Sudan
Recent Economic Developments
Author: International Monetary Fund
Publication Date:
28 Feb 1995
eISBN:
9781451833652
Language:
English
Keywords:
ISCR; CR; U.S. dollar; exchange rate; commercial bank; broad money; debt service; money stock; export proceeds; private sector; banking system; balance of payments
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This paper reviews economic developments in Sudan during 1990–94. In 1993 and 1994, the authorities decided to redress the economic imbalances by adopting a more comprehensive approach aimed at substantially lowering the rate of inflation through tighter fiscal and monetary restraint along with a more flexible exchange rate policy. Government expenditure was contained more tightly, particularly through cuts in investment outlays: the primary deficit and government recourse to domestic bank financing fell significantly in 1993/94. However, the fiscal and monetary policies put in place failed to lower inflation below 100 percent in 1992/93 and 1993/94.

Abstract

This paper reviews economic developments in Sudan during 1990–94. In 1993 and 1994, the authorities decided to redress the economic imbalances by adopting a more comprehensive approach aimed at substantially lowering the rate of inflation through tighter fiscal and monetary restraint along with a more flexible exchange rate policy. Government expenditure was contained more tightly, particularly through cuts in investment outlays: the primary deficit and government recourse to domestic bank financing fell significantly in 1993/94. However, the fiscal and monetary policies put in place failed to lower inflation below 100 percent in 1992/93 and 1993/94.

Sudan: Basic Data

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Sources: Staff estimates and projections based on information provided by the Sudanese authorities.

Based on Social Indicators of Development, 1993, The World Bank.

Interest on an accrual basis.

I. Introduction and Summary

Sudan, the largest country in Africa, has considerable natural resources, particularly fertile land. Since the early 1980s, however, Sudan has been plagued by inadequate growth, high inflation, and severe balance of payments pressures. A large proportion of the population lives in poverty, and literacy levels are low. Fiscal policy has been weak, while monetary policy has been geared toward accommodating budgetary imbalances. The exchange rate has been overvalued and protected through restrictions. As a result, the economy has turned increasingly inward, with the share of exports in GDP now one of the lowest among developing countries. At the same time, Sudan’s foreign debt obligations have far outstripped its ability to pay. External payment arrears, including substantial amounts owed to the Fund, have mounted with the result that relations with the majority of external creditors have been severely impaired.

Several factors accounted for the decline in economic performance. Agricultural production, the mainstay of the economy, was stifled by government intervention in production and marketing. In pursuit of food self-sufficiency, the Government diverted arable land from more profitable cash crops, such as cotton, to the cultivation of grains. An uneven pattern of rainfall produced large swings in output, including a contraction in 1989/90 (fiscal year beginning in July), followed by a major upswing in 1991/92. On the fiscal front, the inadequate revenue base, coupled with weak expenditure controls resulted in large fiscal deficits that were financed by credit from the banking system. As a result, the rate of inflation accelerated from about 53 percent in 1989/90 to over 100 percent in the next two years. The prolonged conflict in the south of the country has been a drain on the economy. The poor export performance and increased demand for imports resulted in a widening of the external current account deficit to over 30 percent of GDP in 1991/92; external debt service obligations have been financed almost entirely by a further accumulation of arrears.

In an effort to arrest the rapidly deteriorating economic situation, from 1991 onward the Government decided to move away from a long tradition of interventionist policies and to assign a greater role to the private sector and the market mechanism. Marketing arrangements in agriculture were liberalized and state enterprises were privatized. This redirection of policies took place at a time when the economy was buffeted by adverse terms of trade movements and a decline in foreign assistance. Because of an attempt to protect consumption levels, the structural reform measures at first were not accompanied by adequate supporting policies in the fiscal, monetary, and exchange rate areas, with the result that the rate of inflation remained well over 100 percent during this period.

Mindful that a partial approach to economic reform was not yielding the desired results, in 1993 and 1994 the authorities decided to redress the economic imbalances by adopting a more comprehensive approach aimed at substantially lowering the rate of inflation through tighter fiscal and monetary restraint along with a more flexible exchange rate policy. Government expenditure was contained more tightly, particularly through cuts in investment outlays: the primary deficit and government recourse to domestic bank financing fell significantly in 1993/94. However, the fiscal and monetary policies put in place failed to lower inflation below 100 percent in 1992/93 and 1993/94. Steps were taken to liberalize the exchange system and bring the exchange rate closer to market levels, but these reforms were not sustained under pressure of ongoing high levels of inflation.

The redirection of economic policies, in conjunction with the favorable impact of generally good rainfall, has begun to show results. Sudan’s economic growth record has improved significantly: the rate of growth is estimated broadly at about 8 percent on average over the three-year period that began in July 1991. Exports also have turned around with a sharp increase registered in 1993/94. Inflation, however, continued above 100 percent a year through October 1994.

The authorities’ adjustment and reform strategy was reinforced in 1994 in an effort to adopt a comprehensive and coherent approach toward strengthening the balance of payments and bringing down inflation. Fiscal policy was tightened: government recourse to bank borrowing is expected to be almost eliminated for 1994/95. Efforts at achieving a unified market-determined exchange rate also resumed and were intensified. Cooperation with the Fund improved, including through increased payments. However, financial assistance from foreign donors and creditors has not resumed on any significant scale.

This paper provides the background information to the staff report for the 1994 Article IV consultation (EBS/94/245, 12/20/94). Developments in the real sector are discussed in Chapter II, followed by fiscal, monetary, and external developments in Chapters III, IV, and V, respectively. The appendices contain a description and assessment of the present tax system, banking practices, and the exchange and trade system, as well as the statistical tables.

II. Developments in the Real Sector

1. Overview

Although Sudan is the largest country in Africa, with an area covering 2.5 million square kilometers, it is also one of the poorest with a per capita income of about US$210 a year. 1/ Population is estimated at about 27 million and is growing at a rate of approximately 2.7 percent a year. The economy is based largely on agriculture, which accounts for about one third of the country’s output. Agricultural production is concentrated in the central savannah zone. The northern third of Sudan is arid desert, but the areas in the south and southeast consist of tropical rain forests with large untapped potential and swampland. The country is traversed by the Blue and White Nile rivers, which provide ample water to a vast region; some 4 million feddans are under irrigation. 1/ Cropped areas, including those in the irrigated and rainfed sectors, amount to only 20 million feddans (3 percent of total area) out of a total potential arable land area of 80 million (12 percent of total area).

The growth of the economy over the past five years has been greatly influenced by variations in weather, which have had direct consequences for agricultural output and indirect effects on the manufacturing and services sectors (Chart 1). For example, the 11 percent recovery of output in 1991/92 (fiscal year beginning July 1) was precipitated by abundant rainfall, after the persistent drought that resulted in negative or little growth in the previous two years. The slowdown in economic growth in 1992/93 and 1993/94 was partly attributed to poor rainfall, but other important factors that contributed to this slowdown included, inter alia, pest infestation, plant diseases, shortages of essential inputs, and delays in credit availability at crucial stages of planting and harvesting. Recently, however, these adverse developments have been offset by the benefits derived from a redirection of economic policies toward privatization and improved pricing structure, which has raised the level of efficiency and production incentives.

Chart 1
Chart 1

SUDAN REAL SECTOR INDICATORS, 1981 - 94

(Fiscal Years Ending in June)

Citation: IMF Staff Country Reports 1995, 012; 10.5089/9781451833652.002.A001

Sources: Staff estimates based on information provided by the Sudanese authorities.

After rising by 7.6 percent in 1992/93, real GDP continued to grow by 5.6 percent in 1993/94, largely on the strength of advances in agriculture and the services sectors (Table 1). During this period the industrial sector registered only marginal gains, reflecting the shortages of foreign exchange and essential inputs for manufacturing. A summary of the noteworthy developments in each of the maj or sectors follows.

Table 1

Sudan: Origin of Gross Domestic Product, 1989/90-1993/94

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Sources: Ministry of Economics, Planning, and Investment; and Fund staff estimates.

2. Agriculture

Agriculture accounted for 37 percent of total output in 1993/94, over four fifths of exports, and about two thirds of employment. Following a 14 percent increase in the previous year, agricultural output rose by 10 percent in 1993/94. This outcome stemmed mainly from a 23 percent increase in livestock production by way of increases in the number and quality of herds and expanded processing of meat. By contrast, output from crops fell moderately, reflecting the adverse factors discussed above. Forestry continued to show a substantial gain of about 20 percent from the extraction of gum arabic.

a. Crop production

Sudan’s crop production is broadly divided into the irrigated and rainfed sectors; the latter is further split into a mechanized and a traditional subsector. Roughly two thirds of Sudan’s crop output comes from areas under irrigation, which produce mainly sorghum and wheat, followed by groundnuts, millet, fruits, and vegetables. The more important crops in the rainfed mechanized subsector are sorghum, millet, and sesame; those in the traditional rainfed subsector include sorghum, millet, groundnuts, sesame, fruits, and vegetables.

(1) Irrigated sector

Irrigated agricultural schemes cover approximately one fifth of the total area under cultivation. Overall performance of this sector turned from a decline during 1992/93 to an increase of 15 percent in 1993/94, resulting from larger than average yields (in particular, groundnuts), better farm maintenance and ground preparation, intensified spraying against pest infestation, and the application of superior varieties of seeds (Table 1). In the case of wheat, a larger area under cultivation accounted for significant gains in output, reflecting continued government emphasis on achieving greater self-sufficiency in foodgrains.

Cotton still remains the major cash crop. Cotton output fell by 13 percent in 1993/94, extending the long declining trend to less than one third of the production in the mid-1980s (Table 2). Similarly, planted areas declined to only 292,000 feddans in 1993/94, or less than half the acreage devoted to cotton in the mid-1980s. 1/ More recently, in 1993/94 the decline in harvested areas by almost one fifth was mainly because of a drop in export prices. The effects of this fall in output were also manifested in a proportionate drop in the volume of ginned cotton lint, both in 1993/94 and over the previous five years (Statistical Appendix Tables 12 and 13).

Table 2

Sudan: Selected Agricultural Crops, Average 1983/84-1987/88; 1992/93-1993/94 1/

(Area in thousands of feddans: production in thousands of metric tons: and yield in kilograms per feddan)

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Source: Ministry of Agriculture.

