VZCZCXRO6355
OO RUEHROV RUEHTRO
DE RUEHKH #0330/01 0701147
ZNR UUUUU ZZH
O 111147Z MAR 09
FM AMEMBASSY KHARTOUM
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3213
RUCNIAD/IGAD COLLECTIVE
RUEHGG/UN SECURITY COUNCIL COLLECTIVE
RHMFISS/CJTF HOA

UNCLAS SECTION 01 OF 02 KHARTOUM 000330 
 
DEPT FOR AF A A/S CARTER, AF/SPG, AF/E, EEB/IFD 
DEPT PLS PASS USAID FOR AFR/SUDAN 
DEPT PLS PASS TREASURY FOR OIA, USED IMF, AND USED WORLD BANK 
ADDIS ABABA ALSO FOR USAU 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ENRG EAID PREL PGOV SOCI SU
SUBJECT: TWO REPORTS ANALYZE SOUTH SUDAN'S BUDGET CRISIS 
 
REF: A. KHARTOUM 185 
      ¶B. KHARTOUM 224 
      ¶C. KHARTOUM 298 
 
¶1.  This is an action request - see para. 13. 
 
¶2.  (SBU) SUMMARY:  According to two independent analyses, the GoSS 
can expect to receive no more than 3/4, and possibly as little as 
1/2, of the Sudanese Pounds (SDG) 3.658 billion revenues anticipated 
in its 2009 budget.  Transfers from the Government of National Unity 
(GNU) in January fell well below even these levels on a monthly 
basis, although they increased in February.  The GoSS seems still 
not to have come to terms with the gravity of its situation and has 
been tinkering with short-term fixes, rather than debating 
fundamental policy corrections.  END SUMMARY. 
 
¶3. (SBU) Post has received two analytical papers that shed 
additional light on the fiscal challenge facing the Government of 
South Sudan (GoSS) in the coming year (refs. A and B).  Both analyze 
the GoSS 2009 budget in light of current information on likely 
revenues and examine possible responses.  Although differing 
somewhat in specifics, both the Joint Donor Team (JDT) in Juba and 
World Bank staff (please protect) agree that the GoSS budget as 
adopted seriously overestimates anticipated revenues in 2009. 
 
¶4. (U) 2009 GoSS Budget 
        - - - - - - - - - 
       (Note:  SDG 1:US$2.2) 
 
Total Expenditures  SDG 3.607 billion 
 
Of which: 
Salaries    SDG 1.846 billion (51 percent) 
Operating Expenses  SDG 0.846 billion 
Capital    SDG 0.860 billion 
 
Total Revenues   SDG 3.658 billion 
 
Of which: 
Oil revenues (based on  SDG 3.402 billion (93 percent) 
 US$50/bbl forecast) 
Non-oil    SDG 0.245 billion 
 
¶5.  (SBU) Both GoSS and GNU budget-revenue estimates are based on 
forecasted international oil (Brent crude) prices of US$50/bbl. 
However, as both studies note, world prices are unlikely to move 
above US$45/bbl during the coming year, and may average less than 
that.  Sudan's Nile blend crude normally sells at a US$5/bbl 
discount below Brent.  The lower quality Dar blend sells at a 
discount of US$20-30/bbl below Brent.  Compounding this decline in 
prices, Nile blend makes up a declining proportion of Sudan's 
exports and this trend is likely to continue. 
 
¶6.  (SBU) Both the JDT and the World Bank forecast that GoSS 2009 
revenues will be significantly less than the budget assumes.  The 
JDT estimates that the GoSS is likely to achieve only 2/3 of its 
2009 revenue goals.  The World Bank analysis lays out several 
possible scenarios.  In the best case (oil prices remain at current 
levels,) GoSS revenues will reach 3/4 of its budget target.  In the 
worst case, (oil prices fall further, GNU fails to pay existing 
arrears, and GoSS fails to collect its anticipated level of non-oil 
revenues,) it would collect only 1/2 of its anticipated revenues. 
 
