IMF HOLDS OUT HOPE FOR CHAD, BUT INSISTS ON FISCAL

UNCLAS SECTION 01 OF 02 NDJAMENA 000547 SENSITIVE SIPDIS LONDON AND PARIS FOR AFRICA WATCHERS E.O. 12958: N/A TAGS: ECON EFIN IMF PGOV PREL US IBRD MASS CD SUBJECT: IMF HOLDS OUT HOPE FOR CHAD, BUT INSISTS ON FISCAL DISCIPLINE REF: A. NDJAMENA 534 AND PREVIOUS ¶B. NDJAMENA 427 NDJAMENA 00000547 001.2 OF 002 -------------- SUMMARY -------------- ¶1. (SBU) The November 18 debrief to the diplomatic community by the visiting IMF delegation tracked what delegation head Sukhwinder Singh had told Ambassador earlier (Ref A). The IMF is trying to persuade the GoC to prepare and live within budgets that are sustainable without oil revenue, in marked contrast to the history of the last few years, in which the GoC spent blithely, without respect for budget allocations. If Chad creates a credible 2009 budget, and shows some fiscal prudence over the next few months, the IMF would consider putting in place a Staff-Monitored Program sometime in 2009, which might lead to a more formal relationship and eventually to debt forgiveness under the Heavily Indebted Poor Countries Initiative (HIPC). The visit seems to have fulfilled the IMF's modest goal of maintaining a cordial relationship with Chad, even though it is not in a position to put in place any sort of program until the GoC demonstrates minimal fiscal discipline. We continue to be impressed by the IMF's commitment to maintaining a dialogue with the GoC, despite the latter's continued poor fiscal performance, and its acknowledgement of the realities here. END SUMMARY. -------------- FISCAL MANAGEMENT WOULD PAVE WAY FOR FURTHER PROGRAMS -------------- ¶2. (SBU) On November 18, the IMF delegation in town since November 5 to conduct Article IV consultations with the GoC, debriefed the diplomatic community on its visit. The readout was similar to what Sukhwinder Singh had told Ambassador earlier (Ref A). The IMF is trying to persuade the GoC to prepare and live within budgets that are sustainable without oil revenue (which is by far Chad's largest source of revenue),in marked contrast to the history of the last few years, in which the GoC spent blithely, without respect for budget allocations. If Chad creates a credible 2009 budget, and shows some fiscal prudence over the next few months, the IMF would consider putting in place a six-month, Staff-Monitored Program sometime in 2009. Successful implementation of a Staff-Monitored Program could lead to an IMF program supported by the Poverty Reduction and Growth Facility (PRGF),which in turn could help pave the way for debt forgiveness under the Heavily Indebted Poor Countries Initiative (HIPC). But these are big ifs, in light of the GoC's recent fiscal imprudence. ¶3. (SBU) Chad needs to demonstrate progress in putting its fiscal house in order before the IMF can consider any type of program. Chad's budget deficit, when one excludes oil revenues, is a whopping 30 percent of GDP, whereas a sustainable deficit level for Chad would be 4 percent -- a level at which the IMF said Chad had been operating just a few years ago. In 2008, the wage bill alone is projected to consume all non-oil revenue. (Much of the recent increase in the wage bill is attributed to the army, but there has also been an impressive increase in the total for civil-service salaries.) This presents a huge problem for future fiscal sustainability. While stressing that it is up to the Government to decide its priorities, the team is recommending civil-service reform and a reduction of the wage bill. It is also recommending less spending in the health and education sectors, which it believes have reached their absorptive capacity, in favor of sectors where investment could produce growth, such as agriculture and livestock, roads and transportation, and energy. -------------- "CHAD ALWAYS ACCEPTS" - AND THEN -------------- ¶4. (SBU) Discussing the overall state of the economy, Singh characterized Chad's record during the past few years as "not good." There has been very little progress in structural reform, infrastructure is weak, the business environment is poor, waste is unacceptably high, and even the petroleum sector is not very competitive. Asked by the EU Ambassador whether Chad accepts the Fund's analysis, Singh responded that "Chad always accepts." The problem is getting the GoC to acknowledge its expenses and figure out, realistically, how to accommodate them within its means. A couple of NDJAMENA 00000547 002.2 OF 002 examples: -- The GoC's draft 2009 budget shows security expenses of only 0.5 percent of GDP -- down from 15 percent in 2008. While such a cut would be laudable, the IMF doesn't find it credible. -- Chad's health and education ministers told the visiting team they want only money for recurrent costs to make their facilities function (e.g., to staff the already built medical facilities and schools),as they do not need additional buildings. Yet the day after the IMF debrief, the GoC/ruling party newspaper, Le Progres, reported that the Cabinet adopted a 2009 budget that includes more construction funds for schools, health clinics, and hospitals. ¶5. (U) While Singh acknowledged that Chad had been experiencing tough times (i.e., its internal and external political situation),he insisted that fiscal management is needed, preferably sooner rather than later. The Fund has proposed "a trajectory" to reduce expenses to avoid Chad having to make drastic cuts in future years. ¶6. (U) On the positive side, the team noted that Chad's financial sector is so small and has so little involvement with international banks that it has been virtually untouched by the international financial crisis, and its banks have remained very conservative in issuing loans. -------------- STATISTICS -------------- ¶7. (SBU) The IMF predicts that Chad's oil income will increase from USD 1.2 billion to USD 1.9 billion in 2008, but fall to USD 0.7 billion in 2009 as a result of lower oil prices and the GoC's September 2008 protocol with ESSO (Ref B),which advanced the payment of some taxes and royalties from 2009 to 2008. It expects Chad's GDP to fall by 0.4 percent in 2008, but to grow at 3.5 to 3.6 percent per year from 2009 through 2011, although it expects oil production to remain at 45-47 million barrels/year from 2008 on. The IMF expects 2008 inflation of 7.5 percent, mostly due to the cost of imported foodstuffs, with only modest, 3 percent annual increases in subsequent years. -------------- COMMENT -------------- ¶8. (SBU) The visit seems to have fulfilled the IMF's modest goal of maintaining a cordial relationship with Chad, even though it is not in a position to put in place any sort of program until the GoC demonstrates even minimal fiscal discipline. We continue to be impressed by the IMF's commitment to maintaining a dialogue with the GoC, despite the latter's continued poor fiscal performance, and its acknowledgement of the realities here. ¶9. (U) TRIPOLI MINIMIZE CONSIDERED. NIGRO