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Sudan: Staff Report for the 2014 Article IV Consultation and Second Review Under the Staff-Monitored Program

Author(s):
International Monetary Fund. Middle East and Central Asia Dept.
Published Date:
December 2014
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Introduction

1. Sudan is a fragile state weighed by a heavy debt burden and an unsettled domestic and regional political environment. These problems, together with limited revenue mobilization, have been constraining Sudan’s growth prospects and poverty reduction efforts. The economic and financial situation worsened following the secession of South Sudan in 2011. The domestic conflicts in Southern Kordofan, Blue Nile, and Darfur states and the new conflict in South Sudan threaten domestic and regional stability. U.S. sanctions, which were recently extended for an additional year, are also creating uncertainties.

2. Sudan’s external debt, most of which dates back to the 1970s, is unsustainable. External debt, at the end of 2013, was estimated at US$45 billion (78 percent of GDP)—most of which, including its debt to the IMF, is in arrears.1 The unresolved arrears, combined with U.S. sanctions since 1997, rule out access to most sources of external financing, including concessional borrowing.

3. Sudan has had 14 Staff Monitored Programs (SMPs) since 1997. These programs provided the authorities with comprehensive frameworks to design and implement policies and reforms to address their economic challenges. They helped the authorities stabilize the economy through tight fiscal and monetary policies and supported the modernization of tools to manage the economy, including through reforms in monetary policy operations, tax policy, and public financial management. These programs also facilitated the provision and sequencing of technical assistance from the Fund and others.

4. Sudan’s economy has yet to recover from the shock of South Sudan’s secession three years ago. Sudan has been heavily dependent on oil since the late 1990s: the oil sector provided sizeable budget revenues and a major share of the country’s foreign exchange receipts. The secession of South Sudan in 2011 took away three-quarters of oil production, half of fiscal revenues, and two-thirds of the international payments capacity. As a result, the economic situation deteriorated significantly, resulting in the buildup of large economic imbalances.

5. A first attempt was made in June 2012 to address the economic imbalances through a package of corrective measures.2 Nevertheless, the outcome for 2012 was mixed while the reform process was interrupted in 2013 with the adoption of a budget void of any significant reform measures in support of the needed fiscal consolidation.

6. In September 2013, the authorities embarked on a stabilization program the success of which hinges significantly on improvements in the domestic and regional political environments. The program’s objective is to restore macroeconomic stability, strengthen social safety nets, and lay the groundwork for sustainable growth. In parallel, the authorities expect that the national dialogue in Sudan initiated earlier this year and the return of peace in South Sudan will ensure the continuation of oil flows. The authorities consider their stabilization program supported by the SMP a basis for a track record towards debt relief from international creditors, which is crucial for sustaining growth and the adjustment process.

7. The recent breakdown in relations with correspondent banks has complicated international financial and trade transactions (Box 1). During the second quarter of 2014, most foreign banks stopped transacting with Sudanese banks following the US$8.9 billion penalty levied in June 2014 by the U.S. authorities on BNP-Paribas for violating the U.S. sanctions on doing business with Sudan and other countries. As a result, the foreign exchange market tightened and the parallel exchange rate weakened significantly.

Box 1.The Recent Breakdown in Correspondent Bank Relations

In recent months, Sudanese banks have experienced a breakdown in their correspondent relations with foreign banks. This comes as a result of the prosecution by the U.S. of BNP Paribas in early 2014 for breaking U.S. sanctions against Sudan and other countries. Foreign and local entities based in Sudan are reporting difficulties and delays in processing foreign exchange transfers to and from Sudan.

As a result, trade has been adversely affected, and the shortage of foreign exchange in Sudan has worsened. Export receipts are being delayed. Importers are unable to obtain trade financing (e.g., letters of credit) or transfer payments. Embassies, international organizations, and other entities based in Sudan—who are all exempt from sanctions—are affected by foreign correspondent banks’ refusal to process foreign exchange transactions. The June and September payments to the IMF were received with long delays as a result of this situation.

If the breakdown in relations with correspondent banks continues, it is likely to have a considerable negative impact on the economy: (i) growth will be affected because exports and imports will decline. The lower imports of foodstuffs, intermediate goods, and raw materials will result in lower domestic consumption and production; (ii) inflation will rise as a result of shrinkage of supplies and higher cost of imports; and (iii) shortage of foreign exchange will contribute to depreciation of the exchange rate on the parallel market, thereby fueling inflation and undermining macroeconomic stability. These adverse developments will impact the poor and the most vulnerable segments of the population, and will most likely increase poverty rates in Sudan.

1 In June 2014, BNP Paribas pleaded guilty to violating U.S. sanctions on doing business with Sudan and other countries and was fined US$8.9 billion by the U.S. authorities.

8. The political environment has improved somewhat with progress on the national dialogue. In August 2014, the leaders of the Umma Party and the Sudan Revolutionary Forces (both opposition) signed a declaration in Paris calling for, among other things, an end to the fighting in the two border states and the adoption of democratic and peaceful principles to foster political change. This was followed in early September 2014 by an agreement on the principles of the National Dialogue in Addis Ababa between the Paris Declaration group, representatives of the National Dialogue 7+7 Committee, which comprises seven each representatives from the opposition and the ruling National Congress Party (NCP), and the African Union High-Level Implementation Panel (AUHIP). This agreement was followed by the release of some political prisoners.

9. The armed conflict in South Sudan, which erupted in December 2013, persists. The conflict has affected oil production there and forced many South Sudanese to seek refuge abroad. Sudan has granted unrestricted access to its territory to refugees from South Sudan and has received more than 100,000 of them so far. The UN relief agencies have been assisting the refugees.

10. The authorities have started implementing an outreach strategy with South Sudan under the auspices of the AUHIP to garner support for debt relief. Sudan and South Sudan, together with the African Union (Tripartite Committee), developed an outreach strategy and an action plan to help garner support for debt relief, which was supported by the June African Union summit. In September, members of the Tripartite Committee held a briefing for key external creditors in Khartoum to discuss the need for debt relief, which was followed by a briefing by the Minister of Finance to the diplomatic community on Sudan’s economic policy implementation and the need for debt relief to support the implementation of poverty reduction policies. These briefings were followed by meetings with the donor representatives in Washington during the Annual Meetings. Furthermore, the two countries recently agreed to extend the “zero option” to October 2016.3

11. The authorities’ policies since the last Article IV consultation have be en broadly in line with Fund recommendations. Notable achievements include improving revenue mobilization, containing expenditure, and unifying the official exchange rates. However, monetary policy management remains weak, including the central bank’s involvement in quasi-fiscal operations, and the business environment still needs to improve.

Economic Developments, Outlooks, and Risks

12. The secession of South Sudan had a significant impact on the Sudanese economy. Between 2010 and 2012, annual oil production dropped from 168 million barrels to 38 million barrels, budgetary oil revenues from 11.5 percent of GDP to 1.5 percent of GDP, and oil exports from US$11 billion to US$2 billion. These substantial economic and financial losses affected all sectors of the economy and resulted in slower growth, inflation rising to high double digits, and deteriorating fiscal and current account balances (Table 1).

Table 1.Selected Economic Indicators, 2011-19
201120122013201420152016201720182019
Est.Prel.Projections
Output and prices(Annual changes in percentage)
Real GDP (at factor costs) 1/−0.3−2.23.33.13.43.94.24.64.7
Oil GDP 1/−36.0−59.015.66.33.23.84.45.05.5
Non-oil GDP 1/6.84.72.72.93.43.94.24.64.7
Consumer prices (end of period)18.944.441.928.712.48.66.55.75.3
Consumer prices (period average)18.035.137.138.420.610.57.66.15.5
Non-oil GDP deflator15.232.636.332.820.810.57.35.95.9
Oil GDP deflator62.023.832.532.434.66.13.94.03.7
Investment and saving(In percent of GDP, unless otherwise specified)
Gross disposable income97.597.597.998.298.298.498.899.199.1
Gross domestic expenditure98.0106.8106.5104.7104.6104.5104.2104.2104.0
Final consumption78.988.186.587.286.786.385.685.184.5
Gross capital formation19.118.720.017.517.818.118.619.119.4
Gross Savings18.69.511.411.011.512.113.113.914.5
Government operations
Revenue and Grants18.09.89.911.412.012.412.512.712.8
Revenues17.79.49.210.911.311.711.812.012.2
Tax revenue6.46.16.16.16.67.17.47.77.9
Total expenditure17.813.512.112.413.313.012.812.812.6
Current expenditure16.112.011.111.011.611.110.49.99.3
Wage bill5.44.84.33.73.53.53.53.53.3
Subsidies1.51.82.01.82.32.01.40.90.4
Transfers6.12.62.22.72.82.82.82.93.0
Capital expenditure1.71.51.01.31.72.02.42.93.3
Overall balance0.2−3.7−2.3−1.0−1.2−0.7−0.3−0.10.3
Overall primary balance1.4−2.3−0.9−0.10.00.50.80.91.2
Non-oil primary balance−4.1−3.8−2.9−1.5−1.8−1.3−1.0−0.8−0.4
In percent of non-oil GDP−4.7−3.9−3.0−1.6−1.9−1.4−1.0−0.8−0.5
Monetary sector(Annual changes in percentage, unless otherwise specified)
Broad money17.740.313.019.116.315.515.211.610.2
Reserve money27.846.720.314.714.413.212.79.48.4
Credit to the economy8.034.123.228.021.921.822.526.429.1
Velocity (Non-oil GDP/M2 ratio, end of period)3.73.74.65.25.65.65.55.55.5
Ratio of Money to Broad Money70.971.471.271.271.271.271.271.271.2
Net claims on government as a ratio to Non-oil GDP11.711.09.78.16.76.05.44.94.5
Credit to the economy as a ratio to Non-oil GDP14.914.512.712.011.612.213.315.217.6
External sector(In percent of GDP)
Exports of goods (in US$, annual percent change)−12.9−53.7−6.47.611.27.710.56.16.2
Exports of oil12.42.82.42.73.43.33.23.13.0
Imports of goods (in US$, annual percent change)−7.52.64.7−4.13.75.46.65.44.7
Merchandise trade balance4.1−5.4−6.2−4.9−4.9−4.8−4.6−4.5−4.2
Current account balance−0.4−9.2−8.6−6.5−6.3−6.0−5.5−5.1−4.9
External debt service (in percent of exports of G&S.)
Commitment basis24.444.743.539.735.232.029.628.126.4
Cash basis2.44.22.83.32.92.62.72.82.6
Total external debt59.481.477.879.977.975.873.370.768.1
Total external debt (in US$ billion)41.443.245.046.448.049.551.152.754.4
Gross international reserves (in millions of US$)1,3171,6931,6191,7162,0802,4392,7773,0553,336
In months of next year’s imports of G&S.1.51.91.91.92.22.42.62.82.9
Memorandum items:
Nominal GDP (in millions of SDGs)179,535225,677317,503435,140547,797631,607711,613792,833884,070
Nominal non-oil GDP (in millions of SDGs)156,104215,776303,487411,897517,745597,221670,821745,077828,114
Nominal GDP (in $US million)67,32763,16366,74870,03064,49565,69169,17673,52778,729
Exchange rate (SDG/US$, end of period)2.684.425.70
Exchange rate (SDG/US$, period average)2.673.574.71
NEER (2007=100, percent change, period average)−16.0−12.2−28.1
REER (2007=100, percent change, period average)−4.88.1−3.4
Sources: Sudanese authorities; and staff estimates and projections.

Excluding South Sudan from 2011 onward.

Sources: Sudanese authorities; and staff estimates and projections.

Excluding South Sudan from 2011 onward.

Text Figure 1:.Oil production, 2010-14

(In million barrels)

13. To adjust to the new economic situation, in 2011 the authorities developed a three-year emergency plan and implemented some corrective measures in June 2012 and September 2013.4 The September 2013 measures included increases in domestic petroleum prices by 67–75 percent, unification of multiple official exchange rates and a step devaluation of the unified rate by about 22 percent. The adoption of these measures was facilitated by improved relations with South Sudan and the resumption of oil production in mid-2013. However, there was civil unrest, including the loss of life, in reaction to some of the reforms.

Text Figure 2.Budgetary oil revenue

(In percent of GDP)

14. Despite progress in implementing adjustment policies, economic performance through end-2013 was mixed. Growth started to recover in 2013 but remained sluggish, weighed by poor harvests and lower gold production. Inflation accelerated to 42 percent by end-December, reflecting the September exchange rate devaluation and increase in fuel prices. Fiscal performance was better than expected due to improved tax and custom collections. Reserve money growth decelerated to 20 percent at end-2013 (from 47 percent a year earlier), largely reflecting lower gold purchases by the central bank. The gap between the official and parallel market exchange rates dropped to about 47 percent. Gross international reserves declined to US$1.6 billion—about 1.9 months of imports (Table 2).

