RISING OIL PRICES, REPAID ARREARS PROVIDE GOSS TEMPORARY

UNCLAS SECTION 01 OF 02 KHARTOUM 000727 DEPT FOR SE GRATION, S/USSES, AF A/S CARSON, AF/E, EEB/IFD NSC FOR MGAVIN DEPT PLS PASS USAID FOR AFR/SUDAN DEPT PLS PASS TREASURY FOR OIA, USED IMF, USED WORLD BANK ADDIS ABABA ALSO FOR USAU SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON EFIN ENRG EAID PGOV PREL KPKO SOCI AU UNSC SU SUBJECT: RISING OIL PRICES, REPAID ARREARS PROVIDE GOSS TEMPORARY RELIEF FROM BUDGET WOES REF: A) KHARTOUM 330 B) KHARTOUM 715 C) STATE 33559 ¶1. (SBU) SUMMARY: With world oil prices on the rebound and arrears in revenue-transfers from Khartoum reduced, the Government of Southern Sudan's (GoSS) revenues are gradually reaching levels projected in its 2009 budget, after an extremely lean first quarter. GoSS spending priorities are salary payments and transfers to states, with payment of contractual obligations coming in a distant last. While the improved revenue situation promises short-term relief, the GoSS will remain vulnerable to revenue shocks until it tackles underlying weaknesses in governance that are the real source of its problems. END SUMMARY. ¶2. (SBU) After an acute shortage in January and February (ref. A), GoSS revenues are reviving, although not to the levels of 2007-early ¶2008. According to the GoSS Ministry of Finance and Economic Planning (MoF),first quarter 2009 GoSS revenues were Sudanese Pounds (SDG) 457 million, or approximately USD 207 million. This was only one half of anticipated revenues for the period. Oil Revenues Up - - - - - - - - ¶3. (SBU) The early 2009 revenue shortfall was caused by a combination of low global oil prices and depressed sales. By late May, however, world oil prices had rebounded to levels equal to or higher than those assumed in the 2009 GoSS budget (i.e., US $50/bbl). (Note: The 2009 GoSS budget projected 93 percent of total revenues to come from oil revenues. This is actually a decrease from the 98 percent dependence on oil revenues in the 2008 budget. End note.) Sudan's Nile blend crude sells at a discount of about US $5/bbl below Brent crude. The more plentiful Dar blend sells at an additional discount below that. If oil prices at least remain steady, production and sales are strong and arrears do not begin to build up again, GoSS revenues for the rest of 2009 should approximate levels forecast in the budget. Arrears Coming Down - - - - - - - - - - ¶4. (SBU) CPA-mandated oil revenue transfers from the GNU MoF to the GoSS fell seriously into arrears in late 2008 as oil prices declined, reaching a total of more than USD300 million in December, further contributing to the GoSS fiscal crisis. Since the beginning of 2009, however, transfers have increased, and arrears have steadily declined. The reduction in arrears has helped the GoSS avoid an even more difficult fiscal situation than the one it faced in the first quarter. At the working level, GNU and GoSS MoF officials agreed in principle to eliminate all arrears as soon as possible. On May 28, the GoSS told donors that 73 percent of the arrears had been cleared. On June 1, the GNU MoF announced that all arrears had been paid down. (Note: US $77 million in arrears dating from 2005 is in dispute between the GoSS and GNU. Starting in January, the GNU also began deducting an election fund from transfers. This amounted to about USD 39 million from transfers to the South in the first quarter, which the GoSS is counting as part of the arrears. It is unclear whether or how these amounts figure into the GoSS' 73 percent or the GNU's 100 percent figure three days later. End note.) Looking Beyond Revenues - - - - - - - - - - - - ¶5. (SBU) However, the root cause of GoSS fiscal difficulties stems from poor budget execution and undisciplined spending, compounded in the last eight months by falling revenues. In both 2007 and 2008, the GoSS significantly overspent budgeted expenditures. For example, by mid-2008, many GoSS ministries had spent their entire annual appropriations. Thanks to surging international oil prices, the GoSS was able to adopt a budget supplemental late in the year that covered overspending. When oil prices began to decline, however, that option disappeared. It now remains to be seen whether the GoSS has learned its lesson and has the capacity and discipline to restrain spending in the future, or whether ministries will again go on a spending spree with the partially restored flow of revenues. Expenditures: Priority on Paying Salaries - - - - - - - - - - - - - - - - - - - - - - ¶6. (SBU) According to the Ministry of Finance, top GoSS spending priorities are salary payments, transfers to state governments, and "petty cash" for ministries, which the government believes it can cover this year even in a worst-case revenue scenario. Contractual KHARTOUM 00000727 002 OF 002 obligations are assigned a lower priority, and the GoSS warns that it may not be able to meet these if oil revenues weaken or if arrears accumulate once again. ¶7. (SBU) Salaries absorb about one half of the GoSS budget. The GoSS workforce is badly bloated, with the government acting as the employer of last resort in a subsistence agriculture economy ravaged by war, where there is virtually no private sector to jobs. Since 2005, the GoSS has attempted to prevent social unrest by carrying some 250,000 people on the government payroll some, many of these veterans or dependents, including 150,000 SPLA soldiers. The emphasis on meeting current salaries and operating costs at the expense of capital investment is further delaying the development of an economy that could provide employment opportunities outside the government sector. Comment - - - - ¶8. (SBU) Southern Sudan's fiscal problems are primarily a matter of poor governance (poor budget execution, uncontrolled spending, overstaffed government workforce, failure to develop non-oil revenue sources, and corruption) compounded by depressed revenues. In the short to medium-term, oil revenues may rebound and give the GoSS some breathing space. However, oil prices remain volatile, and in the long run, Sudan's overall oil output will decline, with the proportion of the lower grade/lower priced Dar blend increasing. Unless the GoSS seriously tackles its underlying governance problems, it will remain vulnerable to the vagaries of revenue transfers from the North. The impact of this week's appointment of David Deng Athorbei as Minister of Finance (ref. B) (the third such change in three years) on the GoSS's budget and spending practices remains unclear. WHITEHEAD