COUNTRY REPORT

Zambia Democratic Republic of Congo at a glance: 2002-03

OVERVIEW Presidential, legislative and municipal elections are likely to be held in either late November or early December 2001. The presidential candidate of the ruling MMD party, , will face a strong challenge from Christon Tembo, of the opposition FDD party. It is unlikely that the MMD will win an overall majority in the legislative election, but it and the FDD will be well represented in the new parliament. We expect the to continue to weaken, to an average of ZK4,389:US$1 in 2002 and ZK5,142:US$1 in 2003. Mainly because of improved food production, the average inflation rate is expected to fall to 20.5% in 2002 and 17.6% in 2003. The current-account deficit is forecast to narrow from 4% of GDP in 2002 to 2.9% of GDP in 2003, largely as a result of higher mining export revenue and lower debt-service payments. Key changes from last month Political outlook • The MMD’s decision to bar seven ministers from standing at the forthcoming legislative election suggests that they are being purged because they are FDD party sympathisers. Economic policy outlook • The government’s economic policy priority for 2002-03 is to produce a full poverty reduction strategy paper and then begin to implement it. However, it now looks likely to be delayed until mid-2002. Economic forecast • We have lowered our forecast of real GDP growth to 4.3% in 2002 despite increased mining output, because of weak copper demand and prices. Real GDP growth will pick up to 4.6% in 2003 as the US economy recovers and world copper demand strengthens. November 2001

The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The EIU delivers its information in four ways: through our digital portfolio, where our latest analysis is updated daily; through printed subscription products ranging from newsletters to annual reference works; through research reports; and by organising seminars and presentations. The firm is a member of The Economist Group.

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Contents

3 Summary

Zambia

5 Political structure 6 Economic structure 6 Annual indicators 7 Quarterly indicators 8 Outlook for 2002-03 8 Political outlook 8 Economic policy outlook 10 Economic forecast 13 The political scene 18 Economic policy 21 The domestic economy 21 Economic trends 22 Mining and energy 23 Agriculture 24 Foreign trade and payments

Democratic Republic of Congo

26 Political structure 27 Economic structure 27 Annual indicators 28 Quarterly indicators 29 Outlook for 2002-03 32 The political scene 39 Economic policy and the economy 42 Foreign trade and payments

List of tables

10 Zambia: international assumptions summary 12 Zambia: forecast summary 32 Democratic Republic of Congo: forecast summary 40 Democratic Republic of Congo: monthly inflation, 2001 41 Democratic Republic of Congo: government revenue, Jan-Jul 2001

EIU Country Report November 2001 © The Economist Intelligence Unit Limited 2001 2

List of figures

13 Zambia: gross domestic product 13 Zambia: kwacha real exchange rates 19 Zambia: 91-day Treasury-bill rate 21 Zambia: annual inflation 22 Zambia: copper cash prices 28 Democratic Republic of Congo: copper price 31 Democratic Republic of Congo: foreign trade 31 Democratic Republic of Congo: gross domestic product 40 Democratic Republic of Congo: exchange rates 2001 40 Democratic Republic of Congo: monthly inflation

EIU Country Report 4th quarter 2001 © The Economist Intelligence Unit Limited 2001 3

Summary

November 2001

Zambia

Outlook for 2002-03 Presidential, legislative and municipal elections are likely to be held in either late November or early December 2001. The presidential candidate of the ruling MMD party, Levy Mwanawasa, will face a strong challenge from Christon Tembo of the FDD opposition party. It is unlikely that the MMD will win an overall majority in the legislative election, but it and the FDD will be well represented in the new parliament. The government’s economic policy priority for 2001-03 is to produce a full poverty reduction strategy paper and then begin to implement it. We have lowered our real GDP growth forecast to 4.3% in 2002 despite increased mining output, because of weak copper demand and prices. Real GDP growth will pick up to 4.6% in 2003 as US recovery and world copper demand strengthens. We expect the kwacha to continue to weaken, to an average of ZK4,389:US$1 in 2002 and ZK5,142:US$1 in 2003. The average inflation rate is expected to fall to 20.5% in 2002 and 17.6% in 2003, mainly owing to higher food output,. The current-account deficit is forecast to narrow from 4% of GDP in 2002 to 2.9% of GDP in 2003, largely as a result of higher revenue from mining exports.

The political scene A former vice-president, Levy Mwanawasa, has been named as the MMD’s presidential candidate, and the FDD has chosen another former vice-president, Christon Tembo, as its candidate. But the MMD have questioned his nationality, which could bar him from standing. The opposition parties have failed to agree on a single presidential candidate. The electoral roll was finalised in late . The MMD’s parliamentary list of candidates has excluded seven ministers, signalling a purge within the MMD of FDD supporters.

Economic policy Zambia’s poverty reduction strategy paper has still not been finished, but the World Bank has endorsed the government’s commitment to economic growth, which has led it and the IMF to release funds. Tax revenue has exceeded its target, and monetary policy has been tightened to support the kwacha.

The domestic economy The government is optimistic about its real GDP growth and inflation estimates for 2001. However, the kwacha has begun to depreciate. The Konkola Deep mining project has been postponed and Chibuluma South mine has been almost closed, but Mopani Copper Mines has expanded operations. The government has invited tenders for importing maize to meet food shortages.

Foreign trade and payments Zambia has introduced non-tariff barriers to restrict the import of some Zimbabwean products. The Angolan rebel group, UNITA, has continued to smuggle diamonds into Zambia. With the apparent delivery of funds from donors, international reserves are believed to have risen to around US$250m.

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Democratic Republic of Congo

Outlook for 2002-03 The inter-Congolese dialogue will face a testing time in the coming months as efforts are made to keep all the parties involved. Recent obstructiveness toward the dialogue may indicate that hardliners in President Joseph Kabila’s govern- ment are gaining the upper hand. The government’s priority in the dialogue is to win the support of other delegates for President Kabila’s remaining head of state during the transition, which it is seeking to do by offering positions in a future unity government. The government is unlikely to agree to any outcome that does not include its remaining in power. Lack of a mutually agreed timetable for the withdrawal of their troops will remain a key obstacle to the implementation of the peace process by the main foreign parties involved. The government for its part hopes to be seen to be co-operating with efforts to disarm the negative forces, even if recent efforts are lacking in substance. The economic outlook has improved greatly as the government continues with market-based reforms for stabilising the economy. The authorities hope to stabilise real GDP in 2001, and return to positive growth in 2002 for the first time for over a decade. A donor conference in December is expected to result in an enormous increase in assistance for reconstruction.

The political scene The inter-Congolese dialogue finally began on October 15th in Ethiopia, although the talks were marred by a government walk-out. The other parties carried on, eventually agreeing to most of the government’s demands in its absence. The next meeting in was set for November 19th. The walk-out cost the government much support in the capital, Kinshasa, leading to a renewed security crack-down. Fighting has intensified in the east of the country between the pro-government Mai-Mai and militias and the Rwandan proxy force, the RCD. Tensions is growing between and involving their respective proxy forces in the DRC. The UN has voted to bring its peacekeeping operation in the DRC up to full strength, to assist with a third phase involving demobilisation and the reintegration of ex-combatants.

Economic policy and the The government is continuing with the ambitious economic reforms it is economy committed to under its staff-monitored programme, including tight monetary and fiscal controls. Both the exchange rate and inflation have continued to stabilise. An IMF mission which visited in October has endorsed the progress made by the government. President Kabila sacked the directors of all state companies in August, alleging corruption and mismanagement. A new copper and silver mine is to begin production in 2002.

Foreign trade and payments Donors are preparing a new package of assistance to support reconstruction in the DRC which may amount to several billion dollars. An agreement to help clear the country’s arrears to multilateral institutions—assisted by and Belgium—must be concluded before large-scale assistance can resume.

Editors: Angus Downie (Zambia), Douglas Mason (DRC); Paul Gamble (consulting editor) Editorial closing date: October 31st 2001 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

EIU Country Report November 2001 © The Economist Intelligence Unit Limited 2001 Zambia 5

Zambia

Political structure

Official name Republic of Zambia

Form of state Unitary republic

Legal system Based on the 1996 constitution

National legislature National Assembly; 150 members elected by universal suffrage; all serve a five-year term

National elections November 1996 (presidential and legislative); next elections due in November or December 2001

Head of state President elected by universal suffrage for a term of five years

National government The president and his appointed cabinet

Main political parties The Movement for Multiparty Democracy (MMD) is the ruling party, with a large parliamentary majority. The National Party (NP) and Agenda for Zambia (AZ) were the only two other parties to win seats in the 1996 legislative elections. The former sole party, the United National Independence Party (UNIP) boycotted the 1996 elections, but it, the United Party for National Development (UPND, formed in late 1998) and the recently formed Forum for Democracy and Development (FDD) party have all won parliamentary seats in by-elections. The FDD, the Zambia Republican Party (ZRP), and the have all been recently formed by former MMD cabinet members. The Zambia Alliance for Progress (ZAP), formed in 1999, de-merged from the ZRP in January 2001. There are over 30 parties in total

President Vice-president Enock Kavindele

Key ministers Agriculture & fisheries Mishek Chinda Commerce, trade & industry Yusuf Badat Communications & transport Joaquim Mwape Defence Joshua Simuyandi Education Reuben Musakabantu Energy & water development David Saviye Finance & economic development Katele Kalumba Foreign affairs & co-operation Keli Walubita Health Levison Mumba Home affairs Vacant Information & broadcasting Vernon Mwaanga Lands Abel Chambeshi Labour & social services Newstead Zimba Local government & housing Bates Namuyamba Mines Chitalu Sampa Presidential & legal affairs Eric Silwamba Science, technology & vocational training Valentine Kayope Tourism Michael Mabenga Works & supply Vacant

Central bank governor Jacob Mwanza

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Economic structure

Annual indicators

1996 1997 1998 1999 2000a GDP at market prices (ZK bn) 4.0 5.2 6.3 8.4 10.9 GDP (US$ bn) 3.3 3.9 3.4 3.5 3.5 Real GDP growth (%) 6.6 3.3 –1.9 2.4 3.1 Consumer price inflation (av; %) 43.1 24.4 24.5 26.8 26.0b Population (m) 9.5 9.8 10.1 10.4 10.7 Exports of goods fob (US$ m) 994 1,110 816 759 800 Imports of goods fob (US$ m) 1,056 1,055 971 870 1,008 Current-account balance (US$ m) –122 –252 –335 –195 –265 Foreign-exchange reserves excl gold (US$ m) 222.7 239.1 69.4 45.4 244.8b Total external debt (US$ bn) 7.1 6.7 6.9 5.9 5.9 Debt-service ratio, paid (%) 22.1 18.9 21.0 50.8 37.2 Exchange rate (av) ZK:US$ 1,207.9 1,314.5 1,862.1 2,388.0 3,110.8b

October 31st 2001 ZK3,765:US$1

Origins of gross domestic product 2000c % of total Components of gross domestic product 1999 % of total Agriculture 17 Private consumption 77 Industry 26 Government consumption 10 Mining 6 Gross fixed capital formation 17 Construction 5 Change in stocks 1 Manufacturing 12 Exports of goods & services 31 Government & other services 58 Imports of goods & services –37 GDP at market prices 100 GDP at market prices 100

Principal exports 2000 US$ m Principal imports 2000 US$ m Copper 377 Capital goods 547 Cobalt 80 Manufactures 220

Main destinations of exports 2000d % of total Main origins of imports 2000d % of total UK 25.2 South Africa 67.1 South Africa 24.5 UK 9.8 Switzerland 9.4 7.5 7.5 US 5.9 a EIU estimates. b Actual. c Official estimates. d Based on partners’ trade returns; subject to a wide margin of error

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Quarterly indicators

1999 2000 2001 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Prices Consumer prices (1994=100) 387.4 401.3 437.0 463.5 491.6 518.6 565.1 567.3 % change, year on year 26.9 28.0 22.5 25.1 26.9 29.2 29.3 22.4 Copper, LME (US cents/lb) 76.1 78.9 81.5 78.9 85.0 83.8 80.1 75.0 Financial indicators Exchange rate ZK:US$ (av) 2,403.6 2,482.5 2,714.4 2,866.4 3,177.6 3,685.1 3,658.3 3,344.0 ZK:US$ (end-period) 2,413.7 2,632.2 2,758.2 3,022.0 3,232.2 4,157.8 3,039.1 3,704.4 Interest rates (av; %) Deposit 21.00 21.00 20.93 20.00 20.03 20.00 21.90 23.17 Weighted lending base 41.23 42.10 40.67 38.93 37.97 37.63 45.33 46.37 Treasury bill, 91-day 36.70 36.15 34.41 31.59 29.14 30.32 40.87 43.74 M1 (end-period; ZK bn) 432.3 513.0 474.5 582.3 639.8 775.9 790.1 874.1 % change, year on year 14.9 23.6 25.0 46.2 48.0 51.2 66.5 50.1 M2 (end-period; ZK bn) 1,241.0 1,397.9 1,422.6 1,724.7 1,977.6 2,429.1 2,070.4 2,326.5 % change, year on year 24.9 27.7 33.5 49.4 59.4 73.8 45.5 34.9 Sectoral trends Copper in concentrates (‘000 tonnes) Production 70.4 63.0 57.9 32.1 65.8 70.3 66.8 72.4 Exports 55.9 61.3 50.4 41.5 63.0 61.7 70.9 72.1 Cobalt (tonnes) Production 749 922 655 329 887 1,070 821 1,188 Exports 526 698 707 256 1,357 880 811 1,243 Foreign tradea (US$ m) Exports fob 126.5 129.3 184.7 214.8 165.2 192.8 227.1 n/a Imports fob –217.7 –248.9 –203.6 –237.7 –292.9 –366.4 –255.8 n/a Trade balance –91.2 –119.6 –18.9 –22.9 –127.7 –173.6 –28.7 n/a Foreign reserves (US$ m) Reserves excl gold (end-period) 72.6 45.4 8.9 29.8 89.4 244.8 249.9 195.6 a DOTS estimates.

