Sudan
Recent Economic Developments

This paper reviews economic developments in Sudan during 1997–99. Sudan initiated reforms under the 1997 and 1998 Staff-Monitored Programs. Real GDP growth accelerated modestly to an annual average of about 6 percent during 1997–98. Inflation declined from an average of 133 percent in 1996 to 17 percent in 1998. Fiscal revenue buoyancy has increased markedly after years of stagnation at low levels and, coupled with an improvement in budget control, has succeeded in sharply reducing the overall budget deficit. Aided by positive real rates of returns, financial disintermediation has been halted.

Abstract

This paper reviews economic developments in Sudan during 1997–99. Sudan initiated reforms under the 1997 and 1998 Staff-Monitored Programs. Real GDP growth accelerated modestly to an annual average of about 6 percent during 1997–98. Inflation declined from an average of 133 percent in 1996 to 17 percent in 1998. Fiscal revenue buoyancy has increased markedly after years of stagnation at low levels and, coupled with an improvement in budget control, has succeeded in sharply reducing the overall budget deficit. Aided by positive real rates of returns, financial disintermediation has been halted.

I. Introduction

1. Sudan is the largest country in Africa (2.5 million square miles and 28 million people) with considerable natural resources. It is also one of the poorest countries in the world, with low per capita income (US$280 per year), weak social indicators, and persistent structural distortions and institutional weaknesses in the economy. Poverty and political instability have led to the emigration of a large number of skilled Sudanese over the years, seriously weakening the administrative capacity of the government. Sudan is heavily indebted to external creditors with a debt of US$22.4 billion as of end-1998 (of which US$19.3 billion was in arrears), equivalent to 253 percent of GDP and more than 3,655 percent of export of goods and nonfactor services.1 The high level of arrears and the poor political relations with many creditors and donors have resulted in a near drying up of international aid and credit, further exacerbating the domestic economic difficulties.

2. Sudan initiated economic reforms in the early 1990s aimed at liberalizing the economy. Progress has been made in deregulating and opening of the economy to private sector participation, and an average annual growth rate of about 5 percent was maintained during 1992-96. However, macroeconomic policies up to 1997 were characterized by: (i) high fiscal deficits that were driven by large subsidies and financial support for inefficient public enterprises, the secular decline in the revenue ratio, and lax controls on spending, the granting of guarantees, and the contracting of debt; (ii) an inappropriate monetary policy, characterized by high central bank liquidity emissions, (owing to the automatic monetization of the deficits of the government, and financing the agricultural schemes and public enterprises), direct credit controls, and negative real rates of financing and deposit, resulting in financial disintermediation; and (iii) a distorted exchange rate policy which relied heavily on direct exchange controls and a multiple exchange rates regime. Attempts to reduce macroeconomic imbalances were undermined by the highly distorted tax system that was characterized by widespread exemptions and weak tax administration, weak expenditure controls and debt management, the absence of non-inflationary debt instruments, and inadequate monetary policy instruments.

3. To address these deficiencies, Sudan initiated reforms under the 1997 and 1998 staff-monitored programs (SMP). The realignment of macroeconomic policies included: (i) reducing the fiscal deficits to less than 1 percent of GDP by eliminating subsidies, increasing revenue buoyancy (through improved tax administration and initiating tax reform), and improving budget management and monitoring, (ii) tightening and re-orienting monetary policy to achieve a significant reduction in inflation, eliminating most credit controls, and introducing new monetary instruments suitable for effective indirect monetary control; and (iii) reforming the exchange rate system, which led to the unification of exchange rates in October 1998.

4. The economy has responded positively to these reforms. Real GDP growth accelerated modestly to an annual average of about 6 percent during 1997-98. Inflation declined from and average of 133 percent in 1996 to 17 percent in 1998. Fiscal revenue buoyancy has increased markedly after years of stagnation at low levels and, coupled with an improvement in budget control, has succeeded in sharply reducing the overall budget deficit. Aided by positive real rates of returns, financial disintermediation has been halted. For the first time in many years, in 1998 the velocity and cash-to-deposits and foreign currency deposits ratios declined and the ratio of quasi-money deposits to current deposits increased. The current account deficit2 has also declined from 7.6 percent of GDP in 1996 to 4.1 percent in 1998, mainly as a result of increased private transfers and improved export performance.

5. Notwithstanding these achievements, the macroeconomic situation remains fragile and many weaknesses remain in the economy. In particular, a largely inefficient public sector continues to play an important role in the economy. The infrastructure, especially in the irrigated sector, energy, and transportation sectors has deteriorated to the extent that it is becoming a major impediment to growth. Public investment and social spending are constrained by the still limited revenue mobilization effort, as well as the burden of the war in the south. Financial and foreign exchange intermediation by commercial banks is still very weak, while the indirect monetary policy tools and bank supervision are at a fairly early stage of development. High tariff protection and some complex trade procedures still hinder foreign trade.

6. This paper provides background information to the 1999 Article IV staff report. In addition, this paper will elaborate on the economic and reform developments that took place in 1997 and 1998. The remainder of the paper is organized as follow: real sector developments are described in Section II; fiscal sector developments in Section III; monetary sector developments in Section IV; and finally, external sector and exchange system developments are discussed in Sections V and VI, respectively.

II. Real Sector

A. Overall GDP Developments

7. Since the early 1990s, real GDP has grown at an annual average rate of about 5 percent, and the growth has been relatively stable compared to the sharp output swings experienced during the 1980s. This stability is attributable in part to relatively favorable weather conditions and to the economic liberalization policies that have sustained growth and fostered greater economic diversification.

8. Real GDP growth averaged about 4.6 percent during the period from 1992/93 to 1996, with agriculture and industry each contributing about 1.1 percentage points to average GDP growth, while trade and other services together contributed another 2 percentage points (see Tables 1 and 2). The GDP growth rate accelerated to an estimated average of about 6 percent during 1997-98, led by the growth in agriculture which contributed about 3.5 percentage points (about 45 percent of which was generated by the growth in non-traditional crops). Other notable developments during 1997-98 were the rapid growth of construction activities (triggered in part by the construction of the oil pipeline), which contributed an estimated 2 percentage points to the average GDP growth, and the diminishing contribution to GDP growth of trade and other services which barely grew during the period (in part because of the decline of government services).

B. Sectoral Developments

9. Sudan’s economy is based largely on agriculture which accounted for about 40 percent of GDP on average during 1992/93-98, while trade and other services (a significant part of which are agriculture related) averaged about 46 percent of GDP. Nevertheless, developments in 1997 and 1998, point to the growing pace of economic diversification. While the share of agriculture in GDP has remained broadly the same over 1992/93-98 (see Chart 1), industry and construction have increased their contribution to GDP from an average of 7.6 percent and 4.9 percent, respectively in 1992/93-96, to an average of 10 percent and 7.5 percent, respectively, in 1997-98. This transformation occurred at the expense of trade and other services with their share in GDP declining from an average of 48 percent during 1992/93-96 to an average of 42 percent in 1997-98. This outcome could be the attributed, at least in part, to the financial stabilization programs of 1997-98. The rapid decline in inflation rates, the return to positive real rates of returns on bank deposits and finance, and the relative stability of the exchange market have crowded out many trade and services activities and attracted private investment and transfers to industry and construction. There were also notable changes within the agricultural sector. The share of non-traditional crops in agriculture output has risen steadily from about 14 percent in 1992-93 to an estimated 36 percent in 1998, reflecting the liberalization policies, including eliminating price controls and cropping restrictions.

Chart 1.
Chart 1.

Sudan: Selected Real Sector Indicators, 1992/93 -98

(Fiscal years ending June 30)

Citation: IMF Staff Country Reports 1999, 053; 10.5089/9781451833683.002.A001

Source: Sudanese authorities; and Fund staff estimates.

Agriculture

10. Agriculture is the dominant sector in the Sudanese economy. In addition to generating directly about two-fifths of GDP, agriculture also drives activity in service sectors such as transportation, agro-industries, and commerce, that account for a large part of the rest of the economy. Even more importantly, 80 percent of the labor force is employed in agricultural and related activities, and the performance of agriculture is the main determinant of year-to-year changes in poverty levels and the food security of the population. Finally, agriculture is the source of virtually all of Sudan’s exports, and therefore the key determinant of balance of payments developments.

11. Sudan has huge agricultural potential in terms of the amount of arable land and pasture, as well as plentiful water resources. Arable land area is estimated at 200 million feddans,3 of which 40 million feddans are cultivated (forests, pastures, and deserts make-up the rest). About 4 million feddans are irrigated, mostly by Nile waters. Rainfall in Sudan varies from very little in the north to tropical amounts in the south. Even in areas with moderate rainfall, there is enormous year-to-year variability.

12. In recent years, agriculture has begun to live-up more to its potential, in response to stabilization and structural reform measures. Agricultural GDP has increased at a rate of about 5 percent between 1993/94 and 1998, and has pulled the economy along at about that rate, as noted above. The growth has been export-led, with export volume growing at well over 7 percent a year. Nevertheless, performance within the agricultural sector has been mixed, with the irrigated sector still encumbered by the inheritance of past policies and the lack of investment.

The macroeconomic policy environment

13. One of the main causes of the improved performance of the agricultural sector during 1997-98 has been the enhanced incentives resulting from the exchange and trade reforms. Traditionally, macroeconomic policy in Sudan has been biased against exportables; official exchange rates at which exporters had to surrender foreign exchange have in most periods been overvalued in comparison with the parallel market exchange rate. This resulted in implicit taxation of the agricultural sector and lower producer prices, which discouraged production. With the exchange market reforms implemented since 1997, the divergence between the official and parallel market exchange rates was gradually reduced and surrender requirements have been largely eliminated (see Section VI). As a result, despite the declines in most international prices over the last several years, production incentives have been strengthened and there has been a strong export response. Nevertheless, the sharp further decline in commodity prices in the second half of 1998 has made some exports, including groundnuts, and sesame uncompetitive.

14. The authorities have also made efforts to reduce explicit taxation of the agricultural sector. The federal government has taken a decision under which total taxation of agricultural products (including federal, state, and local taxes) is to be limited to 20 percent in the rainfed sector and 15 percent in the irrigated sector, which would entail a considerable reduction from estimated earlier taxation levels of 30-10 percent. However, compliance with the decision is difficult to ascertain, and state and local governments are dependent on agricultural taxes to maintain their operations. In addition, some states levy taxes on goods crossing state borders, which particularly effects traded goods. The federal government has gradually been reducing export taxes (only cotton and gum arabic are now taxed).

15. The improved supply of inputs has been another cause of the stronger performance of the agricultural sector. Traditionally, agricultural inputs were supplied exclusively by public sector entities such as the Agricultural Bank, the Mechanized Rainfed Corporation, or the larger agricultural corporations, and their supply was coordinated by a Government High Committee. However, the import of agricultural inputs has been liberalized and is currently dominated by the private sector. With foreign exchange now freely available to importers, the supply of agricultural inputs is no longer considered a major constraint on production.

16. In the past several years, progress has also been made in liberalizing agricultural marketing and pricing. With the privatization of the Sudan Cotton Company (a farmer’s cooperative that buys about 60 percent of cotton production), all crops are now marketed by the private sector with the exception of gum arabic where there is a monopoly with minority government participation, and the Sudan Sugar Corporation, which competes with a private sector company. The government occasionally buys and sells sorghum, as it manages the country’s strategic reserve with a view to reducing food insecurity.

17. Agricultural prices now largely reflect international prices. In the past, the prices of many products were set by the Government bearing in mind the need to contain implicit subsidies—in an environment of overvalued official exchange rates—which placed downward pressure on prices. Currently, most producer prices, including the prices of sorghum, groundnuts, sesame, sunflower, and millet are determined at auctions in producing areas around the country, while procurement prices of cotton, wheat, and gum arabic are set on the basis of international prices and transportation and processing costs (see Table 15) 4 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. The purchase prices of the Gum Arabic Corporation are also set to reflect international prices, minus taxes and various transportation costs. This effectively sets the ceiling on prices, although there is considerable competition among merchants who collect the gum arabic from farmers and hold auctions in the producing areas.

18. While exchange and trade system liberalization has clearly improved the policy environment, weaknesses in the budget and the banking system have resulted in the inability of the government to maintain the infrastructure and provide support services. These are major constraints to agricultural development, and have affected the irrigated schemes in particular, as discussed below.

Irrigated agriculture

19. The irrigated sector covers about 4 million feddans. This is equivalent to about 10 percent of agricultural land but it contributes nearly one-half of the value of agricultural output (excluding livestock and forestry). It has the greatest potential, as high value crops such as cotton and wheat will mostly be produced in this sector, and yields for other crops are potentially far higher than in the rainfed sector. However, the performance of the irrigated sector has been below expectations, with slower growth being recorded than in the rest of agricultural sectors.

