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Cablegate: Concerns Grow Over Economic Downturn in Drc

VZCZCXRO5629
RR RUEHBZ RUEHDU RUEHGI RUEHJO RUEHMR RUEHRN
DE RUEHKI #1100/01 3490743
ZNR UUUUU ZZH
R 140743Z DEC 08
FM AMEMBASSY KINSHASA
TO RUEHC/SECSTATE WASHDC 8893
INFO RUCNSAD/SADC COLLECTIVE
RUEHXR/RWANDA COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/TREASURY WASHDC
RUEAIIA/CIA WASHDC
RUZEJAA/JAC MOLESWORTH RAF MOLESWORTH UK
RHMFISS/HQ USEUCOM VAIHINGEN GE

UNCLAS SECTION 01 OF 02 KINSHASA 001100

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON ETRD EAID EINV PGOV PREL CG
SUBJECT: CONCERNS GROW OVER ECONOMIC DOWNTURN IN DRC

1. (SBU) Summary. Falling international commodities prices, a
tightening of credit, the still incomplete mining contract review
process and continuing instability in eastern DRC have combined to
create an increasingly worrisome macroeconomic situation in the DRC.
GDP growth for 2009 will likely be in the 3 to 6 percent range, down
from earlier projections of over 11 percent as recently as October.
GDP growth for 2008 should reach between 9 and 10 percent. The
mining sector, the major driver of the DRC's recent economic growth,
continues to contract, with over 40 companies halting or closing
operations in Katanga province alone. At the same time, many have
questioned the significant increase in spending and unrealistic
assumptions in the GDRC's $5 billion 2009 budget. End Summary

GLOBAL FINANCIAL CRISIS HITS THE DRC
-------------------------------------


2. (SBU) The GDRC began to officially acknowledge the country's
slowing economy in early November, when the Central Bank of Congo
(Banque Central du Congo, or BCC) revised downward its 2009
projected GDP growth rate from 11.9 percent to below 10 percent,
citing in particular falling international demand for metals and
minerals. The outlook has become increasingly bleak, with local and
international experts projecting the actual growth rate at as little
as half of official projections. The IMF told donors on December 10
(septel) that economic growth for 2009 will likely reach 5 or 6
percent, while the President of Citibank's DRC subsidiary projects
the economy growing at only 3 to 5 percent next year.

3. (U) Another indication of distress within the economy has been
the slow but steady depreciation of the Congolese Franc (CF) against
the dollar and falling reserves levels. (Note: With a highly
dollarized economy, exchange rate trends greatly impact domestic
economy activity. End Note) As of December 9, the CF has depreciated
by 18 percent against the U.S. dollar since the beginning of 2008.
Recent exchange rate fluctuations have led to increasing
unpredictability about the CF's future value and, as a result, a
growing lack of confidence by the market. International reserves
have fallen to concerning levels, from $219 million in September to
$148 million in mid-November.

4. (U) The DRC's mining sector, the major engine of the country's
recent economic growth, lies at the heart of the economic downturn.
Lower international prices for key minerals, combined with a
tightening of credit, have led to more than forty mining or
processing companies in Katanga province alone halting operations or
going out of business. Provincial officials in Katanga have
indicated that more than 300,000 people, many of them artisanal
miners, will be out of work as result of the downturn in commodities
prices. Investor confidence in the sector has been further dampened
by the slow pace of the mining contract review, which has repeatedly
been delayed over the past year and still remains uncompleted.


2009 BUDGET RAISES CONCERNS
-----------------------------

5. (U) Despite growing indications of a significant economic
downturn for 2009, the GDRC's 2009 budget, presented by Prime
Minister Muzito to Parliament on December 2, includes substantially
higher spending levels over 2008. The 2009 budget totals $5 billion,
up from $3.6 billion approved for 2008, reflecting a 40 percent
increase in dollar terms (62 percent in Congolese Francs). The
budget is based on an assumed annual GDP growth rate of 9%, which
most view as highly unrealistic. Domestic revenues are budgeted at
$2.8 billion, up 32 percent (in Congolese Francs) from 2008. The
budget will be financed through central government revenues (56
percent), external resources (34 percent), and revenues from the
provinces (10 percent). External financing includes both budget
support, primarily through HIPC, and financing of investments,
including through the Chinese agreement. External financing is set
to increase by 13.5 percent over 2008, while revenues from the
provinces are set to increase by 174 percent over 2008.

6. (U) The budget devotes 20.3 percent of spending to economic
activities, 4.8 percent of spending to health, and 9.4 percent of
spending to education. The budget proposes a 23 percent (Congolese
Francs) increase in the government payroll, to the equivalent to
approximately 50 percent of domestic revenues, and a $40 million
extraordinary allocation to support security operations in Eastern
DRC.

7. (SBU). Comment. A slowing economy will put additional pressure
on the GDRC to deliver on its development promises to an
increasingly frustrated Congolese population. The revenue and

KINSHASA 00001100 002 OF 002


spending levels in the 2009 budget will almost certainly need to be
revised based on more realistic assumptions. While stability in
eastern DRC and an improved investment climate remain critical for
the DRC's long-term economic growth, exogenous factors are the more
immediate cause of the economic downturn. Both the IMF and GDRC have
appealed to donors to provide emergency budgetary or balance of
payments support for the DRC. Post will report on briefings to
donors by both the IMF and GDRC septel. End Comment.

BROCK

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