Table 2.Balance of Payments, 2011-19(in Millions of US Dollars)
201120122013201420152016201720182019
Est.Prel.SMP Request1st ReviewProj.Proj.
Current account balance−288−5,839−5,750−5,212−4,343−4,518−4,091−3,948−3,784−3,766−3,850
Current account balance (on cash basis)1,345−4,226−4,174−3,601−2,735−2,911−2,492−2,356−2,197−2,185−2,269
Trade balance2,751−3,405−4,132−3,073−3,288−3,400−3,145−3,183−3,153−3,278−3,326
Exports, f.o.b.11,0635,1224,7935,6555,6535,1565,7316,1716,8197,2367,686
Oil exports8,6792,0121,7202,6702,5612,0852,3872,3892,4242,4922,586
Crude oil8,3781,7551,6172,4152,4021,8842,1782,1802,2122,2752,361
Petroleum products301257102254159201209209212217224
Non-oil products2,3843,1103,0732,9853,0923,0713,3443,7824,3954,7445,101
Of which: Gold1,4422,1581,0488331,0121,1721,2581,2521,2911,3701,431
Imports, f.o.b.−8,312−8,528−8,925−8,728−8,941−8,555−8,876−9,354−9,971−10,514−11,013
Foodstuffs−1,699−1,844−2,135−1,809−1,947−1,847−1,714−1,710−1,737−1,755−1,789
Petroleum products−662−947−1,313−1,499−1,587−1,612−1,752−1,880−1,989−1,944−1,703
Machinery and transport equipments−2,892−2,707−2,384−2,430−2,383−2,243−2,423−2,609−2,866−3,171−3,550
Manufactured goods−1,610−1,761−1,658−1,727−1,684−1,586−1,730−1,868−2,054−2,262−2,527
Other−1,450−1,268−1,434−1,263−1,339−1,267−1,257−1,287−1,325−1,382−1,444
Services (net)−1,389−875−226−708152130209255227210209
Receipts7641,1591,5781,3731,9601,8612,0032,1472,2432,3362,435
Of which: Oil fees charged to South Sudan00123390333343382336289289289
Of which: TFA transfers00248520438460446446446446446
Payments−2,153−2,033−1,805−2,081−1,808−1,730−1,795−1,892−2,016−2,126−2,227
Income (net)−2,763−2,422−2,772−2,595−2,712−2,685−2,725−2,739−2,739−2,757−2,800
Receipts1081492700−40274647
Non-oil payments−1,886−2,220−2,533−2,284−2,353−2,352−2,367−2,386−2,407−2,431−2,455
Public interest due−1,701−1,676−1,663−1,664−1,657−1,656−1,651−1,648−1,647−1,646−1,646
Of which: interest cash payments−67−64−87−53−50−50−52−56−60−65−65
Other payments−185−544−870−620−696−696−716−738−760−784−810
Oil related expenses−985−216−249−338−359−333−353−353−359−372−391
Current transfers (net)1,1128631,3801,1641,5051,4371,5701,7191,8812,0602,067
Private4394459456071,0619921,1141,2491,3991,5651,558
Official673418436557445445456470482495509
Capital account and Financial Account−1,0004,0613,5233,6762,6622,8292,7202,6172,4392,3702,462
Capital account162320309235249232210204213225223
Financial account (net)−1,1613,7413,2143,4412,4132,5972,5102,4132,2262,1452,239
Disbursements606376344377324261313318335356382
Amortization−445−402−381−405−405−405−347−286−305−317−300
Of which: Cash payments−216−198−90−182−182−182−173−157−183−206−195
Net foreign assets of banks (increase -)313−61227−61232234242251262274286
Investors’ net income-cost oil−1,362−731−515−771−762−765−767−761−763−763−763
Foreign direct investment and portfolio (net)2,6662,4663,0912,3512,4872,3222,0992,0452,1332,2532,226
Other net capital flows−2,9382,0924471,950537950971845564343409
Public−1,388556580614685624694747826876931
Private−1,5501,536−1331,336−14832627798−262−534−522
Errors and omissions−7085496500000000
Overall Balance−1,996−1,229−2,162−1,536−1,681−1,688−1,371−1,331−1,345−1,395−1,388
Overall Balance (on cash basis)−134588−295298149141401390364297298
Financing1,9961,2292,1621,5361,6811,6881,3711,3311,3451,3951,388
Change in net international reserves (increase -)192−547299−260−115−108−378−375−357−297−301
Gross reserves249−37675−250−105−98−364−359−339−277−281
Gross usable reserves (increase -)249−37675−250−105−98−364−359−339−277−281
Gross earmarked and other reserves (increase -)00000000000
Short-term foreign liabilities (increase +)−51−16423000000000
IMF (net)−5−7−6−10−10−10−14−16−18−20−20
Disbursements00000000000
Repayments−5−7−6−10−10−10−14−16−18−20−20
Exceptional financing1,8041,7761,8631,7961,7961,7961,7491,7061,7011,6931,689
Of which: Change in arrears1,8041,7761,8631,7961,7961,7961,7491,7061,7011,6931,689
Financing gap00000000000
Memorandum items:(In percent of GDP)
Current account balance (accrual basis)−0.4−9.2−8.6−8.3−6.9−6.5−6.3−6.0−5.5−5.1−4.9
Current account balance (cash basis)2.0−6.7−6.3−5.7−4.3−4.2−3.9−3.6−3.2−3.0−2.9
Excluding official transfers (cash basis)1.0−7.4−6.9−6.6−5.0−4.8−4.6−4.3−3.9−3.6−3.5
Non-oil current account (on cash basis)−8.4−8.0−6.7−7.6−5.8−4.8−4.9−4.3−3.7−3.6−3.9
Current transfers (net)1.71.42.11.82.42.12.42.62.72.82.6
Of which: Private transfers0.70.71.41.01.71.41.71.92.02.12.0
Gross International reserves (in US$ Million)1,3171,6931,6191,8681,7231,7162,0802,4392,7773,0553,336
In months of next year’s imports1.51.91.92.01.91.92.22.42.62.82.9
Financing gap0.00.00.00.00.00.00.00.00.00.00.0
Net repayment of external debt−322.1−115.2−167.1−141.3−92.0−29.4−86.7−105.0−92.1−85.1−122.0
(Annual changes in percent, unless otherwise specified)
Exports of goods (value)−12.9−53.7−6.418.317.97.611.27.710.56.16.2
Non-oil exports of goods (value)39.530.4−1.25.00.6−0.18.913.116.27.97.5
Imports of goods (value)−7.52.64.7−1.80.2−4.13.75.46.65.44.7
Nominal GDP (in millions of U.S. dollars)67,32763,16366,74863,06363,03470,03064,49565,69169,17673,52778,729
Crude oil exports (volume, in millions of barrels)87.518.615.826.626.624.826.027.728.729.931.2
Sudanese crude oil price (U.S. dollars per barrel)95.894.694.690.794.296.395.289.687.586.385.4
Sources: Sudanese authorities; and staff estimates and projections.
Sources: Sudanese authorities; and staff estimates and projections.

Text Figure 3.Oil Exports, 2010-14

(In billions of US$)

15. Macroeconomic performance has been improving gradually in 2014. Economic activity has been recovering owing to a rebound in gold extraction and growing manufacturing, trade, and services sectors. On the fiscal front, the budget deficit dropped to 0.4 percent of GDP (against 1.2 percent the previous year) by mid-year, curbing government recourse to central bank financing. The current account deficit is also estimated to have narrowed to 2.7 percent of GDP in H1 2014 from 4.6 percent of GDP in H1 2013, following last September’s exchange rate devaluation and the fiscal consolidation efforts. Inflation, which peaked at 47 percent in July, declined to 39 percent in September thanks to a good agriculture harvest and the drop in the parallel market exchange rate.5

16. The parallel market exchange rate premium has declined considerably (by 18 percentage points since August 2014). This decline has been principally due to an appreciation of the parallel market rate following increased agricultural exports and increased supply of foreign currency on the parallel market, but also a devaluation by 3 percent of the official exchange rate;6 it stood at 47 percent in early November.

Text Figure 4.Exchange Rates, 2010-14

17. The outlook for the remainder of 2014 remains favorable. Non-oil growth is projected at 2.9 percent as gold extraction is expected to be strong and agriculture to rebound owing to favorable weather. Inflation is expected to decelerate to 29 percent by year-end as the one-off effects of the September 2013 fuel price increases dissipate, monetary policy is tightened, and food price declines owing to the expected good harvest. The fiscal deficit is projected to narrow to 1.0 percent of GDP (0.2 percentage points better than previously projected) on account of improved revenue collection and tight expenditure control (Table 3). The current account deficit is expected to narrow to 6.5 percent of GDP on account of continued fiscal consolidation.

Table 3A.Government Operations, 2013-19(In Millions of SDGs)
2013201420152016201720182019
Prel.SMPRevisedProj.
Revenues and grants31,30946,13149,42165,94978,10388,916100,585113,394
Revenues29,23643,98247,27262,07273,58583,95695,244107,677
Tax revenues19,42725,05926,67636,18844,69952,76660,86869,888
Income, profits and capital gains1,7142,1062,3953,0113,7514,4245,2096,137
Property198787109188218252291
Goods and services11,01714,53515,23620,37924,86629,27133,72938,625
International trade and transactions6,6208,2438,87012,57815,75718,68821,48324,604
Other588888111137164195232
Oil revenues4,8054,7614,4486,6788,1189,14110,01510,852
Domestic sales4,6104,4714,0936,1237,1818,0038,6699,493
Oil exports revenues1952903555549371,1371,3461,359
Other nontax revenues5,00514,16316,14819,20620,76722,05024,36126,936
Property income1,0341,4201,2511,5721,9052,2892,7203,235
Administrative fees7331,0381,0281,2921,6402,0262,4753,026
Transit fees9252,4411,8522,4832,3612,0452,1432,232
Other (including TFA)2,3139,26512,01713,85914,86215,69117,02218,443
Of which: TFA1,1773,2442,8583,7844,2834,5834,8045,003
Grants2,0732,1492,1493,8764,5194,9605,3415,718
Total expenditure38,54051,07653,77972,69482,26491,165101,388110,965
Expense (current expenditure)35,20945,22547,92963,51469,94273,98278,37482,017
Wages 1/13,67016,01216,01219,30222,39625,05027,37529,459
Goods and services2,9293,8034,9196,1845,9566,6237,2097,797
Interest due4,3564,0614,0616,6627,3247,5887,9418,005
Foreign interest due416336336445537620702728
Domestic interest due3,9403,7263,7266,2186,7876,9697,2407,277
Subsidies6,2147,5278,02712,44112,5589,6917,2133,870
Fuel subsidies6,1606,0276,0279,7079,4636,3803,7430
Other subsidies541,5002,0002,7343,0953,3113,4713,870
Transfers7,06511,90911,90915,26617,37719,93922,66626,231
South00000000
States6,92111,76011,76015,09717,20219,76222,48826,032
Current4,5157,8467,8469,0789,3669,2718,9999,745
Capital2,4053,9143,9146,0197,83610,49113,48916,288
Other transfers144149149169175178178199
Other expenditures9751,9133,0003,6594,3315,0915,9696,655
Net acquisition of NFA (capital expenditure)3,3315,8505,8509,18012,32217,18323,01428,948
Operating balance (accrual basis)−3,8999061,4922,4358,16114,93422,21231,377
Overall accrual balance−7,230−4,945−4,358−6,745−4,160−2,249−8032,429
Overall accrual balance (including discrepancy)−7,230−4,945−4,358−6,745−4,160−2,249−8032,429
Nonoil primary balance 2/−9,069−7,659−6,496−9,982−8,223−6,821−6,075−3,743
Financing (accrual basis)7,2304,9454,3586,7454,1602,249803−2,429
Foreign financing1,2117084911,1811,5471,5671,6202,098
Disbursements1,6381,8441,6232,6553,0613,4493,8424,284
Principal repayment (-))4271,1361,1321,4731,5141,8822,2232,186
Domestic financing6,1414,2373,8685,5642,614682−817−4,527
Bank financing3,9873,0732,4409494949494
Nonbank financing−1,4193,2753,8096,5113,561838−661−4,370
Accounts payable (net arrears accumulation)3,573−2,111−2,111−1,042−1,042−250−250−251
Accumulation of arrears3,7500000000
Repayment of arrears (-)−177−2,111−2,111−1,042−1,042−250−250−251
Financing Gap00000000
Sources: Sudanese authorities; and staff estimates and projections.

The retroactive effect of the September 2013 wage increase will be spread over 3 years starting in 2014. The total amount is SDG1.2 billion, of which SDG 550 million will be reflected under current transfers to state.

Non-oil primary balance excludes oil revenues, grants, transfers to South, oil related transfers to Northern states and pipelines fees paid by the government.

Sources: Sudanese authorities; and staff estimates and projections.

The retroactive effect of the September 2013 wage increase will be spread over 3 years starting in 2014. The total amount is SDG1.2 billion, of which SDG 550 million will be reflected under current transfers to state.

Non-oil primary balance excludes oil revenues, grants, transfers to South, oil related transfers to Northern states and pipelines fees paid by the government.

Table 3B.Government Operations, 2013-19(In Percent of GDP)
2013201420152016201720182019
Prel.SMPRevisedProj.
(In percent of GDP)
Revenues and grants9.911.711.412.012.412.512.712.8
Revenues9.211.210.911.311.711.812.012.2
Tax revenues6.16.46.16.67.17.47.77.9
Oil revenues1.51.21.01.21.31.31.31.2
Other non-oil nontax revenues1.63.63.73.53.33.13.13.0
Grants0.70.50.50.70.70.70.70.6
Total expenditure12.113.012.413.313.012.812.812.6
Expense (current expenditure)11.111.511.011.611.110.49.99.3
Wages 1/4.34.13.73.53.53.53.53.3
Goods and services0.91.01.11.10.90.90.90.9
Interest1.41.00.91.21.21.11.00.9
Subsidies2.01.91.82.32.01.40.90.4
Transfers2.23.02.72.82.82.82.93.0
Other0.30.50.70.70.70.70.80.8
Net acquisition of NFA (capital expenditure)1.01.51.31.72.02.42.93.3
Operating balance (accrual basis)−1.20.20.30.41.32.12.83.5
Overall accrual balance−2.3−1.3−1.0−1.2−0.7−0.3−0.10.3
Non-oil primary balance as a ratio to Non-oil GDP 2/−3.0−2.1−1.6−1.9−1.4−1.0−0.8−0.5
Financing (accrual basis)2.31.31.01.20.70.30.1−0.3
Foreign financing0.40.20.10.20.20.20.20.2
Domestic financing1.91.10.91.00.40.1−0.1−0.5
Of which: Net accumulation of arrears1.1−0.5−0.5−0.2−0.20.00.00.0
Financing gap0.00.00.00.00.00.00.00.0
Memorandum Items
Change in external arrears (SDG million)8,86111,197.011,15914,85116,40217,50018,25018,964
Change in external arrears (percent of GDP)2.93.02.72.92.72.62.42.3
Sources: Sudanese authorities; and staff estimates and projections.

The retroactive effect of the September 2013 wage increase will be spread over 3 years starting in 2014. The total amount is SDG1.2 billion, of which SDG 550 million will be reflected under current transfers to state.

Non-oil primary balance excludes oil revenues, grants, transfers to South, oil related transfers to Northern states and pipelines fees paid by the government.

Sources: Sudanese authorities; and staff estimates and projections.

The retroactive effect of the September 2013 wage increase will be spread over 3 years starting in 2014. The total amount is SDG1.2 billion, of which SDG 550 million will be reflected under current transfers to state.

Non-oil primary balance excludes oil revenues, grants, transfers to South, oil related transfers to Northern states and pipelines fees paid by the government.

18. The outlook for 2015 has improved. An anticipated good agriculture harvest and continued robust gold production are expected to strengthen economic growth to about 3½ percent. Continued tight monetary policy should help reduce inflation to 21 percent. The overall fiscal deficit is projected to remain broadly unchanged relative to 2014, thus limiting government recourse to central bank financing. This, together with greater exchange rate flexibility, should help contain the current account deficit to about 6 percent.

19. Implementation of the authorities’ adjustment program should help restore macroeconomic stability and improve growth prospects over the medium term. Driven by agriculture, minerals, and oil, growth is expected to accelerate gradually to about 4.7 percent in 2019. With prudent macroeconomic policies, inflation is expected to fall to single digits by 2017. The external current account deficit is expected to gradually narrow toward sustainable levels (Table 1). However, the external debt overhang and the large arrears, along with U.S. sanctions, will continue to hinder access to external financing and weigh on growth prospects.

20. Risks are largely tilted to the downside. Downside risks include the fragile domestic security and political situation, regional tensions, and global risks (see Risk Assessment Matrix). Public discontent with the costs of the economic reforms in the wake of the 2015 presidential elections and a setback to the national dialogue could complicate the domestic political situation and weaken the reform effort. The breakdown of correspondent bank relations, if sustained, could weigh on trade, investment, and growth prospects. On the upside, a lasting peace agreement in South Sudan would help the recovery of oil production there and result in higher transit revenues for Sudan.

21. In the event of a crisis in Sudan, spillovers would be mainly in the surrounding region. Sudan’s integration with the region and the global economy has been stunted by sanctions and its unsustainable debt position. Spillovers from a possible deterioration of economic conditions in Sudan would mostly affect the immediate neighbors, especially South Sudan, which relies heavily on oil pipelines and food supply routes in Sudan.

Sudan: Risk Assessment Matrix*Potential Deviations from Baseline
Source of RisksRelative LikelihoodImpact if RealizedPolicy Responses
Global
1. Protracted period of slower growth in advanced and emerging economiesHighMedium

  • Deteriorating external balance.

  • Rising pressure on the exchange rate and reserves.

  • Lower growth.

  • Greater exchange rate flexibility would help maintain external stability and prevent reserve losses. Declining revenue and lack of fiscal space would likely require pro-cyclical spending cuts. Weakening commodity prices and the widening output gap would facilitate faster disinflation.

2. Heightened risk of fragmentation/state failure in the Middle East, leading to a sharp rise in oil prices, with negative spillovers to the global economy.MediumMedium

  • Lower growth.

  • Rising unemployment and inflation.

  • Widening fiscal imbalances.

  • Greater exchange rate flexibility will help reduce external pressures. Strengthen social safety nets. Meet fiscal imbalances with spending rationalization.

3. Sustained decline in energy prices, triggered by deceleration of global demand and coming-on-stream of excess capacity (mediumterm)MediumMedium

  • Lower export receipts but also lower import bill.

  • Rising imbalances.

  • Resource sectors’ growth slows.

  • Rising unemployment.

  • Greater exchange rate flexibility will help reduce external pressures. Improve competitiveness and social safety nets. Strengthen non-resource revenue mobilization.

Regional
4. Oil production in South Sudan declines owing to civil conflictsHighHigh

  • Rising imbalances and inflation.

