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DEMOCRATIC REPUBLIC OF CONGO: Against all hope

By Michael Kavanagh
24 May 2010

As the Democratic Republic of Congo gears up to celebrate 50 years of independence, the government hopes debt cancellation will spur an economic renaissance. But only substantial foreign investment is likely to reverse the nation’s fortunes – and firms are still keeping their distance

The Democratic Republic of Congo (DRC) celebrates 50 years of independence on June 30 – a milestone one should greet with respect and bewilderment, given the country’s size (approximately that of western Europe), diversity (four national languages, over 200 ethnic groups), and history of rebellions, secessionist movements and aggressive neighbours (various, sundry and forever invasive).

But June 30 will be more than just a celebration of the surprising fact that Congo managed to make it 50 years intact. The government hopes the day will also mark the beginning of a new era for the country – an era unburdened by the meddling of the United Nations, and the start of an economic renaissance spurred by the cancellation of billions of dollars in debt.

As independence day approaches, the country’s young president, Joseph Kabila, has convinced the UN to begin withdrawing its 10-year-old peacekeeping mission, a sign – premature in the estimation of many – that the government will soon secure the country on its own.

In what could be the biggest write-off in IMF and World Bank history, Congo is poised to have as much as 90% of its nearly $12 billion dollar external debt eradicated end-July, if it can complete the Heavily Indebted Poor Countries (HIPC) initiative.

It is a rare thing for public finances to seize the national imagination anywhere, but it’s fair to say that the entire strength of Congo’s dilapidated state-apparatus is focused on the HIPC target.

“In 2010, with regard to the constraints connected to the goal of reaching the completion point, the government is called upon to implement a prudent and restrictive fiscal policy,” prime minister Adolphe Muzito told the national assembly in April.

With the IMF looking over its shoulder, Congo’s government has tightened its fiscal belt, reduced inflation, and increased its cash reserves. In December it qualified for a three-year, $551 million Poverty Reduction and Growth Facility from the IMF; in March, the first review of the facility was declared satisfactory.

This could mean that 90% of $800 million in debt service payments scheduled for 2010 would be wiped off the books, and for a country whose 2009 budget was only $2.5 billion, it’s not pocket change.

“DRC will have more access to international financial markets, and the image of the country, in terms of financial solvency and credibility, will be greatly improved,” Muzito told government officials in February.

Of course, when you’re starting from the bottom there’s no place to go but up.

Even after debt relief, Congo’s economy will be in a shambles. Over the last two years, the economic crisis and the corresponding drop in commodities prices wreaked havoc on Congo’s mining industry, its chief source of foreign exchange. The economy grew at 2.7% in 2009, down from an expected 10%, and inflation ballooned to 47%.

HOW LONG CAN IT LAST?

But 2010 looks like a better year: the central bank is expecting to keep inflation at 15%, and by April it had achieved that goal, annualized. Growth is expected to double, and the benchmark interest rate has dropped from 70% to 52%. Cash reserves have reached a 25-year high.

It looks like it will be enough to please the IMF and World Bank by June. The question is, how long can it last?

Congo has local and national elections slated for 2011, and its army is still fighting rebels in three corners of the country. “Given its size and its tense internal politics, the DRC is prone to local rebellions fuelled by domestic discontent that can easily get out of control,” the International Crisis Group says in an April report.

The government insists it can pay for both security and the elections, and the prime minister has called for the country’s notoriously corrupt customs regime to double its receipts for the coming year.

But each of Congo’s state-owned mining companies has shut down or is in major financial trouble. The country still imports more food than it produces, in spite of having one of the richest soils in Africa. Only about 3,000km of its roads are paved, none connects one side of the country to the other, and few are well maintained.

Congo is desperate for foreign investment. Given the staggering amount of resources beneath its soil, it’s not unreasonable to think foreign direct investment would be gushing in. But that hasn’t happened.

The International Finance Corporation (IFC) ranks Congo as one of the worst places in the world to do business. Out of 183 countries surveyed for its 2010 Doing Business guide, only Central African Republic fared worse.

President Kabila has charged his government with moving up 20 places before the next IFC rankings come out, and major reforms to the country’s legal, customs and regulatory system are underway.

The government is racing to join the Extractive Industry Transparency Initiative before a June deadline, and is on schedule to become part of the Organization for the Harmonization of Business Law in Africa, or OHADA, an association of 16 African nations using a common legal framework to facilitate investment.

