C O N F I D E N T I A L SECTION 01 OF 03 KINSHASA 001067
SIPDIS
DEPT PASS TO USTR
E.O. 12958: DECL: 06/30/2005
TAGS: ETRD, ECON, EFIN, EINV, CG
SUBJECT: SIGNIFICANT TRADE BARRIERS REMAIN IN EASTERN CONGO
Classified By: W. BRAFMAN FOR REASONS 1.4 b/d.
Summary
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1. (SBU) Summary. Eastern Congo continues to face
significant trade growth barriers. Infrastructure, security,
access to credit, taxation, foreign competition, bureaucratic
obstacles, insufficient information and internal politics are
all serious obstacles that discourage and even reverse growth
efforts, particularly in the manufacturing sector. South
Kivu alone has reportedly lost at least 18,000 jobs since
1996. The GDRC devotes only limited attention to removal of
these barriers. End Summary.
Road to Nowhere, Lights Out
---------------------------
2. (U) Inadequate infrastructure is the primary factor that
hamstrings trade growth in many eastern Congo regions,
particularly the Kasai and Kivu provinces. Severely
deteriorated or non-existent roads and insufficient and
unreliable power supply hamper cost-effective production and
distribution. For example, Sotexki, a Congolese-owned and
operated textile plant located in Kisangani, Kasai Orientale,
functions at an estimated ten percent of its capacity in part
because of problems at the Societe National d'Electricite
(SNEL). SNEL is planning to increase capacity in Kisangani
from 6 to 11 Megawatts, but the provincial director of the
FEC (Federation des Enterprises du Congo, a chamber of
commerce) advises that this still will not meet demand.
Inadequate Security and Credit
------------------------------
3. (SBU) Security problems are the greatest growth
impediment in North and South Kivu. Business persons in both
provinces repeatedly said that the economic sector can
absolutely not advance without security. Violence and fear of
violence have particularly decimated the agricultural sector;
in some cases entire villages have been displaced. Farmers
are frequently afraid to return to their fields and, once
they do, roving militias and poorly paid Congolese military
seize crops and livestock to sell and consume.
4. (C) Business owners throughout the eastern Congo,
particularly among small- and medium-sized enterprises, state
that they have little access to credit. The Commercial Bank
of the Congo (BCDC) in Kisangani and the Kivus makes very few
loans. The BCDC in Lubumbashi reported that it has a loan
portfolio of several million dollars, and one client with a
credit line of USD one million, although most borrowers are
foreign-owned interests. Companies that seek multi-million
dollar loans must normally obtain them outside the DRC. The
BCDC's policies exclude loans to small and start-up
businesses, because a borrower must have at least USD 5,000
on deposit and provide collateral. (Comment: It is unclear
if business owners are unable or just unwilling to obtain
loans from banks. Many Congolese avoid the banking system not
only because they lack faith in bank deposit security, but
also to avoid disclosing assets and therefore triggering tax
liability on otherwise undeclared cash. End Comment.)
5. (U) Credit cooperatives and micro-finance institutions
have begun to fill the credit void in the provincial
capitals, although it is not clear if they have sufficient
assets to foster widespread economic growth. There are at
least two such groups in Kisangani, Credit Boyomais and a
USAID-sponsored program through Hope International, although
Credit Boyomais' rates are high (8 percent per month) and are
limited to borrowers that the cooperatives' owner knows
personally. Credit cooperatives and micro-finance operations
offer lower rates in Goma and Bukavu than the BCDC, but again
availability is likely limited to the few who live in the
towns and hear of the institutions.
The Taxman Cometh
-----------------
6. (C) Onerous, arbitrary taxes and bureaucratic red tape
also penalize and deter growth. The administrative time
expended in determining, negotiating, paying and even
avoiding taxes may create a burden equal to or greater than
the tax liability itself. Most eastern Congolese business
owners were unable even to estimate their tax bill, although
some offered a figure of thirty to forty percent of revenue.
