VZCZCXRO3757
PP RUEHROV
DE RUEHKH #1034/01 1921235
ZNR UUUUU ZZH
P 101235Z JUL 08
FM AMEMBASSY KHARTOUM
TO RUEHC/SECSTATE WASHDC PRIORITY 1295
INFO RUCNIAD/IGAD COLLECTIVE
UNCLAS SECTION 01 OF 03 KHARTOUM 001034
SENSITIVE
SIPDIS
DEPT FOR AF A/S FRAZER, SE WILLIAMSON, AF/SPG
DEPT PLS PASS USAID FOR AFR/SUDAN AND NSC BPITTMAN/CHUDSON
E.O. 12958: N/A
TAGS: PREL PGOV PINS EFIN EAID SOCI KDEM SU
SUBJECT: THE NEW NORTH/SOUTH WAR? IT'S THE ECONOMY, STUPID
1. (SBU) SUMMARY: The SPLM and the NCP are mired in an economic
standoff grounded in competing interpretations of the Comprehensive
Peace Agreement. It is the latest chapter in the two parties'
complex and often dysfunctional relationship, and a further blow to
hopes that unity can be made attractive in Sudan. Mediation out of
the impasse rests within the already burdened GNU Presidency and the
beleaguered relationship between President Bashir and FVP Kiir.
While the controversy is due to be discussed between the pair on
July 11, the episode is further proof the CPA implementation --
three years after the accord's signing - has, in many instances, yet
to go beyond the superficial level of the most significant
milestones and mechanisms required of the parties. END SUMMARY.
--------------------------------------------- -----
CURRENCY TRANSFER DISPUTE SPARKS FINANCIAL WARFARE
--------------------------------------------- -----
2. (SBU) Sparking what the GOSS Minister of Finance Kuol Athian
Mawien and senior NCP officials in Khartoum term "a crisis," the
SPLM, via the Bank of Southern Sudan (BOSS), has refused Central
Bank of Sudan (CBOS) demands to transfer the totality of the South's
hard currency reserves to Khartoum. The NCP, via CBOS, retaliated
in June by withholding from Juba both foreign cash and local
currency shipments for one week. Acting BOSS President Kornelio
Koryom Mayik wrote an internal memo to GOSS Presidential Affairs
Minister Luka Biong Deng, Finance Minister Mawien, and Legal Affairs
Minister Michael Makuei on June 15 which stated the BOSS would be
forced to close in two days if funds were not received from
Khartoum. The BOSS had $15 million remaining in its account, and the
SPLA had already bounced two checks totaling $6 million as a result
of the funds freeze.
3. (SBU) Mayik called for the GOSS' immediate intervention "or face
an economic crisis precipitated by the CBOS' policy of financial
strangulation of Southern Sudan." Minister Mawien told ConGen
PolOff July 9 that Salva Kiir Mayardit called President Bashir
shortly after being briefed and demanded that currency transfers
resume immediately. Kiir reminded the President that the costs of
printing the new Sudanese pounds were borne equally by the GOSS and
GNU, and unless Khartoum wanted the South to start printing its own
currency as an independent nation, it had best share currency in
accordance with the CPA and Interim National Constitution (INC).
Funds were released one day later.
----------------------------------------
THE NCP COMPLAINS WITHOUT APPARENT CAUSE
----------------------------------------
4. (SBU) On June 16, NCP insider and Center for Strategic Studies
Director Sayed El Khatieb complained to CDA Fernandez that Mawien
was "illegally" holding $900 million owed to the CBOS, and claimed
that -- "just as during the census" -- the SPLM would be proven to
be in the wrong. However, internal documents provided to ConGen
PolOff lay out a compelling case for the SPLM counter-argument. The
SPLM maintains that the CBOS's early June demands that the BOSS
transfer to Khartoum all Euro, GPB, and dollar account balances held
at the Arab Investment Company (TAIC) and Commerce Bank Frankfurt
not only contravened an intra-governmental Memorandum of
Understanding between the CBOS and BOSS dated November 2007, but
breached the CPA's Wealth Sharing Agreement. The CBOS contends that
all foreign exchange reserves belong to the Central Bank. The SPLM
agrees, but maintains that the BOSS is the South's window into the
Central Bank, and therefore keeping foreign exchange accruals at the
BOSS is equivalent to keeping funds in CBOS.
-------------------
THE SANCTIONS PINCH?
--------------------
5. (SBU) While the motivation for the CBOS reversal is unclear, the
confluence of enhanced U.S. sanctions and the GOSS's decision to
open correspondent banks in line with the CPA has hampered
Khartoum's access to hard currency. Mawien's July 2007 arrival at
the Ministry of Finance and Economic Planning and a productive visit
to Washington, DC in October 2007 led the GOSS to open its first
foreign correspondent banks. This gave Juba the ability to sidestep
its nascent banking system and for the first time in the GOSS's
history receive hard currency, albeit in foreign accounts. In
Juba's estimation, this gave the GOSS the ability to determine its
own currency investments, and keep all foreign exchange reserves
generated in the South (through conversion of monthly oil proceeds
or through other means) in the BOSS under the long-standing SPLM
position that the bank is a "second window" into the CBOS, not a
subordinate entity. Keeping Southern-generated hard currency
accruals in Juba vice Khartoum renders the NCP unable to access
either foreign exchange reserves generated through the GOSS's
currency conversions or any other investment proceeds. While Mawien
was circumspect with respect to BOSS hard currency holdings, he
believed el Khatieb's figure was "too low."
