DRC BUDGET COMPLETE BUT MAY NEED REVISIONS

C O N F I D E N T I A L SECTION 01 OF 02 KINSHASA 000216 SIPDIS E.O. 12958: DECL: 02/08/2015 TAGS: EFIN ECON PGOV PREL PHUM SOCI CG SUBJECT: DRC BUDGET COMPLETE BUT MAY NEED REVISIONS REF: A. KINSHASA 162 ¶B. KINSHASA 205 Classified By: Econoff Peter Newman for reasons 1.4 b/d ¶1. (SBU) Summary: The draft 2005 GDRC budget is currently awaiting Parliamentary approval. It has increased 42.2 percent compared to the 2004 budget, with foreign assistance comprising 58 percent of total revenue. The budget is balanced and totals $1.809 billion. Provisions of GDRC normal income (i.e. not foreign assistance) have been made for elections and military integration/DDR. Social spending accounts for 16.4 percent of total spending while defense accounts for 9.9 percent. It is very possible that the draft budget will be recalled before it reaches the floor of Parliament in order to increase appropriations for elections and to make adjustments for a weakening exchange rate. End summary. The Budget: In General Terms -------------- ¶2. (SBU) The GDRC has completed a draft 2005 budget and submitted it to the Parliament. The budget totals $1.809 billion and is balanced. This is a 42.2 percent increase over the previous year. Although Parliament is scheduled to begin debate on the budget in February, it is not clear when the budget will be promulgated due to the backlog of overdue legislation. ¶3. (SBU) The baseline macroeconomic indicators assumed for development of the budget are: Nominal GDP: $7.3 billion GDP Growth: 7 percent Inflation: 8.3 percent Exchange Rate: Congolese franc (FC) 415.2 to $1 ¶4. (C) The GDRC is anticipating a year-on-year increase in tax and customs revenue of 32 percent, as was achieved from 2003-2004. IMF ResRep told econoff that this level of anticipated revenue growth will not be possible without strong action against corruption. The formal sector is neither broad nor deep enough to supply the revenue anticipated, which makes controling corruption critical. ¶5. (C) The Congolese Central Bank Governor told emboffs on Feb 2 that the budget could be recalled in the next few days as key basic assumptions have changed (septel). The main problematic assumption is the exchange rate of FC 415.2 since the rate is currently hovering around FC 465 and gives every indication of continuing to slide. HIPC/Pro-Poor Spending and Foreign Assistance -------------- ¶6. (U) Foreign assistance and HIPC write-offs account for 58 percent of total revenue. HIPC-related spending will total approximately $120 million in 2005, of which 83 percent will go to health, education and economic programs. Total pro-poor spending will be $641.8 million, of which 49.78 percent is for economic affairs, 16.88 percent for education, 11.23 percent is for health, and 7.48 percent supports defense-related programs. (Comment: We have unsuccessfully sought clarification about "pro-poor" defense spending from the Ministry of Budget and the IMF. The only way we imagine defense-related programs could be considered pro-poor would be something along the lines of increases in benefits to soldiers' families. End comment.) Total pro-poor and social spending accounts for 35 percent of the budget. Elections Funding! What's that? -------------- ¶7. (C) It appears that all elections expenditures are located under the line item for the Independent Electoral Commission (CEI). The total allocated in the 2005 budget for elections is $161 million, of which $159 million comes from foreign aid. (Note: The overall cost of elections has been set at $285 million, leaving a shortfall of over $100 million, presumably to be funded by as-yet unknown foreign donors. End note.) IMF ResRep told econoff the GDRC has planned to appropriate $5-$6 million of its own funds for elections. The GDRC had previously stated that it would provide $6 million for elections, though about $4 million of those funds apparently were from direct budgetary support from France and Japan. According to the budget document, the GDRC will appropriate $2.1 million of its own revenue for the functioning of the CEI but does not have any other of its own funds dedicated to elections. Reactions to the Minister of Budget's Feb 2 public announcement (Ref B) that only $2.1 million from Congolese revenue sources would be appropriated for elections were sharp. As a result, the final recommendations of the Feb 2-4 Inter-Institutional Conference included increasing GDRC contributions to 10 percent of the total elections costs, i.e. $28 million. After the conference, CEI President Malu Malu told Ambassador that the GDRC has already committed itself to increase its contribution to $15 million. Defense Spending -------------- ¶8. (C) Not surprisingly, defense spending is the most byzantine element of the budget. In addition to the budget document itself, defense spending is explained in the narrative document accompanying the budget. The narrative and the budget document are mutually contradictory. The narrative notes that the GDRC is appropriating $54 million of its own funds to be distributed among elections, DDR/military integration and police restructuring programs. An official at Ministry of Budget explained to emboffs that the $54 million would be allocated as: $20 million for military integration, $6 million for police restructuring, and $28 million for HIPC spending. ¶9. (C) According to the budget document, military spending will total approximately $180 million (9.9 percent of the budget),an increase of $60 million (or 51 percent) versus the 2004 budget. The budget for Ministry of Defense operations is $35 million; $68 million is dedicated to DDR and military integration; and $57 million will go to pay salaries for the approximately 300,000 military. Comment -------------- ¶10. (C) Exchange rate instability and its attendant macroeconomic effects will seriously affect the draft budget which is denominated entirely in Congolese francs. Furthermore, given the ambitious GDRC plans to resolve the FLDR/Interahamwe issue in the Kivus, the additional defense appropriations included in the 2005 defense budget are unlikely to cover total expenses, necessitating additional supplementary spending with the potential to increase pressure on the exchange rate and inflation and exacerbate the GDRC's potential budgetary shortfall (Ref A). The budget may well be recalled before debate begins due to increased elections appropriations and to reflect a declining rate of exchange. End comment. ¶11. (U) Bujumbura minimize considered. MEECE