Cablegate: Imf, Gdrc Appeal to Donors For

VZCZCXRO6492
RR RUEHBZ RUEHDU RUEHGI RUEHJO RUEHMR RUEHRN
DE RUEHKI #1105/01 3501414
ZNR UUUUU ZZH
R 151414Z DEC 08
FM AMEMBASSY KINSHASA
TO RUEHC/SECSTATE WASHDC 8900
INFO RUCNSAD/SADC COLLECTIVE
RUEHXR/RWANDA COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPARTMENT OF TREASURY WASHINGTON DC
RUEAIIA/CIA WASHDC
RUZEJAA/JAC MOLESWORTH RAF MOLESWORTH UK
RHMFISS/HQ USEUCOM VAIHINGEN GE
RUEHBJ/AMEMBASSY BEIJING 0109

UNCLAS SECTION 01 OF 03 KINSHASA 001105

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON ETRD EAID EINV PGOV PREL CG
SUBJECT: IMF, GDRC APPEAL TO DONORS FOR
EMERGENCY ASSISTANCE

REF: (A) KINSHASA 1100;
(B) KINSHASA 918;
(C) 07KINSHASA 1133

1. (SBU) Summary: Both the IMF and Government of the Democratic
Republic of Congo (GDRC) have appealed to donors to provide
emergency support as the DRC confronts a significant economic
downturn as a result of the global financial crisis. During a
briefing to donors on December 10, the visiting IMF Staff Mission
described a worsening macroeconomic situation, including a $500
million balance of payments gap and a $250 million financing gap for
2009. The IMF hopes to provide emergency support to the DRC through
its Exogenous Shocks Facility (ESF), but needs donors to bolster
this assistance with additional funds. Prime Minister Muzito met
with donors on December 11 to outline the GDRC's 2009 budget and
development strategy and pitch a similar appeal for additional,
immediate support. Without additional external financing, the DRC
could face a financial crisis as early as the second quarter of
2009. End Summary.

IMF WARNS OF LOOMING FINANCIAL CRISIS
--------------------------------------

2. (SBU) The IMF Staff Mission led by Brian Ames, visiting Kinshasa
from December 10-20, briefed donors on December 10. The IMF last
visited the DRC in September and returned in December, rather than
their planned February time-frame, due to growing concerns over the
impact of the global financial crisis on the DRC (ref A). Ames
presented a deteriorating macroeconomic situation, including 2009
GDP growth in the 5 to 6 percent range (compared to earlier
projections of over 11 percent), a $500 million balance of payments
gap, a financing gap of $250 million, and deteriorating terms of
trade. The IMF projects FDI to decline by 11 percent of GDP as a
result of lower commodity export prices and tightened global credit.
Ames warned that, absent the intervention of donors, the DRC could
be facing a financial crisis. The IMF will brief donors again on
December 19.

3. (SBU) Ames stated that the DRC was facing an "exogenous shock"
as a result of the global financial crisis. Options for the GDRC to
address the crisis in the short term are limited -- a reduction in
spending, for example, would risk disruptions to basic social
services. The IMF described the Exogenous Shocks Facility (ESF),
for which the DRC is eligible, as a mechanism to respond quickly to
the DRC's financing needs. Under the ESF, the DRC would be eligible
for up to $200 million (equivalent to 25 percent of its quota).
While the ESF requires countries to commit to policies to address
the shock, they do not need to have them implemented immediately.
Ames stated that the DRC must, however, address previously noted
concerns by the IMF regarding mis-reporting of emergency spending
before the IMF would provide any new assistance. This was,
according to Ames, fundamental for the IMF.

4. (SBU) To address concerns on emergency spending, the GDRC would
need to show a positive track-record that emergency spending was
in-line with established procedures. While generally a six-month
track-record would be required, Ames stated that the IMF could be
flexible and reduce this requirement to two or three months. Ames
indicated a possible March time-frame for the ESF assistance to come
before the IMF Board. The Sino-Congolese agreement (refs B and C)
represented an additional possible sticking-point for ESF
assistance. However, Ames stated that the GDRC, at the highest
level, had changed its position regarding renegotiation of the
agreement. Specifically, the GDRC had agreed to renegotiate the
agreement immediately, rather than waiting until the completion of
the feasibility study, scheduled for the end of March, 2009. This
would include lifting of the sovereign guarantees and ensuring
concessionality of the loans. For the ESF, the GDRC could provide
the IMF a letter of intent that it would renegotiate the Chinese
agreement in line with debt sustainability.

5. (SBU) Ames noted that the IMF could not respond alone to the
crisis and called on other donors present to provide support. IMF
staff have been in discussions with the USED at both the IMF and
World Bank, as well as the French and Belgium governments on
possible emergency support. The World Bank could reprogram $100 to
$120 million in resources planned for specific sectors such as
energy. However, the African Development Bank (ADB) has no
mechanism to address exogenous shocks. Since ESF assistance would
only cover the balance of payments gap (the IMF could not provide
budget support in the absence of a formal IMF program), Ames
appealed to donors to cover the remaining gap. A variety of
mechanisms could be used, including line-item budget support.