  • Growing parallel foreign exchange market.

  • Loss of reform momentum.

  • Greater exchange rate flexibility will help reduce external pressures. Tight monetary policy will control inflation. Meet fiscal imbalances with spending rationalization and revenue effort.

5. Heightened tensions between Sudan and South SudanLow to MediumLow to Medium

  • Rising military spending.

  • Higher budget deficit.

  • Higher risk of monetization of the budget deficit.

  • Rising inflation.

  • Fiscal slippages will need to be addressed through higher revenue or spending cuts in nonpriority areas. Monetary tightening to keep inflation in check.

Domestic
6. Heightened social tensions and fiscal slippages owing to 2015 Presidential electionsMedium to HighMedium to High

  • Rising imbalances and inflation.

  • Growing parallel foreign exchange market.

  • Fiscal slippages linked to election spending should be offset by equivalent cuts in nonpriority spending. Tight monetary policy will control inflation. Strengthen social safety nets.

7. Sustained breakdown in correspondent bank relationsHighHigh

  • Drop in exports and imports.

  • Lower supply and higher cost of imports fuelling inflation.

  • Foreign exchange shortage.

  • Outreach efforts to remove sanctions.

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.

Policy Discussions

A. Overview

22. Recent efforts to stabilize the economy, following the large economic imbalances that emerged after South Sudan seceded, are bearing fruit and need to continue despite the difficult circumstances Sudan faces. The ongoing fiscal consolidation should be accompanied by monetary policy tightening to help rein in inflation and stem depreciation pressures. Adjustment of the official exchange rate to align it with market conditions should go a long way toward reducing external imbalances and enhancing the economy’s resilience to real shocks. Structural reforms are needed to help boost investment and growth over the medium term in the non-oil sectors, create jobs, and reduce poverty.

23. Mitigating the impact of the macroeconomic adjustment on the poor should remain a priority. Sudan’s very high inflation rates have had a disproportionate impact on vulnerable groups and the poor. Expanding social safety nets will go a long way to protect the poor and build broader support for policies and reforms.

24. In parallel, Sudan needs to continue efforts to secure progress toward debt relief by reaching out to its major creditors. Debt relief would unlock access to foreign financing, which would help support Sudan’s growth potential through infrastructure and social investment and FDI.

B. Restoring Macroeconomic Stability

25. Discussions focused on policies and reforms to restore macroeconomic stability and supporting broad-based growth. In particular, the emphasis was on:

  • Fiscal consolidation—through revenue mobilization and retrenchment of current spending, including a gradual phase-out of fuel subsidies—should continue, accompanied by increased public investment and social spending.

  • Tightening monetary policy and further lowering central bank financing of the government to help further lower inflation.

  • Greater flexibility of the official exchange rate to reduce the parallel market rate premium, improve the availability of foreign exchange, enhance competitiveness, and help build reserves.

  • Strengthening bank supervision to enhance banking penetration and improve banks’ competitiveness and resilience.

  • Improving the business climate to bolster private sector-led growth.

Pursuing Fiscal Consolidation

26. The authorities’ fiscal consolidation plan is advancing but continued efforts are needed to achieve the goal. The non-oil primary deficit (NOPD) is targeted to decline by 1.4 percentage points of GDP to 1.5 percent of GDP in 2014. This will help limit the overall fiscal deficit to 1 percent of GDP, down from 2.3 percent of GDP in 2013. As a result, central bank financing of the fiscal deficit is expected to drop to 0.4 percent of GDP in 2014, from 0.7 percent of GDP last year (Tables 4, 5, and 6). These objectives are supported by:

  • Enhanced revenue mobilization. Under their economic program, the authorities aim at raising total revenue to 10.9 percent of GDP in 2014 (against 9.2 percent of GDP the previous year) reflecting the full-year effect of the reform measures taken in September 2013, including substantial increases in domestic fuel prices; these are estimated to yield additional revenue of about 1.2 percent of GDP. The authorities also plan additional measures, although their impact will be felt in 2015 and beyond, to reduce tax exemptions, reform the taxation of gold-related activities, and improve tax administration. In this context, a tax and customs reform committee established in March began reviewing tax exemptions and the application of the VAT, and, more broadly, to improve tax policies and practices. Recommendations are expected to be reflected in the 2015 budget;

  • Streamlined expenditure. Current spending is projected to be limited to 11 percent of GDP, mainly by containing the wage bill and subsidy increases, while public investment and social spending are each expected to increase by 0.3 percentage points of GDP to mitigate the negative impact of ongoing subsidy reforms on the most vulnerable. Staff underscored the importance of continued streamlining of nonpriority spending and containing the wage bill to curb inflation.

Table 4.Monetary Survey, 2010-14(In Millions of SDGs)
20102011201220132014
Prel.MarchJuneSeptemberDecember
Proj.
Net foreign assets−4,187−5,876−7,271−12,729−13,409−12,591−14,047−15,207
Central Bank of Sudan−6,429−7,590−10,372−15,428−15,974−15,375−15,964−16,256
Commercial banks2,2421,7133,1002,7002,5642,7841,9161,049
Net domestic assets39,79947,79066,06479,17484,29186,41590,43294,344
Net domestic credit35,48341,53654,88868,02469,51271,19576,97182,641
Net claims on general government (NCGG)13,95118,27223,68129,57528,86229,49531,21733,417
NCGG excluding IMF10,16614,21716,98020,96720,23520,84021,88423,407
Central Bank of Sudan (central government)6,1868,1739,86113,50313,14013,13113,95115,249
Commercial banks (central government)3,9806,0447,1207,4647,0957,7097,9338,158
Claims on nongovernment sectors21,53223,26431,20738,44940,65041,70145,75549,224
Public enterprises2,8102,8213,1704,0044,6544,3724,6865,001
Private sector17,95919,42726,96633,03434,51435,85639,48742,534
Other sectors7631,0161,0711,4111,4811,4731,5811,689
Other items (net)4,3166,25411,17511,15014,78015,21913,46111,703
Broad money35,61241,91458,79266,44670,88273,82476,38579,137
Money24,74829,72942,00647,30949,98452,24154,57656,344
Currency in circulation10,06812,85016,75119,17819,90220,82021,40521,990
Demand deposits14,68016,87925,25428,13030,08231,42033,17034,355
Domestic currency9,84012,00014,24216,48718,19419,24019,30719,374
Foreign currency4,8404,87911,01211,64311,88712,18113,58114,981
Quasi-money10,86412,18516,78619,13720,89821,58321,81022,792
Domestic currency10,38010,89413,96915,39416,97117,89817,82618,510
Foreign currency4841,2912,8173,7433,9273,6853,9844,283
(In percent of beginning of the period broad money stock)
Money18.614.029.39.013.6
Quasi-money6.33.711.04.05.5
Net foreign assets1.4−4.7−3.3−9.3−3.7
Net domestic assets23.422.443.622.322.8
Net claims on government13.512.112.910.05.8
Credit to the economy10.64.918.912.316.2
Nonfinancial public enterprises1.80.00.81.41.5
Private sector8.64.118.010.314.3
(Changes in percent, end of period)
Broad money24.917.740.313.019.1
Money27.320.141.312.619.1
Currency in circulation24.827.630.414.514.7
Demand deposits29.015.049.611.422.1
Of which: Public enterprises31.528.637.115.012.7
Private enterprises24.011.942.112.412.7
Quasi-money19.812.237.814.019.1
Of which: Public enterprises23.3−13.70.6−1.712.7
Private enterprises19.58.327.712.712.7
Deposits24.913.844.612.412.7
Domestic currency23.213.223.213.018.8
Foreign currency31.715.9124.111.325.2
Net foreign assets−8.940.323.775.019.5
Net domestic assets20.220.138.219.819.2
Net claims on government38.031.029.624.913.0
Credit to the economy16.48.034.123.228.0
Nonfinancial public enterprises22.90.412.426.324.9
Private sector15.88.238.822.528.8
Memorandum items(Ratios in percentage)
Ratio of Money to Broad Money69.570.971.471.271.2
Ratio of Currency in Circulation to M228.330.728.528.927.8
Ratio of Private sector deposits to M263.059.960.760.457.1
Net claims on government as a ratio to GDP9.210.210.59.37.7
Net claims on government as a ratio to NHGDP10.911.711.09.78.1
Credit to the economy as a ratio to GDP14.213.013.812.111.3
Credit to the economy as a ratio to NHGDP16.914.914.512.712.0
Velocity 1 (GDP, eop)4.34.33.84.85.5
Velocity 2 (NHGDP, eop)3.63.73.74.65.2
CBOS’s gross foreign assets/M2 ratio11.38.813.114.316.8
Foreign currency deposits/M2 ratio14.914.723.523.224.3
Reserve money growth (annual changes, end of period)17.227.846.720.314.7
Money multiplier (end of period)2.22.01.91.81.9
Sources: Sudanese authorities; and staff estimates and projections.
Sources: Sudanese authorities; and staff estimates and projections.
Table 5.Summary Accounts of the Monetary Authorities, 2010-14(In Millions of SDGs)
20102011201220132014
Prel.MarchJuneSeptemberDecember
SMP RequestAcutalSMP Request1st ReviewAcutalSMP Request1st ReviewProj.SMP Request1st ReviewProj.
Net foreign assets−6,429−7,590−10,372−15,428−14,650−15,974−14,649−16,085−15,375−14,593−16,031−15,964−15,163−16,208−16,256
Gross foreign assets4,0403,6727,7229,49611,4429,02412,59310,8709,39913,79911,82211,63314,38013,33513,287
Of which: Gross international reserve3,8873,5267,4859,1809,9678,70911,0539,3689,08512,19410,23610,08912,71011,66611,618
Of which: SDR holdings4805158541,0991,0651,1031,1151,0581,1061,1651,1071,1071,2111,2111,211
Foreign liabilities10,47011,26118,09324,92426,09224,99827,24226,95524,77428,39227,85327,59729,54329,54329,543
Of which: Short term foreign liabilities3,0973,2024,5617,1607,5447,1977,8937,5066,9548,2427,8537,8538,5918,5918,591
Of which: IMF-related liabilities4,4664,7867,91310,17010,57310,19310,99511,04210,22611,41711,39011,39011,83911,83911,839
Net domestic assets22,53028,25040,68851,89953,29753,60254,74154,81754,77156,18655,78056,18357,47858,02958,073
Net domestic credit12,37615,05620,01128,24627,44228,16928,82330,13528,17630,20431,84931,11231,43234,84934,526
Net claims on general government (NCGG)9,97112,22816,56222,11223,19921,76724,14622,77821,78525,09223,53723,28325,88625,58225,259
NCGG excluding IMF6,1868,1739,86113,50314,24913,14014,84213,69013,13115,43513,98813,95115,87615,57215,249
Claims10,56312,98417,41523,11824,05323,96725,00024,58023,98625,94624,94124,88726,89226,58826,265
Of which: Government Musharka Certificates1,5652,2173,3754,7984,7985,3384,7984,7984,9594,7984,7984,9594,7984,7984,798
IMF on lent3,7854,0556,7018,6088,9508,6269,3039,0878,6559,6569,5499,33210,01010,01010,010
Deposits5917558541,0068542,2008541,8022,2018541,4041,6031,0061,0061,006
CBOS claims on public enterprises346397724792802874812860858821845845831831831
CBOS claims on banks1,9972,3722,6635,1563,2555,2853,6806,2735,2884,1047,2616,7694,5298,2498,249
Money market instruments (CICs)635862187186244186225244186206215186187187
Other items (net)10,15413,19420,67723,65325,85425,43325,91824,68226,59625,98223,93025,07126,04623,17923,546
Reserve money16,16420,66130,31636,47138,64737,62940,09238,73239,39641,59239,74840,21942,31541,82141,817
Currency outside banks10,06812,85016,75119,17820,63419,90221,41420,30520,82022,22220,62021,01822,25221,99221,990
Reserves of commercial banks5,4486,36510,86413,89714,47614,39415,01014,90815,60715,56715,42215,77016,12415,93615,934
Required reserves1,3561,5373,4423,9754,1414,1814,2944,3064,2894,4534,4324,4234,6124,5584,558
Excess reserves4,0924,8277,4229,92210,31910,21310,71710,60111,31811,11410,98911,34711,51211,37711,376
Cash in vault8298101,1181,2341,2841,5841,3331,5281,8361,3831,4721,6261,4321,4161,415
Excess reserves on deposits3,2634,0176,3038,6879,0358,6299,3839,0739,4829,7329,5189,72210,0809,9629,961
Deposits at CBOS included in broad money6481,4462,7013,3953,5313,3333,6673,5192,9693,8033,7063,4313,9393,8933,893
Memorandum items
Gross international reserves (GIR, US$)1,5661,3171,6931,6191,6681,5291,7681,5751,5951,8681,6451,6221,8681,7141,707
Net international reserves (NIR, US$)318121662356405265505307374605377401605452445
Sources: Sudanese authorities; and staff estimates and projections.
Sources: Sudanese authorities; and staff estimates and projections.
Table 6.Summary Accounts of the Commercial Banks, 2010-14(In Millions of SDGs)
20102011201220132014
Prel.Proj.
Net foreign assets2,2421,7133,1002,7001,049
Gross foreign assets3,4942,4894,8944,6963,444
Gross foreign liabilities1,2527761,7931,9962,395
Net domestic assets23,55526,62637,45342,71752,205
Reserves5,8316,83813,13414,44017,350
Of which: Cash in vaults8298101,1181,2341,415
Required reserves1,3181,6463,7754,0294,620
Other reserves3,4003,9507,9889,09811,315
Net claims on central government3,9806,0447,1207,4648,158
Claims4,9076,1327,2777,5908,290
Of which: GMCs4,9076,1327,2777,5908,290
Deposits92788157126132
Claims on state & local government145613758966966
Claims on non-government sectors21,04022,25429,72436,69148,393
Private sector17,95919,42726,96633,03443,570
Non-financial Public enterprises2,4642,4242,4463,2134,237
Non-bank financial institutions618403312444586
Other items, net−7,441−9,123−13,284−16,844−22,661
Unclassified assets7,6908,17911,26213,09717,621
Unclassified liabilities7,6028,19513,66816,65722,410
Capital accounts7,4789,03610,83113,14917,691
Other (incl. discrepancies)527048135182
Deposits24,89627,62339,34043,87253,254
Demand deposits14,11716,15924,75327,53733,425
Domestic currency9,27811,28013,74115,89319,292
Foreign currency4,8404,87911,01211,64314,133
Quasi-money deposits (Time & saving)10,77811,45914,58616,33519,829
Domestic currency10,38010,89313,96915,39418,686
Foreign currency3985666179421,143
Liabilities to CBOS 1/9027211,2131,5441,730
Memorandum items
Deposits with commercial banks25,82327,71139,49743,99853,386
Central government92788157126132
Other sectors24,89627,62339,34043,87253,254
State and local government deposits4125211,7561,7442,117
Demand deposits3503711,3021,1731,424
Time and savings deposits62150454571694
Public enterprises deposits2,0371,9951,8962,0112,441
Demand deposits7128527468801,068
Time and savings deposits1,3251,1431,1501,1311,373
Private sector deposits22,44625,10735,68740,11748,695
Demand deposits13,05614,94222,70525,48430,933
Time and savings deposits9,39010,16512,98214,63317,762
Time deposits2,2973,1654,3975,3716,520
Savings deposits7,0937,0018,5859,26211,242
(Ratios in percentage)
Banks’ credit to deposits ratio85.182.877.585.892.7
Bank reserves as a ratio to bank deposits21.123.027.531.629.9
Reserve requirements as a ratio to bank deposits5.25.58.79.08.6
Excess reserves as a ratio to bank deposits15.817.418.822.621.4
Banks’ cash to deposit Ratio3.22.92.82.82.7
GMC as a ratio to Bank reserves90.196.367.054.652.0
GMC as a ratio to Bank excess reserves119.9127.098.076.572.9
Sources: Sudanese authorities; and staff estimates and projections.

