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.

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SUMMARY
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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.

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OIL REVENUES DOWN
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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.

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EXPENDITURES
STAY STEADY
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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.

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RESTARTING AN
IMF PROGRAM
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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.

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COMMENT
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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