COTE D'IVOIRE: GOVERNMENT MEETING 2007 BUDGET

C O N F I D E N T I A L SECTION 01 OF 02 ABIDJAN 001209

SIPDIS

SIPDIS

STATE PASS TO USTR C.HAMILTON
EEB FOR T.HASTINGS
TREASURY FOR D.PETERS, R.HALL

E.O. 12958: DECL: 12/03/2017
TAGS: EFIN ECON EAID PREL PGOV IMF IBRD IV
SUBJECT: COTE D'IVOIRE: GOVERNMENT MEETING 2007 BUDGET
TARGETS BUT OUAGA SUPPLEMENTAL ACCORD PRESENTS PROBLEMS FOR
2008 BUDGET

REF: ABIDJAN 1176

Classified By: Econ Chief EMassinga, Reasons 1.4 (b,d)


1. (C) Summary. A Joint International Monetary Fund, World
Bank and African Development Bank team briefed the
donor community on its initial findings on November 26. The
assessment team was broadly complimentary of the
government's efforts to remain within budget targets and to
adopt more transparent fiscal expenditure procesess.
However, the team found the government has not been able to
reign in Presidential expenditures, hold the line on
political decisions with budgetary implications, (such as
giving in to striking teacher's demands for a salary
increase) or improve the management of oil and gas revenues.
The result is that spending on social sector
needs has been suppressed. The IFIs are pushing the GoCDI to
make a stronger commitment for 2008, as they move
towards a mid-December WB staff decision on whether to
recommend that its Board accept Cote d'Ivoire's progress on
fiscal governance as sufficient to approve a USD 60 million
IMF budget support package. End Summary.

Joint IMF, WB, AfDB Team Presents Findings on Structural
Reforms
--------------

2. (C) The IMF, WB and AfDB sponsored a joint team to Cote
d'Ivoire to assess progress in implementing governance
reforms and repayment of WB and AfDB arrears. On November
26, Mr. Zeljko Bogetic, Chief Economist at the Fund and
chief of the joint mission reported broad satisfaction in a
briefing to the principal donor community. For the 2007
budget, the bottom line is being respected. Government
expenditures through September are one percent over the
January-September budget target, making meeting the 2007
budget goal a realistic possibility. Additionally, the
government is mobilizing its own resources to pay 50 percent
of its USD 480 million arrears to the WB and 33
percent of its USD 560 million arrears to the AfDB (reftel).
Bogetic also expressed general satisfaction with
the progress in implementing structural reforms to promote
greater transparency in fiscal expenditures, particularly
in the cocoa/coffee sectors and in oil and gas revenue.


3. (C) Despite overall satisfaction with the direction of
government reform, Bogetic noted several significant
weaknesses in the government's performance. First, Sovereign
spending, the account controlled directly by the
Presidency and Prime Minister (with 3/4 belonging to the
former),is running at the same high levels seen in 2006,
despite government promises to the IFIs' to reduce the level
of expenditures. (Note: a local IMF economist told
Emboff that the sovereign account is some USD 100 million
out of a total budget of USD 4 billion). As a result,
desperately needed investments in the health and education
sectors, for example, have not been made. Bogetic also said
that the government's decision to incorporate 4,000 so-called
"New Recruits" into the armed forces had put
unanticipated pressure on the budget. (Note: The "New
Recruits" were brought on after the start of hostilities in
2002, and were promised regular status and the same "war
bonuses" other soldiers and gendarmes, but were not
integrated into the government's armed forces until
mid-2007.) Similarly, raises for teachers who went on
strike and expenditures for elections preparation had not
been incorporated into the 2007 budget. Looking to the
2008 budget, these new commitments, combined with the
government's apparent intent to continue paying "war
bonuses" (despite Gbagbo's having declared the war 'over')
will make it difficult for Cote d'Ivoire to meet the
established budget targets. Further clouding the budget
outlook are government plans to establish a "service
civique" early in 2008 to provide training to armed elements
who agree to disarm. The WB Country Director had
previously told the Ambassador that the Bank would not
support this program, but would support communities
affected by disarmament. How the government plans to finance
the service civique is still a question mark.


