CHAD: UNPREPARED FOR FINANCIAL WINDFALL

UNCLAS NDJAMENA 000734

SIPDIS

SENSITIVE

SIPDIS

DEPT FOR AF, EB, ENERGY FOR CAROLYN GAY AND GEORGE PEARSON,
TREASURY FOR OTA, LONDON AND PARIS FOR AFRICA WATCHERS

E.O. 12958: N/A
TAGS: ECON EFIN ENRG EPET PGOV CD
SUBJECT: CHAD: UNPREPARED FOR FINANCIAL WINDFALL

REF: NDJAMENA 702


1. (SBU) SUMMARY: The Government of Chad (GOC) has complied
with its commitments to date under the April 26 accord
between the GOC and the World Bank, according to team
leaders for the World Bank and IMF. The next steps are to
develop a revised 2006 budget that conforms to the accord,
and finalize a strategy for the reform of the public finance
system. Unblocking of the frozen escrow account payments
will begin once the budget is approved by the Council of
Ministers. Both organizations are extremely concerned by
the prospect of the indirect tax revenue windfall set to
arrive in 2007 (which could amount to USD 1.7 billion in the
current oil price environment),given that Chad has neither
the systems nor the human resources to manage these funds
effectively and transparently. END SUMMARY.

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TEAM LEADERS BRIEF AMBASSADOR ON MISSION
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2. (SBU) On May 17 and May 18, IMF mission leader Harry
Snook and World Bank mission leader Marie-Francoise Marie-
Nelly met separately with Ambassador Wall to discuss the
joint World Bank/IMF mission's objectives and current
observations. Both Snook and Marie Nelly identified two
immediate objectives of the mission: develop a rectified
2006 budget that conformed to the interim World Bank-GOC
accord on April 26, and finalize a strategy for the reform
of the public finance system. The discussion would also
include dialogue on the possibility of developing a
stabilization fund to replace the eliminated Fund for Future
Generations, and ways to strengthen the role of the Revenue
Management College (CCSRP). Both leaders also stressed the
importance of beginning dialogue on the GOC's Poverty
Reduction and Strategy Program (PRSP) and the IMF's Poverty
Reduction and Growth Facility (PRGF) with the GOC.
According to Snook, the IMF hoped to have a review of the
PRGF at the end of the 3-month timeframe of the interim
agreement.


3. (SBU) Marie-Nelly noted that the Bank has lifted its
suspension on its social programs, and would begin the
process of disbursing funds to the specific development
programs. She also stated that the unblocking of the frozen
escrow account payments would begin once the rectified 2006
budget was approved by the GOC's Council of Ministers. At
that point, which she predicted to be sometime in June, the
GOC would receive one-third of the royalty payments, or
approximately USD 40 million. According to Marie-Nelly,
Esso and Chevron had already deposited their royalty
holdings back into the escrow account for disbursement, and
Petronas would soon follow.

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COOPERATION IN SOME AREAS, BUT LACKING IN OTHERS
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4. (SBU) Snook and Marie-Nelly identified strong points in
cooperation with GOC authorities, and a level of commitment
to public finance reform. Snook observed that the
presentation by GOC authorities themselves of the country's
public finance system and possible reform packages during
the multi-donor mission's visit to N'Djamena in April
indicated a greater sense of dedication to the reform
process. Marie-Nelly noted that the GOC had taken all the
appropriate technical steps as part of the April 26 accord
to lead up to the IMF-Bank mission.


5. (SBU) However, the team leaders noted certain areas of
concern in their dialogue with the GOC. Snook stated that
the IMF team was still not receiving specific data from the
Ministry of Finance on GOC spending for the first trimester
of 2006. He also stated that there were specific instances
of military purchases that would require further
investigation by the team. Marie-Nelly stated that the
mission's task was more difficult with the absence of the
Minster of Finance and the Minister of Plan, Economy, and
Cooperation (both on official missions). Both team leaders
speculated that officials were hesitant to provide fiscal
information and cooperate when their jobs might be in
jeopardy, as some have speculated that President Deby would
shake up his cabinet following his recent election victory.
Marie-Nelly admitted her concern that this political
uncertainty would make the task of negotiating extremely
difficult.

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$1.7 BILLION STRAIGHT TO THE PUBLIC TREASURY
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6. (SBU) The World Bank and IMF team leaders discussed the
impact of the indirect revenues which the GOC will receive
as tax payments from the oil consortium members. Marie-
Nelly pointed out that the World Bank had initially forecast
a small amount in indirect revenues for the GOC, operating
under a projected price environment of USD 15 per barrel.
With the price of oil at over USD 70 per barrel, the World
Bank's model now estimates that the GOC could receive
approximately USD 1.7 billion in its Public Treasury by

2008. Marie-Nelly and Snook stressed the importance of
making sure that the GOC had an adequate system in place to
absorb and transparently manage its revenues. The
Ambassador asked both Snook and Marie-Nelly whether the Bank
and IMF would have any leverage on the GOC's ability to
spend these indirect revenues. Both admitted that their
programs paled in comparison to the tax revenue windfall,
and the Bank and Fund would have to find a way to convince
Deby to spend the resources on poverty reduction.

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Remember the Lottery Winners
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7. (SBU) Snook opined that there was probably no country in
the world as poorly prepared as Chad to receive a financial
windfall. He was trying to alert Chadian authorities to the
problems that such a windfall would bring - even using
examples of lottery winners whose lives had become miserable
as a result of their winnings. He noted as well that the
surge in revenues would rapidly taper off in a couple of
years, as Chad's oil reserves were depleted. Persuading the
Chadians that good stewardship of the funds was necessary in
order to provide for the economy when the oil ran out was
difficult, he acknowledged, given Chadian conviction that
additional oil reserves may yet be found.

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COMMENT
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8. (SBU) While the World Bank and IMF have made some
initial progress in the implementation of the interim
agreement, there are roadblocks ahead. Political
uncertainty and possible Cabinet level changes hamper the
GOC's ability to cooperate with the mission. First trimester
spending (including for military purchases) needs
clarification. And finally, the prospect of indirect
revenues, which will soon dwarf donor funding, dramatically
reduces the World Bank's leverage.

Wall