Excludes fruits and vegetables that account for a large portion of agricultural output. For a better indication of total output by subsectors, see Table 1.

Annual average for period 1983/84-1987/88.

The quality of Sudanese cotton has deteriorated in recent years due to high levels of whitefly damage, which makes the cotton difficult to process. The Acala and Barakat varieties, which are produced in more than two thirds of the cultivated areas for cotton, have been the hardest hit. Until 1992/93, there had been a marked shift toward planting the less valuable Shambat “B” variety, which appeared to have a natural resistance to the traditional diseases. However, difficulties in international marketing of this variety have forced a reduction in cultivation of Shambat “B” from 89,000 bales in 1992/93 to only 37,000 bales in 1993/94.

With respect to noncotton crops in the irrigated sector, groundnut production rose by 8 percent to 254,000 tons in 1993/94, entirely because of improvements in yield (Statistical Appendix Table 14). Output of groundnuts was also affected by the shift in cultivation to the more profitable varieties of grains. In view of the high free market prices, areas devoted to wheat rose by 10 percent in 1993/94, with a concomitant rise in output to 475,000 tons in 1993/94. The high profitability of wheat was also reflected in the threefold increase in procurement prices to LSd 38,500 per ton (Statistical Appendix 16). Meanwhile, planted areas of sorghum in the irrigated schemes fell by one quarter in 1993/94; however, this drop in acreage for sorghum was partly compensated by increases in yields, stemming from the introduction of hybrid seeds.

(2) Rainfed sectors

Output trends in the rainfed crop sector have moved according to the weather patterns in the different areas of Sudan. After increasing by some 30 percent in 1992/93, the combined output of the rainfed sectors declined by about one fifth in 1993/94 because of the delays in the rains during the planting season (Table 1 and Statistical Appendix Table 14).

Farms in the rainfed mechanized subsector are owned and managed exclusively by private entities. The average farm size is about 1,000 feddans, but some individual tracts extend to as much as 200,000-300,000 feddans. Production is heavily dominated by sorghum, which accounted for most of the decline in output last year. In 1993/94 sorghum output was cut by half due to a reduction in planted areas (from 10 million feddans to 8 million) and a combination of other adverse developments. First, rainfall was far from adequate and did not arrive in time for the start of the planting season. Second, harvesting and threshing were delayed due to shortages in fuel and other essential inputs. Finally, acreage devoted to sorghum was cut back substantially because the depressed market prices, which barely covered the higher costs of harvesting, transporting, and marketing this crop.

In contrast to the sharp decline in the mechanized subsector, the traditional rainfed subsector fared better in 1993/94, as output increased by 11 percent. Production of cereals such as sorghum and millet fell as a result of the poor rainfall and shortages of essential inputs. On the other hand, despite the reduction in yields associated with inadequate rainfall and shortages of inputs, groundnut production rose by some 20 percent due to the sharp increase in cultivated areas by over 50 percent.

b. Livestock

Livestock production, which accounted for over 40 percent of agriculture and roughly one fifth of total exports, rose by 23 percent in 1993/94 and accounted for 3.4 percentage points of the 5.6 percent growth in GDP last year. Marked gains were registered in processed meat and milk from cattle and sheep owing to better efficiency and increased private sector incentives. The underlying reasons for this favorable outcome include the following: (a) livestock husbandry was integrated into the irrigated and mechanized farming schemes; (b) rotational grazing was adopted; (c) more accessible credit facilities were provided by the Agricultural Bank of Sudan; (d) high international market prices afforded higher quality feed and veterinary care; (e) as regards herds, higher birth and lower mortality rates, and a greater percentage of breeding females markedly increased their quality and size; and (f) high market prices of processed meat encouraged traditional Sudanese herdsmen to shift their wealth from the live herd to financial assets through the sale of processed meat, which is evidenced by the increase in slaughter rates from about 8 percent before 1992/93 to 11 percent in 1993/94.

c. Forestry

Forestry, which accounts for less than 10 percent of agricultural output, rose by nearly 20 percent in 1993/94 owing to the accelerated extraction of gum arable from the acacia (Hishab and Talha) trees in the western regions of Darfur and Kordofan. Gum arable is one of Sudan’s more important cash crops, accounting for an average of roughly 15 percent of total exports. Apart from Sudan, only a few other countries in the “gum belt,” such as Senegal, Mali, Chad, and Nigeria produce gum arable, which explains the continued high level of international prices for this product. Moreover, competition from other countries producing chemical substitutes for gum arable have not fared well in international markets because of the natural aversion to synthetics in favor of natural derivatives.

The increased production of gum arable in 1993/94, was due mainly to adequate rainfall in the key producing regions and a virtual doubling of international prices. Part of the increase last year was also attributed to the decentralization of marketing schemes for the sale of gum arabic. whereas previously sales were concentrated only in the central part of Sudan, in 1993/94 the Gum Arabic Company started a new policy of dispatching agents to hold regular auctions at the major producing areas throughout the country.

Excluding gum arabic, forestry products comprise mainly charcoal, fuel wood, as well as some lesser products such as sawn timber, bamboo, and railroad ties. Because of the continued hostilities in the south where most of the tropical rain forests are located, not much expansion in logging and lumber processing has taken place. The marginal increases in output of this sector reflect mainly the shift by the general public to charcoal and wood to meet energy needs in the wake of recent upward adjustments of electricity tariffs.

3. Industrial and services sectors

Sudan’s industrial sector, which accounts on average for about 17 percent of GDP, is divided into four main categories. Manufacturing is the most important, accounting for over one half of industry; its activities include processing of foodstuffs, beverages, consumer goods (textiles, cigarettes, shoes, and tires), and intermediate goods (cement and petroleum products). Another 30 percent comes from construction of public buildings and private dwellings. Electricity and water account for less than 15 percent; mining and quarrying represent only a negligible proportion of industrial activity.

Following a 15 percent rise in 1992/93, output of the industrial sector stagnated in 1993/94, as the large decline in activity of the manufacturing sector was offset by the increases in construction. The growth of construction doubled to 13 percent in 1993/94, owing to recent efforts at privatization of state-controlled enterprises and the subsequent upgrading of their facilities. In effect, the sale of many state enterprises was accompanied by stipulations that investors, mainly foreigners from within the region, provide fresh capital for the rehabilitation of these newly acquired entities. Also, the decentralization in 1993/94 gave impetus to increased construction activity, such as installation of new wells and public buildings, in the recently expanded number of provinces.

Manufacturing activity weakened sharply, registering a decline of 7 percent in 1993/94. This outcome was due to low capacity utilization of factories related to shortages of foreign exchange and spare parts for the processing of intermediate goods, inadequate supply of water and electricity, and deficiencies in the road transportation network. The decline was most evident in processed foodstuffs, particularly flour, sugar, and vegetable oils, but some modest gains were registered in the production of cigarettes, textiles, shoes, and cement (Statistical Appendix Table 19). Output of the mining and quarrying subsectors, which accounts for only a small portion of the industrial sector activity, showed virtually no change in 1993/94.

The services sector comprises government and other services, which include transport and communications, commerce and hotels, finance and real estate, and personal services. Output of the services sector, which accounts for roughly one half of GDP, rose by almost 5 percent and contributed 2 percent of the value added in 1993/94. Most of the increase derived from commerce and transport, which rose in line with the increases in agricultural and manufacturing output.

4. Petroleum

Petroleum reserves that are estimated at 250-300 million barrels (equivalent to roughly 17 years of consumption at current levels) had been discovered by the Chevron Corporation in the southeastern part of the country, but development and further exploration activity was interrupted after 1984 because of the continuing conflict in the south. More recently, however, a Canadian entity (the Arakis Energy Corporation) has resumed exploration activity and has located some 54 oil wells in the southwest area of the country. Thus far, the drilling of 5 new oil wells has yielded a combined output of 15,300 barrels per day (bpd), and an additional 10 wells are expected to be in operation by 1995/96. By that time, it is estimated that the combined yield from these fields will reach 65,000 bpd in the initial stages, which should partly alleviate the severe domestic shortages of fuel and raise capacity utilization at the national refinery. 1/ The Arakis Corporation is also taking the lead in preparing the construction of a 1,500 km pipeline from these oil fields to Port Sudan on the Red Sea coast. Construction of the pipeline, which is expected to be undertaken by international contractors from Canada, Europe, and the Far East, should take approximately 12-15 months at an estimated cost of about US$300 million.

At present, Sudan’s only refining facility with a capacity of over 20,000 bpd is located in Port Sudan. However, the refinery has been operating at less than 20,000 bpd, which satisfies only about one fifth of Sudan’s energy needs.2/ Consumption of petroleum, which averages roughly 1.5-2.0 million tons a year, varies widely depending on the availability of foreign exchange and the willingness of suppliers to provide credit. Most of the demand is met through imports of crude oil and refined petroleum products, given the limited capacity of the Port Sudan refinery. In 1993/94, imports of crude oil and petroleum products (gasoline, gasoil, diesel, aviation gas, LPG) amounted to 1 million tons, and almost 500,000 tons, respectively.

5. Prices, employment, and wages 3/

The year-average rate of inflation, as measured by the “medium income” consumer price index (CPI), accelerated from 103 percent in 1992/93 to 119 percent in 1993/94 (Table 3). The recent privatization of many state enterprises and the associated liberalization of their previously controlled prices in conjunction with expansionary fiscal and monetary policies in 1992/93, had the initial effect of raising the 12-month rate of inflation to a peak of 143 percent in May 1994. However, data through October 1994 indicated that this rate slowed to about 108 percent, mainly as a result of the tight fiscal program and the restrained monetary and credit policies. Other factors that contributed to the recent decline were the healthy growth of output, particularly foodstuffs, which constitute a large component of the CPI. 1/

Table 3

Sudan: Consumer Price Index, 1989/90–October 1994 1/

(Index, 1990 = 100)

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Sources: Statistics Department of the Ministry of Finance; and Statistical Appendix Table 20.

Middle income index covering greater Khartoum area.

For 1989/90-1994/95, the annual data shown are period averages.

