IMF REVIEW: SITUATION WORSE THAN FIVE MONTHS AGO

UNCLAS SECTION 01 OF 03 KINSHASA 000327 SIPDIS SENSITIVE SIPDIS TREASURY FOR OWHYCHE-SHAW E.O. 12958: N/A TAGS: EFIN ECON PGOV CG SUBJECT: IMF REVIEW: SITUATION WORSE THAN FIVE MONTHS AGO REF: 06 KINSHASA 1608 ¶1. (SBU) Summary. A visiting IMF review team said that the DRC economic situation is worse than it was five months ago, when they characterized it as "difficult" (ref A). The team confirmed that GDRC overspending, financed by Central Bank credit, amounted to at least USD 40 million for January and February. They noted the direct cause and effect this overspending has had on the worsening macroeconomic situation and emphasized that the GDRC must limit itself to spending only what it is taking in. The IMF said it is trying to put together another informal program to follow the SMP for the next six months, with a review tentatively scheduled three months from now to determine whether enough progress is being made to even consider discussing the establishment of a new PRGF program in late 2007. End summary. ¶2. (U) International Monetary Fund (IMF) resident representative Xavier Maret outbriefed the diplomatic and donor community on March 13, following a two-week IMF team visit to Kinshasa, the first since early October (ref A) (Note: Team leader Cyril Briancon, IMF Africa Division Chief who normally conducts the outbrief, was called to the Presidency at the last minute and returned only in time to say that he had deliverd a strong message to the President about what needed to be done to get the DRC back on track with the IMF. End note.) This visit was supposed to occur in January, but was delayed until the new government was in place. The IMF team met with all the pertinent GDRC officials, including Prime Minister Gizenga; the Central Bank Governor; the new Ministers of Finance, Budget, and Plan; and representatives of both public and private enterprises. Maret said the objectives of the visit were to review DRC performance under the SMP; to help the GDRC prepare a macroeconomic framework for 2007 (including a budget); to set up a government plan for the next quarter; and to discuss next steps (such as a new IMF program.) -------------- First, the Bad News -------------- ¶3. (SBU) Maret led off with the bad news: more than ten percent depreciation in the value of the Congolese franc (FC) since the first of the year and over four percent inflation since January 1. (Note: Inflation for January alone was nearly four percent; final statistics for February were not available yet. End note.) Maret attributed the macroeconomic problems directly to government overspending of more than 20 billion FC (around USD 40 million) during the months of January and February, most of it financed by Congolese Central Bank (BCC) credit. He said that there has now been a total of about 47 billion FC of bank financing in 2006 and 2007, versus a projected 15 billion FC for 2006. He added that BCC foreign exchange reserve levels are now down to under three weeks worth of imports (USD 110 million versus USD 150 million in December),less than half of the norm. He noted that many GDRC institutions had overspent their allotments, but said that security sector overspending had been particularly egregious. Unmet structural reforms listed by Maret included a computerized payments system, BCC reforms, a Heavily Indebted Poor Country spending audit, and the takeover of the Banque Congolaise by the Union de Banque Congolaise. -------------- The Good News? -------------- ¶4. (SBU) The IMF resident representative said that it was crucial for the GDRC to stick to its budget by making required payments (e.g., government and military salaries) but also by not resorting to Central Bank financing of deficit spending. He noted that the BCC had taken some actions, such as raising bank interest rates, in order to mop up excess liquidity, but that because of the dollarization of the economy, bank credit to the government translates almost immediately into higher exchange rates and inflation. GDRC revenues were up, he said, to about 10 percent of GDP in 2006, but nearly a third of this was from petroleum sales, which can be expected to be lower in 2007 due to reduced world oil prices. Maret noted that part of the overall GDRC deficit was generated by the BCC, which is suffering from a KINSHASA 00000327 002 OF 003 lack of autonomy, and that an audit of the BCC would be completed by May 2007. -------------- Macroeconomic, Budget Framework for 2007 -------------- ¶5. (SBU) Maret said that economic projections for 2007 are 6.7 percent GDP growth and 12 percent inflation, but noted it is going to be difficult just to meet required payments in 2007 due to expected decreases in outside budget assistance. (Note: The 2006 budget of USD 1.9 billion was more than 50 percent funded from external sources, with only