20. Large agricultural schemes dominate the irrigated sector. These schemes are government-owned but farmers are allocated (based on long-term leases) plots of land. Traditionally, the government controlled all aspects of economic life in the schemes, including: determining the cropping pattern; providing inputs and credit to farmers; organizing the ginning of cotton; and marketing and pricing of output. However, the government has greatly reduced its role in the irrigated sector in recent years. In particular, the agricultural corporations—such as the Sudan Gezira Board (SGB)5—are no longer fully controlled by the government, and farmers associations play a more active role in management. Moreover, the management of the schemes has been decentralized (there are 16 sub-units at Gezira) so that many more decisions are taken locally in consultation with farmers, including those related to cropping patterns. Moreover, within a certain rotation determined at the sub-unit level, farmers can choose, for example, between wheat and sorghum as the cereal in the rotation.

21. Another recent development has been that many of the services that the schemes or individual farmers need can now be provided by the private sector, instead of public entities. Such services include agricultural engineering, canal maintenance, storage, transportation and telecommunications. For example, the Earth Moving Corporation is now competing against private contractors in clearing the canals of silt.

22. Another key change is that the Ministry of Irrigation and Water Resources no longer provide free maintenance of the canals, but charges the schemes for its services. However, as the schemes have difficulties collecting land and water charges from the farmers, there are often difficulties in paying the Ministry and services are not provided on time. This has resulted in the complete blockage of many of the outer canals (and even main canals are silted) and a contraction in the areas under cultivation at the main schemes. At the Gezira scheme, the total area under cultivation was roughly unchanged between the early 1980s and the 1996/97 season. However, the area under cultivation dropped sharply in 1997/98 due to the clogging of the canals and another substantial drop is expected in 1998/99 due to additional silting of the canals caused by the floods of August-September 1998.

23. Given its high water requirement, cotton has been the most affected by the deterioration in the irrigation systems (see Tables 10 and 11). Following a further one-third decline in 1997/98, the area under cotton cultivation in all the schemes was no more than one-third of the level in the early 1980s, and cotton yields have not shown an appreciable increase in the same period (Table 12). Compared with the early 1980s, cotton cultivation has to a large extent been replaced by wheat, reflecting earlier government policies to increase food security and reduce imports. However, areas under wheat, another water-intensive crop, also decreased in 1997/98 due to irrigation difficulties, as there was a shift to less water-intensive crops such as groundnuts and sorghum.

24. The authorities have also pulled back from the financing of the public sector irrigated schemes. In earlier years, the schemes’ working capital requirements were financed directly by the Bank of Sudan (BOS). These loans were at times not fully repaid, especially when crops failed or international prices fell, which resulted in sharp expansion of the monetary base and contributed substantially to the build-up of inflationary pressures. With this type of direct financing no longer available, the schemes are having increasing difficulty in financing the purchase of sufficient inputs, as the banks are reluctant to accept the large risks related to agricultural production at a time when the schemes are generally considered to be in a weak financial position. The inability to finance the purchase of sufficient inputs may also have contributed to the decline in area under cultivation and yield.

25. While the government has made efforts to direct over one-half of capital spending to agriculture, its difficult budgetary position has placed a limit on these efforts (research services and pest control have suffered especially). The network of roads that connects farming areas with the commercial centers has also deteriorated.

26. Because of the above difficulties, yields of cotton and wheat have been stagnant in recent years. However, yields of sorghum, groundnut and other crops which need less of water, other inputs, and agricultural support services, have continued to increase steadily. This substitution away from high-value crops has constrained the growth of value-added in the agricultural sector. However, farmers have reacted to these difficulties by turning to nontraditional crops, including fruits and vegetables, as well as the rearing of livestock which in turn compensated for the weak growth performance of the irrigated sector.

The rainfed sector

27. In rainfed areas, mechanized farming developed rapidly in the 1960s and 1970s, although traditional methods are also still used extensively. The sector is dominated by private producers. The average farm size in the mechanized areas is about 1,000 feddans, although some are as large as 200,000-300,000 feddans. Sesame, sorghum, sunflower, and some short-staple cotton are the main crops produced on the mechanized farms, while smaller farmers focus on raising sorghum, groundnuts, and karkadeh, and collect gum arabic.

28. There has been considerable investment in the rainfed sector over the past decade, and areas under cultivation have expanded sharply. With large areas of land available for the expansion, there has been little incentive for farmers to invest in increasing yields and preserving the productivity of the land, especially in view of the limited extension and research services. In fact, with yields in the past few years have not been much higher than in the 1980s, the decline in international prices has eroded farmers’ income. Moreover, the rapid extension of rainfed agriculture has raised concerns about environmental degradation, as mechanized production moves on rapidly to new areas once existing land becomes less productive.

29. The development of rainfed agriculture is also constrained by the lack of financing and of research and extension services. Only a few of the largest farmers have access to commercial bank financing. The Agricultural Bank is the main source of financing for smaller farmers in more remote parts of the country, but its resources are inadequate to meet all needs.

30. In the absence of virtually any stabilization mechanisms, the pronounced variability of rainfall results in sharp fluctuations in the outputs and producer prices of sorghum and millet (exports of these products are limited compared with production). This has had an important impact of the income of some of the poorest areas of the country and on food security. For example, in 1997/98 areas under sesame and sorghum cultivation declined, in response to lower prices resulting from a large crop in the previous season. However, there was a shift in cultivation towards millet and groundnuts, and the production of these crops increased significantly.

Livestock

31. The livestock sector accounts for about 13-14 percent of GDP, or about one-third of agricultural production. It is a very labor-intensive sector, providing income for a large semi-nomadic population of herdsman who raise cattle, camels, sheep, and goats. The livestock sector also provides supplementary income to many small farmers whose principal activity is the cultivation of crops, including increasingly in the irrigated schemes.

32. The livestock sector has been a principal beneficiary of the exchange reforms. Livestock exports have more than doubled since 1994/95, with annual growth rates (excluding 1996) exceeding the average GDP growth.6 Moreover, in 1999 output is expected to record a further sharp jump due to the increasing availability of forage following the very heavy rains in August-September 1998, The sector has also benefitted from: (i) the privatization of certain support facilities; (ii) efforts to incorporate livestock into the irrigated schemes; and (iii) the increasing adoption of rotational grazing by the smaller producers.

Forestry

33. Sudan has large forest resources. There are rainforests in the south, covering about 10 percent of the country’s land area, which have so far not been exploited. In other parts of the country, forests are less prevalent and were being steadily depleted because of their use for firewood, although recent government efforts to halt the gathering of firewood resulted in a sharp contraction in the share of forestry output in GDP in the mid-1990s. Efforts at reforestation are still at an early stage, but have been intensified in recent years.

34. An important product that originates in the forestry sector is gum arabic which is grown from acacia trees and is a traditional source of cash income in the western parts of the country. Gum arabic cultivation is seen as having important beneficial externalities, being a source of income to some of the poorest segments of the community, and gum arabic trees are useful in slowing desertification.

35. Sudan used to be the dominant world exporter of gum arabic, but its share of the market has declined to well below one-third of world demand of 40—45,000 tons in the mid-1990s. With the development of industrial substitutes and increasing competition from Senegal and Nigeria, international prices of gum arabic has fallen from around US$5,000 per ton in the early 1990s to under US$1,000 per ton currently. Nevertheless, Sudan’s exports have rebounded in recent years from an average of about 16,000 tons in 1994/95-96 to almost 30,000 tons in 1997-98, partly reflecting improved competitiveness due to exchange market reforms. This may have reduced smuggling through neighboring countries (Chad, Eritrea). These illegal channels had developed in response to high taxation and transportation and processing costs in Sudan, as well as historically an overvalued exchange rate.

Economic Activity in the Secondary Sector: 7 1992/93-98

36. Over the period 1992/93-98, the combined output of the secondary sector grew at an average annual rate of about 13 percent with its share in GDP rising from 11 percent at the beginning of the period to 18 percent in 1998. This performance was led by a rapid pace of activity in the construction sector, associated with the ongoing oil pipeline project, and was supported by manufacturing (including mining), both of which offset the weaker performance of the electricity and water sectors.

Manufacturing and mining

37. The performance of the manufacturing sector has been constrained over an extended period by the limited electricity generation capacity of the country and other factors that the government has started to address in the context of ongoing structural reforms. These reforms focused on the creation of an enabling environment for private sector activities with a view to eliciting increased investment. To this end, the government started in the mid-1990’s a process of price liberalization and introduced further investment incentives through the Investment Encouragement Act. This was followed by the liberalization of the exchange system during 1997-98. While the situation in the manufacturing sector remains difficult, with capacity utilization ratios of about 50-60 percent, there has been a positive supply response to the reforms. In particular, the tax incentives and the liberalization of the exchange system, have contributed to increased investment particularly in agro-industry, notably in tanneries. There has also been increased foreign investment, most notably in the petroleum sector.

38. Manufacturing (including mining) output grew at an average annual rate of 14 percent during 1992/93-98 and saw a rise in its contribution to GDP from 5.5 percent to 9.2 percent over the same period (Table 43).8 This performance was largely influenced by developments in the manufacturing sector. Mining activities, which accounted for about 10 percent of the value added of manufacturing (at constant prices) in 1998, experienced a one-time sharp increase in 1996 followed by a more moderate rise in 1997, This evolution reflected the coming on stream of gold mining exploited through joint ventures with foreign companies. Also evident have been the recovery and sustained gains in: (i) foods and beverages, on account of sugar, vegetable oils and soft drinks, (ii) shoe manufacturing, particularly in 1997-98, in line with higher output of the tanneries, (iii) petroleum refining, except in 1997 and 1998 because of the relatively more attractively priced imports, and (iv) cement, particularly in 1998, reflecting the dynamic pace of activity of the construction sector. By contrast, production of flour and textiles have grown increasingly weak reflecting their lack of competitiveness.

Electricity

39. The electricity supply in Sudan has been constrained for a number of years by the unavailability of domestic and external financing required for an adequate expansion of generation capacity. Since 1995 the installed capacity of the National Electricity Corporation (NEC) (National Grid) has remained at about 630 Mw, of which 308 Mw is hydroelectric and the remainder thermal. In addition, fourteen isolated centers are served by thermal generating plants and local distribution networks. As a result, the NEC serves only about 20 percent of the population.

40. Following a sharp increase in 1996, reflecting an expansion in installed capacity in 1995, electricity generation grew again in 1997, albeit at a slower pace, before contracting in 1998 (Table 44). However, as losses were reduced, the level of energy sold remained broadly unchanged in relation to 1997. Most of the demand for electricity centers around the Khartoum area and comes from the residential sector, which represents more than 40 percent of total consumption. Industry and agriculture account for about 36 percent, and the remainder is consumed by the government (12 percent) and commercial establishments (9 percent). Power use in industry has been restrained mainly by supply constraints and, to a lesser extent, by its unreliability which has compelled all major firms to purchase backup power supply units. Overall, the NEC estimates that it only meets the demand of about 20 percent of the population.

41. The financial situation of the NEC has been adversely affected over an extended period by administratively set tariffs, which failed to cover costs, and difficulties in collecting tariff payments from the general public as well as from the government. Since 1997, however, the NEC has been taking a number of measures aimed at addressing this situation in the context of the government policy of eliminating subsidies on oil products and energy services, and reforming the public enterprise sector. Tariffs are being increased periodically (Table 45) to gradually reflect costs with a view to eliminating subsidies by end-2000. These costs have been rising rapidly in line with the liberalization of domestic prices of oil products (see below), which represent over 50 percent of the total cost, as well as by the impact of the exchange rate depreciation on imported materials. The computerization of the billing system and opening of new offices have been instrumental in significantly strengthening the monitoring and collection of customers’ payments, which reached 90 percent of the payable amount in the last months of 1998. Timely payments by the government also contributed to this improvement. Finally, a review of the Electricity Act is being conducted in the context of the ongoing privatization/restructuring program of the government, with a view to encouraging private sector investment in the generation and distribution of electricity. One electricity generating plant is already being operated by the private sector (under a leasing arrangement).

