US embassy cable - 05KINSHASA961

C O N F I D E N T I A L SECTION 01 OF 02 KINSHASA 000961 
 
SIPDIS 
 
E.O. 12958: DECL: 06/01/2015 
TAGS: ECON, EFIN, PGOV, CG 
SUBJECT: IMF GUARDEDLY OPTIMISTIC ABOUT DRC ECONOMY 
 
Classified By: DCM TDougherty for reasons 1.4 b/d. 
 
1. (C) Summary.  Visiting IMF officials expressed guarded 
optimism about DRC economic circumstances and will recommend 
that the GDRC proceed to the sixth and final IMF review.  The 
team stated that the DRC has made adequate fiscal and 
monetary progress, with generally stable inflation and 
exchange rates, despite a fragile macroeconomic situation. 
Some in the international community emphasized frustration 
over the GDRC's continued overspending (particularly on 
travel) and emphasized that the IMF must carry the message to 
the DRC that this is unacceptable. The IMF acknowledged 
Congolese shortcomings which it will continue to monitor. 
The Fund will request an extension of the current PRGF which 
would otherwise expire in June.  We expect the sixth review 
could begin in November, with the current program possibly 
being extended until national elections are concluded in the 
first half of 2006.  End Summary. 
 
2. (SBU) The IMF Review Team, lead by Cyrille Briancon, 
visited Kinshasa May 24-31 to finalize the fifth review under 
the Poverty Reduction and Growth Facility.  This was the 
third visit during the fifth review cycle as a result of the 
review being delayed since January due to macroeconomic 
destabilization resulting from fiscal slippage and subsequent 
inflation.  Emboffs met with Briancon and his team twice. 
The Ambassador hosted a breakfast for Briancon and IMF 
Resident Representative Arend Kouwenaar on May 27, and DCM 
and EconOff attended an out-briefing for donors on May 31. 
 
Stabilization Cause for Optimism... 
----------------------------------- 
 
3. (C) At the May 27 breakfast, Briancon acknowledged that 
the Congolese economy "remains extremely fragile at the 
macroeconomic level" but emphasized recent inflation and 
exchange rate stabilization and increased budgetary control 
as evidence of increasingly sound economic policy.  The high 
inflation that began in late 2004, and which saw prices rise 
19% from January to mid-April, has largely been brought under 
control.  Briancon said that the IMF's inflation target 
through 2005 is an optimistic 20-25%, although he admitted 
that it may reach as high as 30%.  The exchange rate is now 
at 505 FC/$1 -- a slight improvement since April.  Additional 
positive signs included the Central Bank's stabilization of 
its dollar reserves at 90%, enhancing its ability to absorb 
excess liquidity. 
 
4. (C) The Ambassador pointed out that completing the ongoing 
census of combatants is necessary in order to develop a 
coherent budget to pay military salaries regularly. 
Substantial numbers of claimed but "phantom" soldiers will be 
taken off the rolls.  The lower payroll number should enable 
increases in military pay to more reasonable levels (e.g., 
increasing the $10/month currently allocated to soldiers), 
while staying within overall budgeted levels.  While 
acknowledging the point, Briancon expressed concern that 
civil servants would then also demand salary increases, and 
that financing such a pay increase would consume the GDRC's 
entire current discretionary budget. 
 
 
...Although Overspending and Corruption Frustrate Many 
--------------------------------------------- --------- 
 
5. (SBU) Overspending on official travel remains the DRC's 
greatest budgetary problem, Briancon said, because it 
generates both cash shortfalls and a strongly negative 
perception.  Briancon noted that, although the DRC has 
decreased maximum travel per diems from USD 1000 to 500 for 
senior officials (with corresponding cuts for those of lower 
rank), the still high rate undermines the GDRC's lack of full 
commitment to necessary austerity.  Briancon said that travel 
line items account for one-third to 40% of budget overruns, 
and that the IMF is pressuring the DRC to reduce the per diem 
by an additional 25%.  On the plus side, military spending 
has dropped from the peaks that national emergencies provoked 
last year.  Briancon said that the budget is currently fully 
funded, although a number of pledged international donations 
are delayed. 
 
6. (C) The Minister of Budget confirmed at a June 8 meeting 
with the Ambassador that the GDRC was actually running a 
budget surplus as of May 2005, with receipts being somewhat 
higher than anticipated and overall spending somewhat lower. 
He noted, however, that the "quality" of expenditures needs 
further improvement.  Specifically, the government needs to 
decrease what the Minister termed "sovereignty" expenses, 
including travel, in favor of "pro-poor" spending.  The 
Minister alluded to the fact that decreasing and controlling 
"sovereignty" expenditures represents a major change in the 
way of thinking of GDRC decision-makers who have been 
accustomed for decades to assuming that anything associated 
with senior officials would somehow be funded.  The Minister 
also noted that per diem rates will be cut once again next 
month. 
 
7.  (C) At the IMF's May 30 outbrief with donors, 
representatives of some diplomatic missions expressed 
frustration with corruption, lack of transparency, 
overspending, and poverty, and their perception that the IMF 
is not sufficiently pressuring the GDRC for progress in these 
areas.  Some CIAT ambassadors had expressed similar concerns 
at the regularly scheduled CIAT meeting on May 26 to which 
Briancon and his team had been invited.  On both occasions, 
the IMF acknowledged that it was very aware of these 
problems.  As a result of continued pressure on the GDRC 
regarding these issues, some progress has been made. 
Briancon noted, for example, that the IMF is helping the DRC 
begin publishing its budgets quarterly in electronic and 
paper forms to increase transparency.  Short of terminating 
the program (an option no one supports and all agree would do 
far more harm than good), the best course of action is to 
continue pressing for transparency and expenditure controls, 
and to provide technical assistance as appropriate.  CIAT 
subsequently fully endorsed the IMF program in its communique 
of June 9 (septel). 
 
IMF Offered Plans to Move Forward 
--------------------------------- 
 
8. (C) At the  May 27 breakfast, Briancon offered the 
Ambassador an approximate timeline for the continued review 
process and explored possible conflicts with the proposed 
electoral schedule.  The IMF will request an extension of the 
current program from the June 11 deadline through October to 
finalize the fifth review.  The sixth review could begin in 
November, and the IMF could extend the program through June 
2006.  Briancon was sensitive to the political situation and 
asked if it should consider timing the sixth review around 
the election schedule, acknowledging that uncertainty 
surrounding elections will continue to have economic 
consequences. 
 
Comment 
------- 
 
9. (C) Briancon was frank in his "the glass is half full" 
assessment of the GDRC's performance up to this point.  In 
fact, he noted "the glass may only be a third full."  While 
inflation and exchange rates are now apparently under 
control, the slippage since late 2004 was serious, and it is 
clearly too early to declare renewed victory.  Briancon 
stressed that the macroeconomic progress made by the GDRC 
over the past two years fully justifies the continuation of 
the current program -- a judgment with which we fully concur. 
 While corruption needs to be tackled, and budgetary and 
spending systems need to be fully implemented, we remain 
convinced that we have more leverage with an ongoing IMF 
program than we would without.  It is also worth noting that 
this is all new: past governments in Zaire/Congo basically 
did not have budgets, much less any system of monitoring, 
controlling, and reporting.  Moreover, the relative economic 
stability resulting from the current program is essential in 
creating a climate conducive to peaceful and credible 
elections and to a stable post-transition government.  End 
Comment. 
MEECE