VZCZCXRO3341
OO RUEHROV
DE RUEHKH #1456/01 2721158
ZNR UUUUU ZZH
O 281158Z SEP 08
FM AMEMBASSY KHARTOUM
TO RUEHC/SECSTATE WASHDC IMMEDIATE 1990
INFO RUCNIAD/IGAD COLLECTIVE
RHMFISS/CJTF HOA

UNCLAS SECTION 01 OF 02 KHARTOUM 001456 
 
DEPT FOR A/S FRAZER, SE WILLIAMSON, AF/SPG, AND EEB/IFD 
NSC FOR PITTMAN AND HUDSON 
ADDIS ABABA FOR USAU 
DEPT PLS PASS USAID FOR AFR/SUDAN 
DEPT PLS PASS TREASURY FOR OIA, USED IMF AND USED WORLD BANK 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EAGR EAID PGOV PREL PINR IBRD SU
SUBJECT: NORTH-SOUTH FOREX TRANSFER DISPUTE CONTINUES 
 
REF: KHARTOUM 1034 
 
¶1. (SBU) In a September 25 meeting with CDA Fernandez, Central Bank 
of Sudan (CBOS) Governor Dr. Sabir Mohamed Hassan asserted that the 
Bank of Southern Sudan's (BOSS) refusal to transfer excess foreign 
currency reserves to Khartoum was a clear violation of the CPA that 
was hampering his ability to conduct a unified monetary policy and 
manage the country's exchange rate. He blamed political interference 
from GOSS leaders on his deteriorating relationship with his Deputy, 
BOSS President Elijah Malok Aleng Mayen, and implored CDA Fernandez 
to urge GOSS leaders to refrain from politicizing monetary issues. 
Hassan also requested CDA's assistance in protecting CBOS assets 
frozen at the Federal Reserve Bank of New York from a U.S. federal 
court ruling ordering the GOS to pay compensation to the families of 
US sailors killed in the 2000 terrorist attack on the USS Cole in 
Yemen. CDA Fernandez noted that the U.S. Judiciary is independent 
from the Executive branch, but suggested that a meeting between the 
Sudanese Embassy in Washington and the US Treasury Department might 
be helpful in clarifying the issues. End Summary. 
 
¶2. (SBU) Hassan began by stating that the Comprehensive Peace 
Agreement (CPA) is very clear on matters related to the CBOS and the 
conduct of monetary policy, in no small part due to his insistence 
that such details be spelled out during negotiations in Navaisha. 
(Note: Hassan, who holds a Ph.D. in Economics from Syracuse 
University and is a veteran of the IMF in Washington, is widely 
viewed as an able technocrat. End Note.)  He stated that the CBOS 
has autonomy and independence to pursue a unified monetary policy. 
"The CPA is very clear in stating the unity of the Central Bank," 
said Hassan, adding that the BOSS is a branch of the CBOS and its 
Deputy, Elijah Malok Aleng Mayen, is subordinate and accountable to 
him. (Note: The SPLM's longstanding position is that the BOSS is 
merely a "second window" of the CBOS and not a subordinate entity. 
End Note.) 
 
¶3. (SBU) The ongoing dispute, stated Hassan, centers around the 
management of foreign exchange reserves (Reftel). The CPA is very 
clear with regard to the unity of foreign exchange reserves, he 
said, explaining that foreign exchange does not "belong" to the CBOS 
per se but rather to the economy as a whole. The CBOS is merely the 
custodian, and as such it is responsible for availing foreign 
exchange to the national economy. "Whoever needs foreign exchange 
comes to the CBOS," he said. The CBOS acquires foreign exchange from 
both the government and the private sector by buying it through 
local currency, and vice versa. The management of foreign exchange 
reserves is the purview of the CBOS Board of Directors, he said, and 
the policy is two-pronged. (Note:  BoSS President Elijah Malok is a 
member of the CBOS Board of Directors.  End note.)  First, he noted, 
a working balance of foreign exchange is  made available for the 
economy. Second, excess reserves are innvested. To implement this 
policy, he said, the CBOS has a window in Khartoum as well as in 
Juba. If there is a drop in the working balance of foreign exchange, 
the excess is pooled and redistributed. "This process is managed by 
the CBOS," he said. 
 
