CONCERNS GROW OVER ECONOMIC DOWNTURN IN DRC

UNCLAS SECTION 01 OF 02 KINSHASA 001100 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON ETRD EAID EINV PGOV PREL CG SUBJECT: CONCERNS GROW OVER ECONOMIC DOWNTURN IN DRC ¶1. (SBU) Summary. Falling international commodities prices, a tightening of credit, the still incomplete mining contract review process and continuing instability in eastern DRC have combined to create an increasingly worrisome macroeconomic situation in the DRC. GDP growth for 2009 will likely be in the 3 to 6 percent range, down from earlier projections of over 11 percent as recently as October. GDP growth for 2008 should reach between 9 and 10 percent. The mining sector, the major driver of the DRC's recent economic growth, continues to contract, with over 40 companies halting or closing operations in Katanga province alone. At the same time, many have questioned the significant increase in spending and unrealistic assumptions in the GDRC's $5 billion 2009 budget. End Summary GLOBAL FINANCIAL CRISIS HITS THE DRC -------------- ¶2. (SBU) The GDRC began to officially acknowledge the country's slowing economy in early November, when the Central Bank of Congo (Banque Central du Congo, or BCC) revised downward its 2009 projected GDP growth rate from 11.9 percent to below 10 percent, citing in particular falling international demand for metals and minerals. The outlook has become increasingly bleak, with local and international experts projecting the actual growth rate at as little as half of official projections. The IMF told donors on December 10 (septel) that economic growth for 2009 will likely reach 5 or 6 percent, while the President of Citibank's DRC subsidiary projects the economy growing at only 3 to 5 percent next year. ¶3. (U) Another indication of distress within the economy has been the slow but steady depreciation of the Congolese Franc (CF) against the dollar and falling reserves levels. (Note: With a highly dollarized economy, exchange rate trends greatly impact domestic economy activity. End Note) As of December 9, the CF has depreciated by 18 percent against the U.S. dollar since the beginning of 2008. Recent exchange rate fluctuations have led to increasing unpredictability about the CF's future value and, as a result, a growing lack of confidence by the market. International reserves have fallen to concerning levels, from $219 million in September to $148 million in mid-November. ¶4. (U) The DRC's mining sector, the major engine of the country's recent economic growth, lies at the heart of the economic downturn. Lower international prices for key minerals, combined with a tightening of credit, have led to more than forty mining or processing companies in Katanga province alone halting operations or going out of business. Provincial officials in Katanga have indicated that more than 300,000 people, many of them artisanal miners, will be out of work as result of the downturn in commodities prices. Investor confidence in the sector has been further dampened by the slow pace of the mining contract review, which has repeatedly been delayed over the past year and still remains uncompleted. 2009 BUDGET RAISES CONCERNS -------------- ¶5. (U) Despite growing indications of a significant economic downturn for 2009, the GDRC's 2009 budget, presented by Prime Minister Muzito to Parliament on December 2, includes substantially higher spending levels over 2008. The 2009 budget totals $5 billion, up from $3.6 billion approved for 2008, reflecting a 40 percent increase in dollar terms (62 percent in Congolese Francs). The budget is based on an assumed annual GDP growth rate of 9%, which most view as highly unrealistic. Domestic revenues are budgeted at $2.8 billion, up 32 percent (in Congolese Francs) from 2008. The budget will be financed through central government revenues (56 percent),external resources (34 percent),and revenues from the provinces (10 percent). External financing includes both budget support, primarily through HIPC, and financing of investments, including through the Chinese agreement. External financing is set to increase by 13.5 percent over 2008, while revenues from the provinces are set to increase by 174 percent over 2008. ¶6. (U) The budget devotes 20.3 percent of spending to economic activities, 4.8 percent of spending to health, and 9.4 percent of spending to education. The budget proposes a 23 percent (Congolese Francs) increase in the government payroll, to the equivalent to approximately 50 percent of domestic revenues, and a $40 million extraordinary allocation to support security operations in Eastern DRC. ¶7. (SBU). Comment. A slowing economy will put additional pressure on the GDRC to deliver on its development promises to an increasingly frustrated Congolese population. The revenue and KINSHASA 00001100 002 OF 002 spending levels in the 2009 budget will almost certainly need to be revised based on more realistic assumptions. While stability in eastern DRC and an improved investment climate remain critical for the DRC's long-term economic growth, exogenous factors are the more immediate cause of the economic downturn. Both the IMF and GDRC have appealed to donors to provide emergency budgetary or balance of payments support for the DRC. Post will report on briefings to donors by both the IMF and GDRC septel. End Comment. BROCK