The oil sector

42. The oil consumption needs of the country, currently estimated at 1.5 million tons (Table 38), are projected at the beginning of every year as a basis for a monthly tender, by the former Government Petroleum Corporation (GPC), now the Sudan Petroleum Corporation (SPC). Throughout the year, the SPC monitors closely the stocks of oil products to ensure that no shortages arise. Sudan imports finished products and crude oil that is locally refined. Lower world market prices in 1997-98 have made it more attractive to import finished products than crude, with the result that the volume of locally refined products decreased from 694,000 metric tons in 1996 to 411,000 metric tons in 1998 (Table 37). Of the three refineries in Sudan as of end-1998, the Port Sudan and the Obied refineries are the largest with the former absorbing about 80 percent of total production and the latter close to 20 percent. In all, the existing refining capacity is 8,000 barrels per day (bpd).

43. A major shift in government policy regarding the oil sector occurred in 1997, as noted above, with the gradual opening of the importation and distribution of oil products to private sector participation. These activities had been until 1996 the domain of the government through the SPC. As a result, the number of players involved in the sector has increased considerably and there were some small imports of crude and diesel carried out by the private sector in 1998. Nevertheless, the SPC still remains involved to an important degree in the importation and distribution of diesel and gasoline, either on its own or in conjunction with other with private enterprises, reflecting the difficulties of the private sector to secure foreign financing and/or local financing, as well as storage facilities. Overall, however, the private sector is involved in the various activities of the sector in varying degrees and its role is expected to be facilitated with the coming on stream of oil production.

44. In 1998, out of total imports amounting to US$256 million (customs data), the SPC imported on its own or jointly with other enterprises close to 40 percent. The decreasing role of the SPC in the imports of the sector has translated into lower foreign exchange payments by the BOS, thus sustaining the reduced export surrender requirements called for by the liberalization of the exchange system. Thus, BOS payments for oil products decreased from US$234 million in 1996 to an average of about US$80 million in 1997-98. This has been accompanied by the emergence of a new modality of financing by private traders, through the purchase of export crops to generate the foreign exchange for the payment of imports of oil products that are subsequently sold to the SPC for distribution.

45. In parallel with the above change in policy, the government has also eliminated subsidies on domestic oil products through pricing measures. At the beginning of 1997, prices were increased to both eliminate subsidies and generate revenues to the budget through an implicit tax in the form of a price differential. In August 1997, prices were again increased and have been maintained unchanged since then (Table 40) even though international oil prices declined. As a result, the government’s revenue share in the price structure (over/under recovery) has absorbed the difference between the unchanged domestic price and the landed/ex-refinery cost, net of distribution costs. While part of the decrease in international prices has been offset by the depreciation in the exchange rate, additional revenues have, nevertheless, been generated for the budget. Under the current system, retail prices are adjusted by the Ministry of Finance on the basis of information provided by the Ministry of Energy regarding the likely impact on the price structure of oil products, of changes arising, for example, from increases in international prices, depreciation of the currency, or increases in the commercial margin requested by the distributor.

46. Under the tariff and excise reform effective since October 1998, the above-mentioned price differential was replaced by specific excises. Taxation of oil products is currently as follows: (i) imports of crude and all refined products are subject to customs duty of 6 percent on the c&f value (insurance is acquired locally); (ii) the refined products either locally produced or imported are subject to an excise tax on the ex-refinery cost or c&f value of 80 percent for gasoline, 12 percent for gas oil and 6 percent for kerosene/jet.

47. Sudan’s proven oil reserves are currently estimated at 450 million barrels, while probable reserves amount to an additional 350 million barrels. Oil production is expected to start coming on stream in the last quarter of 1999, a few months earlier than anticipated following the completion of the pipeline. The pipeline is being constructed by an international consortium consisting of companies from China, Malaysia, Canada, Italy, Germany, Britain and Argentina at an estimated cost of US$1 billion. It will have a capacity of 250,000 bpd and is expected to become operational in the last quarter of 1999. Production is estimated initially at 150,000 bpd, but could grow up to 400,000 bpd over the medium-term. Taking into account domestic consumption of 50,000 bpd, the value of exports could reach 100,000 bpd. A new refinery with a capacity of 50,000 bpd is currently being built in Khartoum at a cost of US$600 million and is expected to begin operations in 2000, when Sudan would become self-sufficient in petroleum products.

The investment encouragement act

48. The government enacted an Investment Encouragement Act (IEA) in 1990, which was amended in May 1996, to encourage investment activities. Key measures under the Act are: guaranteeing investment against expropriation and nationalization, providing equally treatment to foreign and domestic investors, guaranteeing foreign investors the right to repatriate profits and providing several tax and tariff incentives. Although there are no separate data on investment undertaken under the IEA or on foreign investment, indications are that foreign investment in certain activities has increased in recent years and official estimates point to an encouraging overall investment response. These estimates, only available through 1997, indicate a very rapid increase in investment not only in construction but also in machinery and transport equipment (Table 42). This response notwithstanding, the application of the Act has led to significant problems, including notably the proliferation of tax and tariff exemptions, which has resulted in a high fiscal cost; the dispersion of power to grant the exemptions among various line ministries; and reduced transparency, particularly at the state level. Moreover, loopholes in the Act may have resulted in abuse, which have been compounded by the lack of a database on the beneficiaries’ actual investment and other commitments underlying the concessions.

49. The tax exemptions granted under the Act cover the business profit tax as well as customs duties for a period not to exceed 5 years. However, renewal of exemptions may be possible for enterprises that have entered into a restructuring process entailing a new line of production, or when there is a change in ownership. Moreover, the exemption of customs duties applies not only to capital goods but also to intermediate goods, and the exemptions or reduced statutory tariff rates are applied differently to the same goods depending on the recipient sector. It is estimated that close to 25 percent of total imports in 1998 (US$1.9 million) were subject to reduced rates.

50. The Act is undergoing a review by the government with a view to its adoption by year-end. The modified Act will seek, inter alia, to reduce the cost and coverage of exemptions, centralize the authority to grant exemptions at one ministry, and ensure the simplification and acceleration of the investment application process as well as more effective monitoring of investors’ commitments.

C. Price Developments

51. Consumer and producer prices have been liberalized gradually since 1992 with only petroleum and electricity prices still set administratively. With the re-alignment of domestic petroleum prices with international prices in early 1997, all prices of traded goods reflect international prices. However, electricity tariffs to households are cross-subsidized through higher rates on non-household consumers and, to a lesser extent, by a small budgetary subsidy.

52. Official price data are based on a consumer price index (CPI) that is calculated on a monthly basis for the greater Khartoum area and is produced by the end of the month (see Table 4). A recently instituted reporting system allows the collection of price data from 13 other cities, albeit with a substantial lag Inflation rates, based on the CPI, have declined substantially in 1997 and 1998 owing to the stabilization programs that were implemented in these two years. Average annual inflation rate declined from an average of 107 percent during the period from 1992 to 1996, to a historical low of 17 percent in 1998. This achievement is especially impressive taking into consideration that the unification of exchange rates resulted in a 70 percent nominal depreciation of the official exchange rate during 1997-98.

III. Fiscal Sector Developments

A. Overview

53. Sudan has undergone a major transformation of its fiscal operations since 1992/93, and especially in 1997 and 1998. This included a strong fiscal adjustment and the initiation of major structural reforms. Significant steps were taken in the early 1990s to reduce the budget deficit (on a cash basis) from 11.2 percent of GDP in 1991/92 to 4.0 percent in 1993/94. However, these efforts were not sustained and the deficit remained at around 3-4 percent during 1993/94-96.9 With the adoption of a new stabilization program starting in 1997, the domestic fiscal deficit was reduced substantially from 3.6 percent of GDP in 1996 to under 1 percent of GDP in 1997 and 1998 (see Table 5), The deficit reduction was achieved through the compression of expenditure (recurrent and development) and improved revenue efforts, both tax and nontax, This performance was supported by a number of important structural reforms that the Ministry of Finance (MOF) implemented or initiated during 1997-98, both on the revenue and expenditure sides. These reforms aimed at rationalizing the tax system (including the introduction of the value added tax (VAT) and further curtailment of exemptions), improving tax administration, improving expenditure control and monitoring, reforming fiscal accounting, and enhancing the efficiency of the budget process.

B. Revenue Developments and Reforms

54. Fiscal revenue in Sudan experienced a steady decline relative to GDP during 1991/92-95 (see chart 2 and Table 18), Total revenue in percent of GDP declined from over 8 percent in 1991/92 to 6.4 percent in 1995. The deterioration in revenue was mostly the result of a decline in nontax revenue, reflecting a sharp drop in profit transfers from public enterprises and weak collection of fees. The decline in tax revenue was much smaller, and was entirely the result of the weak performance of taxes on international trade. These taxes declined from 2.7 percent of GDP in 1991/92 to 1.9 percent in 1995, while its share in total tax revenue declined from 51 percent to 37 percent over the same period. The weak performance of taxes on international trade was partially offset by a somewhat better performance of direct taxes and taxes on domestic goods. The overall buoyancy of revenue during 1991/92-95 was slightly negative.10 The tax revenue buoyancy was marginally positive, reflecting the buoyancy of the direct taxes. Nontax revenue, however, had high negative buoyancy.

Chart 2.
Chart 2.

Sudan: Selected Revenue Indicators, 1991/92 - 98

Citation: IMF Staff Country Reports 1999, 053; 10.5089/9781451833683.002.A001

Source: Sudanese authorities; and Fund staff estimates.

55. Several factors contributed to the weak revenue performance during the period of 1991/92-95. First, GDP growth was mostly driven by agriculture which is taxed mostly at the local levels. Second, some taxes were defined in specific terms, thus reducing their responsiveness to changes in national income. Third, the wide application of presumptive taxation and slow adjustments of tax brackets (in response to inflation) depressed the responsiveness of direct taxes to changes in national income. Fourth, the proliferation of tax exemptions weakened the taxbase. Fifth, the use of an exchange rate for customs valuation, that was even more appreciated than the official exchange rate, adversely affected revenue from taxes on imports. Sixth, the weakening of the public enterprises financial position limited and/or reversed their contribution to the budget. Finally, the general weakness of tax and customs administration contributed to the low levels of tax collection.

56. Revenue performance in 1996 improved markedly with collection rising to about 7 percent of GDP. Almost all the revenue improvement in 1996 was due to revenue from taxes on international trade, which in turn reflected the extension of consumption tax to most imports at a rate of 10 percent (effective January 1, 1996), the significant reduction in the spread between the exchange rate used for customs valuation and the official rate, and the initiation of major reforms of the customs administration.

57. The drive for tax and tax-administration reform accelerated during 1997 and 1998. Revenue performance improved only slightly in 1997,11 as many of the measures implemented during the year only took effect later in the year. The measures adopted in early 1997, included the full application of the official exchange rate for customs valuation (starting in May 1997), the imposition of taxes on petroleum products12 and improved tax and customs administration.13 In October 1998 the price differential was transformed into an ad valorem tax. Internal controls were also strengthened, including curbing the power of ministries to retain internally generated revenues (e.g., fees and charges).

58. The full-year impact of revenue measures that were implemented during 1997 as well as additional measures that were adopted in 1998 (see below), boosted revenue in 1998 to 8 percent of GDP (a 1.2 percentage point of GDP increase from 1997), the highest revenue level achieved since 1988/89.14 Moreover, revenue buoyancy reached an unprecedented level in 1998. Although the improvement in buoyancy was led by a sharp increase in the buoyancy of nontax revenue, revenue from all tax categories showed marked improvements, particularly revenue from direct taxes. Non-tax revenues rose from 0.9 percent of GDP in 1996 to 1.6 percent in 1997-98, reflecting an improvement in the administration of fees and charges, and the increase in profit transfers from the public enterprises (reflecting the continued reforms of public enterprises) and from joint ventures. Collection of direct taxes started to show an upward trend in response to the reforms initiated in 1996 and 1997, including reductions in tax rates and adjustments in tax brackets to offset inflation.15 However, despite the full year effect of using the more depreciated official exchange rate for customs valuation, revenue from taxes on international trade increased only marginally. This is partly because of a shift in imports towards goods in lower tariff bands, and partly because of privileges granted under the Investment Encouragement Act and flood rehabilitation related imports during September-December 1998.

59. In October 1998, a major indirect tax and tariff reform was enacted. The reforms involved the rationalization of consumption and excise taxes, which resulted in the elimination of several distortionary consumption taxes and the streamlining of excises to only seven goods, while applying the excises uniformly on domestic and imported goods (see Appendix I). The tariff reform also involved the reduction in the maximum tariff and the number of tariff bands. These reforms represented an important step towards the application of the VAT and the tariff reform (as part of the trade reform) expected over the next three years.

