VZCZCXRO1770
OO RUEHROV RUEHTRO
DE RUEHKH #1120 2781255
ZNR UUUUU ZZH
O 051255Z OCT 09
FM AMEMBASSY KHARTOUM
TO RUEHC/SECSTATE WASHDC IMMEDIATE 4509
INFO RUCNIAD/IGAD COLLECTIVE
RUEHGG/UN SECURITY COUNCIL COLLECTIVE
RHMFISS/CJTF HOA

UNCLAS KHARTOUM 001120 
 
NSC FOR MGAVIN, LETIM 
DEPT PLS PASS USAID FOR AFR/SUDAN 
ADDIS ABABA ALSO FOR USAU 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN EPET PGOV PREL SU
SUBJECT: ECONOMISTS URGE GREATER EXCHANGE RATE FLEXIBILITY FOR 
REBUILDING OF FOREX RESERVES 
 
¶1. (SBU) SUMMARY: Sudan's foreign exchange reserves have trended 
upwards after reaching perilously low levels in March, but the 
Central Bank of Sudan (CBOS) remains too protective of the Sudanese 
pound (SDG), economists at the African Development Bank (AfDB) told 
econoffs on September 24. They urged greater exchange rate 
flexibility and a tightening of fiscal policy for Sudan to maintain 
macroeconomic stability in 2010. END SUMMARY. 
 
¶2. (SBU) Sudan ended 2007 with approximately USD1.1 billion in 
foreign exchange reserves, good for 1.2 months worth of imports, 
according to International Monetary Fund (IMF) data. Reserves had 
reached as high as USD2 billion in May of 2008, before the global 
financial crisis sharply reduced oil revenues and foreign direct 
investment. By March of 2009, reserves stood at a mere USD300 
million, less than two weeks of imports. The rise in oil prices in 
recent months is thought to have improved the reserve situation, 
according to the economists, but the CBOS has not yet released 
second quarter (Q2) 2009 data. 
 
¶3. (SBU) The economists noted that while transparency at the CBOS is 
extremely limited, they believed the reserve crisis was exacerbated 
by the CBOS using foreign exchange to prop up the Sudanese pound. 
"Sudan is too protective of its currency," said AfDB Resident 
Representative Famara Jatta. "They should allow it to find its own 
way," noting that exchange rate flexibility would allow for the 
safeguarding and rebuilding of foreign exchange reserves. 
 
¶4. (SBU) Sudan has agreed to IMF supervision under an 18 month Staff 
Monitored Program (SMP) aimed at maintaining macroeconomic stability 
and rebuilding foreign exchange reserves. Among the key 
recommendations of the SMP are greater exchange rate flexibility, 
rescheduling of external debt, a constraint on non-concessional 
borrowing and tightening of fiscal policy. (NOTE: The IMF, World 
Bank, and other multilateral development banks cannot offer 
low-interest rate loans --so called "concessional financing"- to 
Sudan due to the US sanctions regime. END NOTE.) The years 2007 and 
2008 saw a significant rise in government expenditures due to the 
influx of oil revenues, and cutting back this spending remains a key 
challenge, according to the economists. 
 
¶5. (SBU) Comment: Despite the lack of CBOS data, it appears that the 
atmosphere of an acute foreign exchange crisis has ceased with the 
rise in oil prices. The IMF is correct in advocating a more flexible 
exchange rate regime for the SDG, and the CBOS should be doing its 
utmost to build up reserves in advance of the first SMP review in 
December 2009. But the recent drop in the official exchange rate 
from SDG 2.50 to 2.30 for the dollar indicates the CBOS may be up to 
its old tricks in manipulating the market, a strategy that has cost 
Sudan billions in foreign exchange reserves and will ultimately 
prove unsustainable. 
 
ASQUINO