VZCZCXRO2411
OO RUEHROV RUEHTRO
DE RUEHKH #0727/01 1580451
ZNR UUUUU ZZH
O 070451Z JUN 09
FM AMEMBASSY KHARTOUM
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3914
INFO RUCNIAD/IGAD COLLECTIVE
RUEHGG/UN SECURITY COUNCIL COLLECTIVE
RHMFISS/CJTF HOA

UNCLAS SECTION 01 OF 02 KHARTOUM 000727 
 
DEPT FOR SE GRATION, S/USSES, AF A/S CARSON, AF/E, EEB/IFD 
NSC FOR MGAVIN 
DEPT PLS PASS USAID FOR AFR/SUDAN 
DEPT PLS PASS TREASURY FOR OIA, USED IMF, USED WORLD BANK 
ADDIS ABABA ALSO FOR USAU 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ENRG EAID PGOV PREL KPKO SOCI AU UNSC
SU 
SUBJECT: RISING OIL PRICES, REPAID ARREARS PROVIDE GOSS TEMPORARY 
RELIEF FROM BUDGET WOES 
 
REF: A) KHARTOUM 330 
B) KHARTOUM 715 
C) STATE 33559 
 
¶1. (SBU) SUMMARY: With world oil prices on the rebound and arrears 
in revenue-transfers from Khartoum reduced, the Government of 
Southern Sudan's (GoSS) revenues are gradually reaching levels 
projected in its 2009 budget, after an extremely lean first quarter. 
 GoSS spending priorities are salary payments and transfers to 
states, with payment of contractual obligations coming in a distant 
last.  While the improved revenue situation promises short-term 
relief, the GoSS will remain vulnerable to revenue shocks until it 
tackles underlying weaknesses in governance that are the real source 
of its problems.  END SUMMARY. 
 
¶2. (SBU) After an acute shortage in January and February (ref. A), 
GoSS revenues are reviving, although not to the levels of 2007-early 
¶2008.  According to the GoSS Ministry of Finance and Economic 
Planning (MoF), first quarter 2009 GoSS revenues were Sudanese 
Pounds (SDG) 457 million, or approximately USD 207 million.  This 
was only one half of anticipated revenues for the period. 
 
Oil Revenues Up 
- - - - - - - - 
¶3. (SBU) The early 2009 revenue shortfall was caused by a 
combination of low global oil prices and depressed sales.    By late 
May, however, world oil prices had rebounded to levels equal to or 
higher than those assumed in the 2009 GoSS budget (i.e., US 
$50/bbl).  (Note:  The 2009 GoSS budget projected 93 percent of 
total revenues to come from oil revenues.  This is actually a 
decrease from the 98 percent dependence on oil revenues in the 2008 
budget.  End note.)  Sudan's Nile blend crude sells at a discount of 
about US $5/bbl below Brent crude.  The more plentiful Dar blend 
sells at an additional discount below that.  If oil prices at least 
remain steady, production and sales are strong and arrears do not 
begin to build up again, GoSS revenues for the rest of 2009 should 
approximate levels forecast in the budget. 
 
Arrears Coming Down 
- - - - - - - - - - 
¶4. (SBU) CPA-mandated oil revenue transfers from the GNU MoF to the 
GoSS fell seriously into arrears in late 2008 as oil prices 
declined, reaching a total of more than USD300 million in December, 
further contributing to the GoSS fiscal crisis.  Since the beginning 
of 2009, however, transfers have increased, and arrears have 
steadily declined.  The reduction in arrears has helped the GoSS 
avoid an even more difficult fiscal situation than the one it faced 
in the first quarter.  At the working level, GNU and GoSS MoF 
officials agreed in principle to eliminate all arrears as soon as 
possible.  On May 28, the GoSS told donors that 73 percent of the 
arrears had been cleared.  On June 1, the GNU MoF announced that all 
arrears had been paid down.  (Note:  US $77 million in arrears 
dating from 2005 is in dispute between the GoSS and GNU.  Starting 
in January, the GNU also began deducting an election fund from 
transfers.  This amounted to about USD 39 million from transfers to 
the South in the first quarter, which the GoSS is counting as part 
of the arrears.  It is unclear whether or how these amounts figure 
into the GoSS' 73 percent or the GNU's 100 percent figure three days 
later.  End note.) 
 
Looking Beyond Revenues 
- - - - - - - - - - - - 
¶5. (SBU) However, the root cause of GoSS fiscal difficulties stems 
from poor budget execution and undisciplined spending, compounded in 
the last eight months by falling revenues.  In both 2007 and 2008, 
the GoSS significantly overspent budgeted expenditures.  For 
example, by mid-2008, many GoSS ministries had spent their entire 
annual appropriations.  Thanks to surging international oil prices, 
the GoSS was able to adopt a budget supplemental late in the year 
that covered overspending.  When oil prices began to decline, 
however, that option disappeared.  It now remains to be seen whether 
the GoSS has learned its lesson and has the capacity and discipline 
to restrain spending in the future, or whether ministries will again 
go on a spending spree with the partially restored flow of revenues. 
 
 
Expenditures:  Priority on Paying Salaries 
- - - - - - - - - - - - - - - - - - - - - - 
¶6. (SBU) According to the Ministry of Finance, top GoSS spending 
priorities are salary payments, transfers to state governments, and 
"petty cash" for ministries, which the government believes it can 
cover this year even in a worst-case revenue scenario.  Contractual 
 
KHARTOUM 00000727  002 OF 002 
 
 
obligations are assigned a lower priority, and the GoSS warns that 
it may not be able to meet these if oil revenues weaken or if 
arrears accumulate once again. 
 
¶7. (SBU) Salaries absorb about one half of the GoSS budget.  The 
GoSS workforce is badly bloated, with the government acting as the 
employer of last resort in a subsistence agriculture economy ravaged 
by war, where there is virtually no private sector to jobs.  Since 
2005, the GoSS has attempted to prevent social unrest by carrying 
some 250,000 people on the government payroll some, many of these 
veterans or dependents, including 150,000 SPLA soldiers.  The 
emphasis on meeting current salaries and operating costs at the 
expense of capital investment is further delaying the development of 
an economy that could provide employment opportunities outside the 
government sector. 
 
Comment 
- - - - 
¶8. (SBU) Southern Sudan's fiscal problems are primarily a matter of 
poor governance (poor budget execution, uncontrolled spending, 
overstaffed government workforce, failure to develop non-oil revenue 
sources, and corruption) compounded by depressed revenues.  In the 
short to medium-term, oil revenues may rebound and give the GoSS 
some breathing space.  However, oil prices remain volatile, and in 
the long run, Sudan's overall oil output will decline, with the 
proportion of the lower grade/lower priced Dar blend increasing. 
Unless the GoSS seriously tackles its underlying governance 
problems, it will remain vulnerable to the vagaries of revenue 
transfers from the North.  The impact of this week's appointment of 
David Deng Athorbei as Minister of Finance (ref. B) (the third such 
change in three years) on the GoSS's budget and spending practices 
remains unclear. 
 
WHITEHEAD