PARIS CLUB - APRIL 2009 TOUR D'HORIZON AND DISCUSSIONS ON

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SUBJECT: PARIS CLUB - APRIL 2009 TOUR D'HORIZON AND DISCUSSIONS ON
METHODOLOGICAL ISSUES

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1. (SBU) Summary: During the April Paris Club meeting, the IMF
reported Afghanistan's PRGF was back on track. Some creditors
expressed a willingness to extend Afghanistan's debt treatment, but
Russia noted some 'technical problems.' The World Bank and the Fund
had approved Cote d'Ivoire's decision point under the Heavily
Indebted Poor Country (HIPC) initiative; negotiations with the Club
are expected in May. The Fund and Democratic Republic of Congo
(DRC) authorities reported being close to an agreement on a new PRGF
program, with the proposed $9 billion loan from China the major
outstanding issue. The IMF does not expect the DRC to complete the
HIPC initiative before 2010. Grenada had not provided the
information needed to resolve the comparability of treatment issue.
Moldova was seeking a successor program to the PRGF program that
expires in May, and may need additional treatment from the Club.


2. (SBU) In the discussion of Mongolia, despite assurances given by
the Fund in advance of the April 1 program approval, Russia and
Finland indicated that they were not making progress on resolving
outstanding arrears problems. The IMF did not envision a Club
treatment for Sri Lanka, although the authorities and the Fund
appeared close to agreement on a program. An Article IV mission had
returned from Zimbabwe and found the economic situation to have

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worsened dramatically, with GDP less than half its 2000 level, and
poverty and unemployment at "catastrophic" levels. Preliminary data
indicate a very heavy debt burden, with large arrears. The Club
also discussed methodological issues, including debt sustainability,
seniority, the upcoming June meeting with the private sector, and
proposed changes to the Club's website and logo. Negotiations,
pathbreaking in some ways, gave Seychelles a treatment under the
Evian Approach. End Summary.

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Afghanistan
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3. (SBU) IMF staff reported that the February IMF review had been
postponed to April 22. (Note: the IMF Executive Board approved the
review and PRGF program extension as expected.) Afghanistan had
implemented the prior actions the Fund had sought, and revenue
collections had risen since January. Prudent fiscal policy in
FY08-09 led to disinflation, although a drought had cut growth and
caused commodity prices to rise. Agricultural output was expected
to recover in the new fiscal year, with 9 percent growth projected.
Major risks from the security situation, especially during the
August elections remained, however.


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4. (SBU) The GIROA requested an extension and re-phasing of its
program under the Poverty Reduction Growth Facility (PRGF),with a
sixth review in the fall and a new seventh review in March 2010.
Completion Point could come before the end of 2009, possibly at the
same time as the sixth review. The World Bank reported Afghanistan
was making strong efforts to reach Completion Point, including
trying to complete by late summer a report on the Afghan National
Development Strategy that serves as its Poverty Reduction Strategy
Paper (PRSP).


5. (SBU) The U.S. drew attention to the fact that Afghanistan's
Paris Club treatment had expired at the end of March, but expressed
a willingness to extend the treatment, and make it retroactive to
April 1, 2009. The IMF indicated that it expected the authorities
to make the request soon. Germany agreed with the U.S. proposal,
but Russia (the only other creditor) stated that it had a "small
technical problem" relating to an interbank technical agreement, and
that it could not commit at this time. The Co-Chairman asked the
Russian delegation to discuss the problem with the Secretariat and
hoped it would not be an obstacle.

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Democratic Republic of Congo (DRC)
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6. (SBU) The IMF reported that an Article IV mission had just
returned from Kinshasa. Its main findings were that the economic
situation had deteriorated due to the external environment, with GDP
growth expected to be only 2.5 percent in 2009, down from 6 percent
in 2008. The fiscal situation had deteriorated, with revenues
having fallen with commodity prices, and expenditures rising as the
government attempted to protect key programs, such as inputs for
health and education, from inflation. As for DRC efforts to
renegotiate the proposed China loan, there appeared to be two
factions pulling in different directions, leading to mixed signals.
The feasibility study was now expected by late April. The DRC would
need a couple of months for discussions with the Chinese.


