Sudan
Recent Economic Developments

This paper reviews economic developments in Sudan during 1992–96. Real GDP rose by 5.3 percent in 1992/93 when rains were good and by about 4.5 percent during 1993/94–1995/96, as an uneven pattern of rainfall produced swings in output. With the exception of the first half of 1995, the central government’s fiscal performance was weak during 1992/93–1996, with expenditures typically twice as high as revenues and the deficit (on accrual basis) ranging between 18.7 percent of GDP in 1992/93 and 12.7 percent of GDP in 1994/95.

Abstract

This paper reviews economic developments in Sudan during 1992–96. Real GDP rose by 5.3 percent in 1992/93 when rains were good and by about 4.5 percent during 1993/94–1995/96, as an uneven pattern of rainfall produced swings in output. With the exception of the first half of 1995, the central government’s fiscal performance was weak during 1992/93–1996, with expenditures typically twice as high as revenues and the deficit (on accrual basis) ranging between 18.7 percent of GDP in 1992/93 and 12.7 percent of GDP in 1994/95.

Sudan: Basic Data

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

Through end–October 1996.

Interest on an accrual basis.

Excluding public current transfers.

4/ End-October 1996.

I. Introduction and Summary

Sudan, the largest country in Africa, has considerable natural resources, particularly fertile land. Its predominantly agricultural economy has been buffeted by episodes of flood and drought, a long-running civil conflict, and weak economic policies. As inflation worsened in the last decade, real incomes have fallen. A large proportion of the population lives in poverty, and literacy rates are low. Sudan’s economic and financial situation continues to be very difficult. External and domestic imbalances are unsustainable, and monetary policy has been overly expansionary, accommodating budgetary imbalances and private sector demands. With agriculture representing over one-third of GDP, weather conditions have a major impact on output and growth. Real GDP rose by 5.3 percent in 1992/93 when rains were good, and by about 4.5 percent during 1993/94–1995/96, as uneven pattern of rainfall produced swings in output. With the exception of the first half of 1995, the Central Government’s fiscal performance was weak during 1992/93–1996, with expenditures typically twice as high as revenues and the deficit (on accrual basis) ranging between 18.7 percent of GDP in 1992/93 and 12.7 percent of GDP in 1994/95. Government deficits continued to be financed by the Bank of Sudan, with the net credit to the Government expanding from 5.5 percent of the opening money stock in 1994/95 to about 42 percent in 1996. This direct monetization of the deficit has contributed to accelerating monetary growth and inflation. Inflation accelerated to 71 percent in 1995, to 162 percent in 1995/96, and it reached almost 165 percent in August 1996 (end-period basis).

The poor performance in the period that preceded 1994/95 prompted the authorities in May 1994 to renew efforts to strengthen economic policies by adopting a stabilization program covering 1994/95 which the Fund staff agreed to monitor informally. Performance under the 1994/95 program constituted a significant improvement from the early 1990s. Owing to a rebound in revenue and sustained expenditure containment, net domestic bank borrowing was reduced from 3.2 percent of GDP in 1993/94 to 0.8 percent in 1994/95, with limited government borrowing from the Bank of Sudan occurring during January–June 1995. Revenue rose significantly on account of higher domestic prices of petroleum products and upward adjustments to the exchange rate used for custom duty valuation. Expenditure in 1994/95 was contained to 22.0 percent of GDP (11.1 percent excluding unpaid interest), mainly through cuts in local development expenditures. The tighter credit policy and improved government finances contained total credit expansion to 18.6 percent of beginning-period money stock in 1994/95 (down from 49.2 percent in the previous year). The rate of growth of broad money (M2) decelerated from 89 percent in 1993/94 to 54 percent in 1994/95. Reflecting the tighter stance of fiscal and monetary policies, the twelve-month rate of increase in consumer prices fell from over 100 percent in December 1994 to 57 percent in June 1995. Real GDP grew by about 4.5 percent in 1994/95 mainly on the strength of continued advances in agriculture. This favorable outcome has been attributed largely to the abundant and evenly distributed rainfall, better control of pest infestation, and timely application of fertilizers and higher quality seeds.

Since July 1995, Sudan’s economic and financial performance has deteriorated significantly. Revenue shortfalls were substantial, while extrabudgetary outlays surged mainly on account of the subsidization of domestic petroleum prices. Domestic bank financing of the budget deficit from Bank of Sudan reached LSd 89 billion and estimated LSd 219 billion in 1995 and 1996, respectively, compared to LSd 6.7 billion during the first half of 1995. Private sector credit rose by LSd 44 billion in 1995 and an estimated LSd 191 billion in 1996, compared to LSd 8.0 billion in the first half of 1995. Reflecting the sharp increase in credit expansion during 1995–1996, total liquidity increased by 74 percent in 1995 and is estimated to accelerate by 97 percent in 1996, compared to 20.6 percent increase in the first half of 1995. Consequently, the 12-month rate of inflation reached 165 percent in August 1996 before declining slightly to 157 percent in September.

Sudan’s external position deteriorated significantly during 1995–96, owing primarily to an increase in imports and a drop in net private transfers. This deterioration took place despite an important expansion in export volume, particularly of non-traditional exports, and an improvement in the terms of trade over the same period. Imports rose as short-term capital inflows and other private capital inflows (included in errors and omissions) more than offset the sharp drop in official financing, particularly of project grants and loans. The UN World Food Program and the International Fund for Agricultural Development have become the main sources of official financing whereas all financing from bilateral creditors has practically stopped over the past two years. Thus, the external sector deficit has continued to be financed mainly by a further accumulation of payments arrears, which were expected to reach US$17 billion by end-1996, accounting for about 84 percent of the total stock of debt. In this context, Sudan’s external public debt remains unsustainable, with a debt service due (including late interest payments) exceeding 100 percent of current account receipts, and actual payments, most of them to the Fund, of only about 11 percent of those receipts.

Regarding external sector policies, the Sudanese authorities implemented a series of reforms in the exchange rate, which culminated with the adoption of a market-determined exchange rate system in September 1995. Other measures were also adopted to deepen the foreign exchange market and increase competition. However, most of these measures and the exchange rate regime were reversed by mid-1996. A de facto fixed exchange rate system has been in effect since then despite the lack of supportive financial policies. In addition, a multiple currency practice has been reinstated, and market segmentation has worsened. Consequently, Sudan’s competitiveness has deteriorated, reversing the gains achieved since September 1995, and the volume of foreign exchange transactions has dropped drastically to less than one-third compared to level prior to the adoption of the new measures. A trade reform was also enacted in early 1996, in part based on IMF technical assistance recommendations.

II. The Real Sector

A. Overview

1. Sudan is the largest country in Africa with an area of 2,506,000 square kilometers, but it is also one of the poorest with a per capita income of about US$240 per year. Population is estimated at about 30 million and growing at the rate of 2.9 percent per year. According to social indicators, Sudan is also among the least developed in the world with, inter alia, an adult illiteracy rate of more than 50 percent, rural access to potable water of about 45 percent, and an infant mortality rate of about 75 per thousand. The northern one-third of the country is arid desert, and the areas in the south and southeastern regions consist of rain forests with large untapped potential and swampland. Sudan is traversed by the Blue and White Nile Rivers, which provide ample supply of water to a vast region. Apart from some potential for oil and some gold deposits in the south, the country has few other mineral resources.

2. In these circumstances, the economy is heavily dominated by the agricultural sector, which traditionally accounts for roughly one-third of total production, over four-fifths of exports, and two-thirds of employment. This notwithstanding, there is considerable potential for further exploitation of agriculture. About 4 million feddans1 are irrigated by the Blue and the White Nile Rivers, but the total potential arable land is much larger, estimated at 80 million feddans. In addition, only one quarter of the estimated 240 million feddans suitable for grazing for livestock is currently under pasture. There are two planting seasons in most areas of southern Sudan, of which the first takes place in April with the harvest occurring in July; the second planting starts in July, with harvesting from November onwards. In most of the northern upper-Nile states, the most important rainfall arrives in July–August, and harvesting of the crops begins in November.

3. Being heavily dependent on agriculture, the growth of the economy is influenced by the patterns and amount of rainfall,2 which has indirect effects on the manufacturing and services sectors. In addition, the country suffers from a poor transport system, which is centered around Khartoum, Port Sudan, and the irrigated agricultural schemes, thereby posing a major barrier to the expansion of economic activity to the other parts of the country. Also, the protracted conflict in the south involves a large financial cost, hampers the growth and development of economic activity—in particular oil exploration and production—and imparts a heavy burden arising from the displaced local population and refugees from neighboring countries.

