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Cablegate: North-South Forex Transfer Dispute Continues

VZCZCXRO3341
OO RUEHROV
DE RUEHKH #1456/01 2721158
ZNR UUUUU ZZH
O 281158Z SEP 08
FM AMEMBASSY KHARTOUM
TO RUEHC/SECSTATE WASHDC IMMEDIATE 1990
INFO RUCNIAD/IGAD COLLECTIVE
RHMFISS/CJTF HOA

UNCLAS SECTION 01 OF 02 KHARTOUM 001456

DEPT FOR A/S FRAZER, SE WILLIAMSON, AF/SPG, AND EEB/IFD
NSC FOR PITTMAN AND HUDSON
ADDIS ABABA FOR USAU
DEPT PLS PASS USAID FOR AFR/SUDAN
DEPT PLS PASS TREASURY FOR OIA, USED IMF AND USED WORLD BANK

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN EAGR EAID PGOV PREL PINR IBRD SU
SUBJECT: NORTH-SOUTH FOREX TRANSFER DISPUTE CONTINUES

REF: KHARTOUM 1034

1. (SBU) In a September 25 meeting with CDA Fernandez, Central Bank
of Sudan (CBOS) Governor Dr. Sabir Mohamed Hassan asserted that the
Bank of Southern Sudan's (BOSS) refusal to transfer excess foreign
currency reserves to Khartoum was a clear violation of the CPA that
was hampering his ability to conduct a unified monetary policy and
manage the country's exchange rate. He blamed political interference
from GOSS leaders on his deteriorating relationship with his Deputy,
BOSS President Elijah Malok Aleng Mayen, and implored CDA Fernandez
to urge GOSS leaders to refrain from politicizing monetary issues.
Hassan also requested CDA's assistance in protecting CBOS assets
frozen at the Federal Reserve Bank of New York from a U.S. federal
court ruling ordering the GOS to pay compensation to the families of
US sailors killed in the 2000 terrorist attack on the USS Cole in
Yemen. CDA Fernandez noted that the U.S. Judiciary is independent
from the Executive branch, but suggested that a meeting between the
Sudanese Embassy in Washington and the US Treasury Department might
be helpful in clarifying the issues. End Summary.

2. (SBU) Hassan began by stating that the Comprehensive Peace
Agreement (CPA) is very clear on matters related to the CBOS and the
conduct of monetary policy, in no small part due to his insistence
that such details be spelled out during negotiations in Navaisha.
(Note: Hassan, who holds a Ph.D. in Economics from Syracuse
University and is a veteran of the IMF in Washington, is widely
viewed as an able technocrat. End Note.) He stated that the CBOS
has autonomy and independence to pursue a unified monetary policy.
"The CPA is very clear in stating the unity of the Central Bank,"
said Hassan, adding that the BOSS is a branch of the CBOS and its
Deputy, Elijah Malok Aleng Mayen, is subordinate and accountable to
him. (Note: The SPLM's longstanding position is that the BOSS is
merely a "second window" of the CBOS and not a subordinate entity.
End Note.)

3. (SBU) The ongoing dispute, stated Hassan, centers around the
management of foreign exchange reserves (Reftel). The CPA is very
clear with regard to the unity of foreign exchange reserves, he
said, explaining that foreign exchange does not "belong" to the CBOS
per se but rather to the economy as a whole. The CBOS is merely the
custodian, and as such it is responsible for availing foreign
exchange to the national economy. "Whoever needs foreign exchange
comes to the CBOS," he said. The CBOS acquires foreign exchange from
both the government and the private sector by buying it through
local currency, and vice versa. The management of foreign exchange
reserves is the purview of the CBOS Board of Directors, he said, and
the policy is two-pronged. (Note: BoSS President Elijah Malok is a
member of the CBOS Board of Directors. End note.) First, he noted,
a working balance of foreign exchange is made available for the
economy. Second, excess reserves are innvested. To implement this
policy, he said, the CBOS has a window in Khartoum as well as in
Juba. If there is a drop in the working balance of foreign exchange,
the excess is pooled and redistributed. "This process is managed by
the CBOS," he said.

