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Viewing cable 07KINSHASA327, IMF REVIEW: SITUATION WORSE THAN FIVE MONTHS AGO

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Reference ID Created Released Classification Origin
07KINSHASA327 2007-03-19 10:55 2011-08-25 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Kinshasa
VZCZCXRO8905
PP RUEHBZ RUEHDU RUEHGI RUEHJO RUEHMR RUEHRN
DE RUEHKI #0327/01 0781055
ZNR UUUUU ZZH
P 191055Z MAR 07
FM AMEMBASSY KINSHASA
TO RUEHC/SECSTATE WASHDC PRIORITY 5811
INFO RUEHXR/RWANDA COLLECTIVE PRIORITY
RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY PRIORITY
RHEFDIA/DIA WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUEAIIA/CIA WASHDC PRIORITY
RHMFISS/HQ USEUCOM VAIHINGEN GE PRIORITY
RUFOADA/JAC MOLESWORTH RAF MOLESWORTH UK PRIORITY
UNCLAS SECTION 01 OF 03 KINSHASA 000327 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
TREASURY FOR OWHYCHE-SHAW 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PGOV CG
SUBJECT: IMF REVIEW: SITUATION WORSE THAN FIVE MONTHS AGO 
 
REF: 06 KINSHASA 1608 
 
1. (SBU) Summary.  A visiting IMF review team said that the 
DRC economic situation is worse than it was five months ago, 
when they characterized it as "difficult" (ref A).  The team 
confirmed that GDRC overspending, financed by Central Bank 
credit, amounted to at least USD 40 million for January and 
February.  They noted the direct cause and effect this 
overspending has had on the worsening macroeconomic situation 
and emphasized that the GDRC must limit itself to spending 
only what it is taking in.  The IMF said it is trying to put 
together another informal program to follow the SMP for the 
next six months, with a review tentatively scheduled three 
months from now to determine whether enough progress is being 
made to even consider discussing the establishment of a new 
PRGF program in late 2007.  End summary. 
 
2. (U) International Monetary Fund (IMF) resident 
representative Xavier Maret outbriefed the diplomatic and 
donor community on March 13, following a two-week IMF team 
visit to Kinshasa, the first since early October (ref A) 
(Note: Team leader Cyril Briancon, IMF Africa Division Chief 
who normally conducts the outbrief, was called to the 
Presidency at the last minute and returned only in time to 
say that he had deliverd a strong message to the President 
about what needed to be done to get the DRC back on track 
with the IMF.  End note.)  This visit was supposed to occur 
in January, but was delayed until the new government was in 
place.  The IMF team met with all the pertinent GDRC 
officials, including Prime Minister Gizenga; the Central Bank 
Governor; the new Ministers of Finance, Budget, and Plan; and 
representatives of both public and private enterprises. 
Maret said the objectives of the visit were to review DRC 
performance under the SMP; to help the GDRC prepare a 
macroeconomic framework for 2007 (including a budget); to set 
up a government plan for the next quarter; and to discuss 
next steps (such as a new IMF program.) 
 
------------------- 
First, the Bad News 
------------------- 
 
3. (SBU) Maret led off with the bad news: more than ten 
percent depreciation in the value of the Congolese franc (FC) 
since the first of the year and over four percent inflation 
since January 1. (Note: Inflation for January alone was 
nearly four percent; final statistics for February were not 
available yet.  End note.)  Maret attributed the 
macroeconomic problems directly to government overspending of 
more than 20 billion FC (around USD 40 million) during the 
months of January and February, most of it financed by 
Congolese Central Bank (BCC) credit.  He said that there has 
now been a total of about 47 billion FC of bank financing in 
2006 and 2007, versus a projected 15 billion FC for 2006.  He 
added that BCC foreign exchange reserve levels are now down 
to under three weeks worth of imports (USD 110 million versus 
USD 150 million in December), less than half of the norm. He 
noted that many GDRC institutions had overspent their 
allotments, but said that security sector overspending had 
been particularly egregious.  Unmet structural reforms listed 
by Maret included a computerized payments system, BCC 
reforms, a Heavily Indebted Poor Country spending audit, and 
the takeover of the Banque Congolaise by the Union de Banque 
Congolaise. 
 
-------------- 
The Good News? 
-------------- 
 
4. (SBU) The IMF resident representative said that it was 
crucial for the GDRC to stick to its budget by making 
required payments (e.g., government and military salaries) 
but also by not resorting to Central Bank financing of 
deficit spending.  He noted that the BCC had taken some 
actions, such as raising bank interest rates, in order to mop 
up excess liquidity, but that because of the dollarization of 
the economy, bank credit to the government translates almost 
immediately into higher exchange rates and inflation.  GDRC 
revenues were up, he said, to about 10 percent of GDP in 
2006, but nearly a third of this was from petroleum sales, 
which can be expected to be lower in 2007 due to reduced 
world oil prices. Maret noted that part of the overall GDRC 
deficit was generated by the BCC, which is suffering from a 
 
KINSHASA 00000327  002 OF 003 
 
 
lack of autonomy, and that an audit of the BCC would be 
completed by May 2007. 
 