KHARTOUM 00001034 002 OF 003
6. (SBU) Prior to Mawien's ministerial appointment, the CBOS held
the GOSS's hard currency shares of the South's monthly oil revenue,
dispensing an equivalent amount of local currency to Juba. The SPLM
alleges that income derived from currency investment of both GNU and
GOSS funds residing in the national reserve were utilized
exclusively to meet foreign exchange requirements in the North.
According to Mawien, the GOSS met its official commitments through
the additional conversion of local currency back to hard currency.
GOSS accounts in correspondent banks now allow the BOSS to cater to
the foreign exchange needs of the South -- a move the SPLM maintains
is supported by the November 2007 intra-governmental MOU and Section
Seven of the CPA's Wealth Sharing Agreement. The latter states
"foreign exchange of GOSS is considered part of the national
reserve. GOSS shall use its share of the national reserve to meet
its foreign exchange requirements."
--------------------------------------------- ---
SPLM: NCP ABANDONMENT OF CPA AND OTHER AGREEMENTS
--------------------------------------------- ---
7. (SBU) SPLM outrage over the CBOS's recent actions is two-fold:
consternation over Khartoum's disregard for another
intra-governmental agreement that is barely six months old and the
perception that Khartoum is trying to financially hobble a Juba
otherwise exempt from U.S. sanctions. Initially, when the BOSS
refused CBOS demands for hard currency transfers in June, the
central bank ordered the BOSS to cover GOSS local currency needs out
of BOSS reserves -- drawing down Juba's store of hard currency. The
BOSS refused, noting the 2007 MOU explicitly delinks BOSS purchases
and sales of foreign currency from the local currency needs of the
BOSS. Mawien further underscored this point, noting that interest
accrued as a result of the South's investment of its oil revenue
proceeds "were for the welfare of the GOSS and Southern public," not
replacement funds for the South's hard currency reserves. The GOSS
Finance Minister further contended that the BOSS has generated the
bulk of its hard currency reserve through the conversion of its oil
proceeds, and the 2007 MOU stipulates that "there shall be no
linkage between supplying the BOSS with local currency and the GOSS
share in oil."
-----------------------
SPLM FRUSTRATION BUILDS
-----------------------
8. (SBU) If another forgotten MOU weren't enough to stoke SPLM ire,
a litany of unreciprocated good faith efforts by the SPLM/GOSS/BOSS
to comply with CBOS requests for intra-bank currency transfers has
only served to worsen the North/South relationship. BOSS supposedly
sent 118,000,000 pounds sterling to the CBOS to cover Northern
foreign exchange needs in December 2007 - the sum has yet to be
reimbursed to Juba. The SPLM points to numerous instances pre-MOU
whereby requests for South-oriented funds-transfers were
inexplicably not honored. The CBOS failure to act on a request for a
$4.5 million hard-currency transfer to Stanbic Commercial Bank in
Kenya has irrevocably strained the GOSS's business relationship with
this entity, and impacted Juba's ability to respond to immediate
payment needs related to ministerial medical expenses and upkeep of
the GOSS Liaison Office in Nairobi.
--------------------------------------------- -------
A FRAMEWORK FOR NCP CONCESSIONS, BUY-IN TO SPLM VIEWS
--------------------------------------------- --------
9. (SBU) At the height of the June economic crisis, the Joint
Sub-Committee on Banking and National Projects (a Mawien creation
envisioned, ironically, to improved relations between his own
ministry and the GNU Ministry for Finance and National Economy and
speed CPA implementation) held an emergency meeting in Juba to
implement the details of the GOSS President's edict to Bashir. It
agreed to establish a Joint Technical Committee to examine the
relationship between "CBOS Headquarters and the BOSS" and make
recommendations to CBOS management by July 31. Significantly,
however, the sub-committee set forth three ground-breaking
precedents: i) "Foreign exchange reserves generated through
transfers, including purchase from GOSS and the private sector
within the South's economy, belong to the Central Bank (CBOS/BOSS)
and the BOSS is responsible for implementing the policies of the
CBOS in Southern Sudan"; ii) "neither the GNU nor GOSS finance
ministry's can order the CBOS/BOSS to utilize their reserves, but
both ministries are given priority access and purchasing rights";
iii) "the GOSS Finance Ministry, unlike the GNU Finance Ministry,
has...the right to keep its share of foreign exchange generated by
Sudanese oil revenue within the BOSS."
10. (SBU) Mawien cautiously describes the resolutions generated by
the June 21 meeting as "preliminary," noting the hard currency
controversy will not be fully resolved until discussed between
Presidents Bashir and Kiir on July 11. The sub-committee's
KHARTOUM 00001034 003 OF 003
resolutions offer significant concessions to the SPLM position on
the co-equal status of the CBOS and BOSS (the "two windows"
argument), but it is unclear how much these working-level efforts
were sanctioned by the NCP leadership in Khartoum. Kiir affirmed to
Mawien in a July 7 meeting that the BOSS control over the national
share of foreign exchange reserves generated within the South was
paramount. Although the First Vice President was described as
decidedly pessimistic about the upcoming meeting, he told the
Finance Minister "we will not be reversed on this point."
-------
COMMENT
-------
11. (SBU) COMMENT: Khartoum's attempts to reassert control over
foreign exchange revenue appear to have been temporarily thwarted -
but at considerable political cost. Piling a nuanced economic issue
on top of the Abyei Roadmap and other elements of CPA implementation
is not the conciliatory gesture one expects from an NCP anxious to
woo its "junior partner" before the 2009 elections. Indeed, Finance
Minister Mawien notes incidents like this have heightened chatter
within Juba that increased NCP recalcitrance on such issues may be
precisely what Kiir needs to be persuaded to vie for the presidency
at the national level.
FERNANDEZ