Sources: Bank of Zambia, Statistics Fortnightly; IMF, International Financial Statistics; Direction of Trade Statistics.

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Outlook for 2002-03

Political outlook

Domestic politics Presidential, legislative and municipal elections are likely to be held in either late November or early December 2001. The presidential candidate of the ruling party, the Movement for Multiparty Democracy (MMD), Levy Mwanawasa, has failed so far to make much impression on the apathetic Zambian electorate. However, a low turnout would help Mr Mwanawasa. In addition, his campaign is state-financed and is being given the most favourable coverage by the state-owned media. Nonetheless, Christon Tembo, from the recently formed opposition party, the Forum for Democracy and Development (FDD), which most of the former MMD ministers (expelled from the party in May 2001) have now joined, will make a strong challenge. To prevent a divided opposition vote delivering the presidency to the MMD, the FDD needs to make an electoral pact with other opposition parties, but despite considerable talk this remains unlikely. If, as seems probable, there are several candidates from the opposition, Mr Mwanawasa may win the presidential election. The 2002-03 post-election period is expected to be relatively calm, free from the tribulations of the debate over a third term for President Frederick Chiluba, which has so polarised the country.

It is unlikely that the MMD will win an overall majority in the legislative election as its support appears to be draining away—seven cabinet ministers are not being allowed to stand (suggesting that they are probably FDD supporters, who may defect before the election). But the MMD and FDD will be strongly represented in the new parliament, as will Zambia’s former ruling party, the United National Independence Party, which will secure most of its support from eastern regions, and the United Party for National Development, which enjoys strong support in the south and west of Zambia.

International relations The spillover of the Angolan civil war into border areas continues, and refugees are still crossing into Zambia. Incursions by armed groups can be expected in the forecast period. The armed incursions pose a constant threat to relations between Zambia and , but a tripartite security mechanism between Angola, Zambia and is succeeding in containing the threat, and it is likely to continue to do so in 2002-03.

Economic policy outlook

Policy trends The government’s economic policy priority for 2002-03 is to produce a full poverty reduction strategy paper (PRSP) based on the July 2000 interim PRSP, and then to begin its implementation. The PRSP is expected to amplify the interim PRSP’s focus on ensuring macroeconomic stability, increasing social spending, targeting poverty alleviation, widening the tax base, improving fiscal control and completing the privatisation programme. The government has said that the PRSP will be finished by the end of 2001 (compared with an earlier deadline of September), but the forthcoming election will delay it further until

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the first half of 2002. The completion of the PRSP is important, as it will help Zambia reach completion point under the IMF-World Bank’s heavily indebted poor countries (HIPC) initiative, when the bulk of debt relief is received.

The minister of finance, Katele Kalumba, has repeatedly insisted that Zambia remains committed to the privatisation programme, but little movement should be expected before the elections. However, an invitation for bids is due to be issued in December 2001 for a 35% stake, with management rights, in the troubled Zambia National Commercial Bank. In addition, bids for Zambia Railways are due in December and a winner will be selected in July 2002. There is still no cabinet decision on selling Zambia Telecommunications, but the government is considering offering a 25% stake—the initial offer was set at 20% in January 2000. However, a decision is not expected soon. The preliminary stages of privatisation have begun at Zambia Electricity Supply Corporation and Indeni oil refinery.

Fiscal policy Real public expenditure is forecast to rise during 2002-03. Mr Kalumba has promised that economic policy in the remainder of 2001 will not be unduly influenced by the electoral needs of the MMD, and he has predicted a fiscal deficit of 0.8% of GDP in 2001. However, spending levels will be increased by substantial government-funded maize imports to compensate for the poor harvest this year (which will carry over into 2002), partial funding of the 2001 wage agreement with public-sector workers and increased expenditure on social services. In addition, there will be increased spending by the president’s discretionary fund as the elections approach. Balancing this to some extent, revenue collections have been above target in 2001, and we, therefore, forecast a fiscal deficit of 4.2% of GDP. Despite official expectations that revenue will continue to grow during 2002 and beyond, we believe that expenditure will re- main in excess of revenue in 2002-03, however, the fiscal deficit is expected to fall to 3% of GDP in 2002 and 2.7% of GDSP in 2003 as the upturn in mining and services sustains revenue increases and demand for food imports decreases.

However, unless better weather conditions deliver a good harvest in the 2001/02 agricultural year (October-September), demand for food imports will rise again towards the end of 2002, adding pressure on government spending, which in turn may increase the 2002 fiscal deficit (which will carry over into the first half of 2003). Even if there is no food shortage in 2002, the narrowing of the fiscal deficit will be less than we forecast earlier because of the deterio- rating prospects for international copper prices in 2002 caused by depressed demand in the wake of the September 11th terrorist attacks in the US.

A positive development on the fiscal reform front was the announcement by Mr Kalumba in October that private-sector oil firms will be able to import crude oil in 2002, thus ending the government’s monopoly (and reducing government spending on subsidising imported petroleum products). We expect steady donor assistance to Zambia in the post-election period whoever wins the election (as all parties’ policies are generally similar), which will also play an important role in containing the fiscal deficit during 2002-03. However, owing to donor concerns about governance and privatisation in the pre-

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election period, assistance for 2001 may not be fully distributed if Zambia fails to meet fiscal, monetary and other required conditions.

Monetary policy The Bank of Zambia (the central bank) reduced interest rates in August and September, but raised them again in October to support the kwacha. The kwacha is likely to remain under pressure for the remainder of 2001, suggesting that there will be little further scope for interest rate cuts this year. During 2002-03, the central bank is likely to allow a steady depreciation in the currency to maintain export competitiveness, and average real lending rates will fall to around 20% in 2003 from an average rate in 2001 of 24%. But the bank will increase interest rates if the kwacha shows signs of an accelerated fall in its exchange value against the US dollar. However, interest rates can not be held high for long owing to the government’s repayment commitments through its exposure to Treasury bills and bonds. Given the uncertainty over monetary policy and extra government spending, the budget target of 20.5% growth in narrow money supply (M1) during 2001 appears unrealistic, as does the IMF-advised broad money-supply (M2) growth target of 17.5% for 2001. We expect both to rise above official forecasts, to around 30%. In 2002, M1 is forecast to grow by 17% and M2 by 21% as pressure on the money supply diminishes after the elections. This downward trend is expected to be carried over into 2003, barring poor weather, which could force the government to increase money supply growth further to purchase maize and other foodstuffs.

Economic forecast

Zambia: international assumptions summary (% unless otherwise indicated) 2000 2001 2002 2003 Real GDP growth World 4.7 2.2 2.9 4.2 OECD 3.7 1.0 1.5 3.0 EU 3.3 1.6 1.8 2.5 Exchange rates (av) ¥:US$ 107.8 121.2 124.0 121.5 US$:¤ 0.924 0.903 0.968 1.015 US$:SDR: 1.32 1.28 1.30 1.33 Financial indicators ¤ 3-month interbank rate 4.48 4.28 3.88 4.65 US$ 3-month Libor 6.53 3.83 2.59 5.34 Commodity prices Oil (Brent; US$/b) 28.5 25.4 21.5 20.5 Gold (US$/troy oz) 279.3 268.8 255.0 250.0 Copper (US cents/lb) 81.3 72.1 72.8 83.3 Industrial raw materials (% change in US$ terms) 13.4 –7.5 3.7 12.8

Note. Regional GDP growth rates weighted using purchasing power parity (PPP) exchange rates.

International assumptions The outlook for global economic growth is poor, largely owing to the poor economic situation in the US, which has been exacerbated by the September 11th attacks. We expect world GDP (on a purchasing power parity basis) to

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expand at a rate of 2.2% in 2001, 2.9% in 2002 and 4.2% in 2003, against a background of low inflation. The outlook for copper, Zambia’s main export, has deteriorated markedly, but is forecast to recover in the medium term. Copper prices are expected to rise by 0.9% in 2002 to 72.8 US cents/lb from 72.1 US cents/lb in 2001. We forecast an increase in the price to 83.3 US cents/lb in 2003 when demand picks up.

Economic growth We have reduced our estimate of real GDP growth to 4% in 2001 and our forecast to 4.3% in 2002 despite increased mining output, because of weak copper demand and prices. Real GDP growth is forecast to pick up to 4.6% in 2003 as the US recovery and world copper demand strengthens. Following privatisation, fresh investment, new technology and improved management at the copper mines have resulted in a significant increase in production, which rose from 226,000 tonnes in 2000 to around 303,000 tonnes in 2001. This should allow the mining sector to grow by 8% in 2001. Copper output is expected to rise further, to 360,000 tonnes in 2002 and to 375,000 tonnes in 2003, given the capital expenditure plans of the new mine owners. This will lead to mining growth of around 12% in 2002 and 2003.

The services sector will be buoyed up by the government’s pre-election spending in the remainder of 2001, and will again provide around 58% of GDP. This share of GDP will be maintained during 2002-03 even after the elections, as recent tourism investments bear fruit, and sectors such as transport and professional services benefit from the copper mines’ privatisation.

Owing to reduced planting and the poor harvest, agriculture will contract by around 5% in 2001. Prospects for 2002 have been harmed by a recent ban on maize exports, which is a disincentive to commercial producers, though output from small-scale farmers is expected to improve because of the timely supply of inputs this season. We expect agriculture to grow by 2% in 2002; in 2003 crop diversification should help lift agricultural growth to 6%.

The decline of manufacturing is set to continue throughout 2002-03, driven by high fixed costs, sustained South African competition and heavy dumping of cheap Zimbabwean goods. We expect manufacturing to record little real growth in 2001, particularly as the poor 2000/01 harvest will affect maize- milling, which official sources include as a manufacturing activity. Government consumption has risen owing to extra-budgetary spending and is expected to grow by 4% in 2001, 2.6% in 2002 and 3.3% in 2003.

Inflation The government forecasts an end-2001 inflation rate of 17.5%. We think it is unlikely that the target will be met and estimate a year-end rate of 19.4%, particularly if the government honours most of its recent pay awards to the public sector. In addition, food prices have started to rise and will increase further because of the poor maize harvest (the annual inflation rate rose to 17.4% in September, from 16.8% in August, the first rise in 2001). However, these increases are being contained by hidden government subsidies (such as the alleged support being given to certain maize millers), and their inflationary impact will mainly be felt during 2002. We expect the kwacha to continue to weaken over the forecast period, which will introduce cost-push inflationary

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pressures. There will also probably be further public pay awards in 2002-03 (as many recently awarded by the government will not be honoured) and the average inflation rate will be 21.6% in 2001, 20.5% in 2002 and 17.6% in 2003.