7. (SBU) It was unlikely that a PRGF program would be in place in
time for a review in 2009, so HIPC Completion Point would be very
unlikely before 2010. The World Bank reported that there was a
great deal of pressure to maintain real wages and living standards,
and that the central government might be unable to make scheduled
transfers to the regions.

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Cote d'Ivoire
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8. (U) The Fund and Bank approved Cote d'Ivoire HIPC Decision Point
on March 27 and 31, respectively. Negotiations with the Club are
expected on May 14.


9. (SBU) The Fund reported that external public and publicly
guaranteed debt totaled $14.3 billion at end-2007, of which
approximately half was owed to Club members, 28 percent to
multilaterals and 22 percent to commercial creditors. Cote d'Ivoire
could expect to receive about $3 billion (net present value) of
total debt relief through the HIPC initiative; the Paris and London
Clubs had already provided about 55 percent of this amount. The
African Development Bank (AfDB) and the World Bank's International
Development Association (IDA) had provided HIPC treatment through
their arrears clearances, plans were in place with other
multilaterals, and discussions ongoing with the London Club.


10. (SBU) The Secretariat also reported on Cote d'Ivoire's meetings
with the private sector in mid-March. The authorities had proposed
cancellation of 90 percent of the $900 million in arrears, with the
remainder to be paid with funds from IDA's Debt Reduction Facility.
Private sector creditors had thought the proposal ambitious; some
felt they should not have to cancel more debt, given that they had
already provided substantial relief.

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Grenada
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11. (SBU) The Secretariat reported that it had still not been able
to get a clear response from Grenada's authorities as to whether the
loans from Kuwait had been to the central government or to
parastatals. The UK reported that its notes from Grenada's PC
negotiations indicated that the Club had agreed that the Kuwaiti
debts did not need to be treated, but were not clear about loans
from Trinidad and Tobago. The Secretariat will continue to pursue
and provide an update in May.


12. (SBU) The IMF reported that the economic situation had
deteriorated significantly, with GDP expected to fall in 2009 due to
declines in tourism (expected to fall by 3 percentage points of GDP)
and remittances (-10 percent). The import bill would be lower due
to moderated food and fuel prices, but the offset would be only
partial. As a result the country faced a financing gap of $11
million in 2009. It had requested that its PRGF be augmented by $6
million, leaving a gap of $5 million, which extension of Club
treatment could help fill. The Bank indicated that the country was
also seeking more support from the IBRD.

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Kyrgyz Republic
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13. (SBU) The IMF reported strong performance over the previous few
years, but the outlook had worsened due to food and fuel price
shocks in 2008, and more recent shocks to trade, remittances and
financial flows resulting from the global crisis. The Fund had
approved a high access Exogenous Shock Facility (ESF) program in
December after earthquakes and water shortages. End-2008 conditions
were met, and budget support from Russia would more than cover gaps.



14. (SBU) The country's debt indicators had improved dramatically,
with public debt (most of which is external) having fallen below 50
percent of GDP, from 100 percent in 2004. The authorities had not
raised the possibility of seeking HIPC debt relief since they had
been told that they could not receive treatment under the
Multilateral Debt Relief Initiative (MDRI) without HIPC, and it was
uncertain whether the country still met the indebtedness
benchmarks.


15. (SBU) The Co-Chairman asked Russia to brief on its bilateral

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agreement. Russia indicated that it had signed a $193 million
agreement in March, of which $20-21 million was in debt-for-equity
swaps (state-owned assets, SOE machinery, real estate),while the
rest would be written off. The Secretariat opined that the Russian
agreement fell within scope of the March 2005 Paris Club Agreed
Minute with the Kyrgyz Republic, which permits debt swaps up to 20
percent of the amount of each creditor's total claims.

