IMF RESREP BRIEFS SUDAN DONOR COMMUNITY ON CURRENT

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