VZCZCXRO3140
PP RUEHPA
DE RUEHAB #0062/01 0281651
ZNY CCCCC ZZH
P 281651Z JAN 08
FM AMEMBASSY ABIDJAN
TO RUEHC/SECSTATE WASHDC PRIORITY 3945
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
INFO RUEHZK/ECOWAS COLLECTIVE
RUEPGDA/USEUCOM JIC VAIHINGEN GE
RUCPDOC/DEPT OF COMMERCE WASHDC

C O N F I D E N T I A L SECTION 01 OF 04 ABIDJAN 000062 
 
SIPDIS 
 
SIPDIS 
 
STATE PASS TO USTR C.HAMILTON 
STATE FOR AF/EPS E.REPKO, EEB K.DIZOGLIO 
TREASURY FOR D.PETERS, R.HALL 
USAID FOR C.GARRETT, S.SWIFT 
AMEMB ACCRA FOR USAID P.RICHARDSON,K.MCCOWN 
AMEMB DAKAR FOR FCS S.MORRISON, FAS R.HANSON 
 
E.O. 12958: DECL: 01/28/2018 
TAGS: ECON EFIN IDA IMF PGOV PREF USTR EITI IV
SUBJECT: COTE D'IVOIRE ADOPTS BUDGET ON TIME;  IMF, WORLD 
BANK CAUTIOUSLY ACCEPT KEY STEP,  BUT DESCRIBE GOVERNMENT'S 
DISCRETIONARY SPENDING AS "OUT OF CONTROL" 
 
REF: MASSINGA-RICHARD HALL JANUARY 17 UNCLASSIFIED 
 
     EMAIL 
 
Classified By: EconChief EMassinga, Reasons 1.4 (b,d) 
 
¶1.  (C)  Summary.  Cote d'Ivoire adopted its 2008 budget in 
late December 2007, fulfilling a key demand from the 
international financial institutions engaged in ongoing 
assistance negotiations with the government.  The budget is 
8.5 percent higher than that of 2007, reflecting higher 
personnel costs as well as expansion of expenses related to 
ending the five and a half year-old political crisis. 
Revenues are projected to rise with the growth in the 
economy, but serious shortcomings in revenue accounting 
related to oil persist.  The Ministry of Finance will be 
hard-pressed to meet its financial obligations by February to 
end the long-standing arrears to the World Bank and African 
Development Bank, and this problem could be exacerbated if 
receipts from the government's settlement of the 2006 toxic 
waste scandal have been improperly spent.  Without settlement 
of arrears, reaching a decision point to slash the country's 
high indebtedness could be delayed into 2009.  International 
financial institutions identify bloated, out-of-control 
discretionary spending by the Presidency and incompetent 
management of international assistance offers by the Prime 
Minister as key issues hindering the government's ability to 
finance the actions needed to end the political crisis.  End 
Summary. 
 
 
The 2008 Budget Is Adopted 
-------- 
¶2.  (SBU)  Cote d'Ivoire adopted its fiscal 2008 year budget 
on December 28, 2007, representing a key step in its 
multi-step process to normalize its relationship with the 
international financial institutions (the so-called IFIs: the 
World Bank, IMF and African Development Bank).  The Council 
of Ministers adopted the budget on time, in contrast with the 
2007 budget, which was adopted in May 2007, thus allowing a 
substantial portion of that year's expenditures to be 
disbursed outside of normal fiscal controls and outside of 
the watchful eye of the IMF's Abidjan mission.  The IFIs had 
made on-time adoption of the 2008 budget a pre-requisite for 
continuing loans, assistance, and negotiation towards 
eventual multilateral debt forgiveness under the Highly 
Indebted Poor Country (HIPC) initiative. 
 