Zambia: forecast summary (% unless otherwise indicated) 2000a 2001a 2002b 2003b Real GDP growth 3.1 4.0 4.3 4.6 Gross industrial growth 4.6 5.1 5.7 5.2 Gross agricultural production growth 1.8 –4.8 2.0 6.0 Consumer price inflation Average 26.0 c 21.6 20.5 17.6 Year-end 30.1 c 19.4 19.3 17.7 Short-term interbank rate 38.8 c 45.4 42.4 37.2 Government balance (% of GDP) –4.1 –4.2 –3.0 –2.7 Exports of goods fob (US$ m) 800.0 956.8 1,103.2 1,202.0 Imports of goods fob (US$ m) 1,008.0 1,199.7 1,325.7 1,448.9 Current-account balance (US$ m) –265.0 –218.1 –151.4 –112.1 % of GDP –7.6 –5.8 –4.0 –2.9 External debt (year-end; US$ bn) 5.9 5.8 6.0 6.0 Exchange rates ZK:US$ (av) 3,110.8 c 3,626.2 4,388.8 5,141.7 ZK:¥100 (av) 2,886.8c 2,995.7 3,558.9 4,255.2 ZK:¤ (av) 2,873.9 c 3,280.0 4,269.6 5,247.6 ZK:SDR (av) 4,103.3 c 4,640.0 5,757.4 6,875.3

a EIU estimates. b EIU forecasts. c Actual.

Exchange rates Tight monetary policy has also helped to contain the depreciation of the kwacha, and we forecast an average value in 2001 of ZK3,626:US$1. The nominal depreciation of the currency by end-2001 from January 2001 (using average monthly figures) will be around 0%. The kwacha will continue to depreciate in 2002 and 2003, partly to maintain Zambia’s export competitiveness and partly reflecting importers’ demand for US dollars, to averages of ZK4,389:US$1 and ZK5,142:US$1 respectively.

Another important reason for the kwacha’s recent resilience has been the improved state of foreign-exchange reserves, some of which have been released on to the market by the central bank to take pressure off the kwacha. The reserves fell from a high in January of US$249m to around US$170m in August, but are believed to have recovered to US$250m by October thanks to renewed balance-of-payments support from donors. However, Zambia’s reserves will remain under pressure during the remainder of 2001 as extra- budgetary, pre-election spending takes place. Donor inflows are expected to be erratic in 2002-03 because of missed targets in early 2002 (when the new government will be establishing itself in the post-election period), and beyond (because of poor policy implementation). Because of lower than expected mining earnings in 2002, foreign-exchange reserves will remain around US$230m, which gives around 1.7 months of import cover. By 2003, with the election and the US recession over, it is likely that foreign-exchange reserves will rise to around US$260m.

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External sector The current-account deficit is expected to narrow from an estimated 5.8% of GDP (US$218m) in 2001 to a forecast 4% of GDP (US$151m) in 2002 and 2.9% of GDP (US$112m) in 2003. The improving trend is mainly a result of higher revenue from mining exports, supplemented by a small increase in tourist receipts. Despite poor international prices, rising copper production in 2001-03 will increase total export earnings from an estimated US$957m in 2001 to a forecast US$1.1bn in 2002 and US$1.2bn in 2003. Import costs are also expected to rise in the forecast period, from an estimated US$1.2bn in 2001 to a forecast US$1.33bn in 2002 and US$1.45bn in 2003, mostly because of new capital inputs for mining. Increased tourist numbers, owing partly to Zimbabwe’s political and economic problems, will help to reduce the deficit on the services account, which is forecast to fall to US$164m in 2002 and US$140m in 2003, although high transport costs will prevent the deficit from falling further. The surplus on the current-transfers account is forecast to increase slightly, to US$325m in 2002 and US$340m in 2003, owing to rising, though irregular, donor inflows. The deficit on the income account should fall to US$90m in 2002 and to US$65m in 2003, reflecting the fall in interest payments on external debt following HIPC relief, though the fall will be tempered by the larger profits repatriated by the mining companies due to their higher copper production.

The political scene

The MMD names its The former vice-president, Levy Mwanawasa, was formally elected as the presidential candidate presidential candidate of the ruling Movement for Multiparty Democracy (MMD) on August 23rd by the party’s national executive committee (NEC). The choice of Mr Mwanawasa as the MMD’s presidential candidate came as a surprise, since he had been out of active politics for five years, had no public profile and was solicitor-general under the former president, (of the United National Independence Party). However, the minister without portfolio, , whom many considered a possible presidential

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candidate, alleged that the NEC’s vote had been unlawful. He was then swiftly suspended from the MMD and sacked from the cabinet. Mr Sata is contesting his suspension in the courts, but has meanwhile set up his own political party, the to run in the presidential election.

Mr Mwanawasa resigned (some say he was sacked) from President Frederick Chiluba’s government in 1994, apparently in protest at corruption. Mr Mwanawasa’s main appeal to the MMD appears to be that he is relatively untainted by allegations of corruption, though he was implicated in a corrupt land deal in 1993. Mr Mwanawasa’s ethnic background is also a consideration. The MMD has been long been dominated by Bemba from the north, generating much discontent in southern areas, and though Mr Mwanawasa grew up on the Copperbelt, his father is a Lemba from the province and his mother is a Lenje from the south. Mr Mwanawasa’s lack of a power base within the party should enable Mr Chiluba, who won a renewed mandate as party president in April, to retain considerable political influence after the election should he choose to do so. Mr Mwanawasa is certainly not a great electoral campaigner, and his performance at recent rallies has notably failed to stir the party faithful. Mr Mwanawasa suffered a serious car accident in 1991 and he has been dogged during his electoral campaign by allegations about his poor mental health. Mr Mwanawasa’s recent insistence that he was “not a cabbage” has ironically only encouraged debate about his fitness for office.

The parties’ presidential candidates

Movement for Multiparty Democracy (MMD): Levy Patrick Mwanawasa, from the Lemba and Lenje ethnic groups. Strengths: generally considered to be unconnected with MMD’s corrupt practices. Weaknesses: Under the influence of President Fredrick Chiluba; represents a party of failed promises, corruption and state-sponsored assassinations; alleged brain damage from car accident; no real support base within MMD. Support: mainly rural, plus MMD’s urban elite.

Forum for Democracy and Development (FDD): Christon Tembo, from the Timbuka ethnic group (in Eastern province). Strengths: opposed Mr Chiluba’s remaining in power (May 2001, page 13); ministerial and cabinet experience. Weaknesses: associated with MMD government; part of a cabinet that failed to implement what he now says he can do. Support: largely urban, plus students.

United Party for National Development (UPND): Anderson Mazoka, from the Tonga ethnic group (in the south). Strengths: former head of Anglo American’s Zambia operations; donor- and business-friendly; not implicated in any corruption scandals. Weaknesses: lacks government experience; too Tonga- centric; associated with Freemasons; inarticulate. Support: Tonga-peopled areas in the south and west and in North-Western province.

Zambia Republican Party (ZRP): Benjamin Yorum Mwila, from the Bemba ethnic group. Strengths: significant finances to undertake presidential campaign; support of local newspaper, The People; determination. Weaknesses: a former MMD cabinet member and Chiluba loyalist (until he was expelled for saying that he would stand as a presidential candidate; July 2000, page 14);

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Chiluba family member; short-tempered; lacks charisma. Support: lack of grass- roots support.

Heritage Party (HP): represents Pentecostal Christians. Strengths: former vice-president; another MMD cabinet minister expelled in May over the third-term issue; Christian background—incorruptible image; not associated with MMD’s poor record because of his frequently expressed dissent; disciplinarian. Weaknesses: backs the “African village concept” of government administration, which is confused by most of the electorate with the villagisation concept of ; dictatorial; poorly educated; barely known by the electorate; poorly funded party. Support: mainly Pentecostal Christians, but also some urban areas.

Patriotic Front (PF): Michael Sata, from Bemba ethnic group. He declared his candidacy while still a member of the MMD, but has yet to do so for the PF. Strengths: strong grass-roots mobilisation. Weaknesses: yet another former MMD cabinet member (who is closely identified with Mr Chiluba and MMD’s failings); supported Mr Chiluba’s try for a third-term; malicious treatment of former colleagues who held opposing views; alleged leader of violent MMD youth wing, which beat up anti third term supporters; no party structures. Support: parts of and Northern province only.

Others: Tilyenji Kaunda of the former ruling party, United National Independence Party (though Francis Nkhoma, the party’s former president, is challenging him for the nomination); (National Citizens Coalition); Akashambatwa Lewanika (Agenda for Zambia); Gwendoline Konie (Social Democratic Party).

Mr Tembo is elected, but his The recently formed opposition party Forum for Democracy and Development nationality is questioned (FDD; August 2001, page 15) has swiftly emerged as the MMD’s main electoral challenger, and defeated the ruling party in a key by-election in Kabatwa constituency in Lusaka in early September. The FDD held its inaugural national convention in mid-October, where another former vice-president, Christon Tembo, was elected as the party’s presidential candidate (and party president) with a convincing majority. A former MMD minister, , was elected as the FDD’s vice-president. Though competition for the two posts within the FDD was intense, the losing candidates have said they accept the results, and the risk appears to have been averted of the party splitting into opposing factions.

The Zambian vice-president, Enock Kavindele, said after Mr Tembo’s election as FDD president and presidential candidate that Mr Tembo could not stand for president because he is of Malawian parentage. Under a controversial provision of the constitution, Zambians one or both of whose parents are non-Zambian may not contest the presidency. The provision was introduced in 1996, and prevented Mr Kaunda from standing as president that year. Mr Kaunda’s United Independence Party (UNIP), and several other opposition parties, boycotted the 1996 elections in protest, handing the MMD an easy victory. The FDD’s foreign affairs spokesman, , said in late October that UNIP’s 1996 boycott had been a terrible mistake, and that, unlike Mr Kaunda, Mr Tembo would take part in the election while challenging the allegation

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about his parentage in the courts. Mr Patel has cited as precedent the fact that Mr Chiluba served as president in 1997, while defending himself in court against allegations from UNIP that his father was Congolese, and therefore that his presidency was unlawful. Mr Chiluba subsequently won the case in December 1998 (1st quarter 1999, page 13). In addition, in 2000 Mr Chiluba declared that Mr Tembo was a full Zambian citizen, having held the posts of commander of the armed forces and vice-president (among others), so it is uncertain that the MMD’s legal action will be successful.

Opposition parties fail to The opposition parties believe that unless they can agree on a single agree on a unity candidate presidential candidate, Mr Mwanawasa will win the election. The parties have met several times over the last three months to try to reach agreement on the issue, but it seems increasingly unlikely that they will do so. Although the opposition parties are not expected to agree on a joint presidential candidate, they have reached a broad agreement to form a coalition government should one of them win the poll. Mr Tembo, Mr Sata, another former vice-president Godfrey Miyanda, who now heads the Heritage Party, Ben Mwila of the Zambia Republican Party and Anderson Mazoka of the United Party for National Development (UPND) are all set to contest the presidential election. It is still unclear who the UNIP candidate will be, since Francis Nkhoma and Tilyenji Kaunda both claim to be the party president and the matter is before the courts. In a surprise development, the president of the Zambia Alliance for Progress (ZAP), Dean Mung’omba, announced on October 23rd that ZAP would support the MMD in the elections. Mr Mung’omba had previously been one of Mr Chiluba’s sternest critics, and in September was charged in court with defaming the president after calling him a thief. Mr Patel, Ms Nawakwi, and Fred M’membe, the editor of the independent Post newspaper, were also charged with defamation for the same reason. Mr Mung’omba and the others had alleged that in 1997 Mr Chiluba had redirected money intended for maize purchases to a public relations company, employed to improve his image (August 2001, page 16). Mr Mung’omba’s support for the MMD has outraged other opposition politicians, some of whom allege that his support has been bought. Mr Mung’omba denies the charge.

The electoral roll is ready President Chiluba has not formally announced a date for the country’s forthcoming elections, but it seems likely that they will be held in late November or early December. Around 2.5m people, of a potential electorate of over 4m, have registered to vote, and the voters’ register was made available for inspection in late September. The low level of voter registration appears to be largely due to voter apathy, although opposition parties have alleged that the Electoral Commission of Zambia (ECZ) has deliberately done little to encourage registration in constituencies where they enjoy strong support (August 2001, page 14). The ECZ denies the charge. The EU will send 118 observers to monitor the elections, some of whom have already arrived. In a speech to mark Zambia’s 37th independence anniversary on October 24th, Mr Chiluba warned the international community not to interfere in the elections, and said that the monitors “should not start making discoveries”. The closure in August of Radio Phoenix, an independent radio station, and the arrest of Fred M’membe, prompted fears that the government was clamping down on freedom of

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expression in the run-up to the elections. However, Radio Phoenix has reopened and Mr M’membe has been released, and the independent media is being largely left alone by the authorities.

