CHAD: 2007 BUDGET IN DANGER OF SLIPPING

UNCLAS SECTION 01 OF 03 NDJAMENA 000196

SIPDIS

SENSITIVE, SIPDIS

LONDON AND PARIS FOR AFRICA WATCHERS

E.O. 12958: N/A
TAGS: EFIN ELAB PGOV CD
SUBJECT: CHAD: 2007 BUDGET IN DANGER OF SLIPPING

REF: A) NDJAMENA 160, B) NDJAMENA 178


1. (SBU) Summary: The International Monetary Fund (IMF)
and European Commission (EC) are concerned about the
GOC's political will and capacity to meet agreed 2007
budget targets. Wage pressures, corruption and
mounting military and off-budget spending -- combined
with unrealistic assumptions of rising oil earnings -
increase the possibility of a return to insolvency by

2008. End summary.

Budget Overview
--------------


2. (U) The 2007 Government of Chad (GOC) Budget
approved by the National Assembly in early February
projects a CFA 229 billion (USD 458 million) surplus
based on expenditures of CFA 689 billion (USD 1.4
billion) and revenue of CFA 918 billion (USD 1.8
billion). Revenue from oil taxes and fees are projected
at CFA 166 billion (USD 332 million). Revenue estimates
from foreign aid, grants and loans total some CFA 160.5
billion (USD 321 million) and include CFA 39.4 billion
(USD 78.8 million) from bilateral foreign assistance,
CFA 46.5 billion in international organization
assistance (USD 93 million) and CFA 74.6 billion (USD
149 million) in international financial institution
loans.

Revenue Projections Overstated
--------------


3. (SBU) Embassy officers met with European Commission
(EC) financial analyst Charles Coste and an EC-funded
technical advisor to the Ministry of Finance February
27 to discuss the budget. Coste described the budget
as containing unrealistic projections of revenue and
spending. Coste and the technical advisor described it
as based on invalid base data and unrealistic revenue
and spending assumptions. Coste added that the
Ministry of Finance personnel who prepared the budget
document were "prudent" and well-intentioned, but
hampered by a lack of technical capacity and -- given
the diversion of funds through large, unreported off-
budget transfers -- lacked a basis upon which to make
realistic projections. Coste noted that no attempt had
been made to develop a means of tracking oil receipts
and warned that overall revenue projections could be
overstated by as much as 50 percent.


4. (SBU) Coste added that 70 percent of non-oil budget
revenue has been historically spent on salaries. Any
large pay increase in 2007 bloating this recurring
annual expenditure item would have to be largely
financed by oil revenue and could only be sustainable
in the unlikely event current oil production levels
hold and prices in the volatile crude oil market remain
high.

Defense and Off-budget Spending - From Surplus to
Deficit
-------------- --------------
--------------


5. (SBU) Coste said that the IMF had estimated off-
budget expenditures at CFA 50 billion (USD 100 million)
in July 2006, but by October had increased the figure
to CFA 97 billion (USD 194 million). Coste referred to
mounting military and off-budget expenditures as the
great unknown in Chadian government finances. By way
of example, he said that large off-budget cash payments
were made to Chadian army officers to entice them to
engage in combat during the April 2006 rebel attack on
N'Djamena. He claimed that general officers in
particular received huge combat premiums. He claimed
that payments of CFA 5 million (USD 10,000) are
routinely paid to the families of soldiers of the
Zaghawa and other select ethnic groups killed in combat
and that the families of those seriously wounded

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received CFA 3 million ($6,000).


6. (SBU) In addition to rising military expenditures,
he cited contracts that were off-budget, single-source
and open-ended as a major though unquantifiable drain
on the government coffers. According to Coste, the
practice of issuing major supply and infrastructure
contracts without competitive bidding (referred to as
the "simplified procedure") was common practice. He
added that even when tenders were issued and bids
invited, only a select group of suppliers and
contractors close to President Deby responded. Because
only the well-connected could be confident of being
paid, others declined to bid on Chadian government
tenders.


7. (SBU) Coste also cited graft and recurring payments
to "former" rebels as major additional drains on the
budget. Based on import data, he estimated that
customs receipts in 2006 should have totaled CFA 150
billion (USD 300 million). Instead, the Ministry of
Finance reported customs receipts of only CFA 40
billion (USD 80 million). He added that the growth of
pension payments to former rebels was a long-term
recurring liability. According to Coste, the December
2006 peace agreement with Mahamat Nour's FUC (United
Front for Change) and other agreements with rebel
groups dating back to 1991 have put large numbers of
former rebels on the government dole as pensioners.
Coste emphasized that many of the former rebels were
pensioned off at young ages, had obviously never paid
into a pension plan and could be expected to receive
benefits into old age.

IMF Alarmed
--------------


8. (SBU) Previewing the upcoming visit of an IMF team
(scheduled to arrive March 9),IMF representative Wayne
Camard (please protect) reported that the 2007 budget
was under severe pressure. In addition to military
spending, he pointed to unbudgeted big-ticket contracts
(a dozen of which had apparently been signed directly
by the President -- bypassing the Ministry of Finance),
labor union demands for a minimum increase of 50
percent, pressure to "recapitalize" Cotontchad (paying
off Cotontchad's large debt in one go rather than
incrementally) and pressure to pay off internal debt
and arrears.


9. (SBU) Camard said that the budgetary situation
which the team will examine is "fragile." Were all of
the pressures to come to bear, the government would not
be able to stick to the agreed budget -- even with the
"margin of safety" built into the 2007 budget. If the
IMF were to declare Chad out of conformance, Chad would
lose IMF budgetary support of USD 5 million and African
Development Bank budgetary support of USD 10 million.
While these sums in and of themselves were not enough
to be a significant "carrot," Chad would also miss the
HIPC completion point -- losing the chance to write off
some $1 billion in debt (half of which is owed to World
Bank). Finally, although its portfolio has shrunk
dramatically, thereby reducing its leverage, if the IMF
left, the World Bank would be obliged to reassess its
programs here.


10. (SBU) Camard commented that the Chadian government
was in denial about the state of Chad's oil reserves
and under the illusion that Chad is the next Equatorial
Guinea. He warned that if the government continued on
its current spending spree, it would draw down budget
surpluses that are supposed to be retained to even out
spending over the next couple of years. If the surplus
was used up now, by 2008 the government would be unable
to pay its bills, he warned.


11. (SBU) Comment: Public sector demands for a share
of Chad's oil earnings through higher wages and rising

NDJAMENA 00000196 003 OF 003


military spending are the overt and immediate pressures
on the 2007 government budget. A public sector wage
increase of two percent provided for in the budget will
likely lead to a general strike and the indefinite
shutdown of all but essential government operations
(Ref A). A more fundamental issue, however, is the
lack of political will to be fiscally responsible. No
amount of IMF, World Bank or bilateral technical
assistance can lead to fiscal responsibility without
the will to cease off-budget spending, cronyism and
outright corruption. These are the real challenges. End
comment.
Wall