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 02 KINSHASA 001135 SENSITIVE SIPDIS E.O. 12958: DECL: 12/23/2019 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 -- PART TWO OF A SERIES REF: A. KINSHASA 1112 ¶B. KINSHASA 1079 Classified By: Ambassador William J. Garvelink for reasons 1.4 (b) and (d) ¶1. (SBU) Background: This is the second in a two-part series on the GDRC and the HIPC completion point. Part 1 (ref A) was a look at some of the bumps and turns along the way since early 2006 as the GDRC inched its way toward the IMF Board's December 11 approval of the DRC's Poverty Reduction and Growth Facility (PRGF). In this installment, we look at opportunities and pitfalls in light of the DRC's accession to the PRGF and the nation's economic and political realities. This cable also lays out what the GDRC must do in this final stretch of the journey to the HIPC completion point. ¶2. (C) Summary: PRGF 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 the HIPC completion point without a significant, sustained and high-level committment to control spending. Emergency spending has been, and will continue to be, the greatest risk for the DRC to achieve what it could not in 2006: the 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. End summary. Control of spending is the linchpin for success -------------- -- ¶3. (C) If the road to IMF Board approval for the PRGF was not without bumps, neither will be the DRC successfully reaching the HIPC completion point. While the GDRC has made important progress on many of the PRGF's triggers, controlling expenditures remains the single greatest risk for the DRC's meeting it's reviews under the new PRGF. As noted by the IMF staff mission briefing to donors in November, spending commitments by the GDRC already increased starting in October. The GDRC does, in fact, face a number of legitimate increased spending priorities, including for security-related concerns. In addition, the GDRC's budget remains woefully small compared to the country's needs: the GDRC's draft 2010 budget submitted to Parliament in early October totals only USD 5.3 billion, over half of which will be financed by external sources. Much of the (already Qbe financed by external sources. Much of the (already limited) spending towards key social sectors, such as health and education, is consumed by the wage bill. ¶4. (C) The GDRC's spending woes reflect a vicious cycle, though one largely of its own making. A key example can be seen in revenue collection. Increasing domestic revenue remains a key objective of the GDRC under the new PRGF. Currently, however, all of the GDRC's revenue collection agencies (including Customs, OFIDA, and the three other tax agencies, DGI, DGRAD and OCC) are on strike due to the non-payment by the GDRC of bonuses ("primes," in French). At the same time that the GDRC needs to enhance revenue collection, the GDRC is being told by the IMF that their current expenditure plan cannot support paying the "primes" that would ensure the revenue collection agency employees return to work. ¶5. (C) While the fiscal and monetary measures and structural reforms outlined in the PRGF are critical to the DRC's long-term macroeconomic stability, a more transparent budget KINSHASA 00001135 002 OF 002 and expenditure process, and an improved investment climate, the spending issue remains a political one. Given the DRC's highly corrupt and bureaucratic government, including within the key economic ministies agencies, the decision to control spending must come from Kabila. Kabila's message to the Central Bank, Finance and Budget Ministries, and key line ministries (e.g., Defense) must be clear: "Spending must be brought under control." Glass half full or half empty? -------------- ¶6. (C) If Kabila is the key for the DRC to reach the HIPC completion point, which post believes is the case, there are some reasons for mild optimism. First, the GDRC, under Kabila's instructions, took the difficult political step in renegotiating the Sino-Congolese agreement. Second, Kabila appears to be much more engaged on economic issues than in the past. His recent State of the Union address (ref B) highlighted both the importance of debt relief and the need to improve the investment climate. Kabila feels under pressure to show progress before the DRC's fiftieth anniversary of independence on 30 June, 2010. An announcement that the DRC had reached the HIPC completion point would serve as a key economic accomplishment. ¶7. (C) In post's view, a fundamental step in getting Kabila to take the tough political decisions necessary to reach the HIPC completion point will be a high-level and well-coordinated engagement by the donor community. As was seen with Kabila's lack of understanding and information on the Sino-Congolese agreement, his close advisors cannot be relied upon to serve this role. Rather, it took the visit of Strauss-Kahn to open the President's eyes. Once done, Kabila was, in this case at least, willing to give the marching orders to his staff to do what was necessary to address donor concerns. While contacts have informed Econcouns that the Central Bank Governor (a trusted personal contact of the President) has informed Kabila personally of the need to control spending, this message must be reinforced directly by the donors. ¶8. (C) Comment: To recapitulate, progress thus far in reaching the HIPC completion point has been the result of considerable effort on the part of the international community and the GDRC. Reaching the completion point, if it is attained, will be a significant victory for the GDRC. But it will likely not happen without significant effort by both the donor community and Kabila himself. We have an opportunity over the coming months to help President Kabila do the right thing. If we (both donors and Kabila) fail, the DRC faces the real risk of losing a key opportunity to advance the country's development. End comment. GARVELINK