The acceleration of the inflation rate in 1993/94 reflected the initial impact of the liberalization of price controls on consumer goods. In 1992/93 prices of essential commodities were suppressed through the actions of unofficial but government-sanctioned price watch committees; prices were also kept artificially low through the overvalued exchange rate. Following broad liberalization measures in 1993/94, price controls for most of the consumer goods have been liberalized, except bread and sugar, which continue to be viewed as strategic commodities and therefore remain government monopolies. In the case of bread, low-income families are issued subsidy or ration cards that entitle the bearer to purchase a specified amount of bread per month at the subsidized price of LSd 10 per loaf. Bread needs above the specified amount must be purchased at the free market price, which is almost double the subsidized price. The same principle applies to purchases of sugar, allowing lower-income families to buy specified amounts at subsidized prices. However, despite the subsidies, bread and sugar continue to be profitable and contribute net revenues to the budget. Prices for public utilities and for petroleum products have been raised periodically to reflect free market prices (see public finance chapter).

With respect to the system of procurement prices, many state-controlled agricultural enterprises were privatized in July 1993. In effect, majority ownership of most production and marketing corporations dealing with noncotton agricultural commodities have been transferred to private entities, except for the government sugar refining companies and the Gum Arabic Company. As a result, the procurement prices for these agricultural commodities essentially reflect those prevailing in the free market and are determined by periodic auctions held at regular intervals throughout the country. 2/

There are no firm data on employment and wage developments. Employment estimates have varied widely, but the total labor force is placed at roughly seven million, including those migratory and unskilled laborers in the private sector. Of the estimated 650,000 in public or government service, about one third are employed by public enterprises. Regarding wages and salaries, there has been an erosion of real wages, given the sharp depreciations in the exchange rate and the absence of salary adjustments in the recent past. The salary scales in the civil service are broadly comparable to those in the public corporations, except that the latter provide additional compensation by way of special allowances such as for transportation and housing, bonuses, and overtime. Generally, wages of the private sector are about twice those prevailing in the public sector for comparable responsibilities.

6. Privatization

Since the ratification of the Privatization of State Corporations Act in August 1992, the Government has pursued an active policy of divestiture of public corporations. The Act envisaged the sale of 190 public corporations (about 80 percent of all state corporations, including individual enterprises within holding companies) to the general public. As of the end of 1993/94, 25 public corporations active in the sectors of industry, hotels and tourism, agriculture, banks, telecommunications, and energy had already been sold. Most notable was the sale in February 1994 of the Public Telecommunications Corporation. More recently, in October 1994, the Khartoum Tannery was purchased by a group of private investors from the region, while the Sudan Cotton Company was sold to the (privately owned) Farmers Bank. Another 18 corporations remain in the active pipeline for privatization, of which eight were in the process of being sold as of October 1994.

Under Sudan’s current guidelines, privatization is deemed to be achieved when the ownership of more than 50 percent of the shares of an enterprise is transferred to entities other than the Government or parastatal bodies, and when the private sector owners are in a position to determine company policy. Thus far, virtually all privatizations have been effected through the sale of 100 percent of the assets of the enterprise to a single investor or group. The only three exceptions were a tannery, a hotel, and a weaving plant, where the sales were made possible by debt-equity swaps with a foreign conglomerate (Daewoo of South Korea).

The move to privatization of most state agricultural corporations has also had a profound impact on production, particularly in the irrigated and mechanized sectors. Until recently, most irrigated schemes covering cotton, sorghum, wheat, and groundnuts were managed entirely by the respective public corporations. These state entities determined cropping patterns, provided basic services (e.g., land preparation, spraying of insecticides, water, infrastructure maintenance) and inputs (machinery, seeds, fertilizer), and extended credit financing at various stages of production. The tenant farmer provided labor for cultivation and harvesting. The harvested crops were sold to the agricultural corporations at preannounced procurement prices, which took account of the land and water charges to be paid to the Ministry of Irrigation (Statistical Appendix Table 15). 1/

However, since 1992/93 most of the public agricultural corporations governing the irrigated schemes have been privatized, essentially passing management and control to the tenant farmers. For example, the majority of the shares of the Cotton Marketing Corporation and the Oilseeds Corporation were sold to the farmers in July 1993; the decisions regarding cropping patterns and production were henceforth determined jointly by national committees composed of farmers as well as representatives of the Government. As regards crop financing, the Sudanese Commercial Bank—the public entity responsible for extending credit financing—was also privatized and renamed Farmers Bank. The previous system of predetermined producer prices was replaced by a new pricing system that reflected free market prices based on prevailing realized export prices less commissions. As a result, actual procurement prices for cotton rose sevenfold to about LSd 30-42,000 per kantar in 1993/94, compared with only LSd 4,000-6,000 per kantar in 1992/93 2/ (Statistical Appendix Table 16). The same pricing structure was adopted for the other major agricultural commodities, which are now determined at periodic auctions held at various intervals throughout the country. In the cases of gum arabic and wheat, procurement prices in 1993/94 rose by over sixfold and threefold, respectively, as a result of the liberalization of procurement prices.

III. Public Finance

1. Structure and institutional setting

The government sector in Sudan consists of the Central Government and local (state) governments at the provincial and regional levels. Comprehensive and reliable information concerning the financial operations of the regional or provincial governments is not available. However, in recent years the role of local authorities has expanded considerably to include a significant portion of total government expenditure in community and social services. The local authorities do not have access to bank borrowing; they depend on their own sources of revenue and on annual transfers from the central government budget.

The tax base of most state governments consists of a disparate collection of agricultural taxes (90 percent of tax revenue), trading licenses, and revenue from government investments. The budgeted transfers to regions more than doubled in the central government budget for 1994/95. This reflects mainly the establishment in early 1994 of 16 new regional governments (raising the total number of states to 26) with wider administrative and financial responsibilities.

The rest of the public sector consists of the nonfinancial public enterprises which play a major role in the economy despite recent efforts to privatize these entities. Although the net results of regional governments and public enterprises’, operations are estimated on the basis of the transfers received from the Central Government and their borrowing from the banking system, respectively, their operations could not be consolidated with those of the Central Government due to the lack of detailed financial data. 1/

2. Overview (1981/82-1991/92)

The operations of the Central Government have deteriorated sharply during the 1980s and early 1990s. This process continued through 1991/92 when the overall deficit on an accrual basis peaked at 21 percent of GDP (13 percent of GDP on a cash basis). In recent years, the primary deficit converged to the overall deficit on a cash basis as interest paid on external debt represented only a small fraction of external interest falling due (Chart 2).

Chart 2
Chart 2

SUDAN FISCAL INDICATORS, 1981 - 94

(Fiscal Years Ending in June)

Citation: IMF Staff Country Reports 1995, 012; 10.5089/9781451833652.002.A001

Sources: Staff estimates based on information provided by the Sudanese authorities.

Underlying this development was a steady drop in central government revenue. Revenues as a share of GDP averaged about 9 percent since 1984/85, as compared with 15 percent in 1981/82. The major reasons for the poor revenue performance were: (i) a narrowly-based tax structure; (ii) erosion of tax revenue through inflation; (iii) poor tax administration; and (iv) poor performance of the parastatal sector. The high inflation was associated with low buoyancy in the revenue system during this period, because adjustments in controlled prices were limited and delayed. Moreover, the overvalued exchange rate constrained the growth of trade-related taxes.

Total expenditure (excluding interest arrears) fluctuated between 12 percent and 18 percent of GDP. Although this level is not excessively high when compared to other Sub-Saharan countries, it has been maintained in the face of declining domestic revenues and mounting deficits (Chart 2).

The fall in the revenue-to-GDP ratio was only partially offset by cuts in public investment (from 4.5 percent of GDP in 1982/83 to 2.5 percent in 1989/90, and to 1.5 percent in 1993/94). The Government has attempted to control expenditures in successive stages, but these efforts have been largely ineffective due to the emergence of large extra-budgetary expenditures and underlying weaknesses in the planning, budgeting, control, and monitoring systems.

The peak in budgetary deficits during this period also reflects the pattern of expenditures, which (on an accrual basis) rose from 10 percent of GDP in 1982/83 to 21 percent in 1991/92. The cash deficit moved in tandem with the deficit on an accrual basis, climbing to 13.4 percent of GDP in 1991/92. The unification of the exchange rate in February 1992 at LSd 90 per U.S. dollar (compared to the previous official rate of LSd 15 per U.S. dollar) increased sharply foreign exchange-denominated expenditures. This more than offset the measures that were introduced to reduce current and development expenditures. Extrabudgetary expenditures (including unidentified outlays) became increasingly prominent, and in 1991/92 were equivalent to 2 percent of GDP. The ratio of interest arrears to GDP fluctuated between 2 percent and 8 percent depending partly on movements in the official exchange rate.

Foreign financing (excluding financing associated with interest arrears) declined steadily from more than 85 percent of the overall deficit in 1982/83 to less than 45 percent in 1991/92. As a result there was a rapid increase in domestic bank credit to the Central Government to 77 percent of broad money stock in 1991/92, as compared to 5 percent in 1982/83.

A series of budgetary adjustments were introduced in 1991/92. The defense surcharge on imports and the sales tax were doubled to 20 percent and 10 percent, respectively, while taxes on cigarettes were also increased. A temporary export tax was imposed to capture the windfall gains from the exchange rate change. The establishment of a unified exchange rate and price liberalization ended the former system of implicit subsidies, thereby introducing greater transparency into budgetary policies.

3. Revenues

Revenues as a share of GDP have generally stabilized in the past five years at about 8 percent, after declining from levels twice as high a decade earlier. 1/ The buoyancy of the tax system as a whole, which measures the response of total tax revenue (including discretionary tax measures) to changes in GDP has been low, averaging about 0.65. The share of tax receipts in total revenues fluctuated over the period, averaging about 75 percent of total budgetary inflows.

Revenue from the personal income tax has declined continuously from 0.3 percent of GDP in 1989/90 to 0.1 percent in 1993/94. The acceleration of inflationary pressures during the period has adversely affected these receipts, due to the policy of collecting these taxes in the year after the income is earned. Moreover, in the absence of final accounts, initial determinations of tax liabilities are arbitrarily assessed by the Tax Department, leading to frequent appeals that often take years to settle in court, and further eroding the real value of these receipts. Taxpayers have no incentive to speed the process, since the penalty rate of 1 percent a month on overdue obligations is highly negative in real terms.

