VZCZCXRO3757
PP RUEHROV
DE RUEHKH #1034/01 1921235
ZNR UUUUU ZZH
P 101235Z JUL 08
FM AMEMBASSY KHARTOUM
TO RUEHC/SECSTATE WASHDC PRIORITY 1295
INFO RUCNIAD/IGAD COLLECTIVE

UNCLAS SECTION 01 OF 03 KHARTOUM 001034 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR AF A/S FRAZER, SE WILLIAMSON, AF/SPG 
DEPT PLS PASS USAID FOR AFR/SUDAN AND NSC BPITTMAN/CHUDSON 
 
E.O. 12958: N/A 
TAGS: PREL PGOV PINS EFIN EAID SOCI KDEM SU
SUBJECT: THE NEW NORTH/SOUTH WAR? IT'S THE ECONOMY, STUPID 
 
¶1. (SBU) SUMMARY: The SPLM and the NCP are mired in an economic 
standoff grounded in competing interpretations of the Comprehensive 
Peace Agreement.  It is the latest chapter in the  two parties' 
complex and often dysfunctional relationship, and a further blow to 
hopes that unity can be made attractive in Sudan.  Mediation out of 
the impasse rests within the already burdened GNU Presidency and the 
beleaguered relationship between President Bashir and FVP Kiir. 
While the controversy is due to be discussed between the pair on 
July 11, the episode is further proof the CPA implementation -- 
three years after the accord's signing - has, in many instances, yet 
to go beyond the superficial level of the most significant 
milestones and mechanisms required of the parties. END SUMMARY. 
 
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CURRENCY TRANSFER DISPUTE SPARKS FINANCIAL WARFARE 
--------------------------------------------- ----- 
 
¶2. (SBU) Sparking what the GOSS Minister of Finance Kuol Athian 
Mawien and senior NCP officials in Khartoum term "a crisis," the 
SPLM, via the Bank of Southern Sudan (BOSS), has refused Central 
Bank of Sudan (CBOS) demands to transfer the totality of the South's 
hard currency reserves to Khartoum.  The NCP, via CBOS, retaliated 
in June by withholding from Juba both foreign cash and local 
currency shipments for one week. Acting BOSS President Kornelio 
Koryom Mayik wrote an internal memo to GOSS Presidential Affairs 
Minister Luka Biong Deng, Finance Minister Mawien, and Legal Affairs 
Minister Michael Makuei on June 15 which stated the BOSS would be 
forced to close in two days if funds were not received from 
Khartoum. The BOSS had $15 million remaining in its account, and the 
SPLA had already bounced two checks totaling $6 million as a result 
of the funds freeze. 
 
¶3. (SBU) Mayik called for the GOSS' immediate intervention "or face 
an economic crisis precipitated by the CBOS' policy of financial 
strangulation of Southern Sudan."  Minister Mawien told ConGen 
PolOff July 9 that Salva Kiir Mayardit called President Bashir 
shortly after being briefed and demanded that currency transfers 
resume immediately.  Kiir reminded the President that the costs of 
printing the new Sudanese pounds were borne equally by the GOSS and 
GNU, and unless Khartoum wanted the South to start printing its own 
currency as an independent nation, it had best share currency in 
accordance with the CPA and Interim National Constitution (INC). 
Funds were released one day later. 
 
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THE NCP COMPLAINS WITHOUT APPARENT CAUSE 
---------------------------------------- 
 
¶4. (SBU) On June 16, NCP insider and Center for Strategic Studies 
Director Sayed El Khatieb complained to CDA Fernandez that Mawien 
was "illegally" holding $900 million owed to the CBOS, and claimed 
that -- "just as during the census" -- the SPLM would be proven to 
be in the wrong. However, internal documents provided to ConGen 
PolOff lay out a compelling case for the SPLM counter-argument.  The 
SPLM maintains that the CBOS's early June demands that the BOSS 
transfer to Khartoum all Euro, GPB, and dollar account balances held 
at the Arab Investment Company (TAIC) and Commerce Bank Frankfurt 
not only contravened an intra-governmental Memorandum of 
Understanding between the CBOS and BOSS dated November 2007, but 
breached the CPA's Wealth Sharing Agreement. The CBOS contends that 
all foreign exchange reserves belong to the Central Bank.  The SPLM 
agrees, but maintains that the BOSS is the South's window into the 
Central Bank, and therefore keeping foreign exchange accruals at the 
BOSS is equivalent to keeping funds in CBOS. 
 
