MAY 3 AEC WEALTH SHARING WORKING GROUP

UNCLAS SECTION 01 OF 02 KHARTOUM 000718 SIPDIS SIPDIS DEPT FOR AF/SPG AND SE NATSIOS DEPT PLS PASS USAID FOR AFR E.O. 12958: N/A TAGS: PREL PGOV EFIN ECON EAID SU SUBJECT: MAY 3 AEC WEALTH SHARING WORKING GROUP ¶1. Summary: The May meeting of the wealth sharing working group of the Assessment and Evaluation Commission (AEC) featured two presentations on intergovernmental transfers. For the first time, representatives from the Government (GNU) of National Unity (GNU) and the Government of Southern Sudan (GOSS) made joint presentations to the working group. The GNU and GOSS representatives pledged to improve coordination and cooperation. End Summary. ¶2. The May 3 meeting of the Assessment and Evaluation Commission working group on wealth sharing was chaired by the U.S. and attended by representatives from NCP, Norway, Kenya, U.K., U.S. and observers from EU (Germany) and EC, World Bank and UN. The representatives from the SPLM were not present. GNU Presentation Critical of GOSS -------------- ¶3. Government of National Unity (GNU) Undersecretary of the Ministry of Finance and National Economy (MFNE) El Sheikh El Mak gave a presentation on Intergovernmental Transfers. The Undersecretary said all revenue goes into the National Revenue Fund (NRF) in accordance with the CPA. The NRF reallocations are made to three levels: the Federal Government, the GOSS, and the National States Support Fund (NSSF). The latter exclusively handles transfers to states in the North, in contravention of the CPA's wealth-sharing provisions. ¶4. El Mak noted that the GNU Ministry of Finance lacks the capacity to implement the Fiscal Financial Allocation and Monitoring Commission (FFAMC)'s recommendations for direct transfers to Northern state governments. The UN representative called into question the continuing NSSF role, and called for increased transparency within financial transfers in the North. The World Bank representative also voice concern over the NSSF's continued existence, noting that the NSSF is outside the control of the Ministry of Finance. Its continued inclusion in a process of fiscal decentralization therefore creates problems of timeliness and discretion of criteria. (Comment: The NSSF is able to use its own discretion in making transfers to state governments. The concern is that it will not follow the criteria established by the FFAMC. End comment.) More changes and reforms are needed, he emphasized. (NOTE: A report on the ongoing World Bank capacity building program with the MFNE is due to be published in June. END NOTE.) ¶5. El Mak responded that the "status" of the NSSF was under review. The U.S. representative asked that the parties plan to brief future working groups on what steps are being taken to ensure the Ministry of Finance is able to implement fiscal decentralization in accordance with the CPA. (Note: The NSSF Council of Trustees decided to decrease State fund allocations by 6% during the last transfer, giving Northern states a smaller revenue share than originally allocated to them by the FFAMC. End Note.) The percentage breakdown between the three levels is 56% to the Federal Government, 28% to the Northern States and 16% to the GOSS. Acting GOSS Minister of Finance Speaks -------------- ¶6. The Acting Minister of Finance for the Government of Southern Sudan Gabriel Changson Chang discussed the financial system in the South. GOSS budgets for the past two years have been based almost entirely on the 50% share of oil revenues. (Note: The monthly figures for oil revenues transferred to the GOSS for January, February and March 2007 were: $67 million, $58 million and $44 million, respectively. El Mak complained that the GOSS unfairly benefited from the domestic oil subsidy, since the value of the oil sent to local refineries is calculated on international export prices, rather than the actual domestic price. End Note.) ¶7. Block grants totalling $100 million were made to the ten southern states in 2006. The bulk of this disbursement covers personnel costs and state operating costs. State governments are also able to raise revenue through local taxes and fees. The GOSS also awarded development grants targeting the education and health sectors of individual states. Planning was underway to ensure that during the 2008 budget cycle southern states would be able to table individual budget requests to Juba. ¶8. Undersecretary El Mak criticized GOSS book-keeping, noting the GOSS' budget lack of detailed breakdown and that state budgets have classification problems. He contended that non-oil revenues from Southern sources have not been shared with the GNU, as required by the CPA. GNU customs officials have not been allowed to operate in the South, and revenue transfers since July 2005 between Juba and Khartoum have totalled only $2 million. ¶9. Changson agreed that a more realistic approach to the GOSS budget was required, and the current $1.5 billion revenue estimate in particular, will have to re-examined. The generation and collection KHARTOUM 00000718 002 OF 002 of non-oil revenues needs to be improved, he noted, and a legal framework established for its transfer to Khartoum. He explained that the deployment of national customs officials to southern Sudan was not received well because it was poorly explained, and hoped that his presence in Khartoum for meetings would lead to a smoother GNU/GOSS relationship in the financial sector. Changson admitted that the GOSS was not adequately sharing non-oil revenues with Khartoum. He noted his desire to remedy this, and assure that the system of exemptions from customs and taxes is not abused. There is a need to maintain the same rates of foreign exchange in the south and the north in order to avoid arbitrage, the Acting Minister stated. ¶10. The Acting Minister said that the GOSS is working on developing criteria for horizontal transfers within the South and that he is working on improving coordinating mechanisms between the GNU and the GOSS. Under Secretary El Mak commended the GOSS for its efforts to improve its systems, and the North/South relationship overall. The World Bank commended the GNU's compliance with FFAMC recommendations on transparency, particularly with respect to transfers to the South. He called for similarly transparent measures to be implemented within the NSSF. BERNSTEIN