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