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Cablegate: Booming Oil Revenues Provide South Sudan with Budget

VZCZCXRO9168
OO RUEHROV
DE RUEHKH #1484/01 2801034
ZNR UUUUU ZZH
O 061034Z OCT 08 ZDK
FM AMEMBASSY KHARTOUM
TO RUEHC/SECSTATE WASHDC IMMEDIATE 2016
INFO RUCNIAD/IGAD COLLECTIVE
RHMFISS/CJTF HOA

UNCLAS SECTION 01 OF 02 KHARTOUM 001484

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

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EFIN ECON EAID PGOV SU
SUBJECT: BOOMING OIL REVENUES PROVIDE SOUTH SUDAN WITH BUDGET
SURPLUS

REF: KHARTOUM 926

1. (SBU) SUMMARY: An oil-revenue windfall will more than cancel
out mismanagement of budget expenditures in early 2008 and leave the
GoSS with a significant fiscal surplus, according to the south Sudan
World Bank manager. By year's end the government may have set aside
as much as $500 million in reserve. Although GoSS revenues may be
even greater in 2009, decreasing long-term oil production and
prices, and continued inability to exercise expenditure-side
discipline could lead to longer-term problems. END SUMMARY.

GoSS Reaps Revenue Windfall
- - - - - - - - - - - - - -
2. (SBU) Despite seriously overshooting its expenditure targets in
the first half of the year (reftel), the Government of South Sudan
is poised to achieve a significant budget surplus in 2008, according
to South Sudan World bank manager Lawrence Clarke. On October 2,
Clark told the U.S. trade delegation visiting Juba that the GoSS is
benefiting from an oil-revenue windfall. Clarke estimates that the
GoSS will reap $2.6 billion this year in oil revenues under the
wealth-sharing provisions of the Comprehensive Peace Agreement.
(Note: Under the CPA, revenues from oil produced in south Sudan are
divided equally between the Government of National Unity in Khartoum
and the GoSS. End Note.)

Saving for a Rainy Day
- - - - - - - - - - - -
3. (SBU) Clarke said that the GoSS Ministry of Finance plans to
deposit a significant portion of these funds in its reserve account.
Currently, there is $300 million in the Reserve Account. Clarke
expects this to grow to $500 million by year's end. (Note: The
GoSS drew down the Reserve Account to almost zero in 2007, in order
to cover an exploding fiscal deficit and end the year with a
balanced budget. End Note.) The GoSS plans to hold this money in
reserve as insurance against a possible rupture with the GNU
resulting from an ICC indictment of President Al Bashir.

Trouble on the Expenditure Side
- - - - - - - - - - - - - - - -
4. (SBU) Responding to a question, Clarke acknowledged that in the
first half of the year, the GoSS had once more seriously overspent
its budget targets, with some Ministries using up almost their
entire budget allocations for the entire year. This was especially
true of the SPLA. Clarke attributed this to the very large
proportion of the GoSS budget devoted to salaries and its policy of
"social employment." The GoSS remains committed to providing
salaries to SPLA veterans of the civil war and their dependents,
until alternative means of employment can be developed. Clarke
expects the GoSS to introduce a budget supplemental in the near
future to cover the additional spending.

Clouds on the Long-Term Horizon
- - - - - - - - - - - - - - - -
5. (SBU) Clarke foresaw potential problems in outlying years.
Sudan's oil production is beginning to slow and world oil prices
could begin to decline. Still, Clarke said, a 2009 revenue increase
of 30 percent remains a not-impossible best-case-scenario. The GoSS
is currently evaluating potential spending alternatives should the
additional revenues actually be forthcoming. He also spoke highly
of GoSS' budget preparation, saying that it is improving year by
year.

"Poised for a Takeoff"
- - - - - - - - - - - -
6. (SBU) More broadly, Clarke was extremely upbeat about south
Sudan's economic progress and potential. He described the South as
"on the right track" and "poised for a takeoff." He compared south
Sudan to Botswana when he served there in the early 1990's, and
believes that it has the potential for similar economic progress in
the coming 15 years.

Comment
- - - -
7. (SBU) The GoSS revenue windfall and its ability to sock away
significant amounts for a rainy day is good news. However, the
government's seeming inability to control the spending side of
budget implementation, the continued high proportion of funds going
to pay salaries, and its almost total dependence on oil as a revenue
source could spell serious trouble if revenues fall off in the
future. The political unknowns (which would cause a dramatic
decline in revenue) are whether the GNU will hold together through
2011, can the SPLM and NCP negotiate a post-2011 revenue sharing
plan (assuming separation) that will allow the South to transport
its oil through the North, and can the South continue to maintain

KHARTOUM 00001484 002 OF 002


internal stability. The possibility of political ruptures in the
GNU, an early unilateral declaration of independence without a plan
for revenue sharing, or instability in the South are all good
reasons for the GOSS to set aside a sizable reserve during the final
three years of the CPA.

ASQUINO

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