IMF GUARDEDLY OPTIMISTIC ABOUT DRC ECONOMY

C O N F I D E N T I A L SECTION 01 OF 02 KINSHASA 000961

SIPDIS

E.O. 12958: DECL: 06/01/2015
TAGS: ECON EFIN PGOV CG
SUBJECT: IMF GUARDEDLY OPTIMISTIC ABOUT DRC ECONOMY

Classified By: DCM TDougherty for reasons 1.4 b/d.


1. (C) Summary. Visiting IMF officials expressed guarded
optimism about DRC economic circumstances and will recommend
that the GDRC proceed to the sixth and final IMF review. The
team stated that the DRC has made adequate fiscal and
monetary progress, with generally stable inflation and
exchange rates, despite a fragile macroeconomic situation.
Some in the international community emphasized frustration
over the GDRC's continued overspending (particularly on
travel) and emphasized that the IMF must carry the message to
the DRC that this is unacceptable. The IMF acknowledged
Congolese shortcomings which it will continue to monitor.
The Fund will request an extension of the current PRGF which
would otherwise expire in June. We expect the sixth review
could begin in November, with the current program possibly
being extended until national elections are concluded in the
first half of 2006. End Summary.


2. (SBU) The IMF Review Team, lead by Cyrille Briancon,
visited Kinshasa May 24-31 to finalize the fifth review under
the Poverty Reduction and Growth Facility. This was the
third visit during the fifth review cycle as a result of the
review being delayed since January due to macroeconomic
destabilization resulting from fiscal slippage and subsequent
inflation. Emboffs met with Briancon and his team twice.
The Ambassador hosted a breakfast for Briancon and IMF
Resident Representative Arend Kouwenaar on May 27, and DCM
and EconOff attended an out-briefing for donors on May 31.

Stabilization Cause for Optimism...
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3. (C) At the May 27 breakfast, Briancon acknowledged that
the Congolese economy "remains extremely fragile at the
macroeconomic level" but emphasized recent inflation and
exchange rate stabilization and increased budgetary control
as evidence of increasingly sound economic policy. The high
inflation that began in late 2004, and which saw prices rise
19% from January to mid-April, has largely been brought under
control. Briancon said that the IMF's inflation target
through 2005 is an optimistic 20-25%, although he admitted
that it may reach as high as 30%. The exchange rate is now
at 505 FC/$1 -- a slight improvement since April. Additional
positive signs included the Central Bank's stabilization of
its dollar reserves at 90%, enhancing its ability to absorb
excess liquidity.


4. (C) The Ambassador pointed out that completing the ongoing
census of combatants is necessary in order to develop a
coherent budget to pay military salaries regularly.
Substantial numbers of claimed but "phantom" soldiers will be
taken off the rolls. The lower payroll number should enable
increases in military pay to more reasonable levels (e.g.,
increasing the $10/month currently allocated to soldiers),
while staying within overall budgeted levels. While
acknowledging the point, Briancon expressed concern that
civil servants would then also demand salary increases, and
that financing such a pay increase would consume the GDRC's
entire current discretionary budget.


...Although Overspending and Corruption Frustrate Many
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5. (SBU) Overspending on official travel remains the DRC's
greatest budgetary problem, Briancon said, because it
generates both cash shortfalls and a strongly negative
perception. Briancon noted that, although the DRC has
decreased maximum travel per diems from USD 1000 to 500 for
senior officials (with corresponding cuts for those of lower
rank),the still high rate undermines the GDRC's lack of full
commitment to necessary austerity. Briancon said that travel
line items account for one-third to 40% of budget overruns,
and that the IMF is pressuring the DRC to reduce the per diem
by an additional 25%. On the plus side, military spending
has dropped from the peaks that national emergencies provoked
last year. Briancon said that the budget is currently fully
funded, although a number of pledged international donations
are delayed.


6. (C) The Minister of Budget confirmed at a June 8 meeting
with the Ambassador that the GDRC was actually running a
budget surplus as of May 2005, with receipts being somewhat
higher than anticipated and overall spending somewhat lower.
He noted, however, that the "quality" of expenditures needs
further improvement. Specifically, the government needs to
decrease what the Minister termed "sovereignty" expenses,
including travel, in favor of "pro-poor" spending. The
Minister alluded to the fact that decreasing and controlling
"sovereignty" expenditures represents a major change in the
way of thinking of GDRC decision-makers who have been
accustomed for decades to assuming that anything associated
with senior officials would somehow be funded. The Minister
also noted that per diem rates will be cut once again next
month.


7. (C) At the IMF's May 30 outbrief with donors,
representatives of some diplomatic missions expressed
frustration with corruption, lack of transparency,
overspending, and poverty, and their perception that the IMF
is not sufficiently pressuring the GDRC for progress in these
areas. Some CIAT ambassadors had expressed similar concerns
at the regularly scheduled CIAT meeting on May 26 to which
Briancon and his team had been invited. On both occasions,
the IMF acknowledged that it was very aware of these
problems. As a result of continued pressure on the GDRC
regarding these issues, some progress has been made.
Briancon noted, for example, that the IMF is helping the DRC
begin publishing its budgets quarterly in electronic and
paper forms to increase transparency. Short of terminating
the program (an option no one supports and all agree would do
far more harm than good),the best course of action is to
continue pressing for transparency and expenditure controls,
and to provide technical assistance as appropriate. CIAT
subsequently fully endorsed the IMF program in its communique
of June 9 (septel).

IMF Offered Plans to Move Forward
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8. (C) At the May 27 breakfast, Briancon offered the
Ambassador an approximate timeline for the continued review
process and explored possible conflicts with the proposed
electoral schedule. The IMF will request an extension of the
current program from the June 11 deadline through October to
finalize the fifth review. The sixth review could begin in
November, and the IMF could extend the program through June

2006. Briancon was sensitive to the political situation and
asked if it should consider timing the sixth review around
the election schedule, acknowledging that uncertainty
surrounding elections will continue to have economic
consequences.

Comment
--------------


9. (C) Briancon was frank in his "the glass is half full"
assessment of the GDRC's performance up to this point. In
fact, he noted "the glass may only be a third full." While
inflation and exchange rates are now apparently under
control, the slippage since late 2004 was serious, and it is
clearly too early to declare renewed victory. Briancon
stressed that the macroeconomic progress made by the GDRC
over the past two years fully justifies the continuation of
the current program -- a judgment with which we fully concur.
While corruption needs to be tackled, and budgetary and
spending systems need to be fully implemented, we remain
convinced that we have more leverage with an ongoing IMF
program than we would without. It is also worth noting that
this is all new: past governments in Zaire/Congo basically
did not have budgets, much less any system of monitoring,
controlling, and reporting. Moreover, the relative economic
stability resulting from the current program is essential in
creating a climate conducive to peaceful and credible
elections and to a stable post-transition government. End
Comment.
MEECE