance is at historical average minus one standard deviations in 2008-2009 83. Combination of 81-82 using one haif standard deviation shocks 84. One-time 30 percent real depreciation in 2008 85. 10 percent of GDP increase In other debt-creating flows in 2008

Debt Service-to-Revenue Ratio'

Baseline

A. Alternative scenario'

Al . Permanently lower GDP growth

B. Bound tests

81. Real GDP growth is at historical average minus one standard deviations in 2008-2009 82. Primary balance is at historical average minus one standard deviations in 2008-2009 83. Combination of 81-82 using one half standard deviation shocks 84. One-time 30 percent real depreciation in 2006 85. 10 percent of GDP increase in other debt-creating flows in 2008

98

98

98 98 98 96 96

513

513

513 513 513 513 513

31

31

31 31 31 31 31

95 84 76 69 64 52

96 86 79 74 70 70

109 114 108 103 100 108 98 89 61 74 69 57

107 107 96 86 76 59 141 127 117 108 100 62 104 92 84 77 72 60

469 400 347 310 281 227

473 408 359 326 302 298

520 501 456 426 407 453 464 426 371 332 302 249 514 479 413 363 324 248 697 609 535 462 439 357 514 442 385 345 315 261

33 40 26 24 21 14

33 40 27 26 23 25

36 50 36 37 35 39 33 45 32 26 22 19 35 49 34 28 22 18 36 46 33 30 27 23 33 55 32 27 23 19

33

93

135 40 33 58 42

136

376

543 164 134 240 174

15

42

62 19 15 22 21

Sources: Country authorities; and Fund staff estimates and projections.

' Other historical scenarios were exduded because of poor data (especiallyfiscal) during the conflict period (1998-2001). 2Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of 20 (Le., the length of the projection period).

Revenues are defined inclusive of grants.

- 1 6 -

ANNEX 4. ACHIEVEMENTS OF THE 2004-2006 TSS

Annex 4.1 TSS Outcomes Annex 4.2 Annex 4.3

TSS Analytical and Advisory Activities (AAA) Summary of the TSS (as of Sept. 30,2007)

- 17-

b b b b

.

U 8

rn rn

e

e e

I

2 I

e . e 8 . e

. .

I

0 P 4

I

m e, >I

v1

I I I

! I I >

z I: I

1

I

I r i

4

i I

2

I

e, c 5

E e e 00

&

v1 W * h: *

I

m c\1

I

n I

z

3

e e e

1

A

A

3 .

? 2 n

x

I

\o N

I

e

N m hl

31 ~~

LA

LA

t- N

8 2

i

. V, s s

V v r

g;:

P f

I: $ 2

. W /5

I

00 r\l I

IN d c)

I

Q\ N

I 5 Yl

5 Yl 3

N 10 N

3 / X

9 9

3 . 3

m m 3 ;;io

Y l o

$1:

c

I

0 m

I

I

3 m

I

9

.5 e, 9

e e e e

I

c1 m I

I /

m m

I

9

m 0 0 N

e e

I * m I

a

s

a

I

v, m

I

s B a U

a a a a

I

W m I

9

h

a a

I

M I

I

r I

eo rn

I

a a a

I

m I

9

a a

I

0 d I

s

u

e e e e

I 3

d I

8 I

c\1 d

I

I

m d

I

ANNEX 6: COUNTRY AT GLANCE

Congo, Dem, Rep. a t a glance 11 E107

Key Development Indicators

(2008)

Population, mid-year (millions) Surface area (thousand sq. km) Population growth (%) Urban population (% of total population)

GNI (Atlas method, US$ billions) GNI per capita (Atlas method, US$) GNI per capita (PPP, international $)

GDP growth (Oh) GDP per capita growth (%)

(most recent estimate, 2000-2008)

Poverty headcount ratio et $1 a day (PPP, %) Poverty headcount ratio at $2 a day (PPP, %) Life expectancy at birth (years) Infant mortality (per 1,000 live births) Child malnutrition (% of children under 5)

Adult literacy, male (Oh of ages 15 end older) Adult literacy, female (56 of ages 15 and older) Gross primary enrollment, male (% of age group) Gross primary enrollment, female (% of age group)

Access to an improved weter source (Oh of population) Access to improved sanitation facilities (% of population)

Congo, Dem. Rep.