Ministers are excluded At a press conference on October 26th the chief government spokesman, from recalled parliament Vernon Mwaanga, unveiled the MMD’s list of parliamentary candidates. It excluded seven ministers, which appears to signal a purge within the MMD of FDD supporters and be designed to allow a new generation of politicians to rise who are more likely to back Mr Mwanawasa. Mr Sata has invited the dropped ministers into the Patriotic Front, though most will probably head for the FDD. The angry reaction of MMD members at the press conference where the candidates were announced is an indication of how frail the MMD is when Mr Chiluba’s patronage system begins to unravel, and is a sign of what lies ahead with Mr Mwanawasa at the helm.

The National Assembly reconvened in controversial circumstances on October 30th: MMD MPs who attended the recent FDD convention were physically barred from entering the assembly building by security guards. The assembly, which has not sat since March, was apparently convened to conclude unfinished legislative business before Mr Chiluba dissolves it in preparation for the general election. It is rumoured that legislation will be put before the assembly making it obligatory for presidential candidates to prove Zambian nationality before the election. One item that will apparently not be debated is an impeachment motion against Mr Chiluba, proposed by his opponents earlier this year (August 2001, page 16). The speaker of the National Assembly, Amusaa Mwanamwambwa, had rejected calls by assembly members to reconvene parliament to allow the impeachment debate to proceed, prompting criticism that he had violated the constitution in doing so.

More Angolan refugees flee In October an intensification in the fighting between Angolan government to Zambia forces and fighters of the rebel movement, União Nacional para a Independência Total de Angola (UNITA), in Angola’s eastern Moxico province led over 3,000 more refugees to flee across the border into Zambian refugee camps. There are over 200,000 Angolan refugees in Zambia. According to a report of the UN Security Council’s monitoring mechanism on sanctions against UNITA, published on October 12th, UNITA structures continue to function in the Nangweshi refugee camp. The mechanism says it fears that UNITA may be using Nangweshi as a logistical base and has called either for the camp to be moved further away from the border or for stronger action to be taken by the Zambian authorities against the UNITA leadership in the camps. The mechanism also reported allegations that UNITA uses Zambia as a base for supplies, and says it is investigating a suspected business deal made or planned between a Zambian businessman and a UNITA colonel. The mechanism’s report also concludes that Zambia is acting as a conduit for UNITA diamonds, since Zambia’s diamond exports exceed its local production (see Foreign trade and payments).

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Economic policy

Economic policy debated Zambia’s poverty reduction strategy paper (PRSP) is still in preparation, and within PRSP framework will not be completed until the first half of 2002 (earlier deadlines were June 2001 then September 2001). As part of the process, a national conference was held in Lusaka on October 16th-18th. The vice-president, Enock Kavindele, told participants that the conference was proof of the government’s commit- ment to consultation in the PRSP process. Mr Kavindele also repeated the government’s view that poverty reduction requires strong economic growth, brought about by developing Zambia’s substantial resource base, coupled with increased and better-targeted social sector spending. The government’s position has changed little since the PRSP process began in 2000, though the commerce minister, Yusuf Badat, revealed in late September that the government had begun studying ways of bringing international trade issues into the PRSP. According to Mr Badat, improved and predictable access of goods from least developed countries like Zambia into developed countries’ markets should be an essential component of all poverty reduction strategies. African countries are trying to formulate a common position in preparation of a new global trade round, of which this initiative appears to be part. However, even though it is sound idea, it is not clear why the government has made the request so late in the process of formulating the full PRSP. Yet it is consistent with Zambia’s poor record of policymaking (and policy implementation).

At the October PRSP conference, the World Bank endorsed the government’s commitment to economic growth and increased social spending, while emphasising the need for improved governance and greater transparency and accountability in the decision-making process. Following the conference, the Lusaka-based Catholic Commission for Justice and Peace (CCJP), which was one of the main civil society organisations at the conference, alleged that the government had only paid lip-service to consultation and that the government was resisting demands for an independent committee with full legal status to monitor the spending of resources freed up by debt reduction. This it said, demonstrated the government’s lack of serious commitment to either transparency or accountability. On September 11th the government announced with some fanfare the release of ZK27bn (US$7.5m) for the rehabilitation of secondary roads in rural areas, using money previously committed to debt servicing. However, the National Roads Board, which is responsible for road maintenance, apparently has only US$9m of its US$35m requirement for 2001, because of the diversion (some say theft) of its funds to pay for such things as the vote-buying seen at the national convention of the ruling party, the Movement for Multiparty Democracy (MMD) held in April (August 2001, page 14).

The World Bank and IMF agree to release funds

One reason that funds were released for road rehabilitation in September was the World Bank’s requirement that, to qualify for renewed balance of payments support, during 2001 the government should spend at least 80% of the funds released from debt servicing under the heavily indebted poor countries (HIPC)

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initiative on social sectors that target poverty reduction. (It is because the government did not meet this target that the World Bank had previously suspended a US$45m credit to Zambia). In late September the governor of the Bank of Zambia (the central bank), Jacob Mwanza, said that the issue had been settled and that he expected the funds by end-2001. Mr Mwanza also said that, following a successful IMF visit to Zambia in September to measure the country’s performance against benchmarks agreed earlier this year under the poverty reduction and growth facility (PRGF), the IMF would release US$70m in balance-of-payments support, also before the end of 2001. The only previous release of funds in 2001 was US$32m in April (May 2001, page 20); the next release had been expected in July-August.

Tax revenue exceeds target Preliminary results for the 2001 budget are not yet publicly available, but the minister of finance, Katele Kalumba, claimed in October that the government’s fiscal performance this year had been impressive and said that tax revenue between January and September was 4.5% higher than targeted. Mr Kalumba was less candid about expenditure, though he has earlier promised that government spending would not be influenced by the coming elections. There is however circumstantial evidence of an increase in non-budgeted government expenditure as the election campaign intensifies, including increased donations from the president’s discretionary fund to a range of beneficiaries, including schools and hospitals. In addition, the government has to pay for maize imports and for civil service salary increases it agreed earlier in the year. The 2001 budget forecast a fiscal deficit of 0.8% of GDP, which is highly unlikely to be met.

Monetary policy tightened Treasury-bill rates fell during August and September, as the Bank of Zambia to support the kwacha sought to decrease the cost to the government of domestic borrowing, and thus stimulate the economy. Domestic banks, whose statutory reserve ratio requirement (of 12.5%) requires their constant participation in the domestic Treasury-bill and bond market, increased their holdings to maximise their exposure at higher rates before they fell. This had the effect of driving rates down further, but during October, as the kwacha began its traditional end-of- year weakening, the central bank increased interest rates to slow the depreciation. At the end of October the yield on the benchmark 91-day T-bill, which accounts for around one-half of total purchases, stood at 47.4%, compared with a low in August of 45.2%. In August and September the proportion of 91-day Treasury bills to total outstanding T-bills fell by 9% to 49%, as the banks took advantage of higher interest rates on the longer-term instruments before these rates came down. However, because domestic interest rates are so volatile, banks always seek to ensure that they have sufficient liquidity to react fast, and thus remain wary of too great an increase in their exposure to longer-term government securities, however attractive the rates.

Government intervenes to There have been no official price controls on food in Zambia since the MMD keep maize prices low came to power in 1991, though the government is intervening to keep retail maize prices down during the election period. In early September, the govern- ment banned the export of maize because of this season’s maize deficit (August 2001, page 23). Had the maize been exported, Zambia would have been more

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reliant on imports later in 2001 and in early 2002, pushing prices up further. The government invited tenders for imported maize in October (see The domestic economy) and promised millers that if the maize price from suppliers exceeded US$160/tonne, the government would reimburse the difference. Most tenders for the imported maize in October were over US$200/tonne, and the maize import subsidy will cost the government around US$7m-9m. The subsidy will enable millers to sell to the public at less than the market rate, which will also keep the maize price down. Large-scale food imports have not yet arrived in Zambia, but a local company, Chani Milling, is selling maize meal cheaply, forcing competitors to lower their prices. It is unclear where Chani is getting its maize from, and some millers allege that the government is using Chani, whose director Moses Katumbi is a supporter of the president, Frederick Chiluba, as a tool to force down prices. Mr Chiluba retorted in early October that millers were conspiring to keep maize prices high.

Privatisation update

The Zambia National Commercial Bank (Zanaco): The government confirmed in October that it would sell a 35% stake in Zanaco with management rights (May 2001, page 19). Studies are under way on how to restructure Zanaco to ensure that its rural branches, which are generally unprofitable but important for development, can be sustained under private management. The studies should be completed by December, after which bids will be invited for the 35% stake.

Maamba colliery: After repossessing Maamba from Benicon of South Africa in late 2000, the Zambia Privatisation Agency (ZPA) conducted negotiations with three new bidders in mid-2001 (August 2001, page 19) and has recently picked a preferred bidder. Before matters can progress further, the government has to decide what to do about Maamba’s substantial debts; a decision on this is not expected until the first half of 2002.

Ndola Lime: Ndola Lime’s privatisation is being conducted by the same team that negotiated the sale of Zambia Consolidated Copper Mines (ZCCM), which wants the mine be sold to a Belgian company, Socomer. There are allegations of a conflict of interest in the negotiations, since Francis Kaunda, who heads the government team, chairs a company, Access Financial Services, which is partnered with Socomer. Socomer topped the bidding for Ndola Lime in 1998 with a US$17.5m offer, but never demonstrated convincingly that it could pay it. Talks have dragged on, and Socomer’s latest bid is just US$8.5m, while South Africa’s Portland Cement has stuck with its original offer of US$15m. In October the ZPA refused the governments team’s recommendation that it approve Ndola Lime’s sale to Socomer until “certain questions” were answered.

Zambia Railways: Formal bids for management rights to Zambia Railways are due by December 7th, and up to seven international companies are expected to tender (August 2001, page 19). Once the bids are received, they will be evaluated and a winner chosen in time for concessioning to begin in July 2002.

Telecommunications: There has been no progress recently in the privatisation of the communications parastatal Zamtel, and none is expected

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until 2002 (August 2001, page 18). However, the government has announced that it will soon award a fourth cellular network licence in Zambia. South Africa’s Vodacom says it will bid for it.

Energy: Funding is still awaited from the World Bank for a study on restructuring the whole sector (Indeni oil refinery, the Tazama pipeline and the Ndola oil storage facility). Once the government has received funding, tenders for the study will be invited, and the study itself is unlikely to be conducted before the second quarter of 2002. No government decisions on privatisation within the energy sector can be expected until the study is completed. Nonetheless, Mr Kalumbas announced on October 5th that private-sector oil firms would be able to import crude oil by 2002, thus ending the government’s monopoly (Zambia imports around 454,000 tonnes of crude oil per year, most of which is used by the mining industry).

The domestic economy

Economic trends

The government remains On October 5th the minister of finance, Katele Kalumba, said that the optimistic about growth government’s target of a real GDP growth rate of 5% in 2001 was still attainable. An estimated 20% year-on-year increase in mining production has driven GDP growth in 2001, though the impact of this on GDP has been weakened by falls in international commodity prices (see Mining and energy). Meanwhile, agriculture is forecast to contract by 5% in 2001 because of the poor harvest, while manufacturing has continued to stagnate. There has been modest growth in the services sector, mainly in tourism, and the Economist Intelligence Unit estimates that overall real GDP grew by 4% in 2001.

Tight monetary policy In his presentation, Mr Kalumba returned to his original 2001 target of an end- contains inflation 2001 inflation rate of 17.5%, though in June he had forecast the possibility of a higher rate. The latest annual inflation rate, of 17.4% in September is down from the 30% rate seen in January 2001, and Mr Kalumba attributed the improvement to the government’s tight monetary policy. Mr Kalumba said this policy had reduced the rate of increase in broad money supply (M2) by 5% between December 2000 and June 2001, which had acted as a brake on inflation. Another reason for the lower inflation rate has been the resilience during 2001 of the , again largely because of government intervention, while lower than expected oil prices, particularly after the September 11th attacks in the US, have also contributed positively. The year- on-year inflation rate started to rise for the first time in September, and we believe that it will continue to do so. The rate of inflation usually rises in Zambia in the pre-Christmas period (because of the seasonal rise in consumer spending), and planned maize imports will fuel the inflation rate too, even if hidden subsidies (for example, to maize millers) prevent rising costs from being passed on directly to consumers; we estimate the average inflation rate in 2001 to be 21.6%.

