BANK OF SOUTHERN SUDAN: LABORING TO BUILD A

C O N F I D E N T I A L KHARTOUM 001663

SIPDIS

SIPDIS

DEPARTMENT FOR AF/SPG AND EEB/IFD
DEPARTMENT PASS TREASURY FOR OIA

E.O. 12958: DECL: 10/25/2012
TAGS: EFIN ECON EAID PGOV PREL PINR SU
SUBJECT: BANK OF SOUTHERN SUDAN: LABORING TO BUILD A
FINANCIAL SYSTEM FROM SCRATCH


Classified By: CDA Alberto Fernandez, Reasons 1.4 (b) and (d)


1. (U) Summary: The Bank of Southern Sudan is struggling to
establish the foundation for an independent financial system
in the South in the face of physical difficulties and passive
resistance from the authorities in the North. End summary.

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One Country, Two Financial Systems
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2. (U) Under the provisions of the 2005 Comprehensive Peace
Agreement, Southern Sudan is permitted to develop a financial
system separate from the North's sharia-based banking system.
To supervise this system, the autonomous Government of
Southern Sudan is authorized to establish a Bank of Southern
Sudan (BoSS),as a branch of the Bank of Sudan (BoS) in
Khartoum. Under this &one country, two systems8 approach,
national monetary policy is established by the BoS, but is
implemented independently in the North by the BoS and in the
South by the BoSS. The Governor of the BoSS is a member of
the BoS Board of Governors, as are two other (non-BoSS)
Southerners.


3. (U) Three commercial banks already have established
branches in southern Sudan: two Sudanese (Nile Commercial
Bank, Omdurman National Bank),and one foreign (Kenya
Commercial Bank). In addition, Germany's Commerz Bank also
reportedly plans to open a branch in Juba soon. Government
of Southern Sudan officials complain that an absence of
financial services is one important impediment to attracting
foreign investment to their region.

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A Central Bank in Embryo
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4. (U) During a recent visit to Juba, Econoff discussed the
development of the BoSS with a USAID technical advisor at the
Bank. According to this advisor, although the BoSS is
officially only a branch of the BoS, it is in the process of
developing all of the functions of a classic central bank.
Bank departments responsible for research and statistics,
bank supervision, foreign exchange management, and
open-market operations all have been established.

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Resistance from the North
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5. (SBU) Under the CPA, the BoSS is empowered to draft,
issue and enforce banking regulations to govern the South's
separate financial system. Given its status as a branch of
the Bank of Sudan, however, such BoSS-drafted regulations
require BoS approval before they can be implemented.
According to the advisor, the BoSS has identified and is in
the process of drafting 20 regulations required to form a
basic regulatory framework. Of these, six already have been
developed and submitted for Khartoum's approval. However,
the BoS is ignoring the BoSS recommendations and has yet to
approve any of these regulations. In order to overcome
roadblock, GoSS President Salva Kiir is willing to issue the
regulations by decree on his own authority if necessary.
However, Bank officials are resisting this option, believing
that such a move would undermine the BoSS, authority as a
regulator independent of the executive.

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Slow Progress
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6. (U) The advisor told Econoff that the BoSS is making slow
progress towards becoming an effective agency. The Bank is
struggling to overcome severe physical impediments, (e.g.,
the bank still has no internet connection).
The BoSS currently has about 100 professional staff. This
number is to almost triple to 292 with plans to establish
three BoSS branches, in the towns of Wau, Yei and Malakal.


7. (SBU) The advisor spoke highly of the Bank senior and
middle management, many of whom have years of professional
experience with the Bank of Sudan in Khartoum. However, he
noted that their Khartoum experience sometimes leaves them
poorly prepared for their new role. For example, he said
that Bank managers understood poorly the role of interest
rates, since under the North's sharia system, banks are
prohibited from charging interest on loans and interest rates
were not used as a policy instrument.


8. (C) The advisor is less impressed with BoSS Governor

Elijah Mohla. Mohla, he asserts, has been ineffective in
pressing BoSS initiatives with the Board of the Bank of
Sudan. He said that Mohla owes his position to having been
an old SPLA fighter, rather than to any professional
expertise. Mohla is reputed to have been the SPLA,s &money
man8 during the civil war with Khartoum. The advisor said
that this is not an unusual situation, based on his previous
experience as an advisor in central banks in
newly-independent states, and he is optimistic that future
governors will be appointed on merit.


9. (U) Medium-term plans call for the BoSS to establish a
small bank-training center to fulfill a badly-needed
indigenous training capacity. The center will train both
BoSS and commercial bank staff in the fundamentals of banking
practices, e.g., the role of interest rates, open-market
operations, and FX management. The advisor hopes to help the
BoSS to recruit experienced foreign instructors who will then
help the South Sudanese develop their own training program
and to train the South Sudanese instructors.

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Comment
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10. (SBU) The challenges facing the BoSS mirror in microcosm
those of the Government of Southern Sudan more broadly:
inexperience, primitive infrastructure, and lack of
cooperation ) if not downright hostility ) from the
authorities in Khartoum. The development of the Bank as a
central bank in miniature, may reflect the wide-spread
expectation in the South that, following the 2011 referendum,
they will need to be prepared to make their way on their own
FERNANDEZ