59.3 2,345

3.1 32

7.7 130 720

5.1 1.9

44 129 31

81 54

46 30

Sub- Saharan

Africa

770 24,265

2.3 36

648 842

2,032

5.6 3.2

41 72 47 96 29

69 50 98 86

56 37

LOW income

2,403 29,215

1.8 30

1,562 650

2,698

8.0 6.1

59 75

72 50

108 96

75 38

Net Aid Flows

(US$ millions) Net DDA and official aid Top 3 donors (in 2005):

Japan Belgium United States

Aid (% of GNI) Aid per capita (US$)

Long-Term Economic Trends

Consumer prices (annual 56 change) GDP implicit deflator (annual % change)

Exchange rate (annual average, local per US$) Terms of trade index (2000 = 100)

Population, mid-year (millions) GDP (US$ millions)

Agriculture Industry

Services

Household final consumption expenditure General gov't final consumption expenditure Gross capital formation

Exports of goods and services Imports of goods and services Gross savings

Manufacturing

1980

426

39 170

11

3.1 15

36.7 51.4

0.0

28.0 14,395

26.8 35.0 15.2 38.2

81.5 8.4

10.0

16.5 16.4 7.9

I 990 2000

896 177

44 0 95 27 32 13

10.4 4.5 24 4

4129.2 511.0 109.0 515.8

0.0 69.0 100

37.8 50.1 9,350 4,306

(% of GDP) 31 0 50.0 29.0 20.3 11.3 4.8 40.0 29.7

79.1 88.0 11.5 7.5 9.1 3.5

29.5 22.4 29.2 21.4 0.8 -1.3

2008 '

1,828

376 152 141

27.0 32

5.0 13.1

468.3 131

59.3 8,543

45.7 27.7 6.5

26.6

92.8 7.8

13.0

30.7 44.4

3.6

Age distribution, 2006

Male Fnrnale

70-74

60-64 50-54 40-44

30-34

20-24 10-14

0-4 4 30 20 10 0 10 20 30

percent

Under-5 mortality rate (per 1,000) r 200

150

100

50

0 1990 is95 2000 2005

oCongo, Dern Rep OSub-Saharan Africa

Growth of GDP and GDP per capita (Oh) I

O5 I 90 95 00

+GDP - GDP per capita

1980-90 1990-2000 2000-06 (average annual growth %) 3.0 2.8 2.8 1.8 4 . 9 4.7

2.5 1.4 0.8 0.9 -8.0 9.3 1.6 -8.7 5.7 2.0 -12.3 6.2

3.4 -4.5 0.0 -17.4

-5.1 -0.7

9.6 -0.5 7.6 10.7 -2.4 22.5

Note: Figures in italics are for years other than those specified. 2006 data are preliminary, .. Indicates data are not available a. Aid data ere for 2005.

Development Economics, Development Data Group (DECDG).

- 44 -

Congo, Dern. Rep.

Balance of Payments and Trade 2000

(US$ millions) Total merchandise exports (fob) Total merchandise imports (cif) Net trade in goods and services

Current account balance as a % of GDP

892 669

48

-199 -4.6

Workers' remittances and compensation of employees (receipts)

Reserves, including gold ' 51

Central Government Finance

(% of GDP) Current revenue (including grants)

Current expenditure Tax revenue

5.1 4.0

10.6

Overall surplusldeficit -6.0

Highest marginal tax rate (%) Individual Corporate

External Debt and Resource Flows

(US$ millions) Total debt outstanding and disbursed Total debt service Debt relief (HIPC. MDRI)

Total debt (% of GDP) Total debt service (% of exports)

Foreign direct investment (net Inflows) Portfolio equity (net inflows)

60 40

12,609 25

6,875

292.8 2.5

23 0

1 Figure I: Nommal Debt Stock as of end 2006 by Creditor

Commercial Creditor

Private Sector Development 2000

Time required to start a business (days) Cost to start a business (% of GNI per capita) Time required to register property (days)

Ranked as a major constraint to business (% of managers surveyed who agreed)

- - -

Electricity Access tolcost of financing

Stock market capitalization (% of GDP) Bank capital to asset ratio (%)

2006

2,044 2,607

-1,002

-643 -7.5

470

25.1 9.8

11.7

5.5

50 40

9 ,4 74

133.4

2006

155 481.1

57

45.5 14.5

:

Governance Indicators, 2000 and 2006

Voice and accountability

Political stability

Regulatory quality

Rule of law

Control of corruption

0

2006 Country's percentile rank (0-100) 0 2000 higher velues imply bener rabngs

Soume Kaufmann-Kraav-Mastruzzl World Bank

Technology and Infrastructure 2000 2005

Paved roads (% of total) Fixed line and mobile phone

High technology exports subscribers (per 1,000 people)

(% of manufactured exports)

1.8

0 37

Environment

Agricultural land (% of land area) 10 10 Forest area (% of land area) 59.6 58.9 Nationally protected areas (% of land area) 5.0

Freshwater resources per capita (cu. meters) .. 15,639 Freshwater withdrawal (% of internal resources) 0.0

CO2 emissions per capita (mt) 0.03 0.03

GDP per unit of energy use (2000 PPP $ per kg of oil equivalent) 2.0 2.1

Energy use per capita (kg of oil equivalent) 295 296

(US$ milons)

IBRD Total debt outstanding and disbursed Disbursements Principal repayments Interest payments

81 0 0 0 0 0 0 0

IDA Total debt outstanding and disbursed 1,188 2,277,000 Disbursements 0 0 Total debt service 0 0

IFC (fiscal year) Total disbursed and outstanding portfolio 0 14

of which IFC own account 0 14 Disbursements for IFC own account 0 5 Portfolio sales, prepayments and

repayments for IFC own account 0 16

0 3 MIGA

Gross exposure New guarantees 0 0

Note: Figures in italics are for years other than those specified. 2006 data are preliminary .. Indicates data are not available. - indicates observation is not applicable.

1 1/6/07

Development Economics. Deve opment Data Group (DECDG)

-45 -

M illenn iu m Development Goals Congo, Dem. Rep.

.I

With selected targets to achieve between 7990 and 2075 (estimate closest to date shown, +/- 2 years)

Goal 1: halve the rates for $1 a day poverty and malnutrition 1990 1995 2000 2005 Poverty headcount ratio at $1 a day (PPP, O h of population) Poverty headcount ratio at national poverty line (% of population) Share of income or consumption to the poorest qunitile (%) Prevalence of malnutrition (% of children under 5) 34.4 31.0

Goal 2: ensure that chlldren are able to complete primary schooling Primary school enrollment (net, %) Primary completion rate (% of relevant age group) 46 42 39 39 Secondary school enrollment (gross, %) 18 22

54

Youfh liferacy rate (% of people ages 15-24)

Goal 3: eliminate gender disparity in education and empower women Ratio of girls to boys in primary and secondary education (%)

Proportion of seats held by women in national parliament (96 ) 5 5 12

80 Women employed in the nonagricultural sector (% of nonagricultural employment) 26

Goal 4: reduce under-5 mortality by two-thirds Under4 mortality rate (per 1,000) 205 205 205 205 Infant mortality rata (per 1,000 live births) 129 129 129 129 Measles immunization (proportion of one-year olds immunized, %) 38 27 46 64

Goal 5: reduce maternal mortality by three-fourths Maternal mortality ratio (modeled estimate, per 100,000 live births) 990

61 Births attended by skilied health staff (% of total)

Goal 6: halt and begin to reverse the spread of HiV/AIDS and other major diseases Prevalence of HiV (% of population ages 15-49) 3.2 Contraceptive prevalence (% of women ages 15-49) Incidence of tuberculosis (per 100,000 people) 133 366

31

Tuberculosis cases detected under DOTS (%) 42 52 70

Goal 7: halve the proportion of people without sustainable access to basic needs Access lo an improved water source (% of population) 43 46 Access to improved sanitation facilities (% of population) 16 3 0 Forest area (% of total land area) 62.0 59.6 58.9 Nationally protected areas (% of total land area) 5.0 C 0 2 emissions (metric tons per capita) 0.1 0.1 0.0 0.0 GDP per unit of energy use (constant 2000 PPP $ per kg of oil equivalent) 4.5 2.8 2.0 2.1

Goal 8: develop a global partnership for development Fixed line and mobile phone subscribers (par 1,000 people) 1 1 0 37 Internet users (per 1,000 people) Personal computers (per 1,000 people) Youth unemployment (% of total labor force ages 15-24)

iducation indicators (Oh)

25 1

0 2000 2002 2005

*Primary net enrollment ratio (..)

