IMF MANAGING DIRECTOR'S VISIT ADVANCES, BUT DOES

C O N F I D E N T I A L SECTION 01 OF 04 KINSHASA 000520 SIPDIS EAP/CM FOR SFLATT E.O. 12958: DECL: 06/05/2019 TAGS: ECON EAID EFIN EINV PGOV PREL CH CG SUBJECT: IMF MANAGING DIRECTOR'S VISIT ADVANCES, BUT DOES NOT RESOLVE, OUTSTANDING ISSUES ON CHINA AGREEMENT REF: A. KINSHASA 479 ¶B. KINSHASA317 ¶C. KINSHASA 312 ¶D. 08KINSHASA 269 ¶E. 08 KINSHASA 1105 Classified By: Amb. William J. Garvelink for reasons 1.4 (b) and (d). ¶1. (U) Please see guidance request in para. 14. ¶2. (C) Summary: The May 23-25 visit of IMF Managing Director Dominique Strauss-Kahn to the DRC advanced, but did not resolve, outstanding issues with the China agreement necessary for approval of a formal IMF program (Poverty Reduction and Growth Facility, PRGF) and HIPC debt relief. IMF Resident Representative Samir Jahjah told donors during a May 28 briefing that three possible plans were discussed with the GDRC during the visit, referred to as Plans A, B and C. Plan A reflects previous discussions-- the China loan would be renegotiated following the completion of the feasibility study. Plan B, proposed by the DRC government (GDRC) would require renegotiation of the agreement only before the PRGF's first review. Plan C would include Chinese/GDRC agreement to remove the sovereign guarantees in the mining projects immediately, but leave the negotiations on the concessionality of the infrastructure loan until the completion of the feasibility study. ¶3. (C) Summary continued: IMF contacts told Charge and Economic Counselor privately that Kabila and several of his closest advisors --including the lead negotiator on the agreement who is believed to have previously opposed renegotiating the agreement -- are now supportive of immediate engagement with the Chinese. Whether the Chinese would consider removing the guarantees remains the biggest question and most significant potential stumbling block to IMF Board approval of the PRGF. Strauss-Kahn has offered to use his good offices to engage with the Chinese on the issue, a change in the IMF's previous position. The IMF clearly wants the PRGF approved as soon as possible and, ideally, would like to present it to the IMF Board by the end of June. However, this time-frame would require either the Chinese and GDRC successfully negotiating removal of the sovereign guarantee provisions within the next few weeks, or the Paris Club creditors agreeing to provide financial assurances under a Plan B scenario. The PRGF remains critical for the DRC's �0A;macroeconomic stability-- emergency financial assistance has provided the GDRC with some temporary breathing room, but the economy will come under increasing pressure, including a likely fiscal gap, if anticipated first tranche PRGF financing does not arrive in the next few months. Coordinated and senior level engagement with the GDRC, Chinese and Paris Club will be critical to move this important agreement forward. The Ambassador has already begun to engage key Paris Club creditors in Kinshasa on the issue. The political and social consequences of failure to reach agreement on PRGF and HIPC with the GDRC would be grave, impacting the entire Central Africa sub-region. We urge AF to work with EAP on ways to engage with the IMF and China in an effort to achieve much needed financial assistance. End Summary. Introducing Plans A, B, and C -------------- ¶4. (SBU) Jahjah described to donors the three plans discussed by Strauss-Kahn with GDRC officials, including both President Kabila and Prime Minster Muzito. Plan A reflects previous discussions: the GDRC and PRC would wait for the completion of the feasibility study before renegotiating the agreement, including both the government guarantee provisions and concessionality of the infrastructure portion. According to Jahjah, the feasibility study is now only expected to be completed in September at the earliest (Note: Completion of the feasibility study has already been delayed several times. The company conducting the study is a Chinese firm based in South KINSHASA 00000520 002 OF 004 Africa, and is the same company which conducted the pre-feasibility study. End Note) ¶5. (SBU) "Plan B", which was proposed by the GDRC during the visit, would allow the IMF and GDRC to enter into a PRGF immediately, with the renegotiation of the China agreement completed before the program's first review. The GDRC has been searching for a compromise position, which appears to be their Plan B proposal. Jahjah acknowledged that Paris Club creditors, who would need to provide financial assurances for approval of the PRGF, are