Cablegate: Imf Resrep Briefs Sudan Donor Community On Current

VZCZCXYZ0021
OO RUEHWEB

DE RUEHKH #1403/01 2481523
ZNR UUUUU ZZH
O 051523Z SEP 07
FM AMEMBASSY KHARTOUM
TO SECSTATE WASHDC IMMEDIATE 8420

UNCLAS KHARTOUM 001403

SIPDIS

SENSITIVE
SIPDIS

DEPARTMENT FOR AF/SPG, EEB/IFD/OMA AND EEB/IFD/ODF
DEPARTMENT PLEASE PASS TREASURY FOR OIA
WORLD BANK FOR USED

E.O. 12958: N/A
TAGS: EFIN ECON PGOV PREL IMF IBRD SU
SUBJECT: IMF RESREP BRIEFS SUDAN DONOR COMMUNITY ON CURRENT
OUTLOOK AND 2007-2008 PROGRAM

1. (SBU) Summary: IMF ResRep described 2006 as a
&challenging8 year for Sudan, as the government, with only
limited success, wrestled with a combination of growing
expenditure commitments and disappointing revenues. As a
whole the economy grew by a robust 12%. A one-time, 300%
jump in inflation significantly moderated by year end. A
surge in FDI and imports has eased upward pressure on the
Sudanese pound. The 2007-2008 Staff Monitored Program will
seek to strengthen the GNU,s fiscal management and tax
policy. The IMF calculates that Sudan,s $27 billion foreign
debt is unsustainable in the long term and the country will
require debt relief at some point. End summary.

2. (SBU) On August 30, IMF Resident Representative K. Wabel
Abdullah briefed the Sudan Donors Group on the Fund,s
recently completed discussions with the government on a
follow-on Staff Monitored Program (SMP) for 2007-2008, in
advance of Executive Board consideration of the program on
September 7. The new SMP covers the period July
2007-December 2008. Because of debt arrears to the IFIs,
Sudan is not eligible now for IMF financing, but has engaged
in a series of SMPs with the Fund, intended to pave the way
for eventual debt relief.

-----------------------------------
Recent Performance: A Mixed Picture
-----------------------------------

3. (SBU) Abdullah gave the Sudanese economy a mixed review
for 2006. On the one hand, GDP grew by 12% last year and is
forecast to increase by 11% in 2007. (Note: While this
economic boom is clearly evident in Khartoum and the
surrounding Nile Valley, it does not extend to much of the
rest of the country. End note.) The decontrol of many fuel
prices in 2006 led to a one-time, 300% jump in overall prices
levels, but inflation had stabilized at around eight percent
in the first months of 2007, and is forecast to end the year
in the single digits.

4. (SBU) At the same time, the Government of National Unity
(GNU) confronted a serious fiscal crunch in 2006, caused by
conflicting expenditure requirements and revenue constraints.
According to Abdullah, financial clauses in various peace
agreements ending internal conflicts (e.g. the Comprehensive
Peace Agreement and Darfur Peace Agreement) required sizable
disbursements by the GNU.

5. (SBU) Simultaneously, government revenues fell
significantly short of forecasts, due to delayed disbursals
of donor commitments and oil revenue shortfalls, caused by
technical problems in initiating exports of Dar Blend crude.
As a result, the GNU ran up a four-percent-of-GDP fiscal
deficit in 2006. Sudan,s Oil Stabilization Fund, intended to
serve as a buffer in case of emergencies, also was largely
spent over the course of the year. Abdullah did note that
the GNU had demonstrated better control of expenditures in
the first trimester of 2007 and the Oil Fund is slowly being
replenished.

6. (SBU) A significant surge in Foreign Direct Investment
(FDI), along with rising oil revenues, has fueled an import
boom. This surge in imports has eased the appreciation of
the Sudanese Pound since late 2006, but Sudan,s current
account deficit is now 13% of GDP.

-------------------
Medium-Term Outlook
-------------------

7. (SBU) Abdullah stated that the GNU,S response to its
financial crunch had exposed major weaknesses in fiscal
management, with the government unable to adjust its
expenditures in the face of constrained revenues. A major
feature of the new SMP will be strengthening Khartoum,s
financial controls. A second feature will be to reduce
Sudan,s dependence on growing, but volatile, oil revenues by
strengthening tax policy. The Fund also plans to assist
Sudan in drafting a Poverty Reduction Strategy Program (PRSP)
in 2008.

8. (SBU) While Abdullah characterized the GNU,s 2006 fiscal
dilemma as beyond its control, this was challenged by the UK
representative, who noted that significant expenditures had
gone to discretionary budget items that had nothing to do
with the peace agreements, including government salary
increases, security spending, and capital investments in the
Northern (GNU-controlled) part of the country, e.g., the
Merowe Dam. Abdullah did not disagree with this

characterization and noted a lack of transparency in the GNU
finances as a serious problem. He also cited a critical need
for institution building, noting that many key interagency
relationships in Khartoum now are based solely on personal,
rather than any institutional, ties.

-------------------------
Unsustainable Debt Burden
-------------------------

10. (SBU) As part of its SMP discussions, the IMF conducted a
Debt Sustainability Analysis. Sudan,s year end 2006 debt
was US$27 billion in nominal terms, triple the year end 2000
level. Of this, US$6.3 billion is arrearages to official
creditors. Another US$520 million is new lending from China,
India and from Arab lenders. The IMF concluded that, even
with its increased oil revenues, Sudan is not able to sustain
this debt overhang and will require debt relief at some point.

11. (SBU) Comment: Abdullah,s generally upbeat assessment
is in tune with the IMF,s amicable relationship with the
central government. Khartoum values the technical assistance
the Fund provides and the foundation it hopes it is laying
for future debt relief and IMF financing. Meanwhile, the IMF
has avoided irritating the often prickly GoS by focusing
strictly on technical-economic issues and avoiding sensitive
political topics.
FERNANDEZ

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