The difference between commercial banks’ liabilities to CBOS and CBOS’s claims on banks is due to misclassification of government guarantees.

Sources: Sudanese authorities; and staff estimates and projections.

The difference between commercial banks’ liabilities to CBOS and CBOS’s claims on banks is due to misclassification of government guarantees.

27. Rationalizing fuel subsidies remains key to achieving medium-term fiscal sustainability, along with strengthening social safety nets (Box 2). In the first half of 2014, fuel subsidies amounted to 1 percent of GDP due to an unusually warm weather that led to increased fuel consumption, and are expected to reach close to 2 percent of GDP by end-year. In March 2014, Fund technical assistance recommended further steps to reduce fuel subsidies, including the adoption of a flexible fuel pricing mechanism, while improving social safety nets with better targeting of social assistance to the most vulnerable, and systematic monitoring and evaluation of the social safety net system.

Box 2.Fuel Subsidies Reform

Sudan can no longer afford to maintain large fuel subsidies. Before the secession of South Sudan, fiscal revenues from the oil sector financed direct and indirect subsidies to fuel prices. The secession resulted in the loss of about 60 percent of those revenues. Rising international oil prices has also put upward pressure on subsidies.

Fuel subsidies in Sudan are costly, regressive, and inefficient. Direct subsidies amounted to about 2 percent of GDP in 2013, despite a 162 percent average-weighted increase in the prices of fuel since June 2012. (Box 2 Figure 1) The total fiscal cost is more than twice as high when tax exemptions and special tax rates for fuel products are included. The poorest quintile of the population received only 3 percent of the total subsidy in 2011 (Box 2 Figure 2). Subsidies provide an inefficient social protection and crowd out high-priority public expenditure. Also, relatively low fuel prices in Sudan could encourage smuggling of fuel to neighboring countries and promote overconsumption of energy (Box 2 Figure 3).

Box 2 Figure 1:Fuel Product Prices 2010-13 (SDG/Gallon)

Box 2 Figure 2:Distribution of Fuel Subsidies 2011

Sources: Government of Sudan; and IMF calculations

Box 2 Figure 3.International Comparison of Gasoline Prices, 2012

The authorities have used part of the fiscal space created by reduced subsidies to bolster social safety nets (SSNs). They reinforced the Social Initiative Program, including the Cash Transfer Program (CTP), health insurance for the poorest, microfinance, rural women’s empowerment program, and others (Box 2 Table). Considering the bottom three income quintiles in Sudan received only 26 percent of total fuel subsidies in 2011 or 0.3 percent of GDP, cash compensation for the income loss of poor population could be achieved at a cost of less than 1 percent of GDP a year.

Box Table:the Social Initiative Program
Sub-programCoverage and Targeting
Cash transfer to the poorSDG 103 per month → SDG 130 (October 2013) (2015)
Health insurance for the poorEvery household eligible for the cash transfer program
MicrofinanceFrom SDG 1,000 for rural women to SDG 20,030 for graduates
National Student Welfare FundSDG 203 per month to 200,000 poor university students
Rural women empowermentphase
Support for disabled5,000 disabled
Special target groupSelected homeless and internally displaced persons

Removing fuel subsidies is a part of a broad reform strategy. The authorities plan to gradually phase out fuel subsidies by 2019, including by adopting a flexible pricing mechanism. This should be accompanied by a communication campaign that highlights the cost and inequity of current subsidies. The authorities should also review the current SSN programs and develop, with assistance from the World Bank and other donors, a comprehensive medium- to long-term social protection strategy.

28. Looking ahead, continued fiscal consolidation is vital to securing macroeconomic stability and fiscal sustainability. Accordingly, staff recommended a zero primary fiscal balance in 2015, about the same level as in 2014, but rising to a primary fiscal surplus of about 1 percent of GDP by 2019 to put the ratio of the domestic public debt to GDP on a declining path (Table 7). This will require reducing the non-oil primary deficit by mobilizing more revenue while ensuring the fairness of the tax system and shifting government expenditure towards social and investment spending.

Table 7.Medium-Term Macroeconomic Outlook, 2011-19
201120122013201420152016201720182019
Est.Prel.Projections
Production and prices
Nominal GDP (billions of SDGs)179.5225.7317.5435.1547.8631.6711.6792.8884.1
Nominal GDP (billions of US$)67.363.266.770.064.565.769.273.578.7
Non-oil GDP billions of US$)58.560.463.866.361.062.165.269.173.7
Non-oil GDP (percent of total GDP)86.995.695.694.794.594.694.394.093.7
Real GDP growth−0.3−2.23.33.13.43.94.24.64.7
Oil Sector−36.0−59.015.66.33.23.84.45.05.5
Non-oil sector6.84.72.72.93.43.94.24.64.7
GDP deflator20.329.336.332.821.610.17.15.85.7
Non-oil GDP deflator15.232.636.332.820.810.57.35.95.9
Oil GDP deflator62.023.832.532.434.66.13.94.03.7
Income, expenditure and saving
Gross national income (GNI)95.996.295.896.295.895.896.096.296.4
Gross disposable income (GDI)97.597.597.998.298.298.498.899.199.1
Gross domestic expenditure (GDE)98.0106.8106.5104.7104.6104.5104.2104.2104.0
Final consumption78.988.186.587.286.786.385.685.184.5
Gross capital formation19.118.720.017.517.818.118.619.119.4
Gross Savings18.69.511.411.011.512.113.113.914.5
Central government operations
Total revenue and grants18.09.89.911.412.012.412.512.712.8
Revenue17.79.49.210.911.311.711.812.012.2
Of which: Oil revenue10.41.51.51.01.21.31.31.31.2
Grants0.30.40.70.50.70.70.70.70.6
Total expenditure17.813.512.112.413.313.012.812.812.6
Current expenditure16.112.011.111.011.611.110.49.99.3
Capital expenditure1.71.51.01.31.72.02.42.93.3
Overall balance0.2−3.7−2.3−1.0−1.2−0.7−0.3−0.10.3
Money and banking
Broad money17.740.313.019.116.315.515.211.610.2
Reserve money27.846.720.314.714.413.212.79.48.4
Credit to the economy8.034.123.228.021.921.822.526.429.1
Credit to the economy as a ratio to NHGDP14.914.512.712.011.612.213.315.217.6
Velocity (Non-oil GDP/M2 ratio, eop)3.73.74.65.25.65.65.55.55.5
External sector
External trade balance4.1−5.4−6.2−4.9−4.9−4.8−4.6−4.5−4.2
Exports, f.o.b.16.48.17.27.48.99.49.99.89.8
Non-oil exports3.54.94.64.45.25.86.46.56.5
Imports, f.o.b.−12.3−13.5−13.4−12.2−13.8−14.2−14.4−14.3−14.0
Current account balance−0.4−9.2−8.6−6.5−6.3−6.0−5.5−5.1−4.9
Gross useable reserves (in months of imports)1.51.91.91.92.22.42.62.82.9
Public debt70.594.390.390.887.685.081.778.374.9
External debt59.481.477.879.977.975.873.370.768.1
Domestic debt 1/11.012.912.510.99.89.18.47.66.8
Total debt in US$ billion48.849.852.052.753.754.755.556.257.5
Memorandum item:
Crude oil export price (U.S. dollars per barrel) 2/95.894.694.696.395.289.687.586.385.4
Crude oil production (million barrels per year)106.137.643.546.247.749.551.754.357.2
Crude oil exports (million barrels per year)87.518.615.824.826.027.728.729.931.2
Sources: Sudanese authorities; and staff estimates and projections.

Staff estimates and projections.

Sudanese oil blends. Projections are based on the latest WEO assumptions (based on futures prices).

Sources: Sudanese authorities; and staff estimates and projections.

Staff estimates and projections.

Sudanese oil blends. Projections are based on the latest WEO assumptions (based on futures prices).

29. Strengthening public financial management is necessary to strengthen budget planning, execution, and monitoring. Reforms will need to be centered on the development of a medium-term fiscal framework (MTFF) to enhance macroeconomic management and facilitate the implementation of poverty reduction policies. Other key reforms include implementing the Treasury Single Account and effective budgetary controls, linked to a credible cash plan, to prevent arrears, and improving the public accounting system. These should be supplemented by improving within-year budget reporting and transparency, including by publishing quarterly revenue and spending data.

30. The authorities would benefit from continued Fund technical assistance. This will help the authorities improve gold taxation, streamline tax incentives, and enhance the efficiency of the tax system over the medium term. Technical assistance will also continue bolstering public financial management, including by helping complete the banking infrastructure that will support the transfer of funds to the Treasury Single Account and prepare an MTFF.

Authorities’ Views

31. The authorities agreed that fiscal consolidation is critical for restoring macroeconomic stability. They reiterated their commitment to their fiscal program for 2014 and to continued fiscal consolidation over the medium term. The authorities expect that the ongoing tax and customs reforms will help mobilize additional revenue, and confirmed their intention to phase out fuel subsidies over the next five years. At the same time, the authorities committed to strengthening social safety nets to protect the most vulnerable segments of the population to avoid the recurrence of the social discontent and violence that followed the September 2013 fuel price increase. They will continue to enhance their PFM reforms, including the MTFF. The authorities welcomed continued Fund technical assistance. Looking ahead, the authorities agreed in principle to continued fiscal consolidation in 2015, as recommended by staff, but they were not yet ready to discuss a full-fledged budget and supporting measures with the staff. Such a discussion will take place during the forthcoming mission for the third review under the SMP.

Improving Monetary Policy Credibility

32. Monetary policy should be geared to reducing inflation. Despite improvement in the government’s fiscal position, unsterilized gold purchases by the central bank led to faster reserve money growth than targeted by mid-2014. To help reduce inflation, the central bank should mop up the large excess reserves, reduce unsterilized gold purchases, and refrain from using the parallel exchange rate for these purchases. Staff encouraged the central bank to continue using reserve money as nominal anchor—instead of the official exchange rate—given that most private sector foreign exchange transactions are conducted at the parallel market rate.

33. Bringing inflation under control will require greater de facto central bank independence. The monetary policy framework has been hampered by fiscal dominance since the secession of South Sudan. The fiscal consolidation path initiated this year has led to an improvement in fiscal performance and a corresponding reduction in central bank financing, which has reduced reserve money growth. In order to enhance monetary policy credibility, staff encouraged the authorities to enhance the operational independence of the central bank and to mandate it to maintain price stability. In this regard, the central bank should continue to gradually reduce its monetization of the budget deficit, and cease quasi-fiscal operations, such as the provision of foreign exchange at the official rate to the government for fuel and wheat imports.7 Staff also encouraged the central bank to develop a communication strategy to improve transparency and help anchor inflation expectations.

34. The institutional framework of monetary policy management should be strengthened. Enhanced coordination between the central bank and the ministry of finance would improve liquidity forecasts and management. The recently established interbank money market, once fully operational, will improve the effectiveness of monetary policy and banks’ liquidity management and may help dampen inflationary pressures in the future;8 nevertheless, its success will first hinge on the central bank ability to reduce excess reserves in the system. To address excess liquidity, a 20 percent cap on banks’ holdings of government and central bank securities should be relaxed.

Authorities’ views

35. The authorities agreed that tightening monetary policy should help reduce inflation. They are committed to limiting central bank financing of the budget to the level agreed under the program, reducing unsterilized gold purchases by the central bank to contain reserve money growth, and continue using reserve money as the nominal anchor. The authorities are considering relaxing the cap on banks’ holdings of government and central bank securities, but are concerned that such a measure may crowd out private sector credit. They noted that the provision of foreign exchange at the official rate for fuel and wheat imports was temporary and is aimed at avoiding social discontent. They requested Fund technical assistance on improving foreign exchange management.

Enhancing Exchange Rate Flexibility

36. Sudan faces large and unsustainable external imbalances. Staff’s external stability assessment points to significant overvaluation of the currency and problems with external competitiveness (Annex 1). This conclusion is also supported by the wide gap between the official and parallel market exchange rates, which was 65 percent in the third quarter of 2014, before narrowing to 47 percent in mid-November. Despite two step devaluations in 2012 and 2013, high inflation has fully eroded the initial real depreciation of the exchange rate.

37. Greater exchange rate flexibility is essential to reducing external imbalances, enhancing competitiveness, and building up international reserves. Given the shortage of foreign exchange on the official market, the parallel market has nearly completely replaced the official market as a source of foreign exchange for private transactions. Staff urged the authorities to rapidly adjust the official exchange rate in order to reduce the overvaluation of the currency. Closing the gap would remove an implicit tax on exports, rationalize imports, and reduce quasi-fiscal costs. Staff stressed that with continued fiscal consolidation and tight monetary policy stance, and given that most of the economy already operates at the parallel market rate, devaluation of the official rate is unlikely to result in higher inflation.

Authorities’ views

38. The authorities reiterated their commitment to gradually close the gap between the official and parallel market rates, but are reluctant to provide a specific timeframe. They expressed readiness to make gradual monthly adjustments to the official exchange rate. This, together with an expected appreciation of the parallel exchange rate driven by robust agriculture exports and increased foreign exchange receipts from oil transit fees later in the year, would help close the gap and reduce quasi-fiscal losses. In their view, the official rate is a strong determinant of the parallel market rate, and they fear that any rapid change in the former would only impact the latter without closing the gap, as had happened in the past two years.

Financial Sector Policies

39. The financial system in Sudan is dominated by the banking sector and operates under Islamic principles. At end-2013, there were 37 banks, including two established during the year, which accounted for 90 percent of the financial sector assets. Monetization and financial intermediation are low, with broad money at only 21 percent of GDP and credit to the private sector at a low 10.4 percent of GDP at end-2013. Inter-bank transactions are limited, although there is an informal inter-bank market, Qard Al Hassan, whereby banks lend to each other without charging any fees.

Text Figure 5.Broad Money, end-2013

(In Percent of GDP)

Text Figure 6.Domestic Credit to Private Sector, end-2013

(In Percent of GDP)

40. Banking sector soundness indicators remain positive. The capital adequacy ratio exceeded the required 12 percent at end-2013 (Table 8). Although there were modest declines recently in the ratios of liquid assets to total assets and liquid assets to short-term liabilities, banks’ liquidity remains comfortable. The ratio of NPL declined from 7.6 percent at end-2011 to 4.0 percent in September 2014.

Table 8.Financial Soundness Indicators for the Banking Sector, 2010-14
Dec-10Dec-11Dec-12Mar-13Jun-13Sep-13Dec-13Mar-14Jun-14Sep-14
(In percent, unless otherwise indicated)
Capital Adequacy
Regulatory capital to risk-weighted assets 1/10.013.012.014.914.916.6
Regulatory Tier I capital to risk-weighted assets 1/8.911.010.513.613.614.5
Asset composition and quality
Loans to nongovernment to total assets51.8
Gross NPLs to gross loans14.412.611.811.310.49.98.48.48.58.3
NPLs net of provisions to gross loans10.47.67.57.55.85.73.84.64.04.0
NPLs net of provisions to capital43.733.336.533.343.742.516.721.421.019.3
Loans provisions to NPLs31.739.833.530.525.526.953.6
Foreign currency loans to total loans13.79.015.713.211.810.811.811.311.69.5
Deposits and investment accounts to total assets63.963.563.464.565.163.562.263.464.059.5
Foreign currency deposits to total deposits22.018.727.026.924.924.331.925.925.225.4
Off- balance sheet commitments to assets31.529.832.229.928.927.830.129.228.526.7
Liquidity
CBOS deposits to total assets10.813.117.517.318.118.316.516.917.716.4
Required reserves to total assets3.23.55.55.65.65.55.05.25.14.9
Required reserves to total reserves25.523.928.628.928.027.727.827.725.927.1
Cash in vault to total assets1.92.12.02.62.62.01.92.42.72.3
Liquid assets to total assets35.336.341.739.639.839.239.536.337.535.3
Liquid assets to total short-term liabilities98.293.8102.596.396.798.399.591.795.195.7
Source: Central Bank of Sudan.

