Identifier
Created
Classification
Origin
08ABIDJAN62
2008-01-28 16:51:00
CONFIDENTIAL
Embassy Abidjan
Cable title:  

COTE D'IVOIRE ADOPTS BUDGET ON TIME; IMF, WORLD

Tags:  ECON EFIN IDA IMF PGOV PREF USTR EITI IV 
pdf how-to read a cable
VZCZCXRO3140
PP RUEHPA
DE RUEHAB #0062/01 0281651
ZNY CCCCC ZZH
P 281651Z JAN 08
FM AMEMBASSY ABIDJAN
TO RUEHC/SECSTATE WASHDC PRIORITY 3945
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
INFO RUEHZK/ECOWAS COLLECTIVE
RUEPGDA/USEUCOM JIC VAIHINGEN GE
RUCPDOC/DEPT OF COMMERCE WASHDC
C O N F I D E N T I A L SECTION 01 OF 04 ABIDJAN 000062 

SIPDIS

SIPDIS

STATE PASS TO USTR C.HAMILTON
STATE FOR AF/EPS E.REPKO, EEB K.DIZOGLIO
TREASURY FOR D.PETERS, R.HALL
USAID FOR C.GARRETT, S.SWIFT
AMEMB ACCRA FOR USAID P.RICHARDSON,K.MCCOWN
AMEMB DAKAR FOR FCS S.MORRISON, FAS R.HANSON

E.O. 12958: DECL: 01/28/2018
TAGS: ECON EFIN IDA IMF PGOV PREF USTR EITI IV
SUBJECT: COTE D'IVOIRE ADOPTS BUDGET ON TIME; IMF, WORLD
BANK CAUTIOUSLY ACCEPT KEY STEP, BUT DESCRIBE GOVERNMENT'S
DISCRETIONARY SPENDING AS "OUT OF CONTROL"

REF: MASSINGA-RICHARD HALL JANUARY 17 UNCLASSIFIED

EMAIL

Classified By: EconChief EMassinga, Reasons 1.4 (b,d)

C O N F I D E N T I A L SECTION 01 OF 04 ABIDJAN 000062

SIPDIS

SIPDIS

STATE PASS TO USTR C.HAMILTON
STATE FOR AF/EPS E.REPKO, EEB K.DIZOGLIO
TREASURY FOR D.PETERS, R.HALL
USAID FOR C.GARRETT, S.SWIFT
AMEMB ACCRA FOR USAID P.RICHARDSON,K.MCCOWN
AMEMB DAKAR FOR FCS S.MORRISON, FAS R.HANSON

E.O. 12958: DECL: 01/28/2018
TAGS: ECON EFIN IDA IMF PGOV PREF USTR EITI IV
SUBJECT: COTE D'IVOIRE ADOPTS BUDGET ON TIME; IMF, WORLD
BANK CAUTIOUSLY ACCEPT KEY STEP, BUT DESCRIBE GOVERNMENT'S
DISCRETIONARY SPENDING AS "OUT OF CONTROL"

REF: MASSINGA-RICHARD HALL JANUARY 17 UNCLASSIFIED

EMAIL

Classified By: EconChief EMassinga, Reasons 1.4 (b,d)


1. (C) Summary. Cote d'Ivoire adopted its 2008 budget in
late December 2007, fulfilling a key demand from the
international financial institutions engaged in ongoing
assistance negotiations with the government. The budget is
8.5 percent higher than that of 2007, reflecting higher
personnel costs as well as expansion of expenses related to
ending the five and a half year-old political crisis.
Revenues are projected to rise with the growth in the
economy, but serious shortcomings in revenue accounting
related to oil persist. The Ministry of Finance will be
hard-pressed to meet its financial obligations by February to
end the long-standing arrears to the World Bank and African
Development Bank, and this problem could be exacerbated if
receipts from the government's settlement of the 2006 toxic
waste scandal have been improperly spent. Without settlement
of arrears, reaching a decision point to slash the country's
high indebtedness could be delayed into 2009. International
financial institutions identify bloated, out-of-control
discretionary spending by the Presidency and incompetent
management of international assistance offers by the Prime
Minister as key issues hindering the government's ability to
finance the actions needed to end the political crisis. End
Summary.