+Ratio of girls to boys in primary 8 I secondary education (..)

0

Weasles lmmunlzation (Oh of 1-year olds)

1 0 0 ,

75 i

1SSO 1SS5 2000 2005

OConpo, Dem Rep OSub-Saharan Africa

0 0 2

CT indicators (per 1,000 people)

OFixed + mobile subscribers Wlnternet users I 2000 2002

Note: Figures in italics are for years other than those specified. .. indicates data are not available

Development Economics, Development Data Group (DECDG).

1 1/6/07

- 46 -

ANNEX 7: MAP OF DRC

- 47 -

TTsshhuuaappaa

LLoommeellaa

KKaassaaii

KKwwaannggoo

LLuuaallaabbaa CCoonnggoo

LLuuvvuuaa

UUlliinnddii

AArruuwwiimmii

KKiibbaallii

UUeellee

UUbbaannggii

LLuulluuaa

LLoommaammii

LLuukkuuggaa

CCoonnggoo

LLuuiillaakkaa

SSaannkkuurruu

LLuukkeenniiee

KKaassaaii LLuulluuaa LLuuffiirraa

LLoommaa

mmii

LLuueeoo

LLuuaallaabbaa

KKwwiilluu

LLuulloonnggaa

MMii ttuu

mmbbaa

MMttss ..

MMii ttuu

mmbbaa

MMttss

..

