IMF RES REP VIEWS ON DRC ECONOMIC SITUATION

UNCLAS SECTION 01 OF 02 KINSHASA 001473

SIPDIS

SENSITIVE
SIPDIS

TREASURY FOR OWHYCHE-SHAW

E.O. 12958: N/A
TAGS: ECON EFIN PGOV CG
SUBJECT: IMF RES REP VIEWS ON DRC ECONOMIC SITUATION

REF: A. KINSHASA 968


B. KINSHASA 1465


1. (SBU) Summary. The IMF resident representative to the DRC
said that there will be no review of the current Staff
Monitored Program (SMP) until the end of 2006, due mainly to
the ongoing electoral process, security concerns, and a lack
of data. He suspected that DRC government over-budget
spending, observed in April of this year, had recurred in the
months of June, July, and August. He expressed concern that,
in addition to government overspending, uncertainties over
the results of elections and security concerns might
contribute to continuing macroeconomic instability for the
remainder of 2006. He hoped, however, that the SMP, due to
conclude by end 2006, could be followed within a few months
by a new Poverty Reduction and Growth Facility (PRGF)
program, negotiated with the next government. The Poverty
Reduction Strategy Paper (PRSP),submitted on July 17, is
meanwhile being implemented. End summary.


2. (SBU) Econcouns met with International Monetary Fund (IMF)
resident representative Xavier Maret September 12. Maret
said that a formal IMF review team would not visit the DRC
until late in the year, despite the fact that the IMF
Staff-Monitored Program has been in place since April and
would normally need to be reviewed on a quarterly basis.
Instead, he said, a team from Washington will travel to the
DRC in October to meet with GDRC officials on an informal
basis. Maret admitted that the security situation in Kinshasa
and the ongoing election season were factors that had
contributed to the IMF decision not to conduct a full-scale
SMP review at this time. He noted also that economic data
from September, vital to any SMP review exercise, would not
be available anytime soon. (Note: The Ministries of Budget
and Finance websites have posted budget and treasury
cash-flow information for May 2006, projections for June, and
no figures yet for July and August. End note.)


3. (SBU) Maret said that there was reason to believe that
GDRC overspending in April (ref A),which contributed to a
slight depreciation of the Congolese franc (CF) in early May,
was likely the case again for the months of June, July, and
August during the leadup to and aftermath of the first round
of elections. He emphasized the need for the GDRC to limit
government spending to the amount of revenue taken in. He
noted that if the assumed GDRC overspending for the months of
June, July, and August was on items budgeted for the last
quarter of 2006, then the Fund would expect to see
under-budget levels of spending during the last quarter of

2006. Otherwise, he said, the GDRC would find itself in
greater difficulty and that the recent, more serious
depreciation of the CF and the associated inflation could be
expected to continue. (Note: Maret mentioned that the
Congolese Central Bank had just taken measures in an attempt
to control the recent spike in depreciation of the Congolese
franc (septel). End note.)


4. (SBU) Maret attributed recent macroeconomic instability
not only to GDRC overspending, but also to the elections and
the violence of August 20 - 22. He noted that there was the
potential for even more disruption because of the
constitutional requirement that any government employee who
had been elected to the National Assembly, including some
EcoFin ministers and high level parastatal authorities (ref
B) would be required to step down. This, he noted, could
make it more difficult to maintain control of GDRC finances
and make it necessary for the IMF to work with
less-experienced individuals in key ministries and
parastatals. When asked if the SMP would continue past the
end of 2006, whether or not a new government was in place by
January, Maret indicated that there might be a limbo period
in early 2007 when there would be no SMP, but also not yet a
re-negotiated Poverty Reduction and Growth Facility (PRGF)
program in place. He said, however, that this did not
represent a problem, and that IMF technical assistance to the
DRC would be able to continue informally.


5. (SBU) Maret expressed hope that a new government could be
seated before the end of the year, and that one of the first
orders of business would be the formalization and adoption of
the 2007 budget. (Note: the transitional government has
created a draft 2007 budget, basically flat-lining the 2006
budget. End note.) He noted that the 2007 budget, at least

KINSHASA 00001473 002 OF 002


initially, would not include outside budget assistance, since
a formal IMF program would likely not be in place until late
in the first quarter of 2007. He feared that the new
government and the IMF would be unable to quickly negotiate
the next PRGF, but that once in place, it could be reviewed
once before the end of the third quarter of 2007. This, he
noted, would be in time to achieve Heavily Indebted Poor
Country (HPIC) completion point before significant
multilateral debt payments would again come due by the fourth
quarter of 2007.


6. (SBU) Despite uncertainties over elections and the
security situation, Maret said that the Poverty Reduction
Strategy Paper (PRSP),officially handed over to the IMF and
World Bank on July 17, was moving ahead and could be
considered as now being implemented. He explained, though,
that a joint IMF/WB commission had reviewed the document
recently and that it is now going up the chain of approval at
both institutions. Ultimately, he said, it would need to be
apprved by both the IMF and WB boards before being
cnsidered official.


7. (SBU) Comment. Maret is rghtly concerned about the
effects that the curret electoral campaign, suspected GDRC
overspendin during the second quarter of 2006, uncertainties
about the timing of the installation of the next overnment,
and growing macroeconomic instability ay have on the current
IMF Staff Monitred Program and the prospects for negotiating
a new PRGF with the next government. Security concerns and a
dearth of data for the third quarter of 2006 are perhaps
understandable reasons not to conduct an SMP review in
October, but having to wait until the end of 2006 or the
beginning of 2007 to decide whether the DRC has made any
progress towards renegotiating a program with the Fund is
also problematic. While the transition government is either
not fully engaged or distracted by other events, the DRC's
compliance with IMF targets and objectives may get so far off
course that the next government could find itself unable to
rapidly negotiate a new program with the IMF, thereby turning
a difficult budget situation in 2006 into a disastrous
situation in 2007. End comment.
MEECE