¶3.  (U)  The 2008 budget target is 8.5 percent higher than 
that of 2007, up to USD 4.8 billion.  The budget counts on 
2.9 percent GDP growth to finance a portion of the 
expenditure increase, up from 1.7 percent in 2007, relying on 
increased exports of agricultural goods and oil, and growth 
in the service sector.  Projected revenues are USD 3.9 
billion, with a deficit to be financed of USD 873 million. 
The budget projects higher corporate, VAT, customs and oil 
tax revenues, with an additional USD 200 million in revenue 
from redeploying the country's administrative structures 
(customs, income tax inspectors, etc.) in the formerly 
rebel-held north. 
 
¶4.  (U)  Higher spending comes from the ongoing high costs of 
servicing the country's debt (over USD 1.2 billion to finance 
domestic bonds, pay back arrears to IFIs and to keep current 
with IFI debt, along with other miscellaneous loans) and USD 
1.5 billion for personnel costs (up 11.4 percent over 2007 
figures due to wage concessions to unions in the health care 
and educational sectors, as well as continuing rises in the 
costs of maintaining the armed forces).  The budget calls for 
USD 374 million for special spending to end the political 
crisis: USD 63 million for demobilization, USD 48 million for 
the redeployment of the country's administration to the 
north, USD 109 for the country's identification process, USD 
86 million to cover election costs and USD 68 million to pay 
for the country's new "civic service" program designed to 
absorb youth currently in the military, militias and rebel 
Forces Nouvelles who are not slated to be integrated into the 
country's new armed forces. 
 
World Bank Views on the Budget, Long-Term Debt Relief 
--------- 
¶5.  (C)  During a January 16 meeting between the Charge and 
 
ABIDJAN 00000062  002 OF 004 
 
 
World Bank Country Manager Bernard Harbone and key members of 
his staff, Harbone stated that the period running up to early 
February is a "tense time."  Harbone said Cote d'Ivoire's 
arrears clearance, originally scheduled for late January, has 
been postponed until approximately February 13, at which 
point the government will have to pay the balance of its 
promised USD 240-250 million to finally clear its arrears to 
the Bank.  Once it does so, the WB's IDA will pay the 
remainder (USD 240-250 million).  The government has paid USD 
90 million thus far, but has to come up with the remaining 
USD 160 million.  The Ministry of Finance, as seen in the 
2008 budget and in the latter half of 2007, is experiencing 
upward pressures on its resources, making reaching the goal 
by February 13 increasingly difficult. 
 
¶6.  (C)  Harbone participated in the January 14 meeting 
attended by President Gbagbo and Prime Minister Soro in 
Ouagadougou at which the WB representative raised with all 
the key interlocutors the central issue of the discretionary 
budgets of the President and Prime Minister.  These two 
accounts (which do not appear in the basic spreadsheet 
accounting of the budget) are "substantially" inflated over 
2007 levels and put additional constraints on the Finance 
Ministry's ability to finance the end of crisis and "civic 
service" budgets.  OPA Facilitator President Compaore, along 
with Gbagbo and Soro, appear to have taken the critique on 
board, but do not seem to have changed fundamental budget 
policy. 
 
¶7.  (C)  Harbone said that Cote d'Ivoire had achieved 90 
percent of the reform conditions necessary for the IDA to pay 
its half of the arrears bill when the February vote comes up. 
 Cote d'Ivoire is on track to create its Extractive 
Industries Transparency Initiative civil society consultative 
bodies (necessary for the country to be accepted into the 
initiative, which is, according to Harbone, now a 
precondition for continued IFIs engagement).  The IFIs' 
multiple audits of the cocoa and petrol sector are completed 
or nearly so.  According to Harbone, while a great deal of 
analytical work remains to be done, the basics are in place. 
 
¶8.  (C)  Harbone and his deputy, Richard Doffonsou, noted 
that energy issues remain vexingly difficult to assess in the 
government's budgets, both 2007 and 2008.  While two of the 
three energy-related audits are complete (and supposedly 
available to ED offices in Washington), neither the completed 
ones nor the last one in draft show a clear picture of the 
fiscal structure of the sector.  Harbone said the USD 150 
million in petroleum-related taxes from 2007 were "what the 
government wanted us to see" and don't necessarily reflect 
the government's true receipts.  He said the same is true for 
the USD 280 million projected in petroleum-related taxes in 
the 2008 budget.  The government told the IFIs it will 
conduct its own petroleum audit, but that it will not be made 
public; however, that audit will be part of the EITI process, 
which raises the question of whether the IFIs and EITI itself 
would be able to make it publicly available. 
 