In contrast, business profit taxes have recently become an increasingly important source of revenue, reaching almost 30 percent of all taxes collected, and about 2 percent of GDP in 1993/94, or more than twice the ratio in 1989/90 (Statistical Appendix Table 7). This improvement is due largely to the tightening of tax brackets in real terms and efforts by the tax administration to improve compliance. However, the long lag (6-12 months) in the collection of business profits tax, in the face of high rates of inflation, has eroded the tax base. Furthermore, the present system of assessment of business taxes has continued to contribute to the buildup of tax arrears; as in case of personal taxes, business taxes are also assessed arbitrarily by the Tax Department in the absence of final accounts, and frequent appeals by taxpayers can take years to settle in court.

Collections from taxes on goods and services have fluctuated between 1 percent and 2 percent of GDP in the period under review. The low level of domestic manufacturing activity has been a major factor inhibiting the growth of these tax revenues, and receipts of ad valorem consumption taxes also have been sluggish because of wide ranging price and profit controls through 1991/92. Recently, greater price flexibility has substantially improved revenue collections.

Taxes on foreign trade declined steadily from a high of 5 percent of GDP in 1987/88 to 2 percent in 1993/94. This was mainly due to: (i) a widening in the spread between the exchange rate used for customs valuation purposes and market exchange rates; and (ii) the continuing shift in import composition toward necessities that bear low duties. Temporary expedients, such as the assignment of higher-than-invoiced values to imports to counter widespread under invoicing, had little effect in stemming this erosion. The import duty rates are ad valorem, with a standard 25 percent rate applicable to more than half of the items (Statistical Appendix Table 9).

Nontax receipts contributed on average about 25 percent of total revenues over the period, or more than 2 percent of GDP. Their contribution has generally followed the trend in commodity price differentials, which declined to nearly zero in 1989/90, before rebounding to more than 1 percent of GDP the next year, following sugar price increases. The contribution of fees and charges has been maintained in real terms by frequent adjustments in their rates, which are mainly specific. The collection of land and water charges has recently improved, but collection rates remain low and impede further revenue growth in this area. The contribution of public enterprises, from both profit transfers and the sale of capital, remains small in relation to government investment; recently, efforts have focused on improving this performance.

4. Expenditures

Over the five years to 1993/94, total expenditure including interest arrears fluctuated between 18 percent and 31 percent of GDP. These movements were strongly influenced by exchange rate policy during this period, as about half of all government outlays are directly or indirectly denominated in foreign exchange. The foreign currency-denominated expenditures encompass interest payments on foreign debt, imports of food and petroleum and other goods and services, and the foreign component of development expenditure. Prior to February 1992, the increasingly overvalued official exchange rate resulted in a steady decline in the domestic valuation of foreign currency-denominated government transactions. In contrast, budgetary costs increased sharply after the February 1992 depreciation of the exchange rate. Interest falling due on foreign debt accounted for 41 percent of total expenditure in 1992/93, very little of which was actually paid but was instead financed through a further accumulation of arrears.

The structure of expenditure shows that the bulk of outlays during the last five years was current expenditure (averaging 65 percent of total expenditure excluding interest arrears), with development expenditure and net lending accounting for 24 percent, and extrabudgetary expenditures accounting for the balance (Statistical Appendix Table 22). However, in the absence of an economic classification of expenditures, it is difficult to provide a meaningful analysis of government outlays. A reliable estimate of the wage and salary share in total expenditures are not available, as these are dispersed under several other categories, including defense, transfers to regions, and national centralized obligations. Outlays for goods and services comprised about one third of all current budgetary expenditures until 1991/92, when their share is estimated to have declined by half as purchases of imported goods were tightly restrained to pursue overall budgetary expenditure control. Transfers have constituted about 25 percent of current expenditures over the last five years, with federal spending declining in relation to institutional expenditures. The latter comprise a wide range of activities, including unspecified services, pensions, contributions to international organizations and payments for overseas officials, cost of living salary increments, and social funds. Defense expenditure analysis is complicated by a lack of transparency in the account.

Development expenditure declined to less than 2 percent of GDP in 1990/91 before rebounding to an estimated 4 percent in 1991/92. Both local financing and project aid components of development expenditure registered similar declines, with the trends in project aid reflecting mainly valuation adjustments (discussed above), but also due partly to lower disbursements by several creditors. In recent years, the authorities have made efforts to channel development spending into productive activities, so that the agriculture sector receives the largest allocation of funds (about one third), followed by energy and mining, transport, services, and industry.

5. Fiscal developments in 1992/93-1993/94

During 1992/93-1993/94, fiscal policy was significantly tighter than in previous years. The deficit on an accrual basis declined from 21 percent in 1991/92 to 14 percent in 1993/94, and on a cash basis from 13.4 percent to 4.3 percent (Table 4). This was achieved through substantial expenditure restraint, as spending (excluding foreign interest due) fell by close to 7 percentage points of GDP. This fall in the deficit resulted in a sharp drop in government recourse to the banking system.

Table 4.

Sudan: Summary Operations of the Central Government, 1989/90-1994/95

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Source: Ministry of Finance; and Bank of Sudan.

As approved by the National Assembly and adjusted for revised assumptions on exchange rate and interest payments.

There is discontinuity in these series starting with 1993/94, due to a reclassification of the budget invioving, inter alia, movement of the contingency reserve for wage adjustments from the Transfers category to Wages and Salaries category.

As reported in the monetary survey by the Bank of Sudan.

Includes exceptional domestic financing.

a. Fiscal developments in 1992/93

The overall budget deficit on an accrual basis remained at about 21 percent of GDP, notwithstanding the 4 percentage point drop in the deficit on a cash basis. This outcome reflected the valuation of interest arrears at a more depreciated exchange rate. Despite significant gains, revenues were also slow to respond to the price liberalization that started in early 1992, and performance among the major revenue heads was mixed. Income tax collections benefited from increasing the withholding rate from 2 to 5 percent, and strengthening government control over disputed tax liabilities. In particular, taxes on international trade were slow to respond to the twentyfold increase in the valuation rate for customs duties, largely due to official policies limiting the pass-through of higher costs to consumers, but also because of delays in export proceeds that affected related tax receipts. Nontax revenues were sharply higher, as the Government realized over LSd 1 billion from the sale of public enterprises, and sugar emerged as a major revenue source (over 1 percent of GDP).

On the expenditure side, despite a rapid escalation in the domestic cost of imports (up sixfold since February 1992) and inflation exceeding 100 percent per annum, actual outlays were below original budget allocations in several areas. The subsidy situation shifted during the year, as prices were adjusted; initial petroleum surpluses resulted in large subsidies after unification of the exchange rate, but the subsidies were eliminated after the increase in gasoline prices. Extrabudgetary outlays continued to be large, although as part of the February 1992 budget reforms they were officially terminated and have subsequently diminished.

b. The 1993/94 budget and outcome

Estimated revenues in 1993/94 were at LSd 130 billion, about 17 percent lower than envisaged in the budget. This was due mainly to lower collections of direct taxes on business profits and a shortfall in receipts from import duties, both of which were adversely affected by the compression of imports associated with the chronic lack of foreign exchange. In terms of GDP, revenues amounted to about 7.8 percent: direct taxes 2.0 percent, taxes on goods and services 1.7 percent, taxes on international trade 2.2 percent, other taxes 0.5 percent, and nontax revenues 1.5 percent.

Total expenditures excluding interest arrears (LSd 197 billion) were 20 percent lower than envisaged in the budget. This was achieved mainly by a huge cut in development expenditures by 50 percent from their already low budgeted level of LSd 71 billion, in large part due to the revenue shortfalls and to the continued lack of external financing. The fall in development expenditure was offset in part by unforeseen extrabudgetary expenditures (LSd 19 billion).

Net domestic bank borrowing, including the financing of quasi-fiscal expenditures, amounted to LSd 46.2 billion in 1993/94, equivalent to 28 percent of broad money at the beginning of the fiscal year. This compares with a limit of LSd 36 billion in the budget, and actual levels of 40 percent and 78 percent of beginning money stock in the preceding two years.

The overall fiscal deficit amounted to 4.3 percent of GDP on a cash basis (compared with 10 percent and 13 percent in the preceding two years), and 14 percent on an accrual basis, down from 21 percent in the previous two years. Net government borrowing from the banking system, including financing of quasi-fiscal expenditures, amounted to LSd 46.2 billion (27.6 percent of beginning money stock), compared with a limit of LSd 36 billion in the budget, and actual levels of 40 and 78 percent, respectively, in the preceding two years.

6. The 1994/95 budget

The 1994/95 budget, as approved by the National Assembly, but updated for revised projections of the exchange rate and interest payments, was formulated in the context of the Government’s stabilization program and called for limiting net borrowing from the banking system to LSd 65 billion, equivalent to 2.2 percent of GDP.

In nominal terms, total revenue was expected to more than double, to LSd 271 billion, against nominal GDP growth projected at 82 percent. 1/ Tax revenue was budgeted to increase slightly faster than nominal GDP. As a result, the ratio of fiscal revenue to GDP was projected to rise to 9 percent, from 7.8 percent in 1993/94. In addition to the increase in the tax base resulting from a more depreciated exchange rate and higher nominal income, the authorities relied on tighter enforcement efforts and incentive schemes for tax collection by provincial governments that would also boost central government receipts through revenue sharing. Nontax revenue was programmed to triple in nominal terms, reflecting price increases for sugar and petroleum products (now a major nontax revenue source) and higher fees and charges on public services.

Total budgeted expenditure, excluding interest arrears, was expected to increase by 92 percent from 1993/94. Sharp increases were foreseen for development spending (from 1.5 percent to 3.6 percent of GDP) and foreign interest payments (from US$23 million to US$78 million). In contrast, increases in wages and salaries and in defense expenditure (both 57 percent) would be less than the expected rate of inflation, and no extra-budgetary expenditures were envisaged to take place. The budgeted allocation for “wages and salaries” continues to be a minor part of the wage bill, with a large component (LSd 15 billion) contained as a lump sum allocation under “National Centralized Obligations.” Other significant components under the Centralized Obligations expenditure heading are allocations of LSd 20 billion for contingencies and LSd 14 billion for unspecified purposes. Subsidies for the generation of electricity are estimated at LSd 14.5 billion for 1994/95, since the current tariffs charged by the National Electricity Corporation cover about 70 percent of its cost. Over-recovery from the sale of gasoline more than offset by a large amount the under-recovery in heavy fuel oil, resulting in an overall net contribution of LSd 24 billion to the budget.

