Annex to “Change: An Inevitability in Sudan”: A Note on the Status of the Sudan Economy

When it signed the CPA, Sudan had a world of possibility before it, enjoying peace, substantial revenue, and a boom in Foreign Direct Investment. However, because of inept economic management, these opportunities have been squandered. Sudan increased its dependence on the oil sector, despite the obvious signs that this revenue source was drying up. By 2007, foreign investors grew weary of ongoing political risk and high levels of corruption, resulting in a decline in investment levels.

Meanwhile, the government borrowed to fuel its expenditure binge. Despite an approximate US$60 billion in oil exports, the country’s external debt has risen by US$15 billion since the advent of oil production, reaching US$40 billion overall. New debt accrued is unsustainable, in the form of harsher term non-concessional loans given that the regime’s political and human rights issues have impeded access to concessional lending. The regime’s self-inflicted international isolation has also meant debt relief continues to be out of reach.

The government allowed unchecked expansions in public spending. Most of this money would be destined for the security and political sectors, with only a small share going to infrastructure development, industry, and social safety nets. Agriculture, which is the main source of livelihood for 80% of the population, and other productive sectors have been systematically neglected alongside health, water and education contributing to Sudan’s woeful Human Development Index, ranking 169 of 187 overall, the lowest of all MENA countries.

The regime failed to build any type of sovereign fund for future generations or develop its hard currency reserves despite unexpectedly high oil prices in 2007 and onwards. Instead, it managed its currency to bolster GDP through increased consumption, supplied by imports.

Today, Sudan exhibits the signs of the Resource Curse – an increasingly narrow export and employment base, with manufacturing and agriculture in long-term decline. Ironically, the resource has now mostly gone.

The loss of oil exports has had a resounding impact on the economy: the current account balance has drastically turned into a large deficit, officially estimated at US$2.4 billion, and the Sudanese pound has depreciated by approximately 125 percent since secession. Wars in Darfur, Blue Nile and South Kordofan that, by the government’s own admission, have cost Sudan approximately US$4 million per day are depleting resources that the country can ill afford in the midst of an economic crisis caused by the loss of oil revenues and litany of other fiscal maladies.

Consequently, the economic outlook for Sudan is dreadful. The IMF projects 7.2% contraction in 2012 and a 13% decrease in GDP over the next three years, assuming the country pursues a modest policy response to its current circumstances. The response adopted by the regime, in an attempt to address its bottom line, was to amend its budget for 2012, which projected 28% of revenues from oil transit fees and has not been realized. These so called ‘austerity’ measures have been undertaken in an effort to reduce the widening budget deficit by bolstering non-oil revenues and rationalizing expenditures. However, actual expenditure cuts have been cosmetic, not only falling short of announcements but have not been applied to military, security and the sovereign sector in general, spending on which has increased. It is important to note that the government’s now defaulted 2012 budget included 82% spending on the security and political sectors, while 49% of total cross sector expenditures went to public wages and salaries, of which 88% was for these two sectors alone. On the other hand, agriculture received just 3% of total expenditure while the health and education sectors respectively received 2.4% and 2.3%.

The ‘austerity’ measures, which have increased fuel, sugar, VAT, customs and excise duty and have devalued the Sudanese pound by 125%, have served only to exacerbate the already high cost of living and to bring the economy to a tipping point. Inflation continues to accelerate, partly due to the rising cost of basic imported goods, which in turn has increased economic hardship for the poor and vulnerable. Inflation reportedly reached 37.2% in June 2012, double the level in the same month one year ago. The cost of food items has also jumped 41.4% from a year earlier while the price of meat, all of it local, has risen by 150% – today, a kilo of meat costs 50 pounds ($11.4 at the official rate) as opposed to 20 pounds one year ago. For July, figures just released by the Central Bureau of Statistics indicate a staggering year on year inflation of 41.6% – bearing in mind that these statistics are widely believed to be underreported for political reasons. Although some savings were made from the partial removal of the oil subsidies, no social safety net has been implemented to reduce the burden on the poor ensuring that poverty, estimated at 46.5% overall and 57.6% in rural areas in 2009, grows more acute by the day.

Therefore protests against austerity measures over the last two months are not about short-term price increases, but the rejection of government attempts to force the poor and middle classes to pay for a decade of economic mismanagement. The regime’s management of oil revenues, which could have transformed Sudan into an emerging economy, has instead become glaring evidence of its pervasive corruption.

The recent oil deal with South Sudan is yet to be implemented, and while its implementation may provide modest short-term relief it is presumptuous to think it can halt or reverse the deterioration. The announced financial support package will be disbursed over a period of three and a half years and falls well short of covering the fiscal deficit. While officially estimated at US$2.4 billion, privately the regime admits to a deficit closer to US$10 billion. This deficit continues to widen given the economic mismanagement of resources and lack of diversification beyond oil.

The regime also can no longer rely on the heavy investments it was previously able to attract from Asia and the Middle East, especially in the oil sector where credit was readily available. The situation has now changed drastically – both politically and economically. With the loss of oil exports, Sudan’s creditworthiness has decreased. This combined with the existing large debt obligations and arrears situation, the heightened political risks and the prevailing economic uncertainties have made it extremely difficult for Sudan to obtain external financing. As never before, Sudan will need to have access to debt relief for it no longer has the ability, it previously had, to attract foreign loans or to service the harsher terms associated with non-concessional ones. However, there are several reasons that currently render such debt relief virtually out of reach for Sudan. The major obstacle that has stood in the way of Sudan benefitting from such debt relief in the past is political and this situation is now more acute than ever before. To benefit from any official debt relief program, Sudan’s Paris Club creditors will need to be satisfied that the government has taken significant steps in solving its political and human rights problems. With the instability in Darfur, the unrest in Abyei, the conflicts in Southern Kordofan and Blue Nile States and the humanitarian situation in these areas together with the legacy of the ICC ruling, the Sudanese government is a far cry from meeting the minimum political and human rights requirements for debt relief.

An economic turnaround will require drastic restructuring of the allocation of resources towards productive sectors and poverty reduction. With more than 80% of government current spending inflexibly devoted to state transfers and security expenditure, a rationalization of public spending of the required magnitude can only be implemented within a comprehensive restructuring program of the overall government machinery. The large outlays for military and security would need to be curtailed through the dissolution of illegal militias and regime forces, as well as agreements to end civil conflicts. These reforms are at odds with the very existence of the National Congress Party regime given that expenditure is solely designed to sustain its grip on power through patronage, division and extermination of dissent.

The only solution is a political turnaround that facilitates strong pro-poor economic and structural economic reforms.

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