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The kwacha begins to The kwacha depreciated by 4.5% between late July and late October 2001, depreciate again when the rate was ZK3,765:US$1; the depreciation from its average rate in October 2000 of ZK3,338:US$1 was 11.8%. The kwacha has depreciated in the third quarter because of a reduced supply of foreign exchange to the market, particularly from the mining sector, coupled with increased demand (mostly for mine refurbishment and other import requirements). Demand will continue for the rest of the year, but the kwacha’s rate of decline will be lower than in 2000, and in the period January-December 2001, looking at the monthly average exchange rate, there will be virtually no depreciation.

Mining and energy

KCM postpones a decision In mid-October, copper was selling for around 65 US cents/lb on the London over Konkola Deep Metals Exchange, and the Economist Intelligence Unit forecasts an average price of 72.1 US cents/lb in 2001 (the average price for copper in 2000 was 82.3 US cents/lb). The sharp fall in the copper price in 2001, particularly in the wake of the September 11th attacks on the US, has left most Zambian copper production unprofitable. The Bermuda-registered Zambia Copper Investments (ZCI; August 2001, pages 20-21), owned by the London-based Anglo American Corporation, which controls Zambia’s main copper producer, Konkola Copper Mines (KCM), issued a profit warning on August 24th, reporting that it had lost US$38.2m in the six months to June 30th. ZCI’s statement said that KCM had spent US$112m to date in refurbishing its assets, and planned to spend another US$158m, but warned of continued financial constraints in the near term. In the statement, ZCI said that KCM had produced 90,485 tonnes of copper in the first half of 2001, and 1,236 tonnes of cobalt, which it described as “disappointing” and blamed partly on problems at the smelter, which caused a build-up of copper concentrates needing to be processed. The Nkana smelter was closed in August for major repairs but reopened in September, and KCM officials say the backlog will be cleared by mid-2002. After the September 11th attacks, KCM announced that it was postponing a decision to develop the Konkola Deep mine, which has Zambia’s richest ore body and the capacity to produce 200,000 tonnes of copper per year, apparently at costs of around 40 US cents/lb. KCM has completed a feasibility study on Konkola Deep, and Anglo appears keen to proceed, but it seems that the low international copper price had made it impossible to raise sufficient financial backing for the project, which is estimated to cost US$800m.

MCM expands operations Zambia’s other main copper producer, Mopani Copper Mines (MCM; August 2001, page 21), announced in October that the international price was below the cost of MCM’s copper production, of 77 US cents/lb at Nkana, and 69 US cents/lb at . MCM forecasts that its total copper production in 2001 will be 97,974 tonnes. MCM expects its production costs to come down considerably in 2002 to 64 US cents/lb at Nkana and 58 US cents/lb at Mufulira, and the company expects total production for the year to increase to 136,984 tonnes.

On August 21st the Canada-based company First Quantum Minerals (FQM), which owns a 44% stake in MCM, announced that it had completed the

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acquisition of Zambia’s Kansanshi copper deposit (with reported reserves of 3.4m tonnes of copper) from the US firm, Phelps Dodge, for around US$25m. FQM wants to open a new open pit mine in Kansanshi, capable of producing up to 100,000 tonnes of copper a year. In late September FQM started open-cast mining at the Lonshi copper deposit across the border in the Democratic Republic of Congo (DRC). FQM is processing the oxide ores at its Zambian Bwana Mkubwa acid production and tailings retreatment plant, which is under 30 km from Lonshi. The Lonshi-Bwana Mkubwa link is an important step in the implementation of FQM’s strategy to use its Zambian assets as a base from which to develop the even richer mineral deposits available in DRC.

Chibuluma South shuts KCM and MCM have sufficient cash reserves to weather the current downturn down in copper prices, but other mining houses on the Copperbelt are in a less fortunate position. Only four months after opening its new open-cast mine at Chibuluma South (August 2001, page 22), South Africa’s Metorex announced in late September that it was putting the mine on a care and maintenance footing until international prices had recovered.

Manufacturing and services briefs

Zambian manufacturing is in a state of stagnation, but the injection of new investment into the mining sector is having a positive knock-on effect on manufacturers servicing the mining industry, as well as on service providers.

• In late October, South Africa’s Canterbury Mining announced that it would soon be opening a new company in Zambia to supply power transmission products to mines on the Copperbelt.

• The -Zimbabwe listed African Banking Corporation (ABC) launched a Zambian subsidiary in early September. Zambia was previously one of the only countries in the region where ABC did not have a presence.

• Construction has begun on a new US$8m shopping mall, the Arcades, on Lusaka’s Great East Road. The 19,000-sq-metre mall is due for completion in December 2002. Lusaka already has one such mall, Manda Hill.

• The Institute for Southern African Development (ISAD), is shortly to conduct an extensive review of Zambia’s financial markets, on the recommendation of a conference on the sector held in Lusaka in July. The conference concluded that the “Zambian financial market is uncompetitive in its current form due to regulatory conflicts and inconsistencies, non-uniformity in dealing with investors by regulators, regulatory duplicity, high cost of regulation and lack of a reliable regulatory framework for micro- finance institutions”, and that the sector should be restructured.

Agriculture

Government invites tenders Zambia’s poor harvest in the 2000/01 agricultural year (October-September) has for maize imports resulted, as had earlier been forecast, in a maize deficit of at least 150,000

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tonnes (August 2001, page 23). According to the US Agency for International Development’s Famine Early Warning System (FEWS), total production in Southern Africa would meet 80% of the region’s 2001/02 cereal consumption requirements, and it should be possible to meet the shortfall with stockpiles and already-planned commercial imports. Although Zambia has declared a national food emergency, no donors have yet offered assistance with maize purchases. Zambia will get most of its maize from South Africa, which is one of the few countries in the region with a maize surplus. The Zambian government banned maize exports in August, started distributing emergency food relief in September and in late October invited tenders for the import of 150,000 tonnes of maize; the winning bidders were announced on October 26th.

ABSA bank concludes trade Amalgamated Banks of South Africa (ABSA), announced in late October that it finance deal with the FRA had concluded a US$29m trade finance deal with Zambia’s Food Reserve Agency (FRA) to import fertiliser from South Africa for distribution to small- scale farmers. ABSA was involved in a similar deal last season, and reported that despite the poor harvest it had received payment in full. The 2000 fertiliser financing agreement was finalised too late for most farmers, and about half the stock imported in 2000/01 was unused. According to ABSA, this large carry-over in stock should ensure that fertiliser is distributed in time in 2001/02, and it predicts a good harvest from small scale farmers.

Market liberalisation According to the FEWS, small-scale farmers continued delivering maize to the benefits peasant farmers market well into September, surprising millers who had assumed they had already sold their surpluses. The FEWS speculated that small-scale farmers anticipated the rise in maize prices in September, and held on to their stocks until then to maximise profits, and claimed that this showed that these farmers were finally beginning to profit from the liberalisation of agriculture. ABSA reported that some small-scale farmers near Lusaka had sold their crop at a low price early in the season to local companies, on the understanding that the companies would sell the crop much later in the season to realise a higher profit, and then pay a further instalment on the maize to the farmers.

Foreign trade and payments

Zambia imposes non-tariff Zambia is reported to have introduced non-tariff barriers to restrict the import barriers against Zimbabwe of Zimbabwean dairy products. This is in retaliation for Zimbabwe’s new labelling requirements for Zambian dairy products entering Zimbabwe (product information in the Shona and Ndebele languages), which Zambian manufacturers claim are a non-tariff barrier to their exports. Zambia complained to the Common Market for Eastern and Southern Africa (Comesa) in July, but Comesa ruled in Zimbabwe’s favour (August 2001, page 24). In October the Zambian government also made it compulsory for imported roofing materials to meet the standards of the Zambia Bureau of Standards (ZBS). The move appears to be a tit-for-tat measure.

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UNITA is still using Zambia The Zambian government informed the UN Security Council’s monitoring to smuggle out diamonds mechanism on sanctions against UNITA, which reported its findings in October (see The political scene), that no diamonds had been exported officially from Zambia since the end of 1998, and that any documentation suggesting otherwise must have been forged. The government told the mechanism that it had investigated the issue of diamond smuggling and found no evidence of an illicit diamond market on Zambian territory, and added that it had no reason to believe that Zambia was being used by UNITA as a smuggling route to international diamond markets. Yet according to the mechanism’s report, official Belgian statistics show imports of diamonds recorded as being of Zambian origin worth US$13.3m between February and May 2001 alone. The diamonds were high-quality gems, in marked contrast to the low-quality industrial diamonds that Zambia has traditionally exported.

Foreign reserves increase According to IMF figures, Zambia’s international reserves rose during the first quarter of 2001 to reach US$279.2m in April. Reserves were believed to have fallen to US$170m by the end of August, as foreign-exchange outflows, especially for debt-servicing, consistently exceeded inflows. However, following the apparent disbursement of balance-of-payments support by the World Bank and IMF, some sources estimate Zambia’s end-October international reserves at US$250m.

Aid and debt news

• In late August, the Japanese government pledged US$29m for road maintenance, well construction in drought-prone areas, and an immunisation scheme. Japan was reported in October to have granted Zambia US$9.8m in debt relief during 2001, and US$16m in total.

• At the end of August, Russia agreed to write off US$560m, representing 80% of Zambia’s debts to the former Soviet Union. Zambia is due to repay the remaining US$138m over the next 33 years.

EIU Country Report November 2001 © The Economist Intelligence Unit Limited 2001 26 Democratic Republic of Congo

Democratic Republic of Congo

Political structure

Official name République démocratique du Congo

Form of state Unitary republic

Legal system All executive, legislative and military powers are vested in the president. The judiciary remains independent, but the president has the power to appoint and dismiss judges. Following a coup in May 1997, the previous transitional constitution was abolished. A new draft constitution was approved by the Constitutional Commission in March 1998

National legislature A new parliament, the Assemblée constituante et législative-Parlement de transition, iwas appointed in August 2000, which has since fallen into inactivity

National elections July 1984 (presidential) and September 1987 (legislative). Presidential and legislative elections were due in April 1999 but were repeatedly postponed. The new government has yet to commit to a date for new elections which would be in the context of the inter- Congolese dialogue and a peace settlement.

Head of state The president, appointed by the government following the assassination of the previous president in January 2001. The government assumed power by military force in 1997

National government The president is head of government. There is no prime minister. The government was last reshuffled in April 2001

Main political parties The ruling Alliance des forces démocratiques pour la libération du Congo-Zaïre (AFDL) was dissolved in 1999 leaving the government with no party political institutional basis. Rebels opposed to the government include Rassemblement congolais pour la démocratie (RCD), which split in May 1999, and Front pour la libération du Congo (FLC); Union pour la démocratie et le progrès social (UDPS) remains a strong opposition voice

President & head of the executive Joseph Kabila

Agriculture André Philippe Futa Civil service Benjamin Mukulungu Internal affairs Mira Ndjoku Mines & petroleum Simon Tumawako Defence Irung Awan Energy Georges Buse Falay Foreign affairs & international co-operation Léonard She Okitundu Finance, economy & budget Matungulu Nguyamu Health Mashako Mamba Human rights Ntumba Luaba National security & public order Mwenze Kongolo Press & communications Kikaya Bin karubi Post & telecommunications Philipe Kuwutama Mawokos Public works Nkodi Mbaki Plan & reconstruction Denis Kalume Numbi Transport Dakarudino Wakale Minada Security Mwenze Kongolo

Central Bank governor Jean-Claude Masangu

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Economic structure

Annual indicators

1996 1997 1998 1999 2000a GDP at market prices (FC bn)b 306,637c 792,154c 9.9 50.4 313.3 Real GDP growth (%) –1.0 –5.6 –1.6 –10.4 –4.3 Consumer price inflation (av; %) 617 199 107 270 554 Population (m)d 45.2 46.7 48.2 49.8 51.4 Exports fob (US$ m) 1,652 1,189 1,180 933 760 Imports cif (US$ m) 1,403 1,133 1,230 1,108 1,035 Current-account balance (US$ m) –411 –603 –570 –644 –798 Reserves excl gold (US$ m) 83 n/a n/a n/a n/a Total external debt (US$ m) 12,826 12,330 12,929 13,238 12,862 External debt-service ratio, paid (%) 2.7 0.9 1.2 n/a n/a Copper production (‘000 tonnes) 40.1 37.7 38.2 31.2 30.5e Cobalt production (‘000 tonnes) 6.0 3.0 4.0 2.0 3.0e Diamond production (m carats) 22.2 22.0 26.0 20.1 16.0e Exchange rate (av official; FC:US$)f 0.50 1.31 1.61 4.02 21.82

October 26th 2001 FC318:US$1 (official rate, floating)

Origins of gross domestic product 1997 % of total Components of gross domestic product 1995 % of total Agriculture 57.9 Private consumption 81.0 Industry 16.9 Public consumption 4.9 Services 25.2 Gross investment 9.4 GDP at factor cost 100.0 Exports of goods & services 28.2 Imports of goods & services –23.5 GDP at market prices 100.0

Principal exports 2000 foba US$ m Principal imports 1999 fobg US$ m Diamonds 437 Consumer goods 263 Crude oil 141 Capital goods 110 Cobalt 97 Raw materials 115 Copper 45

Main destinations of exports 2000 fobh % of total Main origins of imports 2000 fobh % of total Belgium 61.1 South Africa 21.2 US 17.4 Belgium 15.7 Finland 6.1 Nigeria 10.4 Netherlands 2.6 Zambia 5.2 a IMF data, based on local sources. b The franc congolais (FC) was fixed during 1997-2000 at a rate far below its parallel market value, producing a misleading indication of real GDP size. c NZ (nouveau zaïre) bn. d World Bank, African Development Indicators. e Official estimates. f The franc congolais replaced the nouveau zaïre on June 30th 1998 at the rate of NZ100,000:FC1; the exchange rate in 1996-98 has been rebased into francs congolais from nouveaux zaïres. g Banque Centrale du Congo. h IMF, Direction of Trade Statistics; based on partners’ trade returns, may include exports from rebel-held areas; differ from local trade figures.

