IMF ON RECENT MACROECONOMIC DETERIORATION

1. (SBU) Summary. A visiting IMF team characterized the DRC
economic situation as "difficult" and expressed concern over a
worsening macroeconomic outlook. The Fund laid the blame for rising
exchange and inflation rates squarely on GDRC overspending, fueled
in part by Central Bank credit to the government. In talks with
GDRC authorities, the Fund's experts suggested ways to stabilize the
exchange rate and inflation and to bring GDRC spending under control
before the end of the year. The IMF expects to return in January
2007 to conduct a more formal review of the Staff-Monitored Program.
End summary.



2. (U) International Monetary Fund (IMF) Africa Bureau chief Cyrile
Briancon outbriefed the diplomatic and donor community on October
12, following a 5-day IMF team visit to Kinshasa, their first since
June (ref A). Briancon said the visit had not been a formal review
of the current Staff-Monitored Program (SMP), but rather a close
look at the macroeconomic situation in the DRC and a chance to
discuss matters with GDRC officials.



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Macroeconomic Deterioration


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3. (U) Briancon said that the worsening macroeconomic situation is
of great concern to the Fund. He noted that the Congolese franc has
depreciated by more than 10 percent (from 450 to now over 500
CF/USD) since June, with the bulk of that occurring since late
August. Briancon stated that cumulative inflation for 2006, through
end September, is already at 20 percent (Note: Original projections
for 2006, as used in the Poverty Reduction Strategy Paper issued in
July, were for under 10 percent annually. End note.) He added that
if fourth quarter inflation continued at the same level as
September, inflation could total 30% for the year.



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GDRC Overspending, Redux


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4. (U) Briancon said that, despite higher than expected government
revenues, GDRC expenditures for the month of September had exceeded
the month's budget by some 50 billion Congolese francs (CF), or
about USD 100 million. He stated that 20 billion CF (USD 40
million) of this total was in the form of Congolese Central Bank
(BCC) credit to the GDRC. The remaining 30 billion CF (USD 60
million) was the amount that the Fund felt should have been saved
due to prior GDRC expenditures on items originally budgeted for
September. (Note: IMF resident representative Xavier Maret
indicated weeks ago (ref B) to Econcouns that the Fund expected to
see underspending against the 2006 budget during the last four
months of the year. This apparently did not occur. End note.)
This overspending for the month of September alone equaled the
entire amount overspent for the first eight months of 2006.



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What Can the GDRC Do?


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5. (U) Briancon said that the IMF has suggested an immediate halt to
all new, non-recurring expenditures, and a much tighter inspection
of anything currently in the "chain of expenses." He called these
"difficult" choices and noted that high inflation, once begun, would
be slow to correct. He emphasized that tight BCC monetary policy
would need to precede and accompany tighter GDRC budget policy. He
noted, though, that increased transparency in the budget and
spending plan through Ministries of Finance and Budget website
postings would make tracking GDRC expenditures easier. Briancon
characterized ongoing structural reform under the SMP as "not very
satisfactory" and placed particular emphasis on the need to rein in
total salary payments to the military, teachers, and civil servants
through completion of the required census process.



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Next Steps


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6. (U) Without commenting on whether the GDRC could get its house in
order before the end of the year, Briancon suggested that the next
IMF visit would be in early January 2007 to conduct a final SMP
review, after the elected government is in place. He stated that
only then could the new government negotiate another IMF Poverty
Reduction and Growth Facility (PRGF) program, which it might be
possible to approve and have in place by the end of the first
quarter of 2007. This new PRGF, Briancon said, would have to be
implemented for six months and reviewed successfully in October
2007, a best case scenario, before HIPC completion point could be
achieved sometime during the last quarter of 2007. (Note: this is
dependent also upon one year of successful Poverty Reduction
Strategy Paper (PRSP) implementation, begun in July 2006. End
note.)



7. (SBU) Comment. Neither putting a brave face on the situation nor
sounding the death knell of the Congolese economic program, the IMF
made it clear that the GDRC is in serious trouble as it attempts to
maintain the macroeconomic advances made over the last few years
under the PRGF and now the SMP. The recent installation of another
group of lameduck ministry and public enterprise officials (septel)
for the final two months of the transition does not inspire
confidence that there will be a quick return to fiscal discipline
before year's end.



8. (SBU) Comment (cont.) Whatever the reasons behind massive
government overspending during the electoral campaign and final
months of the transition government (election expenses, security
concerns, public sector salary pressures, etc.), the elected
government scheduled to take office at the end of the year will face
a daunting task: turn the economic situation around and get a new
IMF program in place quickly. Otherwise, the DRC will suffer the
same fate as in 2006: suspension of outside budget assistance and
multilateral/bilateral debt forgiveness programs. Either of these
consequences would be enough to make 2007 another very difficult
year for the DRC, and for its elected government. Worse still, the
new government would find it next to impossible - even under the
best of circumstances - to meet the pent-up expecations of the
Congolese people. End comment.
MEECE