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Viewing cable 06KINSHASA1608, IMF ON RECENT MACROECONOMIC DETERIORATION

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Reference ID Created Released Classification Origin
06KINSHASA1608 2006-10-18 15:40 2011-08-25 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Kinshasa
VZCZCXYZ0021
RR RUEHWEB

DE RUEHKI #1608/01 2911540
ZNR UUUUU ZZH
R 181540Z OCT 06
FM AMEMBASSY KINSHASA
TO RUEHC/SECSTATE WASHDC 4984
INFO RUEHXR/RWANDA COLLECTIVE
RUCNSAD/SOUTHERN AFRICAN DEVELOP COLLECTIVE
RHEFDIA/DIA WASHDC
RUEAIIA/CIA WASHDC
RUFOADA/JAC MOLESWORTH RAF MOLESWORTH UK
RHMFISS/HQ USEUCOM VAIHINGEN GE
RUEATRS/DEPT OF TREASURY WASHDC
UNCLAS KINSHASA 001608 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
TREASURY FOR OWHYCHE-SHAW 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PGOV CG
SUBJECT: IMF ON RECENT MACROECONOMIC DETERIORATION 
 
REF: A. KINSHASA 968 
 
 B. KINSHASA 1465 
 
1. (SBU) Summary.  A visiting IMF team characterized the DRC 
economic situation as "difficult" and expressed concern over a 
worsening macroeconomic outlook.  The Fund laid the blame for rising 
exchange and inflation rates squarely on GDRC overspending, fueled 
in part by Central Bank credit to the government.  In talks with 
GDRC authorities, the Fund's experts suggested ways to stabilize the 
exchange rate and inflation and to bring GDRC spending under control 
before the end of the year.  The IMF expects to return in January 
2007 to conduct a more formal review of the Staff-Monitored Program. 
 End summary. 
 
2. (U) International Monetary Fund (IMF) Africa Bureau chief Cyrile 
Briancon outbriefed the diplomatic and donor community on October 
12, following a 5-day IMF team visit to Kinshasa, their first since 
June (ref A).  Briancon said the visit had not been a formal review 
of the current Staff-Monitored Program (SMP), but rather a close 
look at the macroeconomic situation in the DRC and a chance to 
discuss matters with GDRC officials. 
 
--------------------------- 
Macroeconomic Deterioration 
--------------------------- 
 
3. (U) Briancon said that the worsening macroeconomic situation is 
of great concern to the Fund.  He noted that the Congolese franc has 
depreciated by more than 10 percent (from 450 to now over 500 
CF/USD) since June, with the bulk of that occurring since late 
August.  Briancon stated that cumulative inflation for 2006, through 
end September, is already at 20 percent (Note: Original projections 
for 2006, as used in the Poverty Reduction Strategy Paper issued in 
July, were for under 10 percent annually. End note.)  He added that 
if fourth quarter inflation continued at the same level as 
September, inflation could total 30% for the year. 
 
------------------------ 
GDRC Overspending, Redux 
------------------------ 
 
4. (U) Briancon said that, despite higher than expected government 
revenues, GDRC expenditures for the month of September had exceeded 
the month's budget by some 50 billion Congolese francs (CF), or 
about USD 100 million.  He stated that 20 billion CF (USD 40 
million) of this total was in the form of Congolese Central Bank 
(BCC) credit to the GDRC.  The remaining 30 billion CF (USD 60 
million) was the amount that the Fund felt should have been saved 
due to prior GDRC expenditures on items originally budgeted for 
September.  (Note: IMF resident representative Xavier Maret 
indicated weeks ago (ref B) to Econcouns that the Fund expected to 
see underspending against the 2006 budget during the last four 
months of the year.  This apparently did not occur.  End note.) 
This overspending for the month of September alone equaled the 
entire amount overspent for the first eight months of 2006. 
 
--------------------- 
What Can the GDRC Do? 
--------------------- 
 
5. (U) Briancon said that the IMF has suggested an immediate halt to 
all new, non-recurring expenditures, and a much tighter inspection 
of anything currently in the "chain of expenses." He called these 
"difficult" choices and noted that high inflation, once begun, would 
be slow to correct. He emphasized that tight BCC monetary policy 
would need to precede and accompany tighter GDRC budget policy. He 
noted, though, that increased transparency in the budget and 
spending plan through Ministries of Finance and Budget website 
postings would make tracking GDRC expenditures easier. Briancon 
characterized ongoing structural reform under the SMP as "not very 
satisfactory" and placed particular emphasis on the need to rein in 
total salary payments to the military, teachers, and civil servants 
through completion of the required census process. 
 
---------- 
Next Steps 
---------- 
 
6. (U) Without commenting on whether the GDRC could get its house in 
order before the end of the year, Briancon suggested that the next 
IMF visit would be in early January 2007 to conduct a final SMP 
review, after the elected government is in place.  He stated that 
only then could the new government negotiate another IMF Poverty 
Reduction and Growth Facility (PRGF) program, which it might be 
possible to approve and have in place by the end of the first 
quarter of 2007.  This new PRGF, Briancon said, would have to be 
implemented for six months and reviewed successfully in October 
2007, a best case scenario, before HIPC completion point could be 
achieved sometime during the last quarter of 2007.  (Note: this is 
dependent also upon one year of successful Poverty Reduction 
Strategy Paper (PRSP) implementation, begun in July 2006.  End 
note.) 
 
7. (SBU) Comment.  Neither putting a brave face on the situation nor 
sounding the death knell of the Congolese economic program, the IMF 
made it clear that the GDRC is in serious trouble as it attempts to 
maintain the macroeconomic advances made over the last few years 
under the PRGF and now the SMP.  The recent installation of another 
group of lameduck ministry and public enterprise officials (septel) 
for the final two months of the transition does not inspire 
confidence that there will be a quick return to fiscal discipline 
before year's end. 
 
8. (SBU) Comment (cont.) Whatever the reasons behind massive 
government overspending during the electoral campaign and final 
months of the transition government (election expenses, security 
concerns, public sector salary pressures, etc.), the elected 
government scheduled to take office at the end of the year will face 
a daunting task: turn the economic situation around and get a new 
IMF program in place quickly.  Otherwise, the DRC will suffer the 
same fate as in 2006: suspension of outside budget assistance and 
multilateral/bilateral debt forgiveness programs.  Either of these 
consequences would be enough to make 2007 another very difficult 
year for the DRC, and for its elected government.  Worse still, the 
new government would find it next to impossible - even under the 
best of circumstances - to meet the pent-up expecations of the 
Congolese people.  End comment. 
MEECE