ECONOMISTS URGE GREATER EXCHANGE RATE FLEXIBILITY FOR

UNCLAS KHARTOUM 001120 NSC FOR MGAVIN, LETIM DEPT PLS PASS USAID FOR AFR/SUDAN ADDIS ABABA ALSO FOR USAU SENSITIVE SIPDIS E.O. 12958: N/A TAGS: EFIN EPET PGOV PREL SU SUBJECT: ECONOMISTS URGE GREATER EXCHANGE RATE FLEXIBILITY FOR REBUILDING OF FOREX RESERVES ¶1. (SBU) SUMMARY: Sudan's foreign exchange reserves have trended upwards after reaching perilously low levels in March, but the Central Bank of Sudan (CBOS) remains too protective of the Sudanese pound (SDG),economists at the African Development Bank (AfDB) told econoffs on September 24. They urged greater exchange rate flexibility and a tightening of fiscal policy for Sudan to maintain macroeconomic stability in 2010. END SUMMARY. ¶2. (SBU) Sudan ended 2007 with approximately USD1.1 billion in foreign exchange reserves, good for 1.2 months worth of imports, according to International Monetary Fund (IMF) data. Reserves had reached as high as USD2 billion in May of 2008, before the global financial crisis sharply reduced oil revenues and foreign direct investment. By March of 2009, reserves stood at a mere USD300 million, less than two weeks of imports. The rise in oil prices in recent months is thought to have improved the reserve situation, according to the economists, but the CBOS has not yet released second quarter (Q2) 2009 data. ¶3. (SBU) The economists noted that while transparency at the CBOS is extremely limited, they believed the reserve crisis was exacerbated by the CBOS using foreign exchange to prop up the Sudanese pound. "Sudan is too protective of its currency," said AfDB Resident Representative Famara Jatta. "They should allow it to find its own way," noting that exchange rate flexibility would allow for the safeguarding and rebuilding of foreign exchange reserves. ¶4. (SBU) Sudan has agreed to IMF supervision under an 18 month Staff Monitored Program (SMP) aimed at maintaining macroeconomic stability and rebuilding foreign exchange reserves. Among the key recommendations of the SMP are greater exchange rate flexibility, rescheduling of external debt, a constraint on non-concessional borrowing and tightening of fiscal policy. (NOTE: The IMF, World Bank, and other multilateral development banks cannot offer low-interest rate loans --so called "concessional financing"- to Sudan due to the US sanctions regime. END NOTE.) The years 2007 and 2008 saw a significant rise in government expenditures due to the influx of oil revenues, and cutting back this spending remains a key challenge, according to the economists. ¶5. (SBU) Comment: Despite the lack of CBOS data, it appears that the atmosphere of an acute foreign exchange crisis has ceased with the rise in oil prices. The IMF is correct in advocating a more flexible exchange rate regime for the SDG, and the CBOS should be doing its utmost to build up reserves in advance of the first SMP review in December 2009. But the recent drop in the official exchange rate from SDG 2.50 to 2.30 for the dollar indicates the CBOS may be up to its old tricks in manipulating the market, a strategy that has cost Sudan billions in foreign exchange reserves and will ultimately prove unsustainable. ASQUINO