ZAIRE: SWALLOWING THE BITTER PILL OF ECONOMIC REFORM

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00287R000901430001-6
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 11
• Document Creation Date: December 22, 2016
• Document Release Date: August 19, 2010
• Sequence Number: 1
• Publication Date: August 9, 1984
• Content Type: MEMO

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Central Intelligen? nge~uy
DIRECTORATE OF INTELLIGENCE
9 August 1984
ZAIRE: Swallowing The "Bitter Pill" Of Economic Reform
Summary
Faced with chronic economic problems, Zaire has been
making a strong effort this year to stick to its latest
economic stabilization program. The country has been
experiencing economic and financial difficulties almost
continuously since 1974 and has had limited success with a
series of earlier corrective economic measures. Kinshasa is a
long way from achieving economic stability and Mill have to
maintain strict economic ad3ustment policies for several years
to attain that goal. Expected low levels of new investment and
continued foreign exchange shortages~,e slow economic
growth for the rest of the decade.
Mixed Results in 1983
Following a dismal 1982 economic performance of negative economic
growth, a near record current account deficit of x432 million, and the
virtual exhaustion of foreign exchange reserves, Kinshasa introduced a
number of stronger measures last year to halt the economic and financial
deterioration. These measures, programmed for 1983-84, were intended to
This memorandum. was. self-initiated by Regional Issues
Branch, Africa~Division, Office of African and Latin American Analysis.
Questions and comments are welcome and may be directed to the Chief,
Africa Division, ALA
ALA M 84-10080
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smooth the way for a new IMF standby arrangement for balance of payments
support. Kinshasa's actions anticipated restrictive conditions that the
IMF would, most likely, have required later. The measures included:
-- a massive 77 percent devaluation last September of the zaire in
terms of the IMF's Special Drawing Right (SDR).
-- a floating exchange rate and the temporary establishment of a dual
exchange rate system of official and free (parallel) market rates
in September 1983 as a transition to a unified exchange rate. .(The
two rates were unified in March 1984).
-- a program of fiscal austerity, with strengthened budgetary
controls and tax reform. Anew fiscal regime was introduced for
GECAMINES, again in September, partly with a view to rationalizing
the important revenue flow of that mining parastatal to the
Zairian treasury.
-- liberalization of the trade and exchange system by easing, for
example, restrictions on trade in artisanal gold and diamonds; by
removing restraints on commercial bank retention of foreign
exchange receipts; and by simplifying import licensing
regulations.
-- extensive liberalization of consumer prices and of producer prices
for agricultural products. ~~
Zaire's economic stabilization measures substantially contributed to
a halt in its economic and financial decline last year. Export volume
increases for cobalt, zinc, diamonds, and crude oil also helped. The
foreign trade surplus rose to $410 million, up from $326 million in
1982. Real GDP grew by 0.5 percent, after a 2 percent fall the previous
year. The budgetary deficit was reduced to 2 percent of GDP, compared to
9 percent in 1QR~ The current account deficit fell by $112 million to
$320 million.
Some negative developments clouded the economic picture. The
inflation rate was 76 percent, compared to 37 percent in 1982, mainly
because of the currency devaluation and the accompanying higher domestic
prices for impnrted~~{~etroleum, which were reflected in higher public
utility rates for electricity and public transport. Activity in the
agricultural sector was disappointing, with a poor performance by cash
crops. Production of coffee, Zaire's chief agricultural export, was down
21 percent; palm kernel, ~0 percent, sugar cane, 21 percent; and rubber
and tea, 7 percent each. ~ ~
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More Debt Rescheduling
In a recurring scenario that first appeared in 1976, Zaire, last
December, once again obtained relief on its external debt. Although this
relief has eased somewhat the pressure on the countr 's balance of
payments, the payments situation remains tight.
In its evaluation of Zaire's 1983-84 economic program the IMF
regarded debt relief as a precondition for its approval of a new standby
arrangement. Kinshasa's heavy debt service obligations, which already had
sizeable arrears, threatened to contribute to external financial gaps that
were not consistent with the program presented. At yearend 1982, Zaire's
official and officially guaranteed debt stood at $4.4 billion, of which
$2.5 billion was owed to Paris Club creditors .(certain governments) and
$350 million to London Club creditors (certain commercial banks). Arrears
of debt service obligations were nearly $700 million, with an additional
$220 million overdue for imports and invisible trade. 0
Zaire's success in rescheduling some $920 million of Paris Club debt
obligations in December 1983 enabled the present 15-month IMF standby
arrangement to become effective later that month. The standby will
provide some $240 million in balance of payments support in installments,
subject to periodic review of agreed on performance criteria. In
addition, Kinshasa received a $122 million loan last December from the
IMF's Com~y Financing Facility, for previous shortfalls in export
earnings.
