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Sudan: Selected Issues

Author(s):
International Monetary Fund. Middle East and Central Asia Dept.
Published Date:
December 2017
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Consumer Subsidies1

1. Sudan maintains a number of consumer subsidies which ostensibly are aimed at protecting socially vulnerable groups. These primarily include subsidies on energy (fuel products and electricity) and wheat products.2 However, there is a large body of international experience showing that subsidies are an inefficient policy instrument to protect lower income groups, particularly since most of their benefits accrue to higher income groups who consume higher percentages of these commodities, and through the diversion of limited public resources away from more productive spending. Subsidies distort the allocation of resources as they support over-consumption of subsidized goods and under-investment in their production. Finally, subsidies can also lead to substantial leakages of scarce public resources to neighboring countries if the subsidies result in prices that are lower than in the neighboring countries and goods are smuggled across borders. In Sudan, there is an additional cost arising from subsidies in that—being provided largely as preferential access to foreign currency at an overvalued exchange rate—they are an important factor underlying the reluctance of the authorities to adopt an appropriate exchange rate regime. At end-August 2017, the premium between the official and parallel exchange rates was 216 percent, and moving to a unified and more flexible exchange rate regime would therefore imply either a substantial increase in the budget cost of subsidies or an increase in the retail prices of these commodities.

2. Consumer subsidies in Sudan are delivered through three main channels:

  • Direct budgetary transfers to producers;

  • Tax exemptions to producers and consumers of subsidized commodities; and

  • Preferential access to an overvalued exchange rate by importers of subsidized commodities.

3. The total cost of subsidies in Sudan is high (Table 1). While the direct budgetary cost of consumer subsidies currently appears to be quite low (−0.9 percent of GDP for energy subsidies, and only 0.3 percent of GDP for wheat subsidies), the total cost is very high.3,4 The most recent FAD TA mission found that lost fiscal revenues arising from fuel tax exemptions could be as high as 3.8 percent of GDP.5 Moreover, staff estimates that the fiscal cost of providing access to an overvalued exchange rate for fuel and wheat imports is expected to be close to 5 percent of GDP in 2017.

Table 1.Sudan: Fiscal Cost of Consumer Subsidies (2016–17)
Direct budget transfersTax exemptionsExchange rate subsidy
(Percent of GDP)
Energy products−0.93.814.2
Wheat0.3n/a1.0

Based on 2014 estimates.

Sources: Authorities’ data and staff estimates.

Based on 2014 estimates.

Sources: Authorities’ data and staff estimates.

4. Subsidies are a costly and inefficient policy instrument to protect low income groups (Figure 1).

Figure 1.Sudan: Distribution of Fuel Subsidy by Income Quintile

Source: Reducing Fuel Subsidies and Expanding Social Assistance: The Way Forward, IMF 2012.

  • Assessments by IMF staff in 2012 and 2014 of the fuel subsidy regime in Sudan found that households in the top income quintile receive 68 percent of the benefits from the subsidization of gasoline prices compared with only 1 percent for households in the bottom income quintile.6 In the case of electricity subsidies the top quintile receives 58 percent of the benefits compared with only 2 percent for the lowest quintile. On average, households in the top 2 income quintiles receive around 74 percent of the direct benefits of subsidies on fuel products and 66 percent of the estimated indirect benefits.7 The average monthly benefit for each person in the bottom quintile is only SDG 1, compared for SDG 11 for households in the top quintile. This is consistent with cross country evidence: a recent assessment of the distribution of the benefits arising from consumer subsidies on fuel products in developing countries found that on average the top income quintile received 6 times more benefits from generalized energy subsidies than the bottom quintile.8

  • To date, no assessment has been made of the distributional impact of wheat subsidies, but anecdotal evidence suggests that they are regressive, as wheat is mostly consumed in urban and relatively higher income areas, with poorer rural areas consuming more sorghum. In addition, Sudan is self-sufficient in sorghum production but wheat production is more limited (and hence the need to import wheat). The low domestic wheat prices caused by the subsidy penalize the producers of wheat and close substitutes such as sorghum. Thus, removing the subsidy could have a beneficial impact on farmers and rural incomes.

  • No assessment to date has been done on the distribution of subsidies on pharmaceutical products, but it is likely also to be skewed in favor of the top income quintiles, with specific reference to the urban-rural divide.

5. Removing subsidies on energy and wheat will have an adverse impact on household real income in all segments of the population. Phasing out the subsidies currently provided through access to overvalued foreign exchange will result in an increase in retail prices of at least 216 percent in fuel product prices, subsidized bread prices, and electricity tariffs, and will therefore significantly impact the income of especially those in the lowest income groups.9 The real income loss from the removal of subsidies on fuel products and electricity was estimated by IMF staff in 2014 at, on average, close to 16 percent if both direct and indirect effects are considered. Mirroring the unequal distribution of the subsidy benefits, the income loss will fall more than proportionally on the richer households. However, for the 20 percent of the households in the lowest income distribution, eliminating fuel subsidies without offsetting measures could still imply an income loss of near 9 percent, which they have no room to absorb.10 The increase in wheat prices corresponding to the removal of the subsidy will further reduce the incomes of poor households. The ultimate impact of the removal of subsidies will depend however on mitigating measures, including direct support for the poor and phasing/timing of the removal of the subsidies.