¶9.  (C)  Harbone was more upbeat about the government 
complying with demands for more transparency in the cocoa 
sector and the sector's relation to the country's fiscal 
management.  The IFIs have already won a reduction in the 
country's taxes raised to support the four "cocoa bodies" 
created in the 1998-1999 cocoa liberalization (nearly USD 900 
million has been collected through these special taxes since 
2001, with little in the way of rural infrastructure or other 
benefits for cocoa farmers to show for it) and are driving 
for further modest reductions in the years ahead.  The next 
target in 2009 and beyond on the cocoa agenda will be the 
so-called "unique right to export" (DUS in French) tax, which 
is nearly USD .50 per kilo and is identified as a major 
factor in depressing cocoa farmer income relative to that 
seen in Ghana and other cocoa-growing countries. 
 
¶10.  (C)  Harbone turned to the question of the HIPC decision 
point.  He expressed surprise at discussion in Washington 
about reaching a decision point by the summer of 2008, 
arguing that for that to happen, the IMF's Emergency Post 
Conflict Assistance Package (EPCA) must be on track, as well 
as the AfDB arrears clearance (those arrears stand at nearly 
USD 570 million).  Harbone said that additionally, the 
 
ABIDJAN 00000062  003 OF 004 
 
 
Ivorian Poverty Strategy Reduction Paper would have to be 
complete, along with the strict WB-imposed process of 
consulting widely with civil society and its associated 
examination of respect for human rights and good governance. 
Harbone noted the IFIs would naturally look at the status of 
elections.  He explained that while elections per se wouldn't 
be a prerequisite for HIPC, in practice, successful elections 
would be an important factor in moving forward. 
 
¶11.  (C)  Harbone touched on the Prime Minister's failure to 
draw upon the WB's USD 120 million Post Conflict Assistant 
Package, provided in July 2007 to, inter alia, jump-start the 
disarmament process, support rural infrastructure projects 
and help the identification program.  Those funds could have 
been accessed since July, along with USD 104 million in old 
WB programs now available, if the government had adhered to 
relatively simple requirements.  A key requirement is the 
establishment of an office to direct the post-crisis 
spending.  The PM has been very slow to set up the office in 
the correct manner, and did not sign the decree creating this 
office according to the established rules until January, 
2008; recruitment has not yet begun. 
 
IMF Offers Sharp Commentary on the Budget 
------- 
 
¶12.  (C)  The Charge met with IMF Country Director Phillipe 
Egoume on January 17, and discussed the budget in the context 
of the IFIs' ongoing engagement in Cote d'Ivoire.  Egoume 
confirmed that the country's GDP should rise by 2.9 to 3 
percent in 2008, up from 1.7 in 2007, as predicted in the 
budget, and cited the rebound in private investment, 
propelled by improved investor confidence in the peace 
process, as the reason.  Sounding a serious note of caution, 
however, Egoume said that endemic corruption acts as a 
serious break on the economy's long-term potential, and 
undermines proper fiscal management and tax collection. 
Egoume accused Lebanese traders, for example, of openly 
defying the country's tax laws with the connivance of corrupt 
officials. 
 
¶13.  (C)  Egoume said that cocoa and other agricultural 
exports are doing reasonably well, propping up their portions 
of the country's tax base.  He noted that inflation is 
moderate and under control and even the country's endemic 
roadblocks are gradually loosening their grip on the 
country's economy, adding to gradually falling costs for 
transporting goods.  According to Egoume, coffee production 
is up strongly and international prices are higher, leading 
to better tax receipts.  Egoume said the cocoa sector is 
still seeing substantial transshipment to Ghana, leading to 
that country coming close in 2008 to Cote d'Ivoire's overall 
cocoa export figures.  Egoume cautioned that while 3 percent 
GDP growth is good, it is only good enough for per capita 
income to hold steady, given population growth.  Egoume said 
that the IFIs have won approval from the government to force 
the cocoa regulatory bodies to countersign any investments 
with the IFIs, a measure that IFIs hope will improve the 
cocoa bodies' management and transparency. 
 
