IMF STAFF MISSION PRESENTS MIXED PICTURE TO DONORS

UNCLAS SECTION 01 OF 02 KINSHASA 000317

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON ETRD EAID EINV PGOV PREL CG
SUBJECT: IMF STAFF MISSION PRESENTS MIXED PICTURE TO DONORS

REF: KINSHASA 271


1. (SBU) Summary: The IMF Staff Mission presented donors on March
31 with a mixed picture of their two-week visit (Reftel) to the DRC
to conduct Article IV consultations and engage in technical
discussions on a formal IMF program (Poverty Reduction and Growth
Facility, PRGF). Positive developments included the quick
mobilization of emergency resources to help cover the DRC's fiscal
and balance of payments gaps, open discussions with Parliamentarians
and civil society on the DRC's economic challenges, improved public
financial management, and progress on technical discussions on the
PRGF. At the same time, the IMF noted a residual budget gap of
approximately $100 million that will need to be closed before the
PRGF can be approved, and continuing macroeconomic and fiscal
pressures. In a clear indication that the economic downturn
continues to be the central challenge for the GDRC in the near-term,
the IMF team announced a revised GDP growth rate for 2009 of 2.7
percent, down from a December projection of 4.4 percent. End
Summary.

DONORS PROVIDE KEY SUPPORT, BUT GAPS REMAIN
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3. (SBU) IMF Staff Mission leader Brian Ames told donors on March
31 that recently approved emergency assistance would cover
approximately 60 percent of the DRC's budget gap. Approved
assistance includes $100 million from the World Bank and $200 from
the IMF (Note: IMF emergency assistance under the Exogenous Shock
Facility, ESF, will be provided to the Central Bank to augment
international reserves. It will not be used as budget support. End
Note) An additional $150 to $200 million in emergency assistance is
anticipated from the EU and African Development Bank (AfDB). An EU
representative described planned emergency assistance as totaling
around EUR 50 million. The assistance will be provided as line-item
budget support and disbursed in two tranches, planned for mid-July
and September. EU assistance will be targeted towards food security
and related activities; the EU is still working to identify specific
line-items in the budget to be supported. AfDB plans to provide
$100 million in emergency assistance, with the first $50 million
tranche anticipated before June.


4. (SBU) During the December 2008 Staff Mission visit, the IMF had
identified a budget gap of approximately 220 billion FC
(approximately $275 million at the current exchange rate). However,
additional expenses, lower GDP growth and a significantly
depreciated exchange rate have led to an increase in the previously
projected gap. Ames estimated the residual gap at 80 billion FC or
approximately $100 million at the current exchange rate. Ames noteQ
two options for the GDRC to close the budget gap: a) increase
revenues and/or obtain additional external financing or b) reduce
spending. The GDRC's position, according to Ames, is to ensure
macroeconomic stability and contain expenditures. The IMF plans to
use the April 25/26 Spring IMF/World Bank meetings to discuss
measures to close the remaining budget gap.


PRGF TECHNICAL DISCUSSIONS MOVE FORWARD
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5. (SBU) Ames stated he was generally pleased with the results of
the technical discussions with the GDRC on the PRGF. The IMF team
devoted considerable time to these discussions and was pleased by
the GDRC's willingness to put "all issues on the table." This was a
break from the past. While Ames acknowledged that the team did not
finalize all technical aspects of the agreement, and expressed
disappointment that the GDRC was not better prepared to take
concrete steps on specific measures during the visit, the work ahead
for the GDRC is now clear. The remaining, critical step is for the
authorities to take necessary political decisions on specific
measures. Ames promised to share with donors the draft matrix on
structural reform measures that would be included in a new PRGF. He
was open to donor input on specific reforms to be included.


CHALLENGES AHEAD
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6. (SBU) Ames outlined several specific challenges facing the GDRC
in the areas of the budget, public financial management and
emergency spending. An immediate problem facing the government is
the lack of a system of arbitrage in the budget and expenditure
process. For example, the "Plan de Tresorerie" or Treasury
cash-flow plan, includes expenditures in both Congolese Francs and
US dollars. The recent depreciation of the CF against the dollar

KINSHASA 00000317 002.2 OF 002


has exacerbated this problem, despite what Ames described as
significant progress by the Ministry of Finance in public financial
management, including improved adherence to mandated procedures
governing emergency spending. Ames therefore called on the GDRC to
immediately put in place a system of arbitrage to be overseen by the
Prime Minister's Office (noting that many line ministries would not
necessarily be responsive to a decree issued by the Minister of
Finance). Another problem related to the monthly Plan de Tresoreie
is that recurring, administrative costs (such as salaries) are
usually paid at the end of the month, when credit may not longer
exist. As a result, the government has frequently postponed the
payment of salaries.


7. (SBU) Another challenge continuing to face the GDRC is the lack
of coordination among key ministries on the government's economic
program. Improved coordination among and increased participation by
line ministries such as the Ministries of Agriculture, Education and
Health will be critical as the DRC moves towards HIPC completion
point.


8. (SBU) Finally, implementation of the 2009 budget's wage bill
(masse salaire in French) was noted as another area of increased
fiscal pressure on the budget. The GDRC's 2009 budget calls for a
harmonization of Kinshasa and provincial salary levels. The IMF has
discussed the possible delayed or phased-in implementation of what
amounts to a salary increase for many civil servants. The issue is
politically sensitive for the GDRC, but they may be forced to delay
full implementation of the provisions by a month or two given the
lack of available current resources.

CHINA AGREEMENT-NO COMMENT
--------------


9. (SBU) Despite donor inquiries, the IMF team kept to its now
standard practice of limiting its discussion on the China agreement
to the broad linkages with HIPC and debt sustainability. Ames did
note, however, that the completion of the planned feasibility study
on the agreement had been slightly delayed, from the end of March to
early April. He also stated that while he did not have any
information on the status of the $250 million signing fee ("pas de
porte") included in the agreement, the IMF had urged the GDRC not to
use these funds until after the conclusion of the feasibility study.
The economic and fiscal crisis would likely continue through 2010
and 2011; resources needed to be conserved.


10. (SBU) Comment: Unlike past IMF Staff Mission briefings which
have included a greater focus on recent macroeconomic developments,
the March 31 briefing to donors was more forward looking, including
measures to address the DRC's significant economic challenges. Key
macroeconomic data will be available as part of the IMF's Staff
Report on the Article IV consultations and donors are already keenly
aware of worrisome state of the economy. The focus now is on
ensuring continued macroeconomic stability, the adoption of key
measures and reforms as discussed with the IMF, and continued
positive movement toward a PRGF. The Spring IMF/World Bank meetings
will be critical to resolve several key issues for PRGF approval,
foremost among them measures to close the budget gap.

GARVELINK