IMF MISSION LOOKS AT DRC 2005 PERFORMANCE

C O N F I D E N T I A L SECTION 01 OF 03 KINSHASA 000292

SIPDIS

TREASURY FOR LKOHLER

E.O. 12958: DECL: 02/16/2016
TAGS: EFIN ECON PGOV CG CIAT EAC ELECTIONS IMF
SUBJECT: IMF MISSION LOOKS AT DRC 2005 PERFORMANCE

REF: 2005 KINSHASA 1774

Classified By: Greg Groth, Econcouns, for reasons 1.4 (b) and (d)


1. (SBU) Summary. An IMF team was in Kinshasa January 24 to
February 3 to review the DRC's performance in the third and
fourth quarters of 2005. The IMF was generally satisfied
with macroeconomic stability during the last half of 2005.
Their principal concern was GDRC overspending in some budget
categories, as well as underspending in the pro-poor sectors.
They indicated that the GDRC had not met all of its
structural reform targets, and that the Congolese Central
Bank ended 2005 with dangerously low levels of foreign
exchange reserves. The IMF team expressed concern that the
GDRC had operated all of January without a 2006 budget, which
had yet to be passed by Parliament. The IMF did not set a
firm date for the sixth and final review, but indicated that
a decision would probably be made in March for a review in
late May or early June. They expressed hope that the DRC
would submit its Poverty Reduction Strategy Paper in March so
that implementation might begin in July or August. End
summary.


2. (SBU) An IMF team from Washington led by African
Department Division Chief Cyril Briancon began a ten-day
mission to the DRC on January 24. An IMF mission led by
Briancon was last in Kinshasa in mid-October (reftel). The
team met with GDRC ministers and officials, as well as with
Congolese Central Bank (BCC),World Bank (WB),and donor
country officials. Briancon and recently-arrived country
representative Xavier Maret briefed the Ambassador, DCM, and
Econcouns at a January 31 breakfast. Briancon and Maret gave
a public one-hour outbrief on the IMF mission to an assembled
group of donor country, WB, and UNDP representatives on
February 2.

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Macroeconomic Stability
--------------


3. (SBU) The IMF team made note of macroneconomic stability
in the DRC during the last half of 2005. Inflation, which
had risen to 27 percent by June, was almost zero for the
second half of 2005 and 21 percent overall for the year. The
exchange rate had also been stable, with the Congolese franc
even appreciating slightly against the dollar at year's end.
On another positive note, the IMF said that 2005 GDP growth
of 6.6 percent had been close to expectations and Briancon
opined that it was possible that GDP growth had been even
higher, based on anecdotal information from provinces where
reliable data is not available.

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GDRC Overspending
--------------


4. (SBU) Briancon said that the IMF's main concern was GDRC
overspending in some 2005 budget categories -- salaries,
official travel, and "institutions," which means expenses of
the offices of the President, the four Vice Presidents, and
the Presidents of the Senate and the National Assembly. He
said that this was accompanied by underspending in the
pro-poor sectors such as health and education. He noted that
GDRC expenditures against the donor-supplied budgetary
support portion of the 2005 budget were below projected
levels, since some of the foreign-supplied funding had come
in very late in 2005. This underspending of foreign
budgetary support had been covered by overspending on the
domestically-financed side of the budget, for example on
wages for teachers, civil servants, and the military.
Briancon noted that completion of the ongoing civil servant
and military censuses is urgently required in order for the
government to pay higher agreed-upon salaries without
exceeding the budget. Elimination of "ghost workers" and
duplications can only occur once the census work has been
completed.

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Structural Reforms
--------------


5. (SBU) In addition to incomplete censuses, the IMF mission
found that the GDRC had not accomplished other structural
reforms expected of it in 2005. These included the one-stop
("guichet unique") customs service, a financial
accountability system available for public scrutiny, and the
restructuring of the Congolese Central Bank (BCC) network.
Briancon said that despite IMF technical assistance and its
attempts to help reorganize the central bank, the BCC is
losing money and that its net value is negative due to its
inability to generate revenue.

