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

UNCLAS SECTION 01 OF 16 PARIS 000643 SENSITIVE SIPDIS STATE FOR EEB/IFD/OMA TREASURY FOR DO/IDD AND OUSED/IMF SECDEF FOR USDP/DSCA PASS EXIM FOR CLAIMS - MPAREDES PASS USDA FOR CCC -- ALEUNG/WWILLER/JDOSTER PASS USAID FOR CLAIMS -- WFULLER PASS DOD FOR DSCS -- PBERG E.O. 12958: N/A TAGS: EFIN ECON EAID XM XA XH XB XF FR SUBJECT: PARIS CLUB - APRIL 2009 TOUR D'HORIZON AND DISCUSSIONS ON METHODOLOGICAL ISSUES THIS MESSAGE REPLACES PARIS 0629 TEXT WHICH WAS SENT IN ERROR ¶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 PARIS 00000643 002 OF 016 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. -------------- Afghanistan -------------- ¶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. PARIS 00000643 003 OF 016 ¶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. -------------- Democratic Republic of Congo (DRC) -------------- PARIS 00000643 004 OF 016 ¶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. -------------- Cote d'Ivoire -------------- PARIS 00000643 005 OF 016 ¶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. PARIS 00000643 006 OF 016 -------------- Grenada -------------- ¶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. PARIS 00000643 007 OF 016 -------------- Kyrgyz Republic -------------- ¶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 PARIS 00000643 008 OF 016 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. -------------- 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 PARIS 00000643 009 OF 016 data call. The IMF will provide an update in May. -------------- Mongolia -------------- ¶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 PARIS 00000643 010 OF 016 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. -------------- 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) PARIS 00000643 011 OF 016 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. -------------- Sri Lanka -------------- ¶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. PARIS 00000643 012 OF 016 ¶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. -------------- Zimbabwe -------------- ¶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. PARIS 00000643 013 OF 016 ¶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. PARIS 00000643 014 OF 016 ¶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. -------------- 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. -------------- Methodological Issues: PARIS 00000643 015 OF 016 Private Sector Meeting -------------- ¶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. -------------- Methodological Issues: Seniority -------------- ¶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 PARIS 00000643 016 OF 016 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.