4. As regards recent developments, notwithstanding a slight decline in 1995/96, the growth of output in Sudan has averaged about 4.5 percent in the last five years (Chart 1 and Table 1).3 This favorable outcome, particularly in the past two years, has been due mainly to advances in agricultural production, which has more than offset the drop in services. Industrial output showed modest gains, reflecting mainly increases in mining and manufacturing. A brief summary of developments in each of these sectors is as follows:

CHART 1
CHART 1

SUDAN: REAL SECTOR INDICATORS, 1987–96 1/

(Fiscal years ending June 30)

Citation: IMF Staff Country Reports 1997, 017; 10.5089/9781451833669.002.A001

Source: Sudanese authorities.1/ 1996 data are staff estimates.* Calendar year.
Table 1.

Sudan: Origin of Gross Domestic Product, 1992/93–1996

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

B. Agriculture

Agricultural crops

5. As regards the output of the agricultural sector, following an increase of 14 percent in 1994/95, production rose further by about 9 percent and contributed more than four-fifths of value added in 1995/96 (Chart 1 and Table 1). The slight decline in the rate of growth over the last year reflected mainly the uneven and relative lack of rainfall in certain key producing areas. The fall in output was particularly evident in the rainfed subsector where production of certain basic grains (e.g., sorghum) was markedly affected. All in all, the relatively strong growth of the agricultural sector in general over the past five years has been attributed to the generally abundant rainfall, better control of plant diseases and pest infestation, and the timely application of fertilizers and higher grade seeds.

6. Agricultural output in Sudan may be broadly divided into: (i) crops; (ii) livestock; and (iii) forestry/fisheries. Agricultural crops can be further subdivided into the irrigated and the rainfed sectors, the latter of which is composed of the mechanized and traditional subsectors. The irrigated sector accounts for approximately 4.5 million feddans (3.5 million feddans of cultivated area), and is composed of a few large, mechanized agricultural schemes (e.g., Gezeira, New Haifa, Blue and White Nile, Rahad, Suki, Tokar, Darfur, Khartoum, etc.), the main crops of which are cotton, sugar, wheat, groundnuts, and oilseeds.

7. Regarding the rainfed sector, on the one hand is the mechanized subsector, which is composed of medium-sized farms (averaging roughly 1,500 feddans) in the areas of Damazin, Kosti, Gedaref, Dilling, Renk, and other eastern states. Modern machinery (tractors, combines) and fertilizers are used for planting and harvesting, but the farms rely heavily on migratory labor for completing the weeding process. About 80 percent of these farms are devoted to sorghum, and the remaining 20 percent to sesame. On the other hand, the traditional subsector comprises numerous small farms, averaging 1–5 feddans, which produce cotton, millet, groundnuts, sesame, sunflower, fruits, vegetables, as well as livestock and gum arabic. These small farms, which are located largely in the central states, Kordofan, Darfur, and the southern region, employ largely labor-intensive techniques and generally produce low-yielding varieties of crops.

8. Production of agricultural crops rose by nearly 12 percent (more than one-half of value added) in 1995/96, as the increases in the irrigated crop subsectors more than offset the declines in output for most commodities in the rainfed (mechanized and traditional) subsectors.

  • Irrigated subsector: In 1995/96 output rose sharply by 26 percent, due mainly to production increases in cotton (17 percent), groundnuts (25 percent), and wheat (17 percent) (Table 2). For these products, increases in output were occasioned by expanded acreage to take advantage of the buoyant international market prices, as well as better yields from the cultivation of higher quality seeds, more intensive application of fertilizers, and efficient control of plant diseases. In the case of cotton, use of aerial spraying of pesticides resulted in a more successful control of whitefly infestation, thereby neutralizing the spread of the honeydew decease of the cotton lint. Moreover, contrary to previous years, ginning operations were started on time, and there were no serious problems in transporting the finished product to Port Sudan. On the other hand, output of sorghum declined considerably, which was due entirely to a large drop in cultivated areas. The irrigated sorghum area was also affected by a change in crop rotation in some schemes, with the result that production was reduced by about 30 percent in 1995/96.

  • Rainfed mechanized subsector: Output, particularly sorghum, declined by nearly 15 percent in 1995/96 (Table 2). This outcome was attributed to the poor and uneven distribution of rainfall at the start of the planting season in the eastern (Gedaref) and central (Damazin, Kosti) areas that adversely affected the yields. In the areas of Eastern and Western Equatoria and North Bahr El-Ghazi, rains began on time but there was a dry period in June–July that forced a replanting of crops. Moreover, the failure to control pests (grasshopper and rodents) was cited as important factor in the decline in production. Other crops produced in this area include cotton, millet, and sesame, which also registered output declines stemming from a combination of a drop in acreage and/or yields.

  • Rainfed traditional subsector: This subsector, which is composed of small farms varying in size from 1–5 feddans in western Sudan, concentrates on producing low-yielding varieties of crops, including sorghum, groundnuts, and millet. Output dropped by some 42 percent in 1995/96 (Table 2), also as a result of the uneven distribution of rainfall and the fall in cultivated areas. In the Jonglei state, heavy rains during May, particularly in the Pibor and Pochala areas, resulted in floods and heavy crop losses. In the upper Nile states, notably in the Sobat basin, the rains continued through September, which led to flooding along the Sobat and Akobo areas and to an estimated loss of crops by about 30 percent.

Table 2.

Sudan: Indicators of Selected Agricultural Crops, 1993/94—1995/96 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.

Livestock

9. The main livestock (including processed meat and milk from cattle) producing areas in Sudan are located in the western provinces of the Upper Nile States, Eastern Equatoria, Jonglei, and parts of the Bahr El-Ghazi states. Production of livestock increased by 5 percent in 1995/96, owing to the continued high breeding and lower mortality rates with the application of higher quality veterinary care (Table 1). Moreover, the abundant rainfall resulted in an exceptionally good browse and grazing for cattle and small stock (sheep and goats). In recent years, several other factors contributed to the successful outcome of this sector, including: (i) the continued emphasis on incorporating livestock production into integrated farming schemes (e.g., Gezeira); (ii) the adoption of rotational grazing, greater participation by small private producers; (iii) and increased credit facilities provided by the specialized banks (e.g., Animal Wealth Bank, Livestock Producers Bank, and Agricultural Bank).

Forestry and fisheries

10. A large bulk of the output from forestry/fisheries derives from the production of gum arabic and felled lumber for processing to charcoal and other substitute energy sources. In 1995/96, output from forestry increased by 8 percent (0.3 percent of value added), which was related to the sharp rise in the demand for cheaper sources of energy, particularly in the wake of successive upward adjustments to domestic petroleum prices. Despite relatively poor rainfall in certain key producing areas, gum arabic production rose slightly to about 25,000 metric tons (Statistical Appendix Table 11), of which about 20,000 tons were on account of the higher variety (Hashab), and the remaining one-fifth of the lower quality varieties (Talha). With respect to fisheries, output continued to be exceptionally good due to the high levels of rainfall in southern Sudan and neighboring Ethiopia.

C. Industry and Services

11. Production from the industry and services sectors as a whole rose by about 6 percent, and contributed about 1.1 percentage points to value added in 1995/96. Most evident was a sharp increase in the production of gold, which rose more than five-fold owing mainly to recent discovery and exploitation of gold ore deposits with financial assistance from joint ventures with foreign companies.

12. Following declines in the previous two years, manufacturing output recovered by about 3 percent in 1995/96, mainly on account of a recovery of intermediate goods (cement), and food and beverages (flour, vegetable oils, and soft drinks) (Statistical Appendix Table 15). Modest gains were also registered in the manufacturing of shoes, reflecting the increase in tanning output. At the same time, however, declines were witnessed in apparel, associated with shortages of imported inputs and low capacity utilization of the factories. Meanwhile, the services sector continued to show a drop in output for the second consecutive year, which was caused by the cutback in government services in the wake of the tight fiscal and monetary policies in conjunction with the Government’s stabilization efforts.

13. As regards oil, Sudan’s petroleum reserves are roughly estimated at 250–300 million barrels (equivalent to about 17 years at current consumption levels). In late July 1996, a new refining facility was inaugurated at El-Obeid, with an initial refining capacity of around 10,000 barrels per day (bpd). It is envisaged that the crude oil will be transported by tanker trucks through a newly constructed road from the eight Heglig oil fields in the south, which currently produces about 10,000 bpd. It is roughly estimated that the refinery will be able to supply one-third of Sudan’s consumption needs. Under a joint venture with Russia (Zangas), provisions are underway to construct a 1,800-km. oil pipeline from the Heglig and Unity fields (via El-Obeid to the proposed oil refinery in Khartoum) to Port Sudan. The first stage of the 5-year project incorporates plans for a 300-km. pipeline from the Heglig oil field to El-Obeid will commence in early 1997.