Even the North Kivu Governor could not explain his province's
tax structure. National, provincial and local governments
each impose a variety of taxes and other governmental
requirements, although not all are legal. A South Kivu
factory manager reported that various government officials
impose as many as forty different taxes on his company and
that his accountant spends as much as eighty percent of his
time determining and negotiating tax liability. Several
officials per day may visit a business, often trying to
collect the same tax. Many business persons, particularly in
South Kivu, reported that local officials often create
fictitious taxes.
7. (C) Export taxes in particular impose an obvious obstacle
to trade growth. Factory managers and traders report that the
DRC's export taxes of up to four percent creates a strong
export disincentive. South Kivu alone has reportedly lost at
least 18,000 jobs since 1996 due in large part to the decline
of export markets. Business owners in the Kivus reported that
Rwanda imposes only a one percent export tax, and that other
neighboring countries' export liabilities are similarly low,
discouraging the establishment of legal export businesses in
the DRC. In the Kivus, merchants often illegally export
goods themselves or trade with Rwandans who enter the DRC and
do the smuggling. Katangan businesses also report
substantial illegal exports into Zambia, particularly in the
mineral sector.
8. (SBU) Provincial governments appear to be taking some
measures to reduce tax liability and streamline collection.
The South Kivu Vice Governor for Finance and Economy reported
that he has created an internal tax audit division to
eliminate double and illegal taxation. Both the Province
Orientale Vice Governor for Finance and Economy and the North
Kivu Vice Governor reported cooperation with the GDRC in
Kinshasa that resulted in the elimination of all or most
double taxation. OFIDA (the Congolese customs agency)
established one-stop customs windows ("guichet unique"),
although so far it does not seem to have substantially
reduced customs fraud.
Competition is Tough
--------------------
9. (U) Outside the DRC, lower tax burdens and production and
transport costs create powerful external competition. As
mentioned above, countries that border the DRC have lower
export duties that attract business. Many of these countries
also have more developed infrastructure, including rail and
road systems, that enable cheaper, faster goods transport.
The GOR provides some support to Rwandan exporters, primarily
in the agricultural sector. Lower-cost Asian-manufactured
goods are clearly harming the Congolese manufacturing
industry, particularly in the textile sector. Many DRC
markets sell Chinese-made fabrics for half the price of
identical, higher-quality Congolese textiles. (Comment: Many
Congolese business managers seem to lack updated information
and knowledge of modern business management techniques. For
example, several asked for information about AGOA. One
factory manager noted surprisingly that he no longer had a
captive market and had to pursue customers. End Comment.)
Political Affilation Matters
----------------------------
10. (C) Finally, several business people throughout eastern
Congo said that political party affiliation can still
substantially affect the ease of doing business. For
example, the textile factory manager in Kisangani claimed
that, because the factory owner belongs to one political
faction, other political factions avoid doing business with
the factory. Business owners in the Kivus, including a North
Kivu FEC representative, said that the government creates a
business climate that is much more hostile to them than in
provinces that President Kabila's faction dominates, such as
Katanga. For example, several North Kivu businessmen said
that ministries will not give North Kivu businesses
permission to operate outside of their province and will not
honor agreements made under prior governments. However, the
North Kivu Vice Governor for Finance and Economy vehemently
denied this assertion and said that these businessmen merely
resent that they can no longer conduct business free of
government restriction.
Comment
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11. (C) The GDRC and the provincial governors seem only to
be beginning to understand the importance of enacting reforms
that support the trade sector. Parliament did recently pass a
new Customs Code that emphasizes fraud and red tape
reduction. Further, as discussed above, some officials
recognize the importance of tax reform, even if they are not
able to implement it. However, given their status as
appointed officials, most are probably unwilling and even
unable to push the central government too hard. In
particular, in Province Orientale, the government seemed
ill-informed and ill-prepared to support economic
development. Nevertheless, some promising signs emerged in
South Kivu, where the forward-thinking young Vice Governor
has now engaged the FEC in monthly meetings to discuss
economic issues. End Comment.
MEECE