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Moldova
--------------


16. (SBU) The IMF reported that Moldova had been hit hard by the
crisis, leading to a collapse of its export markets, foreign direct
investment (FDI) and remittance flows. Bank lending had essentially
stopped, and financial institutions were under stress. The central
bank had lost one third of its reserves defending the Leu, while
spending - especially on wages and pensions - had risen in
anticipation of elections, leading to a projected fiscal deficit of
9 percent of GDP in 2009.


17. (SBU) Moldova requested a successor PRGF program to its current
one, which expires in May. Discussions were at an early stage and
further Club treatment may be necessary. The Secretariat launched a

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data call. The IMF will provide an update in May.

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Mongolia
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18. (SBU) The Club last discussed Mongolia in January; on April 1
the Fund Board had approved an 18 month Stand-By Arrangement (SBA)
for $229 million, with $76 million available immediately. The
program, the Fund reported, was designed to restore government
finances, allow the exchange rate to adjust, increase confidence in
the banking system, and protect the poor. The IMF's debt
sustainability analysis indicated that Mongolia was at low risk of
debt distress; its problem was illiquidity. A recent donors'
conference raised pledges of $160 million in budget support for
2009-10 from Japan, Australia and the Multilateral Development Banks
(MDBs). The World Bank added that it expected the remaining deficit
to be covered as other donors defined their plans over the next few
months. An interim strategy paper will go to the Bank's Board in
late May. The country is not expected to come to the Club for debt
treatment.


19. (SBU) The IMF noted that it cannot lend into arrears, without at
least a payment plan or process. Fund staff had obtained

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information from Mongolia, and the Russian and Nordic Executive
Directors had permitted the program to proceed. While the Fund did
not consider disputed amounts to be arrears, for program purposes,
there would need to be a process for resolution, which could be set
up in the fall.

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Seychelles
--------------


20. (SBU) April 15 negotiations with the Seychelles concluded with
an Agreed Minute signed in the early morning hours of April 16.
Seychelles -- an upper middle-income country, but very heavily
indebted and with explosive debt dynamics -- was an unusual case for
the Club. Seychelles' request, received just days before the
meeting, was very ambitious: a 55 percent nominal stock reduction
in three phases. Seychelles wanted a first 35 percent reduction
retroactive to December 2008, with the remaining reductions in equal
phases effective in December 2009 and in March 2010, respectively.
Remaining balances were to be paid over 24 years, with an 8-year
grace period.


21. (SBU) Major points of contention were (1) the amount and
distribution of reduction, (2) the timing of tranches; and (3)

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exclusion of a German loan. As a goodwill gesture, the Seychelles
offered to make a $1 million payment to Paris Club creditors before
June 30; the Secretariat will propose how to allocate this sum.
Additional details of the negotiations will be sent septel.

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Sri Lanka
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22. (SBU) The IMF reported that discussions on a SBA were
proceeding. Final agreement had not yet been reached during the
end-March mission, but the program would focus on reducing the
fiscal deficit and strengthening the external and banking sectors.
The Fund did not expect the country to seek a Paris Club treatment.



23. (SBU) Gross reserves had fallen further, to less than $1
billion, less than one months of imports (down from $1.5 billion
reported to the Club in March). The World Bank reported that the
central bank had halted interventions, slowing the loss of reserves.
Remittances had fallen by 8 percent. Sri Lanka sought
continuation, not reorientation, of its current World Bank program
focused on infrastructure, transportation, health, and other
sectors.

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24. (SBU) In response to a question about the country's debt
sustainability, the IMF recalled that the last Debt Sustainability
Analysis (DSA) a year ago had classified the country as "high risk"
but was never published. Last year's "high risk" had reflected
unsustainable policies and financing gaps that the government closed
with nonconcessional borrowing. Even though the external situation
had worsened, the SBA would be based on sustainable policies, so the
next DSA would "show a different picture." The Secretariat would
complete its data call shortly.

