THE DRC AND THE PRGF: HOW WE GOT HERE AND HOW WE

C O N F I D E N T I A L SECTION 01 OF 03 KINSHASA 001112

SIPDIS

E.O. 12958: DECL: 12/20/2019
TAGS: ECON EFIN EAID PGOV PREL CG
SUBJECT: THE DRC AND THE PRGF: HOW WE GOT HERE AND HOW WE
GET THE DRC TO HIPC COMPLETION POINT

REF: A. 08 KINSHASA 918

B. 08 KINSHASA 426

C. 08 KINSHASA 1105

D. 08 KINSHASA 1100

E. KINSHASA 520

F. JAFFEE-MANZ/LAMORA EMAIL 11/03/2009

G. JAFFEE-EEB/TREASURY EMAIL 11/19/2009

H. KINSHASA 1079

I. JAFFEE-MANZ/LAMORA EMAIL 11/10/2009

Classified By: Ambassador William J. Garvelink for reasons 1.4 (b) and
(d)


1. (C) Summary: This is the first in a two-part series on
the GDRC's long road towards HIPC completion point, with a
look at some of the many bumps and turns along the way since
early 2006 and the IMF Board's December 11 approval of the
DRC's Poverty Reduction and Growth Facility (PRGF). The PGRF
reflects a key opportunity for the government of the DRC
(GDRC) to finally break its long cycle of indebtedness, as
well as to address key structural impediments and implement
sound fiscal and monetary policies. The GDRC rightly views
the approval of the new IMF program as a significant
achievement, particularly following a gap of three years
since falling out of compliance in 2006 with their previous
program and the significant political decision taken in
June/July to renegotiate the Sino-Congolese agreement. While
many of the structural measures included as triggers in the
new PRGF are well underway -- in large part due to the
program's retroactive July 2009 start date -- the GDRC will
not achieve the end goal of HIPC completion point without a
significant, sustained and high-level commitment to cntrol
spending. Emergency spending has been, and will continue to
be, the greatest risk for the DRC to achieve what it could
not in 2006: HIPC completion point. With competing and
vested interests from many ministries, a weak Prime Minister,
and many legitimate pressures (including security spending
and salaries),the active engagement of President Kabila in
controlling his government's spending will be key. Donors,
including the United States, can and must play a key role in
engaging and supporting the President in this effort. The
second installment of this series lays out what the GDRC must
do to reach HIPC completion point. End summary.

What a long and strange trip it's been
--------------


2. (SBU) The December 11 IMF Board approval of the DRC's new
PRGF comes after a three-year long gap in a formal IMF
program. In March 2006, the DRC failed to meet its final
review under its previous program due to fiscal slippages and
inadequate progress on structural reforms. The DRC did
maintain a non-disbursing Staff Monitored Program (SMP) with
the IMF, and managed to make some progress in its monetary
and fiscal programs. Accompanied by high international
prices for the DRC's key export commodities (largely minerals
and petroleum),the DRC's macroeconomic climate was on a
largely positive projectory: higher GDP growth rates, lower
inflation, and a stable exchange rate. The GDRC also
continued to work closely with the IMF to re-establish a
formal IMF program. Despite these positive trends, however,
little progress was made towards entering into a new formal
IMF program.
QIMF program.


3. (SBU) Two key developments impacted the GDRC's
relationship both with the IMF and its progress towards
re-establishing a new PRGF. First, in early 2008, the GDRC
concluded a (at the time) $9.2 billion
minerals-for-infrastructure agreement with the Chinese
government (refs A and B). The Sino-Congolese agreement
immediately raised concerns among both multilateral and
bilateral donors regarding the loan agreement's impact on the
DRC's debt sustainability. At issue were both the
agreement's sovereign guarantees by the GDRC in the mining
portion, and the concessionality of the infrastructure loans.
Throughout 2008 and the first half of 2009, neither the
Chinese nor the GDRC indicated any real willingness to revise
the agreement to ensure compatibility with debt
sustainability. The Chinese, in fact, made several press
statements that strongly indicated an unwillingness to
renegotiate the agreement, including at one point accusing
the IMF of "blackmail." The GDRC appeared either unwilling

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or unable to engage the Chinese.

Economic crisis a catalyst for new direction
--------------


4. (SBU) The global financial crisis, and the sudden and
negative impact on the DRC's economy starting in late 2008
(refs C and D) considerably changed both the economic and
political dynamics in the DRC -- and the GDRC's position on
renegotiating the Sino-Congolese agreement. Throughout late
2008 and early 2009, the DRC's economy continued to
destabilize and deteriorate. The DRC's local currency, the
Congolese franc (FC) depreciated by twelve percent against
the U.S. dollar in one day alone in mid-January;
international reserves had reached close to zero. The
international community responded decisively and quickly to
help stabilize the economy and ensure continuation of basic
services. Emergency international assistance provided by the
IMF, World Bank, EU and African Development Bank in February
and March 2009 was critical in stemming further economic
deterioration. It also provided the GDRC with the breathing
room to take the important next step on the Sino-Congolese
agreement.