“This will send a very positive message to the private sector, both domestically and abroad,” says Adamou Labara, IFC’s representative in Congo.

CONTRACTS

But each time the government takes a step forward, it has a knack of taking two steps back.

And, while IFC’s Labara may be praising Congo for its reforms, his bosses have stopped funding any new projects in Congo, pending the outcome of an international arbitration case involving a mining project in which IFC is a minority investor. The $550 million copper and cobalt project, led by Canada’s First Quantum Minerals, was cancelled by the government – illegally, according to First Quantum and IFC – after a two and a half year review of all of Congo’s mining contracts.

The cancellation caused Canada to hesitate about offering financing assurances for Congolese debt relief at the Paris Club in November, citing worries about “the investment environment”, something that diplomats say they have never seen before – financing assurances are usually pro forma once the club agrees to discuss them.

Congo has responded to First Quantum’s arbitration case by pursuing a series of domestic court cases against all the company’s projects in the country, with damages already amounting to over $12 billion. “The uncertainty surrounding the First Quantum project has been damaging for the government’s reputation among investors, in part because it plays into pre-existing concerns about the country,” says Philippe de Pontet, an analyst with Eurasia Group.

First Quantum is far from the only troubled contract in Congo. The contract for American mining giant Freeport McMoRan Copper & Gold’s $1.8 billion copper and cobalt project is still unresolved, stalling a major expansion.

“The contract review process was marred from the outset by a lack of transparency,” says de Pontet. “As a result of this and the continued stalemate over Freeport’s contract, the Kabila government has not been able to put the long review saga behind it, casting a shadow over the investment climate.”

Last November, the national assembly’s Economic and Finance Commission recommended the government resolve the Freeport contract and start collecting increased taxes and royalties as soon as possible – the contract was bad, but it was legal, they said. As of May, nothing had changed.

Congo’s endemic corruption problem appears little changed: the same commission said nearly $25 million has gone missing from a signing bonus for a $6 billion minerals-for-infrastructure deal between China and Congo.

OIL

But all the drama over copper and cobalt could be nothing more than a sideshow if the country can exploit its potentially vast oil deposits.

Congo produces only 25,000 barrels per day but has proven reserves along its border lakes with Uganda and is opening up exploration under Lake Tanganyika and in its 800,000 sq.km central basin. It’s also hoping to drill for gas on Lake Kivu on the border with Rwanda.

The oil and gas are poised for pumping Ugandan and Rwandan side, but on the Congo side, there are disputed contracts, occasional gunfire – and not a drop of oil or gas coming up from the ground.

Many oil majors still view the country as too risky a bet. Dublin-based Tullow Oil is already pumping from the Ugandan side of Lake Albert and is hoping to exploit the DRC side, but the firm has been waiting for presidential approval for years.

An even bigger risk for Congo is its claim to huge offshore blocks being exploited by neighbouring Angola. The Angola dispute is probably the best barometer for how far Congo has come. The country filed preliminary papers for arbitration with the UN, and many analysts think they’ll win the case. But it’s clear that humble negotiation – not aggressive arbitration – is what’s in store.

Over the years, Angola has provided the Kabila regime with money, weapons and troops when its security was threatened. With elections coming up, the government will need all the support it can get, especially if the UN starts to stand down its forces and Congo decides to fund the elections on its own.

“Relationships between two countries are based on their interests, and the interest for us is the relationship between Congo and Angola,” says Congo oil ministry official Joseph Pili Pili.

Congo’s government knows that even come independence day, with its debt relieved and the UN peacekeepers retreating, the country is still far from independent.

If the floor drops on commodities again like it did in 2008 when 40 extractive companies closed their doors (according to the African Development Bank), or if another rebellion springs up along the eastern borders with Rwanda as happened between 2007–09, the country could be in some serious trouble.

This April, Muzito announced an ambitious plan to double per capita income by 2016 from $200 per year, which is by far the poorest in the region. It would be a notable achievement – annual per capita income was only $80 in 2000 during the height of the civil war. But the figures also show just how far the country has fallen. In 1960, 50 years ago this June, per capita income in Congo was $450.

Débout Congolais is Congo’s national anthem, adopted in the heady days of independence from Belgium. Its title translates as “Arise” or “Stand up, Congolese”.

The morning after June 30, at the dawn of the next 50 years in Congo’s history, there’s no doubt the country will arise, billions of dollars in debt and part of a UN peacekeeping force lighter.

But they’ll still need help standing.

By Michael Kavanagh
24 May 2010