---------------------------------------- 
Macroeconomic, Budget Framework for 2007 
---------------------------------------- 
 
5. (SBU) Maret said that economic projections for 2007 are 
6.7 percent GDP growth and 12 percent inflation, but noted it 
is going to be difficult just to meet required payments in 
2007 due to expected decreases in outside budget assistance. 
(Note: The 2006 budget of USD 1.9 billion was more than 50 
percent funded from external sources, with only about USD 900 
million from the DRC itself.  The new Minister of Budget told 
Ambassador March 15 that the DRC will contribute USD 1.2 
billion towards the 2007 budget, but only expects about USD 
500 million from outside sources (septel).  End note.)  Maret 
quoted the need to increase the salary base from 240 billion 
FC (about USD 480 million) in 2006 to 275 billion FC (USD 550 
million) in 2007, and projected that even with increased GDRC 
revenues there would ultimately be a gap of nearly 50 billion 
FC (approx. USD 100 million) in 2007, which could only be 
reduced by outside assistance.  For this assistance to 
materialize, he noted, the GDRC has to "show something" 
during the next three months while the 2007 budget is 
drafted, debated, and passed. 
 
-------------------------- 
New, Informal IMF Program? 
-------------------------- 
 
6. (SBU) Maret referred to the next informal arrangement 
between the IMF and DRC as a "reference program."  He said 
that this would need to be initiated by a GDRC letter to the 
IMF board.  (Note: In discussions, the GDRC apparently said 
it wanted to distance itself from the former transition 
government by making it clear that the SMP was finished and 
that a new leaf was being turned.  End note.)  Maret made it 
clear that this new arrangement would again include 
macroeconomic criteria and structural reform goals that the 
IMF would expect the GDRC to meet during the first three 
months of the program.  He went on to say, though, that what 
the GDRC really needed was a three-year plan of action in 
order to follow its own Poverty Reduction Strategy Paper 
(PRSP), in existence since mid-2006.  Maret predicted that 
the next IMF visit would be in late May or early June to 
review progress, examine the BCC audit, and discuss the 
possibility of a new Poverty Reduction and Growth Facility 
(PRGF) program with the DRC.  (Note: Given the need to have a 
PRGF in place for at least six months before HIPC completion 
point and Paris Club debt relief are achieved, there is 
virtually no chance that the DRC will be able to avoid the 
large, new multilateral debt payments that will be coming due 
in the fourth quarter of 2007.  End note.)  Maret said that 
the IMF would be sending out technical assistance teams 
meanwhile to assist with the administration and regulation of 
GDRC revenue sources such as taxation and customs entities. 
 
----------------- 
The Tough Message 
----------------- 
 
7. (SBU) IMF Team Leader Cyril Briancon, fresh from his 
last-minute meeting with President Kabila, reiterated that 
the gravity of the situation the new government finds itself 
in requires a "clear determination" on the part of the GDRC 
to make a change.  He said that the government could not 
afford to do what it had in the past: reform itself for two 
weeks and then fall off the wagon.  He said that the 
situation could be stabilized, but that it would be 
"difficult" because of the need to control spending during a 
time when expectations of the new government are running 
high.  He again cited the need to control salaries, which 
make up such a large part of the budget - over 25 percent. 
He said that his team's message to the Prime Minister and the 
President was simple: Limit government spending to its 
revenues; respect the limits of the budget; and use the 
system the government already has in place to control 
expenditures and BCC credit. 
 
8. (SBU) Comment: The IMF team made it abundantly clear that 
the DRC economic situation is poor and not likely to improve 
very much, at least budgetarily, during 2007.  We got the 
 
KINSHASA 00000327  003 OF 003 
 
 
impression, both from the outbrief and during a March 8 
breakfast with the IMF team, that they feel Prime Minister 
Gizenga's new "ecofin" team, including Finance Minister 
Matenda, Budget Minister Muzito, and Plan Minister Kamitatu, 
is serious about turning things around.  We did not get a 
feel for whether they think the team is up to the task. 
There was some barely concealed IMF criticism of BCC Governor 
Masangu, especially over the BCC credit to the GDRC during 
January and February, but acknowledgement that the BCC has 
not been afforded the autonomy or independence that it should 
have.  (Note: It is also still unclear whether Masangu will 
be maintained as BCC Governor.  End note.)  Over the next 
three months the IMF will be looking closely for positive 
signs: that the budget, such as it is, is being respected; 
that salaries are being paid correctly; that the GDRC is not 
resorting to BCC credit to finance more deficit spending; and 
that some real attempt is being made to implement long 
overdue structural reforms.  Even with the best of intentions 
and an honest effort to rein in GDRC expenditures, the DRC 
has dug itself a hole that it will probably be unable to get 
out of before year's end. Perhaps the best the government can 
hope for is a new PRGF before year's end and the prospect of 
outside budget assistance and debt relief in 2008.  End 
comment. 
 
 
MEECE