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The 2006 Budget
--------------


6. (SBU) The IMF mission indicated that it had no problems
with the draft 2006 budget and noted that it even contained
elements of the long-awaited Poverty Reduction Strategy Paper
(see para. 9). Briancon, however, expressed "serious
concern" that there was still no 2006 budget in place at the
beginning of February, and that there has been little control
over GDRC spending since January 1. He said that the GDRC was
apparently operating at 2005 budget levels, but that these
expenditures would be booked retroactively for the beginning
of 2006, once the new budget was promulgated. He noted that
even in the regular GDRC "chaine des despenses" (chain of
expenditures,) up to half of all spending was approved
retroactively, but that at least it was done in a more timely
and transparent fashion. (Note: The 2006 budget was approved
by the Parliament on February 9 and sent to the President for
signature the week of February 12, but as of February 16 was
still not promulgated. End note.)
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Central Bank Issues
--------------


7. (SBU) The IMF's other principal concern was the low level
of foreign exchange reserves in the BCC. Briancon said that
the BCC's foreign exchange reserves at the end of 2005 had
dropped to the equivalent of less than one month of imports.
He acknowledged that this was partly because foreign
assistance funds for 2005 had been lower than expected and
had not all arrived before year's end. The bank had been
forced to draw down its foreign exchange holdings in order to
make some year-end purchases and payments. Briancon said
that this low level of reserves could make it difficult for
the BCC to intervene if the Congolese franc began to
depreciate and would be a "major problem" if inflation in the
DRC began to rise again. Briancon said that this was also
problematic because the DRC will not receive the bulk of 2006
foreign budgetary support funding until after the first half
of the year.

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Sixth Review
--------------


8. (C) Briancon said that the prospects for a sixth review of
the DRC program are "difficult" right now, but that the
current arrangement could in principle be extended through
June 11, if necessary. He said that he hoped to see more
progress, and that the fund would make a decision in late
February or early March on whether or not to schedule the
sixth review for late May or early June. Briancon
characterized the current economic program as an informal
"staff-monitored" approach and said that it was possible the
IMF might need to initiate a formal six-month
"staff-monitored program" (SMP) in March if they found little
or no progress. He said that this might be the best way to
assure the start of a new economic program with the new
government, since it would give the IMF a higher level of
control over the current economic reform program.

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PRSP Delays
--------------


9. (SBU) Briancon and Maret said that it is essential for the
DRC to complete its Poverty Reduction Strategy Paper (PRSP),
have it approved by the IMF, and begin its implementation
with the new government. The Ministry of Plan is the lead
GDRC ministry for this document, but it also needs input and
acceptance by half a dozen other ministries, many of whom are
not in cooperation mode. Briancon predicted that the PRSP
would be available in draft form by March and that
implementation would need to begin in the third quarter of
2006, so that the DRC could then reach completion point
during the third quarter of 2007, before heavier IMF payments
would come due. He noted that there were some elements of the
anticipated PRSP already included in the 2006 draft budget.
(Note: Ambassador spoke recently to Minister of Plan Thambwe,
who told him that he was making it a priority to have the
PRSP ready by March. End note.)

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Suggestions for Improvement
--------------


10. (SBU) Briancon said he had suggested the following
actions to the GDRC to improve their adherence to the IMF
program in 2006:
-- The GDRC should create a "commitment plan" for each 2006
budget line by end February and post it on a GDRC public
internet site. This month-to-month plan would provide
ministry-by-ministry details of salaries, goods and services,
mission travel costs, capital spending, and other
expenditures.

-- The GDRC should adhere to the proposed ten percent
increase in the 2006 budget on expenditures in the
socioeconomic sectors specified in the HIPC program,
especially in the health sector. These pro-poor sector
expenditures should then be confirmed by audits, first of the
financial outlays and then of the actual presence and effect
of the items purchased.

-- The BCC should increase its foreign exchange reserves.

-- Each quarter the Minister of Budget should send a
simplified copy of the current budget status to the National
Assembly, including the plan for out-months.
-- The GDRC must get the "one-stop" customs service up and
running, now that the Congolese Customs Office (OFIDA) has
been confirmed as the sole receiver of customs duties.

-- The GDRC should make sure that the military receive their
salaries, including higher benefits for families, as provided
for in the recent EUSEC (EU mission to provide advice and
assistance for security reform) report. Briancon noted that
the BCC has been issuing the full amounts but salaries are
not being disbursed to soldiers in the field.


11. (SBU) Comment. Although not the sixth review mission
that many, including the GDRC, had expected by now, the IMF
did send a very clear message about the GDRC program. The
GDRC has been put on notice that, despite a return to some
semblance of macroeconomic stability, there is still a lot
that must be done, especially on the structural reform side.
The fund is rightly concerned that with continued
overspending and the low level of foreign reserves in the
bank there could be a return to macroeconomic instability in
the first half of 2006. Sticking to a budget is difficult
when there is no budget, as was the case for the entire month
of January. Hopefully there will be a budget in place by the
week of February 20. Meanwhile, the GDRC can start putting
into place some of the measures suggested by the IMF during
this mission, and after a successful sixth review the IMF
could then initiate a new economic program. This may require
an SMP to get them through the current program. The GDRC's
next major hurdle, though, is to get the PRSP drafted and
approved so that the new government can begin implementation
immediately upon taking office and reach the HIPC completion
point during the third quarter of 2007. End comment.
MEECE