Friday, November 10, 2017 11:55 AM / BMI Research
BMI View: The Democratic Republic of Congo will continue to struggle to finance its operations while its political crisis persists, given lenders' unwillingness to extend credit to the central African state. Although expenditure cuts will keep the deficit contained, salary arrears and reduced subsidies will undermine economic activity.
The DRC's finances will be severely constrained by underperforming revenues and a lack of needed outside financing over the coming quarters, both closely linked to the country's ongoing political crisis. While spending cuts and rising inflation will limit the widening of the fiscal deficit, this will reflect the government's difficulty in financing its operations rather than an improvement in its fiscal outlook. Indeed, although the government reports a budget surplus of CDF90.8mn through July, we believe this figure overstates the government's fiscal health, as civil servants have reportedly not been paid in several months.
We have revised our forecast fiscal deficit for 2017 to 0.8% of GDP, from 3.4% previously (see 'Higher Copper Prices Not Sufficient To Narrow Fiscal Deficit', June 1), as expenditures have been reduced more than we expected in the year through July. Through the first week of August, expenditures totalled CDF2.3bn, or just 42.4% of the total envisioned by the annual budget. Although up 4.3% y-o-y, expenditures lag well behind inflation, which surpassed 50.0% in July (see ' Inflation Will Continue To Rise ', September 1).
Lenders On The Sidelines
The government will continue to struggle to finance its operations while the political crisis persists. Although higher average copper prices and production will boost revenues over the coming quarters, gains will not be sufficient to satisfy the government's needs. In July, the government formally requested financial support from international donors, including the UN, EU and AU.
However, donors have refused due to repeated delays to elections and President Joseph Kabila's apparent unwillingness to step down. In August, an effort to secure a loan from VTB, a Russian bank under US sanctions, went nowhere, reportedly due to the prohibitively high interest rates demanded by the bank. We maintain our view that outside financing is unlikely to be secured without a credible plan to hold the long overdue presidential election.
Moreover, the government's efforts to raise revenues collected from the mining sector are likely to continue facing headwinds. In May, the government reintroduced a revision of its mining code, first proposed in 2015, that would increase taxes on mining profits. Industry opposition has been strong and the government's reliance on the mining sector suggests that its leverage is relatively limited. In August, the government agreed to maintain a suspension of the VAT on imports for mining companies, which had been due to expire in July, due to contradictions on the tax incorporated into the 2017 budget adopted in June.
Expenditure Cuts Will Continue
As a result, the government will continue to cut expenditures, which holds substantial downside implications for economic activity. In addition to missing payments to civil servants, the government has cut subsidies and transfer payments, which fell to 18.2% y-o-y in H117 and equalled just 11.4% of projected annual expenses by end-July. Together with extremely high inflation, these cuts underpin our view that consumption will continue to fall over the coming quarters, weighing on growth.
Additionally, the government's cuts are likely to fuel social unrest, which has been regular over recent months, disrupting commerce. Unions representing teachers, doctors and judges have all staged strikes over recent months due to salary delays, which are likely to persist over the coming quarters.
The government's financial struggles also suggest that its expansionary 2017 budget provides little guide to its operations. In May, Prime Minister Bruno Tshibala presented an overdue budget that envisioned expenditures of CDF11.3bn, double the CDF5.5bn set out in the amended 2016 budget.
Although Tshibala's budget was
enacted in June, it projects revenues will match expenditures and leave a
balanced budget, implying revenue growth of over 200% from 2016 levels.
Tshibala also assumes real GDP growth of 3.5%, notably above our 2.9% forecast,
and inflation of 12.5%, where inflation has officially averaged 34.9% y-o-y
through July and is likely to head higher.
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