D. Inflation and Prices

Inflation

14. After rising from 57 percent in June 1995 to a peak of 165 percent in August 1996, inflation (as measured by the 12-month rate of increase in the medium-income consumer price index) declined to about 157 percent in September 1996 (Statistical Appendix Table 16). Most of the acceleration in the rate during the past several months was caused by: (i) excessive domestic credit expansion to cover the widening Government deficit and private sector financing; (ii) successive increases in the domestic prices of petroleum, which has had adverse repercussions on virtually all sectors of the economy; and (iii) shortages of basic foodstuffs (notably sorghum), owing to poor rainfall in some areas that adversely affected yields.

Price controls

15. Price controls for most consumer goods have been lifted, with the exception of petroleum and sugar, which are considered strategic commodities and remain Government monopolies. In the case of petroleum, despite recent price increases, domestic price levels continue to remain well below the equivalent international market prices, resulting in large Government subsidies to the state petroleum company. In the case of bread and wheat, there are no Government net subsidies mainly as a result of the neutralizing effects of cross-subsidization. In fact, cross-subsidization often yields a net contribution to the budget, as in the case of sugar in the recent past. The mechanism for cross-subsidization for these two products is as follows. For bread, lower income families continue to be entitled to a card authorizing the purchase of a certain number of loaves at the subsidized price of LSd 10 per loaf vis-à-vis a free market price of approximately double that amount. For sugar, the subsidy is administered according to the same principle. A two-tier price structure still applies wherein the lowest income families are issued a ration card, which entitles the bearer to a subsidized price of about LSd 9.38 per rotl (i.e., 0.99 pounds) under the principle of “one ounce per day per person in the family.” Any needs in excess of this amount have to be purchased at the free market price (currently about LSd 900 per rotl).

Procurement prices

16. Most enterprises responsible for marketing agricultural commodities have already been privatized, with the exception of the Sudan Sugar Corporation and the Gum Arabic Corporation. As a result, the prices paid to the farmer (procurement prices) have generally risen in line with international prices. In the case of procurement prices for non-cotton commodities (e.g., sorghum, groundnuts, sunflower, sesame, millet, etc.), procurement prices are freely determined at periodic auctions at regular intervals throughout the country. For cotton, procurement prices are calculated according to the following formula, which results in the pass-through of the benefits of favorable export price to the former: f.o.b. export price in US dollars less 11-1/2 percent (comprising 10 percent export tax; 1/2 percent for “quay” marketing dues; and 1 percent for the exporter) less LSd 700 per bale (preparation fees) equals the “ex-store” price, which is then converted to local currency at the official exchange rate. The “ex-store” price less 4 percent (comprising 2 percent marketing fee for the Sudan Cotton Co. and 2 percent dues for a Reserve Fund) equals the net price paid to the farmer (procurement price). The total deductions from the original f.o.b. price amount to about 16 percent. In the case of wheat, the marketing board announces two months in advance of the planting season a “generous” minimum price, which is sufficiently high to ensure adequate incentives for planting. Any excess profits arising from higher actual market prices are jointly shared at the rate of 30 percent to the Government and 70 percent to the farmer. In the event of a loss, the marketing board absorbs all of the losses.

III. Public Finance

A. Structure and Institutional Setting

17. The government sector in Sudan consists of the Central Government, regional and provincial governments, and nonfinancial public enterprises controlled fully or partly by the Government. The Central Government’s influence on the rest of the economy is both significant and pervasive. The Central Government is the most important part of the general government, and is responsible for formulating and implementing fiscal policy. In recent years, the role of the state governments has expanded to include a significant portion of total Government expenditure in community and social services and in 1993 their number increased from 9 to 26.

18. Until 1995, the Central Government was responsible for financing the current deficits of the state governments and was fully responsible for the development expenditures in Sudan. In early 1996, there was a decentralization of power, and the state governments were granted more autonomy in allocating their expenditures. To enable the state governments to finance their current and capital expenditures, beginning 1996, revenues generated from excise and sales taxes, rental income tax, capital gains tax, car licencing tax, and agricultural tax will be transferred fully to the state governments. The Central Government still finances the national development projects within the states. The local authorities do not have access to foreign or domestic borrowing; they depend on their own sources of revenue and on their share of tax revenue under the new arrangement, and on annual transfers for capital expenditures from the Central Government budget.

19. Nonfinancial public enterprises play an important role in the provisions of goods and services. Public enterprises are engaged in diverse lines of activities such as oil refining, textile manufacturing, sugar production, cement production, and the provision of public utilities transport and communications. Public enterprises also play a major role in the wholesale trade–in particular, monopolizing the exports of cotton and gum arabic, importation of petroleum products, and marketing of sugar. The Government’s policy since the early 1990s has been to privatize as many public enterprises as possible, and to require those enterprises that remain in the public domain to operate on commercial basis.

20. While the financial operations of nonfinancial public enterprises are important, the absence of detailed data hampers the evaluation of the overall fiscal developments of the consolidated nonfinancial public sector in Sudan. The analysis below focuses primarily on Central Government operations, covering activities of the rest of the public sector only to the extent that they are already reflected in the Central Government operations.

B. Overview (1992/93–1995)

21. Over the 3-year period ending 1995, the fiscal position remained weak, with the budgetary revenue equivalent to less than half of budgetary outlays. The fiscal position continued to be weakened by increasing recourse to extrabudgetary outlays, caused mainly by the failure to cover the higher cost of petroleum products stemming from a more depreciated exchange rate and shortfalls in the collections of Government Petroleum Corporation (GPC). After dropping as a percentage of GDP to 12.7 percent in 1994/95 from 18.7 percent in 1992/93, the overall deficit on an accrual basis rose once again to 15.3 percent in 1995 (Table 4). The fiscal deterioration in 1995 occurred in spite of a significant improvement during the first half. Servicing of external debt became increasingly selective, and a further accumulation of external payment arrears in effect became a major financing source. In 1992/93–1993/94, as interest paid on external debt represented only a small fraction of external interest falling due, the primary deficit converged to the overall deficit on cash basis (Chart 2). In 1994/95–1995, the spread between the primary deficit and the overall balance on cash basis widened by about 1 percent of GDP, as interest payment increased during this period.

Table 3.

Sudan: Consumer Price Index, 1991/92–September 1996 1/

(Index, February 1992 = 100)

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Sources: Statistics Department of the Ministry of Finance.

Middle income index covering greater Khartoum area.

For 1991/92–1996, the annual data shown are period averages.

Table 4.

Sudan: Central Government Operations, 1992/93–1996 1/

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Sources: Ministry of Finance; Bank of Sudan; and Fund staff projections.

Starting in 1996, all official accounting moved from a fiscal year (July–June) to a calendar year basis.

Starting in 1995, includes expenditures on commodity aid.

There is discontinuity in these series prior to 1993/94, due to a reclassification of the budget involving, inter alia, reclassification of the contingency reserve for wage adjustments from the Transfers category to the wages and salaries category.

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

CHART 2
CHART 2

SUDAN: FISCAL INDICATORS, 1987–96 1/

(In percent of GDP; fiscal years ending June 30)

Citation: IMF Staff Country Reports 1997, 017; 10.5089/9781451833669.002.A001

Source: Sudanese authorities.1/ 1996 data are staff estimates.* Calendar year.

C. Revenues

22. Despite numerous discretionary measures in the last few years, revenue as percentage of GDP declined to 8.7 percent in 1995 from 9.5 percent in 1992/93 (Table 4). This lack of buoyancy in revenue can be traced to a number of factors. First, Sudan relies heavily on taxes on imports, and due to the lack of timely adjustments in the exchange rate for the customs duty valuation to the level of the official exchange rate, the effective tax rate for custom duties has been declining. Second, the specific nature of many taxes, fees, and charges in the face of high inflation, combined with a long lag between income earned and taxes paid, have effectively constrained revenue growth. Third, Sudan offers a number of exemptions from import duties and taxes on income and profits to encourage activities deemed necessary for the social and economic development of the country. Fourth, tax administration and the collection of tax liabilities have been impaired by shortages of trained staff and equipment and an erosion in taxpayers’ compliance due to the weak penalty enforcement. Fifth, performance of the parastatal sector has been poor. Sixth, the growth of unreported economic activities and the lack of adjustments in fees and charges have, de facto, resulted in the erosion of the traditional tax base.

23. During this period, the decline in total revenue reflected a drop in non-tax revenue, which declined as a percentage of GDP from 2.6 percent in 1992/93 to 1.8 percent in 1995 (Statistical Appendix Table 17). Nontax revenues generally followed the trend in commodity price differentials for oil, which, with the exception of 1994/95, declined to zero. The increase in fees and charges and in revenue generated from taxing the price differential of sugar was not sufficient to compensate for the decline in real terms in the other items in nontax revenue, e.g., car licences, agricultural taxes, and stamp duties.

