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Cablegate: Economists Urge Greater Exchange Rate Flexibility For

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DE RUEHKH #1120 2781255
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O 051255Z OCT 09
FM AMEMBASSY KHARTOUM
TO RUEHC/SECSTATE WASHDC IMMEDIATE 4509
INFO RUCNIAD/IGAD COLLECTIVE
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DEPT PLS PASS USAID FOR AFR/SUDAN
ADDIS ABABA ALSO FOR USAU

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E.O. 12958: N/A
TAGS: EFIN EPET PGOV PREL SU
SUBJECT: ECONOMISTS URGE GREATER EXCHANGE RATE FLEXIBILITY FOR
REBUILDING OF FOREX RESERVES

1. (SBU) SUMMARY: Sudan's foreign exchange reserves have trended
upwards after reaching perilously low levels in March, but the
Central Bank of Sudan (CBOS) remains too protective of the Sudanese
pound (SDG), economists at the African Development Bank (AfDB) told
econoffs on September 24. They urged greater exchange rate
flexibility and a tightening of fiscal policy for Sudan to maintain
macroeconomic stability in 2010. END SUMMARY.

2. (SBU) Sudan ended 2007 with approximately USD1.1 billion in
foreign exchange reserves, good for 1.2 months worth of imports,
according to International Monetary Fund (IMF) data. Reserves had
reached as high as USD2 billion in May of 2008, before the global
financial crisis sharply reduced oil revenues and foreign direct
investment. By March of 2009, reserves stood at a mere USD300
million, less than two weeks of imports. The rise in oil prices in
recent months is thought to have improved the reserve situation,
according to the economists, but the CBOS has not yet released
second quarter (Q2) 2009 data.

3. (SBU) The economists noted that while transparency at the CBOS is
extremely limited, they believed the reserve crisis was exacerbated
by the CBOS using foreign exchange to prop up the Sudanese pound.
"Sudan is too protective of its currency," said AfDB Resident
Representative Famara Jatta. "They should allow it to find its own
way," noting that exchange rate flexibility would allow for the
safeguarding and rebuilding of foreign exchange reserves.

4. (SBU) Sudan has agreed to IMF supervision under an 18 month Staff
Monitored Program (SMP) aimed at maintaining macroeconomic stability
and rebuilding foreign exchange reserves. Among the key
recommendations of the SMP are greater exchange rate flexibility,
rescheduling of external debt, a constraint on non-concessional
borrowing and tightening of fiscal policy. (NOTE: The IMF, World
Bank, and other multilateral development banks cannot offer
low-interest rate loans --so called "concessional financing"- to
Sudan due to the US sanctions regime. END NOTE.) The years 2007 and
2008 saw a significant rise in government expenditures due to the
influx of oil revenues, and cutting back this spending remains a key
challenge, according to the economists.

5. (SBU) Comment: Despite the lack of CBOS data, it appears that the
atmosphere of an acute foreign exchange crisis has ceased with the
rise in oil prices. The IMF is correct in advocating a more flexible
exchange rate regime for the SDG, and the CBOS should be doing its
utmost to build up reserves in advance of the first SMP review in
December 2009. But the recent drop in the official exchange rate
from SDG 2.50 to 2.30 for the dollar indicates the CBOS may be up to
its old tricks in manipulating the market, a strategy that has cost
Sudan billions in foreign exchange reserves and will ultimately
prove unsustainable.

ASQUINO

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