FY 2010 PROHIBITION ON ASSISTANCE TO CENTRAL GOVERNMENTS

UNCLAS SECTION 01 OF 03 KINSHASA 000100 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: EAID EFIN ECON PGOV PREL CG SUBJECT: FY 2010 PROHIBITION ON ASSISTANCE TO CENTRAL GOVERNMENTS WHOSE BUDGETS ARE NOT TRANSPARENT: DRC REF: STATE 1923; 09 KINSHASA 1112; KINSHASA 88; KINSHASA 24 09 KINSHASA 967; 09 KINSHASA 961; 09 KINSHASA 320 ¶1. (U) The FY2010 USG foreign assistance package for the DRC includes funds that are considered assistance for the central government. In addition, the DRC required a waiver in 2009 under Section 7086 (C)(1)of the SFOAA. Post therefore provides the following responses to the questions contained in Ref A. Improved Budget Transparency a Priority -------------- ¶2. (SBU) Enhancing budget transparency, both in the budget formulation and execution process, remains a key priority for the government of the DRC (GDRC) as part of continuing, broader efforts to improve public financial management (PFM). The GDRC, with the support of several donors, has taken some important, concrete steps over the past several years to improve PFM with a particular focus on the budget process. These measures include improved implementation of the new budget-execution system, introduced in 2003, that provides information on expenditure tracking, including required quarterly budget execution reports. The GDRC has also greatly improved its compliance over the past year with measures enacted in 2008 on urgent spending procedures. Monthly budget execution tables are generated and published. The draft and approved budgets as well as the quarterly budget expenditure reports are publically available, including on the Ministry of Budget's website. ¶3. (SBU) The DRC's new three-year Poverty Reduction and Growth Facility (PRGF) arrangement with the IMF, approved in December 2009 (ref B),prioritizes strengthened PFM and includes a series of measures to improve transparency, formulation, and execution of the budget process. Structural measures in the PRGF aimed at enhancing budget formulation and execution include the adoption of an organic Public Finance law that will help harmonize and rationalize the budget process, eliminating extra-budgetary spending, strengthening capacity among provincial level officials, and improving fiscal reporting. Additional measures contained in the PRGF related to improved transparency of revenues focus on implementation of the Extractive Industries Transparency Initiative by mid-March 2010 (ref C) and publication of agreements between public and private enterprises as well as the results agreements under the mining contract review. A key structural measure under the PRGF that has yet to be achieved is the approval by Parliament of the GDRC's draft public procurement law which aims to modernize and improve the transparency of the government procurement process. ¶4. (U) Another important step in addressing improved budget transparency is in the area improved coordination and management of external assistance. External assistance comprises a significant proportion of the DRC's annual budget -- 53 percent for the GDRC's draft 2010 budget. With support from the World Bank, the GDRC and international donors agreed in June 2009 to a series of measures aimed at improving aid efficiency, including in the sharing of information on donor assistance to improve budget formulation. ¶5. (SBU) The GDRC has also shown, for the first time in many years, greater political will to ensure a realistic budget. Most recently, President Kabila refused to sign the DRC's 2010 approved by Parliament (ref D),citing unrealistic spending increases and revenue projections added by Parliament to the GDRC's draft budget. The additional spending related, in large part, to salary increases for elected officials. The GDRC and both houses of Parliament worked for several weeks to harmonize the GDRC's original draft budget and that approved by Parliament in late 2009. Parliament has now approved an amended budget that removes much of the spending increases; the newly approved budget will be sent to President Kabila for his signature. Contacts at both the KINSHASA 00000100 002 OF 003 Ministries of Finance and Budget told Econcouns in mid-January that the President's decision to return the budget as approved by Parliament was not politically motivated; rather, he genuinely sought to ensure a realistic budget that would not jeopardize the GDRC's progress towards HIPC completion point. (Comment: Post concurs with this view. End Comment) The DRC's 2010 budget, which was drafted in close coordination with the IMF, thus represents the first time in many years that the GDRC will have adopted a budget based on realistic revenue projections and corresponding spending levels. But Weaknesses Remain -------------- ¶6. (SBU) At the same, weaknesses in the budget process remain. A key structural challenge relates to the DRC's bifurcated budget process and lack of adequate coordination between the Ministries of Finance and Budget, as well as continuing fiscal pressures due to on-ongoing and often unpredictable security-related spending needs. Capacity, particularly at the provincial level, must also be enhanced to ensure proper budget planning and execution as the GDRC implements decentralization and transfer of budgetary resources to the provinces as mandated by the Constitution. ¶7. (SBU) As noted in last year's submission, revenues and expenditures are detailed in the budget though the source of the revenues can be difficult to determine. Wide-spread corruption and an opaque and duplicative tax structure continue to limit both the collection and transparency of reporting of actual revenues. This is particularly true in the DRC's most important economic sector, mining. As noted in Ref E, the GDRC Senate issued a report in September 2009 stating that between $350-$450 million in mining sector revenues were "lost" in 2008 due to fraud, mismanagement and corruption. In increasing revenue projections in the GDRC's draft 2010 budget, the National Assembly's and Senate's Economic and Financial Commissions (ECOFIN)had in fact argued that many official revenues go unreported. Background on the Budget Process -------------- ¶8. (U) As noted in refs G and F, the DRC's budget is publically available, including on the Ministry of Budget's website and in hard-copy, and openly debated in Parliament. A summary of the draft budget is also publically available. The Ministry of Budget is required by law to submit quarterly reporting on the execution of the budget to the National Assembly. The budget has its basis in the DRC's broader development framework, including the government's Poverty Reduction Strategy Paper (PRSP) and President Kabila's Cinq Chantiers (or priority areas). These in turn are implemented through the GDRC's Priority Action Plan (PAP). This framework was developed in coordination with international partners and civil society. The drafting of the budget, overseen by the Ministry of Budget, includes participation from all stakeholders: ministries, other public agencies, and civil society. Once approved by the Council of Ministers, the budget is submitted to the National Assembly for debate. The IMF worked closely with both the executive and legislative branches to advocate for a realistic 2010 budget. The IMF continues to closely monitor the execution of the budget in line with the PRGF and GDRC spending and reporting procedures. ¶9. (SBU) Comment: Over the past year, the GDRC has shown greater political will and commitment to strengthened public financial management, including in the budget formulation and execution process. As with many other priority areas for the GDRC, the mechanisms are now in place. The key for continued improvements to the DRC's budget process, as part of broader PFM efforts, will be to fully implement and institutionalize the various measures and commitments contained in both the PRGF and already adopted by KINSHASA 00000100 003 OF 003 various government decrees. The GDRC at a senior level clearly understands the importance of ensuring a transparent and realistic budget in the context of the new IMF program. Controlling spending, ensuring continued adherence to established emergency spending procedures, and better mobilization of revenues must continue to be addressed to ensure a transparent budget process. This will depend on resisting political pressures on spending as well as addressing longer-term capacity constraints and improving coordination among the key ministries. We will work with the GDRC in an effort to encourage continued momentum in building on the progress made over the past year and in formalizing these new practices and measures. End comment. GARVELINK