60. Preparations for the introduction of the VAT, that started in March 1997, have been to a large extent completed (see Box 1). While the VAT was planned to be introduced in mid-1999, the need to amend the constitution to effect the VAT necessitated the delay of its introduction until the year 2000 to allow adequate time for parliamentary debate. In April 1999, the states and the federal government reached a preliminary agreement on introducing the VAT as a federally administered tax with the proceeds to be shared between the federal government and the states in a 65 percent to 35 percent ratio. The other reforms included strengthening the large taxpayer unit and introducing unified taxpayer identification number, initially for large taxpayers in 1999 and extending it to other taxpayers a year later.

C. Expenditure Developments

61. The fiscal adjustment during 1991/92-96 relied fully on reductions in domestically financed expenditures, which declined by 6 percentage points of GDP during this period (see Chart 3 and Table 19). This outcome was achieved through cuts in development expenditures, which contributed about 40 percent to the reduction in expenditures during 1991/92-96. As a result, the share of the domestically financed development expenditures in total domestic expenditures declined from 16.4 percent in 1991/92 to 3.6 percent in 1996, and in percent of GDP from 2.7 percent to a mere 0.4 percent, respectively. The reduction in current expenditures was mostly on account of the curtailment of extrabudgetary spending and the sharp reduction in consumer subsidies. Despite these efforts, further reductions in current expenditures were not possible due to budgetary overruns, resulting mainly form lax controls over the issuance of government guarantees and the continued support for domestic petroleum prices.

Sudan: Main Features of the Value Added Tax (VAT)

I. Outline of the VAT

The draft VAT law provides for the usual policy and administration measures found in contemporary VAT legislation. These include equal treatment of domestic production and imports. Both goods and services are equally taxed and the input tax credit is extended to both. The law provides for one positive rate which is 10 percent on all goods and services unless explicitly exempted; and zero-rating for exports. A positive list of exemptions that are limited mainly to agricultural products, medicine, financial services, educational services, and medical services is incorporated in the law. Finally, a tax credit on inputs (including capital goods) for all VAT-registered taxpayers is allowed for to avoid cascading effects. The VAT complements the reforms of the tariff, excises and price differentials which came into effect in August 1998.

II. Revenue effects

Estimates based on 1997 data suggest that replacing the consumption/sales taxes with the VAT would potentially increase revenue by about 1 percent of GDP. In assessing this probable revenue effect, the following factors have been taken into account. First, the VAT, at a uniform rate of 10 percent, will replace the consumption/sales tax, which presently has two rates (10 and 2 percent). Second, some investment goods that are exempted from the consumption tax will be taxed under the VAT. Third, sales following importing and production which are presently exempted from the consumption/sales taxes will be subject to the VAT if taxpayers’ turnover exceeds the VAT threshold. Fourth, the VAT is excise-inclusive while the consumption/ sales is not. Fifth, revenue loss due to the reduction in cascading that presently originates from the consumption/sales tax is expected to be much smaller compared with the revenue gains noted above.

III. VAT administration

Under the draft VAT law, the Customs Department will be responsible for collecting the VAT on imports and the Chamber of Taxation will be responsible for collecting the VAT on domestic transactions. The Chamber of Taxation will be charged with the policy and administration issues of the VAT. Such responsibility division, which is widely practiced, has been agreed by the Customs Department and the Chamber of Taxation. Coordination between the two departments has improved with the Customs Department sharing all of its taxpayers data with the Tax Department, as a basis for introducing in the near future a unified Tax Identification Number (TIN) to be used by all revenue departments. The VAT will be strictly administrated by the federal government with no role for the states in connection with taxes on goods and services. The states will share in the revenue of the VAT with 35 percent. This will eliminate the current overlapping, duplication, and double taxation which impair the free flow.

IV. Preparatory work during the second half of 1998

The VAT law has already been submitted to the Sudanese Association of Chartered Accountants and the Chamber of Commerce and Industry. Following the consultation with the executive and legislative branches, the VAT will be enacted in the second half of 1999 and will replace all existing consumption/sales taxes levied at the federal and states level. The design of VAT forms and internal procedures, and taxpayer education programs have already started and will continue until the introduction of the VAT. Training of the core staff responsible for the VAT has been performed by Fund technical assistance which conducted ten sessions and arranged field visits to countries with experience with VAT (Morocco and South Africa). The registration of taxpayers will start soon after the approval of the law. Training for the operational staff responsible for administering the VAT will be offered on a regular basis. In December the government will issue circulars announcing the implementation of VAT effective January 1, 2000, as well as detailed explanation for taxpayers.

Chart 3.
Chart 3.

Sudan: Selected Expenditures, and Deficit Indicators 1991/92-98

Citation: IMF Staff Country Reports 1999, 053; 10.5089/9781451833683.002.A001

Source: Sudanese authorities; and Fund staff estimates.

62. During 1997-98, new measures were implemented that successfully reduced domestic expenditures by 2.5 percentage points, which accounted for about 70 percent of the fiscal adjustment during this period. Although part of this adjustment was achieved through cuts in development expenditures (which declined from 0.4 percent of GDP in 1996 to 0.2 percent in 1998), the very low level of these expenditures forced most of the adjustment (over 90 percent) to be carried through cuts in current expenditures. Reductions in spending on goods and services (0.7 percent of GDP), mostly on maintenance, and the elimination of the petroleum price subsidy (0.3 percent of GDP), accounted for about 45 percent of the reduction in current expenditures.

63. This outcome was facilitated by the significant improvement in budgetary controls implemented at the beginning of 1997. These measures included the amalgamation of all extrabudgetary funds into the budget and the implementation of strict controls with respect to the issuance of government guarantees. Further reforms were implemented during 1997-98 (as described below) that helped in sustaining the containment of expenditures.

64. The compression of spending over the years left very little scope for discretionary spending. The main fixed components in the 1998 budget were wages (35 percent of the total expenditure), debt service (9 percent), general reserves (11 percent), transfers (5 percent), and other obligations (9 percent), leaving around 18 percent for goods and services and 7 percent for domestically financed development spending. The 1998 budget also had to accommodate unforeseen pressures on account of the floods.

D. Institutional Aspects and Reforms of Expenditure Management

65. The scope of the budget is clearly defined and the process is governed by the budget law. The annual budget is debated publicly in the parliament and the MOF presents to the parliament quarterly public reports on the budget execution. The MOF is committed to introduce the full GFS based budget classification system which would, however, need legislative approval. The MOF formulates both the development and the recurrent budget. While administratively under the budget directorate, the recurrent and development budgets are formulated and consolidated separately, a program was initiated in 1998 aimed at integrating the two budgets into a single format (which will require integration of both the process and of resource allocation priorities).

66. The MOF adopted in 1998 a new budgetary process that, for the first time, harmonized the budget formulation with the macroeconomic framework. This process involved the early preparation of the budget macroeconomic framework and the setting of indicative spending ceilings to guide the ministries in their preparation of their individual budgets. The new budget process was applied in the formulation of the 1999 budget, greatly improving the efficiency of the process and aligning the budget with the macroeconomic objectives of the government.

67. One of the main problems in expenditure management has been the weak accounting system which contributed to past budgetary overruns. While the accounts are prepared to fulfill the compliance function and audit requirement, the government does not track the actual spending at the line ministry level on a monthly basis, and the management role of accounting has not yet developed. To address these problems, the MOF initiated a program in 1998 to reform the accounting setup. This included a change in the top management of the accounts department and establishing a committee to oversee the reforms. One of the main objectives of the reforms will be the enabling of the preparation of monthly reports on actual receipts and expenditures. The Auditor General Office (AG) is an effective unit that is moving in the direction of value or money audit while maintaining its compliance role. The full introduction of the GFS budget classification and the reform of the accounting system will greatly enhance the transparency of the budget and complement the efforts that have been instituted thus far.

68. Budgetary spending is currently tightly controlled by the MOF. This control has been greatly enhanced by the introduction in May 1997 of a much improved monitoring and reporting system, which tracked, inter alia, the daily cash position of the MOF. The MOF follows a system of monthly release of funds to the line ministries. Most of the discretionary expenditures are centralized and funds are released to the line ministries based on the current priorities. Given the centralized expenditure controls, the ministries cannot make any prior commitments. The line ministries thus have little freedom to plan expenditures. In addition, the MOF does not follow financial or cash planning except on a monthly basis when a decision on cash release for the month has to be made. The MOF has, however, decided to introduce a system of rolling quarterly cash planning which will be shared with the line ministries.

69. The government’s financial relationship with the public enterprises is transparent in the budget. The government’s equity participation in the public enterprises is shown under “transferr” in the recurrent budget. Repatriation of government’s share of profits from the enterprises is shown under nontax revenues. In 1998, the revenues from profits repatriation were significantly higher LSd 210 billion) than projected (LSd 192 billion). This reflects, to a large extent, the performance of the joint ventures.

70. The BOS acts as the banker to the government, providing it with retail banking services. The structure of government accounts was streamlined in 1998 and the number of government accounts were reduced to around 127 from more than 1,000. Ministries are not allowed to maintain accounts in the commercial banks. The BOS provides, since last year, a daily flash report to the MOF on the status of government balances. Until 1998, the government accounts in the BOS included the accounts of the agencies which were separate entities (such as universities) but were funded by the budget. Since 1998, however, with the revision in the structure of these accounts, this distinction has become clearer.

E. Fiscal Federalism

71. The federal system was introduced in Sudan in 1995, which involved three levels of government: federal, states and the local councils. The constitution provides clear revenue and expenditure assignments. The main revenue sources of the states are a share in the federal personal income tax, the land sales tax, excises on state industries, and licence fees. Most of the basic services such primary health care, basic education and the provision of safe drinking water are state responsibilities. With the exception of the larger states, most of the expenditure of the states on essential social spending is met through the federal transfers. However, due to the weak revenue base, to finance even the modest social spending the states have, in some cases, resorted to distortionary taxes, such as tax on movement of goods and agricultural production.

72. There have been certain significant developments in the state finances in the last year.16 The states have agreed to share the VAT revenue with the center in a 65 to 35 ratio. The federal government has increased the budget allocation for the states following a parliamentary directive to transfer 10 percent of federal revenues to the states, a significant part of it being earmarked for social spending. The government has decided, as the revenue capacity of the states improves, to gradually shift from financing recurrent expenditures to financing development expenditure As a result, in 1999 three more states have been targeted for graduation, over a two year period, from recurrent to only development support. Thus, currently only 16 states (out of 26) receive support for recurrent expenditure. The federal budget has also earmarked, in 1999, funds to liquidate arrears on account of teacher’s salaries at the state level.

73. The government is keen to review the federal-state relationship and a commission is currently undertaking this review. The government is also strengthening its capacity to monitor the use of the funds at the state level by establishing a monitoring and evaluation unit in the National State Support Fund.

74. The MOF prepares a consolidated budget of the states by major categories of classification. However, the latest consolidated budget available is for 1998, and reports on actual budget execution are not available. Hence, the actual level of spending at the state level is hard to verify on a timely basis, though certain agencies such as the AG and the State Support Fund receive some accounts for their specific needs. The AG eventually audits and certifies the state accounts.

F. Social Spending

75. The government is committed to universal basic education and to extend primary health care to 100 percent of the population. Achieving these goals, however, is complicated by the ongoing conflict and the recent floods and famine. The conflict has also resulted in sharply increased medical needs and problems associated with displacement. At the same time, both the recent floods and famine (in Bahr El Ghazal) have further eroded rural incomes and have resulted in higher incidence of many diseases, thereby stretching the already inadequate social and health infrastructure. The federal budget also has a small budget provision for subsidies to the poor.

Sudan: Khartoum State Fiscal Operations

  • Khartoum State (KS) is the most developed state with total revenue of about LSd 182 billion in 1998 (0.8 percent of GDP). The main sources of its revenue are the business profit taxes on industries on the state list and a 4 percent excise on local goods. Following the formula for devolution of revenues, KS does not receive any general transfer from the NSSF, though it contributes 15 percent of its revenues to the NSSF. However, KS can and does compete with other states for development funds from the NSSF. KS itself is not allowed to borrow, though the local councils can borrow from the Cooperative Bank on the basis of a guarantee given by the KS.

  • KS has 36 local councils. Primary health care and basic education are the responsibility of the local councils. But since the resources of the councils are limited, KS pays the salaries of council employees at the council level. This is, however, not a norm followed by most of the states. On a rough basis, nearly 80 percent of the total expenditure at the council level is spent on health, education, safe drinking water and basic infrastructure.

76. As a first step towards improving health and education services, the government has decided to consider the current level of transfers to the states as a priority area and to protect these in the event of a resource shortfall. It also plans to monitor the transfer to the states to ensure that the money is spent on social sectors; as well as to develop an information system and social indicators in key areas, including primary health coverage, to monitor progress. As a first step, the government has decided to monitor school enrollment as a part of the national plan for universal primary education.