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Quarterly indicators

1999 2000 2001 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Prices Wholesale prices Coffee, US (US cents/lb) 62.2 63.3 50.1 44.7 40.1 33.7 32.0 29.2 Copper, LME, (US cents/lb) 76.1 78.9 81.5 78.9 85.0 83.8 80.1 75.0 Official exchange rate FC:US$ (end-period) 4.50 4.50 9.00 23.50 23.50 50.00 50.00 330.00 Sectoral trends Mining production (annual totals) Copper in concentrates (‘000 tonnes) ( 31.2 ) ( 33.0 ) ( n/a ) Zinc (‘000 tonnes) ( 1.2 ) ( 1.2 ) ( n/a ) Diamonds (m carats) ( 20.1 ) ( 18.0a ) ( n/a ) Coffee production (annual totals; ‘000 tonnes) ( 45.6 ) ( 36.0a ) ( n/a ) Foreign tradeb (US$ m) Exports fob 309.1 307.2 304.9 307.8 281.7 276.4 218.1 n/a Imports cif –158.6 –187.2 –181.3 –184.5 –193.9 –209.6 –105.5 n/a Trade balance 150.5 120.0 123.6 123.3 87.8 66.8 112.6 n/a a Estimate. b DOTS estimates.

Sources: World Bureau of Metal Statistics, World Metal Statistics; Food and Agriculture Organisation; IMF, International Financial Statistics; Direction of Trade Statistics.

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Outlook for 2002-03

Domestic politics The most important issue over the next quarter will be whether the inter- Congolese dialogue will be able to make enough progress to keep the peace process on track and the various parties—the government, the armed and unarmed opposition and civil society—engaged. Although the facilitator, the former Botswanan president Sir Quettumile Masire, has tentatively scheduled the next meeting of the dialogue for November 19th in South Africa, it is unlikely that this date will be met. Following the government’s walk-out from the first round in Ethiopia in October, doubts have been raised over its commitment to the process and whether it is prepared to accept the political compromises and the sharing of power which it is ostensibly committed to through the inter-Congolese dialogue and the Lusaka peace accord. In the meantime, there are some questions over how the dialogue will proceed in the immediate term. In theory, the government’s demands—the appointment of new delegates from the Mai-Mai militia among others—were agreed to by the remaining delegates following its withdrawal from the first round, and that should allow it to accept the new timetable. After months of co-operating with the peace process, the government’s behaviour is a sudden shift and this raises questions about whether the president, Joseph Kabila, is now preparing to downgrade participation in the dialogue or obstruct the process. If that happened it would indicate that hardliners in his government, such as the minister of security, Mwenze Kongolo, and the minister for the presidency, Katumba Mwanke, are gaining the upper hand. However, it is also likely that the government is trying to win time in order to woo other delegates such as civil society and the external opposition—for whom it demanded extra representation in the dialogue—into its camp. The key issue is whether Mr Kabila’s position as head of state, as well as the composition of the government in a transition period, are negotiable. The government steadfastly maintains that they are not, and that the composition of a new government is a matter to be determined in national elections. Moreover, it is almost inconceivable that it envisages any result from the dialogue and elections that does not include its remaining in power. As a result, it will do everything it can to gain the support of other delegates on these issues. Given the fickle nature of politics in the Democratic Republic of Congo (DRC), it cannot be ruled out that behind-the-scenes bargaining will lead to new alliances between the government and its armed and unarmed opposition in exchange for a share of power in the future. Such an outcome is probably the most likely, although a collapse of the inter-Congolese dialogue cannot be ruled out.

After several months of relative calm, the government is again entering into a precarious period. Its premature departure from the talks in Ethiopia cost Mr Kabila much support in the capital, Kinshasa, and will also make key international allies think twice about their previously more or less unqualified support for his regime. At the same time, although he seems to have consolidated his position to some extent in the months following his father’s death, Mr Kabila clearly does not yet have full autonomy of action, and the extreme elements of his cabinet—who have the most to lose from a political transition—will curtail his ability to make decisions on the future of the

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country. If these radical elements do not see their interests protected by President Kabila—who knows that he has a good chance of being elected to the presidency—they may gather other disgruntled elements of the political and military arena to challenge his hold on power. Mr Kabila will then have to strike a difficult balance between their demands and those of the general population for peace and political freedom.

International relations Internationally, Mr Kabila’s government is benefiting from some goodwill among Western countries hoping to encourage compliance with the peace process. His government’s co-operation with the peace process in the past year had helped consolidate such support, although the more recent obstructiveness in the opening round of the inter-Congolese dialogue may disappoint this trust. Nonetheless, development assistance from countries and agencies seeking to re-engage with the government is clearly increasing, encouraged by the improved domestic policy environment.

The lack of a timetable for the withdrawal of foreign troops and the disarmament and reintegration of the so-called negative forces—the Mai-Mai and Interahamwe militias and (Burundian) Forces pour la défense de la démocratie—remains a fundamental obstacle to the peace process. The government will not change its view that all non-invited foreign forces— Rwanda and Uganda—must leave the country before its own allies—Zimbabwe and Angola—will withdraw. For its part, Rwanda remains steadfast that it will not withdraw its forces until the Interahamwe, who have been fighting alongside the government, are disarmed and resettled in Rwanda. Although the government has taken the first steps in that direction, giving the UN access to several thousand alleged Interahamwe combatants, this seems to be a token move rather than a sincere attempt to begin the disarmament process. The upsurge in fighting between the rebel Rassemblement congolais pour la démocratie and the Mai-Mai—an increasingly independent and fractious force whose relations with the government’s are deteriorating—will back Rwanda’s argument that it must maintain a military presence in order to protect its own security interests. Nonetheless, there is little doubt that Rwanda’s presence in the DRC—together with that of Uganda—is coming under growing scrutiny and pressure from the international community. Tension between Rwanda and Uganda also has consequences for the DRC. Although the two governments agreed in October to allow a joint commission to inspect troop locations in the two countries as well as in the DRC, there is still a possibility that violence may erupt between their forces—as has happened in the past. Instability and schisms among the Congolese forces that the two countries are backing, as well as allegations that Rwanda may back a new anti-Uganda movement in the DRC, also increase the likelihood of further tension and clashes. The presidents of Uganda and Rwanda are to meet in London in early November under the auspices of the British government.

Economic policy outlook The economic policy outlook in Congo has greatly improved during the current year, underpinned by efforts to liberalise the economy and end the distortions and controls which have contributed to economic collapse in recent years. In addition to floating the Congolese franc in May, a change long

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overdue as the heavily overvalued exchange rate had become a serious constraint on economic activity, the government is tightening fiscal controls and ending monetary growth as a means of financing the budget deficit. These policies, designed to stabilise the economy, are now the foundation for the government’s interim economic adjustment programme, backed by the IMF and World Bank. The appointment of respected technocrats to key economic portfolios, including Matungulu Nguyamu, a former IMF employee, as minister of finance, has increased confidence in the government’s programme. The IMF and World Bank are re-engaging with the DRC, and the Bank has prepared interim forms of assistance, including an emergency economic recovery programme, which establishes a framework for recovery and includes infrastructure and social stabilisation projects with the greatest impact on poverty reduction. More extensive international assistance is planned, although the government must first successfully conclude the staff-monitored programme (SMP) agreed with the IMF in July, which will run until March 2002. The SMP does not include funding but is designed to allow the government to establish a good record of macroeconomic performance. If it is successful, funding under a poverty reduction and growth facility will follow, which will unlock funds from other donors.

The government is aware that it must comply with the agreed performance criteria if international assistance is to be consolidated and private investment attracted back to the country. After decades of economic mismanagement, recent reforms have been extremely encouraging. However, they also face stiff resistance from rent-seeking interests in government. Recent evidence indicates that senior figures in the regime—including military front companies—are demanding unofficial off-budget payments from the Treasury and central bank. This is a worrying indication of the pressures facing the government’s attempt to establish macroeconomic stability and clean government for the first time in the country’s 41-year post-independence history.

Economic forecast Recent policy reforms have gone some way towards stabilising the economy and creating an environment in which recovery can take place. The reopening of river traffic between government- and rebel-controlled areas has provided an important boost to internal trade and domestic confidence. Liberalisation, which has improved the availability of fuel, and efforts to rehabilitate transport infrastructure will also benefit internal agricultural trade in the areas surrounding the main urban centres. The resumption of investment in the mining sector, backed by planned new mining and investment codes, may contribute to recovery during the latter half of the 2002-03 outlook period. If appropriate economic policies are implemented, as advised by the IMF and World Bank, and they are accompanied by increased foreign assistance, real GDP growth will resume in 2002—for the first time since 1995. In 2001, however, the government is simply aiming to halt the severe decline of recent years and achieve zero real GDP growth. Although current policies are setting the basis for robust recovery, it should be noted that the current emphasis is on stabilisation and the immediate impact on poverty and incomes is limited.

Inflation has fallen sharply in 2001 and may finish at close to an annual average of 100%, down considerably from the 554% recorded in 2000 when

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the government of Laurent Kabila routinely monetised the fiscal deficit. Moreover, inflation is far better than the target of 300% originally agreed with the IMF; from June to September monthly inflation was an annualised 25%. Further falls will depend on continued fiscal and monetary discipline, although so far the government has met its targets in these areas. The exchange rate of the Congolese franc, which was floated in May 2001, has remained stable, although it has resumed a gradual depreciation following an unexpected appreciation in July. The currency is expected to depreciate at the differential between local inflation and that of major trading partners. Congo’s foreign donors are preparing a massive increase in assistance to the country, encouraged by the government’s positive economic performance. A conference is planned to be held in in December, at which pledges of assistance by bilateral and multilateral donors for 2002-03 may run into billions of dollars. Such an outcome, would help solidify international confidence in the government and set the basis for the massive inflow of resources necessary to fund reconstruction.

Democratic Republic of Congo: forecast summary (US$ m unless otherwise indicated) 2001a 2002b 2003b Real GDP growth (av; %) 0.0 2.5 4.0 Consumer price inflation (av; %) 100 60 30 Merchandise exports fob 750 850 1,000 Merchandise imports fob 1,024 1,070 1,128 Exchange rate (av; FC:US$) 300 480 630

a EIU estimates. b EIU forecasts.

The political scene

Parties agree on convening The Democratic Republic of Congo’s long-awaited national dialogue—the the national dialogue multiparty negotiations which are intended to map out the country’s peaceful transition—began to move forward on August 15th when representatives of the rebels, the government, civil society and the unarmed opposition met in the Botswanan capital, Gaborone, for preliminary talks. The meeting, which had been delayed by several weeks for organisational reasons, was to outline how the dialogue process would proceed, as well as set a date and place for it to begin. All parties signed a final document, the Pacte républicaine, establishing the basic principles of the inter-Congolese dialogue which was to open on October 15th in the Ethiopian capital, Addis Ababa. Delegates also agreed unanimously that all foreign forces must retreat immediately—the UN was asked to pressure all sides to do so—and that the country should be reunified, ending the division into rebel- and government-held areas and guaranteeing the free movement of people and goods.