The 1984 Adjustment Program
Zaire's 1984 economic adjustment program focuses on improved
financial management under a regime of fiscal austerity. The key
objectives are:
-- curbs on the budgetary deficit
-- a reduction in the rate of credit expansion in the economy
-- removal of. excess liquidity from the banking system
~..
-- the establishment of a money market to help absorb domestic
currency and reduce the demand for. foreign exchange, and
-- further development of the interbank foreign exchange market.
Kinshasa has successfully undergone two IMF reviews of performance
criteria this year, for the periods ending December 1983 and March 1984.
The review for the June 1984 quarter is scheduled for this month and the
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preliminary indications a,~at Kinshasa will again be in compliance with
the IMF's conditions.
In the course of the IMF reviews, Zaire has been able to obtain minor
waivers of performance criteria or slight modifications in its program
because of mitigating circumstances. Such changes were anticipated by the
IMF and by the Zairian authorities themselves. For example, waivers on
ceilings for the banking system`s net credit to the government and to the
private sector at yearend 1983 were obtained after inproved methods for
compiling monetary statistics, implemented after the 1983-84 program was
prepared, revealed that the ceilings had been exceeded. Also, on the
basis of the IMF review for first quarter 1984, programmed public and
private sector borrowing has been eased somewhat to deal with an
anticipated tight liquidity situation and to accommodate increased
Treasury financing now required by the program.
No Vigorous Economic Performance This Year
In our estimation, Zaire's economic performance this year will not be
a vigorous one. This is not unexpected, in view of tight fiscal and
monetary policies in an economic program that emphasizes longer-term
stability over short-term economic expansion. We expect marginal growth
in GDP this year, between 1 and 2 percent.
In the international accounts, the foreign trade balance should show
some slight improvement. Prices for cobalt, zinc, and coffee are climbing
and higher export volumes are expected for cobalt, diamonds, and crude
oil. Copper production by GECAMINES through mid-year has been on target
at its production capacity of 470,000 metric tons annually. Copper prices
are on the rise, although still below last year's average. Imports, on
the other hand, should rise marginally under the austerity regime. The
current account deficit will likely widen by some $20 million, mainly from
increased int~st payments on external debt owing to non-Paris Club
Stabilization Plans Remain on Course
Zairian President Mobutu and his principal economic advisers,
including Prime Minister Kengo Wa Dondo and Bank of Zaire Governor Sambwa
Pida, have shown unusual resolve this year in implementing the economic
reforms. In addition, the country has been meeting its newly negotiated
debt service obligations. Agreed on monthly deposits in the Federal
Reserve Bank of New York for the benefit of Paris Club creditors have been
made on schedule. A payments program has been worked out with London Club
creditors. All prior arrangements for the reduction of commercial and
invisible trade arrears throu h cash payments in foreign exchange have
been complied with, so far.
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The economic reform measures go much beyond those previously
undertaken. In the process of strengthening budgetary controls an
increasing number of government operations have been centralized under the
Ministry of Finance. A comprehensive listing of government employees,
compiled for the first time, will tend to eliminate payments for non-
existent workers at the same time that the government seeks to control a
~y mechanism that preempts some 25 percent of government receipts.
The June 1984 dissolution of SOZACOM, the parastatal marketing agency
for GECAMINES, has been an additional important move toward greater
financial responsibility. The elimination of the marketing middleman
should improve the timeliness of copper export receipts by GECAMINES and
of payments by GECAMINES to the Zairian Treasury. In addition, a major
source of leakages of foreign exchange receipts, t,hr~ unaccounted for
minerals sales through SOZACOM, has been removed.
The Longer View
Zaire's economic problems do not lend themselves to an early
solution. Even with continued resolve by the Zairian authorities serious
obstacles to economic recovery remain.
-- The inflation rate, expected to be around 50 percent this year,
needs to be brought under control rapidly. If not, continued
depreciation of the Zairian currency will put upward pressure on
prices and wages. This depreciation could also fuel a revival of
the parallel foreign exchange market and cripple an important
element of the recovery program--the establishment of an offic'
exchange rate process that reflects Zaire's costs and prices.
-- Much of the economic recovery program depends on the ability of
GECAMINES to maintain its productive capacity and, consequently,
its key contributions to foreign exchange earnings (about 80
percent) and to the already tight government budget (about 22
percent this year). In the course of maintaining productive
capacity in the recent past GECAMINES has postponed capital
investment and has fallen behind in removing the overburden of the
open p tt?mi~~es at Kolwezi that supply 60 percent of its copper.
GECAMINES now urgently needs capital for plant rehabilitation. To
further complicate the maintenance. of productive capacity, the
deteriorating rolling stock of SNCZ, the national railroad, may
not be able to move sufficient copper concentrates from mines to
refineries.