KINSHASA 00001105 002 OF 003

6. (SBU) Assuming that the GDRC can satisfactorily address IMF
concerns in the Sino-Congolese agreement and on emergency spending
procedures, Ames provided the following possible time-line for IMF
assistance to the DRC: February/March-Article IV Consultations;
March- Board reviews ESF assistance request; April-June (at the
latest) -- Board reviews new PRGF. Under an optimistic scenario,
with a new PRGF approved in April and a first review in September,
the DRC could reach HIPC completion point in December 2009. Ames
noted that this scenario would provide the GDRC with possibly two
tranches of assistance through the PRGF in 2009. An additional $250
million in external financing could also come from the signing
agreement ("pas de port") negotiated as part of the Chinese
agreement. (Note: The signing agreement was included in the
GDRC's 2008 budget, but has still not been provided by the Chinese.
End Note.) However, the most pressing financing needs will be in
the first half of the calendar year, before IMF assistance would be
available.

PRIME MINISTER ENGAGES DONORS, SEEKS SUPPORT
--------------------------------------------

7. (SBU) Prime Minister Muzito met with donor country ambassadors
on December 11 to discuss the current economic situation, the GDRC's
2009 budget, and donor coordination. The Prime Minister used the
meeting to highlight the DRC's worrisome macroeconomic situation and
seek budget support from donors. The Prime Minister opened his
remarks by highlighting the impact of the global financial crisis on
the DRC, including deteriorating terms of trade and lower
international prices for the key DRC exports of copper, cobalt and
diamonds. As a result, the DRC had weak international reserves
levels, putting economic operators at risk. In response, the GDRC
is taking actions to create a more favorable environment for
investors, including adherence to the Organization for the
Harmonization of Business Law in Africa (OHADA) and completion of
the mining contract review process.

8. (SBU) The Prime Minister noted the importance of a new IMF
program and debt relief through HIPC. To this end, the GDRC had
decided to address IMF concerns over provisions in the
Sino-Congolese agreement. However, additional, immediate resources
are necessary, the Prime Minister stressed. He then asked for the
donors present to assist in providing support. Turning to the
GDRC's 2009 budget, Muzito provided a review of past spending dating
back to 2001, noting the positive trend in increasing revenues and
spending through the most current budget. He lamented that even
with the significant increase in spending in the DRC's 2009 budget
(ref A), it remained small compared with spending levels of the
DRC's neighbors, despite the DRC's much larger population. Spending
for 2009 will focus on infrastructure, health, education,
electricity, and water. However, spending levels remain low given
the needs. The 2009 budget is based on the hypothesis of a new IMF
program and HIPC debt relief, but also takes into account the global
financial crisis. Thus, Muzito stated that the GDRC would
reevaluate the underlying assumptions for revenues. Muzito also
spoke at length about challenges facing the agricultural sector and
noted GDRC investments to support increased agricultural production
such as the procurement of 700 tractors.

9. (SBU) Muzito described steps the GDRC's had taken to improve aid
coordination and effectiveness, acknowledging that there had been
weaknesses. Under the GDRC's new structure, the Ministry of Foreign
Affairs will lead on policy, the Ministry of International
Cooperation would have lead responsibility for negotiating donor
assistance, the Ministry of Plan would have lead responsibility for
aid coordination, and the technical ministries would have lead
responsibility for execution.

10. (SBU) Donor interventions included the French Ambassador (on
behalf of the EU), CDA Steve Haykin for the United States, and the
Resident Representative of the ADB, Mujomo Coulibaly (on behalf of
the multilateral development banks). The Belgium, Italian and UK
Ambassadors also provided remarks, though the EU donor countries had
agreed that only France would intervene at the meeting.

11. (SBU) Comment: Donors in Kinshasa have grown increasingly
concerned about a possible financial crisis in the DRC, particularly
as the country continues to face a significant humanitarian
situation in the east and enormous development challenges for the
entire population. The meetings with the Prime Minister and IMF
confirmed what donors have already begun internally discussing: the
DRC needs additional external financing, and quickly. While there

KINSHASA 00001105 003 OF 003

is no question the GDRC can and should take steps over the medium
and longer term to ensure continued macroeconomic stability, the
looming financial crisis is largely due to exogenous factors. The
GDRC's willingness to renegotiate the Sino-Congolese agreement and
reestablish a PRGF reflects positive developments and a new
willingness to engage positively with traditional donors. However,
as the IMF noted during its briefing, the GDRC is extremely limited
in what actions it can take to address the immediate situation;
thus, donors must fill the void. Brian Ames has privately told post
that the IMF Board will not support ESF assistance for the DRC
unless other donors commit to additional emergency support.
Additional or reprogrammed USG assistance in response to the IMF's
and Prime Minister's appeals would both help the GDRC address its
immediate financing needs and smooth the way for emergency IMF
assistance.

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