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Statement by Ms. Kapwepwe, Executive Director for Sudan, and Ms. Serero, Advisor to Executive Director for Sudan, December 3, 2014

Author(s):
International Monetary Fund. Middle East and Central Asia Dept.
Published Date:
December 2014
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The Sudanese economy continues to grapple with the economic shock brought about by the secession of South Sudan in 2011; and the resultant significant contraction in public finances, creating a massive fiscal imbalance and significantly reducing their capacity in international payments. In addition, the challenging domestic and regional political environment; a huge debt burden; and the protracted US and other international economic sanctions, make it even more difficult for Sudan to recover from the effects of loss of oil revenues. The authorities are implementing a Staff Monitored Program (SMP) which serves to anchor the macroeconomic framework, support their reform program, rebuild donor and investor confidence and lead to macroeconomic stability.

Sudan is one of the remaining HIPC eligible countries, which is yet to receive debt relief. The authorities anticipate that the SMP would support their efforts to fulfill conditions required to reach a decision point under the HIPC initiative, though they are greatly disappointed with the lack of progress by the international community in granting them debt relief, as part of the ‘Zero Option’ Agreement.

Recent Economic Developments

Inflation has dropped drastically from an average of 45 percent between May and August, to an annual rate of 39 percent in September and 28 percent in October. The significant decline in the September inflation was largely driven by the dissipation of the effects of fuel price increases a year ago. In October, the drop in inflation is attributed to an appreciation of the parallel exchange rate, and the increased foreign exchange inflows on the backdrop of higher exports of livestock and the receipt of oil transit fees from South Sudan.

Performance under the Program

The program remains on track, with all end-June quantitative targets met, while the indicative target on reserve money was missed due to excess liquidity arising from purchases of gold by the central bank. Structural benchmarks for end September are on track, and as part of the commitment to eventually align the official and the parallel exchange rate, the authorities have devalued the official rate by up to 3 percent since September, 2014. In addition, the authorities have remained committed to making payments to the Fund and minimizing non-concessional borrowing.

The Near to Medium Term Outlook

The agricultural and gold sectors are expected to continue to boom until year end, leading to a stronger recovery in the export sector. In addition, a good harvest is expected to continue to ease pressure on food prices, and drive the overall inflation further down, while the parallel exchange rate is expected to decrease further and stabilize at its normal rate The budget deficit is expected to decline from 2.3 percent of GDP in 2013 to 1 percent in 2014, in tandem with the reduction in the non-oil primary deficit, and maintain the reduction in government borrowing from the central bank. These positive developments are expected to continue in 2015, pushing growth slightly up to 3.5 percent and inflation further down to about 20 percent.

Growth is expected to continue rising gradually from about 4 percent in 2016 to nearly 5 percent in 2019 due to a combination of; retained momentum in the agriculture, mining and oil sectors and implementation of the adjustment program. However, this positive prognosis may be reversed by challenges in security and political environment both, domestically and in the region.

Fiscal Policy

Despite the improved fiscal performance in the first half of 2014, the fiscal space remains tight and macroeconomic imbalances continue. However, the authorities remain committed to applying concerted efforts, critical to restoration of fiscal stability. In this regard, the authorities will adhere to a fiscal program that promotes fiscal consolidation, mobilizes additional revenue and eases the debt burden. The program aims to narrow the budget deficit by reining in fuel subsidies, by way of gradual elimination, while at the same time, containing the wage bill. This would free up some resources to be used in increasing social sector spending in order to enhance social safety nets to protect the vulnerable and support public investment to reinvigorate inclusive economic growth and create employment.

To boost public revenues, the authorities will strengthen the tax policy and administration, and rationalize tax exemptions, with the view to improve revenue collections. This process would be guided by the recently completed recommendations of the Tax and Customs Committee Review, and would be taken into account during the formulation of the 2015 public budget. In addition, the rise in fuel prices implemented through the September 2013 reforms package will make a positive contribution to domestic revenue mobilization efforts.

The authorities are also implementing public finance management reforms which aim to improve budget classification and fiscal reporting, and develop a medium term fiscal framework to enhance budget planning and preparation. Overall, the reforms would facilitate planning, execution and monitoring of the budget, and contribute to the envisaged reduction in the overall fiscal balance.