4. (SBU) Starting last December, however, the GOSS instructed the
BOSS to halt transfer of foreign exchange reserves to the North,
claiming they belonged to the South. Hassan strongly denied the
claim, explaining how these reserves were already exchanged for
local currency by the CBOS. "They can't have their cake and eat it
too," he said. After several months of wrangling, the GOSS
eventually relented because "they had no counterarguments," noted
Hassan. But despite acknowledging that all foreign exchange reserves
were in the purview of the CBOS, they insisted that those held in
the South remain at the BOSS in Juba. "I told them that any excess
reserves must be transferred to the CBOS for investment, but they
refused," he said.

5. (SBU) In response to the South's actions, Hassan stated that he
began withholding local currency from the South pending transfer of
the excess reserves. This prompted an outcry from the South, and
following intervention by Salva Kiir, Hassan stated that he was
compelled by the Presidency to resume local currency transfers. But
the situation has continued, and excess reserves in the South have
accumulated to a substantial amount, he said, noting that the lack
of control of all of Sudan's foreign exchange reserves impedes his
ability conduct a unified monetary policy and manage the country's
exchange rate. "You can't have two places managing monetary policy,"
he said.

6. (SBU) Hassan stated that he wrote a letter to Aleng requesting a
transfer of excess reserves to the CBOS in Khartoum, which was met
with no response. A reminder was similarly ignored, so he resorted
to withholding the hard currency share of the South's oil revenue
shares in favor of local currency. "They are protesting, claiming

KHARTOUM 00001456 002 OF 002


that I'm withholding their share of the proceeds, while I'm in fact
deducting it from money owed," he said.

7. (SBU) Hassan stated that he expressed disappointment to Aleng
that politics were interfering with the conduct of monetary policy.
"Our past successes were based on the lack of political interference
in our operations," he said. "Now, the GOSS is politicizing issues
which should not be politicized. Hassan implored CDA Fernandez to
advise the GOSS to stay out of monetary affairs. "Let us wait until
2011, but until then we all must abide by the rules," he said.

8. (SBU) Hassan also requested the assistance of CDA Fernandez in
protecting the CBOS assets frozen at the Federal Reserve Bank of New
York from a U.S. federal court ruling ordering the GOS to pay
compensation to the families of US sailors killed in the 2000
terrorist attack on the USS Cole in Yemen. "The lawsuit is
politically motivated, and the Central Bank has nothing to do with
it," he lamented. CDA Fernandez agreed that it has nothing to do
with the Central Bank, but noted that the U.S. Judiciary is
independent from the Executive branch. He suggested that a meeting
between the Sudanese Embassy in Washington and the US Treasury might
be beneficial and that the State Department could try to facilitate
such a meeting so that the Sudanese would at least have a better
understanding of the issue.

10. (SBU) Comment: Hassan presents himself as an apolitical
technocrat, and in fact he is widely recognized by the international
community in Khartoum for his commitment to both the letter and
spirit of the CPA and his handling of the current row reflects this.
The fact that the current dispute grew out of the December 2007
cabinet crisis between the NCP and the SPLM indicates that it is
likely entirely political, and as such a political solution is the
best hope for resolving it. The GOSS, after two years of
inconsistent support from the GNU on its hard currency needs, has
pegged the stockpiling of currency in foreign banks to an evolving
"day after" 2011 independence referendum strategy. The GNU,
concerned that the GOSS may take a page from its own playbook, lacks
confidence that its request for hard currency will be honored from
its partners in the south. The entire dispute holds little space
for compromise, and the GOSS sees the foreign currency issue as a
"sovereign" one for the South to manage (reftel.) The GOSS also has
liquidity issues that may prevent it from transferring the money.
Therefore it is unlikely the BOSS will agree to transfer the money,
gambling that Khartoum will not fall on its sword over the issue.
However the GOSS is on thin ice in terms of CPA prerogatives as
defined between the Government of National Unity and the Government
of Southern Sudan. Over time this is yet another issue that
irritates relations between the parties and can be held up as an
excuse for not implementing other parts of the CPA. It is one where
the letter of the agreement favors Khartoum while political
considerations - the South's fear and suspicions of Khartoum's
intentions - trump any effort by the GOSS to fulfill their side of
this portion of the peace accord.

FERNANDEZ

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