Strauss-Kahn to Kabila: wake up and smell the coffee
-------------- --------------


5. (C) In May 2009, IMF Managing Director Strauss-Kahn
visited the DRC (ref E) and met with President Kabila. While
the visit was ostensibly to discuss the impact of the global
financial crisis on a number of African countries, in
reality, howeer, it was used to push the GDRC to take the
necessary political steps to engage the Chinese on
renegotiating the Sino-Congolese agreement. Sources present
at the meeting between Strauss-Kahn and Kabila told econcouns
that Kabila appeared genuinely surprised and unaware of the
problematic provisions in the Sino-Congolese agreement and
the required steps to allow for the DRC to establish a new
PRGF. Post believes Kabila was almost certainly not well
informed on the issue prior to the Strauss-Kahn visit. In
June, the GDRC took the first steps in engaging the Chinese
on renegotiation of the agreement.


6. (C) From post's viewpoint, this move, after many months
of inaction, was likely a result of Kabila finally engaging
directly on the issue. The deteriorating economic situation
certainly supported the timing of this move; however, it is
unclear that Kabila would have fully understood what was
needed, or been willing to take the political decision, in
the absence of the Strauss-Kahn visit. During the IMF staff
mission's early November visit to the DRC (ref F),the IMF
informed donors that the amended agreement had been finalized
and signed by all parties. Specifically, the amended
agreement included the removal of the sovereign guarantees in
the mining portion (totally $3.2 billion) and increasing the
concessionality of the infrastructure portion (including
removing the $3 billion second tranche infrastructure
project). While the interests of the Congolese in
renegotiating the agreement were clear -- possible HIPC debt
relief -- the willingness of the Chinese to take this step
following literally months of strongly-worded public
Qfollowing literally months of strongly-worded public
statements to the contrary, remains unclear to us.

Next stop Paris
--------------


7. (C) With the major sticking point resolved (i.e., issues
related to the debt sustainability of the Sino-Congolese
agreement),approval of a new IMF program seemed on track.
The expectation of both donors and the GDRC was that the
November 18 Paris Club tour d'horizon would result in
financing assurances, thus allowing the PRGF to be presented
at the December IMF Board meeting. Instead, Canada, at the
last minute, refused to provide financing assurances over
concerns related to the DRC's investment climate and the
treatment of several Canadian investors. To ensure consensus
among Paris Club creditors, the Paris Club Secretariat
provided Canada a week to work with the GDRC to resolve the
outstanding issues. (Note: The Canadian government
initially claimed their actions were prompted by the GDRC's
announcement on November 14 of the finalization of the mining
contract review process, including upholding the cancellation

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of Canadian company First Quantum's contract. Post finds
this story somewhat disingenuous -- the GDRC had initially
canceled the contract in August 2009 and had repeatedly
re-launched negotiations with the company. In addition, U.S.
investor Freeport-McMoRan, the largest investor in the mining
sector and subject to the same contract review as First
Quantum, has yet to finalize its contract. (Note: The
mining contract review process was initiated in 2007 and has
been plagued by delays and a lack of transparency. End
note.) Rather than resulting in any tangible improvements to
either the investment climate or resolution of outstanding
Canadian commercial disputes, Canada's actions resulted in a
week of confusion among donors and the GDRC alike, erroneous
local press articles, and an angry GDRC.


8. (C) On November 19, the first of a series of press
articles appeared in several major DRC newspapers,
inaccurately claiming that both Canada and the United States
had not provided financing assurances at the November 18
Paris Club meeting due to concerns over the treatment of
their major investors in the mining sector. In response,
econcouns actively engaged with the GDRC (including President
Kabila's chief of staff, Prime Minister Muzito's economic
advisor, and the Minister of Finance's bilateral/cooperation
advisor) and, in cojunction with the embassy's Public
Affairs Section (PAS),the local press to correct the
inaccurate statements. On November 23, following continued
erroneous reporting in the local media on the U.S. position,
the Embassy's Public Affairs Section issued a press release
correcting the inaccuracies and confirming the U.S. position.


Canada comes around
--------------


9. (C) At the same time, the Canadian Ambassador was working
the diplomatic circuit to try to woo key donors to support
Canada in advocating with the GDRC on improvements to the
investment climate (ref G). During a November 19 meeting
between the U.S. and Canadian ambassadors, the Canadian
explained that her government was seeking key donors to
pressure the GDRC to send a "signal" to the Paris Club
creditors that it would get serious about improving the
investment climate. During the meeting, Ottawa's ambassador
stressed that Canada's position at the November 18 Paris Club
was based on broader concerns over the DRC's investment
climate (rather than a specific investment dispute) and
presented several steps that the GDRC should take to send the
right message to Paris Club creditors. While embassy
obviously supports coordinated efforts among donors to push
the GDRC to make necessary improvements to the DRC's dismal
investment climate, we did not support the timing or use of
the Paris Club for such efforts. EEB and Treasury concurred
with embassy's position; all other donors approached by the
Canadian Ambassador had a similar response to that of the
United States. Canada provided financing assurances on
November 25.


10. (SBU) Comment: The road to HIPC completion point has
been long and arduous. But the journey is not over and there
are many roadblocks and potholes yet to be overcome along the
Qare many roadblocks and potholes yet to be overcome along the
way, including the willingness of President Kabila and his
government to engage with creditors and -- most importantly
-- to take seriously their obligation to limit spending. In
the second installment of this two-part series we will focus
on the final stretch to reach completion point. End comment.
GARVELINK