VZCZCXRO0407
PP RUEHGI RUEHMA RUEHROV
DE RUEHKH #1718/01 3311450
ZNR UUUUU ZZH
P 261450Z NOV 08
FM AMEMBASSY KHARTOUM
TO RUEHC/SECSTATE WASHDC PRIORITY 2416
INFO RUCNFUR/DARFUR COLLECTIVE
RHMFISS/CJTF HOA

UNCLAS SECTION 01 OF 02 KHARTOUM 001718 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR AF A/S FRAZER, SE WILLIAMSON, AF/SPG, EEB/IFD 
NSC FOR HUDSON AND PITTMAN 
DEPT PLS PASS USAID FOR AFR/SUDAN 
DEPT PLS PASS TREASURY FOR OIA, USED WORLD BANK, AND USED IMF 
ADDIS ABABA ALSO FOR USAU 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EAID PGOV PREL KPKO UNSC IBRD SU
SUBJECT: WORLD BANK COUNTRY MANAGER SEES DARK CLOUDS ON SUDAN'S 
FISCAL HORIZON 
 
REF: A. KHARTOUM 1702 
¶B. KHARTOUM 1484 
 
¶1.  (SBU) SUMMARY: Sudan's World Bank Country Manager believes that 
falling oil prices and production, along with the global financial 
crisis, will confront Sudan with a "serious reckoning" in the coming 
two years.  While Khartoum already is facing "hard decisions," the 
position of the autonomous GoSS, which depends almost totally on oil 
revenues and has no capacity to mobilize foreign financing, is even 
more precarious.  END SUMMARY. 
 
¶2.  (SBU) In a November 25 courtesy call, newly-arrived World Bank 
Country Manager Lawrence Clarke shared with Charge Fernandez his 
perceptions of Sudan's economic circumstances.  (Note:  Clarke has 
been serving as the Bank's Manager for South Sudan, in Juba, since 
early this year.  He will continue to divide his time between 
Khartoum and Juba until the arrival of his successor in Juba.  End 
note.)  CDA Fernandez observed that Sudan, both North and South, has 
become used to a "bonanza" in oil revenues in recent years, but that 
bonanza may becoming to an end.  Sudan's prospects for future high 
oil revenues are rapidly dwindling.  Not only are global prices 
falling, but also Sudan's production levels are beginning to shrink, 
and there appears to be little prospect that they will recover (ref 
A).  The CDA asked for Clarke's estimate of how this reality will 
impact Sudan's economy. 
 
Khartoum - Facing Hard Decisions 
- - - - - - - - - - - - - - - - - 
¶3.  (SBU) Clarke agreed that Sudan is facing severely constrained 
circumstances.  Clarke believes that the Government of National 
Unity (GNU) in Khartoum already is making some hard decisions. 
These are beginning to be reflected in 2009 budget that the GNU 
recently submitted to the National Assembly (septel).  The GNU 
depends on oil revenues to fund 60 percent of its budget, he noted. 
The GNU's draft 2009 budget forecasts a six percent deficit.  Two 
thirds of this is to be financed via foreign borrowing, the other 
third domestically. "The Merowe Dam is too far along to be 
cancelled, but other big capital projects will have to be scaled 
back," he suggested.  Clarke thinks that this level of domestic 
borrowing will further increase already serious inflationary 
pressures.  (Note:  Heretofore, Sudan's 2008 inflationary pressure 
has come primarily from rising import prices, making it difficult 
for authorities to combat with normal monetary and fiscal 
instruments.  End Note.)  Clarke noted that the GNU already is 
drawing down its Oil Stabilization Account (ORSA).  He said that the 
GNU has not yet released the expenditure side of the 2009 budget, so 
he does not know how programs will be affected by the constrained 
revenues. 
 
¶4.  (SBU) Beyond falling oil revenues, Clarke thinks that Sudan's 
prospects will be compounded by the global financial crisis.  Clarke 
foresees foreign capital flows, notably from Gulf investors who have 
lost heavily in the financial meltdown, dwindling.  Sudan faces a 
"serious reckoning" ahead in 2009-2010, he concluded. 
 
Juba - In a Tight Spot 
- - - - - - - - - - - - 
¶5.  (SBU) Turning to South Sudan, Clarke said that while the GNU 
depends on oil for 60 percent of its revenues, the Government of 
South Sudan (GoSS) is over 90 percent dependent on oil revenues, 
putting it in a much tighter corner.  Clarke noted that the GoSS has 
benefited from the high global oil prices earlier in 2008, and has 
even been able to set aside a significant part of this year's oil 
windfall (ref. B).  He estimated that the GoSS now has about $200 
million in its Reserve Account, and that this will grow to $500 
million by year's end.  However, this reserve will not last long if 
revenues fall significantly and if the GoSS cannot control 
spending. 
 
¶6.  (SBU) CDA Fernandez commented that thanks to this oil windfall, 
GoSS President Salva Kiir so far has been able to avoid tough 
choices and buy social peace in the South.  Clarke agreed, noting 
that the GoSS keeps 250,000 public-sector employees on its payroll, 
probably 150,000 more than are needed.  The Charge added that of 
these 150,000 are SPLA soldiers.  Clarke said that this illustrates 
the GoSS' dilemma.  Just as almost all of the GoSS revenues come 
from oil, most of its expenditures go to paying salaries, with 
little left over for other needs, including economic development. 
"Khartoum will cut down projects, but Juba will have to cut down on 
salaries and employees," he noted. While there is a critical need 
for DDR in the South, the Southern economy lacks any capacity to 
absorb such a large number of entrants.  The GoSS continues to pay 
redundant workers and soldiers, for fear of the social unrest that 
would follow their discharge.  The Charge agreed that in Southern 
 
KHARTOUM 00001718  002 OF 002 
 
 
Sudan, "R" for reintegration is the critical and most problematic 
component of DDR. 
 
¶7.  (SBU) Clarke concluded that South Sudan is in an extremely 
fragile position.  Both oil prices and output are falling, removing 
any room to maneuver.  At the same time, the South lacks any major 
capacity to mobilize foreign financing to tide it over. 
 
Comment 
- - - - 
¶8.  (SBU) Clarke's pessimistic take on the next few years 
corresponds closely with our own (reftel).  The economic fallout 
from the global economic downturn is further complicating Sudan's 
already intractable political problems and limit the room to 
maneuver of both the NCP and the SPLM. This will put greater 
pressure on both Khartoum and Juba during a period of great 
political (ICC, elections, Abyei arbitration, North-South border 
demarcation, an incoming Obama Administration) volatility. 
 
FERNANDEZ