IMF WORRIED ABOUT CHAD FISCAL SUSTAINABILITY

UNCLAS SECTION 01 OF 02 NDJAMENA 000274

SIPDIS

SENSITIVE
SIPDIS

LONDON AND PARIS FOR AFRICA WATCHERS; DEPT FOR AF, EB,
TREASURY FOR OTA

E.O. 12958: N/A
TAGS: ECON EFIN ENRG EPET PGOV CD
SUBJECT: IMF WORRIED ABOUT CHAD FISCAL SUSTAINABILITY

REF: NDJAMENA 0196


1. (SBU) Summary: A visiting IMF team and World Bank mission
leader said that maintaining fiscal sustainability in Chad
will continue to be difficult, especially when substantial
oil revenue is about to be received (oil taxes paid March 30
come to USD $420 million.) Major concerns include: increased
spending in the military sector; procurement irregularities;
overspending on infrastructure and an expected decline in oil
profit taxes in 2008. While the group left Ndjamena without
reaching agreement on the conditions for renewal of Chad's
IMF Poverty Reduction and Growth Facility (PGRF),talks will
continue in Washington. End Summary.


2. (U) On March 19 and 24, Ambassador met with the World Bank
mission leader Marie-Francoise Marie-Nelly and with the
visiting IMF team in N,djamena. Echoing themes we have
heard before (ref A),Marie-Nelly said that Chad spent a
large part of the FY2006 budget on military expenditures ($84
billion CFA - about USD 120 million - 4.3 percent of GDP).
Entering 2007, the GoC has already spent the $20 billion CFA
- about USD 40 million - targeted for military expenditures
for the whole year. The IMF representative noted that asking
the government to control military spending during a time of
rebel activity will be difficult, but Chad cannot afford to
disrespect the limits of the budget for long or there will be
serious consequences.


3. (U) Coupled with the high military expenditures, the team
commented that the 30 March oil payment will be USD $100
million lower than expected. Marie-Nelly and IMF economists
stated that the parties (i.e. Esso, the college, GoC) all
understand that the total payment for this year is USD $815
million. According to the IMF, the $815 million will be
divided into one $420 million payment (expected March 30) and
$135 per quarter thereafter. The IMF representative
optimistically said, &Once the money hits the account,
everything should go as planned.8 He said that his team,s
message to the government was simple: limit government
spending despite the unsettled security environment; and
abide by the budget. While the group left Ndjamena without
reaching agreement on the conditions for renewal of Chad's
IMF Poverty Reduction and Growth Facility (PGRF),talks will
continue in Washington. The team was able to work out
arrangement with Chadian authorities for creation of the
special stabilization account to hold surplus funds in time
for the receipt of the March 30 tax payment.


4. (U) The World Bank and IMF also noted procurement
irregularities and the "efficiency" of the Minister of
Infrastructure as particular challenges facing Chad.
Procurement irregularities ) a lack of competitive bidding
and overpriced goods and services ) demonstrate a weakness
in controls, they said. Often the awards are given to
friends of the government and outside firms are restricted
from open competition on public contracts. This has become a
common form of corruption in Chad. Additionally, the
Minister of Infrastructure may be preparing a new budget
which would include even more emphasis on infrastructure
projects. Some worry that these new contracts will continue
to take resources away from poverty reduction projects and
instead will fund "roads to nowhere."


5. (U) The group voiced concern that the government of Chad
does not fully appreciate that oil revenues are projected to
decline significantly after 2007. "2007 is an exceptional
year and it will not be repeated," the IMF rep said. As with
tax payments in the United States, each quarter the oil
companies pay 25 percent of the previous year taxes as an
estimated tax. 2006 was extremely profitable (record oil
prices) and the oil companies paid only the estimated tax for
2005, they said. In 2007, the IMF explained, the oil
companies will make up the difference between what is owed
and the actual taxes. In 2007, the price of oil has dropped,
so in 2008, the oil companies will pay considerably less --
if anything -- in profit taxes. The IMF emphasized that in
real dollars, the GoC could have its oil tax income from 2007
to 2008 drop from $1 billion to $300 million. IMF said that
the GoC has no planning mechanisms in place that can cope

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with this type of volatility. The World Bank called on the
GoC to see the oil revenues as an opportunity for Chad to
reduce poverty and to use the oil resources for priority
spending.

Comment
--------------


6. (SBU) The fact that discussions continue on the
possibility of Chad's renewal of the PGRF is a positive sign,
but most observers are deeply pessimistic that the GOC will
be able to control spending sufficient to reach agreement.
WALL