Cablegate: Uk Expert Shares Views On Foreign Exchange Reserves, Oil

DE RUEHKH #1070/01 2661154
O 231154Z SEP 09




E.O. 12958: N/A
SUBJECT: UK Expert Shares Views on Foreign Exchange Reserves, Oil


1. (SBU) Summary: Laura James, Senior Economic Advisor for the UK's
Department for International Development (DFID) said that
implementation of the wealth-sharing provisions of the Comprehensive
Peace Agreement (CPA) have been "fairly smooth", but problems
remain. In 2008, the North stopped paying the South its share of
oil revenues in foreign exchange, shifting payment to Sudanese
pounds (SPG); the South, which has no economically-significant
exports, has spent all of its reserves on imports. Any IMF
technical assistance that may be provided will facilitate a
political deal on the handling of reserves. If the North's argument
that the recent Permanent Court of Arbitration (PCA) decision
requires repayment by the South of oil revenues misallocated under
the Abyei Roadmap prevails, the Unity Fund may also have to repay
the North, James noted.

2. (SBU) Summary continued: While, in James' view, accounting for
oil revenues is transparent, the underlying contracts are not;
responsible management of oil reserves would require a review of the
contracts. (Note: Global Witness, in an early September report
(Septel) on Sudan's oil industry, points out discrepancies in
reported data, and recommends mechanisms for improving transparency
across the range of oil-related transactions. End Note.) U.S.
economic sanctions have prevented Sudan from entering into
agreements with U.S. companies in the oil sector. This in turn has
forced Sudan to enter into worse deals than would otherwise have
been available, as well as helped hide the corruption inherent in
such arrangements. Wealth-sharing has not been decentralized, and
is tightly held by the Government of National Unity's (GNU's)
Ministry of Finance, making it difficult for states to carry out
their responsibilities, James noted. The Government of Southern
Sudan (GoSS) has entered into a 2 billion SPG (USD 800 million)
contract for roads which, like grain contracts (Ref), is entirely
off-budget. End Summary.

2. (SBU) Pol-Econ Chief met with Dr. Laura James, Senior Economic
Advisor for the UK's Department for International Development
(DFID). James, who said she had followed Sudan's economy for years
as part of "The Economist" magazine's economic research unit, called
implementation of the wealth-sharing elements of the Comprehensive
Peace Agreement (CPA) "fairly smooth", but also said issues remain.

--------------------------- ---------------------------Foreign
Reserves: Entitlement, Management Are Problems
--------------------------- ---------------------------

3. (SBU) One issue currently under discussion between the North and
the South, and in aid circles, is management of foreign reserves.
The North remitted oil revenues to the South in U.S. dollars until
September 2008, but then began making remittances in local currency
SPGs. According to James, the underlying rationale for the switch
was that the South had begun hoarding dollars. With its access to
foreign exchange restricted, the South began to spend down what few
reserves it had. The South now has virtually no foreign reserves
with which to purchase imports.

4. (SBU) Both entitlement to and management of foreign reserves
have created problems between the parties. Recently, the South
had to ask the North for sufficient foreign exchange to allow its
officials to travel outside Sudan, James said. In the NCP-SPLM
Points of Agreement resulting from the U.S.-led trilateral process,
the parties to the CPA agreed to refer these issues to the
International Monetary Fund (IMF). These questions, however, are
not merely technical ones; the heads of the Bank of Southern Sudan
and its parent, the Central Bank of Sudan, are both professionals,
have worked together in the past, and have handled transfers between
the banks with ease, James noted. Consequently, she believes IMF
technical assistance will provide political cover for whatever
political deal the parties are able to make on these two issues.

North Argues Arbitration Mandates Repayments

5. (SBU) The CPA, of which the Abyei Protocol is a part, sets out a
formula for the division of oil revenues: 50 percent to the North,
42 percent to the South, and two percent each to the Misserya and
Dinka tribes and to the States of South Kordofan and Blue Nile,
James said. From 2005 to 2008, the CPA parties were unable to
decide on the boundaries of the oil-rich Abyei area. Consequently,
during that period, Abyei area oil revenues went only to the North.
In 2008, the Abyei Roadmap was agreed upon as a temporary mechanism
for allocating between North and South the oil revenues from various

KHARTOUM 00001070 002 OF 003

Abyei fields until such time as the Permanent Court of Arbitration
(PCA), to which the parties had referred the issue of demarcation,
could render a decision, James noted.

6. (SBU) The July 2009 arbitration decision decreed that the
Diffra field was included within the Abyei boundaries. However, it
also held that the Heglig and Bamboo fields were not within the
Abyei area. After the PCA rendered its decision, the North claimed
that the implication of the arbitration decision is that the parties
should look back, and apply the formula from the CPA to rectify any
misallocations that had taken place under the Abyei Roadmap, James
said. Following that argument, they claimed that any revenue paid
on oil from the Diffra field should have been divided according to
the CPA, and thus that the South must repay the North's share. In
addition, the NCP claimed that revenues paid to the South from the
Heglig and Bamboo fields for the years 2008-9 must be repaid to the
North because these fields were not determined, based on
arbitration, to be within the Abyei boundaries.

