IMF REVIEWS PROGRESS, SETS UP DRC STAFF-MONITORED

UNCLAS SECTION 01 OF 02 KINSHASA 000968 SIPDIS SENSITIVE SIPDIS TREASURY FOR LKOHLER E.O. 12958: N/A TAGS: EFIN ECON PGOV CG SUBJECT: IMF REVIEWS PROGRESS, SETS UP DRC STAFF-MONITORED PROGRAM REF: KINSHASA 292 ¶1. (SBU) Summary: An IMF team was in Kinshasa for five days May 27 to June 1 to look at the DRC's performance since February 2006 and to finish setting up a Staff-Monitored Program (SMP). The SMP will provide a bridge between the PRGF program that lapsed on March 31 and the new PRGF the GDRC hopes to negotiate before the end of 2006. The Fund delivered a strong message to the GDRC against government overspending and on the need to complete structural reforms sought under the lapsed PRGF program. End summary. ¶2. (U) An IMF team from Washington led by African Department Division Chief Cyril Briancon began a five-day visit to the DRC on May 27. An IMF mission led by Briancon was last in Kinshasa in early February, shortly before the demise of the DRC Poverty Reduction and Growth Facility (PRGF) program on March 31 (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 IMF country representative Xavier Maret briefed the Ambassador, DCM, and Econcouns at a June 1 breakfast at the EMR. Briancon and Maret gave a public one-hour outbrief on the IMF mission to an assembled group of donor country, WB, and UNDP representatives later that afternoon. -------------- Situation: "Difficult" -------------- ¶3. (SBU) Briancon described the DRC's economic and financial situation at end May as "difficult" and said that he had delivered strongly-worded messages to GDRC officials regarding government overspending and incomplete structural reforms. He said it was clear that despite low levels of GDRC spending during the first quarter of 2006, when the GDRC was still operating on the 2005 budget, GDRC expenditures for April had been well over budget. (Note: The Ministry of Budget website, www.ministeredubudget.cd, shows total overspending for April of nearly USD 29 million, including USD 14 million by the Defense Ministry, USD 4 million by the presidency, and nearly USD 2 million by the Independent Electoral Commission. End note.) Briancon did note, however, that preliminary figures for May indicated that spending had been more in line with the budget for the month. ¶4. (SBU) IMF representatives noted that the macroeconomic stability of late 2005 and early 2006 has begun to slip a bit and attributed this to Central Bank financing of overspending in April. Twelve-month inflation, which had dropped to almost 6.5 percent in April, has now risen to over 7.5 percent and annualized inflation is at nearly 13 percent. The Fund has raised its projected inflation rate for the year to 9.5 percent, and the GDP growth rate has been revised downward from 7.0 to 6.5 percent. Briancon noted that due to higher crude oil prices, and despite slightly reduced production, DRC oil revenues were better than expected in the first quarter of 2006, averaging USD 50 million per month. He said, however, that these unexpected revenues would be needed later in the year to offset the probable loss of direct budgetary support from donors. -------------- Staff-Monitored Program -------------- ¶5. (SBU) In addition to looking at DRC's performance since February, the IMF team worked to finish setting up the interim Staff-Monitored Program (SMP),which will provide continued IMF technical support and allow the DRC to establish a track record that hopefully would lead to a new PRGF program. (Note: The SMP is an IMF administrative entity and does not require IMF board approval. Talks on the establishment of an SMP began during the spring IMF/WB meetings in April. End note.) Once established, the SMP will date from April 1, 2006, and the first quarterly review is expected in early July, with subsequent reviews at three-month intervals. The SMP, which will be in place for between six and eighteen months, will be working on the same conditionalities, including macroeconomic targets and structural reforms, as the Poverty Reduction and Growth Facility (PRGF) program that ended on March 31, 2006. KINSHASA 00000968 002 OF 002 -------------- Teachers and Civil Servants -------------- ¶6. (SBU) Briancon and Maret noted that nationwide censuses of public school teachers and civil servants are still not complete. Not having yet removed ghost workers from the rolls, the GDRC cannot now afford to increase salaries for actual employees. Briancon estimated that the ongoing civil servant census might reduce the rolls by anywhere from five to ten percent, citing the figure of 30,000 ghost workers among 450,000 currently being paid. (Note: This figure does not include public school teachers, estimated at 280,000 nationwide, because under Congolese law they are not considered civil servants. End note.) Briancon, perhaps repeating assurances by Finance Minister Banguli, said that the GDRC expected to have these two censuses completed within a month or two. -------------- Civil Service Backdoor? -------------- ¶7. (SBU) Briancon said that the IMF has learned that public school teachers can be hired by the Ministry of Education without approval by the Civil Service Ministry, and that these teachers can then transfer into civil service positions, again without the approval of the Civil Service Ministry. Briancon expressed concern that this could undo any progress accomplished by the census in reducing civil servant numbers. -------------- Military Salaries -------------- ¶8. (SBU) IMF reps said that the GDRC's plan to raise the minimum salary for a Congolese soldier to USD 50 per month would exceed the 2006 budget allotment of USD 59 million for military salaries. Briancon said that any salary increase must be within budget and based upon the reduction of the effective number of soldiers, verified in a completed census. (Note: Even current best estimates of 150,000 soldiers would push the salary envelope to nearly USD 90 million at USD 50 per month. End note.) That census, like those for public school teachers and civil servants, has yet to be completed. -------------- Poverty Reduction Strategy Paper -------------- ¶9. (U) Briancon noted that the achievement of Heavily Indebted Poor Country (HIPC) completion point by the DRC depends upon having a new PRGF in place for at least six months, as well as the implementation of the Poverty Reduction Strategy Paper (PRSP) for twelve months. He said that he had encouraged the GDRC to deliver the PRSP to the IMF and World Bank by the end of June so that Completion Point, and the resulting debt forgiveness, could be achieved by the third quarter of 2007. (Note: The final GDRC draft of the PRSP was presented to international partners the week of June 5, and should be adopted officially by the end of June. Septel to follow. End note.) ¶10. (SBU) Comment: The strong IMF message of fiscal responsibility and increased attention to needed structural reforms may be falling on deaf ears. The current preoccupation of most members of the GDRC is the upcoming July 30 elections. This is despite the possibility that nearly USD 190 million of outside budget support, representing nearly 10 percent of the 2006 budget, may not be forthcoming due to the lack of a new PRGF before year's end. The first six months of the SMP will almost certainly pass before a new government is installed, and the new government will be hard-pressed to negotiate a new PRGF before the end of 2006. The GDRC, in anticipation of much-reduced revenue, needs to stick to prudent, "quality" expenditures for the rest of 2006. End comment. MEECE