THE NEW NORTH/SOUTH WAR? IT'S THE ECONOMY, STUPID

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