¶4. (SBU) Starting last December, however, the GOSS instructed the 
BOSS to halt transfer of foreign exchange reserves to the North, 
claiming they belonged to the South. Hassan strongly denied the 
claim, explaining how these reserves were already exchanged for 
local currency by the CBOS. "They can't have their cake and eat it 
too," he said. After several months of wrangling, the GOSS 
eventually relented because "they had no counterarguments," noted 
Hassan. But despite acknowledging that all foreign exchange reserves 
were in the purview of the CBOS, they insisted that those held in 
the South remain at the BOSS in Juba. "I told them that any excess 
reserves must be transferred to the CBOS for investment, but they 
refused," he said. 
 
¶5. (SBU) In response to the South's actions, Hassan stated that he 
began withholding local currency from the South pending transfer of 
the excess reserves. This prompted an outcry from the South, and 
following intervention by Salva Kiir, Hassan stated that he was 
compelled by the Presidency to resume local currency transfers. But 
the situation has continued, and excess reserves in the South have 
accumulated to a substantial amount, he said, noting that the lack 
of control of all of Sudan's foreign exchange reserves impedes his 
ability conduct a unified monetary policy and manage the country's 
exchange rate. "You can't have two places managing monetary policy," 
he said. 
 
¶6. (SBU) Hassan stated that he wrote a letter to Aleng requesting a 
transfer of excess reserves to the CBOS in Khartoum, which was met 
with no response. A reminder was similarly ignored, so he resorted 
to withholding the hard currency share of the South's oil revenue 
shares in favor of local currency. "They are protesting, claiming 
 
KHARTOUM 00001456  002 OF 002 
 
 
that I'm withholding their share of the proceeds, while I'm in fact 
deducting it from money owed," he said. 
 
¶7. (SBU) Hassan stated that he expressed disappointment to Aleng 
that politics were interfering with the conduct of monetary policy. 
"Our past successes were based on the lack of political interference 
in our operations," he said. "Now, the GOSS is politicizing issues 
which should not be politicized. Hassan implored CDA Fernandez to 
advise the GOSS to stay out of monetary affairs. "Let us wait until 
2011, but until then we all must abide by the rules," he said. 
 
¶8. (SBU) Hassan also requested the assistance of CDA Fernandez in 
protecting the CBOS assets frozen at the Federal Reserve Bank of New 
York from a U.S. federal court ruling ordering the GOS to pay 
compensation to the families of US sailors killed in the 2000 
terrorist attack on the USS Cole in Yemen. "The lawsuit is 
politically motivated, and the Central Bank has nothing to do with 
it," he lamented. CDA Fernandez agreed that it has nothing to do 
with the Central Bank, but noted that the U.S. Judiciary is 
independent from the Executive branch.  He suggested that a meeting 
between the Sudanese Embassy in Washington and the US Treasury might 
be beneficial and that the State Department could try to facilitate 
such a meeting so that the Sudanese would at least have a better 
understanding of the issue. 
 
¶10. (SBU) Comment: Hassan presents himself as an apolitical 
technocrat, and in fact he is widely recognized by the international 
community in Khartoum for his commitment to both the letter and 
spirit of the CPA and his handling of the current row reflects this. 
The fact that the current dispute grew out of the December 2007 
cabinet crisis between the NCP and the SPLM indicates that it is 
likely entirely political, and as such a political solution is the 
best hope for resolving it.  The GOSS, after two years of 
inconsistent support from the GNU on its hard currency needs, has 
pegged the stockpiling of currency in foreign banks to an evolving 
"day after" 2011 independence referendum strategy.  The GNU, 
concerned that the GOSS may take a page from its own playbook, lacks 
confidence that its request for hard currency will be honored from 
its partners in the south.  The entire dispute holds little space 
for compromise, and the GOSS sees the foreign currency issue as a 
"sovereign" one for the South to manage (reftel.)  The GOSS also has 
liquidity issues that may prevent it from transferring the money. 
Therefore it is unlikely the BOSS will agree to transfer the money, 
gambling that Khartoum will not fall on its sword over the issue. 
However the GOSS is on thin ice in terms of CPA prerogatives as 
defined between the Government of National Unity and the Government 
of Southern Sudan.  Over time this is yet another issue that 
irritates relations between the parties and can be held up as an 
excuse for not implementing other parts of the CPA. It is one where 
the letter of the agreement favors Khartoum while political 
considerations - the South's fear and suspicions of Khartoum's 
intentions - trump any effort by the GOSS to fulfill their side of 
this portion of the peace accord. 
 
FERNANDEZ