about USD 900 million from the DRC itself. The new Minister of Budget told Ambassador March 15 that the DRC will contribute USD 1.2 billion towards the 2007 budget, but only expects about USD 500 million from outside sources (septel). End note.) Maret quoted the need to increase the salary base from 240 billion FC (about USD 480 million) in 2006 to 275 billion FC (USD 550 million) in 2007, and projected that even with increased GDRC revenues there would ultimately be a gap of nearly 50 billion FC (approx. USD 100 million) in 2007, which could only be reduced by outside assistance. For this assistance to materialize, he noted, the GDRC has to "show something" during the next three months while the 2007 budget is drafted, debated, and passed. -------------- New, Informal IMF Program? -------------- ¶6. (SBU) Maret referred to the next informal arrangement between the IMF and DRC as a "reference program." He said that this would need to be initiated by a GDRC letter to the IMF board. (Note: In discussions, the GDRC apparently said it wanted to distance itself from the former transition government by making it clear that the SMP was finished and that a new leaf was being turned. End note.) Maret made it clear that this new arrangement would again include macroeconomic criteria and structural reform goals that the IMF would expect the GDRC to meet during the first three months of the program. He went on to say, though, that what the GDRC really needed was a three-year plan of action in order to follow its own Poverty Reduction Strategy Paper (PRSP),in existence since mid-2006. Maret predicted that the next IMF visit would be in late May or early June to review progress, examine the BCC audit, and discuss the possibility of a new Poverty Reduction and Growth Facility (PRGF) program with the DRC. (Note: Given the need to have a PRGF in place for at least six months before HIPC completion point and Paris Club debt relief are achieved, there is virtually no chance that the DRC will be able to avoid the large, new multilateral debt payments that will be coming due in the fourth quarter of 2007. End note.) Maret said that the IMF would be sending out technical assistance teams meanwhile to assist with the administration and regulation of GDRC revenue sources such as taxation and customs entities. -------------- The Tough Message -------------- ¶7. (SBU) IMF Team Leader Cyril Briancon, fresh from his last-minute meeting with President Kabila, reiterated that the gravity of the situation the new government finds itself in requires a "clear determination" on the part of the GDRC to make a change. He said that the government could not afford to do what it had in the past: reform itself for two weeks and then fall off the wagon. He said that the situation could be stabilized, but that it would be "difficult" because of the need to control spending during a time when expectations of the new government are running high. He again cited the need to control salaries, which make up such a large part of the budget - over 25 percent. He said that his team's message to the Prime Minister and the President was simple: Limit government spending to its revenues; respect the limits of the budget; and use the system the government already has in place to control expenditures and BCC credit. ¶8. (SBU) Comment: The IMF team made it abundantly clear that the DRC economic situation is poor and not likely to improve very much, at least budgetarily, during 2007. We got the KINSHASA 00000327 003 OF 003 impression, both from the outbrief and during a March 8 breakfast with the IMF team, that they feel Prime Minister Gizenga's new "ecofin" team, including Finance Minister Matenda, Budget Minister Muzito, and Plan Minister Kamitatu, is serious about turning things around. We did not get a feel for whether they think the team is up to the task. There was some barely concealed IMF criticism of BCC Governor Masangu, especially over the BCC credit to the GDRC during January and February, but acknowledgement that the BCC has not been afforded the autonomy or independence that it should have. (Note: It is also still unclear whether Masangu will be maintained as BCC Governor. End note.) Over the next three months the IMF will be looking closely for positive signs: that the budget, such as it is, is being respected; that salaries are being paid correctly; that the GDRC is not resorting to BCC credit to finance more deficit spending; and that some real attempt is being made to implement long overdue structural reforms. Even with the best of intentions and an honest effort to rein in GDRC expenditures, the DRC has dug itself a hole that it will probably be unable to get out of before year's end. Perhaps the best the government can hope for is a new PRGF before year's end and the prospect of outside budget assistance and debt relief in 2008. End comment. MEECE