During July-November 1994, the Government revised its fiscal program following the implementation of several measures to raise additional revenues and cut expenditures. The measures could reduce the net domestic borrowing by the Government in 1994/95 to LSd 20 billion (6 percent of broad money at end-June 1994). On the revenue side, the principal measures comprise: (i) quarterly increases in the price of petroleum products and in the exchange rate used for customs duty valuation; (ii) increases in various tax rates; and (iii) higher import duty collection resulting from higher rates on selected items and lifting of the ban on imports of passenger cars. The combined impact of revenue measures is estimated at LSd 27 billion. On the expenditure side, current outlays have been reduced by LSd 5 billion and capital expenditure by LSd 13 billion. Despite this reduction, capital outlays are still expected to increase by more than 50 percent in real terms from last year’s severely depressed level.

IV. Money and Credit

1. Banking structure and functions

The banking system in Sudan consists of the central bank (Bank of Sudan), 27 commercial banks, and several specialized banks. Two of the largest commercial banks, the Bank of Khartoum and El Nilein Bank, are government-owned; most of the rest are private, but with mixed ownership in a few cases. There are also a few foreign commercial banks, both in the form of joint ventures and operating as local branches. Among the specialized credit institutions are the Agricultural Bank of Sudan—by far the largest specialized bank—the Estates Bank, Savings Bank, and the Post Office Savings Bank.

a. Bank of Sudan

Sudan’s central bank, created by the 1959 Banking Act, has responsibility for the country’s monetary policy and foreign reserve management. The Bank of Sudan also supervises the country’s depository institutions. Its powers in this area were greatly enhanced by the Banking Regulation Act of 1991. Traditionally, the central bank established guidelines for rates of return and charge, but in early 1992, the banks were given autonomy to set these rates in some areas.

The central bank is virtually the sole source of credit to the Central Government, and it has assumed responsibility for some government obligations over the years. It likewise accepts deposits from the central and local governments and has extended credit to a number of other public authorities. The Government does not pay any interest on its debts, in whatever form, to the central bank. For most of the 1980s, the Bank of Sudan was the principal source of credit for Sudan’s parastatal enterprises. From September 1990, these activities were suspended, as efforts intensified to make the public enterprises self-sufficient. Under present government policy, the public enterprises are required to recover their operating costs in full and to obtain their credit needs from the commercial banks. As a result, the central bank’s net claims on the public enterprises stabilized at about LSd 2.3 billion during 1992/93 and have changed little since then.

The Bank of Sudan has supervisory responsibility for the commercial banks. The basis for this authority was first codified in the 1991 Banking Regulation Act. Among other provisions, the Act: (i) requires commercial banks to obtain licenses from the Bank of Sudan; (ii) provides for revocation of licenses; (iii) requires prior approval in order for banks to establish or close branches; and (iv) gives the Bank of Sudan authority to set capital and reserve requirements. In addition, the Act puts mergers, profit margins, maintenance of liquid assets, and other aspects of banking activity under Bank of Sudan supervision; provides for monthly reports to, and inspections and/or audits by, the Bank of Sudan; and establishes penalties for breaches of regulations.

b. Commercial banks and Islamization of banking activities

The 27 commercial banks operating in Sudan accept deposits from and extend credit primarily to the private sector and also, to some extent, to local governments and public enterprises. 1/ Sudan adopted Islamic banking in September 1984 and has operated on these norms in subsequent years. Under Sharia principles, the charging of “interest” on financial transactions is prohibited (i.e., fixed ex ante rates of return are not permissible). Borrowing and lending operations are conducted under various purchase/sale or profit sharing arrangements; thus, rates of return are determined ex post. 1/

Several types of Islamic lending are employed in Sudan. For instance, under Musharaka. the most common, banks and their clients both take equity participation in projects and share in the returns. Typically, bank representatives manage the project and also charge a fee for this service. Net remaining profits and losses are shared in the agreed proportions. Murabaha is a form of “markup” finance in which the bank purchases goods or inputs, reselling them to the end user at a markup. A schedule of nominal, minimum Murabaha rates of return is promulgated by the Bank of Sudan for use by the commercial banks. 2/ Finally, Salam is a form frequently used for agricultural production. In this form, the lender takes the return in kind (i.e., takes ownership of the crop), based on agreement with the borrower about the expected price of the harvest. 3/

Beginning April 1989, the Bank of Sudan has from time to time issued circulars setting, and changing, nominal rates of return on Murabaha and Musharaka lending (Statistical Appendix Table 27). Under present rules, different Murabaha rates—ranging from 25 percent to 48 percent—are applicable for lending to various economic sectors. The lowest rates are for priority activities such as agriculture and exports, and the highest apply to local trade, which the authorities regard as unproductive. Musharaka lending is no longer subject to rate of return guidelines, and returns payable to depositors are at the banks’ discretion.

Given recent high rates of inflation—a 100 percent or more—nominal Murabaha rates are significantly negative in real terms. However, lending practices of the banks generate effective rates (in the range of 60-80 percent) that are much higher than these nominal values. While even these returns may not be positive in real terms, the spread between banks’ lending returns and borrowing costs is quite wide. Banks pay no returns on their current accounts (the largest part of their liabilities) and annualized returns to investment account holders have been about 30 percent during 1993 and 1994. In lending operations generally, the Bank of Sudan has granted the commercial banks more autonomy in recent years, in conjunction with other reforms. For instance, credit allocation guidelines (discussed below) have been relaxed and are not rigidly enforced.

c. Specialized credit institutions

The largest specialized credit institution in Sudan is the government-owned Agricultural Bank of Sudan (ABS), which is an important supplier of credit to the agricultural sector. The scale of ABS operations has grown rapidly in the last few years to a total asset size of more than LSd 30 billion. The bank’s lending is mainly directed toward meeting working capital and marketing and storage requirements for the large schemes and private farmers ; loan charges depend on the maturity and purpose of the loan. The ABS has an extensive branch network and has moved extensively into commercial banking activities. In the past the bank’s resources came mainly from government sources, but in recent years the Bank of Sudan has increasingly authorized the ABS to take deposits from the public.

The Sudan Estates Bank specializes in housing finance, but its importance and scope have remained limited. The Post Office Savings Bank and the Sudan Savings Bank, which have not grown much in recent years, accept deposits and extend personal credit on a small scale. Until recently the Industrial Bank of Sudan counted among the specialized banks, but it was merged into the El Nilein Bank group in 1993.

2. Monetary and credit developments

a. Financial deepening and savings mobilization

There has been little scope for deepening the role of Sudan’s financial system in mobilizing and allocating savings more efficiently, as rates of return on financial assets and charges on loans have been kept below inflation rates for more than a decade. In addition, the allocation of credit to various sectors of the economy is largely directed by the Government. The Government itself has drawn the largest share of its own credit from the Bank of Sudan to finance its persistent large deficits. Under such a policy environment, Sudan’s financial system has become of marginal importance in the productive economy, even though its nominal size has risen.

The ratio of broad money (M2) to GDP has steadily declined in Sudan from a high of 31 percent in June 1985 to 15 percent in June 1994. 1/ This increase in broad money velocity reflects disintermediation and an associated deterioration in the ability of the financial system to attract savings. One obvious reason for this decline is the prevalence of negative interest rates on financial assets under present conditions of high inflation. Furthermore, the composition of broad money has changed markedly, with the share of foreign currency-denominated deposits rising from 2 percent in June 1982 to 32 percent in June 1994, while the share of time deposits denominated in local currency declining from 30 percent to 9 percent during the same period. Since banks do not lend these foreign currency resources locally, the shift has further reduced the capacity of the financial system to channel savings to local private investors.

b. Developments through 1991/92

Money and credit developments in 1989/90-1991/92 were characterized by accelerating increases in the domestic assets of the banking system and in the money supply. Since Sudan’s overall external deficits in these years were roughly matched by an accumulation of external payments arrears, most of the growth of money mirrored the increase in net domestic assets. In 1991/92, net domestic credit rose by LSd 40 billion, representing a 96 percent expansion in terms of the beginning money stock (Table 5); this represented a virtual doubling in the rate of the previous two years. Most of the increase was on account of the rise in Bank of Sudan credit to the Government (change of LSd 31 billion, or 76 percent of the beginning money stock).

Table 5.

Sudan: Monetary Survey and Factors Affecting Liquidity, 1989/90-1993/94

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Source: Bank of Sudan.

Includes claims on nonbank financial institutions.

Excluding exceptional domestic financing.

Private sector and public nonfinancial enterprises.

Nominal GDP divided by the average of the stock of money and quasi—money during the period.

Broad money rose by 128 percent in 1991/92, compared with less than 60 percent in each of the two previous years. More than a third of the growth was attributable to the revaluation effects of banks’ foreign currency liabilities to residents (e.g., “free accounts”), as reflected in the more than fivefold increase in quasi monetary liabilities.

As a result of the sharp depreciation in the official exchange rate in early 1992, the net foreign position of the banking system deteriorated considerably. Net foreign liabilities rose from LSd 12 billion in 1990/91 to LSd 235 billion in 1991/92. All of this deterioration was in the central bank’s accounts, since commercial banks traditionally maintain net positive foreign asset positions. Net external liabilities of the Bank of Sudan expanded to LSd 266 billion in 1991/92, from only LSd 14 billion in the previous year, and amount which was virtually identical to the counterpart of valuation changes on the assets side of the banking system accounts.

c. Developments in 1992/93-1993/94

Efforts to slow the growth of money and credit during 1992/93-1993/94 were only partly successful. During the first half of 1992/93 the implementation of the authorities’ financial program was monitored by the Fund staff on an informal basis. Net credit extended to the Central Government was somewhat below the agreed limit; however, the expansion of private credit was faster than programmed. On balance, the 52 percent expansion of domestic credit (as percent of initial broad money) that year was about half the pace set in 1991/92.

In 1992/93 the rate of growth of credit extended (by the Bank of Sudan) to the Government continued to exceed that for credit directed to private sector activities (Table 5). Net lending to the Government contributed a little less than half (31 percentage points) of the impulse to monetary growth, while commercial bank credit to the private sector and state enterprises expanded by 21 percent of the initial broad money stock.

One of the main factors which contributed to this expansion was the authorities’ emphasis on agriculture growth and food self-sufficiency, particularly in view of the fall in foreign assistance. This factor overshadowed concerns about the inflationary consequences of rapid credit expansion.