Data for December 2006 refer only to 27 of the 30 existing banks (exclude Sudanese Agriculture Bank, Capital Bank, and Industrial Development Bank).

Source: Central Bank of Sudan.

Data for December 2006 refer only to 27 of the 30 existing banks (exclude Sudanese Agriculture Bank, Capital Bank, and Industrial Development Bank).

41. The CBOS has taken several measures to improve the performance of the banking sector. It started implementing best practices in banking supervision, which included the CBOS divesting from some public banks, and improving and upgrading the regulatory and institutional framework. The authorities have also taken a number of actions to broaden access to banking services, which included simplifying the procedures for opening bank accounts, encouraging banks to open new branches and setting up a credit registry system. As a result, since end-2013, 32 new bank branches were opened, and 37 new ATMs and about 200 cash points located in supermarkets were installed. In addition, the CBOS is preparing to introduce mobile banking.

42. The authorities are continuing to upgrade the AML-CFT framework. Following the passage of the amended AML-CFT law in June, the CBOS established, with IMF technical assistance, an upgraded AML/CFT circular to enhance preventive measures requirements for the financial institutions under its supervision. A robust supervisory framework would enhance the effectiveness of the AML/CFT regime and further actions are required to exit the Financial Action Task Force’s monitoring process.

43. Stronger bank supervision and privatization are needed to improve banks’ competitiveness and resilience. Key recommendations include: (i) continuing the implementing of best practices in bank supervision, inspection, and enforcement; (ii) the CBOS to divest its remaining interests in commercial banks; and (iii) the completion of the restructuring plan for Omdurman bank is also important.

Authorities’ views

44. The authorities generally agreed with staff’s assessment of the financial sector. They acknowledged that further efforts are needed to bring bank supervision in line with best practices. They welcomed technical assistance from the Fund to this end. The authorities also pointed to progress on the banking sector review, which is being finalized. They intend to gradually privatize their share-capital in banks and have requested Fund assistance in this effort.

C. Policies to Support Inclusive Growth and Reduce Unemployment

45. Improving the business climate is essential for achieving high and sustained growth. Sudan’s business climate, as measured by the 2014 World Bank Doing Business survey, is ranked 149 among 189 countries—in the lowest quartile of all surveyed countries as in previous years.9 Key weaknesses include difficulties in obtaining licenses, accessing credit, and trading across borders.10 Addressing these weaknesses, fighting corruption including by mobilizing AML measures, and strengthening the judiciary would help improve the business climate.

46. Increased investment in human and physical capital is needed to help boost growth and make it broad-based. Sudan lags in the areas of human development and public sector capacity, as evidenced by the UNDP’s 2012 Human Development Index (Sudan ranked 171 out of 186 countries) and the World Bank’s 2012 Country and Policy Institutional Assessment (Sudan is classified as a weak performer). Addressing these weaknesses requires improving the prioritization of public expenditure with increased allocations to the education and health sectors. Improving infrastructure—electricity, roads, and railways—and strengthening regional connectivity are also critical for improving productivity and access to markets, and for lowering transportation costs.

47. Unemployment is a persistent problem, especially for women and the youths. In 2012, the unemployment rate was estimated by the World Bank at 14.8 percent of the labor force (20 percent for women and 24 percent for the youth), with little change since 1991. Labor participation was estimated at about 54 percent (76 percent for men and 32 percent for women). To reduce unemployment, investment in skill-formation activities for the unemployed is important. Providing equal opportunities to women in these activities could significantly boost labor participation and economic growth. Reforms in the agriculture sector, which supports nearly 70 percent of the population, will also help in employment generation (Annex 2).

Protecting the Most Vulnerable

48. Improving the efficiency of the social safety net is critical to protecting the most vulnerable. Sudan’s social indicators compare unfavorably with regional comparators. Phasing out fuel subsidies should be accompanied by measures that shield the poorest and help middle-income groups to adjust11. The authorities intend to increase the number of beneficiaries of the cash transfer program to 500,000 families in 2014 (410,000 as of September 2014),12 complemented by private programs such as the Zakat Fund,13 which benefits 4.5 million households.

49. Work is underway to prepare a full Poverty Reduction Strategy Paper (PRSP) with donor support. The project structure is in place and a household budget survey will be completed by March 2015 to serve as a base on which to develop the poverty reduction strategy. The authorities will use a broad and inclusive consultation process to prepare the PRSP. In the meantime, the authorities are implementing policies identified in the I-PRSP.

Authorities’ views

50. The authorities agreed with staff on the importance of advancing pro-poor policies. They are committed to providing assistance for the neediest as evidenced by the implementation of the I-PRSP, their social commitments under the SMP, and the policy initiatives aimed at shielding the poor and vulnerable from the costs of the reforms. Nevertheless, the authorities noted that their efforts are constrained by the limited resources and expressed hope that fast-track progress on debt relief would unlock concessional resources that would boost pro-poor programs.

D. External debt

Debt sustainability analysis

51. Sudan continues to be in debt distress. Both public and external debt ratios remain at high levels (91 percent and 79 percent of GDP, respectively), and most of the external debt is in arrears. In line with the results of past Debt Sustainability Analyses (DSAs), Sudan’s debt is unsustainable. All external debt indicators breach their indicative thresholds under the baseline scenario, and many of those remain above the thresholds throughout the 20-year projection period. It is therefore critical for Sudan to follow sound economic policies, continue garnering support for debt relief, avoid selective debt servicing, and minimize non-concessional borrowing. As of end-June 2014, nonconcessional external borrowing for development projects was limited to US$147 million, with an average grant element of 26 percent.14 There was no additional nonconcessional external borrowing between June and September 2013. Staff noted that any new borrowing would eventually need to be treated as part of any comprehensive debt relief workout to restore external debt sustainability.

Prospects for Debt Relief

52. Debt relief prospects are predicated on normalizing relations with international financial institutions, and establishing a track record of cooperation with the IMF on policies and payments. While Sudan has met some of those requirements (Box 3), further efforts are needed to reach the Decision Point under the enhanced Heavily Indebted Poor Countries initiative. At this stage, it is not possible to assign a firm timeline for the fulfillment of all the remaining steps, which mainly depend on the result of the bilateral outreach to creditors. Staff advised the authorities to continue to: (i) reach out to all their external creditors, jointly with South Sudan, to secure their participation and support for the debt relief process; and (ii) continue to strengthen cooperation with the Fund on policies and payments, including through the ongoing SMP. Staff welcomed the recent decision by Sudan and South Sudan to extend the “zero option” to October 2016.

Box 3.Path to Normalization of Relations and Debt Relief

Sudan is eligible for debt relief under the HIPC initiative, but has not yet met all the qualifications. The normalization of relations with external creditors, including the Fund, other multilateral institutions, and bilateral creditors, is a key pillar of the requirements for debt relief, requiring efforts in specific areas for each class of creditor. As of now, Sudan meets the following conditions for the HIPC initiative:

  • Faces an unsustainable debt burden that cannot be addressed through traditional debt relief mechanisms;

  • Has developed an Interim Poverty Reduction Strategy (I-PRSP) document. Sudan’s I-PRSP was assessed by the staffs of the Fund and the World Bank and was discussed by both Boards in September 2013, and

  • In 2012 Sudan reconciled its external debt as of end-2010 in order to determine its HIPC eligibility. The reconciliation expires at end-2014. A new debt reconciliation exercise will have to be conducted when Sudan nears the Decision Point.

To reach the Decision Point, Sudan would still need to undertake the following:

  • Obtain assurances of support for HIPC debt relief from a large majority of creditors representing at least 70 percent of HIPC-eligible debt;

  • Whereas Sudan has already done 14 SMPs with the Fund, it would still need to establish with the IMF a track record of strong policy performance for at least six months in the period leading up to the Decision Point, which could take the form of an SMP judged by the Executive Board to meet the policy standards associated with upper-credit tranche arrangements; and

  • Clear its arrears with the Fund, and have a fully financed plan and a timetable to clear arrears with the World Bank and the African Development Bank in order to restore its eligibility to borrow from these sources.

The resources required for the IMF’s participation in the HIPC Initiative have not yet been identified. As the costs to the Fund for providing debt relief to Sudan were not included in the original costing estimates for the HIPC initiative, additional financing will need to be secured when Sudan is ready to clear its arrears and embark on the HIPC initiative.

53. Sudan’s arrears to the Fund totaled SDR 977.7 million at end-October 2014. Sudan made payments totaling about US$7.5million (SDR 4.9 million) thus far this year as agreed under the SMP. They intend to make the remaining quarterly payment to reach a total of at least $10 million in 2014. Staff encourages the authorities to make payments to the Fund that are at least sufficient to cover obligations falling due, make payments regularly, and to significantly increase them as Sudan’s payment capacity improves.

Authorities’ views

54. The authorities agreed with staff’s assessment and advice. They agreed with the results of the DSA. They expressed dissatisfaction with the slow pace of the debt relief process, but remained hopeful that the international community will support Sudan for a fast-track debt relief. They underscored that the extension of the “zero option” was a goodwill gesture, and that in the meantime they would step up their outreach efforts to creditors, including through the joint approach. They agreed to minimize non-concessional borrowing as agreed under the SMP and indicated that they will borrow on the best terms possible to invest in priority agriculture, energy, and infrastructure projects.

E. Statistical Issues

55. Data are broadly adequate for surveillance and program monitoring, although the timeliness, coverage, and periodicity of data reporting could be improved. Further improvements require strengthening interinstitutional and interdepartmental cooperation on data collection and reporting, and enhancing the capacity of the units responsible for compiling statistics.

Second Review under the SMP

56. Performance in the second quarter of 2014 was broadly satisfactory: all June quantitative targets under the SMP were met, except for the indicative target on reserve money (LOI, Attachment I, Table 1). Central bank NDA was contained and NIR was on target. Tax revenue, the non-oil primary deficit, and social spending over-performed, and, as a result, domestic and central bank financing of the central government were well below targets. However, reserve money growth at 8 percent in the year-to-June exceeded the 6.2 percent target, owing to unsterilized gold purchases by the central bank. The authorities have also adjusted the official rate by 3 percent starting in September to narrow the gap between the official, and the parallel market exchange rates. They intend to gradually continue this adjustment process.

57. End-December targets were adjusted. The quantitative benchmarks and targets, except for the domestic financing of the central government and net international reserves have been revised taking into account improved revenue collection and contained spending. The end-December ceiling on net domestic financing of the central government and the floor on net international reserves have been revised taking into account projected lower external financing. The completion of the structural benchmark on the restructuring of Omdurman Bank is now envisaged in December, instead of November.

58. Efforts to keep the structural reform agenda on track are continuing, with delays in some areas but early achievements in others (LOI, Attachment I, Table 2). Early achievements include the extension of the GFSM 2001 classification to all states and issuance, in January, of a directive to close all central government accounts in commercial banks. The tax audit manual has been distributed to the relevant departments and training started at end September, and the establishment of appropriate IT systems is also under way. Further, an amended AML/CFT law was enacted. However, there were some delays. The committee, set up in March to review tax exemptions and enhance collections, finalized its report in October instead of June, and work is still ongoing to strengthen the penalty procedures for noncompliant taxpayers. Similarly, the restructuring plan for Omdurman Bank is still under preparation and should be finalized before year-end.

59. The authorities agreed that the current SMP, which ends in December 2014, has provided them with a framework to address their economic challenges. However, they have yet to decide on proceeding with a new SMP for 2015, and plan to discuss the way forward with the staff during the third review of the SMP.

Article VIII Issues

60. Sudan’s exchange rate regime and the measures taken to restrict access to foreign exchange have been determined to give rise to exchange restrictions and multiple currency practices (MCPs), which are subject to Fund jurisdiction under Article VIII (Box 4). These measures include an exchange rate regime with multiple effective rates and a policy of rationing foreign exchange and allocating it to certain sectors, such that foreign exchange is limited for other current international transactions. The authorities have unified official exchange rates to within a ±4 percent band of the central bank indicative rate. However, a number of exchange restrictions and MCPs remain in effect (see Informational Annex). Staff urged, in line with previous recommendations, the authorities to eliminate the remaining restrictions and MCPs, noting that such measures are not helping Sudan’s economy to reduce external imbalances, attract foreign investment, improve resource allocation, and enhance external competitiveness.

Box 4.Exchange Rate System

Sudan maintains the following exchange restrictions and multiple currency practices that are subject to Fund jurisdiction under Article VIII, Sections 2 and 3:

  • An exchange restriction arising from the government’s limitations on the availability of foreign exchange and the allocation of foreign exchange to certain priority items;

  • A multiple currency practice and exchange restriction arising from the establishment of an official exchange rate (the CBOS rate) for use in all government exchange transactions which in practice differs by more than 2 percent from the rate used by commercial banks;

  • A multiple currency practice and exchange restriction arising from large spreads between the CBOS rate and the parallel market exchange rate due to the CBOS’ limitation on the availability of foreign exchange which channels current international transactions to the parallel market; and

  • An exchange restriction and a multiple currency practice arising from the imposition by the government of a cash margin requirement for most imports

The Authorities’ Views

61. The authorities indicated that they were unable to remove all exchange restrictions and MCPs because of continued pressures on the balance of payments. Shortage of foreign exchange persists despite projected increased foreign exchange receipts from agricultural exports and oil transit fees later in the year. Given current constraints on the CBOS’s ability to meet all the demand for foreign exchange, the authorities had to maintain temporary restrictions and engage in MCPs for strategic priority needs such as imports of food and fuel. The CBOS remains committed to gradually removing the remaining exchange restrictions and MCPs. It will begin to remove the exchange rate restrictions and multiple currency practices by November 2015 and will remove all restrictions within three years.

Staff Appraisal

62. Sudan’s economy has yet to recover from the shock of South Sudan’s secession three years ago. Despite progress in implementing policies to address the resulting imbalances, inflation remains high and growth sluggish. Macroeconomic adjustment has been complicated by structural weaknesses, a heavy debt burden, U.S. sanctions, and volatile domestic and regional political environments, which affect confidence and investment.

63. The authorities embarked last year on an adjustment program to restore macroeconomic stability and lay the foundations for sustained and inclusive growth. The adjustment to the new economic situation is proceeding through fiscal consolidation, monetary tightening, and structural reforms. The authorities have implemented difficult corrective measures, the latest of which in September 2013 entailed a sharp reduction in fuel subsidies, a unification of all official exchange rates, and exchange rate devaluation; these unfortunately led to civil unrest and the loss of life. Adjustment efforts continued in 2014 under the SMP.

64. Economic performance has gradually improved this year but growth has remained subdued and inflation still high at about 40 percent—a sign of continued imbalances. Growth is expected to rebound on account of a good harvest, but the outlook remains uncertain amidst high vulnerabilities, and is weighed by the breakdown of correspondent banking relations, U.S. sanctions, and a fragile domestic and regional political environment. Risks are largely tilted to the downside, though prospects of a successful national dialogue could ultimately lead to resolution of domestic conflicts and improved international relations.

65. Fiscal consolidation should continue while bolstering social safety nets and improving the quality of spending. The favorable fiscal performance in the first half of 2014 is positive and the authorities should continue with disciplined execution of their fiscal program. Enhanced revenue collection efforts and gradual reduction of fuel subsidies should ensure reduction in fiscal imbalances, create space for development and social spending, and reduce government recourse to central bank financing.

66. Monetary policy should continue focusing on reducing the very high inflation. This will require limiting unsterilized gold purchases by the central bank to contain reserve money growth. Promoting a market for government securities and making fully operational the recently established interbank money market to address chronic excess liquidity are important for improving monetary policy management.