77. The government has also started a national poverty alleviation program. The main objectives of the program is to reach out to all the families below the poverty line, estimated at 25 percent of the population or 1.3 million families. The program strategy targets family as the basic unit and seeks to identify and meet the minimum needs in the critical areas of health, education, shelter, provision of safe drinking water, and nutrition to maintain sustainable development. The program has already started and a survey for basic data has been initiated.

IV. Monetary Sector Developments

A. Monetary and Credit Developments

78. Monetary and credit policies have undergone an important transformation during 1997 and 1998, that resulted in substantial reduction in the growth of monetary aggregates. These developments were facilitated by the sharp drop in the BOS lending to government and to public enterprises (see Table 6). The more stable monetary conditions and more attractive real rates of return on deposits (mostly on account of lower inflation) led to some re-intermediation by the financial sector and a reversal of the trend of rising velocity over the past several years. These developments were supported by reforms in the institutional framework for monetary policy at the BOS and the proactive monetary policy.

79. The expansion of broad money decelerated from an average of 85 percent during 1992-96 to 37 percent and 30 percent in 1997 and 1998, respectively (see Chart 4). The freeing of substantial resources from fiscal and quasi-fiscal financing requirements, allowed BOS to reduce the growth of reserve money from an average of 79 percent during 1992-96 to 34 percent in 1997 and further to 29 percent in 1998. The pace of the fiscal adjustment was also evident from the decline in the share of the BOS lending to government in reserve money growth from an average of 74 percent during 1992-96 to 66 percent and 40 percent in 1997 and 1998, respectively. Consequently, the BOS increased its lending to banks (within the tighter reserve money growth objectives that were consistent with the inflation targets) and the share of BOS gross credit to banks in reserve money growth rose from an average of 1 percent during 1992-96 to 17 percent and 15 percent in 1997 and 1998, respectively.

Chart 4.
Chart 4.

Sudan: Selected Monetary, Credit and Price Indicators

Citation: IMF Staff Country Reports 1999, 053; 10.5089/9781451833683.002.A001

Source: Sudanese authorities; and Fund staff estimates.

80. After years of increasing money velocity that resulted in significant demonetization of the economy, the monetary reforms started to take hold in 1998. Velocity declined to 10.5, after rising continuously from 6.4 in 1991/92 to 11.4 in 1997 (see Chart 4). Furthermore, the rapid decline in inflation rates allowed rates of returns on bank investment deposits to become positive in 1997 with further increase in real terms in 1998. These developments have resulted in increased commercial bank intermediation. Several important monetary ratios (cash-to-deposits (C/D), quasi money deposits-to-current deposits (QD/CD), and foreign currency-to domestic currency deposits (FCD/DCD)) started to improve in 1997, with further gains in 1998 (see Chart 4). The C/D ratio declined to 107.9 percent in 1997 and further to 104 percent in 1998, after rising from 72.6 percent in 1992 to 108.3 percent in 1996. Similarly the QD/CD ratio increased noticeably in 1998. After years at a relatively high level, the FCD/DCD ratio also declined in 1998.

81. These achievements were in part due to the proactive stance of the BOS in countering unfavorable exogenous shocks and shifts in money demand. In addition to tightening credit ceiling to the private and public sectors during the first half of 1997, the BOS took further steps, including raising the banks’ minimum profit margins under Murabaha17 by 5 percentage points for all sectors (in March 1997), raising the customer share of financing under Musharaka by 5 percentage points (in May 1997), and introducing reserve requirements on foreign currency deposits (in July 1997) at a rate of 4 percent. Following significant gains in slowing monetary expansion in the first half of 1997 through these measures, monetary policy was further tightened after August 1997 by reducing the overall target for banking system credit expansion.

82. The loosening of monetary policy in January 1998,18 exacerbated by the lowering of the minimum Murabaha rate at the beginning of January (from a range of 35 to 45 percent to a unified 30 percent)19 and the strong seasonal demand for credit (in an environment of excess liquidity), fueled an overexpansion of private sector credit, which in turn destabilized the foreign exchange market and increased inflationary pressures. The BOS reacted by implementing a package of measures in late March and early April 1998 that were designed to absorb banks’ excess liquidity and contain credit expansion. These measures included instructing banks not to extend new credit until further notice and to redeem all overdue loans,20 and eliminating (at end-March) the policy of granting financing to public enterprises at no cost. In addition, the BOS introduced a weekly credit reporting system and initiated an internal review of banks accounting practices.

83. During 1998, the BOS began (for the first time) to actively intervene to smooth the large seasonal swings in the demand and supply of credit that characterize the Sudanese economy. This intervention was facilitated by the introduction of the Central Bank Musharaka Certificate (CMC) in June 1998 (see discussion below). To ensure orderly financing of the summer harvest season, which peaks in August-September, the BOS accelerated the pace of open market sales of CMCs during July 1998 absorbing, by the beginning of August, 1998, some LSd 7.4 billion of banks’ excess liquidity (representing about 14 percent of end-June 1998 banks’ excess liquidity balances). During August- September, BOS open market operations (OMO) in CMC aimed at releasing some of this liquidity, when credit demand conditions warranted it.21 This operation contributed to stifling the exchange rate and price pressures that characterized this period in the past.

Sudan: Islamic Financial Instruments

Islamic financial instruments fall into three broad categories: profit-and-loss sharing, debt, quasi-debt instruments. While each category covers a wide variety of instruments, this box gives a brief description of the contracts that are most frequently used by Islamic banks.

I. Profit-and-Loss Sharing Instruments

1. Musharaka. Is an equity participation contract with the bank and the client contributing jointly to finance a project. Ownership is distributed according to each party’s share in the financing. The main features of this contract are: (i) profits are shared according to an agreed ratio but losses are born in proportion to contribution; (ii) the contract can be open ended or to term; and (iii) each party has the option of participating in the project’s management.

2. Mudharaba. Is a trustee type finance contract where one party provides the capital and the other party provides the labor. The main features of this contract are: (i) profits are distributed according to an agreed ratio; (ii) in the case of a loss, the provider of labor will not be compensated for labor while the provider of capital bears the entire financial loss, provided that there was no violation of contract, mismanagement or criminal conduct on the part of the working partner; (iii) the Mudharaba could be restricted (e.g., to a specific transaction) or unrestricted, and (iv) the restricted Mudharaba cannot be terminated until its conditions are fulfilled.

II. Debt Instruments

1. Murabaha. Is a purchase and resale contracts with the resale price determined based on cost plus profit mark up. The bank purchases the goods ordered by the client and resell them to him at a higher price, usually on deferred payments basis. The main features of this contract are: (i) the cost and the mark up must be known for the bank and the client; (ii) the bank must assume the ownership of the goods prior to reselling them to the client (bearing all the ownership risks in the interim); (iii) the client’s promise to buy the goods purchased on his order by the bank may or may not be binding (in Sudan it is binding); (iv) no interest is ievied for late payments but the bank could require collateral; and (v) the bank cannot sell the Murabaha contract to a third party except at par.

2. Salam. Is a purchase contract with deferred delivery of goods (opposite to Murabaha) and is mostly used in agriculture finance. The main features of this contract are: (i) the contract applies only to products whose availability on maturity date is normally assured and their quality and quantity can be specified; (ii) the bank pays the client the full negotiated price of the contracted goods (e.g., crops) when the contract is signed; (iii) the seller is only obliged to deliver the promised products or the price he received from the bank if the products could not be delivered; and (iv) the contract can be sold to a third party only at par.

3. Qard al-Hasan. (Good loan) is an interest-free loan contract (usually collateralized).

III. Quasi-Debt Instruments

1. Ijara. Is a leasing contract where a party leases an asset for a specified amount and term. The main features of this contract are: (i) the owner of the asset (the bank) bears all the risks associated with ownership; (ii) the asset can be sold at a negotiated market price, effectively resulting in the sale of the Ijara contract; (iii) the contract can be structured as a I ease-purchase contract where each lease payment includes a portion of the agreed asset price; and (iv) the contract can be made for a term covering the asset’s expected life.

84. Similar operations were conducted towards the end of 1998 to counter the strong seasonal pressures that were expected in early 1999. The BOS absorbed by end-December 1998 about LSd 10.2 billion in banks’ excess liquidity through open market sales of CMCs and reduced significantly (particularly during November-December, 1998) its lending to banks. While this operation was successful in containing banks’ credit (banks lending to the private sector was within the intended target), currency leakages in December 1998 and January 1999 (stemming mostly from the withdrawal of deposits by farmers and autonomous government agencies) have partially undermined the success of the BOS operation. As a result, exchange rate and price pressures did emerge in the first quarter of 1999, albeit on a smaller scale than in previous years.

85. In addition to the monetary measures, efforts to improve the soundness of the banking system (see discussion below) inadvertently resulted in further tightening of the monetary policy. In particular, the growth of bank credit was further arrested by bank’s efforts to comply with the Basle capital adequacy ratios during 1997, to provision, and reduce the level of bad loans in early 1998. The tightening of access rules to the BOS overdraft funds in mid-1998 also contributed to the tightening of monetary policy.

B. Monetary Management Reforms

Overview

86. Sudan introduced Islamic banking in 1984 and adopted it universally in 1992. The main feature of Islamic banking is the prohibition of the charging of interest on financial transactions. Deposit and financing operations are conducted under various purchase and sale agreements or on the basis of profit/loss sharing contracts that determine ex-post rates of return (see Box 4). In addition, only equity-based securities can be traded in the open market, with trading values reflecting market expectations of economic performance, and hence rates of return. Financial debt instruments, on the other hand, cannot earn a positive rate of return (through interest, fixed or variable) and cannot be discounted in a secondary market, i.e., can be traded only at par and under strict transfer limitations.

Sudan: Mobilizing Funds by Islamic Banks

Islamic banks offer their depositors mainly four classes of accounts, which are described below in broad terms.

1. Current accounts

Current accounts (CA) are similar to non-interest paying call or demand deposits. The bank provides the safe custody for the deposits, checking and other payment services. The bank guarantees that depositors can withdraw their deposits on demand. In return for the guarantee, depositors are not entitled to any share in the bank’s profits. If the bank utilizes the deposits it will be at its own risk; all profits and losses will be borne by the bank. Because of the guarantee, banks are usually required by central banks to keep legal reserves on these account.

2. Savings accounts

Savings accounts (SA) are similar to current accounts in the right of customers to withdraw their deposits on demand. However, savings accounts can be classified into two categories, each with some special features that distinguish them from CA. Under the first type, the bank continues to provide the depositors with the guarantee to refund the deposits in full. The bank, however, may, at its sole discretion, reward depositors by sharing part of its profits with them from time to time. Under the second type of SA, depositors can benefit from the conveniences of CA but they share in the banks profits on the basis of a minimum balance that is maintained within a period of time (e.g., a month). Legal reserves are sometimes applied to SA.

3. Investment accounts

Investment accounts (1A) are based on an unrestricted Mudharaba/Musharaka contract between the depositors and the bank, where depositors provide the funds and the bank provides labor (and funds in lieu of its capital). The deposits are kept for a term and cannot be withdrawn until maturity. Profits (and losses) from the bank’s general operations are shared between the bank and depositors according to a negotiated ratio. Profits are distributed either when profits are realized or, alternatively, advances are paid to depositors in regular intervals with adjustments made, at maturity, for actual profits. Legal reserves are not kept against IA since the bank does not guarantee them.

4. Special purpose investment accounts

Special purpose investment accounts (SPIA) operate on the basis of restricted Mudharaba (i.e., restricted to a specific investment operation like financing a trade in a particular product). The bank manages the investment and depositors provide the funds. Profits and losses are distributed according to the principles of unrestricted Mudharaba. Depositors in SPIA are entitled to a share in the profits generated from the specified operations, but have no claim on the bank’s general profits. The SPIA is terminated only when the specified investment operation is completed. Similar to IA, no legal reserves are kept on SPIA.

87. This institutional arrangement presented a unique challenge in developing market-based instruments for monetary control and government financing. For effective indirect and market-based monetary control, the BOS needed to have discretionary control over its balance sheets, and hence over the growth of reserve money. Invariably, this would be facilitated through the existence of independent funding markets for the budget and the availability of flexible instruments with which to offset and regulate the flow of liquidity created by autonomous items on the central bank’s balance sheet. It was also important to develop money markets and payments systems, through which banks manage their own liquidity positions and through which policy intentions are transmitted.