Monetary expansion in 1993/94 exceeded the amount envisaged by the authorities, notwithstanding steps taken to tighten policy. In the year through June 1994, bank credit to the private sector and state enterprises grew by 17 percent of the initial broad money stock. The growth of broad money accelerated from 76 percent in the previous year to 89 percent in 1993/94, with one third of the increase due to valuation gains on foreign currency-denominated deposits due to depreciation of the commercial bank exchange rate for the Sudanese pound. Reflecting this increased valuation and a shift out of local currency deposits, which do not yield returns that protect against inflation, the share of foreign currency deposits in broad money rose by 14 percentage points, to 32 percent (Chart 3). The rate of growth of domestic currency component of broad money continued to be significantly lower (57 percent).

Chart 3
Chart 3

SUDAN MONETARY SECTOR INDICATORS, 1981-94

(Fiscal Years Ending in June)

Citation: IMF Staff Country Reports 1995, 012; 10.5089/9781451833652.002.A001

Sources: Staff estimates based on information provided by the Sudanese authorities.

The net foreign liabilities of the banking system changed little in dollar terms during 1993/94; in local currency terms they increased sharply. Commercial banks in Sudan typically have a small positive net foreign asset position (US$265 million in June 1994), but this continued to be outweighed by the net liabilities of the Bank of Sudan (about US$2.8 billion).

3. Credit controls and required reserves

The scope for an independent monetary policy in Sudan has been limited, as a principal role of the central bank has been to finance government deficits. To some extent, however, the authorities have endeavored to control and channel the liquidity resulting from credit extended to the private sector and public enterprises. Prior to June 1994 the Bank of Sudan imposed a variety of bank-specific credit ceilings and subceilings, and also minimum allocations of credit to certain activities, notably agriculture and exports. A typical configuration has been a system of ceilings on specific types of bank credit, with a minimum of 40 percent (at times, 50 percent) to be channeled to agricultural production and the balance available for industrial and trade lending. At times the authorities have also specified geographical criteria for credit extensions. For a number of years the authorities programmed credit allocations for the year as a whole. However, because of high inflation the ceiling sometimes turned out to be more restrictive than intended over the course of a year, and in 1992 the Bank of Sudan began to calculate ceilings on a quarterly basis, to stay more in line with evolving conditions.

In spite of these adjustments, evidence suggested that credit controls, which tended to be administered loosely, were not particularly effective. Contributing to this shortcoming was the fact that the commercial banks often were able to exceed their ceilings through overdrafts on their current accounts with the Bank of Sudan and through particular “excess” credit operations made in collaboration with the central bank itself. During 1993/94, therefore, the Bank of Sudan began to rely more heavily on indirect policy instruments, while enforcing its regulations more strictly.

The statutory reserve requirement was raised by 10 percentage points in November 1993 to 30 percent of demand and savings deposits denominated in domestic currency. 1/ Policy was further tightened in March-April 1994 as the Bank of Sudan moved to strictly enforce the reserve requirement and to monitor closely the use of overdrafts by commercial banks against free reserves. Oversight of banks’ management of their holdings of central bank deposits was also tightened, in conjunction with other prudential and supervisory controls described below. Whereas the commercial banks previously had a “current” account with the central bank that held both their reserves and working balances, the Bank of Sudan has now segregated reserves into a separate account. It has also sharply tightened control over banks’ overdrafts on their current (free reserve) accounts. In the early months of this new system the authorities levied penalties against a number of banks for overdrawing their balances. As a result, account management is now reported to have improved.

4. Prudential measures and oversights

Recently, the Bank of Sudan has taken steps to improve the prudential regulation of the country’s banks. 2/ With regard to bank safety and soundness, in recent months a task force at the Bank of Sudan has worked out a set of guidelines that are generally consistent with the Basle standards for international bank supervision. These guidelines cover such diverse issues as capital adequacy, portfolio quality, loans and dealings with directors and insiders, disclosure, and a number of other areas. Although there is no indication that any significant Sudanese banks are presently in difficulty, the implementation of these guidelines could serve as additional assurance against future problems.

V. External Sector Developments

1. Overview

Sudan’s economy is relatively closed: in 1993/94, exports were equivalent to just 8 percent of GDP. 1/ Export items consist primarily of agricultural products—traditionally cotton, gum arabic, and sesame, but also, increasingly, livestock, notably sheep. Sudan is dependent on imports for most of its machinery, equipment, vehicles, spare parts, chemicals and other industrial materials, as well as a substantial share of its energy supplies. It also imports a large amount of foodstuffs, including humanitarian supplies independently managed by the UN World Food Program.

The contrast between Sudan’s poorly developed export sector and its high import needs has been reflected in a persistently large trade deficit—averaging about 16 percent of GDP over the five years to 1993/94. This shortfall has been financed, historically, by official grants and loans, together with remittances from the large number of Sudanese working abroad. Sudan is currently able to meet only a small percentage of its debt obligations falling due, and arrears are rising rapidly. 2/

Sudan’s external imbalances have been exacerbated in recent years by a significant decline in foreign exchange receipts. Export proceeds which had averaged about US$450 million in the 1980s, fell to US$340-350 million in the three-year period to 1992/93 (Chart 4). This downturn reflected the impact of drought conditions in 1989/90 and 1990/91, the sharp appreciation of the real exchange rate from 1988 to 1992, and public policies that placed low emphasis on exports (including through the policy of divesting irrigated land from cotton production to food crops with a lower export potential). In addition, official grant and loan receipts declined substantially after 1991/92, reflecting Sudan’s poor debt service record and deteriorating relations with the international donor and creditor community. As a consequence, actual debt service payments declined further, and imports were severely compressed, notably in 1992/93.

Chart 4
Chart 4

SUDAN EXTERNAL SECTOR DEVELOPMENTS, 1981 -94

(Fiscal Years Ending in June)

Citation: IMF Staff Country Reports 1995, 012; 10.5089/9781451833652.002.A001

Sources: Staff estimates based on information provided by the Sudanese authorities.

In 1993/94, the situation eased somewhat: export proceeds and unrecorded inflows (mainly private remittances) increased. These developments partly reflected the more liberal economic policies adopted since early 1992, and partly the favorable impact on domestic production and export potential of the generally improved average rainfall levels in the three years to 1993/94.

This upturn in export proceeds and private remittances more than offset the continuing decline in official grant and loan disbursements; while actual debt service payments remained at low levels, Sudan was able to finance an increase in imports in 1993/94 for the first time in three years.

2. Merchandise trade

Sudan’s merchandise trade deficit has been substantial and volatile in recent years; over the six years to 1993/94 the deficit averaged about 16 percent of GDP, varying from over 25 percent in 1990/91 to under 12 percent in the most recent year 1993/94. This volatility has been related, in part, to variations in rainfall conditions. Thus, the drought in 1990/91 and the associated need for food imports contributed to the extraordinary trade deficit in that year. In addition, however, the trade deficit has been affected by the relative availability of grants and capital inflows; for example, the receipt of substantial trade credits in 1990/91 made possible higher imports of petroleum and other nonfood commodities.

Abstracting from the volatility of trade flows, certain underlying trends are apparent. Exports as a percent of GDP declined steadily from 10 percent to 6 percent between 1989/90 and 1992/93, before recovering to 8 percent of GDP in 1993/94. Imports, while more volatile, mirrored the general trend in foreign exchange receipts, falling from 24 percent of GDP in 1989/90 to under 20 percent in the two most recent years (1992/93-1993/94). With the overall decline in imports exceeding that of exports—measured as a share of GDP—the trade deficit has fallen from an average of around 15 percent of GDP in the late 1980s, to 12 percent of GDP in the most recent two-year period.

a. Exports

In 1993/94 merchandise exports picked up considerably, to more than US$500 million compared with US$340-350 million annually in the preceding three-year period (Table 6). In 1993/94 exports were at their highest level in 4 years as a share of GDP, and at their highest in 8 years in U.S. dollar terms. This outturn reflected strong growth of export volumes, up 7 percent in 1993/94, following a 40 percent rise in 1992/93. This growth can be attributed to the generally improved weather conditions in Sudan (relative to the droughts of 1989/90 and 1990/91), together with initial impact of the 1992 exchange rate realignment and the economic liberalization of recent years. In addition, exports have benefitted, as discussed below, from higher world prices for several key Sudanese exports—cotton, gum arabic, and livestock (Statistical Appendix Table 29).

Table 6.

Sudan: Balance of Payments, 1969/90-1993/94

(In millions of U.S. dollars)

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Sources: Information provided by the Sudanese authorities; and Fund staff estimates.

Includes commodity aid imports, and emergency aid assistance for 1989/90—1991/92.

Includes estimates of late interest accrued during the year and Fund special charges.

Crop selection in irrigated areas is the responsibility of joint committees of farmers and government officials. The latter have a significant role in determining a minimum acreage to be allocated to food production. Cotton continues to be Sudan’s single most important export commodity. However, cotton production and exports have contracted in recent years as priority has been given to food crops (such as wheat) rather than cotton.

Accordingly, the acreage allocated to the 1993/94 irrigated cotton harvest was 13 percent lower than a year earlier and 62 percent lower than five years ago (Statistical Appendix Table 13). Thus, although cotton yields rose in 1993/94 due to better land preparation and maintenance of crops than in 1992/93, production fell by 13 percent compared to a year earlier. Accordingly, export volumes fell by 16 percent, notwithstanding efforts to sustain a high level of shipments through a drawdown of inventories. The impact of lower cotton shipments on dollar export proceeds was more than offset, however, by an 87 percent sharp increase in the international price of Sudanese cotton exports. This provided the basis for a 53 percent increase in the value of cotton export proceeds in 1993/94 to US$96 million.

The share of cotton in total export proceeds was unchanged between 1992/93 and 1993/94, at 19 percent, which compares with 52 percent in 1989/90. Cotton production may have bottomed out, however, in 1993/94. In response to favorable world market conditions for cotton and the more attractive exchange rate since July 1994, farmers have increased the acreage allocated to cotton cultivation by an estimated 60 percent for the 1994/95 harvest (which started in November 1994).