------------------- 
THE SANCTIONS PINCH? 
-------------------- 
 
¶5. (SBU) While the motivation for the CBOS reversal is unclear, the 
confluence of enhanced U.S. sanctions and the GOSS's decision to 
open correspondent banks in line with the CPA has hampered 
Khartoum's access to hard currency.  Mawien's July 2007 arrival at 
the Ministry of Finance and Economic Planning and a productive visit 
to Washington, DC in October 2007 led the GOSS to open its first 
foreign correspondent banks.  This gave Juba the ability to sidestep 
its nascent banking system and for the first time in the GOSS's 
history receive hard currency, albeit in foreign accounts.  In 
Juba's estimation, this gave the GOSS the ability to determine its 
own currency investments, and keep all foreign exchange reserves 
generated in the South (through conversion of monthly oil proceeds 
or through other means) in the BOSS under the long-standing SPLM 
position that the bank is a "second window" into the CBOS, not a 
subordinate entity. Keeping Southern-generated hard currency 
accruals in Juba vice Khartoum renders the NCP unable to access 
either foreign exchange reserves generated through the GOSS's 
currency conversions or any other investment proceeds.  While Mawien 
was circumspect with respect to BOSS hard currency holdings, he 
believed el Khatieb's figure was "too low." 
 
KHARTOUM 00001034  002 OF 003 
 
 
 
¶6. (SBU) Prior to Mawien's ministerial appointment, the CBOS held 
the GOSS's hard currency shares of the South's monthly oil revenue, 
dispensing an equivalent amount of local currency to Juba.  The SPLM 
alleges that income derived from currency investment of both GNU and 
GOSS funds residing in the national reserve were utilized 
exclusively to meet foreign exchange requirements in the North. 
According to Mawien, the GOSS met its official commitments through 
the additional conversion of local currency back to hard currency. 
GOSS accounts in correspondent banks now allow the BOSS to cater to 
the foreign exchange needs of the South -- a move the SPLM maintains 
is supported by the November 2007 intra-governmental MOU and Section 
Seven of the CPA's Wealth Sharing Agreement. The latter states 
"foreign exchange of GOSS is considered part of the national 
reserve.  GOSS shall use its share of the national reserve to meet 
its foreign exchange requirements." 
 
--------------------------------------------- --- 
SPLM: NCP ABANDONMENT OF CPA AND OTHER AGREEMENTS 
--------------------------------------------- --- 
 
¶7. (SBU) SPLM outrage over the CBOS's recent actions is two-fold: 
consternation over Khartoum's disregard for another 
intra-governmental agreement that is barely six months old and the 
perception that Khartoum is trying to financially hobble a Juba 
otherwise exempt from U.S. sanctions. Initially, when the BOSS 
refused CBOS demands for hard currency transfers in June, the 
central bank ordered the BOSS to cover GOSS local currency needs out 
of BOSS reserves -- drawing down Juba's store of hard currency.  The 
BOSS refused, noting the 2007 MOU explicitly delinks BOSS purchases 
and sales of foreign currency from the local currency needs of the 
BOSS.  Mawien further underscored this point, noting that interest 
accrued as a result of the South's investment of its oil revenue 
proceeds "were for the welfare of the GOSS and Southern public," not 
replacement funds for the South's hard currency reserves. The GOSS 
Finance Minister further contended that the BOSS has generated the 
bulk of its hard currency reserve through the conversion of its oil 
proceeds, and the 2007 MOU stipulates that "there shall be no 
linkage between supplying the BOSS with local currency and the GOSS 
share in oil." 
 