24. Between 1992/93–1995, tax revenue stabilized at around 6.9 percent of GDP; as a result, the share of tax revenue in total revenue increased from 72.4 percent in 1992/93 to about 80 percent in 1995. These developments were reflected in increasing shares in total revenue of taxes on income and profits, as well as on goods and services, with taxes on international trade more or less maintaining their share. During this period, the share of taxes on income and profit has stabilized at about 2.5 percent of GDP; with business profit tax accounting for almost 80 percent of the total. Business profit taxes have recently become an important source of revenue, and their contribution to total revenue has increased steadily from 20.8 percent in 1992/93 to 22.8 percent in 1995. 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 present system of assessment of business taxes has continued to contribute to the buildup of tax arrears; business taxes are assessed as an estimate by the Tax Department in the absence of final accounts, and frequent appeals by taxpayers can take years to settle in court.4

25. Taxes on goods and services have increased slightly as a percentage of GDP from 1.5 percent in 1992/93 to about 1.7 percent in 1995. However, the low level of domestic manufacturing activity has been a major factor inhibiting the growth of these taxes. Taxes on foreign trade declined steadily from a high of 5 percent of GDP in 1987/88 to2.5 percent in 1995. Taxation on imports has been influenced by delays in changes in the customs exchange rate, considerable changes in the composition of imports, and the shift towards basic necessities, which are usually exempted or subject to low rates. During 1992/93–95, there were 15 adjustments in the customs exchange rate (Appendix I). Exemptions from import duties are accorded to imports by the government and other public sector institutions, as well as enterprises benefiting from investment codes. As a result of these factors, the aggregate tax base has been eroded, and the value of revenue loss is estimated in 1995 to be in the range of 50 percent of total imports.

D. Expenditures

26. Most of the recent increase in total expenditure was attributable to a rapid increase in interest obligations falling due, which reached an estimated 12.9 percent of GDP in 1995 from10.7 percent in 1992/93 (Chart 2 and Statistical Appendix Table 18). As only minimal interest payments were made during the period, interest arrears were built up rapidly. Excluding interest obligations, total expenditure and net lending remained broadly stable between 10 percent and 12 percent of GDP during 1993/94–1995, compared to 17.3 percent in 1992/93.

27. Beginning in 1993/94, the composition of total expenditure and net lending shifted further in favor of current expenditure, which increased from about 63 percent of total expenditure and net lending (excluding interest arrears) in 1992/93 to about 75 percent in 1995; at the same time, the share of development expenditure as a percentage of GDP declined from 5.1 percent to 1.6 percent. Both local financing and project aid components of development expenditure registered similar declines, with the trends in project aid reflecting mainly valuation adjustments and lower disbursements by most creditors. In recent years, the authorities have made efforts to channel development spending into priority activities, with the result that the agricultural sector receives the largest share (about one-third), followed by energy and mining, transport, services, and industry.

28. In comparison to other Sub-Saharan countries, total expenditure (excluding interest arrears) is not excessively high, however; it has been maintained in the face of a declining domestic revenues. The fall in the revenue to GDP ratio has been mainly offset by cuts in development expenditure. The Government has attempted to control expenditures in successive stages, but these efforts have been largely ineffective due to the emergence of large extrabudgetary expenditures and underlying weaknesses in the planning, budgeting, control, and monitoring system.

E. Fiscal Developments in 1996

29. Fiscal policy for 1996 aimed at a substantial reduction in the fiscal deficit and to limit net domestic borrowing from the Bank of Sudan by the Government to 1.0 percent of GDP. The key fiscal adjustments were to be the enhancement of revenue collection and the widening of the tax base. To achieve the revenue target of 12.5 percent of GDP for 1996, the Government intended to implement the following measures: (i) an import tariff reform; (ii) adjustments to domestic prices of petroleum products; (iii) adjustments of the customs duty valuation to the market exchange rate; (iv) increases in various specific excise taxes and in the surcharge on airline tickets; (v) the introduction of the first phase of the general sales tax; and (vi) the privatization of several major public enterprises. Expenditures in 1996 were to be held, on cash basis, to no more than 15.5 percent of GDP with strict limits on nonproductive outlays; a ceiling on general public sector wage increases; the streamlining of the civil service; and the avoidance of extrabudgetary expenditure (mainly petroleum price subsidization).

30. In early 1996, the Government implemented some of the planned revenue measures. First, the import tariff system was reformed. The new tariff schedule includes 7 rates ranging from 5 to 250 percent, compared to 12 rates ranging from 1 to 250 percent previously. In the new tariff schedule, 60 percent of total imports are subject to the 5 percent rate and only 3 percent are subject to a rate higher than 75 percent. Staff estimates for 1996 indicate that the average effective rate declined from about 14.5 percent to 14.2 percent. Second, the defense and security duty that was introduced in 1987 at 20 percent of the c.i.f value of certain imports was replaced by a 10 percent consumption tax on most imports, and the number of exemptions was lowered substantially. However, the other revenue measures were not implemented as originally planned. Only minor adjustments were made to the customs valuation exchange rate, and no adjustments to the price of petroleum products were made during January-May 1996.

31. The weak revenue efforts were exacerbated by a failure to control expenditures (excluding wages, interest payments, and transfers to localities) as originally envisaged. As a result, the implemented measures were not sufficient to reverse the fiscal deterioration that begun in the second half of 1995.5 During the first half of 1996, revenue shortfalls were substantial, while extrabudgetary outlays surged on account of the subsidization of domestic petroleum prices (LSd 83 billion). Domestic bank financing of the overall deficit amounted to LSd 116 billion (Table 4)6 (or 1.1 percent of annual GDP), compared with the authorities’ revised target of LSd 52 billion for the year as a whole, and bank financing by the Government of LSd 93 billion in 1995.

32. The poor fiscal outcome of the first part of 1996 prompted the authorities to adopt a series of emergency measures in May–June 1996 aimed at cutting the fiscal deficit. On the revenue side, the following measures were taken: (i) an increase in domestic petroleum prices and petroleum products: for gasoline, from LSd 1700 to LSd 2,500 per gallon; for gas oil, from LSd 600–750 per gallon to a unified price of LSd 1,200 per gallon; for furnace oil, from LSd 130,000 to LSd 180,000 per ton; (ii) increases in fees and charges: for those under the Ministry of Interior by 135 percent; for usage of federal roads by 50 percent; for hospitals by 120 percent; and for all others by 30 percent; (iii) an increase in stamp duties for all 529 items by 50-900 percent, with an average increase of 200 percent; (iv) and addition of 16 items to the list of commodities subject to stamp duties; and (v) the issuance of various ministerial decrees to generate additional revenues (Box I). For the second half of 1996, the authorities also considered additional corrective actions, in particular, further periodic adjustments to petroleum prices, electricity rates, the customs duty valuation rate, as well as certain fees and charges. The authorities also sought to impose a tax on the domestic price differentials for cement and sugar, improve tax administration, and accelerate the sale of public enterprises.

33. On the expenditure side, the Government committed to curtail expenditures in the second half of 1996, so as not to exceed the LSd 40 billion target for net domestic borrowing. Accordingly, the Government would: (i) resist granting any increase in public sector wage; (ii) streamline the civil service; and (iii) restructure and/or divest additional public enterprises. Several ministerial decrees were issued during May–June to improve fiscal discipline (Box I). The overall effect of the proposed measures would help to limit the deficit on cash basis to 1.0 percent of GDP in the second half of 1996.

34. According to actual data through the end of the third quarter and estimates for end-1996, performance has been disappointing. It is estimated that, for the second half of 1996, the overall fiscal deficit on cash basis will exceed the target by 0.3 percent of GDP, and that net domestic credit to the Government will amount to LSd 103 billion, compared to a target of LSd 40 billion (Table 4). The revenue shortfall is estimated at 1.2 percent of annual GDP, reflecting sharp erosion of the tax base due to higher inflation, as well as insufficient adjustments in domestic petroleum prices and the customs duty valuation rate. The state petroleum corporation, instead of contributing the envisaged LSd 30 billion to the budget, is projected to incur losses of about LSd 46 billion. In addition, the planned increase in electricity prices was rescinded in August in response to widespread public protests. To partly compensate for the revenue shortfall, expenditure (occluding interest arrears) is expected to be held to about 5.0 percent of annual GDP in the second half of 1996, against the envisaged 6.0 percent.

