Cablegate: Pessimistic World Bank Country Manager Reviews Sudan's

VZCZCXRO8040
PP RUEHROV
DE RUEHKH #1291/01 2381450
ZNR UUUUU ZZH
P 251450Z AUG 08
FM AMEMBASSY KHARTOUM
TO RUEHC/SECSTATE WASHDC PRIORITY 1710
INFO RUCNIAD/IGAD COLLECTIVE
RHMFISS/CJTF HOA

UNCLAS SECTION 01 OF 03 KHARTOUM 001291

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

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN EAGR EAID PGOV PREL PINR IBRD SU
SUBJECT: PESSIMISTIC WORLD BANK COUNTRY MANAGER REVIEWS SUDAN'S
ECONOMIC OUTLOOK

REF: KHARTOUM 1220

1. (SBU) SUMMARY: Outgoing World Bank Country Manager Asif Faiz
worries that Khartoum is not thinking through the potential economic
fallout in crafting its strategy to counter a possible ICC
indictment of President al-Bashir. Nor is the Government of South
Sudan (GoSS) in Juba focusing on the economic requirements of
independence. He expects the GoS to try to walk-back its
Abyei-Roadmap revenue sharing commitments, leading to another
flare-up in coming months. According to Faiz, agricultural
development could help Sudan realize its enormous potential, but the
sector remains plagued by poor planning and mismanagement. Bank-GoS
relations have become so strained that the Bank may downgrade its
presence in Khartoum when Faiz departs in October. End Summary.

INFLATION, FOREIGN EXCHANGE, AND THE FISCAL DEFICIT
--------------------------------------------- ------

2. (SBU) On August 19, soon-to-depart World Bank Country Manager
Asif Faiz provided econoffs with a gloomy take on Sudan's
political-economic prospects. According to Faiz, the salient
macroeconomic problem now is accelerating inflation (reftel).
Although the official inflation rate for the last 12 months was 8%,
Faiz estimates that the actual rate was probably around 20%.
Inflation in south Sudan, he said, is even higher. He stated that
inflation is propelled primarily by shortages in the construction
and services sectors, especially in the bustling Khartoum region,
though international pricing pressure also plays a role. Food-price
increases are not an underlying factor, but Faiz said that a bad
harvest would be "a disaster," because global supplies of grain are
so tight that Sudan would not be able to purchase what it would need
on the world market.

3. (SBU) Faiz assessed Sudan's foreign-exchange reserves as strong.
He noted that while the Bank of Sudan is maintaining significant
dollar reserves, it is shifting more and more of its transactions
into other currencies.

4. (SBU) Faiz explained Sudan's high fiscal deficit (4% of GDP,
according to the March 2008 World Bank Interim Strategy Note), as
the result of poor management of Sudan's volatile oil revenues and
government expenditures. Faced with a cash shortage, the Finance
Ministry sought to pay for immediate government purchases with
bonds, resulting in a steep build-up of domestic debt. Faiz
described Dr. Awad Ahmed Aljaz as "horrified" when he took over as
Finance Minister in February. According to Asif, Aljaz replaced
many of the senior Finance-Ministry staff and ordered that
outstanding bonds be paid off as soon as possible. The fiscal
deficit now is being brought back to a reasonable level. Faiz
praised Aljaz as an effective manager and strong believer in fiscal
discipline.

ECONOMIC FALLOUT OF AN ICC INDICTMENT
-------------------------------------

5. (SBU) Faiz professed to be extremely worried about the potential
political and economic implications of a potential International
Criminal Court (ICC) indictment of President Omar al-Bashir on
charges of genocide. He said neither the Government of National
Unity (GNU) in Khartoum nor the GoSS in Juba are trying to think
through and prepare for the consequences of such an indictment.
Faiz wonders whether signatories of the Rome Convention would
maintain relations with a country whose president is under ICC
indictment. Would they be able to continue to provide support to
the various peace agreements? Would the GNU abrogate those
agreements? Would the Bank and Fund have to break-off relations
with Sudan? He noted that the GNU had just vetoed compromise
proposals from both France and the Arab League. Khartoum is not
considering the economic/financial repercussions that may stem from
such hard-line tactics.

GOSS VULNERABLE TO 'FINANCIAL STRANGULATION'
--------------------------------------------

6. (SBU) Likewise, Faiz expressed alarm that the GOSS is woefully
unprepared for the financial and economic responsibilities of
potential post-2011 independence (or even sooner, if the fallout
from an ICC indictment sufficiently strains national unity). He
lamented the shortsightedness of GOSS officials in not planning for
an independent financial system. "If one assumes the worst, the
South could be subject to an economic strangulation" by the North
given its current lack of preparedness. While Faiz is confident
political and military assistance to the South would be forthcoming
from international donors, he doubted that they are thinking about

KHARTOUM 00001291 002 OF 003

economic and financial issues. He urged the USG to use its
influence to focus the South on issues such as developing a
relationship with the Federal Reserve.

