Impact of Slow Global Growth on the DRC

PESA Editorial - DRC - 1Q2017/18

Despite the abundance of mineral resources in the DRC, the country has struggled to curb rising levels of poverty and unemployment. Additionally, falling global commodity prices, combined with slow economic growth in China, have negatively impacted the DRC’s economic growth in the past year.

 

Low commodity prices, poor electricity supplies to mines and the temporary suspension of production at mines, ensured that real GDP growth in 2016 decreased to 5% from 6.9% and 9.5% in 2015 and 2014 respectively. Due to a decline in revenue in 2016, the government announced a 22% cut in spending in its recent annual budget. This will likely have an adverse impact on the service sector, as well as businesses heavily dependent on government funding.

 

According to the Central Bank of Congo (BCC), inflationary pressure has remained stable with annual inflation averaging 1.3% in 2014 and 1.4% in 2015. However, in 2016, this figure rose to 10%, slightly lower than the SADC annual inflation rate of 12.7%1. The inflation rate increase was largely due to the depreciation of the Congolese franc against the US dollar. This has led the BCC to tighten domestic currency liquidity in order to increase the value of the Congolese franc. The continued slump in global commodity prices resulted in company closures and job losses – contributing to a contracted tax base for the government. These factors place a major constraint on the DRC’s fiscus. Based on the country’s fiscal stance for the past few years, one can expect capital expenditure to be delayed and recurrent expenditure to decrease, culminating in a fiscal deficit for 2017.

 

The agriculture, industry and services sectors dominate the economy of the DRC at 20.6%, 32.9% and 46.5% respectively. Over the past five years, the contribution of the agricultural sector to GDP has declined. In 2015, it decreased to 20.6% from 23.3% of the previous year and the figure is expected to be much lower in 2016 due to the impact of the drought in the region. Meanwhile, the services sector, such as telecommunications, retail trade and banking services, has witnessed an increase in its contribution to GDP from 42.3% in 2010 to 46.5% in 2015. Similar to the agricultural sector, the GDP contribution of the industrial sector has undergone slow decline. For its part, the industry sector is primarily dominated by the mining sector.

 

The mining sector remains the main driver of foreign direct investments which have increased significantly over the past decade. Nonetheless, the DRC ranks at the bottom end of the World Bank’s Ease of Doing Business report – at 184 out of 189 countries in 2016. The impact of low commodity prices and the risks involved in operating mining ventures in the DRC are the major contributors to the difficult business environment in the country. On the positive side, French oil company, Total, recently conducted tests in the DRC in order to expand the oil resource sector in the country, thus creating another source of FDI. The mining sector also contributes significantly to the DRC’s external balances, as most of its produce is destined for foreign markets. For instance, copper and cobalt accounted for more than 75% of total exports in 2015. The decline in copper prices had a negative impact on export revenues. Cobalt exports, however, remained largely unaffected as prices remained stable.

 

In 2015, the IMF, in its Article IV Consultation report, emphasised that the DRC should address social inequality and poverty by increasing fiscal space through revenue mobilisation. Poverty remains one of the most critical issues in the DRC, with GDP per capita at USD 442 and 73.1% of the population living below the poverty line of $1.9 a day. Fuelling inequality is the continued rise in unemployment, measured at 49% in 2015. The IMF also encouraged authorities to increase foreign reserves. In the longer term, the country needs to move away from a reliance on the mining sector and rather focus on product and market diversification of its exports. This can be achieved through investing in infrastructure, improving the business environment and enhancing human capital, although this is dependent on government enhancing its domestic revenue. A positive aspect is that debt indicators are more favourable following the 2010 debt relief by the IMF.


1 SADC Harmonised Consumer Price Indices (HCPI)


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