35. For 1996 as a whole, revenue is estimated at LSd 680 billion, about 12 percent lower than envisaged in the original budget. The shortfall in revenue collection was not compensated for by cuts in expenditures. Total expenditures excluding interest arrears and foreign development expenditures (LSd 944 billion) exceeded what was envisaged in the budget (LSd 873 billion) by 8.1 percent. The increase in expenditures was mainly the result of extrabudgetary expenditures, which is expected to reach LSd 129 billion by end 1996. The increase in total expenditure occurred despite a 48 percent cut in development expenditure than originally budgeted. As a result, domestic bank borrowing is projected to be about LSd 264 billion, compared with LSd 62 billion foreseen in the original budget, excluding extrabudgetary expenditures, domestic bank borrowing is expected to reach LSd 135 billion. The Government deficit on cash basis is expected to be about 2.9 percent of GDP. On accrual basis, the deficit is expected to reach 16.3 of GDP, as interest arrears are expected to be about 13.4 percent of GDP.

F. Privatization

36. In an effort to promote greater efficiency and decentralize government operations, the Privatization of State Corporation Act was passed in August 1992, which envisaged the sale of 190 public corporations (about 90 percent of the total number) to the general public. Under Phase I (1993–95) of the program, the Government succeeded in selling 17 public corporations, engaged in joint ventures with private entities in 3 public corporations, leased 2 enterprises, and restructured or transferred to local governments 17 companies. Under Phase II (1995–98) of the plan, the sale of an additional 50 public corporations has been envisaged. In contrast with Phase I, the current plan envisages the sale of the largest enterprises, including the four sugar corporations (Guneid, New Haifa, Assalaya, and Sennar), the National Railways, Sudan Airlines, and the National Electricity Corporation. Notwithstanding the Government’s intention to accelerate privatization as part of their program for the second half of 1996, there has not been any progress as of end-October 1996, apart from the leasing of a hotel to a foreign corporation.

37. In general, the conditions of the sales are on a cash basis and a higher price is charged if the purchase is on credit terms. Moreover, the purchaser should provide for cancellation of any interest arrears, and should provide new capital for upgrading the company. However, the Government has relaxed the conditions of the sale of these enterprises. The slow progress of sales has been due partly to the inability to attract investors, who may be discouraged by the poor state of the corporations, including poor management, inadequate cash flow, unprofitability, and overstating. Instead of allocating some funds to partially rehabilitate the remaining unsold enterprises, the Government has been considering the reduction of the selling prices and easing the conditions for their sale. Moreover, the Government has also decided to manage the privatization program more flexibly and encompass schemes such as leasing and different forms of joint ventures, and would be complemented by appropriate financial and operational restructuring.

IV. Money and credit

A. Institutional Structure

Bank of Sudan

38. The Bank of Sudan was created by the 1959 banking act, and is responsible for managing the country’s monetary and credit policy as well as supervising the banking system. It is the sole source of credit to the Central Government, which does not pay interest on its outstanding debt. Up to August 1990, the Bank of Sudan was also the main source of credit for the public enterprises; since then, most state enterprises and public entities depend on the commercial banks for their financing needs as part of the Central Government’s policy of promoting self-sufficiency of the parastatals. However, a few state enterprises, such as the state petroleum corporation (GPC), have indirect access to the Bank of Sudan via the Central Government’s recent financing of extrabudgetary expenditures for subsidies of domestic petroleum products.

39. In accordance with the Banking Regulations Act of 1991, the Bank of Sudan has supervisory responsibilities over commercial banks, including the issuance and revocation of banking licenses, for authorization to establish or close branches, for setting capital and reserve requirements, profit margins under Islamic banking practices. Part of the provisions under the 1991 banking regulation act was the creation of the Financial Institutions Administration (FLA) which is an agency within the Bank of Sudan that has the responsibility to assist the Bank of Sudan to oversee and regulate the operations of commercial banks and financial institutions, including insurance schemes, pension funds, and government funds. In addition, the FIA monitors all other activities of banks, such as portfolio management, reserves, and provisions.

Commercial banks

40. Sudan’s 27 commercial banks accept deposits and extend credit to the private sector, and to a lesser extent, public enterprises. Two of the largest commercial banks, the Bank of Khartoum and the El Nilein Bank Group, are government owned; most of the other banks are either privately owned or with mixed ownership.

41. Since 1984, Sudan adopted the principles of Islamic banking in accordance with Sharia law, which strictly prohibits the charging of interest on financial transactions and fixed ex-ante rates of return. Borrowing and lending operations are conducted under various purchase and sales agreements or on the basis of profit sharing arrangements that determine ex-post the rates of return (e.g., Murabaha, Musharaka).7 Depending on semiannual reviews of credit needs of the economy (during June and December of each year), the Bank of Sudan, in consultation with commercial banks and representatives of the business and agricultural sectors, sets both the margins for borrowing and the levels of mandatory cash and statutory reserve requirements for the following six-month period.

Specialized credit institutions

42. Sudan has a number of specialized credit institutions, the largest of which is the Agricultural Bank of Sudan and its various branches throughout the country. Among its major functions are to provide a major portion of credit to the agricultural sector for planting and preparation of crops as well as to extend loans for working capital for marketing and storage requirements. The other specialized credit institutions include the Sudan Estates Bank, which specializes in housing finance; the Post Office Savings Bank, which concentrates on deposit and personal credit financing; and the Industrial Bank of Sudan, which deals mainly in business loans. The Government also owns two specialized banks—the Post Office Savings Bank and the Sudan Savings Bank—which accept deposits and extend personal loans on a small scale.

B. Monetary and Credit Developments

Developments through 1994/95

43. In the period 1992/93–1994/95, efforts to contain the growth of money were only partially successful, mainly because of failure to strictly control credit to the Government and lack of enforcement of the overdrafts of commercial banks’ accounts with the Bank of Sudan. In 1993/94, monetary expansion exceeded the amount envisaged by the authorities, as the growth of broad money accelerated from 76 percent in the previous year to 89 percent in1993/94 (Chart 3 and Table 5). During this period, net credit to Government rose by LSd S3 billion (32 percent of beginning broad money stock) to LSd 143 billion. At the same time, credit to the private sector expanded by LSd 29 billion (17 percent of beginning M2) to LSd 71 billion, reflecting mainly the authorities policy of achieving food self-sufficiency in the face of declining external foreign assistance.

CHART 3
CHART 3

SUDAN: MONETARY SECTOR INDICATORS, 1988–96 1/

(Fiscal Years Ending June 30)

Citation: IMF Staff Country Reports 1997, 017; 10.5089/9781451833669.002.A001

Source: Sudanese authorities.1/ 1996 data are staff estimates.
Table 5.

Sudan: Monetary Survey and Factors Affecting Liquidity, 1992/93–August 1996

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Sources: Bank of Sudan and staff projections.

Private sector and nonfinancial public enterprises.

Net reserve assets.

Nominal GDP divided by the average of the beginning and end-period stock of money and quasi-money during the period.

44. In an effort to better control private sector credit, in November 1993, the statutory reserve requirement was raised by 10 percent age points to 30 percent of demand and savings deposits denominated in local currency. This policy was tightened further in April 1994 when the Bank of Sudan strictly enforced the reserve requirement and monitored more closely the use of overdrafts against free reserves. Oversight of banks’ management of their holding of Bank of Sudan deposits was also tightened.

45. In 1994/95 monetary policy was weaker than envisaged by the authorities during the second half of 1994, but it was strengthened considerably in the first half of 1995. The shortfall in private sector performance during July-December 1994 resulted from the lax enforcement of credit ceilings, in particular the accommodation of the increased demand for agricultural credit and other priority sectors. In March 1995, however, the mandatory vault cash reserve requirements were further raised from 10 percent to 15 percent. In addition, directives were issued to commercial banks to raise the cost of borrowing under Islamic banking practices and reduce its availability. Specifically, the share of customers’ own financing under Musharaka was raised from 55 percent to 75 percent for local trade, and from 10 percent to 30 percent for priority sectors. For Murabaha, the margins were raised from 35 percent to 50 percent. With the (12-month) rate of inflation declining from 118 percent in June 1994 to about 57 percent in June 1995, the cost of borrowing approached positive level in real terms. The tighter credit policies, along with the improved government finances, contained credit expansion to 19 percent of beginning broad money stock in June 1995, down from 49 percent in the same period in the previous year. Over this period, the annual growth of broad money decelerated from 89 percent to 54 percent in 1994/95, as had been envisaged.