7. (SBU) If carried to its logical conclusion, James said, the
North's line of argument will also affect the Unity Fund. The North
could base its case by arguing only revenues from the Diffra field
should have gone into the fund, while the fund should pay back the
revenues from the Heglig and Bamboo fields that were mistakenly
allocated to it.

8. (SBU) One issue that was outstanding in 2008, the year of the
roadmap, was the issue of USD 9 million in payments that the North
owed the South. Those arrears were paid to the South by the North
in March, James noted.

Oil Revenues Transparent, Contracts Not

9. (SBU) In James' view, the reporting of oil revenues is quite
transparent; it is unlikely that the figures can be faked, or that
there have been any massive diversions of Southern oil. (Note:
Global Witness, in its September report (Septel) on Sudan's oil
industry, points out discrepancies in reported data, and recommends
mechanisms for improving transparency across the range of
oil-related transactions. End Note.) What is not transparent,
however, are the terms of the original contracts for exploration and
sale of the oil. It is unlikely that the North got the best deal
possible, she said, and likely that corruption is involved. It is
very much in the South's best interest to play a more participatory
role in the management of the oil sector. However, what prevents
the South from playing such a role is their lack of people trained
and experienced in the sector, James noted.

Strategic Management Requires Contract Review

10. (SBU) To answer the question of whether Sudan's oil reserves
are being managed in the best possible way for the long term, one
would have to review the terms of the existing concessions, and to
renegotiate them if necessary. It is probably too late for that
ever to be accomplished, James said, in light of what appear to be
cozy arrangements between the companies and government decision

Sanctions Help Hide Corruption, Bad Deals

11. (SBU) Asked the impact of sanctions on the oil industry, James
said sanctions keep big companies out, which in turn allows the
Chinese and Malaysian companies, which otherwise could not compete,
to come in. Sanctions have not stopped deals; they have merely
assured that the deals that are made are not the best ones they
could be for Sudan. Even if sanctions were lifted, she said, there
is no guarantee that other companies would come in. The existing
relationships are too well established, and likely too corrupt, to
brook any interference. Sanctions have helped cover up the bad
deals and corruption, she said.

Darfur Delays Debt Relief

12. (SBU) Sudan has USD 34 billion worth of debt, much of it
arrears on 1970s development projects and the accumulated interest.
The North believed that, after signing the Comprehensive Peace
Agreement (CPA), the next step was to do debt relief. In James'

KHARTOUM 00001070 003 OF 003

view, the war in Darfur stopped debt relief cold, but the North
nonetheless felt that a promise had not been delivered, and blames
the international community for "upping the ante."

Wealth Sharing Not Decentralized

13. (SBU) While most of the wealth sharing focus has been on oil
and issues linked to the sharing of oil revenues, James believes
that issues surrounding the decentralization of wealth sharing are
of equal significance to the CPA, and have affected whether citizens
actually receive a peace dividend. While the Fiscal and Financial
Allocation and Monitoring Committee (FFAMC) does monitor funds
transfers to the states, allocation of funds to the states is still
handled by the Ministry of Finance and is a very political matter.
State governors have to come in to the Ministry from their states to
ask for money with which to fund their budgets. As a result, a
governor may not know whether he will have sufficient funds with
which to pay teachers in the schools, she said. The end result is
that responsibilities, for education and the like, have in fact been
devolved down to the state, but access to a predictable quantity of
funds has not been similarly handed down. As oil revenues have
shrunk during the global economic crisis, this problem has become
very clear.

14. (SBU) A wealth sharing issue that has not gotten much attention
is access to Nile River water, James said. Foreign assets held
abroad, including museum exhibits, money in foreign accounts and
embassy properties, represent comparatively small amounts of money.
However, if division of this wealth is not thought through, problems
between the parties could arise, James noted.

Enormous Roads Contract Entirely Off-Budget

15. (SBU) According to James, the Government of Southern Sudan has
massively overcommitted its income stream. . This prevents the
South from allocating funds to the areas that most need attention.
Disarmament, Demobilization and Reintegration (DDR) efforts in the
South are starved for funding, James claimed.

16. (SBU) The problem with GOSS grain contracts (Ref) is
well-known, James said, but there are other similar problems with
other contracts that have not yet gotten much attention. In June,
the GOSS entered into a contract for the construction of roads with
Ayot, a Northern Sudanese company. The total value of the contract
is 2 billion SPG (approximately USD 800 million), which is paid in
monthly installments of 10 million SPG (approximately USD 40
million) per month; the contract will run for six years. More
importantly, the contract is entirely off-budget; payments are made
out of the South's share of oil revenues before they are remitted to
the South. James said the contract has obligated far more than
the South can hope to gain from oil revenues. Moreover, it is
unclear what the people of Southern Sudan are getting for their
money. While the contract may result in roads being built, there
has been no planning conducted, and most will represent political

17. (SBU) Comment: James' remarks dovetail with the conclusions of
the September 2009 report (Septel) produced by Global Witness on
transparency in the oil sector.


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