4. (C) Turning to government receipts, Bogetic said that
the pace of receipts was strong, running at or slightly
above projections. In particular, offee/cocoa revenues
remained solid, and oil and gas continue to provide
reliable income. For 2008 and beyond, Bogetic said the IFIs
are pushing for the state-owned oil company PETROCI to

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contribute to the national treasury, something it does not do
currently. The IFI team reported that the results of
the oil, gas and electricity production audits will be
completed soon, and provided to donors' missions in
Washington by the end of 2007. (Comment: IMF Country
Director Phillipe Eugume told Emboff privately that Fund
projections for the government's petroleum-related revenue is
approximately USD 400 million annually, while several
private banking and oil industry sources separately indicate
such revenues are closer to USD 750 million. End
Comment)


5. (C) Discussing priorities for the 2008 budget, Bogetic
said the international community should demand increased
baseline expenditures on social programs and the country's
deteriorating infrastructure base, along with a concomitant
decrease in sovereign spending to close an anticipated USD 70
million budget shortfall. The IMF representative mused
that electricity subsidies would have to be trimmed (a step
we doubt the government will take in an election year),and
that keeping the military budget solvent with the upcoming
integration of Forces Nouvelles troops will be essential.
Cote d'Ivoire's adoption of a published 2008 budget will be a
sine qua non for IFI engagement in 2008. IMF Country
Director Eugume declined requests to share the results of the
cocoa/coffee and oil/gas audits, as well as assessments
of the 2007 budget and 2008 projections (with hard figures
straight from the IMF's interface with the Ministry of
Finance's fiscal control system),indicating such information
will be provided to the donors through their Board
representative, probably in February 2008.


6. (C) The IFI team indicated that the WB Board will meet
in December to decide on several Ivorian issues - the
effectiveness of fiscal governance measures; disbursal of the
second USD 60 million tranche of post conflict
assistance and a possible USD 275 million Economic Governance
and Recovery Grant. The grant, combined with the
government's own funds, would finally put to rest Cote
d'Ivoire's WB arrears. This in turn would open the door to
reviving USD 104 in old WB credits and loan programs (in
transportation improvement, land tenure and education and
training projects) that are currently suspended.

Budgetary Implications of the Supplementary Ouagadougou
Accord, Signed November 28
--------------

7. (C) In the wake of the Ouaga Supplementary Accord, even
great uncertainty reigns over the budget with the
prospect of even more substantial, new costs that could cause
serious disruptions. These costs include: a renewed
disarmament effort, the integration into the civil service of
thousands of "volunteer" teachers who, since 2002, have
filled the gap left by regular teachers who fled their usual
place of residence; pay to Forces Nouvelles troops
who are to be integrated in the country's regular armed
forces; the "service civique" and infrastructure
improvements promised by the President during his recent
swing through the north. Initial reaction by the donor
community to the Supplementary Ouaga has been cool in light
of the technical difficulties the government will face in
trying to finish the audiences foraines and conduct an
identification program so that elections can be held in
June, 2008.


8. (C) Comment: Despite grumbling from the donor community
over imperfect transparency, the IFI appear to be
making some progress in terms of persuading the government of
the need for greater social spending and transparency.
The big picture is not, however, particularly encouraging in
that the investments needed for long term improvement
- most notably in health, education and infrastructure, are
evidently being sacrificed to meet short term, political
imperatives. The IFIs envision an aggressive timetable
leading to a large assistance package in 2008. Other donor
representatives in Abidjan are eager to see exactly what
cards IFI staff are holding (oil/gas revenues estimates,
assessment of the 2007 and 2008 budgets) before passing
judgment on progress made so far. End Comment.
NESBITT