¶14.  (C)  Reviewing the 2007 budget, Egoume said he and his 
staff worked closely with the Ministry of Finance to keep 
expenditures in line with budgeted projections and to 
maintain the country's planned primary fiscal surplus of one 
percent (which excludes foreign financing).  Egoume said 2007 
revenues stayed within projections (aside from oil, which 
produced less revenue than had been anticipated) but that 
some expenditures overshot their targets.  Discretionary 
spending by the Presidency and Prime Minister's Office 
(particularly the former) greatly exceeded initial 
projections.  Egoume said that by the end of September, 2007 
(with another quarter to go in the rest of the fiscal year), 
the Presidency's expenditures were over USD 115 million, 
whereas the budget called for USD 80 million for the whole 
year.  According to Egoume, Presidential personnel costs 
alone through September 2007 were USD 50 million vs. a 
projected USD 23 million for the full year.   Egoume 
explained these overruns negatively affected the ability of 
the Finance Ministry to pay for measures designed to end the 
political crisis as well as for needed social expenditures. 
Government expenditures for education, for example, were USD 
 
ABIDJAN 00000062  004 OF 004 
 
 
400 million through September 2007, versus a projected 650 
million for the whole year; health care costs were USD 115 
versus a projected USD 200 million; and agriculture spending 
was a scant USD 20 million against a planned USD 60 million 
in full year spending.  In sum, while the budget was 
balanced, the excessive spending by the Presidency came at 
the expense of critically needed spending in the social 
sector. 
 
¶15.  (C)  Egoume related the fear that the government's 
holdings in the Central Bank do not add up.  Specifically, 
the USD 100 million in left-over receipts from the USD 190 
million toxic waste settlement with European company 
Trafigura do not appear to be in the government's accounts at 
the Central Bank.  The IMF is investigating this, but if that 
money was spent outside of normal fiscal controls, the 
resulting budget hole would probably prevent the government 
from financing its portion of the WB arrears clearance by 
February, and thus delay Cote d'Ivoire's whole package of 
assistance and budget support from the IFIs.  Asked if the 
government could borrow sufficient cash to make up the 
potential shortfall, Egoume said that banks in the region 
were coming up against their limits on how much government 
paper they can hold as Cote d'Ivoire's recent aggressive 
borrowing has taken its toll and that regional liquidity is 
suffering as a result. 
 
¶16.  (C)  Egoume praised the government for passing the 2008 
budget on time.  He said that all expenditures would thus go 
through the Ministry of Finance's rigorous internal control 
system, rather than the rather lackadaisical system of 
extra-budgetary expenditures the government uses when a 
budget is not in force.  Egoume was particularly pleased that 
the IMF's demand for a detailed quarterly budget status 
report, prepared by the Ministry of Finance (and overseen by 
the IMF) was (grudgingly) accepted by the government.  This 
report will be provided to all Ministries through the Council 
of Ministers and will eventually be published, greatly 
complicating efforts to manipulate the budget for political 
ends. 
 
 
¶17.  (C)  Comment:  The adoption of the budget is a good step 
in the direction of more sound fiscal management and 
readiness to engage seriously with the international 
financial community to fashion the means needed to end the 
political crisis and set the stage for more durable long-term 
growth.  However, serious questions remain concerning the 
ability of the Prime Minister to manage the economic 
portfolio, the oversized Presidential budget, the accuracy of 
reporting of fiscal receipts and whether the government is 
honestly accounting for the toxic waste settlement funds. 
These questions combine to call into serious question whether 
the HIPC decision point can be reached by the summer of 2008, 
or even by the end of the year.  End Comment. 
AKUETTEH