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Cablegate: South Sudan Government Struggles to Construct A

VZCZCXYZ0002
PP RUEHWEB

DE RUEHKH #1649/01 2961235
ZNR UUUUU ZZH
P 231235Z OCT 07
FM AMEMBASSY KHARTOUM
TO SECSTATE WASHDC PRIORITY 8914

UNCLAS KHARTOUM 001649

SIPDIS

SENSITIVE
SIPDIS

DEPARTMENT FOR AF/SPG AND EEB/IFD
DEPARTMENT PASS TREASURY FOR OIA

E.O. 12958: N/A
TAGS: ECON EFIN EAID PREL PGOV SU
SUBJECT: SOUTH SUDAN GOVERNMENT STRUGGLES TO CONSTRUCT A
FISCAL FOUNDATION

REF: A. KHARTOUM 1403

B. KHARTOUM 1568


-------
Summary
-------

1. (SBU) Budgetary planning by the Government of South Sudan
(GoSS) is hampered by excessive personnel costs and
dependence on unreliable revenue sources. The GoSS is
working to correct these deficiencies, but faces an uphill
struggle given a lack of institutional capacity and likely
resistance to needed, but potentially painful, reforms. End
Summary.

---------------------------------------
GoSS Handicapped by Inadequate Capacity
---------------------------------------

2. (SBU) During a recent visit to Juba, Econoff discussed

the fiscal challenges facing the autonomous Government of
South Sudan with Moses Mabior, Coordinator of Foreign
Assistance in the GoSS Ministry of Finance and Planning. The
Finance Ministry currently is in the process of drafting the
2008 GoSS budget. Mabior admitted that a lack of
institutional capacity significantly handicaps the GoSS
generally, including his Ministry's planning capacity. He
noted that the GoSS started from scratch in 2005, and thus
lacks any significant historical base on which to make
budgetary plans. It -- along with the rest of the government
-- also suffers from a critical lack of qualified personnel.

--------------------------------
Expenditures ) Salaries Dominate
--------------------------------

3. (SBU) Mabior noted that spending on current consumption
) especially salaries * dominates GoSS expenditures and has
crowded out capital investment, with security-force
expenditures accounting for 70 percent of GoSS personnel
costs. The GoSS has felt obligated to pursue a policy of
&social employment8, intended to provide incomes for SPLA
veterans of the civil war, war widows, and others considered
by the Sudan Peoples Liberation Movement (SPLM) to be
entitled to GoSS support. The result is a bloated GoSS
workforce, with a relatively small proportion of GoSS staff
doing substantive work. Government payrolls also are plagued
by significant numbers of "ghost" workers who draw salaries,
but are not present for work.

4. (SBU) To remedy this situation, Mabior said the GoSS
plans a payroll-cleanup program that will purge the rolls of
ghost workers and introduce new payroll procedures to prevent
abuses. Additionally, the Ministry of Labor, Public Services
and Human Resources Development will start issuing ID cards
to civil service employees in November. The GoSS also plans
to transfer excess security personnel and non-substantive
civilian employees to programs that will train them either
for productive work in the government or in the private
sector.

-------------------------
Revenues ) Oil Dependence
-------------------------

5. (U) Mabior said that the GoSS currently depends on
volatile oil revenues for over 90 percent of its income.
Under the wealth-sharing provisions of the Comprehensive
Peace Agreement (CPA) between Sudan,s ruling National
Congress Party (NCP) and the opposition SPLM, oil revenues
collected in the area governed by the SPLM are divided
equally between the GoSS and the Government of National Unity
(GNU) in Khartoum. The price of Sudan,s oil exports can
fluctuate widely. For example, the price of a barrel of
Sudanese oil dropped to only US$49 in February (admittedly an
exceptionally low price, one month price) and rose to US$77
in August. Export volumes also have varied; although they
gradually have increased over the course of 2007 as problems
in shipping Dar-blend crude have been overcome. The
unpredictability of these revenues further complicates budget
planning.

6. (SBU) Mabior indicated that the GoSS doubts that it is
receiving all of the oil revenues to which it is entitled
under the CPA (ref b). Although the statistics published by
Sudan,s Ministry of Finance indicate that the South receives
half of the revenues earned from oil produced in the South,
the GoSS questions the transparency of this arrangement on

two grounds. First, according to Mabior, the GoSS is not
privy to the specifics of contracts that the GNU negotiated
with foreign oil companies to develop the fields before the
CPA. The GoSS suspects that, under pressure to raise funds
to pay for the war quickly, the GNU signed sweetheart deals
with its foreign partners and the GoSS now is suffering the
consequences. Second, until the January 1956 North-South
border finally is demarcated, it is impossible to know which
oil fields actually lie in the South. The GoSS suspects that
it is not receiving all of the oil revenues to which it
should be entitled.

--------------------------------
Search for a Stable Revenue Base
--------------------------------

7. (SBU) To correct these weaknesses, the GoSS is slowly
seeking to develop other, more stable, sources of revenue.
Under the CPA, some taxes collected in the South by the GNU
(e.g., VAT, customs duties, corporate income tax) are to be
shared equally between the GNU and the GoSS, in the same way
as oil revenues. Mabior said that in July, the GNU and the
GoSS agreed to establish a joint committee to monitor tax
revenues, paralleling the existing committee that monitors
oil revenues. According to Mabior, a staff has begun
compiling data, but committee members have yet to be named
and tax revenues have yet to begin flowing to the GoSS. When
the committee does begin operation, revenues collected in the
South will be divided retroactively, back to July 2007.
(Comment: Juba has been equally delinquent in sharing
revenues with Khartoum. End comment.)

8. (SBU) Simultaneously, the GoSS Finance Ministry is
beginning to establish a tax-policy framework for the
collection of revenues in the South. The Ministry is in the
final stages of preparing two pieces of key legislation: 1.)
Public Financial Management Act, and 2.) Revenue Act. The
Ministry hopes that both will be enacted by the end of this
year. (Note: This goal is likely illusory, given the slow
pace at which the South Sudan Legislative Assembly has been
dealing with its legislative agenda so far. End note.)

----------------------
Critical Donor Support
----------------------

9. (U) Mabior praised donor assistance to Southern Sudan,
including a U.S. Treasury advisor at the Ministry. In
briefing the quarterly donors group meeting in Juba in late
September, new GoSS Finance Minister Kuol Athian Mawien said
that his government will be looking to the donors for
significant Disarmament, Demobilization, and Reintegration
assistance at the next Sudan Consortium meeting to finance
government payroll-cleanup plans. Mabior said that the next
Sudan Consortium has tentatively been set for late January.
However, the current political conflict between the NCP and
the SPLM has thrown planning into uncertainty.

-------
Comment
-------

10. (SBU) The fiscal challenges facing the Government of
South Sudan mirror closely those of the GNU in Khartoum, as
outlined recently by the IMF (ref a). However, the South
probably faces them to an even greater degree:
overdependence on volatile oil revenues, over-expenditure on
consumption (especially salaries) and a lack of institutional
capacity to compensate for or correct these weaknesses. The
GoSS is at least aware of and committed to tackling these
issues. However, the overall thinness of technical expertise
in the civil service and the political resistance that is
likely to face reforms such payroll-clean-up, will pose
obstacles to implementation that will be difficult to
overcome.
POWERS

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