Developments in second half of 1995 and 19968

46. Following the relatively successful outcome in 1994/95, monetary and credit policies were eased considerably in July 1995. To ensure adequate crop financing, effective July 1, 1995 the Bank of Sudan liberalized credit policies through the adoption of the following measures: (i) a reduction in the ratio of vault cash to demand and savings deposits from 15 percent to 10 percent, and in the statutory reserve requirement from 30 percent to 25 percent; (ii) lowering of the share of borrower’s contribution in Musharaka (i.e., Islamic banking equivalent of interest) lending operations from 75 percent to 50 percent for local trade, and from 30 percent to 25 percent for priority sectors; and (iii) a reduction of the prepayment of principal in Murabaha lending operations from 50 percent to 35 percent.9

47. As a result of the easing of credit policies, performance during the second half of 1995 deteriorated markedly. The growth of liquidity accelerated due to bank financing of the Government deficit and the sharp rise in credit expansion to the private sector. Compared with a target envisaged by the authorities of LSd 25 billion, net bank borrowing by the Government during the second half of 1995 amounted to LSd 90 billion, owing mainly to large extrabudgetary expenditures for the subsidy of domestic petroleum prices. Meanwhile, credit to the private sector also exceeded the target (LSd 30 billion) by about LSd 6 billion. Reflecting the developments in total credit, the annual rate of growth of the money supply (M2) accelerated from 54 percent at end-June 1995 to 74 percent in December 1995; this compares with a target of 43 percent envisaged for the second half of 1995. As a result, the 12-month rate of inflation, which showed a declining trend to 57 percent up to June 1995, accelerated to 71 percent in December 1995 and peaked at about 165 percent in August of 1996, since then it stabilized at about 150–160 percent (Statistical Appendix Table 16).

48. For 1996, the authorities aimed at reducing the rate of inflation to about 30 percent by end-year through tight fiscal and monetary policies. In support of these objectives, several measures were adopted to contain net Government borrowing from the banking system to no more than one percent of GDP, while the ceiling for credit to the private sector was set at LSd 50 billion. In March 1996, although margins and reserve requirements remained the same, some credit tightening measures were taken; these included a prohibition of importers to use bank guaranteed checks for settling import duties, and a ban for borrowing through the check clearing mechanism by using overdrafts with the Bank of Sudan.

49. However, instead of improving, the outcome for the first six months of 1996 deteriorated further. During January-June 1996, domestic financing of the Government deficit amounted to LSd 116 billion10 (compared with a revised target of LSd 52 billion for 1996 as a whole), mainly due to the continued subsidization of domestic oil prices. At the same time, private sector credit rose by about LSd 65 billion, as compared with a target of LSd 20 billion for the first half of 1996. As a result, total liquidity rose much faster than envisaged, with the rate of annual increase of broad money rising from 74 percent at end-1995 to 94 percent at end-June 1996. Reflecting the excessive credit expansion, the 12-month rate of inflation rose further to 163 percent by end-June 1996. Given the slippages in performance, the original objectives, in particular the target of 30 percent for end-year inflation, had to be abandoned.

50. In May-July 1996 when it became increasingly evident that the private sector credit was not being contained, as had been envisaged, the authorities took a series of emergency measures for the second half of 1996. As part of the emergency package in June 1996, these credit tightening measures were taken: (i) an increase in margins for borrowing under Musharaka from 65 to 75 percent for priority sectors, from 20 to 30 percent for production cooperatives, and from 10 to 20–25 percent for household productive activities and small-scale producers; and (ii) an increase in margins under Murabaha from 30 to 40 percent for priority sectors and exports, from 30 to 35 percent for small-scale producers, and from 10 to 20 percent for household productive activities.

51. The revised objectives for the second half of 1996 aimed at reducing the inflation rate to about 85 percent by end-year through a tighter control of the growth of liquidity in the economy. Specifically, the increase in the growth of broad money in the 6-month period ending December 1996 was targeted at 20 percent, or 62 percent on an annual basis. In accordance with this target, over this same period, net domestic credit was to be limited to no more than LSd 80 billion (8 percent of broad money stock at end June 1996), to be distributed equally between the Government and private sectors.

52. In the event, monetary policy remained overly expansionary, with net domestic credit in September already exceeded the end-year target by a wide margin. Although the cost of borrowing was raised as initially planned, it proved insufficient in relation to the increase in inflation. In nominal effective terms and weighted by activity, it is estimated that the average rate of return for Musharaka was increased from 45 percent to 59 percent. While the vault cash reserve requirement of 15 percent was observed by all banks in July-August, the holdings of statutory reserves ranged from 17-23 percent, compared to the minimum required of 25 percent. This shortfall was mainly on account of the more important commercial banks, in particular the public banks, on which the related penalties for non-compliance with reserve requirements were not strictly enforced. Growth of credit to the private sector in the second half of 1996 is expected to amount to LSd 126 billion, about 59 percent increase over the first half. With the envisaged credit requirements of the Government already greatly exceeding targets, the annual rate of growth of broad money is projected to accelerate to 97 percent by end-1996, compared with the revised target of 62 percent, and 74 percent in 1995.

C. Prudential Measures and Oversights

53. Under the 1991 Banking Regulation Act, the Financial Institutions Administration was created to oversee and regulate the operations of commercial banks and financial institutions (including Insurance Schemes, Pension Funds, Government Funds). In June 1994, the Bank of Sudan issued the “Banking Adaptation Scheme” regulations, which require all local banks and branches of foreign banks operating in Sudan to comply with the Balse guidelines on capital adequacy within three years (by June 1997). The Balse guidelines essentially require that each bank should not allow the ratio of core and supplementary capital to risk weighted assets to fall below 8 percent. In addition, the Financial Institutions Administration monitors other activities of banks such as portfolio assessment, reserves, and provisions.

54. A periodic report of the Financial Institutions Administration is periodically submitted to the Governor of the Bank of Sudan, including an analysis and recommendations of the status of individual banks in Sudan, in particular: (i) a list of those banks that are already with the Balse guidelines, (ii) those that will easily be able to adapt to the guidelines in the near future, and (iii) those that will most likely not be able to comply with the guidelines. In the case of the latter, the Bank of Sudan will encourage a merger with other banks to reinforce their financial positions. As a result of previous Committee recommendations, several state banks recently were merged, as follows: (i) the Nilein bank and the Industrial Bank to form the Nilein Group; (ii) the Unity Bank and the Bank of Khartoum to form the Khartoum Bank Group.

V. External sector developments

A. Overview11

55. Sudan’s external position deteriorated in 1995 and 1996, owing primarily to a sharp increase in imports and a drop in net private transfers. The current account deficit (excluding official transfers and interest payments due) increased from 7.5 percent of GDP in 1994/95 to 8.6 percent in 1995 and an estimated 9.7 percent in 1996 (Table 6). Most of the increase in the external current account deficit continued to be financed by a further increase in external payments arrears, short-term capital inflows and unreported private capital inflows (included in errors and omissions). As a result, it was estimated that by end-1996, total external payments arrears would reach almost US$17 billion or 84 percent of total external debt. The overall balance of payments deficit also deteriorated in 1996 to 16.3 percent of GDP, from 15.7 percent in 1995.

Table 6.

Sudan: Summary Balance of Payments, 1992/93–1996

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

Estimates based on actual data through end-August 1996.

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

Net short-term trade and other credit facilities of the Bank of Sudan and commercial banks.

Including refunds of burden sharing.

In May 1995, reflects a restructuring debt operation with the African Development Bank Group amounting to US$29 million.

56. Sudan’s external public debt burden remained heavy, with contracted debt service amounting to more than 17 percent of GDP since 1994/95. However, actual debt service payments have been much lower, at about 1 percent of GDP. Since 1994, Sudan has substantially increased its payments to the Fund in order to avoid a further accumulation of external payments arrears; these payments (including burden sharing refunds) increased from US$5.3 million in 1993/94 to US$55.6 million in 1995, and US$49.9 million in the period January-November 1996.

57. The external current account deteriorated in 1995 and 1996, despite a sharp growth in exports. Exports volume expanded by 32 percent, and prices by almost 11 percent during the two years, with total exports rising from US$422 million in 1994/95 to US$556 million and US$600 million in 1995 and 1996, respectively (Statistical Appendix Table 6 and Table 25). However, over the same period, imports rose from US$1.0 billion to US$1.2 billion and US$1.3 billion, respectively (or about 21 percent in volume terms) despite the continuing decline in official financing. Official financing (including project grants and loans) amounted only to an estimated US$29.5 million in 1996, compared with US$97 million in the previous year (and over US$250 million in the early 1990s).

B. Current Account Developments

Merchandise trade

58. The improvement in Sudan’s trade deficit in 1994/95 was reversed in 1995-1996, as imports rose sharply. The trade gap widened to almost 10 percent of GDP in 1996 from 7.5 percent of GDP in 1994/95. This deterioration took place despite a rapid export growth (from 6 percent of GDP to almost 8 percent over the same period) (Table 6), and the improvement in the terms of trade.

Exports

59. The estimated increase in exports in 1996 took place despite the sharp decline in sorghum exports associated with poor rainfall in the cultivated areas. About two-thirds of this improvement in exports was broadly due to higher volumes, particularly in non-traditional products (Statistical Appendix Table 25). However, the substantial increases in international prices of some traditional exports, such as cotton, also contributed to this favorable export performance, as export volume for these products declined.12 As a result, the composition of exports has changed significantly over the past few years. Traditional exports like cotton and gum arabic, which accounted for 46 percent of total exports in the early 1990s, fell to only 29 percent of total exports in 1995-96. On the other hand, non-traditional exports, particularly sesame, livestock, and gold, which registered sharp increases in both volume and value terms, accounted for about 42 percent of total exports in 1996 from half that amount in the early 1990s. However, exports continue to be dominated by two products—sesame and cotton—which traditionally accounted for almost 45 percent of total exports.