88. The absence of monetary and general government funding instruments had perpetuated the reliance on direct controls on credit and high unremunerated reserve requirements in Sudan. The absence of money markets has also led to large swings in banks’ excess reserves and a loss of monetary control by the BOS. The overall consequence of these inefficiencies had been progressive disintermediation and persistent inflationary pressures.

89. Under the 1997 and 1998 SMPs, the BOS embarked on ambitious and wide-ranging reforms aimed at addressing these shortcomings. The BOS adopted a gradual approach to reorienting its monetary management framework and sought to improve its existing arrangements and instruments, while developing the capacity to introduce and manage the new instruments (including improving its monetary management information system). This gradual approach was consistent with the need to build-up the administrative capacity and experience at market-based intervention. In addition, the objective of the BOS has been gradually and informally changed from the task of financing the deficit and credit allocation to that of inflation control.

Monetary management information system

90. Until 1997, BOS monetary management was based on periodic reviews of money and credit conditions against the targets of the annual programs, with action following these reviews to adjust the monetary stance, if necessary. The weakness of this approach emanates primarily from the significant lags in data availability (six weeks in receiving commercial bank balance sheets and five weeks in producing the BOS balance sheet). The BOS could therefore only react to changed monetary conditions with a substantial lag, rendering the policy response in many instances ineffective. This situation was highly undesirable, especially as Sudan was in the process of adopting a more liberal exchange market environment. In response to these shortcomings, the BOS implemented two important reforms: developing a flash reporting system and establishing a Monetary Policy Committee (MPC).

91. A flash reporting system was developed during the second half of 1997. The reporting system, which the BOS continues to improve, involved preparing on a weekly basis, a summary of the BOS balance sheet (including estimates of reserve money and bank reserve balances), key information from banks on their lending activities, a set of short-term indicators, and a short analysis of the information. When comprehensive information is not available on a timely basis, the data are were based only on indicators from banks in Khartoum—which account for 60-70 percent of banking activity.

92. The MPC was established at the BOS in early 1998, and is chaired by the Governor of the BOS, and membership comprises the Deputy and sub-Governors, with representation from the Research, Foreign Exchange, Banking Supervision and other operational departments, as needed. The MPC also includes high level representation from the MOF. The MPC meets almost weekly and functions as a policy making group which monitors financial developments and indicators, assesses short-term prospects in the money and exchange markets, and decides on the deployment of monetary instruments, and ensures their coordination.

Improving existing arrangements and instruments

93. As of mid-1997, the tools available to the BOS for managing liquidity included, (i) setting the minimum Murabaha rate (which sets the minimum cost of funds) and the minimum share of customer financing under Musharaka contracts (which will limit the size of available “loanable” funds); (ii) adjusting the reserve requirements (which were imposed only on domestic currency deposits); (iii) establishing subsidiary targets for the allocation of credit to various economic sectors; (iv) issuing a guideline to banks advising on the level of “internal liquidity” that banks should hold to meet the demands of their liability portfolio, and, as a measure of last resort; and (v) establishing credit ceilings (usually applied on bank-by-bank basis).

94. These tools, however, had significant shortcomings and were only partially effective in achieving the monetary policy objectives. Banks’ lending rates (under Murabaha contracts) were kept markedly higher than the BOS’s minimum Murabaha rate, suggesting that the floor rate was not effective in restricting bank lending. The effectiveness of changes in reserve requirements was undermined by several factors: (i) the ability of banks to access (relatively easily) an overdraft facility, on which penalties were assessed on a case by case basis and were invariably only “notional”; (ii) given the lag in compiling banks’ data, changes in reserve requirements became effective only after 6 to 8 weeks;22 and (iii) the absence of legal reserve requirements on foreign currency deposits. With respect to credit allocation, penalties were only enforced vis-à-vis the stipulation that banks restrict their loans to “local trade” to 10 percent of their portfolios. Compliance with other credit targets was only expected on an average basis and even then, there was no penalty for noncompliance. The prudential guideline on internal liquidity, which could also serve a control purpose, was not enforced, and banks held more or less liquidity than the guideline, depending on their portfolio needs. Credit ceilings, while effective in controlling bank credit, had their own inherent distortionary effects.

95. The reforms concentrated on improving the effectiveness of reserve requirements and modifying existing rules on overdraft access, as well as rationalizing the BOS credit facilities. To improve the effectiveness of reserve requirements, the BOS introduced in June 1997 legal reserve requirements on foreign currency deposits (at 4 percent)23 and in September 1998 made changes in reserve requirements effective without waiting for the new assessment of the reserve base. Under the new system, the BOS assumes that the reservable liabilities of each commercial bank have not changed since the last assessment day and when the new figures become available, the banks adjust their reserve requirements in accordance with their effective reservable liabilities.

96. One of the most important reforms of the reserve requirements was to move from the calculation of reserve requirements based on the liabilities of banks on the last business day of each month24 to a system of calculation based on the average of weekly deposit balances for the measurement period. However, the inability of most banks to compile and report to the BOS the balance of their reservable base on a weekly basis proved to be a significant impediment. The BOS developed, in cooperation with banks, a new reporting system in September 1998 to facilitate the application of new the reserve calculation system. After several months of trials, the new system was formally introduced in February 1999 and by end March the reservable base was being calculated on the basis of a 4 weeks rolling average.25

97. Access to overdraft funds has been tightened significantly since May 1998, with the aim of preventing banks from obtaining long-term BOS financing under the guise of legitimate overdraft needs and forcing banks to improve their internal liquidity management. The new access rules imposed stiff penalties (including administrative ones like reporting the incidence of access to the boards of directors) and required banks to prove that the financing was to support overdraft needs that could not be foreseen. By end-June 1998, the BOS established a standing credit facility which dispensed credit to banks for overdraft and lender of last resort purposes, as well as general financing needs. The facility was based on time-bound (mostly 14 days to one month) unrestricted Mudharaba contracts.

98. The new standing credit facility has greatly assisted in rationalizing BOS credit operations. Until the establishment of this new facility, BOS financing had been largely project specific (i.e., based on restricted Mudharaba), which meant that the credit was practically open ended, as the BOS could not retrieve it until the project was completed; this process lacked transparency and was prone to abuse by banks. The new facility did not link the financing to particular projects, but to the bank’s general performance over the duration of the financing contract.

Introducing new instruments

99. Before 1997, efforts in developing government funding and money market instruments concentrated on designing project-specific funding instruments where the return to investors was tied to the return on the underlying project, typically a government development project (e.g., refinery, factory, etc.). These efforts, however, did not succeed because these instruments were not suitable for the BOS OMO or for providing general purpose funding to the government.

100. A new approach was pursued during the second half of 1997, culminating in the approval, in November 1997, by the BOS High Shariaa Supervisory Council (HSSC),26 of the principles that would later lead to the development of the CMC and the Government Musharaka Certificate (GMC). The two instruments were based on Musharaka contracts between the BOS (in case of CMC), the MOF (in the case of GMC) and investors in a pool of assets. The CMC asset pool consists of the share ownership of the BOS in commercial banks, while the GMC asset pool consists of the share ownership of the MOF in profitable state owned enterprises. There were, however, major differences in the designs of the CMC and GMC reflecting the different purposes for their issuance (see Box 5). The CMC was launched on June 3, 1998, but the launching of the GMC (the modality of which was approved by the HSSC in May 1998) has been delayed, however, for technical reasons.27

101. The second challenge beside introducing new monetary instruments was developing a framework for the interbank market. In early 1997, the BOS allowed interbank placement of deposits, provided that the BOS was notified and approved of such transactions. However, the BOS did not allow banks to use the funds raised in the interbank market to fund their clearing balances (or alternately to avoid breaching reserve requirements). The rationale for this practice was that the interbank market is intended to help banks in their normal business and should not be used for overnight funding. In addition, one problem that inhibited interbank trading was the lack of familiarity with an appropriate mechanism to conduct trades.

102. By October 1997, the BOS approval requirement for interbank trades was removed and banks were informally encouraged to trade funds among each other. In April 1998, the BOS issued a new guideline for the interbank market, including trading modalities based on unrestricted Mudharaba deposit placements. Under the new guidelines, banks with surplus funds can place funds in unrestricted Mudharaba investment accounts in deficit banks for a finite period of time, with the rate of return being determined according to the profit sharing agreement between the two banks. However, despite the BOS efforts, the interbank money market has not developed in Sudan.

103. The major problem lies in the perception among many banks that interbank trading could reveal weaknesses, help competitors, or reveal financial secrets. Another problem arises from the adequacy and timeliness of information on debtor banks. While the former obstacle could ease with time and the increased sophistication of the financial system, the latter problem is more fundamental. The uncertainty could be reduced substantially by addressing the problem of common accounting standards and reporting.28 To this end, BOS initiated in early 1998 a program to introduce a new accounting system (see Box 6). Banks are expected to fully adjust their accounting practices to the new system in 1999.

Sudan: Design Comparisons between the CMC and GMC

In principle the CMC and GMC are similar in the sense that both instruments are based on the Musharaka principle. Investors share with the BOS and MOF the profits generated by the funds supporting the CMC and GMC. However, there are significant design differences between the two instruments, reflecting the different objectives that they intend to achieve.

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Sudan: Bank Accounting Reform

Until 1998, bank accounting rules were not uniform in Sudan, and accounting procedures varied from bank to bank. Every bank reported monthly financial statements to the Bank of Sudan, but the figures were not necessarily comparable from bank to bank, particularly with regard to the recognition of income. This is largely due to the fact that banks determine their own guidelines for interim recognition of rates of return which arc subsequently adjusted at the conclusion of a contract. In 1998, a new set of accounting standards that is more suitable for Islamic banking was introduced. Banks were required to prepare their 1998 financial statements according to the new set of standards. However, full convergence to the new accounting system is expected only in 1999.

The new accounting framework was developed with techinical assistance from the Bahrain-based Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI). The accounting standards that AAOIFI has published differ from international accounting standards in the sense that they address the specific characteristics of the contracts that govern the assets of an Islamic bank, and the financial instruments that they use to mobilize funds. In addition, Islamic finance rules have special provisions regarding how to contract financial obligations. These provisions call for greater disclosure of information and more emphasis on the rights of the parties under the contract to avoid potential future disputes. This issue is particularly important since collaterall (or other grantees to investors) is not accepted (except under debt obligations which are not remunerated). The last feature, in addition to the prohibition of interest payments, gives rise to financial contracts and transactions that call for greater disclosure of information and specificity of obligations than normally required in conventional transactions.

104. The introduction of the CMCs could also increase the capacity of the interbank market29 This, however, would require a appropriate pricing policy for CMCs that would encourage interbank trading in CMCs.

C. The CMC Experience—The Early Results

105. The BOS conducted the first CMC auction in June 3, 1998, and started using it as an instrument for liquidity management in late July (see Table 25).30 Initially, the primary objective of CMC operations was to familiarize market participants with the instrument and to enhance its attractiveness. Nevertheless, BOS did use the CMC to manage liquidity during the two periods of August-September 1998 and January 1999-February 1999, when much of the demand for credit emerges. The experience thus far is described below.

Pricing the CMCs

106. The BOS maintained the on-demand repurchase price (ODRP) at a small premium over the clearing price of the most recent auction rather than at a discount, which meant that banks were assured of making profits when they liquidated their holdings of CMC (although the size of the premium was not known a priori to banks). The intention of the BOS was to build banks’ confidence in the CMC, given its novelty. Although banks can make a profit almost overnight by presenting the CMCs to the BOS on-demand repurchase window, the experience during July-September 1998, (when the BOS conducted frequent buy auctions) indicates that almost all on-demand sales of CMCs to the BOS have been due to periodic liquidity problems in individual banks. This outcome was in line with one of the intended purposes of the CMC—to be used by banks to manage their own liquidity, and reflects the fact that the on-demand repurchase price, although higher than the sale auction price, was kept below the price established at the buy back auction. This provided banks with an incentive to hold the CMCs until the next buy auction in order to realize higher profits. As a result, the number of CMCs presented to the on-demand repurchase window (ODRW) declined steadily relative to the CMCs sold in the buy auction during August-September, 1998 (see Chart 5).31

Chart 5.
Chart 5.

Sudan: Central Bank Musharaka Certificate (CMC) Selected Indicators, June 1998 - February 1999

Citation: IMF Staff Country Reports 1999, 053; 10.5089/9781451833683.002.A001

Source: Sudanese authority; and Fund staff estimates.

107. The ODRP policy (i.e., setting the ODRP at a premium) has had three major drawbacks; arresting the development of an interbank market in CMCs, contributing to a higher price spread between the sale and buy auctions, and reducing the efficiency of the BOS OMO. Because of the BOS premium offer on the ODRP, banks have had little incentive to sell CMCs to each other. It has been easier and less costly32 for banks to sell to the BOS through the ODRW, and as a result the interbank CMC market has remained largely undeveloped. In addition, banks which might have been interested in assuming a market maker role, quickly became disinterested, further hindering the development of the CMC interbank market.