The 2008 Budget Is Adopted
--------------

2. (SBU) Cote d'Ivoire adopted its fiscal 2008 year budget

on December 28, 2007, representing a key step in its
multi-step process to normalize its relationship with the
international financial institutions (the so-called IFIs: the
World Bank, IMF and African Development Bank). The Council
of Ministers adopted the budget on time, in contrast with the
2007 budget, which was adopted in May 2007, thus allowing a
substantial portion of that year's expenditures to be
disbursed outside of normal fiscal controls and outside of
the watchful eye of the IMF's Abidjan mission. The IFIs had
made on-time adoption of the 2008 budget a pre-requisite for
continuing loans, assistance, and negotiation towards
eventual multilateral debt forgiveness under the Highly
Indebted Poor Country (HIPC) initiative.


3. (U) The 2008 budget target is 8.5 percent higher than
that of 2007, up to USD 4.8 billion. The budget counts on
2.9 percent GDP growth to finance a portion of the
expenditure increase, up from 1.7 percent in 2007, relying on
increased exports of agricultural goods and oil, and growth
in the service sector. Projected revenues are USD 3.9
billion, with a deficit to be financed of USD 873 million.
The budget projects higher corporate, VAT, customs and oil
tax revenues, with an additional USD 200 million in revenue
from redeploying the country's administrative structures
(customs, income tax inspectors, etc.) in the formerly
rebel-held north.


4. (U) Higher spending comes from the ongoing high costs of
servicing the country's debt (over USD 1.2 billion to finance
domestic bonds, pay back arrears to IFIs and to keep current
with IFI debt, along with other miscellaneous loans) and USD
1.5 billion for personnel costs (up 11.4 percent over 2007
figures due to wage concessions to unions in the health care
and educational sectors, as well as continuing rises in the
costs of maintaining the armed forces). The budget calls for
USD 374 million for special spending to end the political
crisis: USD 63 million for demobilization, USD 48 million for
the redeployment of the country's administration to the
north, USD 109 for the country's identification process, USD
86 million to cover election costs and USD 68 million to pay
for the country's new "civic service" program designed to
absorb youth currently in the military, militias and rebel
Forces Nouvelles who are not slated to be integrated into the
country's new armed forces.

World Bank Views on the Budget, Long-Term Debt Relief
--------------

5. (C) During a January 16 meeting between the Charge and

ABIDJAN 00000062 002 OF 004


World Bank Country Manager Bernard Harbone and key members of
his staff, Harbone stated that the period running up to early
February is a "tense time." Harbone said Cote d'Ivoire's
arrears clearance, originally scheduled for late January, has
been postponed until approximately February 13, at which
point the government will have to pay the balance of its
promised USD 240-250 million to finally clear its arrears to
the Bank. Once it does so, the WB's IDA will pay the
remainder (USD 240-250 million). The government has paid USD
90 million thus far, but has to come up with the remaining
USD 160 million. The Ministry of Finance, as seen in the
2008 budget and in the latter half of 2007, is experiencing
upward pressures on its resources, making reaching the goal
by February 13 increasingly difficult.


6. (C) Harbone participated in the January 14 meeting
attended by President Gbagbo and Prime Minister Soro in
Ouagadougou at which the WB representative raised with all
the key interlocutors the central issue of the discretionary
budgets of the President and Prime Minister. These two
accounts (which do not appear in the basic spreadsheet
accounting of the budget) are "substantially" inflated over
2007 levels and put additional constraints on the Finance
Ministry's ability to finance the end of crisis and "civic
service" budgets. OPA Facilitator President Compaore, along
with Gbagbo and Soro, appear to have taken the critique on
board, but do not seem to have changed fundamental budget
policy.