----------------------- 
SPLM FRUSTRATION BUILDS 
----------------------- 
 
¶8. (SBU) If another forgotten MOU weren't enough to stoke SPLM ire, 
a litany of unreciprocated good faith efforts by the SPLM/GOSS/BOSS 
to comply with CBOS requests for intra-bank currency transfers has 
only served to worsen the North/South relationship.  BOSS supposedly 
sent 118,000,000 pounds sterling to the CBOS to cover Northern 
foreign exchange needs in December 2007 - the sum has yet to be 
reimbursed to Juba.  The SPLM points to numerous instances pre-MOU 
whereby requests for South-oriented funds-transfers were 
inexplicably not honored. The CBOS failure to act on a request for a 
$4.5 million hard-currency transfer to Stanbic Commercial Bank in 
Kenya has irrevocably strained the GOSS's business relationship with 
this entity, and impacted Juba's ability to respond to immediate 
payment needs related to ministerial medical expenses and upkeep of 
the GOSS Liaison Office in Nairobi. 
 
--------------------------------------------- ------- 
A FRAMEWORK FOR NCP CONCESSIONS, BUY-IN TO SPLM VIEWS 
--------------------------------------------- -------- 
 
¶9. (SBU) At the height of the June economic crisis, the Joint 
Sub-Committee on Banking and National Projects (a Mawien creation 
envisioned, ironically, to improved relations between his own 
ministry and the GNU Ministry for Finance and National Economy and 
speed CPA implementation) held an emergency meeting in Juba to 
implement the details of the GOSS President's edict to Bashir. It 
agreed to establish a Joint Technical Committee to examine the 
relationship between "CBOS Headquarters and the BOSS" and make 
recommendations to CBOS management by July 31. Significantly, 
however, the sub-committee set forth three ground-breaking 
precedents: i) "Foreign exchange reserves generated through 
transfers, including purchase from GOSS and the private sector 
within the South's economy, belong to the Central Bank (CBOS/BOSS) 
and the BOSS is responsible for implementing the policies of the 
CBOS in Southern Sudan"; ii) "neither the GNU nor GOSS finance 
ministry's can order the CBOS/BOSS to utilize their reserves, but 
both ministries are given priority access and purchasing rights"; 
iii) "the GOSS Finance Ministry, unlike the GNU Finance Ministry, 
has...the right to keep its share of foreign exchange generated by 
Sudanese oil revenue within the BOSS." 
 
¶10. (SBU) Mawien cautiously describes the resolutions generated by 
the June 21 meeting as "preliminary," noting the hard currency 
controversy will not be fully resolved until discussed between 
Presidents Bashir and Kiir on July 11.  The sub-committee's 
 
KHARTOUM 00001034  003 OF 003 
 
 
resolutions offer significant concessions to the SPLM position on 
the co-equal status of the CBOS and BOSS (the "two windows" 
argument), but it is unclear how much these working-level efforts 
were sanctioned by the NCP leadership in Khartoum.  Kiir affirmed to 
Mawien in a July 7 meeting that the BOSS control over the national 
share of foreign exchange reserves generated within the South was 
paramount.  Although the First Vice President was described as 
decidedly pessimistic about the upcoming meeting, he told the 
Finance Minister "we will not be reversed on this point." 
 
------- 
COMMENT 
------- 
 
¶11. (SBU) COMMENT: Khartoum's attempts to reassert control over 
foreign exchange revenue appear to have been temporarily thwarted - 
but at considerable political cost.  Piling a nuanced economic issue 
on top of the Abyei Roadmap and other elements of CPA implementation 
is not the conciliatory gesture one expects from an NCP anxious to 
woo its "junior partner" before the 2009 elections.  Indeed, Finance 
Minister Mawien notes incidents like this have heightened chatter 
within Juba that increased NCP recalcitrance on such issues may be 
precisely what Kiir needs to be persuaded to vie for the presidency 
at the national level. 
 
FERNANDEZ