KONGO CENTRALKONGO CENTRAL

KWANGOKWANGO

KWILUKWILU KASAKASAÏ

KASAKASAÏ-Ï-

ORIENTALORIENTALLULUALULUA

LOMAMILOMAMI

H A U T- L O M A M IH A U T- L O M A M I

HAUT-HAUT-KATANGAKATANGA

TANGANYIKATANGANYIKA

L U A L A B AL U A L A B A

S A N K U R US A N K U R UM A N I E M AM A N I E M A

SUD-SUD-KIVUKIVU

NORD-NORD-KIVUKIVU

I T U R II T U R I

HAUT-UELEHAUT-UELE

T S H O P OT S H O P O

BAS-UELEBAS-UELENORD-UBANGINORD-UBANGI

SUD-SUD-UBANGIUBANGI

MONGALAMONGALA

É Q U AT E U RÉ Q U AT E U R

TSHUAPATSHUAPA

MAI-NDOMBEMAI-NDOMBE

BomaBoma Mbanza-NgunguMbanza-Ngungu

TshikapaTshikapa

Mwene-DituMwene-Ditu

AketiAketi

BunaBuna

BetambaBetambaYumbiYumbi

FaradjeFaradje

FeshiFeshi

IdiofaIdiofa KongoloKongolo

KutuKutu

LikasiLikasi

LubudiLubudi

KilwaKilwa

LusamboLusambo

WatsaWatsa

BulunguBulungu

MangaiMangai

LubutuLubutu

LowaLowa

KabaloKabalo

KapangaKapanga

SandoaSandoa

BafwasendeBafwasende

BanaliaBanalia

ButemboButembo

MobaMoba

SakaniaSakania

DiloloDilolo

PwetoPweto

BasankusuBasankusuBongandangaBongandanga

AkulaAkula

BikoroBikoro

ImeseImese

ZongoZongo

LibengeLibengeBusingaBusinga

BondoBondo

TituleTitule

BumbaBumba

KasongoKasongo

UviraUvira

LulimbaLulimba

Wanie RakulaWanie Rakula

YangambiYangambi BeniBeni

WambaWambaMongbwaluMongbwalu

ManonoManono

IleboIlebo

IkelaIkela

KalimaKalima

KamaKama

MalelaMalela

GomaGoma

MbandakaMbandaka

KanangaKananga Mbuji-Mbuji-MayiMayi

LubumbashiLubumbashi

LueboLueboKikwitKikwit

InongoInongo

KengeKenge

KabindaKabinda

KinduKinduLodjaLodja

BukavuBukavu

BuniaBunia

IsiroIsiroButaButa

GbadoliteGbadolite

LisalaLisala

GemenaGemena

BoendeBoende

KalemieKalemie

KaminaKamina

KolweziKolwezi

KisanganiKisangani

KINSHASAKINSHASA

BandunduBandunduKINSHASAKINSHASA

BANDUNDUBANDUNDU

EQUATEUREQUATEUR

ORIENTALEORIENTALE

NORDNORDKIVUKIVU

MANIEMAMANIEMA

KATANGAKATANGA

KASAIKASAI

ORIENTAL ORIENTAL

KASAIKASAIOCCIDENTALOCCIDENTAL

SUDSUDKIVUKIVU

BAS-CONGOBAS-CONGO

KINSHASA CITYKINSHASA CITY

KONGO CENTRAL

KINSHASA CITY

KWANGO

KWILU KASAÏ

KASAÏ-

ORIENTALLULUA

LOMAMI

H A U T- L O M A M I

HAUT-KATANGA

TANGANYIKA

L U A L A B A

S A N K U R UM A N I E M A

SUD-KIVU

NORD-KIVU

I T U R I

HAUT-UELE

T S H O P O

BAS-UELENORD-UBANGI

SUD-UBANGI

MONGALA

É Q U AT E U R

TSHUAPA

MAI-NDOMBE

KINSHASA

BANDUNDU

EQUATEUR

ORIENTALE

NORDKIVU

MANIEMA

KATANGA

KASAI

ORIENTAL

KASAIOCCIDENTAL

SUDKIVU

BAS-CONGO

Boma Mbanza-Ngungu

Tshikapa

Mwene-Ditu

Aketi

Buna

BetambaYumbi

Faradje

Feshi

Idiofa Kongolo

Kutu

Likasi

Lubudi

Kilwa

Lusambo

Watsa

Bulungu

Mangai

Lubutu

Lowa

Kabalo

Kapanga

Sandoa

Bafwasende

Banalia

Butembo

Moba

Sakania

Dilolo

Pweto

BasankusuBongandanga

Akula

Bikoro

Imese

Zongo

LibengeBusinga

Bondo

Titule

Bumba

Kasongo

Uvira

Lulimba

Wanie Rakula

Yangambi Beni

WambaMongbwalu

Manono

Ilebo

Ikela

Kalima

Kama

Malela

Matadi

Goma

Mbandaka

Kananga Mbuji-Mayi

Lubumbashi

LueboKikwit

Inongo

Bandundu

Kenge

Kabinda

KinduLodja

Bukavu

Bunia

IsiroButa

Gbadolite

Lisala

Gemena

Boende

Kalemie

Kamina

Kolwezi

Kisangani

KINSHASA

CONGOGABON

CENTRAL AFRICAN REPUBLIC

TANZANIA

UGANDA

S U D A N

Z A M B I A

ZAMBIA

A N G O L A

BURUNDI

RWANDA

MA

LAW

I

CABINDA(ANGOLA)

Tshuapa

Lomela

Kasai

Kwango

Lualaba Congo

Luvua

Ulindi

Aruwimi

Kibali

Uele

Ubangi

Oub

angu

i

Lulua

Lomami

Lukuga LakeTanganyika

LakeEdward

Lake Kivu

LakeAlbert

LakeMweru

Lake Malawi

Congo

Luilaka

Sankuru

Lukenie

Kasai Lulua Lufira

Loma

mi

Lueo

Lualaba

Kwilu

Lulonga

ATLANTICOCEAN

LakeVictoria

To Bangui

To Kembe

To Bangasso

To Juba

To Pakwach

To Kibuye

To Ruhengeri

To Bujumbura

To Kitwe

To Luwingu

To Lucano

To Damba

To Pointe-Noire

Mitu

mba

Mts.

Mitu

mba

Mts

.

Margherita Peak(5,110 m)

5°N

0°

5°S

10°S

30°E25°E

30°E25°E15°E10°E

5°N

0°

5°S

DEM. REP.OF CONGO

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.

0 100 200 300

0 100 200 Miles

400 Kilometers

IBRD 33391R1

NO

VEM

BER 2007

DEMOCRATIC REPUBLICOF CONGO

SELECTED CITIES AND TOWNS

PROVINCE CAPITALS*

NATIONAL CAPITAL

RIVERS

MAIN ROADS

RAILROADS

PROVINCE BOUNDARIES**

INTERNATIONAL BOUNDARIES

*The creation of 26 new Provinces was approved by the ratification of the 2005 Constitution, to take effect by February,2009. The existing 11 Province Capitals, shown with green circles, will retain their status, with the exception of Bandundu.Future Province Capitals are shown with white circles.

**The existing 11 Province boundaries and names are shown in dark green; future in light green.