67. Exchange rate flexibility is key to rebuilding reserves and external competitiveness. The wide gap between the official and parallel market exchange rates suggests persistent external imbalances, and the authorities’ commitment to gradually close this gap is welcome. Resorting to foreign exchange restrictions does not address the underlying external imbalances, and the recent removal of some of these measures is a step in the right direction. The authorities’ commitment to eliminate the remaining foreign exchange restrictions and the multiple currency practices is appropriate. In the interim, Staff supports the authorities’ request for the approval of remaining exchange restrictions and multiple currency practices given that these measures are adopted for balance of payments reasons, and are temporary and non-discriminatory.

68. More efforts are needed to enhance financial stability. Stronger banking supervision and privatization are needed to improve competitiveness and resilience of banks. The current restriction on commercial banks’ holdings of government and central bank securities should be relaxed. Further strengthening and implementation of the AML/CFT framework would contribute to improving financial stability and integration into the global financial system.

69. Structural policies should focus on fostering sustained and inclusive growth. Reforms to improve the business environment will promote private sector led growth. Improving the quality of spending to support human capital formation and better targeting of social safety nets will be critical for expanding opportunities and protecting the most vulnerable groups from the effects of fuel subsidy reforms. In this context, the launch of the PRSP process is welcome and will offer an instrument to implement coherent macroeconomic and structural reforms to lift growth prospects and reduce poverty.

70. Performance under the SMP is broadly satisfactory. All of the end-June quantitative targets, with the exception of the indicative target on reserve money growth, were met. The authorities have also made good progress toward meeting their end-September structural benchmarks. The SMP continues to provide a useful framework for the authorities’ policy and reform efforts. The authorities have made determined efforts to implement their program, which nevertheless is subject to significant downside risks, including the fragile domestic security and political situation and regional tensions.

71. Gaining the support of the international community is critical for the success of Sudan’s reform strategy and minimizing risks. Resolving Sudan’s unsustainable external debt is of paramount importance. While Sudan has made some progress towards meeting the requirements for debt relief, the successful implementation of the SMP and intensification of outreach to bilateral creditors will help the case for a comprehensive debt relief. In this regard, staff urges the authorities to reach out to their external creditors, including under the framework of the Joint Approach with South Sudan and the African Union High-level Implementation Panel. Staff welcomes the recent agreement between the governments of Sudan and South Sudan to extend the “zero option” to October 2016. It encourages the authorities to minimize nonconcessional borrowing and avoid selective debt servicing, as these may complicate reaching agreement with creditors on a debt resolution strategy. Sudan should continue efforts to strengthen its cooperation with the Fund on policies and payments, including in the context of the SMP. Staff encourages the authorities to make payments to the Fund that are at least sufficient to cover obligations falling due, make payments regularly, and to significantly increase them as Sudan’s payment capacity improves.

72. It is proposed that the next Article IV consultation take place on the standard 12-month cycle.

Figure 1.Selected Economic Indicators

Sources: Sudanese authorities; and IMF staff estimates and projections.

Figure 2.Selected Political and Social Indicators

Sources: Worldwide Governance Indicators; Global Competitiveness Indicators; UNDP Human Development Indicators; World Bank Development Indicators; and Business Monitor International.

Figure 3.Selected Economic and Financial Indicators

Sources: Worldwide Governance Indicators; Business Monitor International; IFC Doing Business Rankings; Sudanese authorities; and IMF staff estimates.

Annex I. External Sector Assessment

Current account imbalances, an overvalued exchange rate, and low international reserves continue to undermine Sudan’s external stability. Three years after the secession of South Sudan, Sudan has not yet fully adjusted to the permanent loss of oil exports and has not restored its external competitiveness. Applying the EBA-lite methodology, staff estimated a 40 percent exchange rate overvaluation relative to economic fundamentals. Further adjustment would involve diversifying exports, allowing greater exchange rate flexibility, developing a business environment supportive of the non-oil private sector, and gradual buildup of reserves.

Background

1. Sudan’s balance of payments deteriorated significantly following the secession of South Sudan in 2011. Sudan lost about three-quarters of oil production and two-thirds of exports. The current account balance deteriorated, shortages of foreign exchange emerged, and the exchange rate on the parallel market diverged from the official rate. Under the government’s three-year emergency plan, the authorities devalued the Sudanese Pound (SDG) from 2.9 to 4.4 SDG/USD in June 2012 and subsequently to 5.7 SDG/USD in September 2013. However, fiscal and monetary policies remained expansionary for most of this period. As a result, inflation surged, the current account deficit remained high, and the parallel market exchange rate continued to drift away from the official rate.

Recent external developments

2. The current account balance improved in the first half of 2014. While exports were unchanged, imports declined by 15 percent year-on-year in the first half of the year, reflecting adjustment from the September 2013 devaluation as well as a tightened fiscal stance. From July 2013 Sudan also started receiving stable oil-related revenue flows—oil transit fees and TFA transfers—from South Sudan. As a result, the current account deficit is expected to narrow to 6½ percent of GDP in 2014 from 8¾ percent in 2013.

3. The exchange rate continued to depreciate on the parallel market before stabilizing in recent months (Figure 1). External shocks contributed to this depreciation in the first half of the year, including the conflict in South Sudan and the U.S. prosecution of an international bank for violating U.S. sanctions. By mid-2014, the parallel market rate reached 9.5 SDG/USD—a 20 percent depreciation from its end-2013 level. Since July, however, the rate appreciated. In mid-November, the gap between the official and parallel market exchange rates dropped to about 47 percent.

Figure 1.Exchange Rates

(January 2010 – August 2014)

Price competitiveness

4. The official SDG rate is overvalued as suggested by a number indicators: (i) the current account deficit remains high; (ii) the gap between the official and the parallel market rates persists; (iii) the real effective exchange rate depreciation, generated by the nominal devaluations in June 2012 and September 2013, has been largely reversed by high domestic inflation relative to trading partners (Figure 2); (iv) international reserves remain low; and (v) external payment capacity is weak, as evidenced by the continued accumulation of external arrears.

Figure 2.REER and NEER

(January 2010 – June 2014)

Sources: Sudanese authorities; and IMF staff calculations

5. Results from the EBA-lite methodology suggest that Sudan’s currency was overvalued by about 40 percent relative to economic fundamentals.1 Before the secession, Sudan’s current account cash balance2 was broadly in line with fundamentals. Since 2011, however, the current account balance has diverged from the norm (Figure 3), and was about 4 percent of GDP above the level consistent with fundamentals and desirable policies, adjusted for cyclical factors, in 2013. Because of Sudan’s relatively low elasticity of the current account to the REER of 0.09—owing to its low export-and import-to-GDP ratios3—reducing the current account by 1 percent of GDP requires an 11 percent real depreciation. Hence, the current account gap translates into an exchange rate overvaluation of 41 percent.

Figure 3.Current Account Norm and Actual CA Balance

Sources: Sudanese authorities; and IMF staff calculations

Non-price competitiveness

6. Weak institutions and an unfavorable business environment undermine Sudan’s competitiveness. Sudan’s business climate, as measured by the 2014 World Bank Doing Business survey, is ranked 149 among 189 countries—in the lowest quartile of all surveyed countries—as in previous years.4 Indicators point to difficulties in obtaining licenses, accessing credit, and trading across borders. Sanctions imposed on Sudan by the United States generate additional costs and difficulties for international trade and foreign direct investment. Sudan also lags in the areas of human development and public sector capacity, as evidenced by the UNDP’s 2012 Human Development Index (Sudan ranked 171 out of 186 countries) and the World Bank’s 2012 Country and Policy Institutional Assessment (Sudan is classified as a weak performer).

Reserve adequacy

7. Sudan’s international reserves are below the levels considered adequate. Gross international reserves have been on a declining trend since 2006. Following the September 2013 depreciation, they increased moderately (Figure 4) to 1.6 months of imports from a trough of 1.3 months. However, they are still well below the traditional recommended minimum coverage of 3 months of imports, and below the optimal level suggested by the new methodology for low-income countries, which suggests an optimal reserve level of 6 – 6½ months for Sudan, based on country-specific probabilities and the costs of balance of payments crises (Figure 5).5

Figure 4.International Reserves

(January 2006-June 2014)

Figure 5.Optimal level of reserves, 2010–2019

Months of next year’s imports

Conclusion

8. Sudan’s external sector continues to be vulnerable to shocks. To restore external stability and increase resilience to external shocks, Sudan needs to: (i) introduce greater exchange rate flexibility to reduce overvaluation and close the gap between the official and parallel market exchange rates, and gradually remove restrictions on access to foreign exchange; (ii) continue fiscal consolidation and tighten further monetary policy to contain inflation; and (iii) develop the country’s infrastructure and human capital; this requires stepped-up efforts by the authorities to secure debt relief to reduce the unsustainably high external debt burden and unlock concessional foreign financing; (iv) undertake structural reforms aimed at removing structural impediments, and strengthening institutions to create a supportive business environment; and (v) gradually build up reserves to provide sufficient buffers against shocks.

Annex II. Sources of Growth in Sudan

1. Agriculture has the potential for significant inclusive growth. This sector has, since at least 1980, carried promise of becoming a bread basket of the Arab world. However challenging climatic conditions, low productivity and developmental neglect have kept that promise unfulfilled so far.

2. Agriculture supports nearly 70 percent of the population and accounts for about 27 percent of GDP. That share declined from the high of 47 percent in 1996 before the advent of oil in 1998. Since then, agriculture also lost its position as a prime exporting sector. However, this trend has reversed since the secession of South Sudan. Agriculture exports were 18 percent of exports in 2012 and 39 percent in 2013—nearly as much as oil. They more than doubled within one year, owing to exchange rate depreciation and increasing export orientation of agriculture. Sudan’s trade partners highly value Sudan’s agricultural products. One of these, gum Arabic, Sudan dominates the world market.

3. The authorities plan to turn agriculture into the growth engine. The regional economies are showing interest in agriculture and imports of its products. Staff expects, as economic reforms take hold, agricultural exports will dominate Sudan’s exports.

4. Agriculture can lead economic growth provided a number of reforms are implemented. The World Bank has identified necessary reforms and policy actions comprising infrastructure investments, improving access to agricultural inputs, making agricultural markets more efficient, eliminating fees and taxes not related to services provided by the state, and improved extension services.1

5. Agricultural sector reforms should improve economy-wide productivity and growth. According to the IMF research, agricultural reforms are associated with higher productivity growth and higher manufacturing sector productivity that can yield economy-wide productivity gains, including by facilitating structural transformation.2

6. Gum Arabic production is a sector within agriculture with significant potential to deliver inclusive growth. An estimated five million people are directly involved in the gum procurement and utilization of the gum trees. The gum Arabic “belt”—an area of half a million square kilometers where gum trees are growing—extends from the border of Sudan with Ethiopia to its border with Chad and Central African Republic. The gum is exempt from the U.S. sanctions, is widely exported, and used in food, chemical, pharmaceutical, and other industries.

7. Recent reforms in the gum sector have increased production and exports, and lifted incomes of gum producers. The reforms have been supported by the World Bank and International Fund for Agricultural Development.3 The production increased from 20,000 tons in 2009-10 to 88,000 tons in 2013-14. Further increases are expected as the reforms continue. The producers’ take of the gum price has increased from 15 percent to 50 percent improving livelihood and providing incentives for responsible production.

8. Gold mining is another sector with considerable potential. Sudan is rich in mineral resources, and exports of gold have grown rapidly since the late 2000s. In 2011, gold exports were 13 percent of total exports, in 2012 for 42 percent, and in 2013 for 36 percent. Reliable data on gold production are not available, but judging by export volumes Sudan could be the 15th largest gold producer in the world and the third largest in Africa (Table 1). Anecdotal evidence suggests that significant amounts of gold are smuggled out of Sudan.

Table 1.Gold: Sudan and top producers in the world
201120122013
(in tons)
Sudan 1/304625
Chile455055
Indonesia965960
Papua New Guinea665362
Brazil626575
Ghana808785
Uzbekistan919393
Mexico8497100
Canada97104120
South Africa181160145
Peru164161150
Russia200218220
United States234235227
Australia258250255
China362403420
Other countries610655700
World total2,6602,6902,770
Source: USGS and Sudan’s authorities.

Reported exports. Data on production are not available.

Source: USGS and Sudan’s authorities.

Reported exports. Data on production are not available.

9. Gold mining is dominated by artisanal miners. Most artisanal operations are in the North where surface deposits are located. Those are becoming progressively depleted leading to rising operation costs. The authorities estimate that close to one million workers (about 11 percent of total employment) are in gold mining. The authorities are planning to provide extension services to them to improve the safety of operations and legalize them.

10. The government is attracting foreign companies to invest in gold mining. It had awarded 127 concessions of which 10 have started production. The oldest mining operation in Sudan since 1991 is operated by Sudan’s Ariab Mining Company with La Mancha Resources Inc. of Canada. Interest in gold mining in Sudan is shown by Egypt, South Africa, Saudi Arabia, UK, Russia, and China. The government plans to develop gold mining as a part of the broader development mineral sector. They are also focusing on associated minerals and on processing the extracted minerals to higher value-added products. At end-2012 they opened the first gold refinery with a capacity of 150 tons per year.

11. Reliance on gold mining for development is not free from challenges. The most obvious ones are owing to fluctuations of the world price of gold (Table 2). Prices for Sudan’s gold exports have been lower than the indicated world price (GAS price in Table 2) and exports have fluctuated in response to changing prices. In 2013, when, reportedly, the lack of confidence in gold as an investment resulted in a price decrease, Sudan experienced what the local press referred to as a gold recession. Development needs of the sector are another set of challenges. Infrastructure investments, improved business environment, and proper regulations are required. The government is concerned about environmental damage owing to artisanal miners’ usage of mercury for gold smelting. Also, there have been increased tensions and fighting for control of the mines. If gold mining becomes a catalyst of armed conflict and human rights abuses, this could possibly disrupt its exports and deal a blow to Sudan’s development prospects.

Table 2.Gold Exports - Volumes, Value, and Implied Prices(In kg, U.S. dollar millions, and U.S. dollar per kg and ounce)
Q1Q2Q3Q4Year
2011
Volume6,0905,9878,7139,08729,877
Value2472864454641,442
Price
per kg40,53847,70251,08051,08048,254
per oz1,1491,3521,4481,4481,368
GAS price per oz1,3841,5041,7001,6851,569
2012
Volume14,09314,5257,5369,97946,133
Value6446473655022,158
Price
per kg45,69344,54348,41350,32846,778
per oz1,2951,2631,3721,4271,326
GAS price per oz1,6911,6111,6551,7191,669
2013
Volume8,0006,7154,6575,44024,813
Value3463031942061,048
Price
per kg43,19945,09341,75237,78942,254
per oz1,2251,2781,1841,0711,198
GAS price per oz1,6311,4141,3281,2721,411
Source: Sudanese authorities and staff calculations; GAS-IMF Global Assumptions Database.
Source: Sudanese authorities and staff calculations; GAS-IMF Global Assumptions Database.

12. Total factor productivity (TFP) is likely to become a major source of growth in Sudan owing to structural changes in the economy and the sudden stop of reliance on oil after the secession of South Sudan. Although these changes had a negative influence on the economy, they are also removing many of the constraints that hampered TFP growth. It will take some time for the supply of inputs to respond to new price structures and new opportunities, especially given the risks still facing the economy. Nevertheless the productivity improvements can happen much faster.

13. Labor and capital will need to contribute to growth to assure that it is balanced and sustainable. Human capital had historically grown at about 1 percent per annum. Removal of constraints on the economy would likely increase growth rate of human capital. Similarly, capital services are likely to increase assuring sustainable, inclusive economic growth and poverty reduction.

Appendix I. Letter of Intent

Khartoum, November 21, 2014

Ms. Christine Lagarde

Managing Director

International Monetary Fund

Washington, D.C. 20431

Dear Ms. Lagarde,

We appreciate the support received from the International Monetary Fund (IMF) through the Staff-Monitored Program (SMP), on which we embarked to achieve our dual objective of addressing the macroeconomic imbalances created by the secession of South Sudan and advancing our reform program in a challenging domestic and external environment, while at the same time garnering international support for debt relief. This letter updates our March and June 2014 Letters of Intent and Memorandums of Economic and Financial Policies (MEFP), which remain valid, and revises the technical memorandum of understanding (attached) to reflect the recent agreement with oil companies in South Sudan.