6. Successful subsidy reform will require a comprehensive policy framework. Crosscountry evidence suggests six key ingredients for successful subsidy reform.11 These include an energy sector reform plan, communications strategy, phasing and sequencing of price increases, improving efficiency of state-owned enterprises, targeted mitigating measures, and depoliticizing price setting of so-called strategic commodities.

7. In Sudan, the public information campaign should be launched as early as possible following a decision to phase out subsidies. This campaign should comprise wide-ranging consultations with all stakeholders, and should inform the public about the high costs and unequal distribution of the subsidy benefits. It should clearly note measures that will be taken to protect lower income groups, as well as the government’s intention to allocate a large part of the budgetary savings realized through subsidy reforms to other public expenditures that benefit growth and human capital formation, such as education and health expenditures. To further secure support for this policy, the government should also adopt a rules-based mechanism for setting prices for these strategic commodities. Publishing the key parameters of the pricing formulas for all previously subsidized commodities can help to demonstrate the dependence of domestic retail prices on movements in international prices. Support for automatic pricing mechanisms can also be enhanced by adoption of smoothing mechanisms to avoid sharp adjustment of domestic prices in response to global price shocks. Some countries have experienced reversals of subsidy reforms when international price developments have required substantial adjustments in domestic retail prices. Adoption of such smoothing mechanisms though will imply volatility in government revenue since suppliers will always receive prices reflecting actual import and distribution costs.

8. Cash transfers could be used to mitigate the impact of fuel subsidy removal on the lowest income groups. In the case of the removal of subsidies on fuel products, it is estimated that the cost of compensating the lowest income groups could be achieved at a cost of less than 1 percent of GDP a year. The median loss of consumption would be about SDG 14 per capita per month for the poorest 50 percent of the population, which could be offset at a cost of 0.8 percent of GDP per annum. This amount is significantly less than the estimated positive impact of exchange rate liberalization on budgetary revenues. For the removal of all subsidies, around 2 percent of GDP could be allocated to protect the lowest income groups, through raising the current cash grant and increasing its coverage. Sudan has some experience with social safety net measures: currently 750,000 households receive a monthly cash transfer from the budget of SDG200 per household, while around 1 million households receive support from the Zakat Chamber.12 Support though will have to be scaled-up significantly as the number of people considered to be poor was estimated at 15.4 million in 2009.13 The authorities could also complement the direct cash transfer program with introduction of a productive safety net, such as a public works program. Such a program would not only address concerns regarding dependency, but could be structured to support higher economic growth. The authorities could use proxy means testing to help determine eligibility for cash compensation. In the absence of information on the income of individual households, this approach helps to select qualifying households by using more readily-observed indicators such as location and quality of dwelling, demographic structure and ownership of durable goods.

References

    Central Bureau of Statistics2010Poverty in Northern Sudan: Estimates from the National Baseline Household Survey, 2009The Central Bureau of Statistics of the Republic of SudanKhartoumSeptember2010.

    DavidCoadyValentinaFlaminiand LouisSears2015The Unequal Benefits of Fuel Subsidies Revisited: Evidence for Developing CountriesIMF Working Paper No. 15/250 (Washington: International Monetary Fund).

    International Monetary Fund2013Energy Subsidy Reform: Lessons and Implications” edited by BenClementsDavidCoadyStefaniaFabrizioSanjeevGuptaTrevorAlleyne and CarloSdralevich (Washington).

Prepared by Lodewyk Erasmus (MCD).

There are subsidies on pharmaceutical products, but staff have no data on their size or distribution.

Currently net fuel subsidies are negative 1.0 percent of GDP reflecting that domestic fuel prices are higher than the cost of providing oil to the state-owned refinery at the official exchange rate, and the way in which fuel-related public expenditure is recorded in the budget. Specifically, all price adjustments after 2010 are recorded as revenues collected in a stabilization fund while the difference between pre-2011 retail prices and actual cost of fuel products is recorded as a subsidy.

Current limited direct cost of energy subsidies stems from a recent increase in fuel prices in Sudan of on average (40 percent) and the fact that the government had previously not passed to consumers any of the decline in international oil prices over the past two years.

This estimate is likely to have changed in view of movements in international oil prices since then.

These assessments were based on the 2009 National Baseline Household Survey.

Impact of fuel subsidies on electricity, transportation and food.

This study also found that the concentration of subsidy benefits in the hands of the top income groups is even more pronounced for gasoline and LPG, where the top income quintile receives 27 and 12 times that of the bottom quintile, respectively (Coady, Flamini & Sears: The Unequal Benefits of Fuel Subsidies Revisited: Evidence for Developing Countries, WP/15/250).

These increases would be required just to eliminate the subsidy conferred via the overvalued exchange rate used to import these commodities. Further increases would be required to address the subsidies conferred through tax exemptions and special tax rates.

According to the 2009 National Baseline Household Survey, almost 50 percent of the population was below the poverty line.

Energy Subsidy Reform: Lessons and Implications, IMF, 2013.

The Zakat Chamber provides support to qualifying households with contributions from Muslim households who have a religious obligation to donate to charitable causes a fortieth of wealth over and above essential needs.

Sudan: National Household Baseline Survey.

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