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Zimbabwe
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25. (SBU) The IMF reported that an Article IV mission in March had
found that the economic situation had worsened dramatically in 2008,
with GDP falling 14 percent, on top of a cumulative 40 percent
decline from 2000 to 2007. Poverty and unemployment were at
"catastrophic" levels. Seventy percent of the population needs food
aid; cholera had claimed over 4,000 lives. Inflation had peaked at
an estimated 500,000,000,000 percent (500 billion percent),although
since the adoption of hard currency early in 2009 the Zimbabwean
dollar had virtually disappeared. Reserves were about $6 million.

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26. (SBU) Zimbabwe required major efforts and donor support. The
authorities were refraining from quasi-fiscal activity, having
adopted a system of cash financing. They were allowing the
processing of payments in foreign currency, liberalizing prices and
exchange controls, and imposing budget constraints on parastatals.
The external debt burden was unsustainable, with a DSA (based on
incomplete data) indicating a debt level of $6 billion, 190 percent
of GDP.


27. (SBU) There was discussion of the way forward. Italy sought a
roadmap, while noting there would be many steps before any Paris
Club treatment, and suggested a clear look beyond the scoping
mission at matters like a trust fund and development assistance.
The UK inquired about how debt would be treated, were Zimbabwe to
obtain an IMF program. The IMF said there would be an Article IV
discussion, but that the IMF would need to see credible GOZ actions
and signals of donor support before going beyond providing policy
advice. The IMF also noted that Zimbabwe was not considered in the
HIPC ringfence exercise because it was not IDA-only at end-2004.
The Fund did not have the data to determine whether Zimbabwe would
have met the end-2004 HIPC thresholds that were required to qualify
for HIPC. The Co-Chairman proposed that the Secretariat prepare a
working paper on scenarios, in response to Italy's questions.

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28. (SBU) The U.S. delegation shared with counterparts from key
countries that had participated in the March 20 Washington meeting
some of the core outcomes of that discussion.

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Methodological Issues:
Debt Sustainability
--------------


29. (SBU) The IMF presented a review of its recent Board paper on
concessionality, and its proposals for more flexible implementation
of the Debt Sustainability Framework (DSF). One issue that arose
was the difference in language in references to the DSF in the
recent G20 meetings, and particularly between the Working Group IV
language and that attached to the leaders' statement. The IMF was
unsure whether it was being tasked to do something other than the
flexibility exercise already underway, and that it would seek
guidance on this issue, most likely from the International Monetary
Financial Committee (IMFC). The IMF Executive Board will address
this matter.

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Methodological Issues:

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Private Sector Meeting
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30. (SBU) There was some discussion about the Club's annual meeting
with representatives of the private sector, now expected in June.
The Secretariat indicated that it wanted the meeting to be somewhat
innovative, with a more academic and public component added to the
closed door discussion. The Secretariat suggested that this
component address how the financial crisis had unfolded and its
impact on emerging and poor countries. The private session would
cover specific country cases (Argentina, Ecuador, Seychelles and
four HIPCs - Cote d'Ivoire, Congo-Brazzaville, DRC and Liberia) as
well as efforts to improve coordination between the Club and private
and non-member official creditors.

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Methodological Issues: Seniority
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31. (SBU) On the day of the Tour, the Secretariat provided a working
paper on seniority. Because delegations had not had the opportunity
to review it, there was little discussion. The particular question
at hand was whether loans made as part of an upper credit tranche
IMF program in the current crisis should be considered senior to

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other Club loans. Some creditors raised concern about steps that
could diminish the IMF and World Bank's preferred creditor status,
asked about whether such loans would be included in Paris Club
negotiations, and inquired about handling of loans from non-Paris
Club creditors, e.g. the People's Republic of China (PRC).


32. (SBU) For additional information on any country in particular,
please contact David Freudenwald or Nicholle Manz in EEB/IFD/OMA.