108. The price spread between the sale and buy CMC auctions has remained relatively high, which is a cause of concern to the BOS. This could normally be attributed to the novelty of the instrument. The spread, however, has narrowed gradually, as would be expected when the market settles on a price for a new financial instrument. Nevertheless, the ODRP policy may have contributed to the high spread, as banks demanded higher premiums to hold the CMCs until the next buy auction rather than selling them through the ODRW.

109. The ODRP policy has also been detrimental to the effectiveness of the BOS OMO in CMCs. This was most visible when the BOS, concerned with rising bank liquidity in the last quarter of 1998, stopped the buy auctions, which meant that banks could make profits on their investments in CMC only through the ODRW. Consequently, when banks realized by November 1998 that the BOS had stopped conducting the buy auctions and at the same time accelerated the pace of sale auctions, the number of CMCs presented to the ODRW rose sharply, frustrating BOS’s efforts at substantially increasing its net sale of CMCs (see Chart 5).

Managing banks’ liquidity

110. Banks have used the CMC primarily as a tool to manage liquidity, particularly after the BOS tightened access to overdraft funds and increased the penalty for overdrafts. In particular, banks liquidated a part of their CMC holdings when they expected to have an open position in their payments settlement account at the BOS. Despite the shortcomings of the ODRP policy, CMCs were perceived by banks as a useful tool to manage their internal liquidity, as reflected in their price bidding behavior. During the period from September to December (off season) when banks normally accumulate excess reserves, the CMC price established at the sale auction increased markedly, reflecting competition among banks and the availability of funds to invest in CMCs. With rising demand for bank credit during December-February, CMC prices plummeted.

D. Banking Soundness and Supervision

111. Important measures have been taken in recent years to improve the quality of banking supervision, and the soundness of the banking system.33 Since the beginning of 1997, commercial banks have been reporting more frequently (every month) and in greater detail key items of their balance sheets, including on the extension of new loans and on their capital base. This has helped to strengthen off-site analysis of banks and sharpen the focus of on-site supervision. In addition, since January 1997, banks were obliged to report all non-performing loans (i.e., loans that are more than one month overdue) to the banks’ Board of Directors and the BOS, and subsequently the banks are required to inform the banking control department of the BOS about any measures taken to recover these loans. In order to expedite legal procedures to claim collateral, the BOS issued a circular in December 1997 relieving banks from the requirement to seek the BOS permission prior to the initiation of foreclosure proceedings.

112. Banks were instructed in 1996 to attain risk-weighted capital adequacy ratios of 8 percent by end-1997. Following up on this, all commercial banks’ balance sheets for 1996 were reviewed in 1997 for compliance with the required capital adequacy norms. At end-1997, about 7 out of 28 banks34—of which 3 state owned—had capital adequacy ratios of less than 8 percent (3-6 percent). Also, in early 1998 all external auditors of banks were required to compute the provisions needed for classified loans, in accordance with loan classification and provisioning regulations, and the BOS has begun to limit dividend distributions in order to enforce the provisioning rules.

113. The BOS has initiated important accounting reforms with a view to standardizing banks’ financial statements and improving the monitoring of banks by its banking super-vision department. A comprehensive new accounting framework consistent with Islamic banking principles was introduced at the end of 1997 (see Box 5). Banks were expected to be in full compliance with the new accounting procedures by end-1998.

114. Prudential regulations for setting appropriate limits on commercial banks’ foreign exchange exposure in accordance with international norms were introduced in January 1998.

V. External Sector Developments

A. Overview35

115. Sudan’s external current account deficit (excluding official transfers and interest payments due) narrowed from 8.6 percent of GDP in 1995 to 6.7 percent in 1997, mainly as a result of a significant increase in private transfers (see Chart 6). In 1998, however, the deficit widened sharply to 9.8 percent of GDP owing to increased imports related to the construction of an oil-pipeline. These external current account deficits were financed largely by unrecorded private inflows (including errors and omissions) and some trade-related (mainly short-term) private financing. On an accrual basis, the current account deficit was equivalent to 22.6 percent of GDP in 1998. With little foreign assistance, Sudan was unable to meet fully its debt service obligations falling due (about US$1.2-1.3 billion per year), and external payments arrears are estimated to have reached US$19.3 billion at end-1998 (equivalent to 86 percent of total debt outstanding).

Chart 6.
Chart 6.

Sudan: Selected External Sector Indicators, 1993/94 - 98

Citation: IMF Staff Country Reports 1999, 053; 10.5089/9781451833683.002.A001

Source: Sudanese authority; and Fund staff estimates.1/ Exchange rates were unified in October 1998; (-) indicates depreciation.

116. Sudan’s external public sector debt burden remained heavy, with scheduled debt service averaging about 200 percent of exports of goods and non-factor services in 1995-98. However, actual debt service payments have been much lower, averaging about 10 percent of exports of goods and non-factor services over the same period, and most of these payments (about 85 percent) were made to the Fund, in order to effect a small reduction in arrears.

B. Current Account Developments

Exports

117. After recovering in 1995-96, total exports (in U.S. dollar terms) declined in 1997 and remained at this same level in 1998, mainly owing to a sharp pull-back in export prices, and the adverse impact of floods on the output of the irrigated schemes during the second half of 1998 (see Table 7). Although export prices rose by some 11.5 percent in 1994/95 they have since trended downward and in 1997 and 1998 declined by 11 percent and 7.5 percent, respectively (see Chart 6). The decline in export prices, however, masks a broad-based robust performance in the growth of export volumes which after increasing by 25.6 percent in 1994/95 rose by an average annual rate of 7-8 percent during 1996-98.

118. The composition of Sudan’s exports has diversified markedly over the past few years. The share in total export of traditional exports like cotton and gum arabic, which accounted for 37 percent of total exports in 1994/95, fell to only 20 percent of total exports in 1998, while non-traditional exports, particularly groundnuts, sesame, livestock, and gold, registered sharp increases in both volume and value terms, and accounted for almost 50 percent of total exports in 1998 compared to about 35 percent in 1994/95. By 1998, the most important export item was livestock (20 percent of exports) while cotton, which was the most important export item in 1994/95, was now the third most important, accounting for 16 percent of total exports. However, despite the diminished importance of traditional export items, Sudan’s export sector continues to be dominated by a narrow range of products and is therefore susceptible to exogenous shocks such as terms of trade deterioration. Whereas the top three export items accounted for about 52 percent of total exports in 1994/95, by 1998, the ratio had increased to 54 percent.

119. The growth of export volumes since 1995 reflects relatively good weather conditions, more intensive use of fertilizers, improvement in control of pests and plant diseases, the liberalization of procurement prices. More recently, the liberalization of both the trade and the foreign exchange systems, including the elimination of surrender requirement36 and the reduced divergence between official and market exchange rates, have been the key factor in stimulating agricultural production. Severe impediments to export growth include the poor infrastructure, and heavy regional taxation on agricultural production.

120. Sudan’s exports continue to be concentrated in only a few markets. For example, in 1998, about 50 percent of total exports were destined to just four markets, Saudi Arabia (24.4 percent), Italy, and the United Kingdom (each about 10 percent), and Germany (5.4 percent) (see Table 29). In terms of regional distribution of exports, Sudan’s major export market is now the Middle Eastern whose share of exports has risen from 35 percent in 1994 to about 41 percent in 1998. This increase has been at the expense of exports destined to industrial countries which have fallen from 42.2 percent in 1994 to 38.6 percent in 1998. The share of exports destined for Africa and Asian countries also declined, with the latter owing to the virtual cessation of exports (mainly cotton) to China, as a result of the expansion of domestic cotton production in China.

Imports

121. Since 1994/95, merchandise imports have increased at a faster pace (17.5 percent annually) than exports leading to a steady worsening of the trade deficit from 9.3 percent of GDP in 1995 to over 15 percent of GDP in 1998. The increase in imports, which rose from US$1.0 billion in 1994/95 to US$1.9 billion in 1998, reflected increases in volumes37 as imports prices are estimated to have declined at annual average rate of 2.3 percent in 1995-98 (Chart 6). This decline in import prices, especially during 1997-98 (a cumulative decline of 17.5 percent), was due largely to lower oil prices, and it helped offset the decline in export prices (a cumulative decline of 18.6 percent). As a result, since 1995 Sudan’s terms of trade have declined cumulatively by only about 2.7 percent (or by about 0.5 percentage point per year).

122. The composition of Sudan’s imports has also changed markedly since 1994/95. Imports of foodstuffs, which accounted for about 18 percent of total imports in 1994/95, declined to 14 percent in 1998, mainly due to increased local production. On the other hand, imports of manufactured goods and of transport equipment rose substantially, from about 29 percent in 1994/98 to about 41 percent in 1998 mainly on account of imports related to the construction of the oil-pipeline (see Table 30).

123. As regards the sources of imports, in 1998 Saudi Arabia remained the most important trading partner, supplying about 15.5 percent of total imports, while China’s share rose to 14 percent compared to 3 percent in 1994, primarily owing to it’s participation in the oil-pipeline project. From a wider regional perspective, the importance of industrial countries as sources of imports has diminished substantially with their share falling from 40.6 percent in 1994/94 to 35.4 percent in 1998. France, with a share of 6.7 percent in 1998, is the most important source of imports among the industrial countries. The main beneficiary of this decline has been Asia, whose share has increased from 17.7 percent to 26 percent in 1998.

C. Service and Income Accounts and Current Transfers

Service and incomc accounts

124. The deficit in the service account widened from US$5 million in 1995 to an estimated US$27 million in 1998, due primarily to a deterioration in net government receipts, and despite a significant reduction in net service payments by the private sector. The imbalance in the net income account during the past several years is due mainly to the growing burden of external interest obligations (including late interest payments). As most (an average of 85 percent of outstanding debt) of Sudan’s external debt was in arrears during the period 1995-98, an equally large proportion (averaging slightly less than 90 percent) of scheduled interest payments was in fact penalty interest.38

Current transfers

125. Private remittances from the large number of Sudanese working abroad (which constitute an important source of foreign exchange) rose rapidly from about US$60 million in 1995 to an estimated US$490 million in 1998. However, a good part of this increase are transfers that would have been reflected in large errors and omissions in earlier years. In addition, a significant part of this increase reflects the increased use of official channels, as the exchange system became increasingly liberal over time the recent improvements in the functioning of the foreign exchange market. In contrast, recorded official public current transfers, comprising mainly humanitarian food relief and a small amount of cash aid, have declined from about US$44 million in 1995 (compared to US$150 million in the early 1990s) to US$17 million in 1998 (see Table 31).

D. Official Borrowing and Capital Flows

126. Official transfers and project aid to Sudan fell dramatically from close to US$500 million in the early 1990s to US$54 million in 1995, and to an estimated US$17 million in 1998. This trend reflected, inter-alia, the build-up of external payments arrears to virtually all creditors, and adverse external political developments, all of which contributed to the reluctance to provide external financial assistance by some key bilateral donors, multilateral institutions such as the UNDP and the African Development Fund (AfDF), and regional donors. Similarly, the decline in official borrowing has also been striking, with loan disbursements falling from as much as US$86 million in 1995 to around US$13 million in 1998 (see Table 32). The International Fund for Agricultural Development (IFAD), and the Islamic Development Bank have recently become the main source of medium- and long-term project financing. Loan disbursements from bilateral creditors have practically ceased since 1994/95.

127. In contrast, net private capital inflows, including errors and omissions, have risen substantially during the 1990s, which has allowed Sudan to avoid a sharp compression in imports in the face of declining official financing. Although some decline in short-term trade credits is noticeable (from US$331 million in 1995 to US$84 million in 1998), this has been more than offset by inflows of other net private sector capital flows, and of errors and omissions, and as a result, total private sector inflows amounted to an estimated US$446 million in 1995, before rising to US$925 million by 1998. The large “net errors and omissions” likely reflects unrecorded financing (principally workers remittances) of imports.