7. (C) Harbone said that Cote d'Ivoire had achieved 90
percent of the reform conditions necessary for the IDA to pay
its half of the arrears bill when the February vote comes up.
Cote d'Ivoire is on track to create its Extractive
Industries Transparency Initiative civil society consultative
bodies (necessary for the country to be accepted into the
initiative, which is, according to Harbone, now a
precondition for continued IFIs engagement). The IFIs'
multiple audits of the cocoa and petrol sector are completed
or nearly so. According to Harbone, while a great deal of
analytical work remains to be done, the basics are in place.


8. (C) Harbone and his deputy, Richard Doffonsou, noted
that energy issues remain vexingly difficult to assess in the
government's budgets, both 2007 and 2008. While two of the
three energy-related audits are complete (and supposedly
available to ED offices in Washington),neither the completed
ones nor the last one in draft show a clear picture of the
fiscal structure of the sector. Harbone said the USD 150
million in petroleum-related taxes from 2007 were "what the
government wanted us to see" and don't necessarily reflect
the government's true receipts. He said the same is true for
the USD 280 million projected in petroleum-related taxes in
the 2008 budget. The government told the IFIs it will
conduct its own petroleum audit, but that it will not be made
public; however, that audit will be part of the EITI process,
which raises the question of whether the IFIs and EITI itself
would be able to make it publicly available.


9. (C) Harbone was more upbeat about the government
complying with demands for more transparency in the cocoa
sector and the sector's relation to the country's fiscal
management. The IFIs have already won a reduction in the
country's taxes raised to support the four "cocoa bodies"
created in the 1998-1999 cocoa liberalization (nearly USD 900
million has been collected through these special taxes since
2001, with little in the way of rural infrastructure or other
benefits for cocoa farmers to show for it) and are driving
for further modest reductions in the years ahead. The next
target in 2009 and beyond on the cocoa agenda will be the
so-called "unique right to export" (DUS in French) tax, which
is nearly USD .50 per kilo and is identified as a major
factor in depressing cocoa farmer income relative to that
seen in Ghana and other cocoa-growing countries.


10. (C) Harbone turned to the question of the HIPC decision
point. He expressed surprise at discussion in Washington
about reaching a decision point by the summer of 2008,
arguing that for that to happen, the IMF's Emergency Post
Conflict Assistance Package (EPCA) must be on track, as well
as the AfDB arrears clearance (those arrears stand at nearly
USD 570 million). Harbone said that additionally, the

ABIDJAN 00000062 003 OF 004


Ivorian Poverty Strategy Reduction Paper would have to be
complete, along with the strict WB-imposed process of
consulting widely with civil society and its associated
examination of respect for human rights and good governance.
Harbone noted the IFIs would naturally look at the status of
elections. He explained that while elections per se wouldn't
be a prerequisite for HIPC, in practice, successful elections
would be an important factor in moving forward.


11. (C) Harbone touched on the Prime Minister's failure to
draw upon the WB's USD 120 million Post Conflict Assistant
Package, provided in July 2007 to, inter alia, jump-start the
disarmament process, support rural infrastructure projects
and help the identification program. Those funds could have
been accessed since July, along with USD 104 million in old
WB programs now available, if the government had adhered to
relatively simple requirements. A key requirement is the
establishment of an office to direct the post-crisis
spending. The PM has been very slow to set up the office in
the correct manner, and did not sign the decree creating this
office according to the established rules until January,
2008; recruitment has not yet begun.

IMF Offers Sharp Commentary on the Budget
--------------


12. (C) The Charge met with IMF Country Director Phillipe
Egoume on January 17, and discussed the budget in the context
of the IFIs' ongoing engagement in Cote d'Ivoire. Egoume
confirmed that the country's GDP should rise by 2.9 to 3
percent in 2008, up from 1.7 in 2007, as predicted in the
budget, and cited the rebound in private investment,
propelled by improved investor confidence in the peace
process, as the reason. Sounding a serious note of caution,
however, Egoume said that endemic corruption acts as a
serious break on the economy's long-term potential, and
undermines proper fiscal management and tax collection.
Egoume accused Lebanese traders, for example, of openly
defying the country's tax laws with the connivance of corrupt
officials.


