US embassy cable - 05KINSHASA1067

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 
-------- 
 
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 
------- 
 
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