CENTRAL BANK GOVERNOR CONFIRMS INTERIM AGREEMENT ON FOREIGN

UNCLAS SECTION 01 OF 02 KHARTOUM 001578 DEPT FOR A/S FRAZER, SE WILLIAMSON, AF/SPG, AND EEB/IFD NSC FOR PITTMAN AND HUDSON DEPT PLS PASS USAID FOR AFR/SUDAN DEPT PLS PASS TREASURY FOR OIA, USED IMF AND USED WORLD BANK ADDIS ABABA ALSO FOR USAU SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON EFIN EAID PGOV PREL SU SUBJECT: CENTRAL BANK GOVERNOR CONFIRMS INTERIM AGREEMENT ON FOREIGN EXCHANGE DISPUTE, BUT SAYS PROBLEM "NOT RESOLVED" YET REF: KHARTOUM 1566 ¶1. (SBU) SUMMARY: Central Bank of Sudan Governor Sabir Hassan confirmed that there is an interim agreement with the GoSS on the transfer of foreign exchange (FX) held by Bank of Southern Sudan (BOSS),but that the issue "is not resolved." The BoSS is to resume its pre-April transfers of excess FX to the Central Bank, but Governor Hassan evaded questions about what will happen to the $500 million in FX that reportedly already has accumulated in the BoSS. By the end of the year, the two sides are to have formed a joint-committee and hired teams of experts to finally resolve the problem, as well as other disputes. END SUMMARY. ¶2. (SBU) On October 22, Central Bank of Sudan (CBOS) Governor Dr. Sabir Mohammed Hassan provided his perspective on the dispute with the Government of South Sudan over foreign exchange reserves to Assessment and Evaluation Committee (AEC) Chairman Derek Plumbly and Working Group Coordinators, including CDA Fernandez. Hassan confirmed that Government of National Unity (GNU) Finance Minister Al Jaz and GoSS Finance Minister Mawein had reached a provisional agreement on October 20 to return to the pre-April 2008 FX operations, under which the BoSS transfers its excess FX into Central Reserve Account at the CBOS (reftel). Hassan complained that at the October 20 meeting, the GoSS also had raised "new issues" involving CBOS restructuring and management changes, separate from the question of foreign exchange. (Note: These "new issues" refer to Minister Mawein's reftel complaint that Hassan is both CBOS Governor and head of its Management Committee, and his call for further CBOS reorganization to clarify the separation between the Islamic banking system in the north and the conventional system in the south. End note.) ¶3. (SBU) Hassan explained that under the Comprehensive Peace Agreement (CPA),on instructions of the GNU Finance Ministry in Khartoum, each month CBOS transfers into the GoSS' account at the BoSS one half of the revenues derived from oil produced in the south. These revenues are denominated in foreign currency, since they derive primarily from foreign oil sales. Until April, the BoSS would maintain a working reserve (about US$300 million) of FX, and exchange the rest for local currency from the CBOS. The BoSS then stopped these exchanges on the order of the GoSS Finance Ministry and held on to all of the FX. ¶4. (SBU) Hassan said the CPA clearly states (Article 14.2) that the Bank of Southern Sudan is a branch of the CBOS. As such, the BoSS reports to and takes direction solely from the CBOS Board of Governors (on which the BoSS Governor sits as a Deputy Governor). The GoSS has no authority to issue instructions to the BoSS, as it had done in ordering the BoSS to stop transferring foreign exchange to the CBOS' reserve account. Hassan called this a clear "violation of the CPA." ¶5. (SBU) According to Hasan, the Central Reserve Management Unit of the CBOS manages FX reserve policy for all of Sudan, including the South. Because the Sudanese Pound is not convertible, the CBOS must maintain a significant stock of FX in its Central Reserve Account. While the GoSS receives half of the state revenues produced in its territory, foreign exchange such as that held by the BoSS does not belong to the GoSS. The GoSS "wants to have its cake and eat it too" Hassan said. ¶6. (SBU) Pressed by CDA Fernandez on whether the October 20 agreement includes the transfer of the US$500 million that is reported to have accumulated in the BoSS in the interim, Hassan was evasive. Hassan left the impression that, while the BoSS will now start transferring FX back to the CBOS as it had been doing until April, the CBOS and the GoSS have agreed to disagree for now about the disposition $500 million. ¶7. (SBU) When asked, Hassan said emphatically that the dispute is "not resolved." He said the GNU and the GoSS now will form a joint-committee, including participants from the Naivasha talks that led to the CPA, to finally resolve the question. Each side will hire outside experts to advise them. In addition, the committee will examine the "new issues" of CBOS restructuring and management raised by the GoSS on October 20. AEC Chairman Plumbly expressed the hope that the interim agreement will hold and said that the AEC will continue to follow the issue closely. ¶8. (SBU) COMMENT: The GoSS appears to have taken a page from the NCP's book and employed a reading of the often-less-then-clear CPA most favorable to its own interests. The CBOS and GoSS had worked out an earlier agreement that promptly collapsed. We can expect this dispute to continue to drag on while the two sides argue over KHARTOUM 00001578 002 OF 002 their differing interpretations; meanwhile, it appears that the current agreement has appeased the CBOS temporarily. Some of the heat of the argument seems to be Dr. Hassan's view that he has personally been undercut by the GOSS exercising untoward interference of the BOSS. FERNANDEZ