7. (SBU) As have others, Asif was dismissive of the Bank of
Southern Sudan (BoSS) Governor, although he said the Bank staff has
"many good people." In contrast to the BoSS, he stated that the
Bank of Sudan is in the extremely capable hands of Governor Dr.
Sabir Mohamed Hassan. Hassan (a long-time IMF staffer) is honest
and "has abided by both the letter and the spirit of the CPA,"
stated Faiz. "That's not something I can say about anyone else."

WEALTH SHARING AND GOVERNANCE IN ABYEI
--------------------------------------

8. (SBU) Extrapolating from recent production and revenue data, Faiz
estimates that the 8% of Abyei's net oil revenues designated to
Abyei's people and administration by the revenue-sharing provisions
of the CPA amount to roughly $50 million per year. In addition, he
estimates that resources committed to the so called "Unity Fund"
established in the Abyei Roadmap (50% of the GNU's share and 25% of
the GoSS share of Abyei oil revenues) would amount to over $200
million per year. "That's enough money to rebuild Abyei several
times over," he said.

9. (SBU) Faiz believes that the GNU and GoSS will fail to meet
their revenue-sharing commitments, however. He worries that the
donors then will fall into the trap of trying to pick up the
financial responsibility for Abyei's recovery and reconstruction.
He urged donors to learn from past experience, ("I've seen this
happen three times before," he commented) and carefully calibrate
their response relative to GOS/GOSS commitments. Otherwise, he
said, donors will be held responsible for government functions, and
blamed when the population's expectations are not met. The success
of UN and donor-supported programs will depend to a large extent on
Abyei Administration ownership of decision-making and program
implementation. He proposed a coordination and monitoring committee
comprised of the Abyei Administration, UN, donors, GOS, and GOSS,
possibly under to auspices of the AEC, to ensure that the GOS and
GOSS are fulfilling their financial obligations.

AGRICULTURAL INVESTMENT BOOMING ...
-----------------------------------

10. (SBU) Faiz estimated that investment in agriculture (primarily
from Gulf-Arab states) approached $2 billion in the past year,
reflected in the expansion of large mechanized farms of the Nile
Valley, stretching from Kosti north to Dongola. When the Merowe dam
starts generating electricity, he said, it will connect with the
Egyptian grid and agricultural development will spread to the border
at Wadi Haifa. Connection to the Ethiopian grid will move activity
up the Blue Nile as well. Faiz compared Sudan's experience to that
of Brazil, which a quarter century ago made a similar push towards
large mechanized farming. It's no coincidence Brazil has recently
opened an Embassy in Khartoum, he observed.

... BUT PRODUCTIVITY HOBBLED BY POLICIES
----------------------------------------

11. (SBU) However, he continued, Sudan's potentially wealthy
agriculture sector is hobbled by poor management and resource use.
He cited distortions due to subsidies, taxes, lack of credit, lack
of research and development, and even labor shortages as constraints
on productivity. He lamented what he said was massive waste of
water. To date, he said, production has been increased only by
expanding acreage, but it could be increased three-four fold simply
with better management. That agricultural planning is heavily
centralized at the Agriculture Ministry remains problematic, due its
lack of capacity and organization. By contrast, he said, the
state-level agricultural boards are much more progressive.

WORLD BANK-GNU RELATIONSHIP DETERIORIATING
------------------------------------------

12. (SBU) Faiz lamented the World Bank's "difficult" relationship
with the GoS. According to Faiz, the GoS's attitude toward the Bank
deteriorated as it became clear that signing the CPA would not lead
to a debt-relief package. The GoS has given up and "turned their
backs on the West," he said, and has turned instead to China, India
and Malaysia. The GoS is dissatisfied with these relationships, he
said, and it bothers them quite a bit that they have been left
behind (in their view) by the West. As a result of this frosty
relationship, not to mention the possible ICC indictment of
President Bashir, the Bank is unclear what its future role will be

KHARTOUM 00001291 003 OF 003

in Sudan.

Comment
-------

13. (SBU) Faiz was notably more pessimistic than when we last met
with him in March. Six months ago, he was relatively upbeat about
Sudan's immediate prospects, although more cautious about
longer-term challenges. He now is clearly worried about Sudan's
deteriorating relations with the West in the wake of ICC prosecutor
Ocampo's charges. He believes that the GNU is not considering the
possible economic implications of a hard-line response to the ICC.
He thinks the GoSS is at least as complacent regarding the fallout
from the ICC, as well as the preparations required should it vote
for independence in 2011. Faiz appears to be leaving Sudan
disappointed that he has been unable to make a bigger difference,
and his pessimistic outlook may reflect that disappointment, but his
sense of gloom over the ICC process and its effect on the Sudanese
political process is shared by many here in Sudan.

ASQUINO

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