However, there was dissent from the Rwandan-backed rebel group, Rassemblement congolais pour la démocratie (RCD) led by Adolphe Onusumba over whether the president, Joseph Kabila—who was attending the talks—

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should remain as head of state during a transition period. The RCD leader stated that Mr Kabila should not lead the country during the transition period leading to national elections, and arguing instead for an interim government composed of representatives from the parties participating in the dialogue. President Kabila received support from an unlikely quarter, as the other main rebel group, the Ugandan-backed Front de libération du Congo (FLC) led by Jean-Pierre Bemba—with whom Mr Kabila is believed to be in regular contact— stated that it was up to the Congolese people to decide whether he should remain president, implying that this would issue from eventual elections rather than the inter-Congolese dialogue.

Dialogue begins in October, On October 15th the dialogue finally began in Addis Ababa with 80 delegates, but government walks out representing the government, civil society, opposition parties and the rebels— including the RCD splinter group led by Ernest Wamba dia Wamba. This was considerably less than the 330 delegates that had been selected to attend, although the facilitator, the former Botswanan president, Sir Quettumile Masire, stated that this had been due to a lack of funds to host the number originally envisaged. On the grounds that the meeting lacked a full quorum and did not have the authority to take substantive decisions, and that the absent delegates could not be bound by any decisions reached in Addis Ababa, the government claimed that this was not in fact the official start of the inter- Congolese dialogue, but only a technical meeting to discuss modalities. The other delegations disagreed, as did Mr Masire who declared that the inter- Congolese dialogue had officially begun. The government delegation also presented a number of other conditions which it insisted should be met before the real dialogue could begin. These included a demand that religious groups, other exiled political parties and political leaders and the pro-government Mai- Mai militia should be given seats at the negotiating table. After several days of talks, including a number of aborted plenary sessions, the government delegation walked out. This was an obvious blow to the proceedings, although the other delegations continued talking for several days afterwards.

The inter-Congolese dialogue: Addis Ababa, October 2001

In a final communiqué, issued after the government walkout, the remaining delegates to the inter-Congolese dialogue reaffirmed their support for the Lusaka Accord and noted both progress and outstanding issues. • The mediator, Mr Masire, was called upon to organise the next meeting of the inter-Congolese dialogue in South Africa on November 19th.

• In response to the government’s demands, it was agreed to authorise further delegates to accommodate representatives of the Mai-Mai militia and the political opposition in exile. The facilitator was asked to inform the government that the other delegates had largely agreed to its demands.

• The government’s withdrawal from the Addis Ababa meeting was condemned.

• Delegates condemned the failure of the government to honour the commitment—outlined in the Pacte républicaine—to liberalise political activity and allow free movement throughout the country.

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The government is digging Because of its premature departure from the talks, the government was blamed in its heels for the lack of progress in the first round of the dialogue; opposition politicians, civil society and the majority of the population criticised its action. After returning to Kinshasa, the government delegation, led by the minister of foreign affairs, Léonard She Okitundu, began a public relations campaign, repeating the demands it had made at the talks and blaming Mr Masire for causing confusion. Nonetheless, the government realised the unpopularity of its actions and stepped up the military and security presence in the capital in the days following the delegation’s return, apparently fearing popular protests. An attempt by the opposition parties to organise a protest march was foiled by a heavy military presence at the designated gathering point in Kinshasa.

The government’s actions have been interpreted as a attempt to delay the talks in order to put off for as long as possible uncomfortable negotiations about the transition period and the sharing of power. Clearly, Mr Kabila does not accept that his position or the composition of the current government will need to change during a transition period. In an address to the nation on October 14th, Mr Kabila stated that he wanted to lead the country to elections, a statement interpreted as meaning that his position as president during the transition is not negotiable. He also stated that political change could not take place until all foreign forces had left Congolese territory, a process which will inevitably be a long and complicated affair, particularly as Rwanda has linked its own withdrawal to satisfying its security concerns in the eastern part of the country, including the troubled Kivu provinces where it has become enmeshed in a series of complex local conflicts. Although Mr Kabila’s more aggressive attitude has surprised few, the government’s intransigence at the Addis Ababa meeting has caused great concern that his commitment to the political compromises required under the peace process may be dwindling, or that hard- liners in government are attempting to slow down the process.

More fallout from Laurent In late August some 80 people in the Katangan town of Likasi were put on trial Kabila’s assassination by the dreaded military tribunal, the court of military order—against whose sentences there can be no appeal—charged with threatening state security. Among those tried were 11 senior officers and one Congolese diplomat accused of involvement in the assassination of President Laurent Kabila in January 2001, as well as 17 soldiers accused of involvement in a coup plot against him led by Anselme Masasu Nindaga in October 2000. Mr Nindaga, a former ally, of Laurent Kabila, was arrested and executed by him last year (January 2001, pages 37-38). The rest of the accused are charged with plotting a coup against the current president, Joseph Kabila, in April this year. In mid-September seven of the soldiers were sentenced to death, and 33 others given prison sentences of 25 years. Another 40 people were acquitted. The trials have been condemned by local human rights activists as well as the UN’s special envoy for human rights, Roberto Garretton, for lack of transparency. Many of those tried have never been informed of the charges against them and were denied proper legal representation.

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Those thought to be the prime suspects in the assassination, are in prison in Kinshasa, though they have yet to be formally charged. They include Colonel Edy Kapend, Laurent Kabila’s former aide-de-camp, General Nawej Yav, the commander of the Kinshasa military region and a close associate of Mr Kapend, as well as Mr Kabila’s former secretary and several directors of the security services. The initial findings of a commission of inquiry constituted to investigate the assassination were published in May and accused Uganda, Rwanda and the RCD of involvement in the plot (August 2001, page 32), but this was widely derided as a whitewash. At the time, the commission said that the main suspects would soon be brought to trial.

Fighting intensifies in the Over the past quarter fighting between the Mai-Mai and Interahamwe militias east and the RCD has intensified in the eastern provinces of Maniema, and North and South Kivu. On September 7th the militias captured the town of Fizi in South Kivu province, allegedly with the support of Congolese government forces and those of the Burundian rebel movement, Forces pour la défense de la démocratie (FDD). The RCD later recaptured the town in early October, although the Mai-Mai and Interahamwe maintain a strong presence in the area where intermittent fighting is continuing. In early September heavy fighting

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also broke out in the strategic town of Kindu, 400 km south of Kisangani, which has the largest airport in the area and has been held by the RCD since late 1998. The Mai-Mai militia apparently captured the town, which they held for several days, before losing control to the RCD on October 10th. The Mai- Mai commander, Joseph Padiri, claimed in late-September that the RCD had control only of the main towns in Maniema and North and South Kivu provinces, and that his militia controlled the rest of the provinces “with the support of the population”.

The importance of the The Congolese government has denied claims—persistently made by Mai-Mai is growing Rwanda—that it is supplying either the Mai-Mai or the Interahamwe with arms and logistical support. However, its links with the Mai-Mai, who have long been the bulwark of its military defences in the east, are ambiguous. It continues to maintain that they are a legitimate Congolese movement which is fighting Rwanda and Uganda’s occupation of the eastern part of the country (August 2001, page 30). The government’s belated insistence that the Mai-Mai have a seat at the negotiating table (see above) indicates that it realises the need to consolidate the support of this important ally in the run-up to a political transition.

The Mai-Mai are in fact a highly disparate group, with numerous regional leaders all claiming to represent the militia. It originally emerged as a loosely aligned ethnic self-defence force in the early 1990s after years of civil war in the Kivus, and its natural enemy has always been the local Banyamulenge— ethnic Congolese Tutsis. It is now increasingly divided into separate fiefdoms led by individual warlords who do not always see eye-to-eye and have developed their own economic and political interests. This trend was obvious in the decision by one group of Mai-Mai in May to associate itself with the FLC rebel group—the Mai Mai’s nominal enemy. Even the Tutsi-dominated RCD has now demanded that the Mai-Mai be allowed representation in the inter- Congolese dialogue and that they be part of its own delegation. The mediator of the dialogue, Mr Masire, has stated that additional delegates should be accommodated within the delegations of the existing “recognised parties”. In September one of the Mai-Mai’s leaders, Joseph Padiri, demanded that it be given 20% of the seats at the inter-Congolese dialogue. No one else, he said in a written statement, could legitimately represent the interests of the Congolese population living in the areas under RCD control.

Token efforts are made to The government is continuing to try and distance itself from the Interahamwe disarm the Interahamwe militia—responsible for the 1994 genocide in Rwanda and subsequently a major part of the government’s military coalition in the east—including efforts to disarm the force, as required under the Lusaka Accord (August 2001, page 35). In July the government announced that it had assembled several thousand ex-Interahamwe combatants at the Kamina military base in Katanga province, who were ready to be disarmed. A delegation of foreign ambassadors and personnel of the UN military observer mission in Congo (MONUC) visited the base in September. However, by October attempts by MONUC—whose mandate includes assisting in the disarmament and reintegration of ex- combatants in conjunction with the belligerent parties and the joint military

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commission—to start identifying and disarming the Interahamwe forces were being thwarted by the Congolese government. There is also some doubt over the identity of the forces assembled at Kamina—the minister of security, Mwenze Kongolo, referred to them as a previously unheard of group, the Forces démocratiques de liberation du Rwanda whose leadership has demanded a number of political reforms from the Rwandan government, such as the release of political prisoners and dialogue with the “opposition”. In late- October MONUC was preparing to send an advance team to Kamina.

Rwanda, for its part, welcomed the move to begin disarmament but raised doubts over whether those assembled at Kamina were in fact Interahamwe fighters. The Rwandan government also issued inflated estimates of the number of Interahamwe forces who remain at large, claiming there were over 40,000 of them, although most observers have estimated that the force numbers roughly 15,000. The DRC government’s main motive for starting the demobilisation process appears to be connected to the fact that the presence of the Interahamwe force in the DRC is the ostensible reason for Rwanda’s military intervention there.

The power struggle in the The internal struggle for control of Rassemblement congolais pour la FLC continues démocratie-Mouvement de libération (RCD-ML) has continued in recent months. The RCD-ML had merged earlier this year with the Ugandan-backed Mouvement de libération du Congo (MLC) to form the Front de libération du Congo (FLC) led by Jean-Pierre Bemba (May 2001, page 37). However, in August Mbusa Nyamwisi, the RCD-ML’s former secretary general attempted to oust its leader Ernest Wamba dia Wamba and announced that Mr Bemba’s leadership of the alliance between the two groups was invalid. Although the official Ugandan position is that Mr Bemba remains the leader of the FLC, Mr Nyamwisi is the de facto leader of the RCD-ML; the split between the two movements had widened considerably by late-October. Mr Nyamwisi reportedly met Mr Kabila in October, and speculation is widespread that the two may have agreed to collaborate. This would present a serious threat to the MLC's hold on the area, where Mr Nyamwisi, a wealthy businessman, wields considerable influence, and it is clear that both the MLC and the RCD- are concerned about this development. Meanwhile, in late September Mr dia Wamba travelled to Kinshasa for the first time since he emerged as the leader of the original RCD at the start of the war in August 1998.

In the meantime, the RCD-ML has been involved in a dispute with the RCD rebels based in Goma—from which it originally split; in late October both groups accused each other of attempting to occupy the town of Kanyabayonga. A team of MONUC observers sent to investigate, rejected the claims and said that the situation in the area was calm.

Relations between Rwanda Relations between Rwanda and Uganda have continued to deteriorate: both and Uganda worsen sides have accused each other of massing troops along their common border. The rift has widened since two dissident commanders in the Ugandan People’s Defence Force (UPDF) defected to Rwanda and threatened to launch an anti- government campaign from Rwandan territory in July. Meanwhile, according to reports in the press, the Ugandan president, , informed the

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British government in October that military spending would have to be increased in order to respond to the growing military threat from Rwanda. The British government, which has extensive development co-operation programmes with both governments, has been asked to mediate and President of Rwanda and President Museveni are to meet in London in early November for talks chaired by Claire Short, the British minister for co- operation, and representatives of the Foreign Office.

