MAJOR SHORTFALL IN GOSS REVENUES LOOMS

UNCLAS SECTION 01 OF 02 KHARTOUM 001744 SIPDIS SIPDIS SENSITIVE E.O. 12958: N/A TAGS: EFIN ECON PGOV SU SUBJECT: MAJOR SHORTFALL IN GOSS REVENUES LOOMS REF: Khartoum 1168 ¶1. (SBU) Summary: Government of South Sudan (GoSS) revenues from petroleum transfers by Khartoum are falling far short of the projections used for the 2006 budget, leaving significant funding gaps. The proximate cause appears to be World Bank reliance on projected numbers for transfers contained in Government of National Unity (GNU) budget projections. Holdover funds from last year and the lack of capacity for the GoSS to spend the money may help close the gap. However, the ability of the GoSS budget to fund the full range of its priorities is still uncertain, and recriminations have already begun. End summary. -------------- Missing the Revenue Mark -------------- ¶2. (SBU) Conversations with local staff of the World Bank (IBRD), various technical experts, and GoSS ministers have revealed that the revenue figures upon which the GoSS formulated its 2006 budget may be significantly off the mark. The GoSS was expecting revenues of USD 1.3 billion, not including Multi-Donor Trust Fund (MDTF) disbursements and other donor flows, but monthly transfers to date from the GoNU indicate that the figure could be only half that amount. ¶3. (SBU) Experts from BearingPoint, the contractor that helped the GoSS Ministry of Finance prepare the budget, blame IBRD methodology. The IBRD insisted that the GoSS use the figure of USD 1.3 billion from the 2006 GNU budget, because using a lower figure would be a disincentive for full transfer of this amount. Bearing Point said that they, and others, pushed for using a figure based on average monthly transfers to date, approximately USD 60 million/month. The more conservative approach also called for a two-tier budget in which top priorities were funded first, with additional items funded when and if money became available. The same school of thought counseled a sizable reserve as well to cushion any unexpected shortfalls. Ultimately, the IBRD approach prevailed. -------------- The End Results -------------- ¶4. (SBU) The Southern Sudanese Legislative Assembly's (SSLA) final approval of the budget brought surprises of its own (reftel). The SSLA tacked on a last minute amendment that upped the budget for the Sudanese Peoples' Liberation Army from fifteen to forty percent of the budget, an increase from USD 200 million to USD 546 million. This effectively eliminated the reserves. The final bill also abrogated the concept of "top-down" budgeting in favor of a decentralized "bottom-up" approach with increased input from the states. This change of focus has further complicated the budgetary picture. Should transfer funds come to as little as fifty percent of the original projection, this would make existing budget allocations largely meaningless. ¶5. (SBU) The implications for GoSS operations are significant. Salaries are protected so a shortfall would translate into reduced outlays for development and social priorities for a population increasingly unhappy with what it perceives as a lack of delivery on the part of the GoSS and international community. The GoSS is currently hiring at the director and sub-director level, but continued shortfalls would also prevent the ministries from staffing up to the levels required to adequately support future delivery of services. -------------- Recrimination Ahead -------------- ¶6. (SBU) The blame game has already begun at various levels. Senior GoSS officials, including Salva Kiir, have publicly criticized the IBRD for being overly bureaucratic and slowing down MDTF disbursements for roads and other development projects. MDTF officials say that much of criticism was based on misinformation and they are in the process of smoothing things over. However, if such a significant shortfall materializes, there will likely be new recriminations and sharp differences of opinion in technical circles over how the revenue and budget projections came in so high above the mark. One of the most problematic areas of CPA implementation, for the GoSS at least, has been the perceived lack of transparency by the GNU Ministry of Energy and Mining on production, contract, and auction figures. The apparent discrepancy between initial projections and the actual transfer amount can only exacerbate this debate. -------------- Not Necessarily the Titanic -------------- ¶7. (SBU) An expatriate expert working with the GoSS Ministry of Finance and a consultant on financial economics have told us that KHARTOUM 00001744 002 OF 002 while the budget situation is "a mess," the final outlook remains murky, but not necessarily as gloomy as it might seem. At the end of December 2005, the GoSS reportedly had USD 500 million in holdover funds that it had been unable to spend, although this money may have been earmarked for the MDTF. Although the GoSS is expected to expend available revenues more rapidly as the ministries staff up, the budget burn rate could continue to lag. Transfers from the GNU may also increase as additional oil wells and pipelines come on-line, further closing the gap and addressing some of the issues above. In sum, the final budget panorama is not yet painted. STEINFELD