13. (C) Egoume said that cocoa and other agricultural
exports are doing reasonably well, propping up their portions
of the country's tax base. He noted that inflation is
moderate and under control and even the country's endemic
roadblocks are gradually loosening their grip on the
country's economy, adding to gradually falling costs for
transporting goods. According to Egoume, coffee production
is up strongly and international prices are higher, leading
to better tax receipts. Egoume said the cocoa sector is
still seeing substantial transshipment to Ghana, leading to
that country coming close in 2008 to Cote d'Ivoire's overall
cocoa export figures. Egoume cautioned that while 3 percent
GDP growth is good, it is only good enough for per capita
income to hold steady, given population growth. Egoume said
that the IFIs have won approval from the government to force
the cocoa regulatory bodies to countersign any investments
with the IFIs, a measure that IFIs hope will improve the
cocoa bodies' management and transparency.


14. (C) Reviewing the 2007 budget, Egoume said he and his
staff worked closely with the Ministry of Finance to keep
expenditures in line with budgeted projections and to
maintain the country's planned primary fiscal surplus of one
percent (which excludes foreign financing). Egoume said 2007
revenues stayed within projections (aside from oil, which
produced less revenue than had been anticipated) but that
some expenditures overshot their targets. Discretionary
spending by the Presidency and Prime Minister's Office
(particularly the former) greatly exceeded initial
projections. Egoume said that by the end of September, 2007
(with another quarter to go in the rest of the fiscal year),
the Presidency's expenditures were over USD 115 million,
whereas the budget called for USD 80 million for the whole
year. According to Egoume, Presidential personnel costs
alone through September 2007 were USD 50 million vs. a
projected USD 23 million for the full year. Egoume
explained these overruns negatively affected the ability of
the Finance Ministry to pay for measures designed to end the
political crisis as well as for needed social expenditures.
Government expenditures for education, for example, were USD

ABIDJAN 00000062 004 OF 004


400 million through September 2007, versus a projected 650
million for the whole year; health care costs were USD 115
versus a projected USD 200 million; and agriculture spending
was a scant USD 20 million against a planned USD 60 million
in full year spending. In sum, while the budget was
balanced, the excessive spending by the Presidency came at
the expense of critically needed spending in the social
sector.


15. (C) Egoume related the fear that the government's
holdings in the Central Bank do not add up. Specifically,
the USD 100 million in left-over receipts from the USD 190
million toxic waste settlement with European company
Trafigura do not appear to be in the government's accounts at
the Central Bank. The IMF is investigating this, but if that
money was spent outside of normal fiscal controls, the
resulting budget hole would probably prevent the government
from financing its portion of the WB arrears clearance by
February, and thus delay Cote d'Ivoire's whole package of
assistance and budget support from the IFIs. Asked if the
government could borrow sufficient cash to make up the
potential shortfall, Egoume said that banks in the region
were coming up against their limits on how much government
paper they can hold as Cote d'Ivoire's recent aggressive
borrowing has taken its toll and that regional liquidity is
suffering as a result.


16. (C) Egoume praised the government for passing the 2008
budget on time. He said that all expenditures would thus go
through the Ministry of Finance's rigorous internal control
system, rather than the rather lackadaisical system of
extra-budgetary expenditures the government uses when a
budget is not in force. Egoume was particularly pleased that
the IMF's demand for a detailed quarterly budget status
report, prepared by the Ministry of Finance (and overseen by
the IMF) was (grudgingly) accepted by the government. This
report will be provided to all Ministries through the Council
of Ministers and will eventually be published, greatly
complicating efforts to manipulate the budget for political
ends.



17. (C) Comment: The adoption of the budget is a good step
in the direction of more sound fiscal management and
readiness to engage seriously with the international
financial community to fashion the means needed to end the
political crisis and set the stage for more durable long-term
growth. However, serious questions remain concerning the
ability of the Prime Minister to manage the economic
portfolio, the oversized Presidential budget, the accuracy of
reporting of fiscal receipts and whether the government is
honestly accounting for the toxic waste settlement funds.
These questions combine to call into serious question whether
the HIPC decision point can be reached by the summer of 2008,
or even by the end of the year. End Comment.
AKUETTEH