unlikely to support Plan B. He privately told Economic Counselor that while some Paris Club creditor country ambassadors in Kinshasa may in fact be moderating their position on requiring the lifting of the sovereign guarantee provisions before PRGF approval (Ref A),the view from these countries' Finance Ministries remained firm. ¶6. (C) Plan C, discussed for the first time during the Strauss-Kahn visit, would require the GDRC and China to remove the sovereign guarantees for the mining portion of the loan agreement before PRGF approval, with the infrastructure portion to be renegotiated only upon completion of the feasibility study. (Note: The mining portion totals approximately USD 3 billion. The infrastructure portion had totaled USD 6 billion, to be executed in two phases. The second phase, approximately USD 3 billion, has apparently already been eliminated from the agreement. End note.) GDRC officials, including President Kabila (as told to Charge by an IMF official traveling with the delegation) told Strauss-Kahn they are prepared to immediately engage the Chinese. Jahjah stated that a new accord could potentially be completed within two to three weeks. An exceptional meeting of the Paris Club could be called and, with financial assurances in place, the PRGF could come before the IMF Board in late June. Strauss-Kahn has offered to use his "good offices" to engage with the Chinese, a change in the IMF's previous position that the renegotiation of the agreement was between the GDRC and China with the IMF playing a strictly technical advisory role. The Way Forward-- Risks and Recommendations -------------- ¶7. (C) Strauss-Kahn's visit put the China agreement front and center on the GDRC's development agenda. While the visit did not resolve the outstanding issues in the agreement, the key new development was Strauss-Kahn's apparent success (at least according to our IMF contacts) in securing President Kabila's support and agreement to proactively and immediately engage with the Chinese on removing the agreement's sovereign guarantee provisions. While Prime Minister Muzito and several of Kabila's advisors have previously confirmed GDRC commitment to renegotiate the agreement (Refs C, D, E), Kabila has never indicated, either publicly or in private to donors, his personal support for renegotiating the agreement. Though Kabila's support would be a key development, several questions and hurdles remain. The possible stumbling blocks, from post's standpoint, include a) Chinese resistance to removing the sovereign guarantee provisions, b) GDRC inability or insincerity to positively engage with the Chinese on the agreement and c) a possible moderated Paris Club creditor position that would allow a Plan B scenario to be approved by the IMF board. Background and recommendations to address these key challenges are outlined below. Post would appreciate guidance from the Department on the U.S. position on each of the scenarios outlined above -- Plans A, B, and C -- as we continue to engage the GDRC on the issue and dialogue with our bilateral and multilateral donor partners. ¶8. (C) China: The Chinese Ambassador to the DRC has repeatedly stated to the press, including as recently as June 2, that China will not renegotiate the agreement and that IMF pressure to do so was tantamount to "blackmail." China's actual intentions, however, remain a key outstanding question. Post views Strauss-Kahn's willingness to have the KINSHASA 00000520 003 OF 004 IMF engage directly with the Chinese as a positive and necessary step. At the same time, we believe additional USG engagement with China, at the most senior level possible, will be critical. We recommend that we look for opportunities and potential pressures points to convey to senior Chinese decision makers the vital importance of the PRGF and HIPC to the DRC's economic stability and development. We also recommend that the U.S. Executive Director of the IMF engage with Chinese counterparts at the IMF. ¶9. (C) Paris Club: It is critical that the Paris Club present a unified position and that the USG does not become isolated if, in fact, Paris Club creditors are moderating their stance. Post recommends increased engagement with key Paris Club creditors-- U.K., France, Belgium, Germany, and Japan-- at a senior level at the Paris Club and through their missions in Washington to advocate for a firm line on financial assurances. We further recommend that the Executive Directors of the IMF of the above-mentioned countries request a joint meeting, as soon as possible, with Strauss-Kahn to advocate for prompt IMF engagement with