DONORS ASKED TO TELL CHAD TO REIN IN SPENDING

C O N F I D E N T I A L NDJAMENA 000403 SIPDIS SIPDIS PARIS AND LONDON FOR AFRICAWATCHERS E.O. 12958: DECL: 05/08/2012 TAGS: PGOV EFIN EAID CD SUBJECT: DONORS ASKED TO TELL CHAD TO REIN IN SPENDING REF: (06) NJDAMENA 867 Classified By: DCM LUCY TAMLYN FOR REASONS 1.4(B) AND (D) ¶1. (C) Summary and action request: The IMF and the World Bank have asked the United States and France to join them in a new Multi-Donor Mission (MDM) to urge President Deby to rein in military and infrastructure spending in order to maintain Chad's solvency into 2008 and 2009. Chad's request to purchase U.S. aircraft is one (but not the only) reason for projected military overspending. While Chad's overspending threatens its agreement with the World Bank to spend 70 percent of revenues on poverty reduction, the World Bank has signaled that they would like to be flexible on this question. They are also hoping the donors will be better positioned to know what "reasonable" spending on defense looks like for a country in Chad's situation, and be willing to say as much to the President. Comment and action request: Washington guidance on the level of participation and the U.S. position will be required for the MDM. From post's perspective we should continue to urge the Government to restrain spending, stay on track with spending 70 percent of revenues on poverty reduction and engaging in the political dialogue necessary to reduce the need for defense spending. End summary. ¶2. (U) DCM participated with World Bank and IMF Chad representatives in a video conference call with World Bank and IMF (Washington) on May 7 to discuss a proposed MDM to Chad which would include the United States, France, the European Commission and the African Development Bank. A similar MDM (reftel) visited Chad about a year ago and concluded the July 2006 Memorandum of Understanding (MOU) under which the Government of Chad (GOC) agreed to commit 70% of all revenues to priority sectors. (The U.S. was represented at the Mission level.) The new MDM is tentatively scheduled for the end of May/beginning of June ¶2007. Other participants on the call included: France (Ministry of Finance and Ministry of Foreign Affairs); Brussels (European Commission) and Tunisia (African Development Bank). FISCAL SLIPPAGE UNDERMINING 2007 BUDGET ... -------------- ¶3. (SBU) The IMF's David Andrews explained that the primary problem was "fiscal slippage." Chad's fiscal deficit is now projected at 20 percent of GDP - 5 percent higher than was projected for the 2007 budget. The slippage was due to higher military and infrastructure spending, each of which was projected to come in at about $60 million over budget by year's end. Andrews noted that they were also concerned that some of the spending was "off-budget" and carried out beyond the control of the Ministry of Finance. Because of higher expenditures in 2007, Chad would face a serious financial shortfall in 2008 and 2009. ...AND PRIORITY SECTOR FUNDING... -------------- ¶4. (SBU) In addition to the financial impact, increased military spending meant that priority sector spending would not reach 70 percent of revenues as stipulated in the 2006 GOC/World Bank MOU. Paradoxically, the only way now to meet the 70 percent would be to increase priority sector spending and send the budget further into the red. According to the IMF, at lower levels (particularly at the Ministry of Finance) GOC officials understood the need to rein in spending, but did not have the power. The objective of the MDM was to gain assurances from the highest level -- the President if possible - that spending would be controlled. .. BUT IMF AND WORLD BANK NEED DONORS TO WEIGH-IN ON SECURITY SPENDING -------------- -------------- ¶5. (SBU) Andrews explained that, while security spending was both throwing the budget off track in the medium term and also throwing the 70 percent agreement off track, the IMF did not have a mandate to look at security and sought the donor's perspective. Information from partners involved in security sector reform (France was mentioned) would be particularly valuable. Andrews explained that the MDM would also provide an opportunity to look at the amount donors envisaged putting into Chad's resource envelope so that any financing gaps would be evident. If the message to the President on the need to limit spending came from donors representing all sources of funding -- and showing a unified front, then it would have more weight. Andrews noted that the GOC may think that it does not need its international partners, but it will need them after the medium term when oil revenue declines and external support is required again. ¶6. (SBU) Marie Francoise Marie Nelly, acting World Bank Country Director for Chad, updated participants on the three pillars of the 2006 MOU. She explained that the main question going forward from the World Bank's perspective was how to handle Chad's performance in allocating 70 percent of revenues for priority sectors. According to Marie Nelly, the Bank was willing to be flexible on the 70 percent; the point of the MDM was not to tell the GOC to cease spending on security, but to determine what is reasonable. NEXT STEPS -------------- ¶7. (SBU) World Bank President Wolfowitz will be calling President Deby shortly to discuss the proposed MDM. The composition of the Mission had not yet been determined, but it was clear that it would need the participation of a high-ranking Bank or Fund member (at least near the end of the Mission). Draft terms of reference will be circulated to donors for consideration. French and EC participants in the Conference requested more information on the precise objectives of the MDM. COMMENT AND ACTION REQUEST -------------- ¶8. (C) The only way to perform the hat trick required of stemming the budget hemorrhage and maintaining something close to the 70 percent priority sector spending is to reduce military spending. The Bank and the Fund see this as the donor's business and seek donor participation to deliver this message. While Chad's interest in purchasing U.S. aircraft was not specifically mentioned at the video conference, the IMF Representative informed DCM separately that the Minister of Defense notified the IMF that the GOC intended to purchase at least one C-130H in 2007/8 (purchase of other C-130's was uncertain.) The IMF arrived at the military spending projection for 2007 by plugging in the purchase of one $30 million C-130H aircraft ($20 million in 2007 and $10 million in 2008). ¶9. (C) Buying fewer (or less expensive) aircraft would be in the best interest of maintaining Chad's commitment to priority sectors. Washington guidance on the level of participation and the U.S. position will be required for the MDM. From post's perspective we should continue to urge the Government to restrain spending, stay on track with spending 70 percent of revenues on poverty reduction and engaging in the political dialogue necessary to reduce the need for defense spending. WALL