¶7.  (SBU) The programmed GoSS revenues translate to SDG 282 million 
on a monthly basis.  However, in early 2009 the GoSS share of 
revenues fell significantly below this.  In January the GoSS 
received only an alarming SDG 84 million in revenue transfers from 
the GNU Ministry of Finance, and by February 5 only SDG 101 million 
for 2009, only half of what is required just to pay salaries. 
(Note: Later in February, transfers reportedly picked up, indicating 
that the very low January numbers may have been an anomaly.  End 
note.) The GoSS responded to this revenue drop by temporarily 
suspending salary payments. 
 
¶8.  (SBU) The JDT notes that the GoSS's financial dilemma is either 
contributing to, or is further complicated by, other factors.  The 
foreign exchange (fx) reserves of both the Central Bank of Sudan in 
Khartoum and the Bank of Southern Sudan are rapidly dwindling, and 
by late February had fallen to the value of one-two months of 
imports.  In addition, poor harvests in Kenya and Uganda are raising 
the cost of food imports to the south.  The shortages of both 
revenues and fx limit the GoSS's ability to respond. 
 
¶9.  (SBU) Norwegian Embassy oil advisor Anders Hannevik believes 
that neither the GNU in Khartoum nor the GoSS yet fully comprehend 
 
KHARTOUM 00000330  002 OF 002 
 
 
the gravity of their situations.  Hannevik told econoff that his 
recent conversations with GoSS officials in Juba indicated that they 
regard the current budget as "tight," when in fact it is overly 
optimistic.  Hannevik reported that all of the discussion in the 
GoSS he heard revolved around possible short-term expenditure or 
revenue fixes, rather than fundamental policy changes required to 
address the long-term problem.  In addition, Hannevik said that 
Southerners in general appeared to be in a state of denial about the 
nature of the situation, with many attributing the decline in the 
GoSS revenue transfers from the GNU to NCP "economic warfare" 
against them, rather than to depressed world oil prices.  He added 
that many southerners told them that if worse-comes-to-worst, they 
expect the United States to "bail them out." 
 
¶10.  (SBU) Although agreeing on the nature of the problem, the two 
studies suggest differing responses.  The JDT agrees with Hannevik 
that the severity of the crisis is not well understood even within 
the GoSS itself, and it urges that Southern leadership clearly 
communicate the gravity of the situation and the need for additional 
austerity measures.  It specifically recommends that the GoSS first 
postpone infrastructure investments (estimated saving of SDG 45.5 
million,) then reduce capital expenditures more broadly (SDG 11 
million), cut operating costs by 10-15 percent (SDG 20.5 million, 
and make across-the-board salary cuts (SDG 41-61 million). 
 
¶11.  (SBU) In contrast, the World Bank counsels against any cuts in 
capital spending, as well as avoiding the non-payment of salaries, 
as the GoSS did during the severe January revenue short-fall. 
Rather, it argues for a 25 percent across-the-board cut in operating 
expenditures, with greater cuts or elimination of programs deemed 
less effective.  It estimates that this could save SDG 274 million. 
In addition, it recommends that the GoSS use the crisis to enact a 
comprehensive salary reform, including selective salary cuts and 
workforce reductions, starting by purging the roles of "ghost 
workers." 
 
¶12.  (SBU) COMMENT: The global economic crisis is confronting both 
the GNU and the GoSS with similar challenges, but while in the North 
they are certainly serious, in the South they are acute, given the 
latter's  almost total dependence on (falling) oil revenues.  Like 
the GNU, the GoSS has bought social peace through government 
spending in the South by giving potentially restive populations 
employment and salaries.   Therefore, any of the remedies being 
proposed will be extremely sensitive, politically.  It will be 
important for the U.S. to encourage the GoSS to think hard, and in 
longer terms, about how it will deal with its budget crisis.  END 
COMMENT 
 
¶13.  (SBU) ACTION REQUEST: Post requests guidance on how to respond 
to GoSS President Salva Kiir's appeal (ref. C) that the U.S. finance 
an emergency "reserve fund for the South," as well as what measures 
we might advocate to the GoSS to put its financial house in order. 
The GOSS will likely face a major crisis later this year, and we 
need to give them early and clear advice, as well as being clear 
about what support we can and cannot provide to help them with this 
crisis. 
 
FERNANDEZ