VZCZCXRO0814
OO RUEHROV RUEHTRO
DE RUEHKH #0129/01 0331325
ZNR UUUUU ZZH
O 021325Z FEB 09
FM AMEMBASSY KHARTOUM
TO RUEHC/SECSTATE WASHDC IMMEDIATE 2825
INFO RUCNIAD/IGAD COLLECTIVE
RUEHGG/UN SECURITY COUNCIL COLLECTIVE
RHMFISS/CJTF HOA

UNCLAS SECTION 01 OF 02 KHARTOUM 000129 
 
DEPT FOR AF A A/S CARTER, AF/SPG, AF/E 
DEPT PLS PASS USAID FOR AFR/SUDAN 
DEPT PLS PASS TREASURY FOR OIA, UESD IMF, USED WORLD BANK 
ADDIS ABABA FOR USAU 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: PGOV PREL ECON EFIN EAID SU
SUBJECT: GNU STATE MINISTER OF FINANCE BLAMES HIS SPLM COMRADES FOR 
FOREIGN EXCHANGE DISPUTE 
 
REF: A) 08 KHARTOUM 1456 
      B) 08 KHARTOUM 1578 
 
¶1. (SBU) SUMMARY: SPLM-appointed State Minister of Finance in the 
Government of National Unity (GNU) Lual Deng laid the blame for the 
festering dispute over the control of foreign exchange reserves 
squarely on the Government of Southern Sudan (GoSS), by having 
turned a technical issue into a high-level political dispute.  Deng 
said that the CPA clearly makes monetary policy, and hence the 
control of foreign-currency reserves, the responsibility of the 
central bank, and that the GoSS had reneged on an earlier agreement 
that all had thought resolved the issue.  He urged that the U.S. 
tell the GoSS that it is in the wrong and to reach an agreement with 
the GNU.  END SUMMARY. 
 
¶2. (SBU) On February 1, CDA Fernandez and econoff called on Dr. Lual 
Deng, the SPLM-appointed State Minister of Finance in the GNU, to 
discuss the continuing dispute between the GNU and the GoSS over 
control of foreign exchange (FX) reserves (reftels).  Charge 
Fernandez said that he was seeking meetings with other GNU 
officials, including Finance Minister Al-Jaz and Central Bank of 
Sudan (CBOS) Governor Sabir Hassan, to express USG concern and seek 
their advice on how to assist in resolving the dispute.  The Charge 
said that the USG is aware that the two sides are discussing the 
issue, but is concerned that the longer it drags on without 
resolution, the greater the danger that it will emerge as a 
full-blown political crisis.  The U.S. does not want to make the 
situation worse by going public yet, but is deeply concerned that 
the GoSS is heading towards a financial crisis, at which point the 
USG will have no choice but to take a public stand and apportion 
blame.  Whoever is at fault, blame would certainly fall on the GNU 
and the National Congress Party (NCP).  The U.S. and others in the 
international community want to help resolve the issue before it 
reaches this point, he said. 
 
¶3. (SBU) State Minister Deng replied that it is first necessary to 
clear up "confusion" about the issue.  He said emphatically that 
under the CPA (Art. 14.2), the CBOS is responsible for making and 
implementing monetary policy for the entire country, and the Bank of 
Southern Sudan (BoSS) is a branch of the CBOS.  This system was 
agreed to at Naivasha with the advice of the IMF.  FX-reserve 
management is a key instrument of that monetary policy.  The 
reserves held by the BoSS do not belong to the GoSS.  Rather they 
are there to provide the people of the south the FX needed to 
carryout commercial transactions requiring foreign currency.  Any FX 
generated by the southern economy can remain there as needed and the 
CBOS will provide any additional reserves needed to meet local 
demand.  (Note:  The GoSS has contended that the CBOS has not been 
responsive to requests for additional FX, one of its arguments for 
holding on to reserves. End Note.) "Things were going alright until 
the (GoSS) Minister of Finance claimed the money" as the GoSS's, 
Deng said. 
 
¶4. (SBU) Deng commented that the problem is now becoming acute due 
to the precipitous decline in oil revenues on which the GoSS is 
totally dependent, although they are in fact two different issues. 
GoSS revenues in the first quarter of 2009 will be only equal to 
what it collected in November 2008, he noted, and it is rapidly 
drawing down its reserves.  He lamented the habit of both the NCP 
and the SPLM to blame each other for their difficulties.  He warned 
that were the U.S. to blame the NCP and GNU for the problem, it only 
will convince the GoSS that it has U.S. support to do whatever it 
pleases. 
 
¶5. (SBU) Deng continued that the GoSS has not been well advised, 
including by the U.S.  Rather than contravening the CPA and blaming 
the GNU for its difficulties, the GOSS would do better to focus on 
identifying other, reliable revenue sources.  U.S. should tell the 
GoSS to cool down and not blame the GoS or the NCP for its financial 
difficulties.  The IMF could properly advise the GoSS on putting its 
fiscal house in order. Deng recalled that the international 
community, including the USG, was deeply mistaken when it "did 
nothing and said nothing" when the SPLM/GOSS lost one billion 
dollars in 2006 which could be serving now as a reserve fund. 
 
¶6. (SBU) CDA Fernandez repeated that the U.S. wants to see the 
current dispute resolved quietly at the technical level, before it 
reaches the crisis point, and becomes an opportunity for mutual 
demagoguery. He agreed that neither the NCP nor the SPLM lives up to 
agreements they make and both are quick to blame the other.  He said 
that the U.S. has told the GoSS that it should resolve this issue as 
soon as possible, and has avoided commenting on the matter publicly 
so far.  "We respect the experts," he said, "but the rules will 
change if it becomes a political issue."  Deng remarked that he has 
 
KHARTOUM 00000129  002 OF 002 
 
 
"told them (the SPLM) they are wrong," but he added "you are more 
powerful than me in the south." 
 
¶7. (SBU) CDA informed AEC Chairman Plumbly of the discussion and 
Plumbly subsequently met with Deng and CBOS head Sabir Hassan on 
February 2. Hassan continues to be difficult, feeling that he is 
right on the letter of the agreement and that the NCP has the SPLM 
over a (literally and figuratively) barrel.  Embassy will continue 
to stress to GNU and NCP officials that an "implosion in governance" 
in South Sudan because of economic issues would be dangerous for 
both parties to the CPA. 
 
¶8. (SBU) Comment: As both a U.S.-trained, Phd. economist and an SPLM 
member of the GNU, Lual Deng is as close as we have come to an 
unbiased source on this dispute.  His views align closely with those 
of CBOS Governor Hassan.  As GoSS financial reserves quickly 
dwindle, it may be more desperate and be more reluctant than ever to 
compromise.  But it also is being pushed into a financial corner 
from which it may only be able to get out by cutting a deal on the 
NCP's own terms or expecting an unrealistic financial bailout from 
its friends in the West at the 11th hour. The precipitous fall in 
oil revenues plus the hard currency disagreement - which are indeed 
two separate issues - are placing unprecedented financial pressure 
on South Sudan's fragile government and could eventual threaten the 
South's tentative, hard-earned and unprecedented political 
progress. 
 
FERNANDEZ