France and the UK support The central importance to the peace process of disarming the Interahamwe the peace process militia has been emphasised by Western visitors to the DRC in recent months. In August Ms Short met President Kabila in Kinshasa during a visit to the Great Lakes region, and discussed the disarming of the Mai-Mai and Interahamwe militias—the so called “negative forces”—as stipulated under the Lusaka Accord, for which the UK has pledged £5m (US$7.1m). On September 19th the EU also announced that it was ready to help fund disarmament. President Kabila reassured Ms Short that his government was willing to engage in the disarmament process. The French minister of foreign affairs, Hubert Védrine, also raised the issue of disarmament during a subsequent visit to Congo, in which he urged President Kabila to address this issue urgently. This was also a key area of discussion during talks between Mr Védrine and the Rwandan president during the first visit to Rwanda by a French foreign minister since relations with France broke down after the 1994 genocide.

There have been a number of high-level contacts between the belligerents in the war in the DRC over the past month. Mr Kabila and Mr Kagame held talks in Malawi in late-September with the mediation of Malawi’s president, Bakili Muluzi. Although little was revealed about the talks, it was reported afterwards that a joint Congo-Rwanda commission would soon be established to provide a framework for efforts to resolve the two governments’ differences. Meanwhile President of Zimbabwe met the leader of the RCD, Mr Onusumba, for the first time in the Zimbabwean capital, Harare, in late- September. The RCD’s minister of defence, Jean-Pierre Ondekane, said the talks signified that the war had now come to an end. According to Mr Onusumba, the RCD delegation asked Mr Mugabe to convey to Mr Kabila its concern about the continuing military activities of “negative forces” in eastern DRC.

Zimbabwe is accused of Zimbabwe is reported to have signed a contract entitling it to logging rights resource colonialism over an enormous area of the DRC. According to a report entitled Zimbabwe: resource colonialism, published by the London-based non-governmental organisation, Global Witness, the deal involves a company connected to the Zimbabwean military, Operation Sovereign Legitimacy (Osleg). Timber exploitation is to be carried out by an Osleg company, Société congolaise d’exploitation du bois, together with another company involving President Kabila, his relatives and ministers. Osleg is also involved in diamond, copper and cobalt mining concessions in Congo. The recent timber deal has added to the impression that Zimbabwe intends to keep troops in Congo throughout the transition period and beyond in order to protect its resource interests. The report from Global Witness also alleges that Zimbabwe’s announced troop withdrawals have been staged to create the impression that it is complying

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with its commitments under the disengagement process. According to Global Witness, this allegedly involves flying troops in, who are publicly paraded and then flown back out again.

Kofi Annan visits DRC to In early September the UN secretary-general, Kofi Annan, visited the DRC encourage peace process during a four-day tour of the region seeking to keep up the momentum of the peace process. Mr Annan met President Kabila and welcomed Namibia’s decision to withdraw its 2,000 troops from the DRC, the last of which left in late October. He also travelled to the rebel-held city of Kisangani, where he was greeted by thousands of residents demanding the demilitarisation of the city. Mr Annan renewed the demand of the UN Security Council for the complete demilitarisation of the city, as called for in Resolution 1304 of June 2000 (July 2000, pages 31-32). Although Ugandan and Rwandan troops left last year, Rwanda’s proxy force, the RCD continues to control Kisangani, arguing that it is a legitimate Congolese authority recognised as such in the Lusaka Accord. This explanation, rejected by observers who note that Resolution 1304 calls for all military forces to vacate the city, is currently a major source of tension between the RCD and MONUC. Mr Annan subsequently travelled to Rwanda for talks with President Kagame. Mr Kagame noted efforts by the DRC govern- ment to disarm the Interahamwe militia responsible for the 1994 genocide— whose presence in Congo forms the ostensible purpose for Rwandan forces remaining there. However, he reiterated his position that Rwanda would not leave the Congo until its security concerns had been fully addressed.

UN votes to bring its Congo In mid-October the UN Security Council voted to extend MONUC’s mandate operation to full strength into a third phase, which will involve the disarmament, demobilisation, reintegration, repatriation and resettlement (DDRRR) of ex-combatants involved in the war, including the Mai-Mai, and Interahamwe. The Security Council also authorised the deployment of an additional 1,500 UN military observers and support troops. This will bring the total number of UN troops in the country to 5,537, the number originally earmarked for the operation there. Most of the new troops will be deployed to a new base to be set up in the eastern city of Kindu, on the grounds that MONUC’s main activities will be based in the east of the country where the bulk of the war has been fought and where the DDRRR process will be concentrated.

The UN ambassador to the DRC, Kamel Morjane, the former special representative of the secretary-general has resigned. He was replaced in September by Namanga Ngongi, a Cameroonian who was previously the director of the UN Food and Agriculture Organisation.

Economic policy and the economy

Economic stabilisation The government is continuing with the economic reforms it committed itself policies are continuing to under its home-grown, interim economic adjustment programme and the staff-monitored programme (SMP) agreed with the IMF in July (August 2001, page 37). On August 7th the government was reported to have “halted” the printing of money, and since then the exchange rate has stabilised. A mission

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of the IMF which visited the Democratic Republic of Congo (DRC) in October to assess progress under the SMP, is reported to have endorsed progress made during the first five months of the programme. The mission noted that the government was improving on targets laid out in the SMP, including those for inflation, monetary growth and—even—fiscal control. Under the SMP, the government is committed to fiscal transparency and funding its budgetary expenditure on a strictly cash only basis each month, ending all unauthorised and off-budget expenditure. It is also continuing with further fiscal reforms including simplifying the import tax system, replacing the turnover tax with a value-added tax and evaluating tax and revenue collection procedures with a view to overhauling them (August 2001, page 38). Other initiatives include preparing a public enterprise reform programme and a civil service census which are to be completed by the end of the year. Concerns raised in the context of the SMP are the unreliability of local data—unsurprising given the chaotic state of local accounting and data collection systems—and the extremely weak capacity of the DRC’s decayed state institutions on which the programme relies for implementation. To address this, the IMF and World Bank are providing technical assistance to the Ministry of Finance and the Banque centrale du Congo, where four consultancy posts have been created.

The architects of the government’s economic reform programme are the long- serving governor of the Central Bank, Jean-Claude Masangu, and the minister of finance, Matungulu Nguyamu, who was previously employed by the IMF. However, there has apparently been some friction between the two over the control of economic policy.

Inflation and the exchange Following a large, and sudden, appreciation of the Congolese franc from mid- rate stabilise July, when it rose by 25% to reach FC225:US$1 (August 2001, page 39), the currency began to depreciate again before stabilising at a rate of FC315:US$1 in October. Current trends for the currency are roughly in line with inflation. According to data collected by the US Embassy in Kinshasa, monthly inflation rates have been slowing throughout the year (see chart) and this trend has accelerated since June. According to data from the Central Bank, average annual inflation in August was 126%. The government had agreed with the IMF to aim for annual average inflation of 299% in 2001—down from 554% in 2000—although it is now apparent that this target will easily be bettered.

Democratic Republic of Congo: monthly inflation, 2001 (%) Jan 35.9 Feb 13.5 Mar –9.6 Apr 41.2 May 20.3 Jun –1.7 Jul –7.1 Aug 10.5 Sep 6.9 Source: US Embassy, Kinshasa.

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In mid-August the DRC government passed a budget for the second half of the A supplementary budget is year; details were not released. According to a government statement, it had introduced been necessary to pass a budget to comply with the targets agreed with the IMF. Under the late president, Laurent Kabila, budgets were rarely, if ever, officially debated or approved by government. According to the IMF, if the government follows strict fiscal and monetary discipline, it may succeed in reducing its budget deficit to 0.3% of GDP in 2001, down from 4% in 2000. According to targets laid out in the IMF’s SMP, government revenue is to increase to 5.2% of GDP, up from 4.8% in 2000, and government expenditure is to decrease to 7.1% of GDP. Lower expenditure is meant to be achieved by reducing military expenditure and redirecting government resources toward the social sectors. During the first seven months of 2001 total domestic revenue reached FC26.8bn (US$84.3m). Of this, customs revenue accounted for FC12.34bn—46% of the total—and domestic taxation for FC8.17bn.

Democratic Republic of Congo: government revenue, Jan-Jul 2001 (FC m) Customs 12,340 Domestic taxes 8,170 Minières de Bakwanga (Miba; diamond mining company) 2,040 Administrative & land revenue 2,030 Oil-producing companies 722 Oil-distributing companies 412 Générale des carrières et des mines (Gécamines; mining company) 277 Others 809 Total 26,800 Source: Ministry of Finance.

However, revenue weakness remains a serious problem, and this has led to continuing salary arrears; by October for example, military personnel in Kinshasa had not been paid for two months. Now that monetising arrears is not a serious option, the government is reportedly using other unorthodox means to raise quick revenue, including the sale of import tax credits at a discounted rate. This is a costly means of raising revenue and is a practice which dates back to the years of the corrupt regime of the ousted dictator, .

The directors of state Following a national audit of all state-run companies and services, President companies are sacked Kabila signed a presidential decree in August sacking the directors of all state- owned companies. Temporary directors have now been appointed, and the process of searching for new—supposedly more technocratic—management teams is proceeding. According to the decree, the sackings are a result of the mismanagement and possible corruption uncovered by the audit. The dismissals were initially welcomed as a sign that Mr Kabila is serious about cracking down on corruption in his government. However, one prominent individual exempted from the mass sackings was the director of the state diamond mining company, Minières de Bakwanga (Miba), Jean Charles Okoto. Mr Okoto, previously the governor of the diamond-rich Kasaï Occidentale province, is widely believed to be siphoning off large amounts of money from

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the company, and his alleged corruption has led to repeated popular protests in the DRC’s diamond mining capital, Mbuji-Mayi.

New copper and silver mine The Australian company, Anvil Mining, is to start exploiting a copper and to come on stream in 2002 silver mine, with reserves totalling 1.7m tonnes, at Dikulushi in Katanga province from July 2002. Anvil had originally started negotiations with the government of the President Mobutu Sese Seko, in 1997. Pre-feasibility studies during 1997-98 revealed a grading of 60% copper and 60 oz/tonne of silver with a production lifespan of eight years. According to the company’s manage- ment, the project is feasible in part because of easy access to well-developed mining infrastructure in neighbouring Zambia. The first phase of the project will involve investment of an estimated US$5m and will be financed by a combination of debt and equity. Using a heavy-media-separation technique the mine is expected to produce 40,000 tonnes of concentrate per year.

Foreign trade and payments

Donors will make A conference of the Democratic Republic of Congo’s international donors is enormous aid pledges due to meet in Paris on December 20th to discuss assistance for reconstruction. The conference is expected to make pledges for assistance amounting to billions of dollars—the World Bank alone is planning programmes worth roughly US$1bn per year—which would be the most substantial foreign support for the country in decades. Most non-emergency assistance for Congo ended in the early 1990s, following the end of the cold war and the belated admission that the corruption of the former Mobutu regime rendered foreign aid ineffective. Donors prepared to offer assistance to the new government of Laurent Kabila after it came to power in 1997, although with the re-emergence of corruption and mismanagement the offers were not realised. In recent years non-humanitarian aid declined to insubstantial levels.

Although the government’s short-term priority is macroeconomic stability, donors will be meeting to pledge assistance for reconstruction needs. Given the severe economic, institutional and infrastructural decline of the country, the total of such needs is almost limitless. Aside from the current main donors, the IMF and World Bank, a large number of multilateral and bilateral donors are expected to attend. The government held an information sharing meeting in Paris in July 2001 to outline its economic reform programme and win support for a resumption of aid (August 2001, page 41).

France and Belgium will One obstacle to the resumption of large-scale assistance from the IMF and help clear arrears World Bank, necessary to unlock funds from other donors, is the need for the government to clear its arrears to these—and other—multilateral institutions. The clearing of arrears is necessary before either the Fund or the Bank will resume non-emergency assistance. Under a scheme outlined earlier in 2001, the DRC’s arrears will be temporarily cleared using a bridging loan co-financed by France and Belgium (August 2001, pages 40-41). A central problem remains the fact that Congo’s arrears to the African Development Bank (AfDB) are much larger than those to the Fund and the Bank, and the AfDB does not have

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the capacity to easily refinance them. Currently donors are examining several ways for the DRC to clear its arrears.

South Africa will guarantee In July South Africa entered a financing agreement with Congo to supply the finance for oil imports country with 120,000 tonnes of oil through the government’s petrol importing body, Congolaise des hydrocarbures. The South African government has provided a US$30m guarantee for the deal. The arrangement is for eight months and has been agreed between Banque centrale du Congo and First Rand Bank of South Africa.

EIU Country Report November 2001 © The Economist Intelligence Unit Limited 2001