E. External Debt and Debt Service

Recent developments39

128. The total outstanding stock of external debt (including arrears) increased from an estimated US$19.8 billion (about 280 percent of GDP) at end-1995 to an estimated US$22.4 billion (about 255 percent of GDP) by end-1998. As at end-1998, around 57 percent of this debt was owed to bilateral creditors, 19 percent to multilateral creditors, and the rest to private creditors (commercial banks and suppliers’ credits). Almost 65 percent of the non-Paris Club bilateral debt was owed to two countries, Saudi Arabia and Kuwait. Regarding Paris Club bilateral debt at end-1997,40 the United States was the most important creditor, accounting for about a quarter of the debt, followed by the United Kingdom and France, with a share of 14 percent and 13 percent, respectively. About three-quarters of the debt owed to Paris Club bilateral creditors had been previously rescheduled on non-concessional terms (see Table 34). The stock of external payments arrears is also estimated to have increase from US$16.3 billion at end-1995 to US$19.3 billion at end-1998 (see Table 33).41 Therefore, at end-1998, about 86 percent of total debt constituted arrears, compared to all of the debt owed to private creditors (including commercial banks and suppliers) and to the Fund, and about 33 percent to multilateral institutions other than the Fund. The IF AD and the IDB are the only international organization to which Sudan is current on it’s external debt service payments obligations.

129. Sudan’s contractual debt service obligations (interest and principal) also increased from US$1.2 billion in 1995 to about US$1.4 billion in 1998, or from 175 percent of exports of goods and non-factor services to 224 percent. Excluding late interest payments, which were estimated to reach US$1.0 billion in 1998, the debt service ratio would still amount to some 55 percent of exports of goods and nonfactor services. Sudan’s actual debt service payments have remained relatively small compared to contractual obligations—total cash payments during 1995-98 (including payments to the Fund) averaged around US$64 million (equivalent to over 10 percent exports of goods and non-factor services), of which an average of US$55.6 million was paid to the Fund (i.e., over 86 percent of total payments). As a result, the bulk of Sudan’s contractual principal and interest obligations falling due in 1995-98 accumulated as payments arrears. Since early 1995, Sudan has been making payments to the Fund, which has resulted in a decline in overdue obligations. Thus, overdue obligations to the Fund dropped from SDR 1,186.7 million at end-1995 to SDR 1,145 million at end-December 1998.

VI. The Exchange and Trade System42

A. Trade System

130. Following the adoption of a tariff reform package in 1996 which lowered the number of tariff bands and the maximum tariff rate, the pace of trade liberalization slowed in 1997 as the authorities increased, on a temporary basis, the number of tariff rates for revenue reasons. The tariff increases applied to cement (30 percent to 50 percent), plastic raw materials (from 5 percent to 10 percent), packaging materials and plastic products (from 25 percent to 30 percent), and a 4 percent import surcharge (called defense tax) on about 40 percent of imports. On the positive side, in November 1997, export taxes on goods in the lowest bracket (0-3 percent) were eliminated, and were lowered by 3 percentage points for other exports in the other brackets (5-10 percent).

131. However, during 1998, the pace of trade liberalization picked up as emphasis shifted toward an outward-oriented development strategy. The reforms implemented in September 1998 involved the reduction of: (i) the number of tariff bands from 7 to 5;43 (ii) the maximum rate from 250 percent to 80 percent, while the minimum rate was raised from 5 percent to 6 percent; and (iii) the average unweighted tariff rate from 26 percent to 25 percent. The defense tax (a de facto import surcharge) was also eliminated, as was the services tax which had been levied on imports previously subject to quantitative restrictions. Moreover, excise taxes were rationalized to ensure uniform treatment of domestically produced and imported goods. At end-1998, the only import non-tariff barriers that remained for protectionist reasons included a positive list of essential goods which can only be imported using bank credit facilities, and the stamping requirements for import contracts at the Ministry of Commerce. There are no other NTBs such as bans or quotas except for those prohibited for reasons of health, religion, and national security.

132. Substantial progress also took place on the export side. Following the lifting of the ban on the export of scrap iron and bars in October 1998, the only remaining export bans are exports of raw hides and skins, charcoal and firewood, and female livestock.”44 However, export councils consisting of private representatives, remain in place for certain exports45, and are expected to, inter alia, advise the government authorities on indicative export prices. In several instances, however, the suggested minimum indicative price diverged from the international price, and in cases where it was lower, exporters had difficulties in proceeding without the committees’ recommendations. Finally, in the context of the 1999 budget, export taxes were further reduced for cotton and gum arabic (from 7 percent to 5 percent), dura (from 2 percent to 0 percent), and all other exports, except meat, vegetables, fruits and livestock, all of which are exempted (from 2 percent to 1 percent—the remaining taxes are relatively insignificant and contribute to only about 0.1 percent of GDP to government revenues.

133. Export surrender requirements to the BOS were reduced substantially during 1997-98. In May 1997, the surrender requirements for all exports (other than cotton, gum arabic, and a list of 13 specific products) were reduced from 30 percent to 25 percent. At the same time, the requirement for cotton was reduced from 100 percent to 40 percent, while that of 13 specific products was reduced to 40 percent. By end 1998, surrender requirements on virtually all goods had been eliminated with the exception of cotton and gum arabic which were still subject to surrender of 30 percent and 85 percent, respectively. However, all receipts of invisibles continue to be subject to surrender requirements.

B. Developments in the Foreign Exchange Market

134. During the period 1992-96, Sudan had undertaken several unsuccessful attempts at exchange market reform.46 The lack of supporting financial policies, compounded by the limited effectiveness of monetary policy instruments and lack of foreign exchange reserves, undermined reform attempts. Thus, at the beginning of 1997, the exchange arrangement in Sudan consisted of two markets, a free accounts-to-accounts market (open only to individual accounts holders) and the official market comprising the BOS, the commercial banks, and the authorized non-bank dealers. The accounts-to-accounts market was free of restrictions on current and capital transactions and the exchange rate was freely determined by market forces, whereas the official market was limited to permissible current and capital transactions (for banks and nonbank authorized dealers (NBAD)) and the exchange rate was administratively set by a Joint Committee (JC) composed of representatives from the BOS, commercial banks, and NBAD.

135. Starting 1997, the authorities’ strategy (see Box 7) to ensure a successful and sustainable unification of foreign exchange markets involved: (i) a progressive narrowing of the spread between the two exchange rates; (ii) a reduction and elimination of export surrender requirements to the BOS accompanied by shifting official imports from the BOS to the private sector; (iii) the development of an indirect monetary instrument (the CMC) to manage liquidity and to assist BOS intervention to reduce excess volatility in the unified market; and (iv) the continuation of tight monetary and fiscal policies.

136. A wide range of structural reform measures were introduced during 1997. These measures included: restructuring the JC to include a representative from the BOS; widening the exchange rate band from (±) 0.3 percent to (±) 2.0 percent; abolishing the fixed margin between the buying and selling rates; abolishing the surrender requirements to the BOS of the 20 percent of NBAD daily transactions; unifying the appreciated customs exchange rate with the official rate; reducing the spread between the accounts-to-accounts and official rates (from 23 percent at end-1996 to 7.3 percent at end-1997); reducing, in steps, the surrender requirements to the BOS; and drafting regulations on foreign exchange exposure limits. At the same time, the pricing and importation of several petroleum products was liberalized and the financing of public sector imports through the BOS (other than petroleum products, life saving medicines, and spare parts for some strategic projects) was eliminated.

137. In early 1998, further steps were taken in preparation for the unification of exchange markets, including imposing a set of prudential regulations for banks’ foreign exchange positions; and a review, with Fund technical assistance, of the numerous regulations governing the official exchange market and those governing the accounts-to-accounts market with a view to establishing a single regulatory framework for both markets. Also, the authorities begun to draft a code-of-conduct for the market and prepare guidelines for market makers and trading procedures. In addition, the strategy of steadily narrowing the exchange rate spread was continued, while simultaneously reducing the remaining surrender requirements. The BOS also begun to build-up some foreign exchange reserves and to develop procedures for operating in the foreign exchange markets and for the coordination of monetary and exchange market operations.

138. In October 1998, the exchange markets were unified. The Joint Committee was no longer in charge of setting the official exchange rate, and banks and NBADs were free to determine exchange rates and transact freely within the unified regulatory framework. The official exchange rate (which is used for government transactions and for customs valuation) was determined by taking a 14-day moving average of market determined rates in the banking system; this moving average was reduced to 10 days at end-December 1998, and 5 days at end-March 1998. The moving average rate diverges very little from the average daily market exchange rate, and the authorities have undertaken that, whatever the outcome of the calculation of the formula, the rate will not diverge by more than 2 percent. Under the new foreign exchange regulations, current account transactions were free of any restrictions.

Sudan: Unification of the Foreign Exchange Market

Following several years of unsuccessful efforts to unify the foreign exchange market on a sustainable basis, beginning in 1997, the authorities adopted a strategy which, inter-alia, involved the following:

1997

  • Exchange rate policy involved a progressive depreciation of the official Joint Committee (JC) rate to reduce the spread between the official rate and the free market rate. This strategy was to be supported by appropriately tight monetary and fiscal policies

  • The JC was restructured to include a representative from the BOS, and the JC exchange rate band was widened from (±) 0.3 percent to (±) 2.0 percent.

  • The surrender requirements to the BOS of the 20 percent of non-bank authorized dealers (NBAD) daily transactions was abolished. In addition, surrender requirements on exported items were gradually reduced while at the same time, the pricing and importation of several petroleum products was liberalized and the financing of some public sector imports through the BOS were eliminated.

  • As a result of this strategy, the spread between the free market exchange rate and the official JC rate was narrowed from 23 percent at end-19% to 7.3 percent at end-1997.

1998

  • In January, the government reduced the surrender requirements on certain specific products, and on a wide range of manufactured items, and other products. Subsequently, export surrender requirements were gradually removed and by year-end, only irrigated cotton and gum arabic were subject to surrender.

  • The government imposed a new set of prudential regulations for banks’ foreign exchange positions, and began to review, with Fund technical assistance, the numerous regulations governing the official exchange markets with a view to establishing a single regulatory framework for both markets.

  • The strategy of steadily narrowing the exchange rate spread was continued, while simultaneously reducing the remaining surrender requirements. The BOS also begun to build up some foreign exchange reserves and to develop operating procedures for intervention in the foreign exchange markets.

  • By end-1998, the exchange markets had been substantially unified. The official exchange rate was no longer set by the JC, but was based on a 14-day moving average of market determined rates in the banking system. In addition, banks and NBADs were free to determine exchange rates and transact freely within the unified regulatory framework.

  • Under the new foreign exchange regulations, current account transactions were free of any restrictions. However, capital account transactions that would involve using export proceeds or transactions from the export accounts were to be permitted only on a case-by-case basis. The authorities continued to permit without any restrictions the opening of individual unrestricted accounts with resources originating from abroad.

1999

  • From March the official exchange rate was set on the basis of a five-day moving average, and in April the authorities undertook that on any day the diversion between this rate and the daily average market exchange rate would not exceed 2 percent.

However, capita) account transactions that would involve using export proceeds or transactions from the export accounts were to be permitted only on a case-by-case basis. As initially envisaged, the authorities continued to permit the opening of individual unrestricted accounts with resources originating from abroad (such as remittances), and with no restrictions whatsoever. The exchange market regulations and the code of conduct were approved in February 1999.

Table 1.

Sudan: Origin of Gross Domestic Product, 1992/93-1998 1/

(Millions of U.S. dollars)

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Sources: Department of Statistics; and Fund staff estimates.

Data were reported on a fiscal year basis until 1995 and on a calendar year basis thereafter.

Table 2.

Sudan: Sources of Gross Domestic Product Growth, 1992/93-1998 1/

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Sources: Department of Statistics; and Fund staff estimates.

Real GDP and sectoral output data were calculated by deflating the nominal data with GDP deflator.

Table 3.

Sudan: Indicators of Selected Agricultural Crops, 1994/95-98 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.

Table 4.

Sudan: Consumer Price Index, 1992-December 1998 1/

(Index, January 1990 = 100)

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Source: Statistics Department of the Ministry of Finance.

Middle income index covering greater Khartoum area.

Table 5.

Sudan: Central Government Operations, 1994/95-98 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.

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

Table 6.

Sudan: Monetary Survey and Factors Affecting Liquidity, 1994/95-98

(In billions of Sudanese pounds, unless otherwise stated)

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Sources: Bank of Sudan; and Fund staff projections.

Includes public enterprise deposits at the BOS.

Private sector and nonfinancial public enterprises.

Net reserve assets.

Nominal GDP divided by the monthly average of money and quasi-money during the period.

Table 7.

Sudan: Summary Balance of Payments, 1994/95-98

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

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.

Table 8.

Sudan: Main Commodities Subject to Excise, Sales, and Consumption Taxes, and their Rates, 1998

(In percent, unless otherwise stated)

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Source: Data provided by the Sudanese authorities

Revenues collected are transferred to the central government.

Revenues collected are transferred to the state governments.

Revenues collected are shared by the central and state governments.