Exports of gum arable, which totaled US$81 million in 1993/94, represented the second largest single source of export earnings in that year (Statistical Appendix Table 29). Export earnings from gum arable in 1993/94 were the highest in seven years and over four times greater in U.S. dollar terms than a year earlier. This increase was, in part, due to sharply higher export volumes (up 88 percent on a year earlier), reflecting the impact on production of favorable rainfall in key producing areas and the increase in relative prices following the devaluation in 1992. Thus, farmers had intensified efforts to preserve and exploit the gum-producing acacia trees, and the Gum Arabic Company—which has a monopoly concession for exporting raw gum arable—had enhanced its regional purchasing activities. Export proceeds were also boosted by a sharp rise in export prices of gum arable (up 117 percent in 1993/94), as world market conditions strengthened after two years of price declines.

In 1993/94, exports of groundnuts and sesame also increased strongly, reflecting favorable harvest conditions. In addition, livestock exports rose for a third successive year, and sheep became the third largest source of export earnings. As noted in Section II, this trend reflects partly the progressive modernization and commercialization of what was previously a highly traditional activity, together with the impact of increased export prices for sheep—up 14 percent in 1993/94 compared to a year earlier (Statistical Appendix Table 29).

b. Imports

Merchandise imports continue to be constrained by Sudan’s limited access to foreign exchange. As a result, imports tend to be determined by changes in export receipts, grants, remittances, and capital inflows. 1/ In 1993/94, official grant and loan receipts were US$191 million lower than a year earlier (a decline of 53 percent). However, this decline was more than offset by the combined impact of higher export proceeds (up US$152 million) and larger private sector remittances and capital inflows (up an estimated US$127 million). The resultant net increase in access to foreign exchange provided for a 15 percent rise in the value of merchandise imports.

The value of non-oil imports rose even more strongly (by 22 percent), in contrast to Sudan’s petroleum import costs which fell by 8 percent, reflecting lower world oil prices. Imports of industrial commodities, which had been compressed in recent years by shortages of foreign exchange, expanded sharply in 1993/94: imports of chemicals were up 98 percent over the previous year; manufactured goods, 47 percent; and machinery and equipment, 24 percent (Statistical Appendix Table 30). Thus, non-oil, nonfood imports were 21 percent higher than in 1992/93 and 6 percent higher than in 1991/92, notwithstanding an intervening decline in official grant and loan receipts.

3. Services and private transfers

Sudan faces a large deficit in services, in respect of both non-interest transactions and interest obligations (measured on an accrual basis). The precise magnitude of the deficit is unknown, owing to the absence of reliable information on certain non-interest transactions and interest accruals. 2/ On the basis of official statistics, net payments on non-interest transactions fell from about US$24-30 million in 1991/921992/93 to US$9 million in 1993/94. The narrowing of the imbalance in non-interest service transactions may reflect the increased scarcity of foreign exchange and resultant compression of demand for imported services. It is also possible, however, that service transactions that were formerly conducted through official channels are increasingly being diverted to the parallel market where they may not be captured by official statistics.

As regards Sudan’s interest payments, staff estimates indicate that such contractual obligations have risen from about US$840 million annually in 1991/92 and 1992/93 to almost US$870 million in 1993/94, buoyed by the rapidly growing stock of external debt (resulting primarily from the capitalization of interest arrears). Interest accruals were equivalent to 145-150 percent of current account receipts in 1991/92 and 1992/93, but declined to 130 percent in 1993/94, reflecting the upturn in export proceeds.

Private remittances are an important source of foreign exchange for the Sudanese economy, made possible by the large number of Sudanese working abroad. Such remittances are inadequately reflected in the official statistics for banking sector transactions, since these inflows are commonly routed through the parallel market to obtain a more favorable rate of exchange. A better estimate of total private remittances may probably be made by combining the official estimates with the “errors and omissions” entry of the balance of payments, which is believed to largely comprise private capital inflows and remittances. 1/ On this basis, private sector remittances and capital inflows apparently rose to US$580 million in 1993/94, up from an average of US$450-500 million in the preceding three-year period (Chart 4).

4. Official transfers and capital flows

In 1993/94, official borrowing and grant receipts fell for the third successive year (Statistical Appendix Tables 31 and 32). At US$172 million, such inflows were less than half the level of a year earlier, and under one quarter of the annual average during 1989/90-1991/92. Grant receipts totaled US$88 million, largely comprising humanitarian food relief from the UN World Food Program, together with small amounts of bilateral and multilateral funding for technical assistance and infrastructure projects. Bilateral grants to finance commodity imports and development projects have fallen sharply. In 1990/91, six bilateral donors (Canada, France, Germany, Japan, Netherlands, and Pakistan) provided 2which tgrant financing totaling US$70 million; by 1993/94, total grants from these donors were estimated to have dropped to less than US$1 million. Over the same period, annual grant receipts from the UNDP declined by over 85 percent, from about US$42 million to US$6 million. Modest amounts of development grant assistance continue to be provided by Italy and Iran.

New official medium- and long-term borrowing totaled just US$84 million in 1993/94, one third of the level of the preceding year. Official lending by international and regional agencies has fallen sharply. During 1990/91-1991/92, annual lending by international agencies averaged about US$126 million, 2/ while annual lending by Arab regional agencies averaged about US$37 Billion. 1/ By 1993/94, lending by international agencies had dropped to less than US$45 million (primarily from the World Bank/IDA), while lending by Arab regional agencies had declined to less than US$1 million. Trade and balance of payments financing from bilateral sources has also fallen sharply. In the early 1990s, Sudan obtained substantial trade financing from Libyan and Saudi creditors (US$427 million in 1990/91, and US$178 million in 1991/92). In addition, trade financing of US$15-30 million a year was made available by a number of countries—primarily Italy, Indonesia, Nigeria, Pakistan, and the United States. However, following the accumulation of arrears on a number of these and subsequent trade-related loans, trade financing contracted to US$25 million in 1993/94 (and arrears were incurred in the servicing of this debt). Official development loans are essentially limited to financing provided by China for a number of construction projects; unlike other financing sources, these credits have not been cut back in recent years and in 1993/94 were estimated at about US$13 million.

5. Debt and debt service 2/

Sudan’s external public debt service payments remained very small in recent years as compared to the obligations falling due. In 1993/94 debt service payments totaled an estimated US$28 million, of which those to official creditors totaled US$24 million. Of the latter, US$9 million represented a single cash settlement financed out of a new US$25 million loan by the same creditor (i.e., the repayment was comparable to a rescheduling exercise). Of the remaining US$15 million of official debt service, one quarter comprised repayments to the Fund; in addition, one half represented payments to the World Bank and IFAD—designed to meet obligations falling due, thereby ensuring continued access to pipeline disbursements. Minor payments were also made to a number of other bilateral and multilateral creditors for similar purposes.

Reflecting the low level of debt service, the bulk of Sudan’s interest and amortization obligations that accrued in 1993/94 accumulated as arrears. Reliable data on debt service accruals are not presently available; however, obligations falling due in 1993/94 are provisionally estimated at a little under US$1.38 billion, equivalent to over 200 percent of current account receipts. On this basis, new accumulation of arrears during 1993/94 totaled about US$1.35 billion, since only a very small portion of this amount (US$28 million) was actually paid.

During 1993/94, Sudan fell into arrears with the World Bank (US$27 million by end-November 1994), and the African Development Bank and Fund (US$13 million by end-September 1994). In addition, arrears continued to accumulate to a number of other multilateral and regional agencies, including the Arab Monetary Fund (US$260 million at end-September 1994); the European Investment Bank (US$28 million at end-1993); the Arab Fund for Social and Economic Development (US$140 million at end-1993); the OPEC Fund (US$14 million at end-1993); the Kuwaiti Fund; and the Saudi Fund. Sudan remains current with the Islamic Development Bank (IDB) and the International Fund for Agricultural Development (IFAD).

Discussions were initiated during 1993/94 with a number of creditors with a view to addressing Sudan’s mounting payments problems. In particular, the authorities have discussed with the African Development Bank, African Development Fund, and OPEC Fund the possible elimination of arrears in exchange for more than offsetting amounts of new financing. In addition, although arrears to the Arab Monetary Fund and Arab Fund for Social and Economic Development are too large to be settled outright, partial payments may be initiated with a view to restoring cooperation with these agencies. Presently there are no contacts between the authorities and the Kuwaiti Fund and Saudi Fund.

VI. Exchange and Trade System

The paragraphs below document the exchange and trade system in Sudan prevailing at the time of the 1994 Article IV consultation discussions. Changes to the exchange and trade system since July 1, 1993 are summarized in Appendix III. Developments prior to mid-1993 were summarized in the staff report for the 1993 Article IV consultations. 1/

1. Exchange arrangements

a. Background and developments in 1992 and 1993

Sudan has introduced new exchange regimes in each of the last three years, a process marked by the successive unifications followed by segmentation of the official exchange market. In February 1992, as part of the Government’s broader liberalization program, the dual-rate official regime in effect since 1988 was unified at a rate close to that in the parallel market (LSd 90 per U.S. dollar), thereby eliminating a major overvaluation of the currency that had emerged over the previous three-year period. However, the procedures adopted in the commercial banking market for determining the newly unified rate proved to be inflexible. 2/ As a result, the official rate appreciated in real terms once again, and a substantial margin re-emerged between rates in the official and parallel markets: by end-September 1993, this margin exceeded 70 percent. 3/

In response to the growing diversion of exchange transactions to the parallel market on October 16, 1993, the authorities reintroduced a dual rate regime. The central bank exchange rate—which applied to all exports and official receipts and payments—was fixed at LSd 216 per US$1, representing a depreciation of 21 percent against the U.S. dollar. At the same time, the commercial bank exchange rate—to be applied for all other transactions—was depreciated by 44 percent against the U.S. dollar (to LSd 302 per US$1), bringing this rate broadly in line with that in the parallel market (Chart 5).

Chart 5
Chart 5

SUDAN EXCHANGE RATE DEVELOPMENTS, 1984 - 94

(Quarterly Averages, Log Scale

Citation: IMF Staff Country Reports 1995, 012; 10.5089/9781451833652.002.A001

Sources: IMF Information System.

However, responsibility for fixing the commercial bank exchange rate remained with the Bankers’ Committee which, in setting the rate, continued to take into account not only demand and supply conditions in the banking exchange market but also broader economic considerations (including official efforts to limit exchange market volatility and “excessive” exchange rate depreciation). 1/ As a result the commercial bank exchange rate was not maintained at a market-clearing level. When the parallel market exchange rate depreciated to LSd 480 per US$1 by April 1994, the Bankers’ Committee responded by authorizing a move in the commercial bank rate to LSd 402 per US$1. The parallel market exchange rate subsequently appreciated to LSd 400 per US$1 in May, before reverting to around LSd 470 at end-June 1994; during this period, the Bankers’ Committee approved an appreciation in the commercial bank rate to LSd 312 per US$1 by end-June 1994.

