CHAD'S PUBLIC FINANCES (I): PROBLEMS ARE DAUNTING

UNCLAS SECTION 01 OF 02 NDJAMENA 000113 SIPDIS SENSITIVE STATE FOR AF/C AND AF/USSES NSC FOR GAVIN AND HUDSON LONDON FOR POL - LORD PARIS FOR POL - D'ELIA AND KANEDA ADDIS ABABA ALSO FOR AU E.O. 12958: N/A TAGS: PGOV ECON EPET EFIN IMF IBRD CDB EAID PREL EU, FR, CD SUBJECT: CHAD'S PUBLIC FINANCES (I): PROBLEMS ARE DAUNTING REF: A. NDJAMENA 0099 ¶B. NDJAMENA 0079 This cable is sensitive but Unclassified. Not for Internet dissemination. -------------- SUMMARY -------------- ¶1. (SBU) IMF Resident Representative Joseph Karangwa briefed Ambassador March 26 on the current troubled status of Chad's public finances, especially its public revenue management problems, from the IFI perspective. He emphasized Chad's looming budgetary shortfall this year, as oil revenues are down nearly 80 percent from last year while GOC public spending remains high. He outlined changes that the GOC would have to make in budgetary discipline and budgetary procedures for the IMF to succeed in a six-month (April-September) staff-monitored program, after which it could qualify for a "normal" six-month program. Successful completion of six months of a staff-monitored IMF program could get the GOC up to USD 40-50 million per year of IMF budgetary assistance; successful completion of six months of a "normal" IMF program could make Chad eligible for HIPC bilateral debt relief and for multilateral (IFI) debt relief. HIPC and multilateral debt relief would save the GOC some USD 60 million a year in debt service. The GOC needs to revise its 2009 budget, since the budget approved in December 2008 is too optimistic on oil prices and does not reflect a revenue payment amendment with ESSO. END SUMMARY. -------------- OIL REVENUES DOWN -------------- ¶2. (SBU) Karangwa said that Chad's 2009 budget needed urgent revision: the current document was overly optimistic, in that it was based on a price for Chad crude of USD 60 per barrel; that price had now fallen to USD 20 per barrel. The situation was further complicated by the unintended effect of a modification of payment schedules with ESSO in September ¶2008. The GOC was mulling other revenue sources -- boosting non-oil revenues; a USD 400 million surplus from 2008; opening a line of credit from the Bank of Central African States (BEAC); and a special arrangement with ESSO -- to manage funding through 2009. But budget revisions were inevitable. Not all current security spending and infrastructure spending were fully paid in advance, and the GOC kept adding projects and making new spending commitments. Even if the GOC managed to make it through 2009, it would probably have to "mortgage its future" to achieve improved fiscal and budgetary health in 2010. ¶3. (SBU) Karangwa stated that oil revenue tracking was transparent and monies were generally managed in an accountable manner. The IMF knew the amount of royalties and dividends the GOC received, Karangwa said, because those monies were deposited in a Citibank escrow account in London. Lenders got their debts paid and revenues due to the GOC were officially transferred to the Chadian Treasury through the BEAC. ESSO paid income tax and export fees directly to the GOC, also through Chad's account at BEAC, and these figures were available through ESSO, including on its website, updated regularly. -------------- EXPENDITURES STAY STEADY -------------- ¶4. (SBU) The problem, according to Karangwa, was on the expenditure side. The Fund did not dispute Chad's need to spend heavily on its own security, given the nature and extent of threats to that security, but it wanted such spending -- indeed all spending -- to be reflected NDJAMENA 00000113 002 OF 002 appropriately in the Chadian budget. Karangwa outlined the GOC's two main weaknesses: budget discipline and budget procedures. He said that the GOC had little budget discipline and was unable to spend its budget, separate from exigent circumstance like changes in security requirements, as passed by the National Assembly. He also cited high levels of spending, irrespective of established priority spending areas. Karangwa made clear that the GOC did not follow sound budget procedures, given that extra-budgetary spending occurred without scrutiny prior to managing expenses within the existing budget. Karangwa claimed that this method of spending subverted the control of the Ministry of Finance. Further, there were significant issues with public procurement, including massive abuse of direct contracting by individual ministries, as opposed to bidding by tenders, Karangwa estimated that 40 percent of the GOC's spending in 2008 was extra-budgetary. Karangwa said that the GOC had not made any satisfactory progress in addressing such deficiencies over the last three years, so previous IMF programs had failed. -------------- RESTARTING AN IMF PROGRAM -------------- ¶5. (SBU) Karangwa stressed that the IMF would remain engaged and that a new mission led by new Chad Director Christian Josz would visit Chad April 2-15. In Karangwa's view, Chad had much to gain if it could stay "on program" with the IMF. Successful completion of six months of a staff-monitored IMF program could get the GOC up to USD 40-50 million per year of IMF budgetary assistance. Successful completion of six months of a "normal" IMF program could make Chad eligible for bilateral debt relief under the Highly Indebted Poor Countries (HIPC) program, as well as eligible for multilateral (World Bank, Africa Development Bank, etc.) debt relief. Karangwa said that Chad had about USD 1.3 billion in total debt, of which 70-80 percent was owed to multilaterals. HIPC and multilateral debt relief would save the GOC some USD 60 million a year in debt service. ¶6. (SBU) Karangwa said that the GOC and IMF would need to reach an understanding on a revised 2009 budget, and that the GOC would have to show results in executing its budget, as revised and agreed with the IMF, for six months under a "staff-monitored" arrangement running from April to September ¶2009. Karangwa said that there was little current budget assistance to the GOC and there would not be any large IMF or WB assistance without an IMF program. The EU had money it could reprogram but was not currently providing robust budget assistance; the ADB would only likely add USD 25 million to existing assistance programs. Karangwa said he did not see any critical piece of technical assistance that was not already covered through the IMF's AFRITEC and Public Expenditure and Financial Accountability (PEFA) programs and the EU's technical assistance to the Department of the Budget, but he added that the Minister of Finance would be in a better position to know if assistance gaps existed. -------------- COMMENT -------------- ¶7. (SBU) It seems to us that the IMF understands what is wrong with Chad's public finances and how to fix the problems. Septel reports on our conversation with the Minister of Finance, who laid out the GOC's plan to confront its daunting budgetary problems. ¶8. (U) Tripoli minimize considered. NIGRO