the Chinese and to solicit Strauss-Kahn's views on how key creditors can most effectively engage with the GDRC. ¶10. (C) GDRC: We believe that President Kabila represents the key -- and most probable stumbling block -- to GDRC agreement to renegotiate the China agreement. Prime Minister Muzito and key members of his staff have told us and other donors for several months (Refs D and E) that the GDRC is committed to ensuring the agreement is compatible with debt sustainability and that the GDRC has already begun renegotiating the problematic provisions. Prime Minister Muzito affirmed the GDRC's intent to engage in negotiations with the Chinese during a joint press conference at the end of Strauss-Kahn's visit, the first public statement by a GDRC official to this effect. Post believes that Muzito, as well as Finance Minister Matenda and other members of the GDRC economic team, desperately want an IMF program and HIPC. At the same, it is widely believed that individuals close to President Kabila, including lead negotiator for the China Agreement Moise Ekanga and influential advisor Augustin Katumba, have opposed renegotiating the agreement. While Katumba told the ambassador in March (Ref C) that China, not the GDRC, is the stumbling block to renegotiating the agreement, other contacts believe that both Ekanga and Katumba oppose changes to the agreement. ¶11. (C) We believe that coordinated engagement with President Kabila by key Paris Club creditors is essential. Ambassador has already begun discussions with counterpart ambassadors from the key Paris Club creditors. Post would welcome formal instructions to jointly demarche, with these same ambassadors, President Kabila. We feel that a joint demarche would be most effective following a meeting of these countries Executive Directors of the IMF with Strauss-Kahn. ¶12. (C) COMMENT: Post shares the IMF's desire to establish a new PRGF as soon as possible, but only/only after formal renegotiation of the sovereign guarantee provisions and real assurances on debt sustainability. The GDRC has already committed to ensuring that the agreement is compatible with debt sustainability, including in their letter of intent requesting emergency (ESF) IMF assistance. They now need to take the critical step of following through on this commitment. We hope that Strauss-Kahn's visit has swayed those in the GDRC that have the ability achieve what Muzito has most likely not been empowered to do: seriously engage with the Chinese on the issue of the sovereign guarantees. The IMF's time-frame is likely overly optimistic, but possible if the political will exists with China and the GDRC and if Paris Club creditors, led by the United States, engage at a high level with the key players. ¶13. (C) Comment continued: The focus on the China agreement left little time during the Strauss-Kahn visit to discuss the GDRC's macroeconomic program, including public financial management. Jahjah noted during his May 28 briefing that the KINSHASA 00000520 004 OF 004 macroeconomic assumptions presented during the March IMF Staff Mission remain unchanged, including a projected GDP growth rate for 2009 of 2.7 percent. On the positive side, emergency financial assistance from the IMF, World Bank and African Development Bank have closed the DRC's fiscal gap for 2009 -- though this assumes a first disbursement under a formal PRGF later this year. While emergency assistance has also positively impacted international reserve levels -- from a low-point of close to zero several months ago to over USD 200 million in May, risks remain on spending. Jahjah noted, for example, that much of the 2009 budget's emergency spending allocation had already been spent. Resolving outstanding issues in the China agreement remain essential for PRGF approval and debt relief, but the GDRC must also not lose sight of the importance of sound macroeconomic policies and public financial management to reach HIPC completion point. End comment. ¶14. Guidance request: As mentioned in paras. 7-8, post requests guidance from the Department on the U.S. position on each of the scenarios outlined above -- Plans A, B, and C -- as we continue to engage the GDRC on the issue and dialogue with our bilateral and multilateral donor partners. We recommend that AF and EAP look for opportunities and potential pressures points to convey to senior Chinese decision makers the vital importance of the PRGF and HIPC to the DRC's economic stability and development. We also recommend that the U.S. Executive Director of the IMF engage with Chinese counterparts at the IMF. End action request. GARVELINK