AF/W DIRECTOR DOUGHERTY DISCUSSES FINANCING THE

C O N F I D E N T I A L SECTION 01 OF 03 ABIDJAN 000346 SIPDIS EEB FOR K.DIZOGLIO, AF/EPS FOR E.REPKO, AF/W FOR E.PLUMB TREASURY FOR R.HALL, D.PETERS AMEMBASSY TUNIS FOR R.ADKINS USAID/AFR/WA FOR S.SWIFT E.O. 12958: DECL: 05/29/2018 TAGS: PGOV PRELAFDB AFDB EAID ECON IMF IBRD IV SUBJECT: AF/W DIRECTOR DOUGHERTY DISCUSSES FINANCING THE END OF THE POLITICAL CRISIS WITH KEY ACTORS REF: A. ABIDJAN 337 ¶B. ABIDJAN 286 ¶C. ABIDJAN 274 Classified By: EconChief EMassinga, Reasons 1.4 (b,d) ¶1. (C) Summary: State AF/W Director Thomas Dougherty discussed the pivotal question of financing for the end of crisis package ("sortie de crise" in French) with a number of key interlocutors during his May 14-18 visit to Abidjan. Interlocutors discussed Cote d'Ivoire's Highly Indebted Poor Country (HIPC) eligibility and the conditions to reduce the country's debt burden, the country's weak fiscal balance sheet and the state of affairs related to SAGEM. Lastly, he discussed questions related to the much-anticipated launch of the civic service program to absorb unemployed soldiers cashiered out of the armed forces, rebel armed groups and militias. End Summary. International and Financier Communities Views on Financial Situation -------------- ¶2. (C) During a meeting with representatives of the IMF, World Bank, EU, UNOCI, UNDP and several others, IMF ResRep Eugume said the national treasury is "empty", and that without an eventual debt reduction through the HIPC program the country could be left without the means to pay for the sortie de crise. This would pose a potentially awkward situation for the international community, which is ostensibly engaged in Cote d'Ivoire to support crisis recovery and development. The ResRep cited as examples of the Ivoirian treasury's distress the fact that SAGEM was supposed to have been paid 12 billion CFA (USD 29 million) in April and 10 billion (USD 24 million) in May. (Note: The government paid SAGEM an initial tranche of CFA 10 billion (USD 24 million) on May 27, that should have originally been paid in April, but still owes CFA 10 billion promised by the end of May. End note). ¶3. (C) Eugume added that while his information indicates the treasury has 100 billion CFA (USD 241 million) on hand, it owes CFA 24 billion (USD 57 million) to private schools for promised subsidies, CFA 80 billion (USD 192 million) to the AfDB as part of the arrears clearance package and CFA 9 billion (USD 22 million) for demobilization payments to Forces Nouvelles (FN) troops. Moreover, the state has already exceeded the CFA 90 billion (USD 216 million) budgeted for electricity subsidies for all of 2008, refusing to take the politically painful measure of raising residential and business rates. ¶4. (C) While the entire donor community agrees that Cote d'Ivoire needs substantial debt relief, few are inclined to support special treatment for Cote d,Ivoire given its recent track record. Dougherty heard some debate regarding whether debt relief should be granted early, i.e., by the end of 2008 or later, by mid to late 2009. Eugume argued for an early HIPC "Decision Point" and said Cote d'Ivoire's opportunity to quality for HIPC could become increasingly questionable as time passes. He said that the key to qualifying will be when the calculation of export to debt ratio is done - if the calculation is made at the end of 2008/early 2009, debt relief already granted in the form of WB and AfDB arrears clearances (totaling $800 million),Cote d'Ivoire could very well fall short of the 250 percent debt/export ratio cutoff point stipulated by the HIPC rules and the country would not qualify. ¶5. (C) Additionally, Eugume said that HIPC Decision Points are usually only agreed to while a country is under a rigorously negotiated and closely monitored Poverty Reduction and Growth Facility (PRGF). Cote d'Ivoire, by contrast, is only beginning its PRGF negotiations and under the most aggressive scenario, would have only a six month track record to back its application, which would be mitigated by mediocre-to-poor performance under the IMF's already-disbursed USD 120 million EPCA (Emergency Post Conflict Assistance) package. Eugume, supported by World Bank's Interim Country Manager Daniel Sellen, agreed that Cote d'Ivoire's fiscal management falls short in controlling presidential spending, subsidies and openly accounting for all of its oil revenues, but believe that the people of the country merit the relief HIPC can offer. ¶6. (C) A cross-section of West African financiers with whom ABIDJAN 00000346 002 OF 003 Dougherty met separately echoed Eugume's conclusion that the national treasury is short of liquidity. The financier group anticipated, however, that the government would be able to continue its heavy borrowing on the local financial markets to finance its operations in the short to medium term. However, such actions would continue to deprive small and medium sized enterprises of capital, as banks prefer to buy the never-ending stream of short-term Ivoirian bonds than to pursue riskier (but better for the economy's long-term health) business development strategies. SAGEM -------------- ¶7. (C) Although President Gbagbo had told many of Dougherty's interlocutors in the donor community that the Ivoirian government "needs to pay SAGEM," the company is anxious at its exposure due to the government's non-payment (Note: per para 2 above, the government finally made an initial but far short payment to SAGEM on May 27). Donors reported that up to 80 percent of the contract has been subcontracted, and most of those contracts have already been let, making it difficult for SAGEM to walk away without incurring painful costs. When asked if perhaps the government (particularly the presidential camp) never really intended to pay SAGEM, the EC Country Representative, Michel Arrion, said "the SAGEM decision had been imposed during the second Gbagbo-Soro meeting in November 2007" by the Facilitator, Blaise Compaore. Arrion also said Interior Minister (and Gbagbo stalwart) Desire Tagro continues to be particularly adamant in his opposition to the SAGEM contract. Civic Service -------------- ¶8. (C) Arrion said the Commission has had positive dealings with Koffi Malan, newly-named head of the Civic Service. This entity will focus exclusively on training unskilled ex-combatants and preparing them to re-enter society peacefully. Malan is looking at using existing institutions (vocational, technical, etc.) for the civic service program. Arrion said this approach has a decent chance of success, and is being backed by modest support from the Commission (Note: on May 26, the civic service program was finally launched after many delays, taking in 250 ex-Forces Nouvelles combatants. End note). Forces Nouvelles spokesman Sidiki Konate told Dougherty that the FN was concerned at the slow rollout of the civic service, particularly because the program is the centerpiece in the plan to deal with both FN ex-combatants and pro-government militias. ¶9. (C) Malan's style contrasts sharply with that of Daniel Ouattara, head of the National Program for Reinsertion and Reconstruction. Ouattara, subject of an unusually personal, at times bitter conflict between WB staff and the Prime Minister's office, focused initially on creating an expensive new infrastructure, rather than leveraging existing facilities. His PNRRC is now to focus exclusively, however, on finding jobs for ex-combatants who already have a marketable skill. ¶10. (C) Comment. Key international and domestic interlocutors shared candid observations about the budget and macroeconomic situation, SAGEM and the civic service program, and despite expected partisan differences, were lQa]RQQ[ist of challenges is not to be dismissed lightly, it also must be recognized that the political class, across the spectrum, also strongly believes the electoral process will somehow move forward. They seem convinced that the resources needed to cope with the litany of challenges ahead will come from somewhere, which is perhaps a good (if somewhat perplexing) sign of collective hope for the future. End ABIDJAN 00000346 003 OF 003 Comment NESBITT