Monetary Policy and the Exchange Rate

Despite the dramatic reductions experienced in recent months, inflation remains too high. Therefore, in line with advice from staff, the authorities have committed to a tight policy stance to mitigate any buildup of inflationary pressures. They also aim to restrict the monetization of the fiscal deficit to program targets, and mop excess liquidity arising from gold purchases by the central bank at the parallel exchange rate, and substitute reserve money growth for the official exchange rate, as a nominal anchor.

The fiscal shock and other underlying economic fundamentals necessitated the adoption of some temporary relief measures, including the subsidization of imports of basic necessities such as wheat, fuel and medical supplies. This development arose from the need to protect the poor and the most vulnerable.

The authorities agree with Staff on the need to bridge the gap between the official and the parallel rate and eventually move to a flexible exchange regime. However, the authorities are mindful of the social sensitivities around hikes in the price some imported goods. Experience has also shown that a devaluation of the official rate could lead to further depreciation of the parallel exchange rate. Under these circumstances, the authorities are more comfortable with a cautious and gradual closure of the gap between the two rates, at a pace commensurate with conducive domestic economic conditions.

Structural Reforms

The authorities are implementing a number of structural reforms to help stimulate the economy. Reforms to the business climate are expected to promote private sector investment, job creation and growth of the economy. In addition, banking sector reforms will improve financial intermediation and access to commercial bank lending by the private sector. With respect to poverty alleviation, the authorities are implementing policies included in the Interim Poverty Reduction Strategy Paper, while the preparation of a full Poverty Reduction Strategy Paper is in progress. The authorities will continue to implement reforms in areas of human capital development in order to improve labor productivity.

Public Debt and Debt Relief

Sudan’s public debt levels have reached unsustainable levels, and the debt burden continues to rise with the accumulation of arrears and the need for credit to fund development expenditure and the provision of social safety nets. Under the SMP, the authorities have committed to a limited non-concessional external borrowing, though prospects for concessional borrowing remain low, and access to credit remains tight. As extensively discussed in our previous Buff Statements, the high debt burden is exerting a toll on government and its citizenry. Therefore, the need for debt relief in Sudan remains urgent and critical to restore macroeconomic stability.

The authorities have expressed dissatisfaction with the fact that the original deadline for the ‘Zero Option’ elapsed without debt relief for Sudan. It is regrettable that the 14 satisfactory SMPs, the implementation of policies of the Interim Poverty Reduction Strategy (I-PRSP), external debt reconciliation, and adherence to repayment to the Fund, have all failed to advance the process of achieving debt relief. Nevertheless, the authorities have agreed with South Sudan, to extend the deadline for the ‘Zero Option’ to September 2016, in part, to allow time for South Sudan to address the ongoing internal challenges. Both countries will step up efforts in outreach to Sudan’s creditors.

Article VIII Proposed Decision

Staff has determined that some aspects of Sudan’s exchange rate policy are subject to approval under Article VIII, Sections 2(a) and 3(i) of the Fund’s Articles of Agreement. Sudan is still suffering from the debilitating effects of oil revenue loss, due to the secession of South Sudan. As a result, the central bank still faces shortages of foreign exchange, hence the capacity to make international repayments remains limited. Therefore, the short term measures implemented to address the balance of payments problems are still relevant.

To this effect, my Sudanese authorities request the support of the Executive Board in approving the ‘Proposed Decision’ on page 26 of the Staff Report. This would allow them the necessary time to devise an appropriate strategy to phase out the interventions.

Conclusion

The authorities broadly agree with staff that a combination of tight monetary and fiscal policies, and the move towards a single flexible exchange rate, could go a long way in correcting the prevailing macroeconomic imbalances. At the same time, the authorities recognize that reforms to the exchange rate policy should be undertaken within the context of a framework that simultaneously addresses reforms to both fiscal and monetary policies. To this end, they are committed to implementing prudential macroeconomic policies and structural reforms to foster macroeconomic stability, sustain the growth momentum and reduce poverty.

The authorities are also committed to normalize relations with the development partners and expect to be accorded debt relief as other countries which have benefited from the HIPC initiative.

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