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-- Agricultural production will likely continue to be restrained by
the shortage of investment funds, both for agricultural projects
and for improving the domestic transport network necessary for
moving crops to markets. World Bank funds are available for
railroad and road improvement projects in both agriculture and
mining, but the required counter funds are hard to come by in
a regime of budget stringency.
-- Debt service payments will continue to keep Zaire in a financial
straitjacket that will leave little room for applying new --
resources to economic growth. Even with the latest rescheduling,
debt service consumes 50 percent of government expenditures, with
Zaire's total debt at the end of 1983 an estimated $5.2 billion,
including commercial debt. The IMF believes that, for future
economic programs to be viable, debt rescheduling will be required
each ear for the rest of the decade.
only a sm oportion of Zaire's
debt principa w ever e recovered.
The Political Fallout
Despite its austerity, we do not see Zaire's economic adjustment
program having any adverse political fallout for President Mobutu even if
maintained, as appears necessary, for several years. There may be future
protests by mineworkers, students, and civil servants, but Mobutu remains
firmly in control, after his election this month to a third seven year
term. Zaire's living standards have been falling for nearly a decade and
the majority of the population has apparently adopted a fatalistic
attitude toward hard times. Although there are some 50 anti-Mobutu groups
inside and mostly outside Zaire we believe that none of them are
influential enouvide a serious challenge, or alternative, to the
present regime.
President Mobutu has apparently resigned himself to swallowing the
self -described "bitter pill" of economic reform, with its requirement of
rigorous and more honest economic and financial management. Even if
sustained economic adjustment programs eventually succeed in turning the
Zairian economy around, however, aspects of the present regime will
continue to prevent~~~the country from realizing the full economic potential
of its rich endowment of natural resources. These negative attributes
include pervasive corruption at high levels, a concentration of power in
Mobutu that stifles administrative initiative in the government, and the
official practice of favoritism to sp~terest groups and regions at
the expense of the national economy.
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ZAIRE:
Table I
Current Account
Million US $ 1981 (a)
1982 (a)
1983 (a)
1984 (b)
Current account
balance
-424
-432
-320
-338
Trade balance
210
326
410
465
Exports f.o.b.
1500
1454
1523
1642
Copper
757
791
781
778
Imports f.o.b.
1290
1128
1113
1177
Oil
249
187
171
194
Net services and
transfers
-634
-758
-730
-803
a. Estimated.
b. Projected.
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Table II
Zaire: Selected Economic Adjustment Measures in
the Present Economic Recovery Program
Economic Adjustment Measures Implementation Status
Devaluation of the zaire by 17.5
percent in terms of the SDR.
Floating of the zaire and introduction
of a temporary dual exchange rate
arrangement.
September 1983
September 1983
Adoption of a new fiscal regime
for GECAMINES
Liberalization of all domestic retail
prices.
Rescheduling of official debt to
Paris Club
Establishment of a blocked Bank of
Zaire account for handling external
debt service payments
Unification of official and free
market exchange rates
Auctioning of Treasury Bills as
part of creating a domestic money
market
Substantial reduction in customs
duties
Comprehensive 1 i st?i ng s of
government employees
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September 1983
September 1983
December 1983
January 1984
January 1984
June 1984
Incomplete
Believed incomplete
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Table III
Zaire: Composition of Exports, 1982 (Percent)
Copper
40.4
Cobalt
6.6
Diamonds
11.7
Coffee
18.9
Other
22.4
X00.0
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Zaire:
Selected Economic Indicators
1980
1981
1982
1983
1984 (a)
Real GDP Growth
(Percent)
2.4
2.4
-1.0
0.5
1.5
Consumer Price
Changes (Percent)
47
35
37
76
49
Copper Export Volume
(Percent change)
37
12
5
-6
-4
Debt Service Ratio
as percent of
exports of goods
and services
22
25
18
18
27
a. Projected.
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ZAIRE: Swallowing The "Bitter Pill" Of Economic Reform
Distribution:
Original - Ambassador James K. Bishop, Deputy Assistant
- Secretary for African Affairs, Dept. of State
1 - Frank G. Wisner, Deputy Assistant
- Secretary for African Affairs, Dept. of State
1 - Princeton Lyman, Deputy Assistant Secretary
- for African Affairs, Dept. of State
1 - Pierre Shostal, Director, Office of Central
- African Affairs, Dept. of State
1 - Ralph Bresler, Desk Officer for Zaire, Office
- of Central African Affairs, Dept. of State
1 - DDI
1 - ADDI
1 - DDO/Africa
1 - NIO for Africa
1 - NIC Action Group
1 - PDB Staff
1-ILS
1 - C/DDI/PES
1 - D/ALA
2 - ALA/PS
1 - ALA Research Director
4 - OCPAS/IMD/CB
5 - ALA/AF
2 - AF/RI
4 - ALA/RI
ALA/AFB (9 August 1984)
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