As a result, during the nine-month period to end-June 1994, the commercial bank exchange rate appreciated by 46 percent in real terms (31 percent based on period average exchange rate). Thus, the impact of the October 1993 devaluation was fully negated by mid-1994. Over the same period, the official exchange rate—which remained fixed at LSd 216 per U.S. dollar—appreciated in real terms by an estimated 51 percent. At end-June 1994, the margin between the official exchange rate (applicable to exports) and that in the parallel market stood at over 115 percent, implying an even greater market segmentation than that prior to the October 1993 modification to Sudan’s exchange regime.

b. Exchange regime reforms adopted since July 1994

As a first step under their reform program for 1994/95, the authorities sought to address the accumulated distortions and segmentation of the exchange regime. Thus, on July 2, 1994 the Government abolished the official and commercial bank exchange rates, and reintroduced a unified official regime under which the rate of exchange would be freely determined in the interbank market by the independent actions of commercial banks. 2/

Under the new regime, the 27 commercial banks authorized as foreign exchange dealers were required to post buying and selling rates for foreign exchange on a daily basis (subject to a maximum spread of LSd 7 per U.S. dollar). 1/ Henceforth, all transactions in foreign exchange by commercial banks—except certain sales to the Bank of Sudan—would be conducted by banks at these posted rates.

For official transactions, the Bank of Sudan calculates daily official buying and selling exchange rates, based on the rates quoted in the interbank market. The official buying rate is calculated according to a weighted average of the individual buying rates established by commercial banks: due to reporting lags, the official rate is based on interbank rates in effect two business days earlier. The official selling exchange rate is calculated by applying a margin to the buying rate, which was in the range of LSd 3-5 during July-October 1994. The Bank of Sudan publishes the official buying and selling rates around noon of each business day, and these rates become effective from the start of the following business day. In effect, there is a three-business-day lag between the establishment of interbank rates by commercial banks and the application of the associated official buying and selling exchange rates by the Bank of Sudan.

Official foreign exchange requirements are met through the compulsory sale by commercial banks to the Bank of Sudan of a proportion (initially 80 percent) of their foreign exchange purchases. Foreign exchange not subject to compulsory sale may be used by banks for their own purposes. 2/ Two rates of exchange are applied by the Bank of Sudan in purchasing foreign exchange from banks: a portion (initially 30 percent) is purchased at each commercial bank’s own selling rate; the remainder (i.e., 50 percent) is purchased at the Bank of Sudan’s official buying rate (or the individual bank’s selling rate, whichever is the lower).

The high proportion of commercial banks’ foreign exchange purchases that are subject to compulsory sale to the Bank of Sudan at the official buying rate appears to have contributed to a degree of rigidity in banks’ quotations in the interbank market. Specifically, banks have been reluctant to establish exchange rate quotations that are significantly more depreciated than the average for the market as a whole. This is because losses would be incurred when buying foreign exchange from exporters (or other customers) at this rate and subsequently selling one half of such foreign exchange to the Bank of Sudan at the official buying rate (which would be more appreciated, in line with quotations by other market participants). 1/ In addition, banks have seen few benefits from quoting a depreciated exchange rate, since foreign exchange market shares have been relatively insensitive to small variations in buying rates. Exporters tend to surrender their earnings to banks with which they have established links, possibly including preferential access to credit or foreign exchange. Mean-while, other foreign currency inflows are conducted at the more attractive rates available through the parallel market and are unaffected by the rates quoted by banks.

As a result of these and other rigidities and distortions in the new regime, 2/ the exchange rate quoted in the commercial banking market continues to be set at a level that is not market-clearing; consequently, banks generally face a significant excess demand for foreign exchange. This demand is satisfied, in part, by parallel market transactions, commonly conducted through informal sales of foreign exchange by holders of “free” foreign currency accounts. Such accounts can be opened by all residents, and may be credited without restriction, other than the need for a customs declaration for cash deposits. Foreign exchange held in such accounts may be transferred without restriction to other “free” account holders, and may be withdrawn to finance all current and capital transactions. While formal intermediation between account holders is prohibited, an active informal market in foreign exchange between “free” account holders is officially tolerated.

The rate of exchange for transactions in the parallel market has been significantly more depreciated than that in the interbank market: as of end-October 1994, the parallel market rate for account transactions was about LSd 490-495 per US$1, compared to quoted buying rates of about LSd 390-395 in the interbank market. As a result, Sudan’s exchange regime remains segmented, with export proceeds, compulsory remittances by Sudanese working abroad, and official transfers conducted at the more appreciated interbank rate, and with a large part of the private sector’s non-export-related transactions conducted at the depreciated rate in the parallel market. Although the degree of segmentation between the two markets diminished during the initial period of operation of the new exchange regime, the gap has not continued to narrow: the margin between the interbank and parallel market exchange rates was almost 50 percent during July 1994, declined to about 22 percent at end-August 1994, 1/ and remained at about 22-25 percent during September-November 1994.

2. Trade and payments system

a. Imports and import payments

The official exchange market in Sudan has generally been marked by a pervasive shortage of foreign exchange. The authorities have responded to such shortages by imposing quantitative restrictions on import activities, the range and severity of which have varied over time. 2/ Since February 1992, imports have no longer been subject to restrictive licensing procedures, but have been subject to a negative list, the coverage of which has been adjusted on a relatively frequent basis. This list has commonly included agricultural and manufactured items produced domestically (such as sugar, livestock, and textiles), together with high-cost consumer imports such as automobiles, and household and electronic items.

In July 1992, as part of the Government’s broader liberalization program, the coverage of the negative list was reduced to six main product groups. 3/ This liberalized regime was maintained for about nine months. However, from mid-1993, the negative list was progressively expanded, with additional groups of items introduced in April, June, and November 1993. By end-1993, an extensive range of imports—comprising about 50 product groups—were prohibited.

The negative import list was narrowed slightly in February and April 1994, and more significantly in July 1994, as part of the Government’s reform program for 1994/95. From July 9, 1994 the negative list covered only sugar and automobiles, in addition to imports prohibited for reasons of religion, health, and national security.

b. Payments for invisibles

In principle, formal restrictions on payments for invisibles only apply to the personal limit of US$5,000 per year on purchases of foreign exchange to finance travel abroad. In practice, however, given the severe shortage of foreign exchange in the official market, commercial banks apply informal rationing procedures that generally limit access to foreign exchange for invisible transactions. Notwithstanding this, foreign exchange can be obtained legally for travel and other invisible purposes—albeit at a more depreciated rate of exchange—through informal parallel market transactions. Such transactions—generally purchases of foreign exchange from holders of free foreign currency accounts—are free from restrictions, other than a personal limit of US$5,000 on withdrawals of bank notes for foreign travel: there is no limit on the amount that can be withdrawn as traveler’s checks or bank checks.

c. Exports and export proceeds

Exports are free from licensing requirements. However, exporters must comply with administrative procedures designed to ensure full repatriation and surrender of foreign exchange export proceeds. Export contracts are subject to approval by the Ministry of Commerce. To deter underinvoicing by exporters, the Ministry of Commerce enforces minimum export prices for certain commodities, which are updated on a periodic basis. In addition, the Ministry of Commerce would normally deny export permits for commodities subject to export prohibition, and to exporters not in compliance with repatriation and surrender requirements in earlier export activities.

Export proceeds are subject to compulsory repatriation and sale to the banking system within 45 days of the shipment of goods. At the time of shipment, export documentation is collected by the Customs and forwarded to the Bank of Sudan. After a 45-day period, the Bank of Sudan contacts the commercial bank identified by the exporter to confirm the receipt of export proceeds. In cases of noncompliance, follow-up investigations are conducted by a committee of Bank of Sudan officials.

At end-October 1994, exports subject to prohibition were limited to unprocessed hides and skins, for which local processing was being encouraged. However, as a temporary measure to deter certain illegal domestic activities, scrap aluminum and copper were subject to an export ban from May 1994 to July 1994. In addition, in response to domestic food shortages, sorghum was subject to a temporary export ban from July to October 1994.

d. Proceeds from invisibles

Sudanese nationals working abroad are required to remit annually to domestic residents a minimum amount of foreign exchange. 1/ Remittances must be channeled through the banking system at the commercial bank exchange rate (now the interbank rate). The following schedule of minimum remittances became effective from April 1, 1994: manual workers, soldiers, and medical assistants, US$150; other general employees, US$350; professionals, including university teaching assistants, US$600; professors, doctors, and employees of International organizations, US$800; and businessmen, US$600-US$5,000 (depending on the business activity). Exemptions are provided, however, for Sudanese nationals working in a number of countries, other than employees of international organizations.

Travelers entering Sudan must declare all holdings of foreign currency. Vithin a three-month period, this amount must be either deposited in a free foreign currency account, sold to an authorized foreign exchange dealer, or retransferred abroad.

Appendix I: The Tax System of Sudan

This appendix is organized in three main sections. The first section describes the operation and performance of the main taxes levied in Sudan between 1982/83 and 1993/94. It also highlights some of the important factors that have hindered the effective operation of certain specific taxes. The second section discusses the principal factors characterizing the tax system of Sudan that have lead to the decline in tax revenue in relation to GDP. It also provides estimates of the revenue losses generated by the existence of lags in the payment of taxes. The third section analyses and provides some estimates of seigniorage revenues, and of the “implicit tax” that is collected by the Government through an overvalued official exchange rate.

1. Operation and performance of taxes

a. Personal income tax

The personal income tax (PIT) is paid annually by residents on all income earned in Sudan or abroad, including wages, salaries, leave and sick pay, and all other remuneration for employment or services rendered. However, interest and domestic dividends, employers’ contributions to retirement and medical schemes, and housing and transport allowances are excluded. Individual income taxes are “pay-as-you-earn” basis, and are deducted by employers who are obliged to submit collected monthly revenues by the 15th day of the following month. In the case of a refund, employees may file their returns after December 31.

As of July 1994, the applicable personal income tax rates are as follows:

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