We have met all the end-June quantitative benchmarks and targets set for the second review of the SMP, except the indicative target on reserve money growth which was missed but will be achieved by year-end through corrective measures described below. We have also made good progress on structural conditionality by advancing implementation of the reforms agreed under the program, most notably in the areas of revenue administration, public financial management, and anti-money laundering and combating the financing of terrorism (AML/CFT).

The tangible benefits of the program are already evident, most notably in continued economic recovery and greater fiscal stability, although we need to continue our efforts to bring inflation down. We consider these results evidence of a track record of macroeconomic performance and policy implementation required to obtain debt relief, which remains an utmost priority for us.

Economic growth continues broadly as expected, performance in gold extraction has been very good, and we expect a bountiful harvest thanks to ample and timely rains. Twelve-month inflation has begun to decline from 46 percent in August to 39 percent in September, and this is expected to continue as the impact of the one-off effect of last year’s energy price hikes, the exogenous events that led to the depreciation of the curb market exchange rate in the first half of the year, and seasonal factors begin to dissipate. The depreciation pressures in the curb market have eased and the gap with the official exchange rate declined from 65 percent in August to 47 percent in mid-November. Reserve money grew by 8 percent over the first six months of the year, exceeding the 6.2 percent target for June. Gross international reserves increased to US$1.6 billion and net international reserves exceeded the June target. Fiscal performance in the first half of the year was strong: with revenue rising by more than 60 percent relative to the same period last year and expenditure in line with targets, the budget deficit dropped to 0.4 percent of GDP (against 1.2 percent last year). In parallel, the central bank’s net credit to the government declined over the first six months of the year.

Much remains to be done, though, and in the months ahead we will build on the progress already achieved. With this in mind, we have reached an understanding with the IMF staff on a revised macroeconomic framework for the remainder of 2014 and the medium term, updated quantitative benchmarks and indicative targets for end-December 2014, and re-phased the structural benchmark on the restructuring plan for the Ommdurman Bank, as the preparation of the plan will take longer than previously envisaged (Tables 1 and 2).

Table 1.Quantitative Targets, 2013-14
20132014 1/
DecemberMarchJuneSeptemberDecember
SMP requestAdj.Actual1st ReviewAdj.Actual1st ReviewActualRevised Program
Quantitative Benchmarks
Domestic financing of the central government (ceiling; in SDG million) 2/5,5961,0591,149−2201,1991,1985792,5183,868
CBOS net credit to the central government (ceiling; in SDG million)13,50314,24914,24913,14013,69013,69013,13113,98815,249
CBOS net domestic assets (ceiling; in SDG million) 3/51,69953,29753,29753,34138,20638,20638,20539,26941,562
Net international reserves (floor; in millions of U.S. dollars) 2/355405390267307307374377445
Contracting or guaranteeing of external long term non-concessional debt by the government or the central bank (ceiling, in millions of U.S. dollars) 4/60060060047600600147600147600
Central government budget domestic expenditure arrears accumulation (ceiling, in SDG million)000000000
Payments to the Fund (in millions of U.S. dollars)62.52.52.55.05.05.07.57.510.0
Indicative Targets
Tax revenue (floor; in SDG million)19,4275,2955,2955,74611,56211,56211,89118,17326,676
Social spending (floor; in SDG million)5805005002966886886951,0802,000
Reserve money (ceiling; change in percent) 3/20.36.06.03.26.26.28.09.014.7
Nonoil primary deficit (ceiling; in SDG million) 2/8,3771,7431,7431,9304,1224,1213,4626,1726,496

Cumulative from the beginning of the year.

Subject to an adjustor to take account of oil-related fees and TFA from carrying crude oil of the RSS being different than assumed in the program.

Calculated using program exchange rate. The definition of NDA has been revised for end-June target and onwards; see Technical Memorandum of Understanding (Attachment II). March 2014 NDA is SDG37,091 million under the revised definition.

Continuous benchmark.

Cumulative from the beginning of the year.

Subject to an adjustor to take account of oil-related fees and TFA from carrying crude oil of the RSS being different than assumed in the program.

Calculated using program exchange rate. The definition of NDA has been revised for end-June target and onwards; see Technical Memorandum of Understanding (Attachment II). March 2014 NDA is SDG37,091 million under the revised definition.

Continuous benchmark.

Table 2.Prior Actions and Structural Measures Under the 2014 SMP
BenchmarksTarget DateMacroeconomic RationaleStatus
Prior Actions for Request of SMP
1. Adopt a 2014 budget in line with SMP.Support fiscal consolidation.Met.
2. Unify the CBOS exchange rates.Eliminate distortions in the foreign exchange market and ensure flexibility going forward.Met.
Structural Measures
Tax policy
1. Reduce VAT exemptions.Jun.2014Boost tax revenueThe report of the Review by Tax and Customs Committee was finalized in October.
Revenue administration
2. Complete and adopt the manual for risk-based audit and non-audit interventions.Sep. 2014Enhance VAT and income tax productivity.Audit manual is distributed to the departments in June. Training on the manual started in September.
3. Strengthen the penalty procedures for non-compliant tax payers.QuarterlyEnhance tax administration.The report of the Review by Tax and Customs Committee was finalized in October.
Expenditure policy
4. Develop, with Fund TA, a flexible fuel pricing mechanism.Dec. 2014Improve the efficiency and targeting of current spending.Authorities are reviewing the March 2014 TA report.
Public financial management
5. Extend the GFSM 2001 compatible economic classification to the six remaining states, and monitor the quality and consistency of classification applied at the state level.Sep. 2014Improve budget classification and fiscal reporting.Met.
6. Develop a medium-term fiscal framework (MTFF) that provides three-year aggregate fiscal targets and projections of revenue and expenditure by main economic categories.Dec. 2014Enhance budget planning and preparation.Designing MTFF is in progress with TA from METAC in August 2014
7. Close all central government accounts in commercial banks (except in areas with no CBOS branch).Jun.2014Improve cash management.Met.
Financial sector
8. Prepare a time-bound restructuring plan for Omdurman Bank in line with the recommendations of the independent audit.Dec. 2014Reduce risks stemming from the financial sector.Under preparation.
AML/CFT
9. Enact the amended AML/CFT Law based on the recommendations of the December 2013 IMF Technical Assistance on AML/CFT.Sep. 2014Support anti-corruption efforts, improve financial sector stability and integration into the global financial system.Met.

We remain committed to implementing the agreed policy mix aimed at achieving macroeconomic stability. We will: (i) continue fiscal consolidation through revenue enhancement and fiscal retrenchment, while broadening social protection and allocating more resources to productive projects; (ii) continue our tight monetary policy stance and improve the monetary transmission mechanism; iii) address external imbalances by assuring greater exchange rate flexibility through a managed-float exchange rate system; and (iv) enhance the capacity of the financial public sector.

Our macroeconomic objectives for 2014 remain broadly in line with the first review projections. We expect non-oil real GDP to grow by 2.9 percent as a result of a rebound in agriculture, gold extraction, continued good performance in manufacturing, robust export performance, and productivity gains as reforms take hold. We are committed to: (i) bringing inflation down to about 30 percent by year-end, reflecting the combined effects of fiscal consolidation and further monetary policy tightening, as well as the dissipation of the base effect from last year’s energy price adjustments; (ii) limiting the overall fiscal deficit to 1.0 percent of GDP, reflecting improved revenue collection and contained spending; and (iii) narrowing the current account deficit to 6½ percent of GDP, reflecting improved exchange rate flexibility.

Owing to our adjustment efforts, the medium-term outlook remains favorable despite being weighed by the difficult domestic and external environment, the absence of significant foreign financing, the unsustainable debt burden, and the adverse impact of sanctions on the domestic economy, cross-border transactions, and foreign investment. The outlook has been further clouded by the widespread negative effect of the sanctions against an international commercial bank involved in transactions with Sudan, which are taking a heavy toll on our economy and, ultimately, on the poor.

Fiscal adjustment remains the cornerstone of the program. On the revenue side, we are pressing ahead with the implementation of the revenue-enhancing measures outlined in the March and June MEFPs. In particular, progress is underway to rationalize tax exemptions, strengthen taxpayer compliance, and advance a framework that uses risk-based audit and non-audit interventions. The committee on tax and customs reform has advanced its work; its report was finalized by October and its recommendations will be incorporated in the 2015 budget. On the expenditure side, we continue to be committed to the SMP targets for the year despite some overruns on goods and services and on fuel subsidies due to exceptionally warm weather, and we are strengthening public financial management as outlined in the March and June MEFPs. We are containing the wage bill and ensuring improvements in operations of the state-owned oil company and the electricity sector. We have extended the GFSM 2001-compatible classification to the six remaining states, and have closed all central government accounts in commercial banks except in areas with no Central Bank of Sudan (CBOS) branches.

We will further tighten our monetary policy stance to keep inflationary pressures in check. In this context, we will maintain our reserve money growth target of 14.7 percent for the year, despite the overshooting in the first half of the year, and will limit monetary financing of the fiscal deficit to 0.4 percent of GDP. To achieve this, we will reduce the injection of liquidity in the economy as we will contain domestic gold purchases at the curb market rate, even though gold exports constitute an important source of foreign exchange. At the same time, we will continue to strengthen the central bank’s independence and improve the transmission mechanism of monetary policy by: (i) improving the coordination between monetary and fiscal policies; (ii) promoting an interbank market for commercial banks; (iii) expanding the open market operations to provide commercial banks with the opportunity to recycle unused cash balances; and (iv) relaxing restrictions on commercial banks’ holdings of government and central bank securities to help develop a market for such securities and reduce excess liquidity.

To improve the operation of the banking sector, we are working to implement best practices in bank supervision, inspection and enforcement; update the risk-based manuals for offsite and onsite supervision; limit the direct ownership of banks by CBOS; and upgrade the legal, regulatory, and institutional framework of the sector. We will finalize a plan to restructure Omdurman National Bank in line with the recommendations of the independent audit by December 2014. To strengthen our governance framework, we have enacted an amended AML/CFT law.

A continuation of the tight monetary policy stance, lower fiscal deficits, and enhanced exchange rate flexibility should reduce the gap between the official and curb market exchange rates. The persistent gap between those two rates reflects insufficient foreign exchange supply and limited exchange rate flexibility, together with absence of international financial support. We fully recognize the urgent need to reduce this gap, and have introduced measures to enhance flexibility in foreign exchange transactions. Specifically, commercial banks and foreign exchange bureaus have been allowed to set the exchange rate freely within the trading bands of the managed float regime, while exporters have been allowed to sell their proceeds to any importer at an agreed price. From end-June, we have begun a gradual adjustment of the indicative rate with a view to achieving convergence between the official and the curb market rates. As part of our commitment to enhance flexibility, we adjusted the official exchange rate by 3 percent to narrow the gap between the two rates. This will be followed by regular adjustments as needed, depending on market developments to preserve our limited foreign exchange reserves and the economy’s competitiveness.

We remain committed to improving the business environment, strengthening our social policies, and upgrading debt management. The reform agenda will continue to focus on lowering the cost of doing business in order to attract increased domestic and foreign investment. We are also taking action to improve transparency and governance. We will continue our efforts to improve the human capital and reduce poverty within the framework of the I-PRSP, and we will finalize a full PRSP with support from external donors. Specifically, in addition to increased assistance to the most needy, we are also allocating more funds to basic social spending, which has already increased in line with targets.

Resolving the unsustainable debt burden remains the government’s utmost priority. In this regard, we are profoundly disappointed that none of our efforts have been matched by the creditors or the international community so far. Indeed, we have satisfied key technical requirements, including a long track record of economic performance that spans 13 successful SMPs, finalized our I-PRSP, and reconciled our external debt records with creditors. We urge creditors, donors, and the international community to recognize our efforts and commitment, as evidenced by our track record of performance under the current and past SMPs, and to take concrete and positive action towards awarding debt relief on an equal footing with other countries. In the meantime, we are committed to: (i) minimizing non-concessional borrowing, and to borrowing on as concessional terms as possible; and (ii) continuing to make regular quarterly payments to the IMF totaling at least US$10 million in 2014, and further increasing them if Sudan’s payment capacity improves.

The deadline under the “zero option” elapsed in September 2014, and according to the agreement, the external debt would have been apportioned between Sudan and South Sudan since creditors, donors, and international community have not provided firm commitments to deliver debt relief. This failure by the international community to move toward granting debt relief has come at great socio-economic cost to Sudan, and has stifled our attempts to spur economic growth and reduce poverty. Nevertheless, in light of recent events in South Sudan and in order to give time to the Tripartite Committee (Sudan/South Sudan/African Union) to carry out its outreach strategy, the parties have agreed to extend this deadline to September 2015. Moreover, we intend to: (i) continue our technical work; (ii) step up, through the Tripartite Committee, our joint outreach efforts towards the international community to secure debt relief; and (iii) supplement the joint outreach with bilateral outreach to intensify the process, while reporting all efforts in this regard to the Tripartite Committee.

The government of Sudan is committed to a comprehensive national dialogue to achieve sustainable peace in Sudan, as envisaged in the agreement signed in Addis Ababa on September 4 under the auspices of the African Union High-level Implementation Panel.

We believe that the policies set forth herein and in the above-mentioned MEFPs are sufficient to achieve the objectives of our program, and we stand ready to take any additional measures that may become necessary for this purpose. We will consult with Fund staff in advance of any revision of the policies described here and in the March and June MEFPs, in accordance with the Fund’s policies. We will remain in close contact with Fund staff and provide timely information required for monitoring economic developments and implementation of policies under the SMP.

We authorize the IMF to publish this letter and the policy documents related to this second review under the SMP.

Sincerely yours,

/s/

BadrEldein Mahmoud Abbas

Minister of Finance and National Economy
/s/

Abdelrahman Hassan Abdelrahman Hashim

Governor, Central Bank of Sudan
Attachment I. Technical Memorandum of Understanding

1. This technical memorandum of understanding (TMU) sets out the framework for monitoring the performance of Sudan under the 2014 Staff-Monitored Program (SMP). It specifies the quantitative benchmarks, indicative targets, and structural benchmarks on the basis of which the implementation of the SMP will be monitored. In addition, the TMU establishes the terms and timeframe for transmitting the data that will enable Fund staff to assess program implementation and performance.

2. The SMP relies on seven quarterly quantitative benchmarks and four indicative targets for end-March 2014, end-June 2014, end-September 2014, and end-December 2014.

3. The quantitative benchmarks are:

  • (i) Ceiling on domestic financing of the central government;

  • (ii) Ceiling on the CBOS net credit to the central government;

  • (iii) Ceiling on net domestic assets of the central bank;

  • (iv) Floor for the buildup of net international reserves of the CBOS;

  • (v) Ceiling on new nonconcessional external loans contracted or guaranteed by the government or the central bank;

  • (vi) Ceiling on central government budget expenditure arrears; and

  • (vii) Floor for payments to the Fund.

4. The indicative targets are:

  • (i) Floor for tax revenue;

  • (ii) Ceiling on reserve money growth;

  • (iii) Floor for social spending; and

  • (iv) Ceiling on non-oil primary deficit.

5. Some of these targets are subject to adjustors. The definitions of these variables and the adjustors are set out below. All the quantitative benchmarks and structural benchmarks are displayed in Tables 1 and 2 of the MEFP.

Definitions

6. Central Bank of Sudan (CBOS) net domestic assets (NDA) are defined as reserve money minus CBOS net foreign assets (NFA), minus revaluation accounts. CBOS Net foreign assets (NFA) are defined as foreign assets minus foreign liabilities. Foreign assets comprised of active accounts and other foreign assets of the CBOS. Foreign liabilities comprised of the following items: CBOS use of Fund credit, overdue Fund charges, liabilities to other international organizations, short-term liabilities, and other foreign liabilities. Revaluation accounts are as noted in the balance sheet of the CBOS.