60. The growth of exports over the past few years can be attributed to relatively good weather conditions, more intensive use of fertilizers, improvement in control of pests and plant diseases, and the liberalization of procurement prices. However, Sudan’s exports are still far below their potential, as in the 1970s their level had already reached above US$1 billion (measured in 1990 prices). Severe impediments to export growth still remain in effect, particularly in irrigated schemes where crop selection is not entirely based on market mechanism (for instance, cotton production and exports have contracted in recent years, as priority has been shifted to cultivation of food crops in these areas13). Other impediments include poor infrastructure; the lack of a consistent agricultural policy; heavy taxation; and export surrender requirements that penalize key exports.14 For example, in the case of gum arabic, Sudan had maintained until recently a monopoly in international markets; however, an inappropriate domestic and international price policy has hindered export growth, despite its low cost of domestic production. Farmers receive only about 40 percent of the international price, which has been set at such a high level, thereby encouraging the use of gum arabic synthetics and the entry of other producers in the region to compete in international markets.15 Furthermore, gum arabic is subject to high central and regional taxes in Sudan.

61. Another important impediment to export growth is the high concentration of Sudanese exports to only a few markets. For example, in 1995, 53 percent of total exports were destined to just four markets, Saudi Arabia (20 percent), the U.K. (14 percent), China (11 percent), and Italy (8 percent) (Statistical Appendix Table 26). In the case of cotton, 45 percent of exports were destined to China and 16 percent to Thailand. In fact, the favorable domestic production of cotton in China explained the sharp decline in Sudan’s cotton exports during the first part of 1996. Furthermore, about 45 percent of gum arabic exports were destined for the combined markets of the United States and France in 1995, and for sesame, as much as 33 percent of exports were destined to just two markets—Saudi Arabia and Egypt.

Imports16

62. Merchandise imports have also continued to grow—in U.S. dollars terms—reaching US$1,219 million in 1995 and an estimated US$1,344 million in 1996, after dropping to around US$1,023.4 million in 1994/95. About two-thirds of this increase in imports was broadly due to higher volumes (Statistical Appendix Tables 24 and 25).

63. The composition of imports also has changed significantly over the past few years. Imports of foodstuffs, which accounted for 25 percent of total imports in 1991/92, declined to 18 percent in 1995 and further to 16 percent in 1996. This has been mainly due to lower imports of wheat, resulting from increased local production in the irrigated areas. Imports of transport equipment has also declined over the past two years, despite the recent increase in imports of trucks associated with the transportation of petroleum from the newly discovered oil fields in southern Sudan. In contrast, imports of chemical products, particularly fertilizers and insecticides, manufactured goods and machinery and equipment rose to 51 percent of total imports in 1995–96, compared with about 35 percent in 1991/92, reflecting in part the authorities’ policy to encourage agricultural production in an effort to achieve self-sufficiency in foodstuffs. Most recently, in 1996, the further increase in import volume of 5 percent, following a sharp rise (15 percent) in 1995 (Statistical Appendix Table 25), was the result of an apparent stockpiling of commodities, particularly petroleum products, associated with the uncertainties regarding a possible U.N. embargo on trade with Sudan and market expectations of further devaluation of the pound. The increase in imports was also attributed to the rise in implicit import subsidies due to the lag in adjusting the customs valuation rate for taxation of imports.

64. As regards the sources of imports, Saudi Arabia, as in the case of exports, was the most important trading partner, supplying about 10 percent of total imports in 1995 (Statistical Appendix Table 27). Egypt and United Arab Emirates were also important suppliers among regional countries with a combined share gradually rising to 10 percent in 1995. The United Kingdom, Germany, Japan, and France represented the primary sources of imports among industrialized countries, each with a total share of about 6 percent. In Asia, South Korea has become the most important import market (Statistical Appendix Table 27).

C. Service and Income Accounts and Current Transfers

Service and income accounts

65. The deficit in the service account is expected to widen from US$5 million in 1995 to US$16 million in 1996 (Table 6), due primarily to a deterioration in net government receipts. However, this deterioration may be indicative of an increase in transactions passing through official channels after the liberalization of the exchange rate regime in September 1995. The larger imbalances in the net income account in 1995 and 1996 reflected primarily the growing burden of external interest obligations (including late interest payments) on outstanding foreign debt. Contractual interest obligations reached US$913 million in 1995 and over US$1 billion in 1996, thus remaining above 120 percent of total current account receipts despite the improvement in exports. However, actual interest payments as a percentage of current account receipts declined from 3.8 percent to about 3 percent in 1996, most of which were on account of payments to the Fund (Table 6 and Statistical Appendix Table 31).

Current transfers

66. Private remittances, which constitute an important source of foreign exchange from the large number of Sudanese working abroad, dropped from close to US$100 million in the early 1990s to about US$60 million in 1995 and to an estimated US$24 million in 1996. However, this outcome does not imply that total private remittances have in fact declined over the past few years, particularly in view of the fact that Sudanese (locals) are highly dependent on this source of income. First, exchange rate developments influence how much of such remittances take place in the official channels or in the parallel market (including unofficial channels). In addition, exchange rate developments also are major determinants whether Sudanese living abroad send cash or goods in-kind to Sudan. Given the uncertainty created by the frequent changes in exchange rate policy, this explains the reasons for the increasing proportion in total imports of machinery and equipment, which include TV, radios, ovens, and other household items, since the early 1990s. Chi the other hand, official public current transfers, comprising mainly humanitarian food relief and a small amount of cash aid, have remained stagnant at about US$44 million a year since 1994/95 (compared to US$150 million in the early 1990s). Current transfers from bilateral creditors or other multilateral creditors have been negligible during most of the 1990s (Statistical Appendix Table 28).

D. Official Borrowing and Capital Flows

67. Official loans and project grants declined sharply from close to US$500 million in the early 1990s to US$97 million in 1995, and are expected to decline further in 1996 to about US$29 million (Chart 4). The decline in project grants was particularly significant since the peak of US$40 million in 1992/93. Since then, they gradually declined to an estimated US$8.5 million in 1996, comprising of UNDP technical assistance, African Development Fund (AfDF) and Islamic Development Bank (IDB) financing for a few infrastructure and institutional strengthening projects. Modest amounts of project grants from bilateral donors have been provided most notably by Germany over the past few years. Official borrowing has also declined significantly to about one-sixth of the level achieved in the early 1990s. The International Fund for Agricultural Development (IF AD) has recently become the main source of medium- and long-term project financing, together with small amounts from the Islamic Development Bank and the OPEC fund. Nonetheless, financing from bilateral creditors has practically ceased since 1994/95 (Statistical Appendix Table 29). In 1995, Sudan received about US$81 million from the African Development Bank/Fund, after reaching in May 1995 a debt restructuring agreement in the amount of US$29 million, but disbursements from that institution are envisaged for 1996.

CHART 4
CHART 4

SUDAN: EXTERNAL SECTOR DEVELOPMENTS, 1987–96 1/

(Fiscal years ending June 30)

Citation: IMF Staff Country Reports 1997, 017; 10.5089/9781451833669.002.A001

Source: Sudanese authorities.1/ 1996 data are staff estimates.* Calendar year.

68. In contrast, net private capital inflows have risen substantially during the 1990s (Chart 4), which have allowed Sudan to avoid a sharp compression in imports in the face of decline in official financing. In particular, net short-term capital flows, which include trade and other credit facilities of the Bank of Sudan and commercial banks, reached US$331 million in 1995 and US$141 million in 1996. “Net errors and omissions” likely reflect an unrecorded financing of imports and other private capital inflows and remittances. On this basis, it is estimated that private capital inflows would have risen to US$719 million in 1996 from US$506 million in 1995, and from an average of about US$380 million in the preceding four-year period.

E. External Debt and Debt Service

Evolution of the external debt burden

69. Sudan’s external debt burden, one of the highest in the world, reached almost2,600 percent of current account receipts in 1995 and is estimated to reach about 2,900 percent in 1996 (Table 6), compared with an average ratio of only 116 percent in the early 1970s. The increase in Sudan’s external debt burden over the past 25 years was exceptional, even when compared to other African countries such as Uganda where external debt peaked in 1992 at over 1,500 percent of exports of goods and services, or in Zaire where it amounted to more than 900 percent by the mid-1990s. In Latin America, only Nicaragua’s external debt service ratio reached a level comparable to Sudan’s, at about 3,000 percent by the late 1980s.

