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Cablegate: World Bank Country Manager Sees Dark Clouds On Sudan's

VZCZCXRO0407
PP RUEHGI RUEHMA RUEHROV
DE RUEHKH #1718/01 3311450
ZNR UUUUU ZZH
P 261450Z NOV 08
FM AMEMBASSY KHARTOUM
TO RUEHC/SECSTATE WASHDC PRIORITY 2416
INFO RUCNFUR/DARFUR COLLECTIVE
RHMFISS/CJTF HOA

UNCLAS SECTION 01 OF 02 KHARTOUM 001718

SENSITIVE
SIPDIS

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

E.O. 12958: N/A
TAGS: EFIN ECON EAID PGOV PREL KPKO UNSC IBRD SU
SUBJECT: WORLD BANK COUNTRY MANAGER SEES DARK CLOUDS ON SUDAN'S
FISCAL HORIZON

REF: A. KHARTOUM 1702
B. KHARTOUM 1484

1. (SBU) SUMMARY: Sudan's World Bank Country Manager believes that
falling oil prices and production, along with the global financial
crisis, will confront Sudan with a "serious reckoning" in the coming
two years. While Khartoum already is facing "hard decisions," the
position of the autonomous GoSS, which depends almost totally on oil
revenues and has no capacity to mobilize foreign financing, is even
more precarious. END SUMMARY.

2. (SBU) In a November 25 courtesy call, newly-arrived World Bank
Country Manager Lawrence Clarke shared with Charge Fernandez his
perceptions of Sudan's economic circumstances. (Note: Clarke has
been serving as the Bank's Manager for South Sudan, in Juba, since
early this year. He will continue to divide his time between
Khartoum and Juba until the arrival of his successor in Juba. End
note.) CDA Fernandez observed that Sudan, both North and South, has
become used to a "bonanza" in oil revenues in recent years, but that
bonanza may becoming to an end. Sudan's prospects for future high
oil revenues are rapidly dwindling. Not only are global prices
falling, but also Sudan's production levels are beginning to shrink,
and there appears to be little prospect that they will recover (ref
A). The CDA asked for Clarke's estimate of how this reality will
impact Sudan's economy.

Khartoum - Facing Hard Decisions
- - - - - - - - - - - - - - - - -
3. (SBU) Clarke agreed that Sudan is facing severely constrained
circumstances. Clarke believes that the Government of National
Unity (GNU) in Khartoum already is making some hard decisions.
These are beginning to be reflected in 2009 budget that the GNU
recently submitted to the National Assembly (septel). The GNU
depends on oil revenues to fund 60 percent of its budget, he noted.
The GNU's draft 2009 budget forecasts a six percent deficit. Two
thirds of this is to be financed via foreign borrowing, the other
third domestically. "The Merowe Dam is too far along to be
cancelled, but other big capital projects will have to be scaled
back," he suggested. Clarke thinks that this level of domestic
borrowing will further increase already serious inflationary
pressures. (Note: Heretofore, Sudan's 2008 inflationary pressure
has come primarily from rising import prices, making it difficult
for authorities to combat with normal monetary and fiscal
instruments. End Note.) Clarke noted that the GNU already is
drawing down its Oil Stabilization Account (ORSA). He said that the
GNU has not yet released the expenditure side of the 2009 budget, so
he does not know how programs will be affected by the constrained
revenues.

4. (SBU) Beyond falling oil revenues, Clarke thinks that Sudan's
prospects will be compounded by the global financial crisis. Clarke
foresees foreign capital flows, notably from Gulf investors who have
lost heavily in the financial meltdown, dwindling. Sudan faces a
"serious reckoning" ahead in 2009-2010, he concluded.

Juba - In a Tight Spot
- - - - - - - - - - - -
5. (SBU) Turning to South Sudan, Clarke said that while the GNU
depends on oil for 60 percent of its revenues, the Government of
South Sudan (GoSS) is over 90 percent dependent on oil revenues,
putting it in a much tighter corner. Clarke noted that the GoSS has
benefited from the high global oil prices earlier in 2008, and has
even been able to set aside a significant part of this year's oil
windfall (ref. B). He estimated that the GoSS now has about $200
million in its Reserve Account, and that this will grow to $500
million by year's end. However, this reserve will not last long if
revenues fall significantly and if the GoSS cannot control
spending.

6. (SBU) CDA Fernandez commented that thanks to this oil windfall,
GoSS President Salva Kiir so far has been able to avoid tough
choices and buy social peace in the South. Clarke agreed, noting
that the GoSS keeps 250,000 public-sector employees on its payroll,
probably 150,000 more than are needed. The Charge added that of
these 150,000 are SPLA soldiers. Clarke said that this illustrates
the GoSS' dilemma. Just as almost all of the GoSS revenues come
from oil, most of its expenditures go to paying salaries, with
little left over for other needs, including economic development.
"Khartoum will cut down projects, but Juba will have to cut down on
salaries and employees," he noted. While there is a critical need
for DDR in the South, the Southern economy lacks any capacity to
absorb such a large number of entrants. The GoSS continues to pay
redundant workers and soldiers, for fear of the social unrest that
would follow their discharge. The Charge agreed that in Southern

KHARTOUM 00001718 002 OF 002


Sudan, "R" for reintegration is the critical and most problematic
component of DDR.

7. (SBU) Clarke concluded that South Sudan is in an extremely
fragile position. Both oil prices and output are falling, removing
any room to maneuver. At the same time, the South lacks any major
capacity to mobilize foreign financing to tide it over.

Comment
- - - -
8. (SBU) Clarke's pessimistic take on the next few years
corresponds closely with our own (reftel). The economic fallout
from the global economic downturn is further complicating Sudan's
already intractable political problems and limit the room to
maneuver of both the NCP and the SPLM. This will put greater
pressure on both Khartoum and Juba during a period of great
political (ICC, elections, Abyei arbitration, North-South border
demarcation, an incoming Obama Administration) volatility.

FERNANDEZ

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