US embassy cable - 05KINSHASA216

C O N F I D E N T I A L SECTION 01 OF 02 KINSHASA 000216 
 
SIPDIS 
 
E.O. 12958: DECL: 02/08/2015 
TAGS: EFIN, ECON, PGOV, PREL, PHUM, SOCI, CG 
SUBJECT: DRC BUDGET COMPLETE BUT MAY NEED REVISIONS 
 
REF: A. KINSHASA 162 
     B. KINSHASA 205 
 
Classified By: Econoff Peter Newman for reasons 1.4 b/d 
 
1. (SBU) Summary: The draft 2005 GDRC budget is currently 
awaiting Parliamentary approval. It has increased 42.2 
percent compared to the 2004 budget, with foreign assistance 
comprising 58 percent of total revenue. The budget is 
balanced and totals $1.809 billion. Provisions of GDRC normal 
income (i.e. not foreign assistance) have been made for 
elections and military integration/DDR. Social spending 
accounts for 16.4 percent of total spending while defense 
accounts for 9.9 percent. It is very possible that the draft 
budget will be recalled before it reaches the floor of 
Parliament in order to increase appropriations for elections 
and to make adjustments for a weakening exchange rate. End 
summary. 
 
The Budget: In General Terms 
---------------------------- 
 
2. (SBU) The GDRC has completed a draft 2005 budget and 
submitted it to the Parliament. The budget totals $1.809 
billion and is balanced. This is a 42.2 percent increase over 
the previous year.  Although Parliament is scheduled to begin 
debate on the budget in February, it is not clear when the 
budget will be promulgated due to the backlog of overdue 
legislation. 
 
3. (SBU) The baseline macroeconomic indicators assumed for 
development of the budget are: 
 
Nominal GDP: $7.3 billion 
GDP Growth: 7 percent 
Inflation: 8.3 percent 
Exchange Rate: Congolese franc (FC) 415.2 to $1 
 
4. (C) The GDRC is anticipating a year-on-year increase in 
tax and customs revenue of 32 percent, as was achieved from 
2003-2004. IMF ResRep told econoff that this level of 
anticipated revenue growth will not be possible without 
strong action against corruption. The formal sector is 
neither broad nor deep enough to supply the revenue 
anticipated, which makes controling corruption critical. 
 
5. (C) The Congolese Central Bank Governor told emboffs on 
Feb 2 that the budget could be recalled in the next few days 
as key basic assumptions have changed (septel). The main 
problematic assumption is the exchange rate of FC 415.2 since 
the rate is currently hovering around FC 465 and gives every 
indication of continuing to slide. 
 
HIPC/Pro-Poor Spending and Foreign Assistance 
--------------------------------------------- 
 
6. (U) Foreign assistance and HIPC write-offs account for 58 
percent of total revenue. HIPC-related spending will total 
approximately $120 million in 2005, of which 83 percent will 
go to health, education and economic programs. Total pro-poor 
spending will be $641.8 million, of which 49.78 percent is 
for economic affairs, 16.88 percent for education, 11.23 
percent is for health, and 7.48 percent supports 
defense-related programs. (Comment: We have unsuccessfully 
sought clarification about "pro-poor" defense spending from 
the Ministry of Budget and the IMF. The only way we imagine 
defense-related programs could be considered pro-poor would 
be something along the lines of increases in benefits to 
soldiers' families. End comment.) Total pro-poor and social 
spending accounts for 35 percent of the budget. 
 
Elections Funding! What's that? 
------------------------------- 
 
7. (C) It appears that all elections expenditures are located 
under the line item for the Independent Electoral Commission 
(CEI). The total allocated in the 2005 budget for elections 
is $161 million, of which $159 million comes from foreign 
aid. (Note: The overall cost of elections has been set at 
$285 million, leaving a shortfall of over $100 million, 
presumably to be funded by as-yet unknown foreign donors. End 
note.) IMF ResRep told econoff the GDRC has planned to 
appropriate $5-$6 million of its own funds for elections. The 
GDRC had previously stated that it would provide $6 million 
for elections, though about $4 million of those funds 
apparently were from direct budgetary support from France and 
Japan. According to the budget document, the GDRC will 
appropriate $2.1 million of its own revenue for the 
functioning of the CEI but does not have any other of its own 
funds dedicated to elections. Reactions to the Minister of 
Budget's Feb 2 public announcement (Ref B) that only $2.1 
million from Congolese revenue sources would be appropriated 
for elections were sharp. As a result, the final 
recommendations of the Feb 2-4 Inter-Institutional Conference 
included increasing GDRC contributions to 10 percent of the 
total elections costs, i.e. $28 million. After the 
conference, CEI President Malu Malu told Ambassador that the 
GDRC has already committed itself to increase its 
contribution to $15 million. 
 
Defense Spending 
---------------- 
 
8. (C) Not surprisingly, defense spending is the most 
byzantine element of the budget. In addition to the budget 
document itself, defense spending is explained in the 
narrative document accompanying the budget. The narrative and 
the budget document are mutually contradictory. The narrative 
notes that the GDRC is appropriating $54 million of its own 
funds to be distributed among elections, DDR/military 
integration and police restructuring programs. An official at 
Ministry of Budget explained to emboffs that the $54 million 
would be allocated as: $20 million for military integration, 
$6 million for police restructuring, and $28 million for HIPC 
spending. 
 
9. (C) According to the budget document, military spending 
will total approximately $180 million (9.9 percent of the 
budget), an increase of $60 million (or 51 percent) versus 
the 2004 budget. The budget for Ministry of Defense 
operations is $35 million; $68 million is dedicated to DDR 
and military integration; and $57 million will go to pay 
salaries for the approximately 300,000 military. 
 
Comment 
------- 
 
10. (C) Exchange rate instability and its attendant 
macroeconomic effects will seriously affect the draft budget 
which is denominated entirely in Congolese francs. 
Furthermore, given the ambitious GDRC plans to resolve the 
FLDR/Interahamwe issue in the Kivus, the additional defense 
appropriations included in the 2005 defense budget are 
unlikely to cover total expenses, necessitating additional 
supplementary spending with the potential to increase 
pressure on the exchange rate and inflation and exacerbate 
the GDRC's potential budgetary shortfall (Ref A). The budget 
may well be recalled before debate begins due to increased 
elections appropriations and to reflect a declining rate of 
exchange. End comment. 
 
11. (U) Bujumbura minimize considered. 
MEECE