IMF-WORLD BANK TEAM PRESENTS GLOOMY REVIEW

UNCLAS NDJAMENA 001307 SIPDIS SIPDIS DEPT FOR AF, EB, ENERGY FOR CAROLYN GAY AND GEORGE PEARSON, TREASURY FOR OTA, LONDON AND PARIS FOR AFRICA WATCHERS, DAKAR FOR FCS REPRESENTATIVE CYNTHIA GRIFFITH GREENE E.O. 12958: N/A TAGS: ECON EFIN ENRG PGOV CD SUBJECT: IMF-WORLD BANK TEAM PRESENTS GLOOMY REVIEW ¶1. (SBU) SUMMARY: The IMF-World Bank joint mission is facing challenges in its attempts to work with Chadian authorities to develop a medium-term expenditure framework for oil revenue management, according to the mission's team leaders. The GOC's inability to accept the realities of dwindling oil production will hinder its ability to maintain a sustainable national budget. The mission has also identified a number of exceptional military expenses that cannot be accounted for, and has pointed out that some of these expenditures include the recently-received tax payments from Chevron and Petronas. END SUMMARY. - - - - - - - - - - - - - - - - - - - - IMF-WORLD BANK TEAM: SOME GOODS NEWS... - - - - - - - - - - - - - - - - - - - - ¶2. (SBU) On November 5, World Bank Chad-Cameroon country manager Marie-Francoise Mary Nelly and Harry Snoek, leader of the visiting IMF mission, met with the Ambassador to discuss the recent activities of the IMF-World Bank joint mission. The team, which arrived October 26 and is expected to be in N'Djamena until mid-November, was tasked with assisting the Chadian authorities to implement a medium-term expenditure framework for the use of the country's oil revenues for poverty reduction, and look to the development of a stabilization fund to preserve the country's unspent revenues (provisions laid out in the July 13 agreement between the World Bank and GOC). Marie-Nelly noted that prior to the team's arrival, the Bank and Fund informed the GOC of the mission's objectives, and the GOC had agreed to cooperate with the mission's activities. ¶3. (SBU) Snoek and Marie-Nelly stated that the GOC was moving forward in some aspects of the July 13 agreement. Specifically, Chadian authorities were scrupulously ensuring that the proposed 2007 budget accorded 70 percent of the country's budgetary resources to priority sectors that focused on poverty reduction (according to the World Bank-GOC agreement). They also noted that the GOC was making efforts to program both direct (royalty payments) and indirect (tax payments) oil revenues for the construction of roads, medical clinics, and rural electrification projects. In addition, the country appeared on its way to paying off its external and internal arrears by 2010. - - - - - - - - - ...BUT MOSTLY BAD - - - - - - - - - ¶4. (SBU) Unfortunately, according to the team leaders, the positive steps taken by the GOC were overshadowed by negative trends in the planning of the budget. Simply put, the Government appeared to be operating under intense political pressure to realize investment projects for 2007 in amounts that were unsustainable. Snoek stated that the GOC was preparing its medium-term expenditure framework based on the unsubstantiated premise that oil revenues would flow into Chad's treasury into the future, permitting the country to program and execute the same level of infrastructure projects, as well take care of its recurring expenditures. This view is hinged on the belief that oil prices would remain high (which was not a guarantee) and that oil production would continue at its current pace (also doubtful as the country's reserves are expected to dry up by 2030). As a result, the 2007 budget was already unsustainable Taken together, the current programmed expenditures and the projected oil revenue stream meant that the country would be in a fiscal crisis by 2009 or 2010. ¶5. (SBU) Marie-Nelly said that while technicians appeared to understand the need to limit programming of projects for the coming years, authorities at the ministerial level did not appear to "get it." She also noted that while the GOC had previously expressed a willingness to maintain close relations with the mission, the relations on the ground had not been strong. Marie-Nelly said the Minister of Finance, for instance, had not met regularly with the team, as he had promised prior to the team's arrival. This was particularly true in the Bank and Fund's proposal for a creation of a stabilization fund to save unspent oil revenues for potential future fiscal imbalances. According to Snoek, the GOC had been very reluctant to discuss the matter, and there had been little progress in the development of such a mechanism. Marie-Nelly argued that the GOC was probably reluctant to accept any proposal that required the GOC to safeguard unspent revenues, as the pressures to spend the country's revenues for present initiatives would be too great. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - GOC'S MILITARY EXPENDITURES USING CHEVRON, PETRONAS TAX PAYMENTS - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ¶6. (SBU) Snoek and Marie-Nelly both pointed out that military expenditures were continuing, and were in many cases unaccounted for. Most disturbing, according to Snoek, was the inability by the Ministry of Finance to account for 160 million USD in defense spending (i.e., while the books show the money was spent, it is unclear where the resources went). Snoek pointed out that the Chadian budget laws permitted the GOC to reserve resources for "exceptional" military expenditures, such as reinforcing the efforts of the Chadian national army in the East. In many cases, these expenditures were not often documented. Marie-Nelly alluded also to reports of "flows" outside the budget, in which resources were being taken from certain sectors for defense spending, which again were very difficult to track. ¶7. (SBU) Marie-Nelly added that some of the 281 million USD tax payment made in October by oil consortium members Chevron and Petronas were also being programmed for military and defense spending. She noted that according to the July 13 agreement between the GOC and the World Bank, while the GOC was required to commit all direct and indirect oil revenues to poverty reduction for the 2007 budget, it was free to spend the indirect revenues for 2006 on non-priority sectors, such as security. As the tax payment fell under the 2006 fiscal year, the GOC was able to spend the tax payment on security needs, and had appeared to have done so. - - - - COMMENT - - - - ¶8. (SBU) The World Bank's and IMF's negative assessment of the country's budgetary trends does not bode well for Chad's financial stability in the coming years. If the country is unable to execute a sustainable medium-term expenditure framework, it will fall into the financial problems that it faced in early 2005, as salary arrears grew and the country was unable to manage its internal and external debts. Continued instability in eastern Chad will only hurt matters, as the GOC will continue to spend resources (including tax revenues obtained from the American-led oil consortium) on military needs, and divert resources from budget priorities. Should the GOC be unable to agree with the Bank and the Fund on the preparation of a sustainable budget, there could be ramifications on GOC programs in other areas, such as the country's Poverty Reduction and Growth Facility Review and Chad's eligibility for debt relief under the Heavily Indebted Poor Countries Initiative. WALL