70. Sudan’s external debt problems became evident by the late 1970s, when the country started to accumulate external payments arrears. During that period, contractual debt service increased from less than 20 percent of current account receipts to almost 56 percent by 1979. At that time, the debt service ratio also climbed to about 450 percent. As noted above, the situation has worsened significantly since the mid-1980s, with Sudan’s debt burden rising rapidly to nearly 3,000 percent by 1990s.

71. The increase in the debt burden was due to a combination of a rapid increase in the outstanding stock of external debt and a sharp decline in current account receipts (Chart 5). External debt was contracted largely at nonconcessional terms, which culminated in a rapid accumulation of interest arrears and associated late interest penalties. In addition, in terms of 1990 dollar prices, current account receipts, particularly exports, declined to less than US$0.5 billion by the early 1990s from US$1.3 billion in 1986, and a peak of US$1.9 billion in 1977. This adverse performance resulted from several factors, including the maintenance of tight exchange and trade control in the face of high inflation, a protracted armed conflict, policies biased against export expansion, such as the allocation of irrigated crop land, the failure to fully pass the benefits of any exchange rate and international prices changes along to producers, heavy central and regional taxation, and a piecemeal approach to structural reforms.

CHART 5
CHART 5

SUDAN: CURRENT ACCOUNT RECEIPTS AND EXTERNAL DEBT, 1971–95

(In millions of U.S. dollars at 1990 prices)

Citation: IMF Staff Country Reports 1997, 017; 10.5089/9781451833669.002.A001

Source: Iradian (IMF, May 1996, unpublished manuscript).1/ Including receipts from exports, services, and (net) private transfers.

Recent developments

72. The total outstanding external debt increased from US$19.3 billion (official estimates) at end-1995 to an estimated US$20.3 billion by end-1996, equivalent to about 270 percent of GDP in 1995–96. Around 58 percent of this debt was owed to bilateral creditors, 22 percent to multilateral creditors, and the rest to private creditors (commercial banks and suppliers’ credits). Almost 70 percent of the non-Paris Club bilateral debt was owed to two countries, Saudi Arabia and Kuwait. Regarding Paris Club bilateral debt, the United States was the most important creditor (22 percent), followed by the United Kingdom and France, each with around 13 percent. About two-thirds of debt owed to all bilateral creditors was estimated to represent pre-cutoff-date debt, none of which was previously rescheduled on concessional terms (Statistical Appendix Table 32). The stock of external payments arrears is also estimated to increase from US$15.8 billion at end-1995 to US$17 billion at end-1996 (Statistical Appendix Table 30).17 Therefore, about 84 percent of total debt would constitute arrears by end-1996, compared to 100 percent of the debt owed to private creditors (including commercial banks and suppliers) and to the Fund, and about 26 percent to multilateral institutions other than the Fund. Until recently, the IF AD remained the only international organization to which Sudan had no outstanding external payments arrears.18

73. Sudan’s contractual debt service payments also increased from US$1.2 billion in 1995 to about US$1.3 billion in 1996, or from 161 percent of current account receipts to 187 percent. Excluding late interest payments, which were estimated to reach US$885 million in 1996, the debt service ratio would still amount to 60 percent of current account receipts. Sudan’s actual debt service payments have remained very small, in comparison to contractual obligations. In 1995, the public sector made total cash payments (including payments for arrears on repurchases and burden sharing refunds) of about US$70 million, of which US$55.6 million was to the Fund (i.e., 80 percent of total payments), and the rest to the African Development Bank, OPEC fund, and IF AD. During the first eleven months of 1996, payments reached US$52.2 million, of which US$50 million to the Fund (96 percent of total payment) and the rest to the IF AD. Total payments (including those made by the private sector) amounted to US$73.5 million in 1995 and about US$56 million through November 1996, about 10 percent of current account receipts in 1995 and 11 percent in 1996. As a result, the bulk of Sudan’s contractual principal and interest obligations falling due in 1995–96 accumulated as payments arrears.

74. Since early 1995, Sudan has been making payments to the Fund, which has resulted in a decline in overdue obligations. Thus, overdue obligations dropped by SDR 1.8 million to SDR 1,186.7 million at end-1995 (including the effect of burden sharing refunds of SDR 3 million in that year), and to SDR 1,180.1 million at end-November 1996 (also including the effect of burden sharing refunds of SDR 2.6 million through end-November, 1996).

VI. The Exchange and Trade system

A. Exchange Rate Arrangements19

Developments in 1995 and the first half of 1996

75. In March–September 1995, the Sudanese authorities implemented a series of reforms in the exchange area, which culminated with the replacement of the multiple exchange rate regime in effect at that time with a unified market-determined exchange rate system.20 In addition, in order to deepen the foreign exchange market, the compulsory export surrender requirement to the Bank of Sudan by commercial banks was reduced from 65 percent to 50 percent of most export proceeds (except cotton and gum arabic) in March 1995, and the requirement to surrender 20 percent at the Bank of Sudan’s (non-market) reference rate was eliminated by end-September.

76. Market competition was enhanced by allowing non-bank foreign exchange dealers to start operations in September 1995. Toward end-1995, the number of non-bank dealers increased to 21 and their volume of transactions grew quickly to over US$30 million a month. Thus, the total volume of transactions in the foreign exchange market reached about US$54 million in December 1995, with non-bank dealers accounting for 60 percent of the total. Prior to the opening of non-bank dealers, the commercial banks’ volume of foreign exchange transactions had, on average, amounted to around US$20 million a month in the period January–August, 1995. As the commercial banks’ volume of transaction failed to decline since the opening of non-bank dealers, the sharp increase in the total volume of transactions was indicative to the entry into official channels of transactions previously taking place in the illegal parallel market.

77. Sudan’s international competitiveness improved as a result of the new exchange rate policy of September 1995. The commercial banks’ exchange rate depreciated by 32 percent in nominal terms vis-à-vis the U.S. dollar in the period September–December 1995, or by about 9 percent in real terms, reflecting the need to compete with the rate prevailing in the parallel (account-to-account) market (Chart 6). The non-bank dealers’ rate also depreciated over the same period, albeit at a much lower pace, as since the onset, their rate was closer to the one prevailing in the parallel (account-to-account) market. As a result, the spread between commercial banks and non-bank dealers’ rate declined to about 3 percent, and the spread between the official exchange rate, calculated by the Bank of Sudan as the weighted average rate (by transactions volume) of all foreign exchange market participants, and the non-bank dealers’ rate declined to 1.3 percent by end-1995.

CHART 6
CHART 6

SUDAN: EXCHANGE RATE DEVELOPMENTS, 1987–96

Citation: IMF Staff Country Reports 1997, 017; 10.5089/9781451833669.002.A001

Sources: Sudanese authorities, Information Systems Notice; and Staff estimates.1/ Non-bank dealer rate from September 1995.

78. However, following the elimination of the Bank of Sudan’s reference rate for surrender of export proceeds on September 27, 1995, a spread among the commercial banks’ and non-bank dealers’ rate remained below 10 percent only through January 1996. As commercial banks maintained their privileged access to mandatory export proceeds (not surrendered to the Bank of Sudan) and a continued monopoly on surrender of services proceeds, renewed market segmentation reemerged; this was because the rate of commercial banks became increasingly less depreciated in comparison to that of the new non-bank dealers, who were limited to operations in the market for invisibles.21

79. During the first quarter of 1996, the nominal depreciation of the commercial banks’ exchange rate vis-à-vis the U.S. dollar was much lower than the rate of inflation, resulting in a real appreciation of about 11 percent from December 1995 to March 1996. In contrast, non-banks’ rate depreciated in real terms by about 21 percent over the same period. As a result, the spread between these two markets widened again to 20 percent (consistent with the past spread between the banks and the parallel market) before reaching 45 percent in March 1996. This was mainly because the excess demand pressures resulting, among other factors, from speculation surrounding the possibility of U.N. sanctions, manifested themselves primarily in the non-bank dealers markets. In addition, in April 1996, the Bank of Sudan increased the export surrender requirement to 50 percent (thereby reversing an early decision to reduce it to 30 percent) and continued to impose a 10 percent surrender on non-bank dealers daily purchases of foreign exchange (see Appendix III for a summary of changes in the exchange and trade systems during October 1995–October 1996). Furthermore, the 100 percent surrender requirement on proceeds of exports of cotton and on transfers by Sudanese expatriates, and the 95 percent on exports of gum arabic were maintained, as the Government needed the foreign exchange to continue financing the imports of basic commodities, particularly petroleum products. Meanwhile, the non-bank dealers’ volume of transactions continued to rise, reaching US$46 million in March 1996 (accounting for almost 80 percent of the total volume of transactions in the market), whereas commercial banks’ volume amounted to only about US$12 million, hal