7. CBOS net credit to the central government (NCG) is defined as CBOS credit to the central government minus total central government deposits. Central government deposits include all accounts of line ministries and agencies controlled by the government;

8. CBOS credit to the central government includes temporary advance, plus CBOS’s acquisition of Government Musharaka Certificates (GMCs) and Government Investment Certificates (GICs), plus CBOS long-term claims on the central government;

  • The central government comprises all accounts of line ministries and agencies controlled by the government (corresponding to Group no. 11, Group no. 12, and some accounts of the Group no. 19 in the CBOS general ledger), the Zakat funds (recorded under Group no. 13), and margin deposits placed with the CBOS by the central government against letters of credit issued by the CBOS. The definition includes all oil-related accounts controlled by the government (e.g., OSA).

9. Net international reserves (NIR) are total gross official foreign reserve assets on active accounts minus official short-term liabilities. The gross reserve assets include assets maintained on accounts with overseas correspondent banks, foreign exchange banknotes in the vaults of the central bank, monetary gold, and SDR holdings. Short-term liabilities include the foreign liabilities, net of barter and payment agreements and non residents’ time liabilities, as reported in the balance sheet of the CBOS. 1

10. To evaluate program targets, the guinea equivalent values of foreign exchange denominated items in the balance sheet of the CBOS will be calculated at the program exchange rate of SDG 5.672 per U.S. dollar, and SDG 8.708 per SDR. For currencies other than SDR and U.S. dollar, cross program exchange rates against the U.S. dollar will be fixed as of end-March 2014.

11. Domestic financing of the central government is defined as total net domestic borrowing by the central government, including net borrowing from the banking system (including GMCs and GICs), net sales of GMCs and GICs outside the banking system, promissory notes (i.e., standing orders, letters of guarantees,2 sanadats, etc.), revenues from privatization (net of new acquisition of financial assets), revenues from leasing, buildup of domestic government arrears, and drawdown in government cash deposits at the CBOS.

12. Non-oil primary fiscal balance of the central government (NOPB) is defined as non-oil revenues3 minus non-oil expenditures4 excluding net interest payments (interest payments minus interest receipts) cumulatively since the beginning of the calendar year.

  • The floor on the NOPB set in Table 1 will be lowered by the excess in project loans or budget loans relative to program assumptions. The floor on the NOPB set in Table 1 will be raised by the shortfall in project loans relative to program assumptions.

13. Debt is defined for program purposes in accordance with Executive Board Decision No. 12274, Point 9, as revised on August 31, 2009 (Decision No. 14416-(09/91)).

  • For the purpose of this guideline, the term “debt” will be understood to mean a current, i.e., not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. Debts can take a number of forms, the primary ones being as follows:

    • (i) Loans, i.e., advances of money to the obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans and buyers’ credits) and temporary exchanges of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements);

    • (ii) Suppliers’ credits, i.e., contracts where the supplier permits the obligor to defer payments until sometime after the date on which the goods are delivered or services are provided; and

    • (iii) Leases, i.e., arrangements under which property is provided which the lessee has the right to use for one or more specified period(s) of time that are usually shorter than the total expected service life of the property, while the lessee or retains the title to the property. For the purpose of the guideline, the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement excluding those payments that cover the operation, repair or maintenance of the property.

  • Under the definition of debt set out in point (a) above, arrears, penalties, and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt are debt. Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.

14. A non-concessional external debt ceiling applies to the contracting and guaranteeing by the public sector of new nonconcessional borrowing debt with nonresidents with original maturities of one year or more. The ceiling applies to debt and commitments contracted or guaranteed for which value has not yet been received. This applies to private debt for which official guarantees have been extended and which, therefore, constitute a contingent liability of the public sector.

  • The public sector comprises the central government, the central bank, nonfinancial public enterprises (enterprises and agencies in which the government holds a controlling stake—typically owns more than 50 percent of the shares, but which are not consolidated in the budget, and other official sector entities.

  • For program purposes, the guarantee of a debt arises from any explicit legal obligation of the public sector to service a debt in the event of nonpayment by the debtor (involving payments in cash or in kind), or from any implicit legal or contractual obligation of the public sector to finance partially or in full any a shortfall incurred by the debtor.

15. For program purposes, a debt is concessional if it includes a grant element of at least 35 percent, calculated as follows: the grant element of a debt is the difference between the present value (PV) of debt and its nominal value, expressed as a percentage of the nominal value of the debt. The PV of debt at the time of its contracting is calculated by discounting the future stream of payments of debt service due on this debt. The degree of concessionality of debt will be calculated using 5 percent discount rate. The concessionality calculator is available via the Internet at www.imf.org.

16. Central government budget expenditure arrears are defined as budgeted central government payments to residents determined by contractual obligations that remain unpaid 90 days after the due date. Under this definition, the due date refers to the date in which domestic debt payments are due according to the relevant contractual agreement, taking into account any contractual grace periods.

17. Broad money is defined as the sum of local currency circulating outside of the banks, banks’ demand, and time and savings deposits. It also includes transferable deposits and margin deposits against letters of credit placed by state and local governments, nonfinancial public enterprises, and the nonbank private sector with the CBOS.

18. Reserve money is defined as the sum of local currency circulating outside of the banks, total reserves (required and excess) for banks, and deposits at the CBOS included in broad money.

19. The program sets a floor on priority social spending of the central government. For the purpose of the program, priority social spending of the government is defined as the central government’s spending on social benefits program that includes cash transfer, spending on health insurance, on primary health care, and students support.

20. Transitional financial arrangement (TFA) is defined as in the September 2012 agreement between Sudan and South Sudan and consists of financial transfers paid by the government of South Sudan and totaling $3.028 billion. These payments are expressed in per barrel terms ($15/barrel), based on South Sudan’s projection of an average of 152,000 barrels/day of oil production. If production is higher, payments will be made at the agreed rate until cumulative payments reach $3.028 billion.

21. Oil transit fees from South Sudan government are defined in the September 2012 agreement as the fees paid by South Sudan government for exporting its oil using Sudan’s pipeline and oil infrastructure. These fees (i) average $9.1/barrel, of which only $6.9/barrel accrue to the government (including government’s share in the pipelines and processing facilities) and the rest to oil companies; and (ii) will apply for the whole 3½ year period and will be renegotiated thereafter.

22. Oil transit fees from oil companies are defined as the government’s share in the fees paid by oil companies operating in South Sudan for exporting their oil using Sudan’s pipeline and oil infrastructure.

Adjustors

23. An adjustor will be applied for the oil transit fees from South Sudan government and oil companies and TFA accrued from carrying crude oil from South Sudan. The gross programmed government revenue is based on the program’s assumptions about oil transit fees and TFA from South Sudan. Accrued revenue is the cumulative government revenue inflows based on actual shipments at current international prices (f.o.b. Port Sudan).5 The local currency equivalent of the dollar difference between the programmed and accrued oil transit fees and TFA, needed to calculate the adjustor, will be obtained by multiplying the dollar difference by the average of the monthly exchange rates prevailing during the period in question.

The programmed value for the oil transit fees and the TFA are as shown in the Table below.

2014
Q1

Actual
Q2

Actual
Q3

Program
Q4

Program
(in USD millions, cumulative from beginning of the year)
Oil transit fees from South Sudan government and oil companies73.0151.9247.5343.1
TFA114.0237.2348.6460.0
Total (oil transit fees + TFA)187.0389.1596.1803.0

The adjustor will work as follows:

  • If the accrued oil transit fees and TFA falls short of the programmed value, the program targets on domestic financing of the central government and non-oil primary deficit will be increased by 25 percent of the local currency equivalent of the difference between the accrued and programmed value. The program target for NIR will be reduced by 25 percent of the difference between the accrued and programmed value.

  • If the accrued oil transit fees and TFA exceeds the programmed value, the program targets on domestic financing of the central government and non-oil primary deficit will be reduced by the local currency equivalent of the difference between the accrued and programmed value. The program target for NIR will be increased by the difference between the accrued and programmed value.

24. The payments to the IMF are defined as a minimum quarterly payment of US$2,500,000.

Program Monitoring

25. The Sudanese authorities established a program-monitoring committee composed of senior officials from the Ministry of Finance, the Ministry of Petroleum, the CBOS, and other relevant agencies. The IMF Resident Representative has an observer status on this committee. The committee is responsible for monitoring the performance of the program, recommending policy responses, informing the IMF regularly about the progress of the program, and transmitting the supporting materials necessary for the evaluation of benchmarks. The committee shall provide the IMF with a progress report on the program on a monthly basis within four weeks of the end of each month, using the latest available data.

Data Reporting

26. The following table contains the agreed reporting framework. To the extent possible, the data will be submitted in both printed and electronic form to the IMF local office.

Reporting AgencyType of DataDescription of DataFrequencyTiming (within period specified)
Central Bank of SudanCBOS balance sheetDetailed CBOS balance sheetMonthly15 days after the end of each month
Monetary surveyBanking system balance sheet and consolidated balance sheet of commercial banksMonthly30 days after the end of each month
Cash flow of foreign exchangeCash flow data of foreign exchange, including sales and purchases by the dealing room at the CBOSMonthly1 week after the end of each month
Banking indicatorsCapital adequacy; asset composition and quality including non-performing loans; profitability; liquidity; open FX positions; and compliance with prudential normsMonthly30 days after the end of each quarter
Balance of paymentsDetailed composition (exports, imports volume and values, invisible transactions, quarterly BOP tables).Quarterly2 months after the end of each quarter
External debtContracting or guaranteeing of medium-and long-term external debt of the government, the CBOS, and state owned companiesQuarterly30 days after the end of each quarter
Disbursements and repayments, (i) scheduled, and (ii) actual interest and principal on debt of the government, the CBOS, and state-owned companies, by creditorMonthly30 days after the end of each month
Ministry of Finance and National EconomyCentral government operationsRevenues, expenditures, and financing as in GFSM 2001 formatMonthly30 days after the end of each month
Central government domestic debtEnd-month stocks, and monthly issuances and repayments, of all domestic debt instruments: GMCs, GICs, loans and advances from the ban king system, sanadat, letters of guarantee, standing orders, accounts payable (including arrears) and amortization scheduleMonthly30 days after the end of each month
Social spendingSpending on education, health and trainingMonthly30 days after the end of each month
External supportDisbursement of grants, disbursement and repayment (principal and interest)of loans by donor, breakdown of foreign budget and project grantsMonthly30 days after the end of each month
Central Bureau of StatisticsCPIIncluding detailed data and inflation for imported productsMonthly1 week after the end of each month
Ministry of Finance and National Economy / Ministry of oilOil transit fees/TFA, from South SudanShipment data, listing by blend specifying date, quantity, prices, and values in US$ and in guineaMonthly30 days after the end of each month
Crude oilProduction by block; share of Sudan and foreign partners; prices and values ($ million), investment and production costs by blockMonthly30 days after the end of each month
Sales to refineriesSales listing by refineries specifying date, quantity, prices, and values in US$ and in guineaMonthly30 days after the end of each month
RefineriesVolumes and prices of production, consumption and imports of gasoline, gasoil, fuel oil, jet oil, kerosene, and LPG (see attached template).Monthly15 days after the end of each month
Net operating income transfers to the treasuryNet income of SPC (including those derived from exports of petroleum products), see template.Monthly15 days after the end of each month

Sudan has been in arrears to the Fund since July 1984.

See the 2012 Article IV consultation (IMF Country Report No. 12/299; September 7, 2012) for an elaborate discussion.

Sudan and South Sudan in September 2012 reached the so-called “zero option” agreement whereby Sudan would retain all the external liabilities after the secession of South Sudan, provided that the international community gave firm commitments to the delivery of debt relief within two years. Absent such a commitment, Sudan’s external debt would be apportioned with South Sudan based on a formula to be determined.

See IMF Country Report No. 12/298 for a summary of the 2012 measures.

In the second quarter of 2014, a series of exogenous events—the uncertainty associated with the conflict in South Sudan, the breakdown of correspondent banking relations with international banks, and floods that reduced food supply—and the injection of excess liquidity by the central bank through unsterilized gold purchases depreciated the parallel exchange rate and increased inflation.

Sudan has two official exchange rates. First, there is the “indicative” rate set by the central bank. Second, there is an “official” rate set by the central bank within ± 4 percent of the indicative exchange rate and applied to government transactions. The difference between the “official” and the “indicative” rates is now less than 2 percent. Commercial banks and foreign exchange bureaus are required to set their rates ± 4 percent of the indicative exchange rate. In practice, commercial banks trade at the upper part of that band.

The cost of quasi-fiscal activities, including the purchase of gold at the parallel market exchange rate and the sale of foreign exchange at the official market rate to finance fuel and wheat imports, amounted to 0.7 percent of GDP during the first half of 2014.

To promote interbank activities and reduce banks’ excess reserves, the authorities recently established a “liquidity management fund” to encourage interbank activities. Banks are required to contribute a total of SDG 750 million in proportion to the size of their deposits, of which 60 percent is in the form of government securities and the remainder in cash. Banks can borrow overnight from this fund with a 0.1 percent fee, to cover liquidity shortages.

These indicators should be interpreted with caution because of the limited number of respondents, limited geographical coverage, and standardized assumption on business constraints and information availability.

U.S. sanctions against Sudan also generate additional costs and difficulties for international trade and foreign direct investment.

The WB is currently providing technical assistance to Sudan to improve the targeting, payments and monitoring mechanisms of the social safety net.

The total budgeted amount for social spending in 2014 more than doubled compared to 2013 to SDG 2 billion (or 0.4 percent of GDP).

Zakat is the practice of taxation, prescribed by Islam, imposed upon Muslims based on accumulated wealth and distributed to poor Muslims; the Zakat Fund is not part of the government budget.

These loans were provided by bilateral official creditors and Arab multilateral development institutions.

The External Balance Assessment (EBA-lite) methodology was developed as a successor to the macroeconomic balance approach used under CGER. EBA-lite takes into account a broader set of factors—including policies, cyclical conditions, and global capital market conditions—that may influence the current account and real exchange rate.

Interest and penalties on Sudan’s external debt arrears have been excluded from the current account deficit in this exercise as they do not present actual cash flows.

Trade elasticities, estimated by Tokarick, 2010, were applied: Sudan has an export supply elasticity of 0.57 and an import demand elasticity of 1.23.

These indicators should be interpreted with caution because of the limited number of respondents, limited geographical coverage, and standardized assumption on business constraints and information availability.

Crispolti, V., and others, Assessing Reserve Adequacy for Low-Income Countries, Washington, D.C.: International Monetary Fund, 2013. Optimal reserve level is based on an estimated annual marginal return on capital of 6 percent and a real return on reserve assets of ½ percent for Sudan.

World Bank, Diagnostic Trade Integration Study, 2008 and 2014.

See “Anchoring Growth: The Importance of Productivity-Enhancing Reforms in Emerging Market and Developing Economies,” Staff Discussion Note 13/8.

See “Revitalizing the Sudan Gum Arabic Production and Marketing Project”: http://www.worldbank.org/projects/P110588/revitilizing-sudan-gum-arabic-production-marketing?lang=en.

These liabilities are related to government debts dating back to the 1970s and 1980s and that were not repaid.

These guaranties are issued by the government to finance capital and current spending and may, in some instances, be countersigned by the CBOS.

Oil revenue include royalties, oil income taxes, oil-related profit transfers, income from state equity in the oil sector (including national oil company dividends), oil export taxes, receipts from granting exploration rights, and signature bonuses.

Oil expenditures include government investment in the oil sector and any associated recurrent spending, other current oil spending, and transfers to national oil companies.

As compiled monthly by the Ministry of Finance and National Economy (MOFNE).

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